The number of physician-owned health plans that have failed or sold out to competitors is growing. And last month two more plans joined the ranks of at least a dozen casualties that have occurred during the past two years.
With some, proposals were in place, but the plans couldn't raise enough capital to get going. Others secured the necessary startup funds but quickly ran short and couldn't raise more.
That was the case at Patient's Choice, created by the Louisiana Medical Society in 1997. After accumulating losses of $4.6 million, the Baton Rouge-based HMO is facing a shutdown by the state insurance department. The state says it is doing its best to ensure that none of the plan's 14,435 enrollees will be left without insurance.
Patient's Choice dropped below its state-required net worth of $3 million in June. Although a call for more capital went out, too few physicians responded.
According to market observers in Louisiana, Patient's Choice didn't control costs or utilization well enough to support its rich benefit package. Ironically, its effort to truly provide choice resulted in a loss of negotiating leverage with hospitals because it had signed on so many hospitals to its provider network.
To establish Patient's Choice, 2,142 Louisiana physicians invested $6,000 each, or about $12.9 million, in the plan. Although the amount was adequate for startup capital, soaring costs quickly became a problem.
The other plan that met an unwelcome fate last month was Bremerton, Wash.-based KPS Health Plans, which was seized by the Washington state insurance commissioner for falling below the state-required net worth of $3 million. KPS had lost a total of $12.1 million since 1996 because of unprofitable state contracts that covered about 60% of its 72,000 enrollees.
Asked to recapitalize the plan, its 350 physician owners agreed to contribute $10,000 each. But the state, impatient to correct the net-worth deficiency, put KPS in receivership before it could present its recovery plan. Regulators say they are confident they can rehabilitate KPS and keep it operating.
KPS was created by the local medical society in the mid-1930s to help physicians contract directly with employers and later evolved into a full-fledged PPO. In the late 1980s, which were far better times for the plan, KPS tested a Medicaid managed-care program that was replicated statewide. Its troubles stem at least in part from its unwillingness to release the money-losing state contracts it had held for so long, plan administrators say.
Despite these failures, advocates of physician-owned health plans remain. One example: In their new book, Physician Driven Health Plans (McGraw-Hill), two consultants advise that now is the time for physicians to seize control of medical care by creating health plans. Authors William De Marco and Kenneth Hekman acknowledge many physician-owned plans have failed. But, they point out, many have succeeded, such as plans sponsored by the Geisinger Foundation of Danville, Pa., and the Scott & White Clinics of Temple, Texas.
De Marco and Hekman identify 55 plans in operation as physician-sponsored or physician-driven, meaning doctors have an ownership interest or some influence on the organization through governance roles. Examining 1996 data from InterStudy, they found that those plans performed better financially than national HMOs, losing $7.99 per member in 1996 compared with $10.49 for the HMOs.
The idea of doctor-owned health plans catapulted into prominence in the mid-1990s. Frustrated by the limits on choice that HMOs were putting on both patients and physicians, as well as declining incomes, thousands of doctors invested in start-up HMOs, many with the support of state medical societies. In several cases, the HMOs were created to bid for business under new state Medicaid managed-care programs.
But physician-owned health plans face challenges others don't. One important difference is that they tend to begin operations without enough capital, says Peter Kongstvedt, M.D., a healthcare consultant at the Washington office of Ernst & Young. They also draw sicker enrollees than other plans because of patients' trust in doctors. What's more, many businesses won't contract with physician-owned plans because they fear the plans won't survive, he says.
"In some cases," Kongstvedt says, "plans have underestimated how difficult it is to run things that need to be run. This is not a blanket statement. But you can't cut out the middleman; you can only replace him. And in some cases, you can replace him with a worse middleman."
Generally, only large, established medical groups have the money, marketing know-how and reputations to run thriving health plans, Kongstvedt says.
Several ventures backed by medical societies didn't raise enough capital to get going. Among those were efforts in Connecticut, Florida, Illinois, Kansas and New York.
In Washington state, medical society-sponsored Unified Physicians of Washington collapsed two years after its 1996 startup. It had been capitalized with $12 million, in part supplied by local physician organizations. The plan had 41,000 enrollees in 1997.
In Oklahoma, PROklahoma Care, a 4,000-enrollee HMO, was shut down in July 1998 by its owners after two years of operation.
"We lost our butt," says Joe Crosthwait, M.D., vice president and medical director at Oklahoma Physicians Network, an IPA that emerged from PROklahoma.
"The hope was physicians could have a say in how their patients were cared for, but demand for services far exceeded the premium we could charge, and we had competition from the big boys," he said.
About 960 doctors invested a total of $3 million in the HMO effort.
Crosthwait says he thinks the days are numbered for HMOs anyway because people are turning to more loosely managed PPOs. As for the new Oklahoma IPA, Crostwait hopes it will contract directly with employers.
One state medical society that managed to put together a viable plan-at least for a time-is the California Medical Association In 1995 about 7,600 physicians invested $1,000 each in the effort, known as California Advantage. But it soon abandoned its plans for an HMO. And last year it decided to shut down its 7,000-enrollee PPO as well, rather than give a controlling interest to an investment partner.
CMA President Jack Lewin, M.D., says he believes the project could have worked.
"Unfortunately, the venture was under-capitalized, and it didn't have enough of a market strategy," he says.
Lewin says that he thinks doctors still have a significant interest in the idea and that someday the CMA might consider another effort. Right now, however, it is focusing on developing an information technology company, he says.
"What we would need to do next time is use more business sense: start smaller, plan more carefully (and limit its reach to) a defined area instead of statewide," Lewin says. "If one could overcome the early phase, in which these ventures attract sicker patients, one could have health and wellness programs, instead of just taking care of disease. That's when physicians can be very viable."