There was a time when the "s" in SHMOs stood for "social." Now it also stands for "stock."
SCAN Health Plan, one of the four original social HMOs authorized by Congress in 1982 to offer expanded benefits to Medicare beneficiaries, has filed with California authorities to convert to for-profit status.
Dubbed SHMOs, social HMOs have pooled funds from Medicare, Medicaid and member premiums to provide more than 50,000 seniors with community-based long-term care on top of regular healthcare benefits.
SHMO programs, which include homemaker services, meals on wheels and transportation to medical appointments, are designed to keep the elderly living at home and out of institutions as long as possible. SHMOs also provide limited nursing home care.
Long Beach-based SCAN becomes the first HMO to file for conversion with the California Department of Corporations under a new state law that spells out procedures for HMOs seeking to become for-profit companies. The legislation was passed following controversy over whether converting plans such as Woodland Hills-based WellPoint Health Networks met their public benefit obligation for the years in which they enjoyed tax breaks.
SCAN officials say that although their conversion meets the law's requirements, they expect it will get intense scrutiny. A Consumers Union spokeswoman told MODERN HEALTHCARE*the group will study SCAN's plan closely because it's the first conversion under the new law.
SCAN is also the first SHMO to convert to for-profit status. Two of six SHMOs approved by HFCA last year-Sierra Health Services' Health Plan of Nevada based in Las Vegas and CAC-Ramsay Health Plans, a United HealthCare Corp. subsidiary based in Coral Gables, Fla.-are already for-profit plans.
Citing a highly competitive environment made even more brutal by the planned merger of Medicare giants PacifiCare Health Systems and FHP International, SCAN officials say conversion to for-profit status will generate capital needed to market their unique product and to expand. SCAN, "a very tiny company among giants," needs "to create name recognition," said Sam L. Ervin, its president and CEO.
Revenues and enrollment have been growing at 25% over the past several years, Ervin said. SCAN now provides prepaid medical and dental coverage to about 12,000 seniors in Los Angeles, Orange, Riverside and San Bernardino counties. The company made $1.4 million on revenues of $67 million in its fiscal year ended June 30.
SCAN offers expanded Medicare benefits at no cost to Medicare recipients, while other SHMOs charge a premium depending on their markets.
HCFA pays SHMOs 100% of Medicare costs per enrollee, calculated by county. Medicare risk HMOs receive 95% of those costs per capita.
Per-enrollee payments by county vary by several hundred dollars, a problem the government hasn't figured out how to fix, said Walter Leutz, project director for SHMOs at the Heller Graduate School at Brandeis University in Waltham, Mass. Brandeis received the first grant-from the Carter administration-to develop a SHMO program in the 1970s, he said.
But despite having a unique product, "it's hard to get people's attention these days in the healthcare market. There's so much information out there; a small HMO has an awful hard time getting its message across," Leutz said.
Conversion also will allow SCAN more flexibility to enter new business arrangements like joint ventures, Ervin said.
The conversion has been in the works for more than two years, he said. Under the plan filed with state authorities, SCAN's 13-year-old not-for-profit foundation will become the health plan's sole owner, receiving 100% of its stock.
According to the conversion plan, during 1997 the company will issue 33,333 new shares of stock, representing 25% of total shares outstanding, to private investors. This sale is expected to generate up to $9.5 million. In addition, the foundation will sell 5% of its stock to private investors to raise cash.
In 1999, the company may complete another private offering of 20,000 shares, raising an estimated $5.5 million. Or the company may complete an initial public offering of 20,000 new shares, generating up to $9.1 million. The foundation would continue to divest its remaining stock in the company over the next few years.
Following state law requiring the foundation to be independent, Ervin will remain its president and CEO-without a vote-for only one year, to assist in the transition.
There are nine SHMOs in all. In 1982 Congress authorized four SHMO demonstration sites, and HCFA chose SCAN; Elderplan, of Brooklyn, N.Y.; Kaiser Permanente Center for Health Research, in Portland, Ore. ; and Seniors Plus, operated by Minneapolis-based Health Partners. Seniors Plus dropped out of the demonstration in 1994.
Congress completed a series of votes that extended SHMOs through 1997.
In 1995, HCFA selected six new sites. Besides the Nevada and Florida plans, they include Fallon Community Health Plan in Worcester, Mass.; Grand Junction, Colo.-based Rocky Mountain HMO; Contra Costa Health Plan in Martinez, Calif.; and Richland Memorial Hospital Health Plan in Columbia, S.C.
"The idea of a health plan offering a richer package of benefits, with members paying a higher premium in certain markets in return for protection against a broader range of risks, is a good policy," Leutz said. But he concedes that probably no one knows whether SMHOs are budget neutral or if they save money for the Medicare system.