With premiums for health maintenance organizations climbing faster than those for preferred provider organizations, employers are beginning to wonder what happened to the “management” in managed care.

While HMOs may still be less expensive than PPOs or indemnity plans, if they are doing their job in managing costs, why are their prices going up so much?

Industry observers blame three developments.

First, consumer backlash has forced plans to eliminate gatekeepers and specialist referrals and open drug formularies to include more choices-all once thought to be vital to controlling utilization and therefore costs.

Second, many plans are now for-profit entities that must respond to shareholder demands, which also is contributing to cost pressures.

And last but certainly not least, providers are becoming more aggressive in their negotiations with plans, scoffing at capitation and risk-sharing, and demanding more money and autonomy (see story, page 10).

Despite these setbacks, benefit consultants and employers believe managed care is still the best way to rein in health care costs. It’ll just have to do so a little bit differently in the future, they say.

“There is less management” in managed care as a result of “rebellion from both providers and employees,” observed Rich Ostuw, global health care practice director at Watson Wyatt Worldwide in Stamford, Conn.

“But, in many situations, even though the rate of increase in managed care is higher, nobody would say we want to go back to an indemnity system,” he said.

“What managed care has done best is in the areas of preventive care and reducing the cost and risk of unnecessary surgical procedures,” Mr. Ostuw pointed out.

“In many locations, and for many populations, there still is an important place for managed care plans,” he insisted. “We shouldn’t abandon it in the areas where it’s working.”

HMOs, once thought to be the panacea for rising health care costs, are beginning to look a lot more like PPOs, which many employers had hoped to use as steppingstones to move employees into the more-restrictive managed care plans.

“As you look at the distinction between (HMOs and PPOs), the differences are starting to blend,” said Brad Fluegel, health sector market leader for Tillinghast-Towers Perrin in New York.

HMOs have eliminated or curbed specialist referral requirements, expanded their drug formularies and are doing less capitation in their contracts with providers, industry observers say.

HMOs also experienced significant financial losses over the past few years and are now playing catch-up.

“The rate increases in prior years were well below medical trends,” Mr. Fluegel said. “Plans were more growth-oriented than profit-oriented and were aggressive on price in order to get the business.”

But that approach backfired. Lower premiums, coupled with higher prescription drug costs and less management, have put many HMOs in the hole, he said, and now they have to raise rates substantially to return to their former levels of profitability.

Furthermore, now the majority of plans are for-profit and have shareholders to answer to, said Blaine Bos, principal at William M. Mercer Inc. in Chicago.

As health plans consolidate and become publicly traded, “shareholders are demanding that more attention be paid to the bottom line,” Mr. Bos said. “Shareholders want better returns on their investment, so HMOs have to raise prices to improve profitability.”

Increased provider clout also is making it harder for HMOs to negotiate good discounts, which also is adding to the plans’ overhead, consultants point out, and the more they have to pay their doctors, the more they have to charge in premiums.

“The doctors are more sophisticated in how they negotiate contracts,” Mr. Bos said. “They’ve discovered how much power they have.”

But while managed care may be hitting some obstacles today, it did have a significant impact on health care costs over the past 10 years, almost everyone agrees.

“It has delivered on the cost promise,” said Ken Sperling, health care practice leader at Hewitt Associates L.L.C. in Norwalk, Conn.

“The discounts are real. It’s still cheaper to deliver care in an HMO with a $5 copayment than in an indemnity plan with a $400 deductible,” Mr. Sperling said.

“I think what happened is when companies changed to managed care plans, they had a one-time decline in their costs because of the discounts they were getting and case management and everything these managed care plans were doing to control costs,” said Mike Pikelny, corporate actuary and employee benefits consultant at Hartmarx Corp. in Chicago.

“But now that all those programs are in place, I think the increases for all the plans are going up at the same rate,” Mr. Pikelny said.

“It’s just that management care plans started from a lower level, and that one-time savings is gone,” he said.

Despite these trends, managed care plans will always cost less than indemnity plans will, Mr. Pikelny and others say.

“HMOs squeezed a lot of fat out of the system,” agreed Mr. Bos. “They’ve gotten rid of a lot of administrative inefficiencies, and now it’s getting hard.”

To survive, managed care will have to shift its focus, many say.

For example, rather than just offering discounts, plans will tout quality, use evidence-based medicine and institute new technology and procedures to eliminate medical errors, all of which have been shown to reduce cost over the long run, Mr. Bos said.

“But that’s a more-expensive and difficult proposition,” he acknowledged.

This is where the newest trend, the so-called “consumer-driven health care model,” will likely come into play, observers say.

“They say the way to focus on quality is to get the consumer involved,” Mr. Bos said. “But that’s a tough proposition too, because it means educating employees so they look at health care in a new way.”

And, “the return on investment will be much, much lower than in the beginning of managed care,” Mr. Bos predicted. He added that “the employer and the employee are going to pay for the transition.”

“I expect to see some pretty healthy increases for the next two to three years, as plans rebuild reserves and reinvent themselves,” Mr. Fluegel said.

And “there will be higher levels of cost-sharing with employees,” he said.

But “we’re certainly not going to go back to a world of fee-for-service medicine,” Mr. Fluegel said.

“It’s kind of like the stock market in a way,” he said. “We’ve been in a bull market for several years, and people have forgotten that the market goes up and it goes down-it vacillates. The same holds for health care premiums.”

“There used to be a five-year cycle, but that’s been moderated somewhat because of the advent of managed care,” Mr. Fluegel said. “But the underlying issues haven’t gone away.”

“Managed care in its current form has hit the wall,” said Hewitt’s Mr. Sperling.

“We’ve changed the intercept,” he said, “but not the slope.”