PPOS RIDING A WAVE OF POPULARITY
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June 07, 1999 01:00 AM

PPOS RIDING A WAVE OF POPULARITY

Chris Rauber
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    PPOs are surfing high at the moment, and plenty of entrepreneurs want to catch the wave.

    Recent studies, including a much-noted William M. Mercer survey of employer-sponsored health plans released in January, show that PPOs' share of the health insurance market is growing rapidly, and in fact was significantly higher than that of more tightly managed HMO plans in 1998.

    Often derided in recent years as "managed-care lite," PPOs now command 40% of the market among covered workers, compared with 29% for HMOs, the survey found. And PPO enrollment has skyrocketed 60% over the past four years, according to the study, which surveyed 4,200 employers across the country.

    "The market for PPOs will continue to grow, and the industry looks to gather greater market share," says David Williams, interim chairman of the Fort Lee, N.J.-based American Association of PPOs and chief executive officer at the Mount Prospect, Ill.-based Health Preferred of Mid-America PPO.

    Many observers say the freedom of choice, flexibility and cost control PPOs offer are increasingly attractive to both employers and consumers.

    That explains why several of the nation's largest PPO networks are eying their smaller brethren with renewed interest. Many of those targeted are provider-sponsored plans, which account for about 10% of the nation's PPOs, according to a study last year by SMG Marketing Group, a Chicago-based healthcare information and consulting firm.

    Many smaller plans lack the capital to fund needed information technology and other infrastructure improvements or the size to appeal to large employers, trust funds, labor unions and other customers.

    "There's certainly going to be a consolidation in the marketplace," most of it targeting local and regional plans, says Lee Dickerson, the Sacramento, Calif.-based executive vice president of provider networks for First Health Network, Downers Grove, Ill., one of the nation's largest PPOs.

    First Health prefers to grow on its own and hasn't made a PPO acquisition since 1992, Dickerson says. But he knows there are lots of smaller plans on the sales block.

    Among those most interested in snapping up PPO bargains is a new player, Beyond Benefits, which recently entered the fray in a big way.

    Late last month, Irvine, Calif.-based Beyond Benefits made its inaugural acquisition, buying 4-million-enrollee Preferred Health Network from Woodland Hills, Calif.-based Foundation Health Systems. Preferred Health, which contracts with hospitals and doctors in 38 states, generates annual revenues of about $12 million, according to Foundation officials. Terms of the deal weren't disclosed.

    Beyond Benefits was launched last fall to buy regional PPOs and quickly build a base from which it could compete with the nation's largest PPOs. Its senior management consists of three managed-care veterans: George Bregante, former president of Irvine-based Beech Street, one of the nation's leading PPOs; Barbara Rodin, former president and CEO of BPS Healthcare, a Los Angeles-based PPO; and Asim Ashray, BPS' former chief financial officer.

    Bregante, Beyond Benefits' CEO, says his company has several similar deals in the works and could double or triple in size by year-end. At that point, "we expect to be able to compete with anybody," he claims.

    Bregante's braggadocio is backed by funding from major venture capital firms such as Menlo Park, Calif.-based New Enterprise Associates, Seattle's Fraizer & Co. and Boston's Ticonderoga Capital.

    "We can see that (consolidation) trend just starting" among PPOs, says Blaine Bos, a Chicago-based healthcare consultant at William M. Mercer and one of the authors of its recent survey. Five or six major players dominate the national PPO scene, Bos says, and they're increasingly interested in acquiring smaller, regional PPOs.

    "There's a huge drop-off" in size and clout after that, says Bos, and a huge opportunity for the big guys to get even bigger.

    Although there were 1,035 PPO plans nationally as of mid-1998, according to the American Association of PPOs, many of them are owned by a much smaller coterie of companies. Julia de Peyster, a spokeswoman for the association, says that roughly 400 corporations own their own plans. Other sources say only about 100 of them are of significant size.

    In its Dec. 28, 1998, list of the nation's largest PPOs, Business Insurance ranked San Diego-based CCN, New York-based MultiPlan, First Health Network, and Irvine-based CorVel Corp. as the four biggest plans by enrollment (See chart). Beech Street would have ranked fourth in the published version, with nearly 13.3 million enrollees, but it didn't submit data in time to be included.

    Analyzing PPO networks is tough, because companies in this niche, many of them privately held, are leery of sharing financial and other data. Enrollment is also difficult to gauge, since PPOs only estimate the numbers of notoriously fluid "eligible enrollees," while HMOs can count only those enrollees for whom they have a clear financial obligation.

    Bos and other observers stress that PPO enrollment figures are self-reported, while HMOs must report data to state regulators.

    Despite the uncertainties, interest in consolidation is clearly gaining momentum. In another indication of that interest, Beech Street and Newport Beach, Calif.-based Capp Care merged in March, creating a combined network of about 16 million enrollees.

    That total is less than the sum of the companies' previously announced enrollment tallies, acknowledges Bill Hale, president of the merged organization, because Beech Street has eliminated duplications and exaggerations from its post-merger roster.

    Previously, "we were counting every enrollee and his homeless brother," jokes Hale.

    At various times last year, the pre-merger Beech Street claimed as many as 19 million total enrollees in statements to the press.

    Hale says the Capp Care acquisition cements Beech Street as a "comprehensive national PPO," expands its network of contracting doctors and hospitals, and puts it in a position to provide deeper discounts to clients.

    Many of the remaining regional and provider-owned PPO plans around the country will soon be targeted by the 10 largest PPOs, Hale says. Beech Street has merger discussions under way with at least two potential partners, he says.

    The plan also expects a five-year partnership with Internet healthcare giant Healtheon Corp. to help it consolidate the industry by offering doctors and hospitals more and better data through a dedicated "intranet" platform, a private Internet-style network.

    Not to be outdone, MultiPlan, already the nation's second-largest PPO network with 23 million enrollees, is also looking for good PPO deals.

    MultiPlan has nabbed two regional PPOs in recent months, acquiring a Louisiana plan with 100,000 enrollees in mid-April from New Orleans-based Advantage Health (April 19, p. 17), and Ethix Mid-Atlantic, a PPO covering New Jersey and eastern Pennsylvania, in mid-March from Blue Bell, Pa.-based Aetna U.S. Healthcare. Terms weren't disclosed in either transaction.

    And MultiPlan, which previously bought PPOs in 10 states over the past two years, has made no secret of its continued interest in acquisitions. "We're in the market," says Sidney Meyer, its executive vice president, who handled the Ethix deal.

    Industry leader CCN, meanwhile, acquired SequaCare, a regional PPO based in Boise, Idaho, in February, a transaction that it says made it the state's largest PPO with more than 50,000 enrollees. CCN bought the plan from a regional employers association, IEC Group, for an undisclosed price.

    Despite the recent wave of transactions, Beech Street's Hale expects it to be some time before any of the industry's giants decide to join forces.

    Until then, "it'll probably be four or five of us that drive the consolidation," Hale predicts.

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