Hoping to beat managed care at its own game, thousands of doctors invested in start-up HMOs that promised to adopt physician-friendly policies and commit more money to patient care. But many of these plans haven't met expectations.
Physician Healthcare Plan of New Jersey has admitted it can no longer survive as a stand-alone HMO. Less than four months after receiving a statewide license, it hired an investment banking firm to identify "strategic options," according to a letter sent to shareholders last month by Chairman Joseph Billotti, M.D.
"PHPNJ is consistently undercut by larger HMO players when attempting to negotiate contracts for large group covered lives," said the letter, which MODERN HEALTHCARE obtained.
It's a far cry from the plan's billing in a 1995 news release as a grass-roots movement that would "offer the people of New Jersey an alternative to existing managed-care plans."
In its initial offering, the plan raised $17.5 million from 3,500 physicians in the state, who bought stock at $5,000 per share.
Neither Billotti nor the plan's spokeswoman returned phone calls seeking comment.
The New Jersey plan isn't alone. A look at physician-owned HMOs launched in the past three years found only a minority have made significant progress toward a competitive, physician-owned product (See chart).
The biggest obstacle is capital. Some plans raised millions from physicians and local medical societies, but that wasn't enough to compete with big HMOs.
California Advantage, which was started by the California Medical Association in 1995, has abandoned its goal of running an HMO, said acting Chief Executive Officer John Ramey. On Jan. 1, it began marketing a PPO and other products, which have about 9,000 enrollees.
An HMO license would require $15 million to $20 million in reserves that the plan does not have, Ramey said. "When the capital needs were identified, the impracticality of that became apparent," he said.
To pay for a marketing push, California Advantage recently borrowed $3 million from the Audio-Digest Foundation, a subsidiary of the California Medical Association.
CMA Executive Vice President John Lewin, M.D., acknowledged that California Advantage is "an extremely difficult venture" but said it can work "because of the philosophy of it."
Similarly, Pennsylvania Physicians Care doesn't have enough capital to operate statewide, as indicated in its 1995 prospectus. It began marketing a PPO in 16 small counties on April 1 and has applied for an HMO license, President and CEO Richard Felice said.
Meanwhile, some stockholders who paid $5,000 per share want the plan to expand immediately. The 1995 offering raised $22 million, exceeding its capital goal of $16.5 million. The offering was endorsed by the Pennsylvania Medical Society.
Felice said the plan intends to expand, but it could take years to build up enough cash; advertising in Philadelphia alone would run $15 million.
"I don't think anyone thought $22 million was going to instantly start a statewide HMO," Felice said.
Some plans failed to raise enough capital to launch a product. Doctors Health Plan in Florida folded this year after raising just $2.4 million of the $30 million it needed. Two other start-ups, Primus Health Care Corp. in southern Florida and All-American Health Enterprises in downstate New York, also failed to attract investors.
Several start-ups received loans from state medical societies, which are at risk if the ventures fail to meet their initial capital goals.
The Florida Medical Association and the Florida Osteopathic Association lost about $750,000 on the failed Doctors start-up, said Jack McAbee, the plan's interim chief of staff.
No one promoted physician-run HMOs more than Tom Garvey, a New York consultant who has traveled from state to state telling doctors their survival and autonomy depends on owning their own HMOs. His firm, Garvey Group, did feasibility studies for many plans.
Garvey said he still believes physician-owned HMOs are viable but blamed doctors for messing them up.
"Their lack of business acumen coupled with their egos makes it very difficult for them to execute plans," he said.
Garvey said he believes physicians will revisit the idea of owning HMOs, even in states with high managed-care penetration. But two factors counter that trend. First, some HMOs are enhancing patient and physician satisfaction by eliminating the hated gatekeepers.
Second, national managed-care companies are undercutting the prices of even well-established provider-owned plans.
For example, last week, 20-year-old Physicians Health Services, which is controlled by Greater Bridgeport (Conn.) IPA, agreed to be acquired by Foundation Health Systems for $280 million. Also last week, FHS completed its promised $50 million bailout of a hospital- and physician-owned HMO in New Jersey, First Option Health Plan (See story, p. 26).
Plans sponsored by medical societies, independent practice associations and other grass-roots provider movements tend to thrive in noncompetitive markets but founder as giant plans move in and implement stricter utilization controls, said Doug Werner, FHS' senior vice president of strategy planning and business development.
Despite the risks, physicians continue to launch new HMO projects. In Louisiana, MD HealthShares attracted one-third of the state's physicians to invest $1,000 per share last summer. In Connecticut, the Hartford County and New Haven County medical societies are about to launch an offering.
Plans in states with low managed-care penetration and those with strategic partners seem to fare the best.
For example, Unified Physicians of Washington started marketing its PPO, HMO and point-of-service plans in January 1996 and has 41,000 enrollees. It expects to break even next year and has seen its value increase fourfold, to $16.8 million in 1996, said President and CEO James Peterson.