In the mid-1990s, Omni Healthcare, a hospital-owned managed-care plan, decided to reach beyond its central California bailiwick and try to crack the much-larger San Francisco Bay area market.
The strategy befuddled many, because the Bay Area was already dominated by managed-care behemoths such as Health Net, Kaiser Permanente and PacifiCare Health Systems.
Several years later, the skeptics have been vindicated. Omni has fewer than 350 enrollees in the seven-county Bay area, including just one in heavily populated Alameda County.
Omni's Bay area woes revealed the plan's inability to compete effectively in Northern California's rugged managed-care market. Last month, Sutter Health and St. Joseph's Regional Health System decided to shutter the health plan and transfer its enrollees to Blue Cross of California, a unit of publicly traded WellPoint Health Networks (May 24, p. 2).
Omni's unhappy saga matches those of many of its counterparts in the shrinking pool of provider-owned health plans.
National managed-care companies and large regional health plans have gobbled a number of the nation's largest provider-owned HMOs in recent years, including several that have topped the charts in MODERN HEALTHCARE's annual surveys of the niche. The HMOS include Burbank, Calif.-based CareAmerica, Phoenix-based HealthPartners Health Plans of Arizona, and Arlington, Texas-based Harris Methodist Texas Health Plan, which is being sold.
"Provider-owned plans do not have a good future," says Peter Kongstvedt, a healthcare partner in the Washington office of Ernst & Young. "I don't see the niche growing at all. I see it shrinking."
MODERN HEALTHCARE's annual survey of provider-owned HMOs shows that downward trend. Several of the segment's largest players have been sold or shut down in recent years, and many others are in precarious positions.
Overall, just 7.6% of HMOs nationally were owned by hospitals or hospital systems in 1998, down from 8% the previous year, according to SMG Marketing Group, a Chicago-based healthcare information and marketing consulting company.
In contrast, the 10 largest managed-care companies have bolstered their market share dramatically in recent years, from 47% of total HMO enrollment in 1987 to 67% last year, according to InterStudy, a Minneapolis-based managed-care research firm.
Larger corporations now own 53% of regional HMOs, compared with about 46% two years ago, according to a report released last month by Scott-Levin, a Newton, Pa.-based consulting firm that tracks healthcare trends for the pharmaceutical industry.
However, supporters insist there's still a sustainable niche for provider-owned plans that have a strong position in their local or regional markets and can appeal to consumers and physicians who have become alienated from other forms of managed care.
Portland, Ore.-based Providence Health Plans, a unit of Seattle's Providence Health System, for example, is one of the three largest managed-care companies in Oregon, says Executive Director Jack Friedman.
And although the company suffered significant losses on discontinued operations in Washington state last year, Friedman is convinced that Providence-and other provider-owned plans with a strong market presence-can make it. But less-dominant players, such as plans with fewer than 80,000 enrollees, "are being squeezed out," he concedes.
Survey results. Overall, MODERN HEALTHCARE's recent annual surveys of provider-owned HMOs clearly track a market niche in decline. Last year, the magazine contacted 110 provider-owned HMOs and received 30 responses. This year, 91 health plans were contacted, and 31 replied. As previously noted, several of last year's most significant players, including Harris Methodist and HealthPartners Health Plans of Arizona, are no longer provider owned or are expected to soon depart the category.
Those departures leave Detroit-based HAP and Providence Health Plans as the only provider-owned HMOs in the survey with annual revenues of $400 million or more. The same two health plans are the only respondents this year boasting more than 300,000 enrollees.
In contrast, most of the fastest-growing provider-owned plans surveyed are insignificant in size compared with the strongest national and regional players.
Further, many of the provider-owned plans surveyed posted net losses in 1998 (See charts). Of the 20 for-profit plans that responded to this year's survey, for example, 10 lost money, seven posted a profit, and three-St. Louis-based Mercy Health Plans-Missouri, Carmel, Ind.-based Sagamore Health Network and Metairie, La.-based SMA Health Plan-did not provide financial data. Three respondents on the for-profit list posted losses of $10 million or more. Topping the list was Harris Methodist, with a $99 million loss.
Or take Carelink Health Plans, of Charleston, W.Va., which is owned by Camcare, the parent of Charleston Area Medical Center, West Virginia's largest hospital. Officials say the 63,000-enrollee plan has posted losses of nearly $31 million over the past four years, including a $12.9 million loss last year on revenues of $91.8 million.
