Providers-the same folks said to be interested in launching Medicare provider-sponsored organizations and in direct contracting with large employer purchasing groups-appear to be bailing out of the insurance niche in increasing numbers.
The trend is most apparent with HMO plans at the top end of the spectrum.
"It's more or less a natural evolution," says hospital consultant Wanda Jones, who is also president of San Francisco's New Century Healthcare Institute. "Hospitals have the capability to capitalize a health plan in the beginning, but they don't have the ability to take it statewide or national."
In one sign of the times, California Advantage, a tiny PPO operated by the California Medical Association and owned by about 7,600 doctors, announced June 2 its plans to file for federal bankruptcy protection.
As a result of brutal competition and consolidation, even the largest provider-owned HMOs are far smaller than national giants such as Aetna U.S. Healthcare, Kaiser Permanente and the looming United HealthCare Corp.-Humana behemoth. In a rapidly consolidating marketplace, that may not be big enough.
Several of the largest health plans included in MODERN HEALTHCARE's annual survey of provider-owned HMOs and PPOs last year have been sold or are on the sales block.
CareAmerica, the largest provider-owned HMO in both revenues and enrollment in last year's survey, was sold by UniHealth to Blue Shield of California in late 1997 (Dec. 1, 1997, p. 44).
Health plans now on the market that are expected to be scooped up by nonprovider purchasers include Arlington-based Harris Methodist Texas Health Plan and Sacramento, Calif.-based Omni Healthcare. Harris Methodist responded to this year's survey; Omni did not.
Meanwhile, HealthPartners Health Plans of Phoenix is being sold by Phoenix-based Samaritan Health System and TMC HealthCare, an affiliate of Tucson (Ariz.) Medical Center, according to sources familiar with the situation. The rumored buyer: giant United HealthCare of Minneapolis (May 4, p. 4).
All three-Harris Methodist, Omni and HealthPartners-were among the provider-owned leaders nationally last year in enrollment and revenues.
Time, financial pressure. Overall, MODERN HEALTHCARE*contacted 110 provider-owned HMOs and 114 provider-owned PPOs for this year's survey. Thirty HMOs and 27 PPOs responded. The relatively skimpy response rates appear to reflect both the significant time pressures health plan executives are under and their unwillingness to divulge confidential financial data in an era of intense competition and consolidation.
Responses have dropped consistently in recent years.
On the not-for-profit side of the ledger, there were just 10 HMO respondents to the survey, but financial results were considerably stronger across-the-board. All but two of the 10 not-for-profit HMOs that responded were profitable last year.
The exceptions were tiny Hometown Health Plan of Massillon, Ohio, and Farmington Hills, Mich.-based Mercy Health Plans, which last year lost $1.8 million and $3.6 million, respectively.
And several not-for-profit plans, notably Henry Ford Health System's HAP health plan, Providence Health System and Sentara Health Management, posted profits of $4 million or more, led by HAP's $21.4 million on revenues of $914.9 million. Some analysts say large provider-owned plans in cities dominated by a few huge employers-such as the automobile manufacturers in and around Detroit-could find themselves in a relatively safe haven.
But immediate financial concerns don't appear to be driving the decisionmaking, at least not in all cases. Omni came close to breaking even last year, losing just $196,000 on $174 million in revenues, says interim Chief Executive Officer Robert Fahlman.
But current owners Sutter Health of Sacramento and St. Joseph's Medical Center of Stockton, Calif., hired the investment banking firm Morgan Stanley in mid-April to put the 164,000-enrollee plan on the market. Executives expect to sign a definitive agreement to sell it by summer's end.
Times have been tougher at Harris Methodist, which lost more than $8.5 million last year after posting $18.5 million in net income the previous year. And this year is looking even worse, according to Harris Methodist spokeswoman Lisa O'Steen.
The 283,400-enrollee plan is on target to lose roughly $18 million in 1998, she says, blaming locked-in premiums, state-mandated restrictions, and continuing difficulties controlling medical and pharmacy costs.
To stay competitive, Harris Methodist's parent, Irving-based Texas Health Resources, is exploring a possible merger with Blue Cross and Blue Shield of Texas. "We may make a decision in June or early July," O'Steen says. "It's not really a sale. Neither (plan) will be going away."
Texas Health Resources, formed through the Aug. 1, 1997, merger of Harris Methodist Health System and Presbyterian Healthcare Resources, is a $2 billion company with nearly 15,000 employees. But even with resources of that magnitude, it doesn't want to go on alone in operating its health plan.
