William H. Bowen, chief of staff during the last 15 months of Bill Clinton's tenure as governor of Arkansas, is no stranger to political and social upheavals.
Named last summer as president and chief executive officer of Healthsource Arkansas, a startup HMO that's 30% owned by 595-bed St. Vincent Infirmary Medical Center in Little Rock, he's stepped onto the firing line to play a large role in overhauling the state's healthcare system.
St. Vincent's equity partner is Concord, N.H.-based Healthsource, an HMO operator that specializes in underserved markets. St. Vincent chose the equity partnership approach rather than simply contracting with Healthsource because with an equity partnership, "you can share control of the venture," Mr. Bowen said.
Healthsource Arkansas deal is but one example of how providers and insurers are scrambling to form exclusive arrangements that will enable them to corner segments of the managed-care market.
"We couldn't sit still. We had to acquire a competitive piece of the market," said Joe Timmons, St. Vincent's senior vice president for business development.
Some 45 million Americans-about one in six people-are enrolled in HMOs, according to the Group Health Association of America, a Washington-based trade group.
That number will grow as public and private payers begin transferring the people they cover into managed-care programs. Some analysts say as manyas 80% to 90% of Americans will be enrolled in managed care by the end of the century.
Currently, HMOs' market share exceeds 27% in only 36 of 199 metropolitan areas recently surveyed by InterStudy, a Minneapolis-based managed-care research organization. Penetration is lagging in several areas. In Arkansas, for example, only 4% of the population-some 90,000 enrollees-belong to one of the four HMOs operating in the state, InterStudy found.
Growth strategy.So substantial growth lies ahead for those organizations that can tap their financial resources and develop the analytical tools needed to operate businesses that strive to keep patients healthy and out of hospitals.
"This is a new way of doing business for all of us," said Nicholas J. Reiland, CEO of HealthAdvantage, a 47,000-enrollee HMO also based in Little Rock.
As a new HMO, Healthsource Arkansas has gone head-to-head with HealthAdvantage, which was created in March and is operated by another partnership involving a hospital and insurer.
HealthAdvantage is 25% owned by St. Vincent's crosstown rival, 690-bed Baptist Medical Center. Some 800 of the HMO's physicians own a 25% stake in HealthAdvantage, while Arkansas Blue Cross and Blue Shield, the state's largest health insurer, owns the remaining 50%.
As part of the deal, the Blues canceled its exclusive provider arrangement with St. Vincent. On Jan. 1, the insurer shifted 15,000 of its 20,000 Arkansas HMO enrollees to Baptist.
The agreement "allows Baptist Medical providers to be marketed directly to Blues customers on a preferred basis for the first time," Mr. Reiland said. The Blues cover about 500,000 people in Arkansas.
To counter that move, Healthsource agreed to invest $5 million in its venture with St. Vincent. The hospital contributed an unspecified amount of cash and a 90,000-enrollee PPO it owned.
Arkansas profit.With 5,000 HMO enrollees so far, Healthsource Arkansas has targeted 52 of Arkansas' 75 counties for service and expects to begin making a profit by December, Mr. Bowen said.
In Arkansas and elsewhere, hospitals and physicians are adapting to a managed-care environment in which carefully monitoring the provision of services often results in more savings and higher profits.
Managed-care organizations that are partially or wholly owned by one or more hospitals or hospital systems posted healthy net margins and robust enrollment gains in 1993, according to the 75 provider-based plans surveyed this year by MODERN HEALTHCARE.
Of the 31 HMOs that participated in this year's survey, only four plans said they lost money, compared with seven money-losing plans out of 43 HMOs surveyed a year ago.
Some highlights of this year's survey of 31 hospital-backed HMOs and 44 PPOs include:
The HMOs' revenues rose to $2.6 billion, a 20% increase compared with 1992 and 27% more than revenues of 1991.
Average net income was $1.8 million, up about 9% compared with 1992. The aggregate per-enrollee profit margin was about 1%.
The HMOs' enrollment rose 13% to 1.7 million in 1993.
The PPOs' enrollment in 1993 rose to 5.9 million, up 19% compared with the previous year.
HealthAdvantage, which had 27,000 enrollees in 1993, posted net income of about $400,000 on revenues of $35 million. The new patients from Arkansas Blue Cross and Blue Shield's Arkansas HMO will help swell revenues to twice that amount in 1994, Mr. Reiland said.
the HMO, HealthAdvantage also has developed a point-of-service plan as an "intermediate step to help employers dip their toes into the managed-care waters," he said. In point-of-service, enrollees may choose from a larger selection of providers at a greater out-of-pocket expense.
HealthAdvantage recently enrolled 4,500 state workers out of a possible 30,000 workers under a new contract, Mr. Reiland said. The HMO's goal is to have 150,000 enrollees by 1998.
Even in competitive markets, loyalties between providers and HMOs can change abruptly.
In Worcester, Mass., for example, where managed-care penetration hovers around 60%, a price war erupted after 475-bed Medical Center of Central Massachusetts and Pilgrim Health Care, a local HMO, announced they would join in a new insurance venture and then guaranteed to meet or beat the prices of competitors.
After Pilgrim's incursion into central Massachusetts, which has 800,000 residents, "we all lowered our prices," said John Powell, president and CEO of Central Massachusetts Health Care, which has 82,000 enrollees in Worcester.
The other major HMO in central Massachusetts is Fallon Community Health Plan, which operates a hospital and has about 170,000 enrollees.
