DCCUMENT RESUME 04295 - fB3394623] (Restricted) The Sound Health Association: A Federally Qualified Health Maintenance Organization. HRD-77-119; B-164031(5). December 2, 1977. 26 pp. + 5 appendices (15 pp.). Report to Rep. Paul G. Rogers, Chairman, House Committee on Interstate and Foreign Commerce: Health and the Environment Subcommittee; Son. Edward M. Kennedy, Chairman, Senate Committee on Human Resources: Health and Scientific Research Subcommittee; by Elmer B. Staats, Comptroller General. Issue Area: Health Programs: Health Maint. Organization's Compliance with Law (1214). their Viability as A1ternative to fee-for-service mode of Producing Care Contact: Human Resources Div. Budget Function: Health: Health Care Services (551)}. Organization Concerned: Department of Health, Education, and Welfare; Sound Health Association, Inc., Takora, WA. Congressional Relevance: House Committze on IntDerstate and Foreign Commerce: Health and the Environment Subcommittee; Senate Committee on Human Resources: Health and Scientific Research Subcommittee. Authority: Public Health Service Act (42 U.S.C. 246(e)). Health Maintenance Organization Act of 1973, as amended. P.L. 94-63. 42 U.S.C. 242b (Supp. V). 42 U.S.C. 229b. 42 U.S.C. 299j. The Sound Health Association, Inc., of Tacoma, Washington, is a consumer-owned, prepaid health plan and was the first health maintenance organization qualified by the Department of Health, Education, and Welfare (HEW) under the Health Maintenance Organization Act. The provision of health care services on the basis of prepaid rates provides incentives for the organization to emphasize preventive medicine to reduce overall health care costs. Findings/Conclusions: The Sound Health Association appears to be providing comprehensive prepaid health care in accordance with the act. Although delays in the publication of implementing regulations slowed the development of the association and caused increased operational costs, it should have enough operating income to meet operating costs by the second quarter of calendar year 1979 provided that it meets enrollment projections, improves marketing efforts, and controls costs. The association requested a waiver of the open enrollment requirement. HEW did not issue the waiver, but it has not forced the association to have an open enrollment period. The association is serving the indigent but has not actively so'nght enrollment of high risk individuals. As of December 31, 1976, it was providing comprehensive health care services to 6,016 members. The Federal Government requires employers to include a health maintenance organization in their employees' health benefit plans. For employees represented by a labor union, the health maintenance organization alternative is subject to collective bargining. Generally, unioas have not offered the plan as an option. (Author/SW) ESTytTrE . . - hoj r!!e,!ael outide the Genoral a Ascot rr...;f`F£ A 4 :specific "t ft' 0 :' of approval bah the 3a a.* C .. .; .@. .i .a$.onC REPORT OF THE COMPTROLLER GENERAL OF THE UNITED STATES The Sound Health Association-- A Federally Qualified Health Maintenance Organization The Sound Health Association, Inc., of Tacoma, Washington, is a consumer- owned, prepaid health plan and was the first health maintenance organization qualified by the Department of Hrilth, Education and Wel- fare under the law. As of December 31, 1976, the Sound Health Association was providing comprehensive health care services to 6,016 members. HRD-77-119 DECEMBER 2, 1977 COM TRPOL.LZR EINERAL OPF 11 UNITED ITATI WAIHINOTN D.C. fhI B-16403.(5) The Chairman and Ranking Minority Member Subcommittee on Health and Scientific Research Committee on Human Resources United States Senate The Chairman and Ranking Minority Member Subcommittee on Health and the Environment Committee on Interstate and Foreign Commerce House of Representatives This report discusses findings and conclusions on our evaluation of Sound Health Association, Inc., of Tacoma, Washington, a federally qualified health maintenance organi- zation. A draft report was sent to Sound Health for review and comment. Where appropriate, we have included its comments in the report. This is the first in a series of 14 individual reports to be issued in compliance with section 1314 of the Health Maintenance Organization Act, as amended. An overall report summarizing all our evaluations initiated under section 1314 will be submitted to the Congress by June 1978. As requested by the Chairman and Ranking Minority Member, Subcommittee on Health and Sciertific Research, Senate Com- mittee on Human Resources, we will be forwarding separate reports on each health maintenance organization evaluation to them and also to the Chairman and Ranking Minority Member, Subcommittee on Health and the Environment, House Committee on Interstate and Foreign Commerce. We are also sending copies of this report to the Depart- ment of Health, Education, and Welfare. The Civil Service Commission will receive copies of reports on health mainte- nance organizations which participate in the Federal Employees Health Benefits Program. B-164031(5) While wehope that this and our subsequent evaluations of federally qualified health maintenance organizations be of use to the subcommittee(s) and the will responsib:.e agencies, we believe that the public disclosure Federal of our dis- cussion of several of the issues in the zeports advertently and inappropriately have an adverse may in- the health maintenance organizations' marketing effect on capability and financial viability. Therefore, we distribution of this report, and unless have limited the released subcommittee(s), we will restrict the public by the this and other reports in this series. release o, Comptroller General of the United States 2 REPORT OF THE THE SOUND HEALTH ASSOCIATION-- COMPTROLLER GENERAL A FEDERALLY QUALIFIED HEALTH OF THE UNITED STATES MAINTENANCE ORGANIZATION DIGEST This report, on the Sound Health Association, Inc., Tacoma, Washington, is one in a series of evaluations of individual health mainten- ance organizations. A health maintenance organization provides health care services to its members based on prepaid rates. This provides incentive for an organization to emphasize preventive medicine to reduce over- all health care costs. Sound Health appears to be providing compre- hensive prepaid health care to its members in accordance with the Health Maintenance Organi- zation Act. Although delays in the publica- 'ion of implementing regulations by the De- partment of Health, Education, and Welfare (HEW) -lowed the development of Sound Health and caused iiicreased operational costs, Sound Health should have enough operating income to meet operating costs by the second quarter of calendar year 1979. Sound Health requested a waiver of the open enrollment requirement. HEW did not issue the waiver, but it has not forced Sound Health to have an open enrollment period. Sound Health is serving the indigent but has not actively sought enrollment of high risk individuals. Thus, its membership does not appear to represent the various age, social, and income groups in its service area. Sound Health will not have enough income to mee: operating expenses by the end of a 36-month Federal loan subsidy period. Late publication of regulations by HEW delayed Sound Health's enrollment program, and member- ship has lagged about 6 months behind original projections. However, Sound Health should attain a brsak-even poirt--operational reve- nues will equal operatior expenses--by laor dats. Upon removal, the report cover date should i notedhereon. i HRD-77-119 the second quarter of calendar year 1979 provided that it --meets enrollment projections, -- improves marketing efforts, and -- controls costs. Employers in the Sound Health service area must include i health maintenance organiza- tion in their employees' health benefit plans. Although some employers resent this Federal requirement, those contacted said the added administrative costs of offering employees a health maintenance organization were negligible. Sometimes employers paid more for employee participation in the Sound Health plan than in other health benefit plans. However, in all cases, in- creased employer contribution was volunt :y. For employees represr.;Led by a labor union, the health maintenance organization alter- native is subject to collective bargaining. Many employees in the Sound Health service area receive health benefits through union trust programs negotiated through collective bargaining. Sound Health has generally been unsuccessful in getting unions to offer the health maintenance organization as a health benefit plan option for members. In commenting on this repcrt in July 1977, Sound Health stated that they generally agreed with GAO's conclusions. They point out that the organization has grown to 9,200, the marketing system is better organized, and controls imposed on health services are working well. ii Content DIGEST i CHAPTER 1 INTRODUCTION 1 Sound Health Association 2 Federal financial assistance 4 Scope of evaluation 5 2 HaS SOUND HEALTH BEEN ABLE TO MEET THE ORGANIZATIONAL AND OPERATING REQUIREMENTS OF THE HEALTH MAINTENANCE ORGANIZAT:ON ACT? 7 Open enrollment 7 Enrollment of members broadly represen- tative of its service area 9 Describing the community rating system 12 3 WILL SOUND HEALTH BE ABLE TO OPERATE WITHOUT CONTINUED FEDERAL FINANCIAL ASSISTANCE? 