It may be the first Roman Catholic-sponsored managed-care plan to buy a for-profit HMO.
But that's just business as usual at Fidelis Care New York, a scrappy not-for-profit that's become the second-largest Medicaid managed-care plan in the state. Since its inception in November 1993, Fidelis' network has swelled to 3,500 contracting providers serving 22,000 Medicaid recipients in the New York City area.
Late last month, Fidelis picked up another 40,000 enrollees as well as 7,700 physicians, more than 100 hospitals and various other providers under contract through its $7.8 million purchase of Better Health Plan, Amherst, N.Y., from Durham, N.C.-based Coastal Physician Group, a financially troubled physician practice management company. The deal goes a long way toward meeting Fidelis' statewide ambitions.
"Basically this was an exercise in building something from scratch or buying somebody else's product," said Mitchell Kornblit, a principal with Shattuck Hammond Partners, the New York-based investment banking firm that served as Fidelis' financial adviser on the deal.
By buying Better Health, Fidelis saved "several million dollars" compared with what it would have spent cobbling together a statewide network, Kornblit said.
The combined plan serves 26 counties, giving Fidelis a jump start on the state's move into a mandatory managed-care program for Medicaid recipients. HCFA approved the state's federal waiver this summer.
How this Queens, N.Y.-based Medicaid plan-begun by Catholic Medical Center of Brooklyn and Queens-had the cash and the moxie to acquire a for-profit plan is largely a factor of its Catholic sponsorship.
In the spring of 1995, the eight bishops of New York agreed to create a statewide plan based on the church's vision of serving the poor, the medically underserved and the community at large, said Mark Lane, Fidelis' president and chief executive officer. Under the bishops' sponsorship, Fidelis sought required state approvals and raised enough money from the diocese, hospitals, Catholic charities and other constituents to capitalize the statewide expansion over a two- to three-year period.
Lane declined to reveal the total amount of cash raised, saying only that was in the "multimillions."
Fidelis' opportunity to buy a chunk of its statewide network arose from Coastal's financial woes. As part of a managed-care expansion initiative, Coastal bought Better Health in May 1995 for $19.7 million in cash and $2.4 million in loan repayments to shareholders and banks. But Coastal's deepening losses forced the company to put certain assets on the block, including Better Health.
Better Health generated net revenues of $47.5 million, or 8.6% of Coastal's revenues, in the year ended Dec. 31, 1996.
Although Coastal took a big hit on the sale, Fidelis' $7.8 million cash offer for Better Health's operating assets made the grade.
"Coastal needed the money," said Ted Marcuccio, a vice president in the Boston-based healthcare group of Advest, Coastal's financial adviser. He said the price is consistent with prices paid for distressed plans as well as Medicaid plans. Coastal said liquidation of the remaining assets and liabilities may generate an additional $2.5 million for the company.
"The price . . . was a reasonable price," agreed Kornblitt, Fidelis' adviser. "As an alternative to building an HMO from scratch, the purchase of Better Health Plan was very attractive."
Better Health, based in the suburbs of Buffalo, was first put on the block by another investment banking firm in April 1996. But the plan proved unsalable.
Buyers were put off by the plan's expiring waiver from federal rules that require managed-care plans to maintain at least a 75-25 ratio of Medicaid to commercial enrollees, explained Dobbin O. Bookman, an associate with Advest's healthcare group. Better Health's waiver expired this July 1. But Fidelis has its own, so that was not a factor.
There was another turnoff, according to Bookman: "It was Medicaid and it was New York. That scares people."
But Medicaid and New York are Fidelis' bread and butter.
In the coming months, Fidelis management plans to begin working with providers throughout the state to develop managed-care services for "special needs" populations, including people with HIV and AIDS.
Fidelis also intends to work with the state and respective counties in developing managed-care pilot programs for the uninsured. "We don't know the real structure or what will work, but we do think managed care could be an answer for this population," Lane said.
And, of course, Lane and his colleagues will begin integrating Better Health into the Fidelis network.
"I think what we want to do is take the best of both worlds and make it great," he said.