Problematic futures. The most recent round of sales of provider-owned plans to nonprovider organizations follows several similar transactions in 1996, including Oak Brook, Ill.-based Advocate Health Care's sale of its Health Direct HMO to Humana and Foundation Health Systems' acquisition of Trumbull, Conn.-based Physicians Health Services.
And the outlook for a number of other provider-owned plans could be problematic, given their less-than-encouraging financial results. "The demands of running a major managed-care plan or PPO require a tremendous investment, and that makes it very hard for a provider-owned organization to stay competitive and effective," says Glenn Smith, a senior healthcare consultant at Watson Wyatt Worldwide in San Francisco.
"I think they're going to drop by the wayside," Smith adds.
Omni's owners, for example, noted bluntly in April that they lack the capital and commitment to make the health plan more competitive in the pressure-packed Northern California market. "Omni was a good fit with our healthcare systems when there were multiple smaller regional HMOs, and it has served our organizations and our patients well," says Sutter CEO Van Johnson. "But we realize times have changed, the market has consolidated, and Omni needs to grow. Moving Omni to the next level will require either a substantial investment or a new sponsor."
About 10 contenders have indicated interest in the health plan, Omni's Fahlman says.
Either an outright sale or a partnership with a larger managed-care player is being considered, officials say.
Capital needs. Access to capital is likely to be a major factor in the long-term survival of many provider-owned plans. Half the 20 respondents on the for-profit HMO list reported financial losses in 1997, with five plans sustaining losses of $5 million or more. Several other plans barely broke even.
Conversely, only two for-profit HMOs, Partners National Health Plans of North Carolina and Preferred Plus of Kansas, posted profits significantly higher than $1 million.
Southwest Health Alliances lost nearly $28 million last year, after hemorrhaging more than $16 million in 1996. And HealthPartners, the Phoenix plan owned by Samaritan Health Systems, Tucson Medical Center and Southern Arizona Independent Trust, was also deep in the red, with more than $12 million in 1997 losses.
Despite the tough times experienced by many provider-owned plans, several smaller HMOs have grown quite rapidly in recent years, including tiny Altru Health Plan in Grand Forks, N.D.; Akron, Ohio-based SummaCare; Preferred Plus of Kansas, Wichita; Paramount Health Care, Maumee, Ohio; Virginia Beach, Va.-based Sentara Health Management; and Partners National Health Plans of North Carolina, Winston-Salem. But with the possible exception of HAP, even the largest HMOs are still far smaller than many of their investor-owned and major not-for-profit competitors nationally.
The same is true in the PPO niche as well. The largest provider-owned organizations included in the survey, such as Minneapolis-based PreferredOne, a not-for-profit PPO with 562,000 beneficiaries, or Sagamore Health Network of Carmel, Ind., a for-profit plan with 646,600 beneficiaries last year, are far smaller than their competitors. And many observers expect the provider-owned ranks to shrink.
In fact, according to data provided by the Association of Managed Healthcare Organizations and SMG Marketing Group, a Chicago-based healthcare and marketing consulting company, not one of the nation's 32 largest PPOs is provider-owned.
Tricky business. In the short term, the success of most provider-owned PPOs depends on the continued presence of the mid-sized insurers that rent their networks, says Peter Kongstvedt, M.D., a healthcare partner in Ernst & Young's Washington office. Without that cushion, "it's a much more tricky proposition," he says.
Further, many experts say the majority of provider-owned plans simply don't have the long-term capital needed to create the information system infrastructures to successfully compete in the long run.
For example, Irvine, Calif.-based Beech Street Corp., a privately held PPO network that already covers nearly 20 million patient lives, is spending $30 million to upgrade its computer system.
"It's all moving toward electronic commerce," says George Bregante, Beech Street's president and chief operating officer.
Bregante says increasing numbers of provider-owned plans are seeking buyouts by bigger players such as Beech Street, which acquired a provider-owned organization two years ago and now is in discussions with two others. Bregante is a member of the PPO council, or governing board, of the Fort Lee, N.J.-based Association of Managed Healthcare Organizations, which represents about 230 PPOs and Medicare PSOs nationally.
"The number of provider-owned PPOs is shrinking, and I think it's going to continue to shrink," Bregante says. "There's going to be a real consolidation."