The Kansas Medical Society is shutting down one HMO at the end of this month and surrendering control of another after losing millions of dollars on an undercapitalized venture into the insurance business.
It's the dismal end of yet another ambitious effort by physicians and other providers to reclaim their rightful place in the managed-care universe.
The 1,710 Kansas doctors who bought stock in Heartland Physicians Health Network in 1994 now have seen their capital vaporized.
Collectively, the two plans operated by Heartland have lost about $16.4 million over the past three years.
The medical society intended to put patients first, said D.W. Bell, M.D., an ophthalmologist in Overland Park, Kan.
"We're going to compete on quality, on taking care of patients the way they should be taken care of, and not how much money can be made for the stockholders," she said.
The marketplace took them at their word. Four-and-a-half-years later, Heartland Physicians' two health plans have lost so much money that the Kansas Insurance Department is supervising their demise.
Heartland Physicians' commercial HMO, called Heartland Health, is shutting down April 1. Its Medicaid HMO, called Horizon Health Plan, is handing over its network and its 24,000 enrollees to a minority-controlled Medicaid HMO based in Missouri, in exchange for a financial bailout and a 20% stake in the new plan.
Doctors and other Heartland plan providers say they are owed millions of dollars for services rendered to plan enrollees, which they may or may not recoup. The exact amount hasn't been disclosed. And the fact that the physician-providers and the physician-stockholders are one and the same makes this transaction doubly delicate.
The collapse of the Kansas plans adds one more tombstone to the crowded cemetery of physician-sponsored health plans. Encouraged by financial and logistical support from the American Medical Association, numerous state medical societies tried to hatch their own captive HMOs and PPOs in the early 1990s, when physicians still believed they could halt the onslaught of the big investor-owned managed-care companies.
But in Kansas and elsewhere, resistance proved not only futile but ruinous. For example, the California Medical Association's California Advantage PPO declared bankruptcy on June 2, 1998, after losing $11 million in two years (June 8, 1998, p. 6).
"In December we had 12,500 enrollees in Heartland," said Jerry Slaughter, executive director of the Kansas Medical Society. "That's when we made our decision to stop. We weren't making any progress toward achieving profitability."
The medical society raised about $7 million in total capital. Doctors bought shares at $2,000 each.
According to insurance department documents obtained by MODERN HEALTHCARE, about $3.5 million was borrowed from Kansas Medical Mutual Insurance Co., a malpractice insurer owned by the medical society. Another $1 million was borrowed from the medical society.
More capital was injected as necessary to remain above statutory minimums, "but we never had adequate capital to make it flourish," Slaughter said. The plan marketed to the small group market, including doctors' offices. Policyholders received a letter from Heartland advising them to find a new insurance carrier by April 1.
The Heartland plans owe back payments not only to physicians and ancillary providers but to hospitals.
"It's a very politically sensitive issue right now," said Larry Tobias, spokesman for the Kansas Hospital Association. None of the hospitals were willing to talk about how much they're owed.
Horizon failed largely because of two issues, Slaughter said. First, the capitation rate was inadequate to cover the cost of services. In 1997, the state paid an average of $85 per enrollee per month. In 1998 that was bumped up to $120, but it still wasn't enough. The state made no provision for administrative expenses to run the plan.
The Kansas Department of Social and Rehabilitation Services, which administers Medicaid, did not pay a $1.3 million bill due on Jan. 1, 1998, until Sept. 2, 1998.
Ann Koci, commissioner for adult and medical services, said the state couldn't pay until it received HCFA approval for a change in the payment mechanism.
Horizon was the largest and is now the only Medicaid managed-care contractor in Kansas. Two others, Blue Advantage and HealthNet, dropped out at the end of 1998.
The Horizon network and its contract with the state are really its only assets. In the takeover plan approved by the insurance department, a Kansas City, Mo., HMO called FirstGuard will rent the Horizon network for $2 per enrollee per month.
That minimal rent income will be used as collateral for a loan to allow Heartland Physicians to repay the unpaid providers in Kansas. FirstGuard will assume ownership of 80% of Horizon and rename it FirstGuard Kansas. FirstGuard is working with the department of social and rehabilitation services to raise the average capitation rate to $125 per enrollee per month.
FirstGuard began operating on Jan. 1, 1997, in Missouri as a Medicaid managed-care HMO serving the Kansas City area. It is an offshoot of Swope Parkway Health Center, a minority-controlled federally qualified health center in central Kansas City.
FirstGuard has 22,000 enrollees and had net income of $189,246 in 1998 on revenues of $30.3 million, according to the Missouri Insurance Department. Its net worth was $2.7 million on Dec. 31, 1998.
E. Frank Ellis, president of FirstGuard, said the opportunity to take over Horizon will strengthen FirstGuard and make it more viable in the market.
"It gives us more capacity, more efficiencies of operation, ability to consolidate our purchasing power for member benefits and services," Ellis said. "The whole economy of scale increases once we reach the critical mass, which is roughly 35,000 or 40,000 lives."
As provider-sponsored health plans, Horizon's and FirstGuard's missions are comparable, Ellis said. This arrangement allows the Kansas Medical Society's Horizon plan to remain viable and retire its debt.