14 Optimistic enrollment projections and marketing problems 15 Higher than anticipated utilization 18 Audit of Sound Health 19 Our financial projection 19 Conclusions 21 4 WHAT IS THE EFFECT OF DUAL CHOICE ON EM- PLOYERS AND SOUND HEALTH? 22 Economic impact on employers 22 Employer reaction 23 Union resistance 24 5 QUALITY ASSURANCE PROGRAM 25 Page APPENDIX I Letter :!ated Ma) 2' .376, from the Chairman and Ranking Minority Member, Subcommittee on Health, Senate Committee on Labor and Public Welfare 27 II Letter dated July 26, 1977, from the President, Sound Health Association 29 III Sound Health Association operating results for the quarters ended March 1975 through March 1976 31 IV Organizational and operating requirements for health maintenance organizations 32 V GAO actuarial projections for Sound Health Association 36 ABBREVIATIONS GAO General Accounting Office HEW Department of Health, Education, and Welfare HliO health maintenance organization CHAPTER 1 iN'TRODUCTION The Health Maintenance OXganization (EMO) Act of 1973, as amended, requires GAO to evaluate the operations of cer- tain HMOs which hlave been certifie.; by the Department of Health, Education, and Welfare (HEW) as complying wit;! the dct's organizational and operational requizements and which have received financial assistance under the act. Section 1314 of the act, as a,..-nded, requires us to report to the Congress on the ability of these qualified HMOs -- to meet the requirements of the act regarding ;heir organization and operation, including the HMOs ability to include medically indigent and high risk individ- uals in their membership and to prc ide services to medically underserved populations, and -- to operate on a fiscally sound basis without continued Federal financial assistance. The act directs us to study and report tree economic effects on certain employers required by section 1310 of the act, us amended, to offer membership in qualified HMOs as an c¢ptional health benefit plan, an option referred to as dual r.ho ice. The act also requires us co evaluate (1) the operations of distinct categories of HMOs in comparison with each other, (2) HMOs as a group us compared with alternative forms of health care delivery, and (3) the imyact that HMOs. individ- ually, by category, and as a group have on the publIc health. To the extent possible we will include such information in our summary report to the Congress. However, as noted in our September 3, 1976, report, "Factors That Impede Progress in Implm.enting the Health Maintenance Organization Act of 1973," no state-of-the-art agreement exists on what methods have been developed to provide comparative and health status information to be used for such evaluations. For this report we will describe the HMO's quality assurance program. This evaluation coicerns the Sound Health Association, Tacoma, Washington, and is one in a series of evaluations of IIMOs to be conducted in compliance with the act. At the request of the Chairman and Ranking Minority Member, Subcommittee on Health and Scientific Researcn, Senate 1 Committee on Human Resources (formerly the Subcommittee on Health, Senate Committee on Labor and Public Welfare), separate reports on each HMO evaluation wiUl be issued to them and to the Chairman and Ranking Minority Member, Sub- committee on Health ard the Environment, House Committee on Interstate and Foreign Commerce. A report summarizing all our audits initiated under section 1314, as amended, will be submitted to the Congress *y June 1978. SOUND HEALTH ASSOCIATION Sound Health was incorporated in June 1972 under Washington State laws as a nember-owned nonprofit HMO and began enrolling members and providing prepaid health services in April :1974, before qual-ificati-on as an HMO by HEW.: Its- board of directors, which is responsible for setting policyv and guiding the affairs of the organization, is elected by its membership. In June 1974 after publication of preliminary regula- tions covering the HMO Act, the board of directors voted to seek certification as a qualified HMO. Its original health plan was revised to include preventive dental care for children, outpatient mental health care, improved out- of-area medical benefits, and liberalized hospital benefits. HEW certified Sound Health as a qualified HMO on November 29, 1974--the first HMO to be certified in the United states--and awarded the HMO a $1 million loan, the first loan under this program. Sound Health provides health care services primarily to members who live in Pierce County, Washington. (See page 3.) Sound Health furnishes outpatient health care at its health center facility in Tacoma, but inpatient care and specialized services, such as extended care and mental health services, are supplied through contracts with hospitals and other health care providers. The Sound Health outpatient facility can provide health care services for up to 12,000 members. Prospective enrollment groups received information stating that other convenient health care centers would he added as enrollment increases. The Sound Health director stated that some plans and personal contacts had been made to establish satellite health care clinics in two additional areas. He estimated these would be needed in the latter part of 1977. 2 PIERCE COUNTY PIERCE COUNTY Location of Sound Health farilty FEDERAL FINANCIAL ASSISTANCE Federal financial assistance to prepaid hsl!th care delivery programs was available before the HMO Act under several sections of the Public Health Service Act (42 U.S.C. 246(e) (repealed Public Law 94-63), 42 U.S.C. 242b (1970 and Supp. V, 1975), 42 U.S.C. 229b (1970), 42 U.S.C. 299j (1970)). Between December 1971 and December 1974, Sound Health, or its predecessor, the Puget Sound Health Care Association, received three gran,'s totaling $428,382 under section 314(e) of the Public Health Service Act (repealed by Public Law 94-63). This section provides for grants to any putlic or nonprofit private agency, institution, or organization to cover partially the cost of (1) providing services to meet health needs which are limited by geographic scope or specialized regional or national significance or (2) initially developing and support- ing new health services programs. In January 1972 the Puget Sound Health Care Association received a grant of $100,000 to fund the initial planning and developing of a hospital-based HMO. Unable to purchase a hospital facility, the Puget Sound Health Care Association changed the original concept of a hospital-based HMO to a community-based organization, and a successor corporation, Sound Health Association, was established. The grant was transferred to Sound Health in June 1972. The HMO Act authorizes Fedaral financial assistance through grants and contracts to public or private nonprofit organizations for HMO feasibility studies, planning, and initial development. The act requires each HMO to be fiscally sound. However, because developing HMOs may have difficulty meeting operating expenses, the act provides for Federal loans during their first 36 months. Interest accrues from the date of the loan closing and is to be paid in accordance with the loan agree- ment, which requires repayment of the principal beginning between the fourth and fifth anniversaries of the direct loan closing. In June 1974, after 2-1/2 years of developmental activi- ties supported by section 314(e) grants, Sound Health applied under the HMO Act, for an operational loan of $563,000 and an initial development grant of $124,520. HEW did not act on the loan application because it had not published its final HMO program regulations. As an interim measure, however, HEW awarded Sound Health an initial development grant of $304,738. 