Of course, most providers cannot sustain losses of that magnitude. Unlike their larger national and regional counterparts, most provider-owned HMOs lack the reserves to carry operating losses for very long-or to make the significant investments in information technology that most experts believe are required for long-term success.
Given the daunting capital requirements, "you do wonder if some of the provider-owned plans are willing to make the investments," Providence's Friedman says.
These statistics explain why national managed-care companies and large regional plans continue to grow or consolidate market strength in many key markets-often at the expense of provider-owned plans. National companies include Aetna U.S. Healthcare, Cigna, Foundation Health, Kaiser, Prudential HealthCare, United Healthcare and WellPoint. Among the regional heavy-hitters are Anthem, AvMed Health Plan, Highmark Blue Cross and Blue Shield, Oxford Health Plans and Trigon Blue Cross and Blue Shield. Last October, Miami-based AvMed scooped up 23,000-enrollee St. Augustine Health Care, a primarily physician-owned plan in Tampa, Fla., which lost nearly $8.4 million on revenues of just $15.2 million in 1997 (Oct. 12, 1998, p. 28).
The deal increased AvMed's enrollment to nearly 400,000-more than all but a handful of the nation's remaining provider-owned plans can claim.
Many provider-owned plans are clearly struggling to hold their ground. Again, Omni's case is instructive.
After deciding last year that it couldn't compete in the rough-and-tumble Sacramento, Calif., marketplace without a major cash infusion, Omni's owners tried to sell the troubled health plan. Sacramento-based Sutter and Stockton, Calif.-based St. Joseph's, a six-hospital system, placed Omni on the market last spring, hoping to sell it for an estimated $120 million. After finding no takers at anything close to their asking price, the systems yanked the plan off the sale block in December.
Things quickly went from bad to worse. Omni lost $2 million on revenues of nearly $187 million last year. Its enrollment fell to 124,000 last month from 164,000 last spring. In May, its owners decided to bail out, announcing they would shutter Omni as soon as they could move its enrollees elsewhere.
In effect, Sutter, one of California's largest hospital systems, with 26 acute-care facilities and 1998 revenues of $2.9 billion, and St. Joseph's, a unit of San Francisco-based Catholic Healthcare West, simply weren't willing to make the huge investments needed to make Omni competitive. System officials estimated those investments at $10 million or more over the next few years.
Tough trends. Of course, there are brighter spots in the survey data. They include Detroit-based HAP; Little Rock, Ark.-based HAP; Indianapolis-based M-Plan; Winston-Salem-based Partners National Health Plans of North Carolina; and Lansing, Mich.-based Physicians Health Plan, among others. For a few standout provider-owned plans, enrollment, revenues and profits continue to climb.
At Health Advantage, net income soared to $4.7 million on revenues of almost $105 million last year. In comparison, it reported net income of just $1 million in 1997, when its revenues exceeded the 1998 total by more than $17 million. Yet even some of the more successful provider-owned plans have been hit with shrinking profits, or even losses, in recent years. And sales of provider-owned HMOs have exacerbated the growing gaps in enrollment and revenues that separate large national and regional managed-care companies from their smaller provider-owned counterparts. For example, Phoenix-based Samaritan Health System and Tucson, Ariz.-based TMC Healthcare sold 510,000-enrollee HealthPartners Health Plans of Arizona last October to a United Healthcare subsidiary for a reported $235 million (Nov. 9, 1998, p. 68). The former owners said they couldn't afford the estimated $70 million in infrastructure investments the growing plan required.
The acquisition made United Healthcare Services, United's Arizona subsidiary, the state's largest health plan by far, with 680,000 enrollees.
In a similar deal that is pending, Harris Methodist is being sold to Health Care Service Corp., parent of the newly merged Blue Cross and Blue Shield plans of Texas and Illinois, for just under $100 million (April 19, p. 17). Harris Methodist lost nearly as much-$99 million-last year, and some sources contend the deal's momentum has slowed as a result. The huge loss included a $49.5 million operating hit on revenues of $586.6 million, and nearly $50 million held in reserve to cover future losses.
The 308,000-enrollee plan is owned now by 14-hospital Texas Health Resources.
An example of more-selective health plan pruning is Providence Health System. Last year the system sold two Washington state managed-care plans-an HMO and a PPO-to rival Seattle-based Regence Blue Shield, already one of the largest health plans in the Pacific Northwest. Providence also sold a second Washington state PPO, Sound Health, to the First Choice Health Network provider group. Those three plans, along with some discontinued Medicaid business, helped produce a $13.7 million loss for Providence Health Plans in 1998, on the heels of a $14.4 million loss the previous year.
