As market competition continued to take its toll in the past year, several provider systems sold their HMOs to large investor-owned managed-care organizations.
But other provider-owned plans, even some that posted losses or smaller profits in 1996, say they are not about to sell, even though large investor-owned plans are knocking on their doors regularly.
"Just about every one of them has contacted us," says Mary Ann Tournoux, vice president of sales and marketing at Massillon, Ohio-based HomeTown Health Plan, which lost money last year.
Respondents to MODERN HEALTHCARE's annual survey of provider-owned HMOs and PPOs say the bottom line is important but not all-consuming, as it is for investor-owned HMOs that must answer to shareholders. Last year, provider-owned plans continued to invest operating capital in information systems, new products, geographic expansion and mergers with other provider plans.
Among the recent casualties of market competition are Health Direct, sold by Oak Brook, Ill.-based Advocate Health Care to Humana for $20.5 million; Trumbull, Conn.-based Physicians Health Services, which will be acquired by Foundation Health Systems for $280 million; and First Option Health Plan, based in Red Bank, N.J., which FHS is bailing out with a $51.7 million investment.
Woodland Hills, Calif.-based CareAmerica, the top HMO in the survey based on enrollment and revenues, is expected to be acquired by not-for-profit Blue Shield of California.
But despite challenges from giant HMOs, several survey respondents are market leaders and have won national recognition. Two of them-Harris Methodist Texas Health Plan, based in Arlington, and M-Plan, based in Indianapolis-made the Sachs Honor Roll, a national consumer-satisfaction survey that singled out 13 plans as all-around top performers in their markets (May 12, p. 48).
Last month, Albuquerque-based Presbyterian Health Services bucked the sell-off trend and announced it would buy struggling FHP of New Mexico, a unit of investor-owned PacifiCare Health Systems, based in Cypress, Calif. (June 2, p. 2). Executives at other provider-owned plans exulted at that groundbreaking role reversal.
"I think you may see other examples of this type in the future. . . Over the next few years, you'll see a lot of combinations in areas that you wouldn't suspect," says Alex Slabosky, M-Plan president.
Provider advantages. Plan executives say their chief selling point to purchasers and potential enrollees is that they're neighbors. They're locally owned and operated, focused on the customer, familiar with provider arrangements in their region and quick to respond to changing conditions.
Some executives say they may even be benefiting from the consumer backlash against allegedly greedy investor-owned HMOs featured in the media.
Consultants say it's too soon to tell whether provider-owned HMOs will leverage those advantages. And provider plans have to deal with the same basic issues all HMOs face, chiefly medical management. Peter Boland, a healthcare consultant and publisher in Berkeley, Calif., says provider plans have "the opportunity . . . to better manage and incentivize providers," but they may not have the capability.
Peter Kongstvedt, M.D., a partner with Ernst & Young in Washington, writes in the Managed Health Care Handbook that far from eliminating the proverbial middleman between payers and providers, provider plans have to re-create it by adopting the effective management techniques of successful commercial HMOs.
Profit pain. Along with the HMO industry as a whole, profits at many provider-owned HMOs suffered last year because of pricing pressures and increasing medical costs.
Of the 29 HMO respondents to MODERN HEALTHCARE's survey, nine reported a loss. Of the 16 that made money, five reported profit increases and four returned to profitability after losses in 1995. Four provided no financial data.
By all signs, the plans are very busy. The 29 plans that responded to the survey were among a total of 113 contacted. Springfield, Mass.-based Health New England seemed to typify the state of the industry. It provided financial data but couldn't make an executive available for an interview because "the company is focused on going live" with a new main computer system this month, a spokeswoman reports.
Forty of 137 provider-owned PPOs contacted by MODERN HEALTHCARE responded to the survey, but most provided no financial data. Twenty reported an increase in the number of people covered, while five reported a decrease and four remained unchanged. Eleven provided no data.
Enrollment gains were not as healthy as in last year's survey. In 1996, 36 of 42 respondents reported an increase in the number of people covered, while only three reported a decrease and three remained unchanged.
By contrast, virtually all HMO respondents reported enrollment growth. That may have come at the expense of PPO enrollment as more payers offered HMO options to beneficiaries.
HMO alliance. Joining forces against the investor-owned competition last year, 12 provider-owned HMOs with 50,000 or more enrollees came together as the HMO Alliance. The plans, which will collaborate to build business opportunities on a national level, have a total enrollment of 1.5 million.
Eight of the survey respondents are alliance members, and several place among the survey's top 10 plans in various categories. Most of the alliance's plans were profitable last year.
