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Minimizing the outward flow of cash

Having lots of health insurance premiums flowing in the front door is nice, but it will be of relatively limited value to FTP if that money just ends up flowing out the back door to buy healthcare for subscribers.  Gekko has to find ways of minimizing the amount of money it costs him to administer actual healthcare.  He knows this will be a challenge, since the reason HMOs have been given a mandate to run healthcare in the first place is that no other method of reducing costs has worked. But he is confident.  The key element that was missing from those prior efforts has now been supplied - the profit motive.  What a wonderful way to concentrate the mind!  He is sure he can find ways to cut costs.

Furthermore, the healthcare crisis itself will be very helpful to him, in that it provides him with some very useful cover.  The need to trim the cost of healthcare gives him an acceptable reason to make cuts that might otherwise be unacceptable.  And the mandate not to reduce the quality of care gives him an excuse to keep his premiums as high as he can.  (If we cut our premiums too much, he will say, quality will suffer.)  Confident that he has a lot of latitude, Gekko develops strategies for minimizing his cost of doing business.

Cost-minimizing strategy # 1 - Use economies of scale.  

Making FTP a very big HMO has benefits in addition to merely increasing the inflow of dollars.  It gives Gekko opportunities to capitalize on the economies of scale. He negotiates favorable purchasing agreements with all the major vendors. He works to reduce pharmacy costs by having the major pharmaceutical houses "bid" to have their drugs included on the limited FTP drug formulary (i.e., a list of drugs approved by FTP).  And he quickly acts to streamline the management of each of his new hospitals as they come on line, firing layers of old-fashioned administrators, and replacing them with streamlined management teams made up of his own people, using standard FTP operating policies and procedures.

Cost-minimizing strategy # 2 - Avoiding unnecessary risk.

A glance at the dynamics of the HMO industry is enough to convince Gekko that the biggest risk he faces is sick patients.  They are extremely expensive these days. The sickest 10% of the population, in fact, account for over 70% of all healthcare spending, and one really sick subscriber can wipe out the potential profit from twenty, thirty, or even fifty healthy subscribers.  Sick patients are to be avoided like the plague.  

There are two obvious ways of avoiding the sick.  First, don't sign them up.  Second, if you do have to sign them up, make it unpleasant for them to stay with you.

Fortunately, the system Gekko has inherited helps immensely. Since FTP's insurance products are only available through employers, only employed people can sign up for FTP.  And employed people are, on average, far healthier than unemployed people.  There are good reasons for this. In most of the cities in which FTP operates, a substantial proportion of the unemployed do not have jobs precisely because of some chronic illness, disability, or addiction. And because employers are loath to employ the obviously ill, there's an invaluable screening process that takes place before anyone even becomes eligible for FTP. You can't buy prescreening like that at any price, and Gekko's getting it for free.  

Not all of Gekko's options in this regard are purely passive. He notes that several of FTP's new hospitals run specialty centers that are clearly counterproductive - two hospitals, for instance have Congestive Heart Failure Centers, and five have Cancer Centers.  Why should he support clinical programs that go out of their way to attract patients with chronic (and therefore expensive) illnesses? Gekko orders his Medical Directors to figure out how to make these programs profitable within 6 months, or shut them down.

In addition, FTP's new size gives Gekko some clout where it counts.  When he learns that Congress is considering legislation that would require insurers to make health insurance available to people who are "between" jobs, he directs FTP's high-paid lobbyists to keep any such bill from having teeth.

Despite his best efforts, Gekko realizes, FTP will get its share of patients with chronic illnesses.  He'll deal with these simply by allowing layers of obstacles to form between those patients and the care they need.  Gekko realizes he doesn't have to ask anyone to create such barriers - they'll form naturally within any bureaucracy.  What he needs to do is to let the system bog down in red tape for the ill, while, at the same time, to work hard to keep the system squeaky clean for healthy subscribers.  

It won't be long before the chronically ill begin switching to other plans out of sheer frustration - preferably back to indemnity plans so their premium rates (and thus FTP's) will keep rising.  Even better, the healthy (who are receiving benefits like free memberships to health clubs) won't know what the malcontents are complaining about - FTP seems pretty good to them. And as a result, when FTP does its periodic consumer surveys, at least 70% or 80% of its subscribers (i.e., a proportion representing a large majority of its healthy subscribers), will rate its service as good to excellent.

