If anyone ought to be bitter about the managed-care merger wave, it's Jeff Margolis.
The 33-year-old executive survived three changes of ownership as his managed-care company was swallowed by ever larger buyers until he got bounced from his job in a fourth buyout last year.
Now, as he prepares to open
his own health information services company, Margolis is cautious about the future of many consolidations but is still a believer in their potential.
Bigger companies can "really deliver more types of benefits and services because when you've got economies of scale and you put together a good infrastructure, your ability to distribute new ideas very rapidly can be very exciting," he says.
Such prospects have lifted spirits on Wall Street, where-amid the general HMO price slump-investors ran up the stocks of three HMOs involved in big mergers. Industry analysts and health plan executives
give rave reviews to completed mergers, which offer the prospect of rebounding earnings.
But some industry observers and providers are less sanguine. They question the tactics of the merged companies, whether they actually save any money, and whether they are creating customer satisfaction and loyalty. The corporations may be serving the short-term demands of the financial community, the critics say, but they are not helping patients or their long-term business.
The dealmaking among health plans is particularly galling to hospital executives such as Jamie Kalama, vice president of strategic development at Saddleback Memorial Medical Center in Laguna Hills, Calif. She says mergers are "an opportunity for the health plans and a threat to providers because typically what happens is (plans) will cherry-pick. They will pick the best terms and rates of the contracts with both plans-usually to the detriment of providers."
Kalama says the disruption to patients lasts about a year because of changes in administrative procedures. "The disruption to providers lasts a lot longer," she says.
Curiously, although Consumers Union raised concerns about quality, choice and member service in opposing proposed mergers-most recently those in California-the organization has not studied the effects of mergers once they occurred.
Here is a look at a few of the most recent high-profile consolidations and what has happened so far:
The merger wave crests
Cypress, Calif.-based PacifiCare Health Systems acquired FHP last month, and Rancho Cordova, Calif.-based Foundation Health Corp.'s merger with Health Systems International, Woodland Hills, Calif., closed last week.
But before these recent California deals, Minneapolis-based United HealthCare Corp.'s purchase of MetraHealth Cos. for $2 billion in 1995 carried forward the wave of consolidations that began when Travelers Insurance Co. and Metropolitan Life Insurance Co. combined their struggling health operations to form MetraHealth in 1994.
In 1996, Woodland Hills-based WellPoint Health Networks bought the group health and life business of Massachusetts Mutual Life Insurance Co. for $380 million. WellPoint also bought the group health and life business of John Hancock Mutual Life Insurance Co. for $86.7 million. And Aetna bought Blue Bell, Pa.-based U.S. Healthcare for a whopping $8.9 billion, creating Aetna U.S. Healthcare.
Even not-for-profit Kaiser Permanente weighed in with several acquisitions in 1996, its first since 1988 (See related story, p. 114).
The recent for-profit deals are quite distinct, however. Each faces its own challenges, particularly the need to combine corporate cultures-a process most people agree takes many years.
In acquiring MetraHealth, United, a market leader in HMOs, bought a traditional health insurer with nationwide sites.
WellPoint is the for-profit creation of Blue Cross of California and specializes in setting up networks-from PPOs to HMOs-focusing on the individual, small group and senior markets. In Mass Mutual, it bought the health line of a traditional insurer with strength in markets where WellPoint wants to expand.
In U.S. Healthcare, Aetna, a traditional health insurer, bought a successful HMO in the hope of transforming Aetna's sluggish operations nationwide.
Enamored of dealmakers, Wall Street has praised the big mergers, even though only WellPoint's earnings rose last year.
Woody Grossman, chairman of managed healthcare services at Price Waterhouse in Dallas, says "earnings have not materialized to a significant extent because (the companies) are still going through the transition of getting their systems balanced and getting the benefits driven through the organization."
Besides, Grossman says, "they're in a cycle of price competition that has hurt earnings." That cycle will turn and "earnings will come back," he predicts.
Provider spokesmen also hail the deals.
"The potential benefits (of big mergers) are significant," says James Hillman, chief operating officer at the American Medical Group Association, which represents physicians contracting with managed-care plans. "The leaders in the industry are acquiring other HMOs, and it appears that the strong are getting stronger."