Norwalk, Mass.-based Pilgrim said it has about 15,000 enrollees in the Worcester area. So far, the HMO has signed up 21 employer groups representing about 1,000 potential enrollees as part of the Medical Center deal.
So far, no Pilgrim enrollees have been admitted to Medical Center. Both parties said their agreement included a joint sharing of financial risk, but they declined to reveal specific financial details.
Shifting alliances.Mr. Powell estimated that Central Massachusetts Health Care accounted for about 20% of Medical Center's patient load and said it had about $20 million in patient billings to cover some 2,400 inpatient admissions a year. He said Medical Center's deal with Pilgrim may force his company to seek new agreements with two other hospitals in town rather than "subsidize (Pilgrim's) patients" at Medical Center.
Because Medical Center's deal with Pilgrim also includes many of its physicians, Mr. Powell said his company was hoping to help as many as 100 other local physicians establish their own medical group to lay the groundwork for an integrated delivery system. If that effort succeeds, the HMO would be in a stronger position to compete for prospective clients, he said.
Masking distress.Stiff competition can cause financial distress. Sometimes, rapid growth masks that distress.
For example, Stockton, Calif.-based Omni Health Plan's enrollment nearly doubled last year to 85,000 enrollees. But the HMO, which is 50% owned by Sacramento-based Sutter Health, expects to lose $460,000 on total revenues of $89.5 million in 1993, said Thomas Hamilton, Omni's chief financial officer. In 1992, Omni had 44,436 enrollees but lost nearly $2 million on total revenues of $47.3 million.
Tough competition.In Sacramento, Omni must compete against Foundation Health Corp., which has shifted many of its 180,000 enrollees from Sutter's two Sacramento hospitals to Mercy Healthcare Sacramento as the result of a contract dispute last year. In addition, Foundation has opened two of the three medical clinics that it previously announced it would open in the Sacramento region to counter two of Sutter's largest clinics, Sutter Medical Group and Sacramento Physicians Network.
In 1992, Sutter paid nearly $5.5 million for a 50% share of stock in Omni, which was owned by 319-bed St. Joseph's Medical Center in Stockton, and Omni IPA Medical Group, a group of San Joaquin physicians and the HMO's principal provider. The IPA and St. Joseph's together received $3.3 million in the deal, and they retain 50% ownership in Omni. Omni has about 54,000 enrollees in the IPA's service area.
The HMO is part of Sutter's strategy of affiliating with large medical groups to create an integrated system of regional managed-care providers. But the expansion has been a drain on shareholders' resources.
Cash infusion.Last year,Sutter gave the HMO a cash infusion of $1.25 million in the form of preferred stock. Mr. Hamilton characterized the transaction as a "loan (because) we needed money to expand in the Sacramento area." However, the preferred stock won't be redeemed unless "the board deems there are sufficient earnings," he said.
In addition, the hospital system gave Omni another $1.6 million this year to help pay for managing a state-sponsored managed-care program covering some 40,000 to 60,000 indigent and uninsured enrollees in Sacramento County. That coverage began April 1. Executives hope the added enrollment eventually will help the HMO cut its costs by spreading expenses over a larger base of eligible patients.
Excessive administrative costs linked to expansion have contributed to Omni's financial woes, Mr. Hamilton said. Its administrative costs are running 15% to 17% of revenues,compared with the industry average of 14% to 15%.
The HMO also has found it hard to control its medical costs, which forced St. Joseph's and the IPA last year to return more than $1 million, Mr. Hamilton said. Under the agreement, the IPA, St. Joseph's and Sutter must refund to Omni a percentage of revenues paid to them whenever medical expenses, as a percentage of revenues, climb above a predetermined cap.
In 1993, the HMO's medical-loss ratio was 86%, but its actual costs ran about 2% higher, Mr. Hamilton said. By contrast, the average medical-loss ratio for investor-owned HMOs is about 80%. As a result, the financial condition of the IPA suffered.
Big losses.According to the IPA's balance statement for the year ended Dec. 31, 1993, the IPA lost almost $2.5 million on capitation payments of $17.1 million in 1993. The year's loss included a deficit of $1 million for the last three months of the year. The operating losses left the IPA with a net worth of negative $2.5 million at the end of 1993.
Capitation works well with primary-care physicians, said Jeffrey J. Denning, a medical practice management consultant in Long Beach, Calif., who noted, "Providing more services isn't discouraged by the plan. It's just not rewarded with additional fees."
But capitation doesn't perform as admirably when specialists are involved. "Most IPAs don't have enough enrolled patients to make a reasonable risk pool for many of the high-cost specialties," Mr. Denning said.
An IPA-model HMO with 20,000 enrollees would make capitation profitable for as many as 40 family physicians. But, by contrast, an IPA would need only two out of the 20 or so orthopedic surgeons in its network to share capitation. "If they are all asked to share the risk, nobody will get the enrolled numbers that can make it work on a capitated basis," he said.
As a result, many IPA-model HMOs have to revert to fee-for-service compensation to reward specialists who perform the most services. "If (physicians) get paid for doing more, it's not capitation," he said.
Observers noted that, under the shareholders' agreement, most of the financial risk has been shifted from Omni to its shareholders. Mr. Hamilton said there was "considerable concern" about how much longer the shareholders would be willing to finance the HMO's cost overruns. "You can't go on indefinitely like that," he said.
He said all of Omni's contracts for 1994 have been budgeted at a medical-loss ratio of 84.6% in an effort to stem the losses. The IPA lost only $50,000 in the first two months of 1994. "We believe we've turned the corner on this thing," he said.