A survey  in 2000 by the Kaiser Family Foundation and Consumer Reports showed that while 64% of Americans gave their health plans an A or B grade, the sickest 20% reported having major problems getting the care they need.  The most common complaints were denials of care, difficulty getting in to see a doctor, and billing problems.  "These results are not good news for consumers," said Peter Lee, President and CEO of the Pacific Group on Health.  On the other hand, these results are "good news for consumers," said Susan Pisano, spokesperson for the American Association of Health Plans (AAHP). I guess it all depends on whether the consumers you're talking about are the ones who are healthy or the ones who are sick.  It is perhaps not surprising that the AAHP naturally identifies with the needs of the former.

In any case, to the greatest extent possible, health plans seek to attract only healthy patients. The practice of attracting only healthy patients is called "skimming" or "cherry-picking," and it's a true art form.  HMOs make a lot of money by enrolling healthy young families and avoiding the old or chronically ill. In the mid-1990s when indemnity insurance plans were still common, skimming actually made money for the HMOs twice - once by enrolling only patients who probably will not need medical care; and again by driving the sick into traditional indemnity plans, thus causing the premiums of those plans to rise, and pulling up the HMO's premiums automatically.

Nowhere was the practice of skimming more profitable for HMOs than in the government's push in the mid-1990s to get Medicare patients into HMOs.  A Medicare HMO during that era got paid a flat amount per enrollee. If it spent less in delivering healthcare than it took in, the HMO kept the difference.  The amount Medicare HMOs received was set at 95% of what it costs to care for a Medicare patient on a fee-for-service basis, which at the time was about $5000 per year.

HMOs were plenty smart enough to figure out what Congress apparently couldn't - cherry-picking is especially profitable with Medicare patients.  If HMOs could recruit from the healthiest 75% of Medicare patients (who use only 9% of the Medicare health dollar), the sickest 25% of patients then would continue using fee-for-service plans, thus driving cost for those plans through the roof.  The HMOs continued to receive 95% of those higher premiums.

HMOs had to work a little harder to cherry-pick Medicare patients (since employers didn't do the dirty work for them), but they were more than up to the task, and it was especially worth the effort.  The public recruiting of Medicare patients at the time was telling. We saw HMOs advertising enrollment drives in affluent suburbs, or at country clubs, or on the third floor of a building without elevators.  Medicare HMOs assiduously avoided the less affluent parts of town.  They not only avoided recruiting patients in such locations, they (and non-Medicare HMOs for that matter) also avoided contracting with doctors whose offices were located within a couple of bus transfers of those areas.  (So as an added benefit - if you're trying to covertly ration healthcare - this practice punished doctors who chose to work in such economically deprived areas.)

The Medicare HMO scheme worked very well (for the HMOs) until the late 1990s, when the government finally noticed that the for-profits were skimming all the healthy patients and leaving the sick ones for standard Medicare.  They changed the rules to remedy this practice - and within three years virtually every for-profit HMO had abandoned the Medicare program.

If you can't cherry-pick the healthy patients any more, you can still try to frustrate the sick. The practice of discouraging usage of expensive services, and thus making healthcare particularly inconvenient for the ill, has been openly discussed as a legitimate technique among healthcare managers.  A 1994 article in the Journal of Health Care Marketing is particularly interesting in this regard.  This article praises several useful techniques that HMOs have developed for discouraging the use of (or "demarketing") costly healthcare services.  To quote:

"Decreasing accessibility to services . . . . can be accomplished by "managing" the information distributed to patients regarding services available and how to access them.  For example, an organization might excessively promote less-costly preventive procedures . . . .and repress information about other elective and/or expensive services.  In addition, providers can strategically locate and number specific services to make them easy (e.g., primary care) or difficult (e.g., specialists) to utilize.  Furthermore, lag periods . .  . . also serve as containment strategies.  Lags may be affected by the need for referrals, limited number of contracted specialists, restricted or inconvenient appointment availability, and increased office-visit waiting periods."

So we see once again that institutionalized waste and red tape are an essential part of covert rationing.  While Gekko is willing to streamline the internal processes that impact the efficiency of FTP itself, and is not against improving the convenience factor for healthy subscribers, he will, at best, simply let processes that impact services for sick patients bog down in bureaucratic inefficiencies, and at worst, actively establish road blocks to adequate services.