4 Sound Health did obtain a Federal loan of $1 million, effective November 1, 1974. The final amount of the loan was larger than the original amount requested because during its loan review process, HEW determined that Sound Health's lossts would exceed its originally requested amount. Under the loan conditions, Sound Hea!th must break even; that is, income must equal expenses by November 1977 and must have sufficient cash to begin loan principal repayment in July 1979. As shown below Sound Health has received 'Fe',dralfunds totaling $1,733,0001 about 75 percent of the funds were pro- vided under the HMO Act. Federal Financial Assistance Date Type Authority awarded Amount Purrose Grant Public Health Planning and Service Act. (a) $ 428,382 development section 314(e) of a hospital- based HMO Grant HMO Act 7/26/74 304,738 Initial develop- mernt Loan HMO Act 11/29/74 1,000,000 Initial deficit Total $1,733,120 a/Represents three section 314(e) grants covering the period Dec. 16, 1971, to Dec. 15, 1974. SCOPE OF EVALUATION Our review was done at the Sound Health Association, Tacoma; HEW's Health Services Administration Headquarters, Rockville; and HEW's region X offices, Seattle. We also inter- viewed employer representatives at their offices in Tacoma and Pierce County. To determine Sound Health's ability to be fiscally sound without continued Federal financial assistance, we -- compared Sound Health's financial history to its ini- tial financial projection s,bmitted when applying for qualification and also for a Federal loan; 5 -- reviewed the actuarial projections used by Sound Health and prepared new projections from data ob- tained during our reviews and -- reviewed Sound Health's marketing program, its finan- cial operations, and its systems to control ovrer- utilization of services. To evaluate Sound Health's ability to meet the other requiremrents and purposes of the act, we -- compared its organizational structure and its level of health services provision to the requirements of the HEW regulations which had been used in qualifying Sound Healthy and -- evaluated Sound Health's health services programs to medically underserved areas, high-risk individuals, and nthe indigent. Summarized in appendix IV are our determinations on Sound Health's compliance with the act. CHAPTER 2 HAS SOUND HEALTH BEEN ABLE TO MEET THE ORGANIZATIONAL AND OPERATING REQUIREMENTS OF THE HEALTH MAINTENANCE ORGANIZATION ACT? The HMO Act directs qualified HMOs to be fiscally sound; offer specified health benefits; and meet certain other organizational and operational requirements, including use of a community rating system to develop premium rates. (See app. IV.) Sound Health's financial viability is discussed in chapter 3. Sound Health offers the specified health benefits, meets the organizational requirement, and generally satisfies the operating requirements of a federally qualified HMO. Provisions not met include -- the open enrollment requirement which Sound Health never fully implemented and which was never formally waived by HEW; and -- the broadly representative n;embership requirement, which we believe could be better satisfied by Medicare enrollees. HEW has not published program guidelines for interpreting some operational requirements. For example, although HMOs must establish a community rating system for fixing periodic payments, HEW has not published guidelines to be used in devel- oping such a system (see p. 13). HEW encourages an HMO to implement certain other program objectives of the act but does not require it. Guidelines have not been established, thus leaving the interpretation to each HMO. An example of such an objective would be in the ways services should be directed toward medically underserved areas. OPEN ENROLLMENT P:ior to being amended section 1301(c)(4) of the HMO Act of 1973 stated that each HMO shall 7 "* * * have an open enrollment period ofnot less than thirty days at least once during each consecutive twelve-month period during which en- rollment period it accepts, up to its capacity, individuals .n the order in which they apply for enrollment." Sound Health was subject to this requirement during its first year of operation. Exceptions to the open enrollment requirement could be authorized by the Secretary if the HMO demonstrated, to HEW's satisfaction, that it had enrolled or would be forced to enroll a disproportionate number of individuals who were likely to make excessive use of its services and that enroll- ing more such individuals would jeopardize the financial via- bility of the HMO. In 1975 Sound Health held an 8-day open enrollment period in which 40 members were enrolled. Sound Health re- quested a waiver of the remaining 22 days for 1975 because: "Continuation of this open enrollment period would attract more people who are extremely ill and thus put our organization into a questionable financial position because of assumed risk. We believe it would be beyond what this organization could sustain." Sound Health also requested a waiver of the entire 1976 open enrollment period. The 1976 request noted that about 75 percent of the members who had joined during the 1975 open enrollment period had preexisting and/or chronic medical conditions. These conditions included hypertension, cancer, cardiac problems, diabetes, cataracts, arthritis, and alcohol- ism. Data maintained for these 40 enrollees showed that their rate of utilization of services had exceeded the average for total enrollees as shown below: Utilization Comparison (October 1974 - March 1976) Enrollees' annualized rates Services 5pe i1ent pri --- Totai enrollees Office visits 6.9 per member 5.9 per member X-ray .95 per member .9 per member Hospital days 1,350 per 495 per 1,000 members 1,000 member 8 The Sound Health director mated that Sound Health had received many inquiries from persons with severe or chronic medical problems as to the date of the next open enrollment. He said that Sound Health cannot afford to accept high-risk individuals--at least not until the membership is large enough to absorb the high per capita costs for such individuals. Regional HEW and Sound Health officials said that both requests for waiver had been tacitly approved by HEW, but no documentation was available to show the requiremen* itad been waived. HEW headquarters officials have not issued a formal waiver, but neither have they forced Sound Health to have an open enrollment period. HEW has not issued final criteria for considering re- quests for waivers. The amendments to the HMO Act changed the open enrollment requirements jo that open enrollment is now required for only those HMOs which -- have been providing comprehensive health services on a prepaid basis for 5 years or have 50,000 members and -- did not incur a financial deficit in their most recent fiscal yeat. Because of these amendments, Sound Health will not have to have an open enrollment in the near future. It will not have been operating for 5 years as a qualified HMO until late 1979; it had 6,000 members as of December 31, 1976; and it continues to incur deficits. ENROLLMENT OF MEMBERS BROADLY REPRESENTATIVE OF ITS SERVICE AREA Section 1301(c) of the act requires an HMO to enroll persons broadly representative of various age, social, and income groups within the area served. Federal implementing regulations provide no guidelines defining a "broadly repre- sentative" membership. Sound Health is serving the indigent (Medicaid) but has not actively sought enrollment of high- risk (Medicare) individuals. This suggests that Sound Health's membership doas not represent various age, social, and income groups in its service area. 9 Medicare enrollees In its application for qualification as an HMO, Sound Hel1th indicated that its health professionals and contract providers were eligible to serve Medicare beneficiaries. Sound Health offers a Senior Plan, which supplements the Federal Medicare program anc provides the same health ser- vices and benefits available to othe: Sound Health members. As of April 1, 1976, only 30 members were enrolled under the Senior Plan. The Sound Health director stated that Medi- care beneficiary enrollments have not been actively sought because Sound Health would have to act as a fee-for-service provider, which must obtain payment from Medicare. Medicaid enrollees Sound Health has contracted with the Washington Depart- ment of Social and Health Services to provide health ser- vices to Medicaid beneficiaries. The Sound Health contract became effective July 2, 1975, and was subsequently amended to include the following conditions: -- Enrollment by Medicaid beneficiaries will be voluntary. --Sound Health will enroll eligible Medicaid recipients throughout the year. -- The Department of Social and Health Services will approve Sound Health's marketing plans, procedures, and materials used to recruit Medicaid enrollees. -- The Department of Social and Health Services will be able to inspect and evaluate the quality, appropriate- ness, and timeliness of contract services and to audit and inspect books and records. -- Within 2 years after the contract effective date, no more than 50 percent of the Sound Health members may be Medicare or Medicaid beneficiaries. Sound Health negotiated an increase in the monthly Medi- caid premium--from $17.20 to $20 per enrollee--effective February 1, 1976. Health care benefits provided to Medicaid members are essentially comparable to those provided to regular members, except that Sound Health is not required to provide mental health and alcohol and drug abuse health care services to Medicaid members. 