Despite the divestitures, Providence remains one of the nation's largest operators of provider-owned HMOs, with nearly 306,000 enrollees. It added significant enrollment and revenues in January 1998, when it acquired Eugene, Ore.-based SelectCare HMO, with about 145,000 enrollees, from Bellevue, Wash.-based PeaceHealth system.
Providence Health Plans lost $600,000 on its continuing health plan operations last year. And its HMO-related losses in Washington state inspired the Roman Catholic system to dump most of its health plan enrollment there.
In Virginia, meanwhile, Sentara Health System and a regional division of Bon Secours Health System are scrapping their mutual Medicare HMO effective Dec. 31, forcing about 14,000 enrollees back into traditional Medicare coverage (June 7, p. 2). Norfolk, Va.-based Sentara owns 80% of 164,000-enrollee Optima Health Plan; Bon Secours Hampton Roads Health System, also based in Norfolk, owns the remaining 20%.
Hope remains. Even though provider-owned plans are being squeezed into a smaller segment of the overall market, some observers believe there's space for tightly targeted plans to grow and prosper.
That's not much of a silver lining, but given the seemingly relentless pressures they've faced, it's something for hospitals to hold on to.
Although many providers are bailing out of the health insurance business or losing money and wondering whether to keep balancing the conflicting demands of being a provider and a health insurer, "in appropriate markets, the outlook (for provider-owned HMOs) is great," says Jacque Sokolov, M.D., chairman and senior partner at Sokolov, Schwab Bennett, a consulting firm in Los Angeles. Chances for success are especially good if a health plan is linked to dominant providers in its region, Sokolov says.
Examples include HAP, one of the stars of MODERN HEALTHCARE's survey this year, and Maumee, Ohio-based Paramount Health Care, Sokolov says, although Paramount posted a $3.9 million loss on revenues of $233 million last year.
However, successful provider-owned plans must focus on regional or smaller markets to compete with national and regional powerhouses, Sokolov concedes. He says approximately 85% of ongoing provider-owned plans have annual revenues between $50 million and $250 million-far less than regional managed-care companies such as Oxford or Trigon, to say nothing of the large national players.
Even so, regionally focused provider-owned plans such as HAP, which was one of the more profitable health plans in Michigan last year (May 10, p. 46), insist they have a healthy future.
HAP's revenues rose 9% to $992 million in 1998, reflecting growth in commercial, Medicare-risk and Medicaid-risk enrollment, according to Joseph Schmitt, senior vice president and chief financial officer. Earnings, however, slumped 58% to $9.2 million, from $21.7 million in 1997. The Michigan plan was hurt by factors affecting all HMOs, such as rapidly increasing pharmaceutical costs, and by less-generic problems, such as distant relations with local providers at its 45,000-enrollee Medical Value Plan in Toledo, Ohio, Schmitt says.
Despite the earnings slump, HAP's model, which features globally capitated agreements with Henry Ford Health System in Detroit and other providers, appropriately aligns financial incentives and clinical performance, Schmitt says.
"There are folks who can make it work," he says. "So far, we've been able to succeed."
To help that process along, HAP sold its money-losing Medical Value Plan unit in March to Toledo-based ProMedica Health System, which is merging it into its Paramount Health Care. In return, HAP received a 20% stake in the new Paramount.
Conflicting roles. The inherent tension when hospitals run health plans has convinced some industry leaders that the two roles may be incompatible-or very close to it.
William Boettcher, chief executive officer at Burlington, Vt.-based Fletcher Allen Health Care, warned executives at a managed-care conference in San Francisco last month that participating in risk-sharing health plans has cost many hospital organizations "tons of money." His system, which runs the state's largest hospital-a teaching hospital at the University of Vermont Medical School-also owns 28% of the 21/2-year-old Vermont Health Plan. Blue Cross and Blue Shield of Vermont owns 50%; two other hospitals hold the remaining shares in the 25,000-enrollee managed-care plan.
"My own HMO is the worst contract I have," Boettcher said at the ninth annual National Healthcare Symposium. He said that painful experience convinced him that he'd be dragged into a similar contract "kicking and screaming."
Given experiences like his-and the Omni example in California-many hospital executives are beginning to feel the same way.
But optimists such as Providence's Friedman say running a successful provider-owned plan isn't impossible. "If you can achieve a market position (that's) a top-three position, I think it's sustainable," he says.