FHP International Corp. will dismantle its staff-model operations under a bold restructuring plan announced last week.
The HMO will sell its four hospitals and put its physician clinics in a separate company that will contract with other payers.
In an interesting twist, the new company, Comprecare Medical Group, will be poised to compete with physician practice management companies, which buy practices and revamp them to operate under managed care.
FHP also will eliminate 500 of its 14,000 employees and flatten its corporate structure, yielding an annual savings of $15 million.
The HMO anticipates transition costs of $75 million before taxes or 70 cents per share after taxes. As a result, earnings will be flat during the next two quarters, the company said.
Wall Street was unimpressed. Moody's Investors Service placed $100 million of FHP notes under review for possible downgrade. FHP stock fell 19 cents the day of the announcement to close at $23.31.
Moody's said FHP might have to lower premium rates because of intense competition in California. The ratings agency also said the company increased the risk to bondholders by placing assets in a subsidiary.
Fountain Valley, Calif.-based FHP was founded as a staff-model HMO in 1961, but it now serves only 20% of its 1.7 million enrollees at its own clinics and hospitals.
"Our membership for the staff model has been flat, whereas the contracted side of the business has really taken off," FHP spokeswoman Ria Carlson said.
In recent years it's become cheaper for FHP to contract with independent hospitals, which have lowered costs. FHP plans to sell its acute-care hospitals in Fountain Valley and Salt Lake City, which have a total of 356 licensed beds, and two subacute facilities.
Also, large independent medical groups with multiple locations have formed in Southern California, drawing patients from FHP clinics.
Comprecare will run FHP's 57 physician clinics, accepting fee-for-service patients and contracts with other HMOs and PPOs. In the past, FHP's clinics have served only FHP members.
With Comprecare, FHP sees an opportunity to compete in the swelling industry of physician practice management.
"Given FHP's 34 years of experience in managed care, we expect Comprecare Medical Group to be a major factor among physician practice management companies," FHP President and CEO Westcott W. Price III said.
Time will tell. Brooks G. O'Neil, managing director and research analyst with Piper Jaffray in Minneapolis, said Comprecare might have to distance itself from FHP to attract other payers. "It will not be accepted as an independent company while FHP continues to own 90% of it," he said.
Moreover, he said, successful practice management companies use significant physician and management ownership-as high as 80%-to promote efficiency.
By comparison, Comprecare President Jack Massimino and other managers and physicians will own 10%. Key primary-care physicians will have a financial interest in the clinics where they practice.
But Peter Boland, a consultant and publisher in Berkeley, Calif., called the spinoff a "bold strategy" that could pay off. He said FHP clinics have cost controls built in.
"They understand how to deliver care through a capitated reimbursement system, and the others are just learning," he said.
Comprecare will run all of FHP's staff-model operations in Arizona, California, Guam, Nevada, New Mexico and Utah. They include more than 500 doctors and 95 dentists, pharmacies, labs and optical boutiques. It will have more than $350 million in annual revenues.
The overhaul was not accepted by FHP founder Robert Gumbiner, M.D., who said ownership is a way to control costs and quality. He resigned from FHP's board in protest after being replaced as chairman.