Stronger health plans are good for providers because the plans will become more sophisticated at entering capitation programs with "provider partners," he says.
Hillman worries their gigantic size will make plans more difficult to negotiate with, but he says, "I hear more fears than negatives" from providers.
Combining big companies, Margolis says, takes a long time, is highly disruptive and is harder than expected. "Most large projects fail," he says flatly.
Margolis' last job was senior vice president and chief information officer at FHP. A 1994 MODERN HEALTHCARE "Up & Comer," or rising young healthcare executive, Margolis is now starting his own company.
"People have to understand that the integration of large organizations in business is one of the most underrated and complex tasks that goes on in business today from an operating standpoint," he says. Most organizations underestimate the amount of effort and time required of key management personnel to make the integration occur, he says.
So companies "cut corners because it takes longer than expected and it costs more money and they're pressured by (Wall Street) to do it," Margolis says.
"The good news," he says, is companies like PacifiCare and FHP "have learned you have to maintain your real focus on your external customer," whatever other corners wind up being cut.
The United way
There's no lack of contenders for the prizes held out by successful mergers.
With one swoop, buying MetraHealth allowed United to grow from about a dozen health plans in the East, Midwest and South to 45 health plans. It gained a presence in Arizona, California, Colorado, Texas, Washington state and new East Coast markets.
"What we were trying to accomplish in the acquisition of MetraHealth was establishing new platforms for growth for United," says Jim Carlson, executive vice president of health plan operations.
One of those platforms was the large transaction-processing centers that came with MetraHealth, which handled a large volume of indemnity claims. Carlson is convinced that without those centers and MetraHealth's former markets, United was unlikely to have won the contract to provide Medicare supplemental policies to members of the American Association of Retired Persons.
"It's the largest group insurance relationship in America," Carlson says. The AARP business, covering 5.7 million members, will begin next January and yield annual revenues of $4.5 billion, he says.
The AARP also bestowed its endorsement on United as one of eight HMOs it is making available to members for the first time.
United "energized" MetraHealth plans "with a whole new product line and a wealth of resources," Carlson says. As a result, United grew by more than 1 million enrollees in 1996, above and beyond the enrollees it acquired through MetraHealth.
"It's the best example I can give you that these strategies are working," Carlson says.
The acquisition also put United solidly in the business of serving the country's largest employers.
But an industry executive familiar with several mergers says United is just beginning to utilize MetraHealth's national capabilities.
"I don't think any of these (mergers) are winning combinations yet," says the executive, who requested anonymity.
The melding of cultures in the new United has not been a particular problem, Carlson says, because MetraHealth was such a new company and its managers respected United.
As for provider relations, Carlson says, "you'll find there are very few hospitals that want to bet against United." Providers respond to size and most want to be on the winning team, he says. United has gone into former MetraHealth sites like Phoenix and found renewing contracts went smoothly, he says.
The merged company is benefiting enrollees in a number of ways, Carlson says. United's products-which emphasize choice and access-have been extended to former MetraHealth enrollees. United's transplant network is now available to giant national accounts.
Working toward improved quality for enrollees, United has the resources to speed up its plans' applications for National Committee for Quality Assurance accreditation. "There's a question whether MetraHealth would have been able to do that," he says.
In another coup for United, HCFA gave its first approval to United's "passport" program, which allows coverage portability for enrollees in Medicare risk HMOs who move from one location to another. In other plans, enrollees who move around the country have to disenroll from one plan in one site and enroll in another plan at another site.
The consolidation has saved United "well over $100 million in administrative costs on an annualized basis" as of the end of 1996, Carlson says.
Yet, despite the savings, United didn't meet its earnings targets for 1996, nor is it reducing premiums. United's net income for 1996 rose only 2% to $392.2 million from $382.9 million in 1995, although revenues soared 78% to $10 billion.
Christine Bennis, an analyst at UBS Equity Research in New York, says the lackluster income performance was due to pricing and operating losses in most of MetraHealth's at-risk lines of business.
United may not have reduced premiums, Carlson says, but at least it didn't raise rates in 1996 while medical costs increased "more than anyone expected."
