Early Returns: HMO Rates Up 18 Percent for 2004

Large companies renegotiating plans or dropping vendors; some smaller companies adopting tiered pricing, others ditching coverage entirely. Plus: SEC comes down hard on ex-Xerox CFO, launches formal probe of Tenet.

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Is this good news or bad news?

According to a new survey by Hewitt Associates, preliminary 2004 HMO rates are up almost 18 percent.

Alarming stuff, admittedly. Then again, consider this: last year, forecasts had HMO rates going up 21 percent in 2004.

Hewitt found that in 2003, the average HMO premium increased by 17 percent—again, slightly down from early predictions. The reason for the savings? Plan changes, negotiations, and terminations by customers, the study says.

“The good news is that this may signal the moderation of health-care increases over the next few years,” said Ken Sperling, East market leader for Hewitt’s Health Management Practice. “The decrease in HMO rates reflects the fact that health plans have made an adjustment to make up for conservative pricing last year, hospital costs are slowing, and while drug utilization is still high, greater use of over-the-counter and generic alternatives have impacted drug prices.”

Hewitt, which captured data from nearly 140 large employers representing more than 1 million employees, found that companies are making plan-design changes and—here’s the kicker—sharing more of the cost with workers.

For example, the number of companies with a $15 office co-pay nearly doubled, from 24 percent in 2002 to 43 percent in 2003. At the same time, employers offering $10 office co-pays dropped from 58 percent in 2002 to 39 percent in 2003.

Specialty-care office visit co-pays also continue to rise, with 40 percent of companies using a $15 co-pay, up from 25 percent in 2002, and another 12 percent are requiring a $20 co-pay, Hewitt adds.

And 55 percent of organizations use a $50 co-pay for emergency-room visits, while 16 percent use a co-pay of more than $50, doubling from just 7 percent in 2001.

The upshot: Sperling says he expects HMO cost increases to end up in the low- to mid-teens for large organizations. “However, continued increases at these levels remain unaffordable for the majority of employers, so we expect companies to continue making aggressive plan-design and employee-contribution changes for the future,” he added.

What’s more, it appears that smaller companies are not having as much success holding down medical-benefit cost increases (if you call a 17 percent increase a success). In 2002, HMO costs for midsize companies rose 24 percent, to an average $4,715 per employee, while the cost of PPO coverage rose 16.3 percent, to $5,298. This according to a separate study of small and midsize employer health plans conducted by Marsh Inc. That survey is based on responses from 1,333 employers with 10 to 999 employees.

In general, smaller companies—employers with 10 to 199 employees—saw their health-care benefit costs rise by more than 20 percent in 2002 and are likely to experience another double-digit increase in 2003, according to Marsh.

As a result, some of the employers have been forced to drop coverage altogether, Marsh added. For example, just 62 percent of employers with 10 to 49 employees reported offering health coverage, down from 66 percent in 2002.

Mid-size employers didn’t fare much better. Companies with 200 to 999 employees saw their health-care costs rise 13.5 percent last year, to $5,840. This is higher than the $5,733 paid by employers with 1,000 or more employees.

As in the case with larger employers, the small and midsize companies are also shifting more of the costs onto their employees.

For example, about 25 percent of the companies in the survey of small and midsize companies hiked the employee-contribution percentages, and about a fifth increased deductibles, co-pays, or out-of-pocket maximums.

Employers are also become more creative with their pricing.

For example, among midsize employers offering prescription-drug card plans, the use of three-tiered co-payments—increasing co-pay amounts for generic, preferred brand, and nonpreferred brand-name drugs—grew from 35 percent to 42 percent in 2002.

Companies are obviously trying to manage prescription-drug benefit costs, whose increases averaged 16.8 percent in 2002.

Marsh also found a growing interest among employers in consumer-directed health plans, which give employees responsibility for purchasing the health-care services they need out of an employer-funded spending account, backed up by catastrophic coverage for major, unplanned expenses.

