The conflicting pressures of owning provider networks and an HMO are pushing some multihospital systems into selling off their HMOs to focus on care delivery.
The systems have outgrown the strategy of eliminating the HMO or insurer "middleman" by starting a health plan. And systems have no trouble unloading their HMOs; provider-owned plans have become attractive acquisitions for larger HMO companies.
Although most systems are still launching or expanding their HMOs, two multihospital systems-Advocate Health Care of Oak Brook, Ill., and St. Francis Health System of Pittsburgh-announced this spring they were bucking the trend by selling their HMOs to large multistate companies.
Also, in February, Dreyer Medical Clinic in Aurora, Ill., said it is negotiating to sell its 39,000-enrollee Dreyer Health Plans to Blue Cross and Blue Shield of Illinois. Meanwhile, the clinic is selling its assets to Advocate, with which it is negotiating a long-term management agreement.
Several other provider systems have sold an interest in their health plans to insurers or HMOs. In May, Madison, Wis.-based Wausau Insurance Cos. said it would become a one-third owner of Physicians Plus Insurance Corp., also of Madison. Physicians Plus, which has a 90,000-enrollee HMO, is 70% owned by Physicians Plus Medical Group and Meriter Hospital of Madison.
In today's healthcare world, where size is important, smaller plans are selling out or seeking bigger partners. "I expect to see more of it," said John Penshorn, vice president at Piper Jaffray, an investment brokerage in Minneapolis.
In MODERN HEALTHCARE's 1996 survey of HMOs and PPOs, data received from 37 HMOs owned by provider systems showed that 10 posted losses and eight saw a drop in net income, signs that these plans might be ready to partner with larger organizations or sell out.
On the other hand, provider-owned plans that are growing rapidly are looking for stronger partners to support their ambitions. One such plan is SelectCare, which is owned by PeaceHealth of Bellevue, Wash., a system sponsored by Sisters of St. Joseph of Peace, Health and Hospital Services, Eugene, Ore.
SelectCare saw a "pretty spectacular" doubling of its enrollment to 151,000 in the past three years, said Tom Lawry, PeaceHealth vice president. For over a year, PeaceHealth and Sisters of Providence Health System of Seattle had been discussing a merger of SelectCare and Providence's HMOs in Oregon and Washington. That would lead to a merger of two provider-owned plans.
Then "about two months ago, we at PeaceHealth pulled back," asking whether that combination was the one best suited for its plans to expand geographically, Lawry said. "It's a very big decision you can only make once."
"There's a natural compatibility in the markets we currently serve," Lawry said of SelectCare and Providence's HMOs, and the door is still open to a possible merger. But another type of partner to fuel multistate expansion also is a possibility, he said.
"We haven't ruled out anything at this time that fits....our mission and strategic goals," which are greater cost efficiencies and improved ability to attract new groups that want health plans in multiple regions, Lawry said.
For systems, the question is "how do you use a health plan, whether you fully own it or have another strategic relationship that gives you the same benefits," he said.
Getting back to basics. Meanwhile, other provider-owned plans have chosen their large multistate partners. Advocate, one of the largest Chicago-area systems, said in April it plans to sell Health Direct, its 122,000-enrollee managed-care organization, to Healthsource, Hookset, N.H., for $27 million.
Advocate will concentrate on its "core strategy of building a competitive provider network," said Richard R. Risk, president and chief executive officer. The HMO was started in 1980.
In May, Pittsburgh's St. Francis said it would sell Advantage Health, its 60,000-enrollee managed-care company that includes two HMOs, to Woodland Hills, Calif.-based Health Systems International for $12.5 million. The HMOs were started in 1991 and 1993.
St. Francis would be the third provider-owned HMO to sell to HSI, whose expansion strategy so far has consisted of acquiring providers' plans. "If you're going to enter a new market, I believe you have to have a partner. You don't just buy your way in," said Curt Westin, HSI's senior vice president, general counsel and secretary. "You have to have a significant delivery mechanism."
Jay Gellert, HSI's new president and chief operating officer, said: "We believe the future of healthcare is in payer-provider partnerships, and a provider-owned health plan is an ideal vehicle for this.
"We're very favorably inclined to working with providers in developing and expanding the health plans they've developed," he added.
An HSI spokesman said the company it is concentrating its effort in the Northeast.