That's "absolute nonsense," says Peter Boland, a healthcare consultant and publisher in Berkeley, Calif. If employers aren't benefiting from the consolidation through reduced costs or better patient care, then the value of the merger hasn't been proved, he says.
Moreover, "the jury is out and is going to be out for some time as to whether these companies have been able to integrate (their operations) for ongoing savings-not one-time savings, but ongoing savings. That's the sign you have re-engineered your systems," Boland says.
Some in the industry question the assumption that big companies have substantially lower administrative costs than smaller firms.
Boland also questions whether any savings are being plowed back into infrastructure investment that will improve medical management.
Companies say they need to merge in order to support the massive information systems needed to generate outcomes data and make them available, says Ruth Given, director of healthcare policy at the California Medical Association. But companies aren't making large investments in systems to capture risk-adjusted outcomes data, she contends.
Besides, she asks, if companies merge into several large, monopolistic players, what is their incentive to develop those systems? Why wouldn't they just siphon administrative savings off into profits?
Leonard Schaeffer, chairman and chief executive officer of WellPoint, insists his company is making substantial investments in information systems.
The company can do that-and needs to-in order to pursue its successful strategy of buying traditional indemnity insurance companies and transitioning enrollees into more managed-care plans, he says. WellPoint's 1996 earnings exceeded analysts' expectations, rising 12% to $202 million from $180 million in 1995.
A company that doesn't concentrate on HMOs but offers a broad spectrum of products has to invest in medical management systems to manage risk, Schaeffer says.
WellPoint will continue to offer a range of products, he says. "Categorically, I don't believe all Americans will be members of HMOs," he says. In the future, if there is an evolved plan, it will be something between a PPO and a point-of service plan, he says. "The future is not in HMOs."
The Mass Mutual acquisition bought WellPoint enrollees in New York, Massachusetts and Texas, which were new markets for the managed-care company. And with the Mass Mutual accounts, WellPoint-which is dominant in the small-group market in California-acquired a whole new market segment: large employers. In less than a year, WellPoint has been able to introduce full-risk products into 10 of Mass Mutual's top 15 accounts, which were largely indemnity business, according to Robert Hoehn, an analyst at Salomon Brothers.
Enrollment grew by 18% in 1996-or 159,000 enrollees-above and beyond the new enrollees that came from Mass Mutual.
Schaeffer points out that one reason the acquisition added to earnings so quickly was WellPoint paid approximately $300 per enrollee for Mass Mutual vs. more than $3,000 per enrollee paid by Aetna for U.S. Healthcare. Schaeffer says administrative savings have been substantial since the acquisition. That has translated into "very modest premium increases" in California, he says. Across the country, WellPoint's premiums are going up because most of the acquired business was indemnity, which costs employers more to buy, he says. WellPoint's goal is to reduce premiums for employers by providing them opportunities to choose more managed-care products, he says. Those, in turn, will be more profitable for WellPoint.
WellPoint's spectrum of plans also helps with provider relations because doctors who don't like HMOs have the choice of dealing with WellPoint through another form of managed care, Schaeffer says.
The acquisition is also bound to improve things for patients, he says. Mass Mutual had "a terrifically positive reputation for customer service and quality of care. They serve large employers and that has kept them loyal. We intend to maintain that. The difference is we have more medical management" than the old-line insurer. "We do more analysis of clinical data, which will hopefully allow us to identify the outliers" and to improve care, Schaeffer says.
When opposites merge
It's a reflection on the turbulent merger of two disparate companies-resulting in thousands of layoffs-that MODERN HEALTHCARE was unable to obtain an interview with any Aetna U.S. Healthcare executives despite repeated requests. When the magazine reached an executive in charge of provider contracting in California, he said, "I'm not allowed to speak to anyone."
But Aetna must be reaching analysts at Merrill Lynch, which proclaims the company is "well on its way to gaining recognition as the premier national provider of healthcare services."
Salomon Brothers' Hoehn chimes in that "this acquisition has paved the way for Aetna to become one of the major players in the future HMO market, which we envision to contain no more than five or six national HMO companies."
Although Aetna's PR apparatus maintains its silence, Thomas R. Williams, head of Aetna's western region, addressed the merger issues at a healthcare forecast conference at the University of California Irvine's graduate school of management in February. Williams emphasized that mergers and consolidations must result in a better product for the consumer.