10 To attain its goal of 1,000 members from the Aid to Families with Dependent Children program, Sound Health acted as follows to increase Medicaid enrollment. It sent mailings to Medicaid recipients, conducted training sessions for Depart- ment of Social and 1':alth Services staff, provided information to social and health service agencies, and evaluated the recruiting program. Monthly enrollment statistics of Medicaid beneficiaries for Februr-y through May 1976 were: Medicaid Enrollment Cumulative Date Added Lost total January 31 - - 319 February 1 33 24 328 March 1 22 16 334 April 1 219 49 504 May 1 525 46 983 Total 799 135 A continuing program provides for mailing information to Aid to Families with Dependent Children program partici- pants every 6 months. Service to medically underserved areas The Secretary of HEW may designate areas which have a shortage of personal health services as medically underserved. HMOs are not required to serve such areas, but HEW encourages them to do so. HEw classified 10 census tracts in Pierce County as medically underserved areas, each within the Sound Health immediate service area. The Sound Health clinic is in an area classified as medically underserved. Sound Health officials stated it has not emphasized serv- ice to underserved areas becauo · , except for Medicaid bene- ficiaries, marketing is conducted through employee qooups without regard to the residence of prospective members. Al- though some Sound Health members are in medically underserved areas, this has occurred by accident rather than design. 11 DESCRIBING THE COMMUNITY RATING SYSTEM Originally section 1301(b)(1) of the act requires that payment for basic health services provided by the HMO be fixed under a community rating system. Section 1302(8) of the HMO Act, as amended, defines a community rating system as "* * * a system of fixing rates of payments for health services. Under such a system rates of payments may be determined on a per-person or per-family basis and may vary with the number of persons in a family, * * *. * * * such rates must be equivalent for all in- dividuals and for all families of similar com- position." Nominal differentials in payment rates are permitted for certain categories of members to reflect the different administrative costs of collecting payments. Differentials may also be established for members enrolled under contract with a governmental authority or any health benefit program for employees of Stater, political subdivisions of States, and other public entities. Sound Health officials said its premium rates are an adjusted experience rate for the entire membership. In deter- mining the premium rates, Sound Heal'h divides the total budgeted costs by the forecasted member months. In addition, the rates are partially determined by local competition. Our comparison of rates for competitive health benefit plans suggests Sound Health could raise rates 10 percent above projections and still be competitive with other plans. (See p. 19.) As of July 1, 1976, Sound Health premium rates were: Coverage Monthly premium Employee $27.00 Employee and spouse 54.00 Employee, spouse, and child(ren) 79.51 Employee and child(ren) 52.81 Employee (Medicare supplement) 13.50 12 HEW has not published, nor has it any specific plans for publishing, program guidelines to interpret how community rating should translate into a premium structure. As a result we could not determine if Sound Health's rate structure com- plies with act requirements for a community rating system. The HMO amendments have changed application of the community rating requirement to after the HMO has been qualified for 48 months. 13 CHAPTER 3 WILL SOUND HEALTH HE ABLE TO OPERATE WITHOUT CONTINUED FEDERAL FINANCIAL ASSISTANCE? As stated in chapter 1, the HMO Act requires each qualified HMO to be fiscally sound. 8owever, because a devel- oping HMO may have difficulty in meeting initial operating expenses, section 1305 of the act, as amended, provides for Federal loans, not to exceed $1 million in any fiscal year or $2.5 million in total, to assist during its first 36 months of operation. HMOs eligible for loans must be certified as qualified. However, to become qualified, an HMO must be fiscally sound. For Sound Health the Federal loan establishes fiscal soundness. Sound Health obtained a Federal loan of $1 million ef- fective November 1, 1974. We question Sound Health's ability to break even by November 1977, as planned. However, our actuarial projections indicate that even though Sound Health will not break even as planned, its cash flow will permit payments on the loan principal to begin in July 1979 as sche- duled. According to the loan agreement, Sound Health will pay only interest until July 1979 when it must begin principal repayment. Projections prepared by Sound Health with HEW assistance in June 1976 showed Sound Health having sufficient operating revenues to meet operating expenses by November 1977. However, Sound Health -- has failed to meet enrollment projections in the past-- partially due to Federal delays in publishing dual- choice regulations, --cnntinues to have marketing problems, and -- has experienced unnecessary and unanticipated costs. Sound Health must overcome these difficulties to continue with- out Federal financial assistance. Changes in rates charged by Sound Health, reductions in planned overhead costs, or other organizational changes could significantly improve Sound Health's financial position. 14 OPTIMISTIC ENROLLMENT 7ROJECTIONS AND MARKETING PROBLEMS The enrollment projectionr from sound Health, submitted with its application Lof ajalification in 1974, was revised in June 1976. This re-,ision predicts an enrollment increase from 3,048 in March 1976 to 13,931 in November 1977--an aver- age increase of 544 members a month. This increase appears overly optimistic in light of past performance. Sound Health's average monthly increase was 292 and 257 members during the third and fourth quarters of 1975, respectively, and 249 members per month during the first 6 months of 1976. The 1976 figures included a Medicaid enrollment increase of 525 during May. During the quarter ended Marcn 1976, about 76 percent of Sound Health's revenue was from membership dues. The remainder was generated through copayments, fee-for-. service income, and interest income. Sound Health expel s to obtain over 90 percent of its revenue from membershi, :.ues. Our actuarial assessment of the future financial vi&- bility of Sound Health suggests that improved marketing i- crucial for Sound Health's success. Even assuming an improvement in marketing, we believe the Sound Health enroll- ment projections may be overstated unless additional member- ship sources are identified. The enrollment projections submitted with Sound Health's qualification application in 1974 have proven overly optimis- tic, as shown on the following chart. 5 COMPARISON OF ACTUAL AND PROJECTED ENROLLMENT NUMBER OF MEMBERS 18,000 16,000 14,000 /- // 12,000_ SOUND HEALTH / 10,000 1974 ENROLLMENT // ~~~~10,000 -PROJECTION ENROLLMENT 8 0 o /,, PROJECTION // / ,/ SOUVD HEALTH / ACTUAL ENROLLMENT 2,000 - 12/74 6/75 12/76 6/76 12/76 6/77 12/77 16 Federal delays in the HMO qualification and certification process and in publishing regulations and guidelines to imple- ment the dual-choice provisions of the act have contributed to Sound Health's failure to meet enrollment expectations. However, several other factors have contributed and continue to contribute to this condition, including -- Sound Health's lack of organization in its marketing effort, -- employer resistance to the act (see ch. 4), and -- local union resistance to Sound Health (see ch. 4). An HEW official conducted a marketing assessment of Sound Health in 1974 and reported that, "I was surprised to find that the basic data essential to make intelligent marketing decisions has not been acquired in spite of 3 years an.d $700,000 of involvement to date." Our actuarial review showed that, even assuming an improvement in mar- keting, Sound Health enrollment projections may be substan- tially overstated unless additional membership sources are identifies. (See app. V, p. 36.) Sound Health's success in enrolling employee groups has been mixed. The first year rate of penetration--that is, the percentage of employees who chose to enroll during the first year the plan was offered to their respective employer-- was 3.1 percent. Enrollment efforts in April 1976 included failure to enroll anyone in a company with 1,100 eligible employees. The plan also enrolled only 10 in a company with 985 employees, 1 in a group of 170, and none out of 150. In commenting on our draft report, a Sound Health official pointed out these failures were due to problems with union acceptance and inability to obtain access to employees. However, as noted on page 11, Sound Health did have signifi- cant Medicaid enrollment. Recently, the Sound Health director moved to organize the marketing function, including establishing a data base on Pierce County emplovL8s. For employees represented by a labor union, the offer of the HMO alternative is subject to collective bargaining. Sound Health's entrance into the health benefit programs of local