In line with its strategy of acquiring provider-owned plans, early this month HSI named Arthur Southam, M.D., as president and CEO of Health Net, its HMO subsidiary. Southam has been president and CEO of CareAmerica, an HMO owned by UniHealth, a Burbank, Calif.-based integrated system.
When Health Direct's predecessor HMO was formed 16 years ago, "it was common back then to think that to be a successful integrated delivery system, you had to have an HMO license," said Lee Sacks, M.D., president of Advocate Health Partners, the system's contracting arm. But Advocate has "re-examined this assumption in light of the current market" and found it's not valid, he said.
Ironically, systems selling their HMOs to bigger plans say terms of the selloffs-usually multiyear global risk contracts-give them what they wanted in starting HMOs in the first place: more control over patient care and the clout to expand into new geographic areas.
"A partnership with Advocate and Blue Cross will make it possible to expand the Dreyer delivery system," said Thomas J. Stemper, M.D., Dreyer's chairman of the board, at the start of exclusive negotiations in February. "It will generate more opportunities for growth and, over time, will provide the security that comes from affiliation with the leading provider network and managed-care organizations in the area."
In the deal between Wausau and PCI, Wausau will provide financial support for regionwide development of PCI's integrated delivery system.
New HMOs still the rule. But market activity isn't dominated by providers selling all or part of their health plans, industry observers say.
A glance around the market shows that hope springs eternal: Provider systems continue to form or buy HMOs.
Of the 182 hospital system respondents to MODERN HEALTHCARE's 1996 Multi-unit Providers Survey, 49 said they owned an HMO, up from 37 in the 1995 survey, when the hospital system respondents numbered 172.
Thirty-two of the 1996 respondents said they offered an HMO in a joint venture with an insurer, up from 21 in the 1995 survey.
Of the reporting hospital systems in 1996, 37 HMOs supplied enrollment and financial data.
A decade earlier, MODERN HEALTHCARE's 1985 multihospital systems survey showed that only 15 hospital systems operated HMOs.
Medical associations in several states, including California, New York and Washington, also recently have formed or are planning to form HMOs.
of Louisville, which manages Alternative.
To strengthen its market share, in 1990, Blue Cross and Blue Shield of Kentucky bought a 51% interest in Alternative, allowing the Blues-now Anthem Blue Cross and Blue Shield-to offer two HMOs in Kentucky.
Alternative is considered a joint venture between the providers and Anthem, Bell said.
Provider systems will not necessarily sell to a large commercial HMO. In this market, where deals are "all over the map....it's just as likely for a provider system to buy" another system's HMO, said Barbara Harness, vice president at the American Hospital Association's Center for Health Care Leadership.
Although the AHA doesn't keep a database on provider-owned HMOs, Harness said she has observed that partnering to offer an HMO is "much more prevalent" than providers selling off an HMO.
For example, Springfield, Va.-based Inova Health System is partnering with WellPoint Health Networks, Woodland Hills, Calif., to offer a new HMO in the District of Columbia and northern Virginia (May 13, p. 28). Not-for-profit Inova had been seeking an aggressive partner to form an equity joint venture. The three-hospital system, which also owns physician practices, will take global risk contracts from WellPoint.
With California HMOs continuing to move East and large HMOs like Minneapolis-based United HealthCare Corp. moving into new markets, many HMOs are interested in joint contracting with integrated delivery systems, said Ross Stromberg, chairman of the national healthcare practice at Jones, Day, Reavis & Pogue, a Los Angeles law firm.
The firm is working on a deal between Southwestern Integrated Delivery Network-which includes five hospitals and several physician groups in Pittsburgh-and an HMO in which SIDN will provide all healthcare services for a percentage of the premium. Jones, Day is working on similar arrangements between PennCare, an integrated network in central Pennsylvania, and HMOs.
Systems like Mullikin Medical Centers, based in Long Beach, Calif., enter global risk contracts in California, "but here we're talking about new markets where it's unheard of," said Stromberg, who assisted Mullikin in getting a modified HMO license in California.
"In a couple of arrangements we're looking at, providers already have a small HMO," Stromberg said. Those providers, who want statewide coverage to go after Medicaid contracts or major employers, might partner with a large HMO. They would create a new jointly owned company that would merge the provider-owned and the large HMO, he said.
This process might eventually lead to the providers selling off their HMOs.
"If you do a joint venture, then it's not out of the question it will evolve over the course of time, and one partner will buy out the other," Stromberg said.