Alliance members have a long-term commitment to an integrated delivery system that includes a health plan, says Cathy K. Eddy, the alliance's chief operating officer. "The challenge (for the plans) is to go from a health plan that's a strong niche product to one that offers multiple product lines, to move beyond a region to statewide operations and to contract with providers that are nonowners," Eddy says.
M-Plan, the survey's fastest-growing HMO by revenues in the past five years, had a 59% drop in 1996 net income to $264,000 from $645,000 in 1995. Revenues last year grew 26% to $186.2 million from $148.2 million in 1995.
M-Plan spent more than $400 million in capital equipment alone in the past few years. The plan is expanding statewide and making an ongoing investment in information systems, staff and building brand identification, Slabosky says. Despite competition from national and large regional players, "we're the largest commercial HMO in the state, able to outgrow all the competitors in the market," Slabosky says. "We get calls all the time from publicly traded firms that want to buy us. Right now, we have no plans to change our status."
The plan has been able to generate capital through operations and investment from its owners, Clarian Health Partners.
Timing also has been a factor, Slabosky says. M-Plan began operations in 1989. The important thing is to break into a market early, before outside plans have gained a foothold, Slabosky says.
But that caveat doesn't deter Tom Elkin, the former healthcare purchasing chief at the California Public Employees Retirement System. Elkin is now chief executive officer at Western Health Advantage, which was licensed as a commercial HMO May 1 and enrolls 12,000 in a Sacramento managed Medi-Cal program. Medi-Cal is the state's Medicaid program. It will begin enrolling commercial patients in August.
"Some people think we're absolutely crazy" starting an HMO in a well-penetrated market, Elkin says. But its owners are "well-respected, mature hospital systems that have been managing fully delegated capitated care for some time," he says. The HMO will also enjoy the "psychological" advantage of the backlash against investor-owned plans, he believes.
Full speed ahead. Another startup, Missouri Advantage in Jefferson City, which is owned by four local hospitals, was licensed last July. The rural, community-based HMO is going head to head against Humana and the Blues but hopes to capitalize on the fact that it's community owned and operated, says Kevin McRoberts, executive director.
Missouri Advantage has more than 5,500 enrollees now, projects 10,000 by the end of the year and is "going full speed ahead" with its Medicare risk contracting application, McRoberts says.
HomeTown Health Plan, one of the survey's top 10 HMOs by enrollee growth in the past five years, lost $464,000 last year on revenues of $30.8 million. "Huge amounts of capital" went into starting a Medicare risk product and becoming a state-certified workers' compensation managed-care organization, Tournoux says.
Enrollee growth has been robust because "our entire existence is based in this community. We position ourselves as a neighbor. We facilitate existing relationships between hospitals, physicians and local employers. We just want to make healthcare more cost-effective. We don't want to change it," she says.
Providers have embraced that idea because "they get tired of big plans from big cities coming in and telling them how they're going to practice medicine," she adds.
To give providers a freer hand, the plan has not only capitated primary-care physicians but hospitals, unlike most large HMOs in the area.
Another plan that posted a loss because of investments in information systems and expansion last year is Toledo, Ohio-based Family Health Plan, a division of Mercy Health System. The plan lost $4.3 million on revenues of $51.5 million.
Family Health is expanding statewide and into three Michigan counties and has a plan to move into other markets where Mercy facilities operate, such as Kentucky, Pennsylvania and Tennessee, says Bruce Haskin, president and CEO. "Our view is this is an investment in trying to advance Mercy Health System's capability to serve as an integrated delivery network," he says.
The company also became certified as a managed workers' compensation organization and set up an indemnity insurance company so it can offer a point-of-service plan and have "a full array of products to offer employers," he says.
Net income at HealthPartners Health Plans, based in Phoenix-the third-largest plan in the survey in revenues and enrollment-plunged 90% in 1996 to $1.8 million from $10.8 million in 1995. Those results reflect a merger with Samaritan Health Plans and the cost of expanding product lines, says Thomas Perrotta, vice president of marketing.
Investment payoff. Meanwhile, Harris Methodist Texas Health Plan serves as an example of investment paying off. In 1995, Harris lost $20 million as it bought buildings and equipment and hired key staff members. In 1996, Harris capitated most of its network and primary-care physicians, who received fee-for-service in 1995, says Thomas Keenan, executive vice president and COO.
The result was a $20.3 million profit in 1996 on revenues of $409.5 million. Harris, with almost 250,000 enrollees, is second only to CareAmerica among survey respondents in enrollment and revenues.