It wasn't until 10 Pennsylvania hospitals began to act like insurers that their HMO started making money -- after first chalking up more than $8 million in losses.
Using clinical guidelines and management tips from an actuarial consulting firm to the insurance industry, the hospitals' HMO, Alliance Health Network, turned the corner financially late last year.
The same guidelines, which recommend brief hospital stays for many medical and surgical cases, have been criticized by many medical specialty groups for shortchanging patient care.
But physicians, who hold one-third of Alliance's board seats, are solidly behind the changes.
"We have the support of the doctors," said Frank Gerlach, interim president and chief executive officer at Alliance. "Because without Alliance (they know) that then it will be back to Highmark."
Gerlach is referring to Pittsburgh-based Highmark Blue Cross and Blue Shield, which controls about 75% of the Erie, Pa., health insurance market and, according to providers there, has the clout to dictate clinical practice and payments.
Launched in 1994 by 477-bed Saint Vincent Health Center and 467-bed Hamot Medical Center, both of Erie, Alliance has seen four consecutive years of losses. A combination of hefty administrative expenses and rich payment rates to providers contributed to Alliance's cumulative $8.2 million shortfall.
"We were trying to run a managed-care plan almost like an indemnity plan," Gerlach said.
Spurred in part by local employers, Saint Vincent and Hamot staked about $6 million each to start the Alliance HMO as a challenger to Highmark's dominance. Hamot had previously run its own money-losing HMO, called Great Lakes Managed Care, which was folded into Alliance.
Other area hospitals have since invested lesser but undisclosed amounts in Alliance. They include 55-bed Corry (Pa.) Memorial Hospital; 286-bed Horizon Health System, Greenville; 243-bed Meadville (Pa.) Medical Center; 112-bed Metro Health Center, Erie; 101-bed Millcreek Community Hospital, Erie; 173-bed Northwest Medical Center, Franklin; 90-bed Titusville (Pa.) Area Hospital; 23-bed Union City (Pa.) Memorial Hospital; and 105-bed Warren (Pa.) General Hospital.
The picture at Alliance is finally brightening thanks to better cost controls and a welcome rate hike. The 41,000-enrollee HMO became profitable during the second half of 1997 and projects net income of more than $4 million this year.
Starting last July, Alliance withheld 15% of payments to hospitals and physicians in a complicated risk-sharing arrangement that allowed providers to earn back the reserved money in proportion to their scores on a combination of quality and efficiency measures.
Meanwhile, competing Highmark raised area premiums by double-digits, Gerlach said, allowing Alliance breathing room to boost premiums as well. Between lower costs and higher revenues, Alliance replaced red ink with black, earning net income of $512,000 in the second half of 1997.
The plan still posted a loss of about $2.5 million for the entire year, according to documents filed with the Pennsylvania Insurance Department that MODERN HEALTHCARE obtained last week. But that's an improvement over the $4.3 million loss the plan reported in 1996.
The key to the turnaround was bringing in well-known insurance consultant Milliman & Robertson last year to protect the providers from themselves.
Seattle-based Milliman develops utilization and payment guidelines that are widely used by managed-care companies to establish payment policies and rates. Almost as widely, medical practitioners have criticized Milliman's bottom-line approach as being at odds with quality medical care.
"We needed to have someone advise us independently what market rates were," said Stephen Danch, chief financial officer at Hamot.
Over the past three to five years, insurers' payments to medical providers in Erie and nearby markets have fallen about 10%, Danch said, but Alliance hadn't kept pace with the decline.
Alliance's revision of payments to providers could prove important in the Pennsylvania attorney general's ongoing review of a proposed merger between Hamot and Saint Vincent. The Federal Trade Commission also is investigating the proposed merger, which would give the hospitals a virtual acute-care monopoly in Erie and a 70% share of their 11-county primary market (Nov. 24, 1997, p. 6).
A captive HMO and its fairness in contracting for certain services were sticking points in the state's review of the merger of Penn State Geisinger Health System last year. Final state attorney general approval is pending, although the state allowed the hospital systems to merge last July.
Balancing the dual roles of provider and payer hasn't been a cakewalk for Alliance and its provider members.
"There have been modifications to reimbursements . . . that had to be made," said Robert Cox, executive vice president and treasurer at Saint Vincent. "The better we do, the worse we do," Cox said, because making Alliance fiscally strong has taken sacrifices by the hospitals and physicians backing the HMO.
Nevertheless, the reduction in payments is part of the healthcare landscape, Cox concedes, like it or not. "You don't look for revenue to bail you out anymore -- you just have to manage expenses."
Because providers have been more directly involved in the business decisions of the HMO, however, the transition to lower rates has been eased somewhat, he said.
So far, the financial strain hasn't broken either hospital. For fiscal 1997, Hamot earned net income of $5.5 million on revenues of $175 million. Saint Vincent earned $4.6 million on revenues of $146 million.