In New Mexico, it's a hospital system's turn to play banker in a proposed managed-care transaction.
St. Joseph Healthcare, a four-hospital system based in Albuquerque, is lending Cimarron Health Plan half the money to buy QualMed of New Mexico from Foundation Health Systems. The price has not been disclosed.
In exchange for its loan, St. Joseph will get a seat on the seven-member board of Cimarron and two seats on the eight-member board of Cimarron's parent corporation, Health Care Horizons, also based in Albuquerque. St. Joseph's parent corporation, Denver-based Catholic Health Initiatives, approved the loan but has no financial interest in the HMO sale.
Although he joked that the deal "lets me yell at the insurance company if they make me unhappy," St. Joseph Chief Executive Officer and President Steven Smith said the deal shows the creativity required to survive in New Mexico's competitive healthcare market.
Late last year St. Joseph received the first waiver from HCFA to begin a Medicare provider sponsored organization, allowing hospitals and doctors to deliver risk-shared Medicare coverage without an intermediary health plan. But unlike its other competitors, St. Joseph had no stake in a commercial HMO, making it vulnerable on the managed-care end.
St. Joseph originally asked Cimarron to provide third-party administration for the PSO, Smith said. Although that contract didn't transpire, Smith said, those negotiations led to talks about a managed-care joint venture.
"We think our niche in the market is to be provider. . .influenced," said Cimarron President Garrey Carruthers.
An undisclosed portion of the deal's financing came from commercial lenders, but Carruthers said St. Joseph's provider expertise makes it more valuable than a commercial lender would be. "We need to have principal partners like St. Joseph's at the policy table," Carruthers said.
The deal continues a tradition of strong ownership links between hospitals and managed-care plans in the state. Hospital systems launched and still own New Mexico's two largest HMOs, 350,000-enrollee Presbyterian Health Plan and 150,000-enrollee Lovelace Health Plan.
Formed in 1993, for-profit Cimarron, owned by a consortium of physicians and by Health Care Horizons, which operates Health Plus HMOs in Illinois, Michigan and Puerto Rico, has about 62,000 enrollees statewide. Of those, about 51,000 are Medicaid recipients.
According to the information most recently available from the New Mexico Department of Insurance, Cimarron earned $495,707 on revenues of $36.6 million in 1997.
QualMed also makes money. The state said the 34,000-enrollee plan turned a $1.4 million profit on revenues of $44.4 million in 1997. QualMed's enrollment includes 3,500 Medicare beneficiaries.
Foundation is selling much of its QualMed business as part of a restructuring plan. QualMed merged with Foundation subsidiary Health Net in 1994.
Observers agree that it is unusual for a hospital to join forces with an HMO to purchase a second health plan. "This is one of the first examples of out-of-the-box thinking for managed care. But I think it's a very appropriate initiative to redraw and reconfigure (New Mexico's) playing field," said Peter Boland, CEO of Boland Healthcare consulting firm in Berkeley, Calif.
Boland and other observers said the state's providers are independent enough that the larger players are unlikely to merge. Albuquerque has one of the nation's highest managed-care penetration rates, and its providers can be vulnerable to the leverage of health plans. But by partnering with Cimarron, St. Joseph gains equal footing with HMO-owning rivals Presbyterian and Lovelace.
"Providers sometimes get left out in a market as mature as this, and the question is whether they wither and die or come up with a new strategy," Boland said. That Cimarron went to a hospital system to get a loan shows "to some degree where the capital is," Boland added, noting that HMOs' volatile performance has made banks hesitant to lend them money.
No major shifts are expected in provider contracts, because QualMed and Cimarron refer patients to the same systems: St. Joseph and 263-bed University Hospital in Albuquerque, which is owned by the University of New Mexico and is the state's primary provider for low-income patients.
Under the deal, St. Joseph is likely to get more referrals over time, and the joint network of 2,900 QualMed and Cimarron physicians is likely to be expanded. But those changes haven't been worked out yet, Smith and Carruthers said.
A University Hospital spokesman said system executives were looking at the deal, expected to close in October pending approval by the New Mexico Insurance Department, which will begin its review in July.