unions has been very limited, and Sound Health faces strong union resistance. However, both Sound Health and union officials told us this resistance stemmed from conflicts 17 between them rather than weaknesses in the Sound Health plan or the HMO Act. (See ch. 4.) Publication of the dual-choice guidelines and regulations in October 1975 and Sound Health's certification for dual- choice in January 1976 should inprove Sound Health's marketing. Also, the Civil Service Commission has approved Sound Health to participate in the Federal Employees Health Benefits Pro- gram beginning January 1, 1977. The Sound Health director said that over 10,000 Federal civilian employees live in Pierce County, making the Federal Government one of the lar- gest area employers. HIGHER THAN ANTICIPATED UTILIZATION Sound Health has operated at a deficit since it became- operational in April 1974. During calendar year 1975, it incurred an operating loss of $549,169, or $108,645 more than anticipated. Much of this loss can be attributed to Sound Health's failure to meet enrollment expectations. However, some of the loss resulted from higher than anti- cipated costs, particularly in health service payments to providers who are not on the Sound Health staff (referral costs). Referral costs incurred during 1975 exceeded Sound Health's cost projection by more than $67,000. Sound Health also underestimated and underbudgeted for these costs during the first quarter of 1976. Referral costs exceeded the budget by $50,978. The Sound Health director said that about $15,000 of the first quarter 1976 referral costs were avoidable because services could have been provided by Sound Health. He stated that controls on referrals had been implemented in April 1976. For example, X-rays and laboratory tests are now performed by Sound Health, and plan approval iL required before members may be hospitalized. Referral costs were reduced from $80,456 in the first quarter of 1976 to $49,178 in the second quarter. In commenting on our draft report, Sound Health's execu- tive director clarified the point on referral costs. He stated that beginning in April of 1976, "we instituted more strict controls over referrals to all outside specialists in the areas of ;i-b and X-ray. Whenever possible we also control the tests being done prior to hospitalization by having them done at our health center." The director told us that because an HMO cannot refuse to enroll individual members of a group covered by other health plans offered by the employer, some employees with 18 preexisting health care needs convers to HMO coverage during group enrollment periods when it is economically advantageous for them. According to the director, Sound Health has been adversely affected by many group enrollees with preexisting cardiac, cancerous, orthopedic, and other conditions requiring extensive treatment. Similarly, the director said that from December 1975 to May 1976, Sound Health enrolled 30 pregnant members. Th- Sound Health finance director said that mater- nity costb account for $3.66 of the monthly premium rate. AUDIT OF SOUND HEALTH Sound Health's 1974 and 1975 financial statements were audited by a certified public accounting firm and found in order. The HEW Audit Agency performed a quick assessment audit of Sound Health in August 1974 and a followup audit in August 1975. The 1974 quick assessment audit disclosed several weaknesses which Sound Health needed to correct to provide proper management of and accountability for grant funds. The HEW followup audit reported that most of the deficiencies had been corrected or resolved. Deficiencies reported in August 1974 which we still found in April 1976 included untagged nonmedical equipment and a statement by the financial officer that a physical inventory of equipment had never been taken. Two deficiencies noted in the 1975 audit report had been referred to the region X HMO branch but had not been resolved at the time of our review. The report states that: -- Sound Health inappropriately allocated about $13,000 ($11,766 Federal share) in costs to its HMO develop- ment grant. -- Sound Health had inappropriately applied $58,830 in operating costs to the HMO development grant. It then used loan funds to replace the grant funds. Sound Health's comments on our draft report acknow- ledged a need for a more up-to-date physical inventory and affirmed plans for an annual inventory. OUR FINANCIAL PROJECTION Our analysis of the future financial viability of Sound Health indicated that proposed premium rates must be increased for Sound Health to break even. Appendix V contains our actuarial assumptions and projections. A comparison of rates for competitive plans suggests Sound Health could raise 19 rates 10 percent above its already projected increase and still be competitive with other plans. In commenting on our draft report, Sound Health said some difference may exist in the competitive health ;lans that were compared. We agree that differences in health benefits offered ray exist. However, the rates below were offered to the sal, group which required a set of minimum benefits to be included in the four health plans. Comi-arison of Sound Health Monthl Premium Rates With Competitive Plans note a) Sound Blue Group Western Pecsons under 65 Health Cross Health Clinic Employee $27.60 $ 41.90 $29.83 $53.64 Employee and spouse 55.20 83.15 58.53 63.13 Employee, spouse, and child(ren) 81.25 118.00 84.68 89.25 Employee and child(ren) 53.70 76.75 53.76 61.76 i/Rates offered to Washington State employees in 1976 as obtained from a brochure entitled "State Employees Insur- ance, Board Approved Medical Plans." With a 10-percent increase, we project operating profits for Sound Health during the second quarter of 1979 when its membership approaches 20,000. The following schedule shows our projections. Profit/ Enrollment Income Expenses Loss(-) 1976 5,293 1,003,734 1,545,547 -541,813 1977 10,772 3,244,022 3,666,889 -422,867 1978 16,363 5,899,639 6,193,692 -294,053 1979 21,626 8,875,044 8,821,019 54,025 1980 25,000 11,650,968 11,130,115 520,853 20 CONCLU8SIONS For Sound Health to become financially viable without continued Federal financial assistance, we believe it needs increased premium rates and more members. Although tion Sound Health's ability to break even within the we36-month ques- subsidy period prescribed in the HMO Act, we believe they can accomplish this within 5 years. 21 CHAPTER 4 WHAT IS THE EFFECT OF DUAL C'IOICE ON EMPLOYERS AND SOUND HEALTH? Section 1301 (the dual-choice provision) of the HMO Act, as amended, provides that every employer, which (1) has at least 25 employees in the HMO's service area, (2) is required to pay the minimum wage, and (3) provides health benefits to employees, must offer employees the option of joining a qualified HMO. The act relieves an employer from contributing more to the cost of the HMO plan than it con- tributes to other health benefits plans. We contacted 16 employers, 3 labor representatives, and an insurance consulting firm in the Sound Health service area to determine -- the economic effect on employers of offering Sound Health membership to employees as an optional health plan in compliance with the HMO Act, --employer rea-ction to the act, -- how Sound Health has used dual choice and its effect upon Sound Health, and -- union response to Sound Health and the HMO Act. The employers contacted in the Sound Health service area reported no significant economic impact from the require- ment that Sound Health membership be included as an option to employees in their health benefit programs, and none of the employers had measured the effects of Sound Health mem- bership on the health of their employees. Employer attitudes toward the act ranged from lack of concern to strong resent- ment of Federal interference in their business. ECONOMIC IMPACT ON EMPLOYERS Employers which offered Sound Health membership as a dual- choice option to their employees said the effect on administra- tive costs was negligible. The employer contributions for employee health benefits generally remained the same. However, some employers said that they had voluntarily changed their contributions but had not measured the cost differences. For example, one employer's contribution amounted to 10 percent of employee health plan premium costs for each year of 22 employment with the firm, regardless of the health plan selected. Another employer, a self-insurer, contributed up to $36 a month for health benefits for an employee dependents under the company's indemnity plan. and his The employer agreed to pay the same amount toward Sound Health In addition, this employer agreed to pay the entiremembership. Health premium up to $36 a month for individuals Sound without pendents, even though premium costs for such employees de- the company's plan is only $21 a month. The employee under fits director said that generally high health service bene- tend to select an HMO to avoid the deductibles and users payments