Officials at SCAN Health Plan, the first social HMO to attempt conversion to for-profit status, are worried the small plan may hit rough waters under a California law that spells out HMO conversion procedures.
The state law under which SCAN is attempting to convert was passed following controversy over whether giant plans such as WellPoint Health Networks met their public benefit obligation for the years in which they enjoyed tax breaks. The law requires a converting plan to donate its fair value to charity.
Officials at the 12,000-enrollee plan say that, while it is converting to get capital to expand into new areas and increase its provider networks, the conversion process might make it a takeover target. Long Beach, Calif.-based SCAN holds a valuable Knox-Keene license, which allows it to operate as an HMO in California.
The plan, which operates in four counties, might be acquired by a larger plan if state officials saw that as a way to maximize SCAN's value to the public, company officials fear.
The state Department of Corporations is currently reviewing SCAN's application to convert. It follows the intent of the law in that the company will donate 100% of its stock to a not-for-profit foundation, which will become SCAN's sole owner.
Despite the controversy that usually swirls around conversions of health organizations to for-profit status, none has yet surfaced over SCAN's move. Consumers Union and the California Medical Association, which have objected to other conversions, have been silent on this one.
But the concern SCAN officials have is over preserving the small plan's independence through the conversion process. Bill Rice, SCAN's chief financial officer, said, "Suppose someone came in and said that in this transaction, there's a higher value (to the public) in selling to a third party. That would go against the very intent and reason for our conversion."
SCAN wants to convert because it operates in the shadow of the nation's largest Medicare HMO, PacifiCare Health Systems. Unlike PacifiCare, SCAN is a niche marketer, offering seniors community-based long-term care on top of regular Medicare benefits. It is only one of three SHMOs in the country.
"One of the things that's happening in the marketplace, the medium-sized HMO is starting to disappear through consolidation," leaving only small and large HMOs, Rice said. "Clearly SCAN is on that lower end of the spectrum. We truly believe that we have a mission that's unique, and we want to preserve that and stay independent."
A small plan has more of a hands-on approach that is attractive to some enrollees.
"We may be much more capable . . . as a small company," said Stuart Byer, SCAN vice president of public affairs and development.
SCAN, with about $80 million in annual revenues, has been profitable since 1988 and earned $2 million last year.
But company officials wonder how small plans are going to survive.
"Clearly, if we were in North Dakota, it wouldn't be an issue, but we operate in the most expensive environment in the country. We have no billboards, no television ads," Byer said.
Rice added, "We suffer from such basic things as name recognition."