Hospitals don't belong in the HMO business, says insurance broker Rusty Levy of New Orleans. That's why he resigned from the board of Touro Infirmary in 1994 after it ignored his advice and created the Advantage Health HMO.
The hospital's decision has proved expensive. Touro and its two equity partners have shelled out $72.7 million to start up and cover the snowballing losses of the 5-year-old plan, which later this year will go out of business.
The demise of Advantage Health is the result of mistakes of cost control, medical management and pricing (Jan. 18, p. 4). At its peak, it was the third-largest HMO in Louisiana, with 79,303 enrollees and a 13% market share. About half of those enrollees arrived in mid-1997, when the plan bid on and won a contract to cover state employees. That move proved ruinous (March 30, 1998, p. 2).
Any way you slice it, losses from this hospital-sponsored HMO will chop a sizable chunk out of the bottom lines of its equity owners.
Advantage Health is owned in equal parts by three Louisiana hospital groups: Franciscan Missionaries of Our Lady, based in Baton Rouge and the owner of three hospitals; Sisters of Charity of the Incarnate Word Healthcare System, based in Houston and the owner of four hospitals in Louisiana; and Touro.
Franciscan Missionaries could not be reached for comment. Neither could Shannon Gaffney, the temporary CEO who is winding down Advantage Health.
Touro spokesman Eben Fetters said the hospital's total investment in Advantage Health was in the "low double-digit millions." He added that revenues the hospital has gained through Advantage Health "have certainly met the hospital's business objectives" but declined to give specifics.
According to the most recent figures available from the Louisiana Department of Insurance, Advantage Health lost $20.6 million in the nine months ended Sept. 30, 1998. On revenues of $136.1 million, it spent $139 million on medical and hospital care and $17.3 million on administration last year.
In calendar 1997, Advantage Health lost $31.9 million, and in 1996 it lost $7.6 million.
Advantage Health is by no means the only provider-owned health plan that's gone under in recent years. The California Medical Association's California Advantage PPO filed for bankruptcy protection last June. Griffin Hospital in Derby, Conn., closed down its Suburban Health Plan in November after it lost $10 million in four years (Nov. 23, 1998, p. 3). Dozens more hospital-*and doctor-owned plans are struggling.
Craig Gardner, spokesman for the Louisiana Department of Health, said the three hospital owners contributed $22 million in extra capital in the first nine months of 1998 to keep the plan solvent. That's in addition to the $28.5 million invested in 1997.
Figures for the fourth quarter of 1998 won't be available until after March.
"They haven't had to do it (offer a capital infusion) on instructions from us. They have done it on their own," Gardner said. "They have maintained the minimum net worth requirements all along. They continue to fulfill their commitment as owners."
That commitment will end on June 30, when Advantage Health will stop covering its final enrollees, the 38,000 state employees. State Insurance Commissioner Jim Brown attributed the plan's folding to the unprofitable state contract.
Most commercial purchasers of Advantage Health have made alternate arrangements for their enrollees. Individual enrollees and remaining commercial accounts as of Feb. 1 are being rolled over into another HMO, Patient's Choice.
That plan was started in 1996 by members of the Louisiana Medical Society. It is the second-smallest HMO in the state, with only 2,602 enrollees as of Sept. 30, 1998, and a market share of less than 1%.
Insurance broker Levy predicted hard times for Patient's Choice. "The only thing left from Advantage is the slop. Who would stay except those who could not afford to leave?"
At Advantage Health, Levy said, "management was inadequate from the top. Second, they underpriced the product. Third, they didn't control costs."
The sales force and managers spent money too freely and didn't stick to their pricing, Levy said. "You could always go back and say, `If you want the business, do this, this and this,' and they'd do it. They were so hungry for business, they'd do anything. That is not typical of insurance plans. They may come off a few pennies if you really press them, but they're not going to budge (further)," he said.
Hospitals make money by getting people into the hospital; HMOs make money by keeping people out of the hospital. "I think the hospitals that have thrived in the New Orleans area are the ones that have not been part of an HMO," Levy said.