required in the company plan. Therefore, premiums may be slightly higher, costs to while the Sound Health company self-insurer may be lower because of the high medical as a utili- zation costs shifted to Sound Health. However, has not measured or studied the effect of this the employer practice. Employers also said the dual-choice provision noticeably affected their relationships with other has not health plans or representatives of these health plans. EMPLOYER REACTION Several employers contacted expressed resentment the HMO Act; others said they were indifferent. about Employers said their resentment stems from the level of Federal ference" in their businesses, not from Sound Health. "inter- Employer representatives said, and Sound that it has not emphasized the employer's legalHealth agreed, obligation to offer Sound Health's benefit plan. The marketing approach used has been to explain the benefits of the plan employer support. Through trade associations, and request professional organizations, and sources publications, other than Sound Health, many employers we contacted became aware legal obligation to offer an HMO. Sound Health of their has sent written dual choice notifications to those employers which (1) initially refused to offer dual choice, (2) written notification, or (3) strongly resisted requested the program. qound Health had sent such letters to 69 employers first 4 months of 1976. in the The Sound Health director said offered the Sound Health plan until several employers had not implementing regulations had been published and Sound Health was qualified for dual choice. The qualification delay contributed to failure to meet enrollment projections. Based Sound Health's with local employers, we believe Sound Health on our contact to enroll more employer groups because of the will be able regulations. dual choice 23 Three employers said they were uncertain if they were obligated to offer the Sound Health plan if most of their employees were receiving health benefits from union health and welfare trusts. UNION RESISTANCE Local union officials said unions in Pierce County have expressed strong resistance to Sound Health. This stemmed from conflicts between Sound Health and union officials, not weaknesses in the Sound Health plan or the HMO Act. Only two unions in the area signed group sponsorship contracts with Sound Health, and only about 600 members were eligible under these contracts. Union officials said they knew of no restrictions that would prevent them from offering an HMO option to their members. Union officials also said that one union had presented the Sound Health plan at a membership meeting. After being told by a local union leader that only one health plan could be selected by the group, the membership, by majority vote, chose their present carrier. 24 CHAPTER 5 QUALITY ASSURANCE PROGRAM Section 1301(c)(8) of the act requires each HMO to establish an ongoing quality assurance program which stresses health outcomes and provides for review by physicians and other health professionals of processes for providing health services. HEW regulations state that each HMO shall have a quality assurance program which -- collects systematic data on performance and patient results and -- is designed -to meet t-he professional standards review established under the Social Security Act for services provided by hospitals and the operating health care facilities or organizations. The Sound Health quality assurance program adopted in February 1974 included the following policies and Sound Health implementing actions: Qualification of medical group members The Sound Health medical director stated that all its staff physicianc arc board certified or board eligible. Management information system Elements of the management information system are examined to identify real or potential problems. Management information system data shows the number of encounters by each Sound Health provider, referrals to outside providers, and quantitative use of other medical services. For example, the finance director said analysis of the system had alerted Sound Health to an increase in referral costs during the first quar- ter of 1976. (See p. 18.) Member relations Sound Health surveyed members in 1975 and 1976 to obtain opinions on its health services. Generally, members were asked if such items as waiting time, medi- cal staff competence, and medical facilities were satisfactory or unsatisfactory. Sound Health also established committees to deal with health benefits and member grievances. 25 Medical audit The Sound Health medical director stated of the limited number (three) of Sound that because Health physi- cians, no systematic peer review of medical exists. However, he told us the medical procedures staff weekly. Sometimes the procedures prescribed meets fic cases are discussed, but no documentation for speci- for these informal case reviews. Region is kept stated they are helping Sound Health X HEW officials peer review program. develop a systematic Continuing education Many (12 out of 29) professional staff participated in the Sound Health continuing education 1974-75. course 3 during HEW, in its review of the Sound Health application, noted the Sound Health quality HMO qualification continuing education programs followed assurance and the regulations. We were told that all hospitals under contract with Sound Health have State-approved utilization review The Professional Standards Review Organization procedures. performs peer review activities in short-term, in this region hospitals only and has yet to implement acute care ambulatory review in facilities such as Sound Health's care peer outpatient clinic. In our opinion Sound Health should establish a more formal peer review system to insure the administered by its providers. Such quality of care a system documented regular review of systematically should include selected cases. 26 APPENDIX I APPENDIX I N &US# A. wua Jm, N.J., . .N jUwU RUat5H. W. V. JAlo N,.. VW. N.Y. e- - "X .1, jA W,h UWIM. PA. N.I, n.ow 1.mm. T, 4C.. A W*UWIAM NAl UMW .A M A WALYIN M~ir. A P. E, 1.MSiLB. Bu ,O.¢., 1. A,WLD M WNI* J& I*I BOAU.,JA.LlC ,AOMCANO WI.I AR, May 24, 1976 -May (5) 24031 The Honorable Elmer B. Staats Comptroller General of: the United States General Accounting Office 441 G-Street, N.W. : - Washington, DC.= 2 48 X Dear Mr. Staats: In April, members of your staff provided information to our staff regarding the General Accounting Office's initital reviews of HeaLth Maintenance Organizations under section 1314(a) of the Health Maintenance Organization Act of 1973. In addition to expressing the Subcommittee's appreciation for the assistance your staff has provided the Subcommittee in exercising its oversight responsibility and in its deliberation on S.1926, the purpose of this letter is to confirm the review approach presented by your staff. We understand that GAO has started a review of two qualified HMOs as a beginning point for meeting its require- ments under section 1314(a) as it would be amended by S.1926. Mr. James Martin's November 21, 1975 testimony before the Subcommittee has indicated that the slow rate of progress in establishing "qualified" HMOs along with the lack of an accepted or generally agreed upon methodology for evaluating the impact of HMOs on the health of the public would prevent GAO from meeting the reporting deadline (December 29, 1976) for the evaluations called for by sections 1314(b) and 1314(c). The Subcommittee acknowledges that in view of the unanticipated delays in implementing the HMO Act of 1973, the 36 month reporting requirements for sections 134(b) and (c) now appear unrealistic and are virtually moot. However, the Subcommittee is pleased to note that GAO is planning to include elements of subsections (b) and (c), in its reviews of the individual "qualified" HMOs, specifically: (1) evaluations of the economic effects of section 1310 upon the employers that have included the "qualified" HMO in their employee health benefit programs and (2) descriptions of the quality of care assessments and evaluations in each lIMO. 27 APPENDIX I APPENDIX I As yc4r staff complete the reviews like reports on each review forwarded to ofus each HMO, we would (and as previously discussed with our staff, copies to the Chairman and Minority Member of the House Subcommittee Ranking on Health and Public Environment, Interstate and Foreign Commerce Committee). may supply copies of ti.e individual reports to DHEW You and to the Civil Service Commission to assist them in the performance of their regulatory and monitoring duties over HMOs. report to the Congress would be submitted by June A summary or by section 1314(a) as amended by S.1926. 