It's a tired plot: Health plan goes bust. Providers are left holding millions in unpaid claims.
The latest version is playing out in Massachusetts, where New England's largest HMO, 1.2 million-member Harvard Pilgrim Health Care, was placed under state receivership last month. Perhaps never before has a plan with such market dominance-approaching 40% of Massachusetts HMO enrollment-been at risk of evaporating.
Interested parties, including hospitals and health systems, have been toiling to prevent liquidation. A menu of options, possibly including a sale to a for-profit insurer and a hospital-driven debt restructuring, was to have been identified by late last week. A course of action could be decided as soon as March.
Whatever the outcome, the situation could rock eastern Massachusetts hospital credits. Some observers are drawing lessons for the healthcare industry nationwide. Namely, providers need to be more vigilant about the financial strength of their payers.
Rating agency Standard & Poor's recently began analyzing hospital and HMO credits jointly in the same markets, looking at their mutual impact. In January it issued its first report on how the Harvard Pilgrim crisis will affect hospitals and other health plans.
Standard & Poor's plans to issue similar reports for other states in the coming months. Jack Reichman, a director of a team that analyzes managed-care plans, says the agency is in a unique position because it rates a substantial number of HMOs and hospitals. Nationwide, it tracks 200 HMOs, 500 not-for-profit hospitals and 10 investor-owned hospital companies with a total of 500 hospitals.
"Sometimes what's good for one sector is very bad for another sector. We need to understand how what's happening in one impacts the others," Reichman says.
Such an analysis makes sense, because providers take a hit if an HMO can't pay its bills. In Massachusetts, the picture is dismal. None of the state's leading HMOs earns an investment-grade rating, Reichman says.
Even under the most optimistic scenario, Harvard Pilgrim's problems could affect hospital credits, says Standard & Poor's, which released a preliminary list of 19 hospitals and systems with Harvard Pilgrim receivables (See chart).
Long-term volatility in the HMO market could hurt the profit margins of some providers as employers and consumers switch coverage. Further, the weakness of the HMO market could prompt a move to indemnity plans, which might generate higher reimbursements for providers but boost the number of uninsured, according to Standard & Poor's.
New York-based Moody's Investors Service, which rates 23 hospitals in the state, has warned investors of "serious credit ramifications" for hospitals and physicians if they are forced to write off uncollected charges.
Both rating agencies are waiting for a rehabilitative plan to be approved before they decide whether changes in ratings or outlooks are warranted.
The timing couldn't be worse for Massachusetts hospitals, whose profitability and liquidity levels are below national averages. According to the Massachusetts Hospital Association, 1999 total profits for hospitals in the state were 0.3% and operating losses were 3%, based on survey responses from 53 hospitals.
The hospital association's most recent estimate of hospitals' receivables is $265 million.
"Everybody's very focused on the fact that the provider community can't afford to take a big haircut here," says David Kirshner, chief financial officer of Children's Hospital in Boston.
Children's is one of the strongest hospitals in the market, but still expects to lose $40 million on operations on revenue of $480 million in the fiscal year ending Sept. 30. The facility is struggling with cutbacks in government funding. Its projection does not include fallout from Harvard Pilgrim, which owed the hospital $2 million as of last week, Kirshner says.
In general, hospitals prefer a plan that keeps Harvard Pilgrim in business and maintains competition among HMOs, says Judy Glasser, spokeswoman for the state hospital association.
Complicating matters is strong sentiment against allowing a for-profit plan to enter the market. But if resources can't be found at home to save the plan, Massachusetts might have to reconcile itself to an investor-owned HMO taking over.
To block such an outcome, some hospitals reportedly have been exploring a plan whereby hospitals would accept some form of IOU, such as surplus notes, in exchange for their receivables. The notes would be payable with interest if the plan regained its financial footing.
The alternative of a state bailout could cost a hefty $250 million or more, according to Standard & Poor's.
Questions are being raised about why Harvard Pilgrim was allowed to operate and expand while losing money and falling behind on payments to providers. Jim Vaughan, a vice president at Cain Brothers investment banking and advisory firm in New York, says hospitals "could have raised their hand in prior years" and refused to contract with Harvard Pilgrim.
Glasser says the hospital industry has been trying to pass prompt-payment and other oversight legislation, but it's difficult for individual hospitals to refuse a payer.
"It's not in the mission or spirit or philosophy of most hospitals to leave out a huge percentage of patients in their community," she says.