While the largest employers were the first to adopt these plans, 15 percent of midsize employers say they are likely to move to a consumer-directed health plan in the next two years, according to Marsh.

“With careful management, an employee could wind up ‘banking’ money from the account over the years and, in some plans, use it to help pay for postretirement medical coverage,” Marsh points out.

Ex-Xerox CFO Barred, Fined by SEC

The Securities and Exchange Commission came down hard on two former Xerox Corp. finance executives following an SEC investigation into the company’s accounting wrongdoing.

Former chief financial officer Barry Romeril was barred for life from being an accountant, while former director of accounting policy Gregory Tayler was suspended for three years. Tayler has the right to apply for reinstatement afterward.

The commission ordered Romeril to disgorge nearly $3 million of ill-gotten gains, and levied more than $1.2 million in prejudgment interest and a $1 million civil penalty. He was also permanently barred from being an officer and director.

Tayler was ordered to pay $92,603 in disgorgement of ill-gotten gains, $32,397 in prejudgment interest, and a $75,000 civil money penalty.

The SEC claims that from 1997 to 2000, Romeril fraudulently misled investors about Xerox’s true financial performance through the use of numerous accounting actions, most of which failed to comply with generally accepted accounting principles (GAAP). The alleged chicanery accelerated the recognition of equipment revenues by approximately $3 billion and increased pretax earnings by about $1.4 billion, according to the commission.

“Romeril directed or allowed lower ranking defendants in Xerox’s financial department to make accounting adjustments to results reported from operating divisions to accelerate revenues and increase earnings, including the use of accounting practices known internally within Xerox as margin normalization, return-on-equity, and price uplifts and lease extensions,” the commission said in its complaint.

In addition, the SEC claims Romeril—with the help of other senior Xerox financial executives—fraudulently established a $100 million reserve for “unknown risks” arising out of a 1997 acquisition by Xerox. According to the complaint, Romeril “knew and approved of the improper release of the reserve in later years to cover expenses unrelated to the acquisition.”

The SEC also charged that Romeril authorized Xerox’s use of $315 million of numerous other excess or cushion reserves and $157 million of interest income from tax refunds to manage Xerox’s earnings. The complaint alleges that Romeril failed to disclose the use and financial impact of all of these accounting actions, as well as certain lease transactions that Xerox entered into in 1999 (known as Partnership Asset Strategy, or PAS, transactions) that resulted in substantial and material increases in the company’s financial results and earnings trends at the expense of future periods.

As for Tayler, the commission alleges that from 1997 to 2000, he misled Xerox investors by participating in and failing to disclose the use of Xerox’s most material accounting actions, including margin normalization and return-on-equity that accelerated equipment revenues and earnings in violation of GAAP. The complaint also alleges that Tayler fraudulently failed to disclose the use and financial impact of Xerox’s 1999 PAS transactions.

In April 2002 the SEC brought an injunctive action against Xerox, which consented to the entry of a final judgment that permanently enjoined the company from violating the antifraud, reporting, and recordkeeping provisions of the federal securities laws.

Xerox also paid a $10 million civil penalty, agreed to restate its financial statements, and agreed to hire a consultant to review the company’s internal accounting controls and policies.

SEC Launches Formal Probe of Tenet

In another SEC action, Tenet Healthcare Corp. said it received a civil subpoena for documents from the commission, indicating that it is conducting a formal investigation of the company.

This follows disclosures by Tenet last November that the SEC had initiated an informal inquiry.

The subpoena seeks documents since May 31, 1997, related to Medicare outlier payments, stop-loss payments, and increases in gross charges, as well as the company’s financial and other disclosures.

The company said it would supply the requested documents and continue to cooperate with the SEC.

Late last year, CFO David Dennis resigned while COO Thomas Mackey retired after the company reported two separate unrelated investigations—one regarding outlier payments to Tenet hospitals and the other stemming from the merger of two of its hospitals in Missouri.

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