Plans by Harris Methodist Health System to convert its 10-year-old HMO to for-profit status may hit a snag as Texas officials scrutinize the transaction.
Consumers Union is questioning the conversion of the not-for-profit Harris Methodist Health Plan in Fort Worth, Texas, and how its assets, valued at $280 million, will be transferred. The consumer advocacy group raised similar questions when Blue Cross of California converted to for-profit status last year. After state regulatory scrutiny, the insurer agreed to donate its $2 billion in assets to a charitable foundation.
Harris' HMO "is a charitable trust and we are concerned about how the assets are going to be valued and transferred," said Lisa McGiffert, senior policy analyst in the Southwest office of Consumers Union in Austin. Harris' HMO has 425,000 enrollees, and officials say they want to convert it to for-profit status to raise capital and gain equity partners (Aug. 21, 1995, p. 40).
Although converting tax-exempt HMOs to tax-paying is a new issue to Texas regulators, the blending of those tax classes is becoming more common in the HMO business.
The Texas Department of Insurance has had a "very large increase" in HMO applications from joint ventures that include both for-profit and not-for-profit partners, said Leah Rummel, who heads the department's HMO division.
Just last week, Houston-based Methodist Hospital, one of the nation's biggest and richest tax-exempt hospitals, filed an application with the state to operate a for-profit HMO.
That and the Harris HMO conversion could raise the profile of tax-exempt hospitals getting into the for-profit HMO business. Until now, there has been little scrutiny. Harris officials said that when they filed the application last November no public comments were presented.
However, last week, Consumers Union asked the state attorney general's office to investigate further into the transfer and valuation of Harris' HMO.
Harris officials portray the conversion as a simple transaction in which the tax status changes but the assets are still owned by a tax-exempt entity, the seven-hospital Harris health system.
Ron Bourland, chief financial officer for Harris Methodist Health System, said the HMO will simply become a for-profit subsidiary of the tax-exempt system, and very little else will change.
"There's no ownership change, and no stock options are being offered to anyone," Bourland said. In that way, the conversion is "dramatically different" than the California deal, in which Blue Cross' HMO, WellPoint Health Networks, went public.
Although the HMO had been profitable for several years, it lost $19.3 million on revenues of $292 million in 1995. Recently, it ranked as the fastest-growing provider-owned HMO (May 1, 1995, p. 44).
Bourland said the HMO was valued at $280 million based on several formulas, such as per-member prices, discounted cash flow and comparable HMO valuations. Of the HMO's enrollees, 225,000 are at-risk members, which are typically used to calculate per-member price valuations. At-risk enrollees are totally covered by capitated payment arrangements. At that multiple, the valuation would be $1,240 per member. Similar valuations of public companies put per-member prices at between $540 and $3,200, according to Robinson-Humphrey, an Atlanta-based investment banking firm.
"It's a complex transaction," said Sonya Sanchez, a spokeswoman with the state attorney general's office, about the Harris valuation and conversion. The attorney general's charitable trust division continues to review the deal, but she said it was "premature to say what will happen."