He stopped short of saying that actually happened.
In 1995, Aetna sold its property-casualty business to focus on managed care and international operations. The company "was getting beat up" in the small and medium-sized employer market, although it had strong multistate accounts, Williams says. It had also failed to integrate 18 HMOs.
"We were looking for someone to run our managed-care business," Williams says.
Aetna chose U.S. Healthcare for a number of reasons: It had grown from the ground up, over 22 years, without a single merger partner. It had a strong Northeast presence, like Aetna. It was focused on commercial business and was strong in the small and medium-sized employer markets. And both companies were "passionate about medical management" and favored "proactive intervention" to change provider behavior, Williams says.
Despite the attraction, merging the two companies' cultures has been "like Sly Stallone and Jimmy Stewart trying to make an action film," Williams says.
The company is basing its strategies on the best practices of each partner. For example, executives decided to implement U.S. Healthcare's provider contracting methods rather than Aetna's, Williams says. But that decision is causing friction among California providers that have evolved beyond plan-imposed medical controls.
Saddleback's Kalama challenges Williams' contention that U.S. Healthcare has the best practice in provider contracting.
Kalama says that in the mature California marketplace, Aetna and other plans had been giving medical groups and hospitals full-risk capitated contracts, while retaining about 25% for administration and profit.
Now U.S. Healthcare is trying to "unwind" the agreements to contract directly with individual physicians on a fee-for-service basis. "On the hospital side, the new contract from U.S. Healthcare is very aggressive," she says. "They want to slash rates, but they're doing it in a unique and difficult-to-understand way, (using) a fee schedule based on codes that no hospital I know of can administer.
"This approach seems like we're going back 20 years," Kalama says. What's more, she says, it's "bullying."
U.S. Healthcare's practices might have appeared very progressive to an old-line East Coast company like Aetna, Kalama says. But it may be that the U.S. Healthcare systems don't know how to administer capitation.
Another reason Aetna may be turning back from capitation is Aetna and other plans "were glad to get rid of risk when medical groups and hospitals were losing money," Kalama says. But now that providers have slashed costs, reduced staff, developed clinical paths and pursued other economies to make risk profitable, "Aetna and all of the other health plans want their share of the sweat equity," she says.
Medical groups in California have also become quite powerful, and the health plans don't like that, Kalama says. If they can unravel the contracts and make promises to individual doctors who might not like the group's administration, plans can regain their leverage, she says.
Some analysts are tempering the general enthusiasm about the Aetna-U.S. Healthcare merger. A December report by Oppenheimer & Co. says, "The level and timing of synergies to be realized by the company in connection with its recent acquisition of U.S. Healthcare may prove to be lower and more difficult to achieve than is generally anticipated on Wall Street."
Those reservations are understandable given Aetna's 1996 performance. Although eventually the deal is supposed to generate $300 million in administrative savings, last year the company took a $275 million restructuring charge and announced it would lay off more than 4,000 employees.
Aetna posted a loss of $193 million in the fourth quarter ended Dec. 31, 1996. Net income for the year fell 79% to $58.7 million from $286 million.
But the giant has found the capital to make more acquisitions. At the beginning of the year, Aetna announced it will buy a small HMO in Colorado. It also said it will invest in about 49% of a Brazilian company providing health and life insurance and pension plans. This will expand Aetna's international business and open the door for the introduction of managed care when the time is right, analysts say.
With many questions about the value of mergers unanswered, reporters can do little more than record the deals and point to their possibilities. Besides their potential value to stockholders, theoretically the deals are done with the goal of improving healthcare for enrollees.
On the whole, says the executive familiar with several mergers, when these large plans have come together, enrollees' experience has been generally positive. The plans' systems capability has improved, and their combined expertise has become available to more enrollees.
But as far as long-term value to enrollees, "I don't think it's a vast improvement or a major opportunity for reduced premiums or enormously improved service. And it can be a negative. It depends on the quality of the execution. It can be horrible for the customers if it's done badly," he says.
Consultant Boland says: "If you don't increase customer value, you're sowing the seeds of your own destruction. The message now is that managed care is about big business, not about customer value. That's a real dangerous message to generate."