1978 as called Again, the work by your Manpower and staff on the implementation of the HMO Act Welfare by DHEW Division and the GAO questionnaire survey of prospective HMO grant applicants have greatly assisted us in our d eli-bera-t-i-ons-on amendments of 1975. We look forward to receiving the :::-:: :: report on this effort as well as the reports on the final reviews on HMOs. your planned Qg ; Sincerel Richard S. Schweiker ar Kennedy Ranking Minority Member Chairmr Senate Subcommittee on Senate ,..hco ftee on fHealth Hiealth 28 APPENDIX I; APPENDIX IX SOUND. HEALTH ASIOCIATION i.'- . L · . .: . ;I July 26, 1977 Mr. Gi gory United StatesJ.General Ahart, Director Accounting Office Human Resources Division Washington, D. C. 20548 Dear Mr. Ahart: We ha\ reviewed the draft of a proposed report prepared by the Comptroller General of the of Sound Health Association, United States on the evaluation a federally qualified HMO. We are attac.ing a list of corrections made prior to publication of the that we think should be study. Generally the report is a fair and accurate expression of the position of Sound Health Association The report succinctly reported as it was in June 1976. to its present status. the evolution of our organization As the letter indi.cates the study great deal has happened since is late in being published. A our organization haw reached a the original Study. For example, better organized marketing cystemmembership of 9_00. It has a within the year on the operational and we have matured considerably imposed on health services are levels. The controls we ways to control other expenses working well and we are seekirq as effectively. We invite you to return and do explore some other aspects of a follow-up assessment and perhaps HMO development such as manpower development in the i!MO movement process itself. or evaluation of the development Sincerely yours, Robert E. Huesers, President REHang cc: Lou Smith, GAO, Seattle 29 APPEhbIX It APPENDIX II GAO note: The attachment pertains to material that was included or deleted from the report. 30 APPENDIA. T APPENDIX III SOUND-HALTH AS8OClATZON OPEATING RSSULTS FOR THE QUARTERS ENDED MARCH 1975 THROUGH MARCH 1976 Qu arter Ended MarCh June..... september 'e Dcmbe-r ... iFc 1975 1975 1975 1975 1976 Income: Member dues $45,532 $54,177 $72,528 $117,028 Copaymente $154,433 351 900 399 1,365 2,950 ree for service and other operation income 20,348 15,312 18,286 30,396 Interest income 32,290 20,284 .2,513 3699 31,566 13,419 1 Totall ineome -0$6,517 72,900 $S94,912 ;$180,355 S1203089 Expenses= Physicians $ 23,864 $ 18,676 $ 23,533 $ 41,95! Health center $ 30,851 operations 35,632 52,759 49,593 33,593 Hospital care 73,187 8,142 4,631 23,248 53,081 79,022 Drugs and vision care 4,399 5,545 7,904 9,361 Other contracted 13,781 health services 16,851 8,256 29,249 63,900 Reinsurance and 801456 out of area 1,183 2,046 2,539 5,831 Facilities and 5,989 equipment 19,056 21,940 25,053 12,198 Administration 20,819 37,472 32,824 32,846 47,583 47,184 Enrollment 18,076 29,379 19,584 24,793 Business taxes 24,420 908 1,113 1,524 2,165 2,768 Interest 24,076 23,426 23,606 26,796 Authorization 25,698 and develop- ment costs _8 _8393 8393 _8393 _8,393 Total expenses $198j052 $208,988 $247,072 $329,739 Si4 6 Revenue Loss(-) -$111,535 -$13 -$152,160 -149,384 -$209,479 Average number of members 877 1,008 1,468 2,180 2,944 31 APPENDIX IV APPENDIX IV ORGANIZATIONAL AND OPERATING REQUIREMENTS FOR HEALTH MAINTENANCE ORGANIZATIONS In Not in compliance compliance The HMO shall be a legal entity which provides: X Basic health services for a basic X health service premium which is: -- paid on a periodic basis X without regard to the dates health services are provided -- fixed without regard to the X frequency, extent or kind of health services actually furnished -- fixed under a community rating X (as defined by system Sound Health; see ch. 2) -- may be supplemented by X additional nominal payments, except that such payments may not serve as a barrier to delivery of health services. Supplemental health services for a X supplemental health service payment which is fixed: -- on a prepayment basis, X -- under a community rating X (as defined by system. Sound Health; see ch. 2) The services of health professionals X which are provided as a basic health service shall be provided through health professionals who are members of the staff of the HMO, through a medical group or individual practice association unless the health pro- fessiona:q services are unusual or infrequently used or the basic health service was provided because it was 32 APPENDIX IV APPENDIX IV In Not in compliance compliance medically necessary and could not be X provided by such a health professional. Basic and Supplemental Health Services X shall be available, accessible and be provided in a manner that assures con- tinuity and when medically necessary be available and accessible twenty-four hours a day and seven days a week. A member of an HMO shall be reimbursed X by the organization for his expenses in securing basic or supplemental- health services other than through the organi- zation if it was medically necessary. An HMO should have a fiscally sound X (with some operation and adequate provision against the risk of insolvency which is satis- changes neededt factory to the Secretary. see ch. 2) An HMO should assume full financial X risk on a prospective basis for the provision of health services, except that the HMO may obtain insurance or make other arrangements. An HMO shall enroll persons who are broadly representative of the various X age, social and income groups within the area it serves. An HMO shall have an open enrollment X (During our review, period of not less than thirty days at least once during each consecutive Sound Health was not twelve month period during which en- in compliance. How- ever the act, as rollment it accepts, up to its capacity, individuals in the order in which they amended, does not apply, (Unless] the HMO demonstrates require open enroll- to the Secretary the need for a waiver. ment until certain criteria are met; see p. 9) 33 APPENDIX IV APPENDIX IV In Not in compliance compliance Ali HMO shall not expel or refuse to re- X enroll any member because of his health status or his requirements for health service. An HMO shall be organized in such a X manner that assures that at least one- third of the membership of the policy- making body of the HMO be members of the organization and there shall be equitable representation on the member portion of the policymaking body of members from the medically underserved populations in proportion to their enrollment relative to the entire enrollment. An HMO shall be organized in such a X manner that provides a meaningful pro- cedure for hearing and resolving griev- ances between the HMO and the members of the organization. An HMO shall have an organizational X (some improve- arrangement for an ongoing quality ments are neededt assurance program which stresses see ch. 5) health outcome and provides review by physicians and other health pro- fessionals of the process followed in the provision of health services. An HMO shall provide for its members: -- medical social services X -- encourage and actively provide X for its members' health education services. An HMO shall provide or make arrange- X ments for continuing education for its health professional staff. An HMO shall provide for an effective procedure for developing, completing, evaluation, and reporting to the Secretary statistics and other information: 34 APPENDIX IV APPENDIX IV In Not in compliance compliance -- cost of operations X -- patterns of utilization of services X -- availability, accessibility, and acceptability of its services a/ -- to the extent practical developments on the health status of its members a/ -- such other matters as the Secretary may require. a/ a/HEW has not completed reporting requirements. 35 APPENDIX V APPENDIX V GAO ACTUARIAL PROJECTIONS FOR SOUND HEALTH ASSOCIATION Our analysis of the Sound Health financial outlook indicates it is unlikely to succeed under the rate structure proposed by Sound Health's finance director. A comparison of rates for competitive plans suggests Sound Health could raise rates 10 percent above those projected and still be competitive with the other plans. We made a second pro- jection, assuming Sound Health would increase premiums 10 percent above projected amoutLs as of January 1977. Under this assumption the plan would begin to have operating pro- fits during the second quarter of 1979. C 3h flow problems will probably not occur if the HEW loan to Sound Health is increased to $2 million, as expected by Sound Health, and if the loan period is extended beyond 3 years, as author- ized in the 1976 amendments to the HMO Act. The first pay- ment on the principal is scheduled for July 1979. For Sound Health to succeed it must improve its marketing significantly. The executive director of Sound Health has expressed willingness to move toward achieving this. Even assunLing an improvement in marketing, we believe that Sound Health enrollment projections may be substantially overstated, unless additional membership sources are identified. The major differences in assumptions used in the Sound Health projection (showing a fourth quarter 1977 break-even point) and our projections are summarized as follows. Sound Health Assumption projection GAO projection Inflation 10-percent simple 10 percent compound rate, factor rate (not com- 20-percent effective rate pounded) for malpractice insurance, and 10 percent additional premium Hospital 450 days per 1,000 480 days per 1,000 utiliza- members a year members a year tion 36 APPENDIX V APPENDIX V Facility Delay adding facili- Lease second facility expan- ties. It is unclear when enrollment reaches sion from projection work- 12,500. Stop enroll- sheets where members ment activities when are to be cared for membership approaches after original the 25,000 limit of 2 facility is out- facilities. grown. Enrollment Initial penetration Accepted Sound Health pro- rates of 5 percent jected Medicaid and non- for some specific group enrollment increases. major employers Assumed enrollment increases (Federal, and State for 25 or fewer employment or Government, Boeing, less approximately equal the etc.). It is un- increase between 3/1/75 and clear what enrollment 3/1/76. Initial penetration increases were as- rate of 3.8 percent for large sumed to be. groups with semiannual Approximately increase for 3 years straight line in- of 1.5 percent (3 per- creases in nongroup cent annual increases enrollment, and for Federal employees). Medicaid enrollment Peak penetration after spurts for Medicaid the fourth year of 12.8 in April and October percent. Used specific after semiannual enrollment drives planned mailings. by Sound Health when available. Assumed drives in 10 firms per quarter averaging 75 em- ployees for remaining months through end of 1979, when all major employers will have been contacted. Assumed 2.3 plan members per employee. INFLATION FACTOR We accepted the 10-percent rate used by but applied as a compound rate. A 10-'- cent Sound Health Cused by Sound Health) results in a 50-percent simple rate after 5 years. A 10-percent compound rate increase (used results in a 6 1-percent increase after 5 years. by us) Feb. 1976 Seattle area medical expense consumer price index - 169.6 37 APPENDIX V APPENDIX V Feb. 1972 Seattle area medical expense consumer price index - 122.9 Annual effective rate of increase - 8.4% 100 = Jan. 1967 Feb. 1976 national hospital charges consumer price index = 144.1 Jan. 1972 national hospital charges consumer price index = 100.0 Annual effective rate of increase = 9.6% 100 - Jan. 1972 "Jan./Feb. 1975 Malpractice Digest" published by St. Paul Fire and Marine Insurance quotes malpractice premium in- creases over the previous 5 years as 154-percent for low- risk doctors (non-surgeons) and 172 percent for high-risk doctors--effective annual rates of about 21 and 22-percent, respectively. PREMIUM INCREASE For Sound Health to become viable under our assumptions, a 10-percent rate increase above that projected by Sound Health would be required. A premium comparison, based on a chart in the brochure "State Employees Insurance, Board Approved Medical Plans" (see p. 20 of report), indicates that such an increase would leave Sound Health rates com- petitive with all listed plans except Blue Cross low option (benefits not comparable) Kaiser (not available in Tacoma) and well below Blue Cross high option rates. UTILIZATION RATE The finance director of Sound Health said he assumed the hospital utilization rate could be reduced to 450 days for 1,000 members by postponing elective surgery (such as vasectomies) until fewer than a prescribed number of Sound Health members were hospitalized. We don't believe Sound Health can achieve the dramatic enrollment improvement needed for success and also refuse to provide benefits as promised. Therefore, GAO used a utilization rate closer to actual hospital use. 38 APPENDIX V APPENDIX V Hospital utilization for the let quarter of 1976s 2,855 members in Jan. x 533 annual days per 1,000 - 1,522 annual days 2,929 members in Feb. x 524 annual days per 1,000 - 1,535 annual days 3,048 members in Mar. x 429 annual days per 1,000 - 1,307 annual days Total 4,36 Total member months (2,855 + 2,929 + 3,048) . 8,832,000 members 494 annual days per thousand members FACILITY EXPANSION The original projection of the Sound Health finance director showed a second facility would have to be leased when enrollment approached 12,500 and a third facility would be needed at a membership of 25,000. He then revised his projection, eliminating the lease expense for additional facilities and adding a variable expense when membership exceeds 14,000. We know of no way of adding parts of facilities as each new member joins. The only alternative is to add a new facility when the existing one is outgrown. Adequate facilities are crucial to a successful marketing program. We, therefore, used Sound Health's original projection. Since our projection indicated that membership would peak at around 26,000, we assumed a cutoff of enroll- ment activity at the 25,000 level, which would be the capacity of the 2-facility operation. Sound Health stated that our assurption could apply within the initial period of Sound Health development, but they expect to have other facilities in a larger capacity in years to come. ENROLLMENT AND PENETRATION RATES A 3.8 percent first year penetration rate, that is, the percentage of employees enrolled during the first year the plan was offered to respective employers would be a significant improvement over recent Sound Health experi- ence. The calculations below show a first year rate as of March 1, 1976, following the initial offering and may 39 APPENDIX V APPENDIX V reflect some reenrollments and the initial enrollments. The first year rate for the period ended March 1, 1976, was 3.1 percent. Sound Health's April 1976 enrollment drives included such failures as Pacific Northwest Bell--10 out of 985, Tacoma Housing Authority--0 out of 150, Boeing--0 out of 1,100, Pierce County Health Department--l out of 170. A Sound Health official pointed out that these failures were due to problems with union acceptance and inability to obtain access to employees. Projected improvement is hoped for because of the apparent willingness of Sound H-alth's executive director to improve Sound Health's marketing department and to finalize dual-choice regulations. The Community Health Care Center Plan of New Haven, Connecticut, opened in October 1971. Its penetration rates have averaged 5.9 percent for the first year and 14.3 percent for the fourth year, and have leveled off in the fifth. The straight-line rate of penetration increase has been 14.3-5.9 = 2.8%. We assumed a 3-percent rate of increase 3 for Sound Health since it is starting from a lower initial rate. Penetration Rate Computed for Groues Under Contract as o 3-T1/76 3/1/76 - Employees in Sound Health from firms with 24 of fewer employees 161 3/1/75 - Employees in Sound Health from firms with 24 or fewer employees 99 Increase in employees enrolled 62 x 2.3 average members per employee x2.3 Increase in membership 142.6 .12 12 Monthly membership increase 12 40 APPENDIX V APPENDIX V Firms of 25 employees First-year Penetration or more Employees enrollees rate Under contract as of 3/1/75 5,889 307 5.2% Contracted 3/1/75 through 3/1/76 11,467 358 3.1% Combined 17L356 665 3.8% Omitted from this calculation were Sound Health, which has 100-percent penetration; a bank corporation (Sound Health advised us that it expects very little success with banks); and the State of Washington (which had had no enrollment drive as of March 1976). We obtained a schedule of enrollment 1976 through September 1977 and noted that drives for December the Civil Service Commission had approved offering Sound Health to 10,000 Federal employees effective January 1977. For those months for which no enrollment drive information was available, we assumed that 10 firms could be contacted a month, averaging 75 employees a firm, The average number of employees came from a listing provided by Sound Health. We eliminated firms with fewer than 25 employees and firms already Li der contract or scheduled for enrollment drives. The remaining 351 firms on the list had 26,292 employees (an average of 75 a firm). In addition to the firms on the list, we in- cluded 13 firms not listed, each averaging 75 employees. These assumptions result in no additional major employers to enroll after December 1979. We also assumed neither substantial increases nor decreases of employment will occur in the Tacoma area. HEW's HMO Reporting System Report on "Membership per Contract for Federally Qualified Health Maintenance Organ:zations" for the quarter ended December 1975 shows that Sound Health had averaged 2.3 members per contract for all contracts and 2.2 members per contract for group contracts. We used the higher average. (10233) 41
The Sound Health Association: A Federally Qualified Health Maintenance Organization
Published by the Government Accountability Office on 1977-12-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)