The current rush eastward is more intense than earlier migrations by California HMOs because the Golden State's market is becoming saturated.
In California, HMOs cover 38% of the population, more than any other state. This compares with 19.5% in the nation as a whole, and less than 10% in many markets outside metropolitan areas.
Another reason HMOs want to move east is that pressure from the state's giant employers and purchasing coalitions like the Pacific Business Group on Health and the California Public Employees Retirement System has steadily reduced HMO premiums.
Most California HMOs "are facing tremendous pressure on (profit) margins," said William Kalm, a partner who heads Andersen Consulting's healthcare practice in Southern California and Arizona.
Another problem for HMOs in California is that because managed-care penetration is so high, there is "a commodity view of the marketplace. It's very difficult to differentiate yourself other than on price," Kalm said.
Migrating eastward, "it's a less penetrated market, and HMOs have a greater opportunity to differentiate themselves based on their services and on the products they offer," he said.
Building national coverage.
The reverse pioneers seek states and regions where managed care can move in, slash costs and yield profits.
And with every new outpost, they can offer better coverage to multistate employers seeking to simplify their benefit programs by contracting with fewer plans.
These big, profitable players have the means to migrate. Including WellPoint Health Networks, Woodland Hills, Calif., whose merger with HSI, also based in Woodland Hills, is expected to close by year-end, they generated a combined $453 million in annual income, according to their most recent annual reports.
Revenues for the companies were a combined $14.3 billion.
As public companies, they also can use stock to acquire companies and expand.
But the large California players have a long way to go to develop nationwide coverage. Some, like HSI-which after its merger with WellPoint will become the largest for-profit HMO-"have the ability.....but do not have the presence nationally," Kalm said.
Others "have points of excellence but not full coverage," he said.
And California HMOs moving eastward are encountering "the dragons that got slain a long time ago in California," said Patrick Stewart, president of FHP of Texas, who started FHP operations there in 1994 and in Nevada in 1992.
Obstacles include capitation-wary physicians who aren't organized into the large medical groups needed to serve HMO networks and populations that still think of HMOs as second-class medical care.
Outside California, HMOs also still have to sell their value over insurance plans to brokers and employers who think, "What's the big deal about 20% coinsurance and a $500 deductible?" Stewart said.
Having to sell, again.
California HMOs are surprised that outside the West they still have to market to employers, said Larry Tucker, California healthcare practice leader for Hewitt Associates, a national benefits consulting firm based in Lincolnshire, Ill.
In California, employers are generally sold on managed care, and much HMO advertising is aimed at getting employees to sign up for the plans their companies offer, he noted.
When Steve Nolte, PacifiCare vice president and general manager for central Florida, set out 13 months ago to expand the Cypress, Calif.-based HMO's networks in the state, "a small team preceded me by a couple of months. They told me, `Put on your asbestos suit, you're going back in time,"' he said.
But it turned out not to be as bad as that.
"By the time I got there the doctors had begun to soften. We still met a lot of resistance, and there are certain counties in central Florida where doctors are resistant to capitation and at this time we haven't got into them.
"But we think with time and patience, things will change," Nolte said.
One of the biggest challenges to HMO expansion through acquisition is "cultural assimilation," Kalm said. This is especially true when for-profit companies buy physician-run HMOs.
For example, Foundation, based in Rancho Cordova, Calif., bought physician-run Intergroup Healthcare Corp. in Arizona and HSI bought M.D. Enterprises of Connecticut, also run by physicians.
Cultural assimilation is required "if you are a physician-run organization, where your focus is based on care delivery, and you now have to focus on cost" after merging with a for-profit company. A lot of effort has to go into "getting the synergies that companies expect from these mergers and acquisitions," Kalm said.
The big California HMOs that want to establish a presence in Eastern states also are sensitive to being seen as outsiders.
They stress that their companies are decentralized and that officials and plans in other states operate with a great deal of autonomy, responding to the demands of local markets.
Despite the obstacles to expansion, these HMOs are propelled by opportunities beyond the state's borders and the grinding competition at home.
The eastward migration of California HMOs is not a new phenomenon.
Oakland-based Kaiser Permanente expanded to Denver and Cleveland in 1969 and later into the District of Columbia and other points East.
But although it has set up a special staff to look into acquisitions, Kaiser hasn't made any Eastern acquisitions since it took over a Maxicare plan in Atlanta about eight years ago.
The specter of Los Angeles-based Maxicare's expansion experience no doubt keeps California HMOs walking a fine line. In 1986 alone, Maxicare bought two large multistate HMOs with 1.2 million enrollees, which nearly doubled its enrollment.
Maxicare had grown to 30 HMOs with about 2.3 million enrollees in 26 states by the end of 1987.
Choking on these acquisitions, Maxicare filed for bankruptcy in March 1989. Under its reorganization plan, it sold or closed 19 HMOs.
"Maxicare has stabilized. They've been consistently chipping away, retaining accounts, getting new accounts," said Barbara Wachsman, Western regional practice manager at Towers Perrin Integrated Healthcare Consulting.
In the reorganization, Maxicare retained operations in states with low managed-care penetration.
"We kept the good business opportunities," said Edward Coglan, Maxicare's vice president of advertising and communication. The provider now has about 340,000 enrollees nationwide.
Today, the going is easier for California HMOs looking to expand. When Maxicare was trying to absorb companies from 1986 to 1988, it encountered "resistance from providers and hospitals," Wachsman said.
In many more regions across the country, "providers are jumping into managed care, developing integrated systems that can take risk," Wachsman said.
Smaller plans with physicians that are just getting their feet wet in risk-taking are looking for strong partners to help make the full transition into capitated managed care.
For example, Harold Cramer, chairman and CEO of Graduate Health System in Philadelphia, which owns Greater Atlantic Health Service, a 100,000-enrollee HMO in the same city, said the plan's board "had a vision" of building an integrated delivery system to compete in a market dominated by big players like Independence Blue Cross, Philadelphia-with 400,000 enrollees-and U.S. Healthcare, Blue Bell, Pa., with 600,000 enrollees.
Graduate's 3,000 physicians are still paid through discounted fee-for-service contracts and are just getting into capitation as they serve Medicare recipients, Cramer said.
Starting with "a short list of five potential companies we thought brought together the skills that we needed" to compete, Graduate found its partner: HSI, which announced in July it will acquire Greater Atlantic Health Service for $100 million.
`Discounted fee-for-service has no upside for (providers) at all.'