Physicians in Massachusetts still don't know whether Harvard Pilgrim Health Care will pay what it owes them. Now, concerns about the impact of possible bailout scenarios are bubbling to the surface.
Since Harvard Pilgrim was placed in receivership Jan. 4, the prominent question has been whether it's feasible to keep the HMO not-for-profit. Hospitals and health plans in Massachusetts are predominantly not-for-profit.
"The clear preference in the provider community, in the regulatory community, is to recapitalize Harvard Pilgrim, to have it remain independent and not-for-profit," says Nancy Turnbull, an instructor of health policy and management at Harvard University.
For the most part, providers have liked working with the Brookline, Mass.-based HMO, she says. "I think the desire is to have the plan continue to be a local plan and a plan that is locally accountable. When you kind of peel back the for-profit vs. the not-for-profit, there's some strong ideological differences."
A for-profit buyer likely would not pay accounts on a dollar-for-dollar level, says Jack Evjy, president of the Massachusetts Medical Society. "Physicians don't have endowments. They don't have free care pools. They've already accepted risk, discounted fees and delayed payments. There's the threat of going bankrupt."
The ethical principles of medicine have meant physicians traditionally have been there for patients, Evjy says. "But if you lose your practice, you can't be there for anyone. That is the reality of where things are going."
Estimates of a bailout are reaching $300 million, and more than 20 potential suitors--including several for-profit health plans and several non-healthcare organizations--are reviewing Harvard Pilgrim's finances. About 15 potential investors met with the attorney general in a secret meeting Feb. 5 to discuss options.
The 1.1 million-member HMO, the largest in the state, was placed in receivership after company officials discovered an accounting error that increased the company's projected losses from $135 million to between $150 million and $177 million.
Providers have been promised that they will be paid for services provided since the state stepped in. What is unclear is whether payment will be forthcoming for services provided before the state action.
"The new management hasn't had time to turn the Titanic around," says Jim Vaughan, a principal with Cain Brothers, a financial services firm. The current administration at Harvard Pilgrim took over in mid-1999. "It's really bad. They have run out of net worth. It's a big mess."
The Massachusetts Medical Society is surveying members to get a handle on how much they are owed. That amount still isn't known.
The medical society is working to play a role in the decision about what will happen to the faltering HMO. The medical society was granted an appearance--a formal request to have a role--in the proceedings, which are being conducted by the state's attorney general and Department of Insurance.
At this point, any bailout scenario--liquidation, selling to a not-for-profit, converting to a for-profit or pursuing the group bailout the attorney general proposes--seems plausible. Even the chances of a state-aided bailout are increasing. Although emphatically against a state-funded bailout initially, the speaker of the Massachusetts House appears to be backing off that position slightly. Thomas Finneran told the Boston Globe that the Legislature could act quickly to consider state-backed surplus notes or a low-interest loan.
About 20 groups signed confidentiality agreements allowing them to look over Harvard Pilgrim's books in order to prepare a proposal.
The Globe reported that a confidential memo from state officials, which was distributed to potential investors at the Feb. 5 meeting, said $225 million in cash was needed immediately to bail out the HMO. Of that, regulators are trying to get $175 million from potential investors and others willing to sign 10-year high-risk notes in hopes that Harvard Pilgrim will be able to pay it back, the newspaper reported. Investors would get their money only if Harvard Pilgrim managed to solve its problems and bounce back financially. The plan reportedly didn't ask hospitals to defer payments on the $265 million they claim they're owed.
Last month Massachusetts' attorney general backed away from rehabilitating Harvard Pilgrim with money from hospitals. The hospitals had wanted taxpayer-backed loan guarantees in exchange for their financial assistance.
Thomas Reilly says he plans to seek investments from major employers, the same ones whose employees are covered by Harvard Pilgrim.
One aspect of the plan calls for Harvard Pilgrim to sell its health centers for at least $50 million.
The attorney general's office declined to confirm the Globe reports or comment on them.
The Massachusetts debacle isn't the first problem for Harvard Pilgrim. The HMO pulled out of Rhode Island in December citing massive losses. As a result, the National Committee on Quality Assurance yanked the HMO's accreditation. Three former Harvard Pilgrim Health Care centers in Rhode Island are expected to be sold for $5.6 million, according to published reports. The money likely will be used to pay millions owed to hospitals, physicians and other healthcare providers in Rhode Island.
Other issues that need to be addressed include liquidity and availability of enough cash for day-to-day operations, Cain Brothers' Vaughan says. Assuming the HMO's net worth was zero, all indications point to needing between $200 million and $300 million in cash infusions to get the HMO back in line, Vaughan says. "They need to get back into minimal compliance with respect to net worth."
Keeping premiums low to encourage growth kept administrators from knowing what the actual costs were, he says. "They did it year in and year out. It finally caught up with them and bled all of the net worth out of the place."
The Feb. 11 deadline for potential bidders to submit their plans came and went without comment from the attorney general's office. It's unknown when those plans will be released to the public, says Steve Bilafer, spokesman for the attorney general.
Among the potential investors are some non-healthcare entities, including Harvard University, whose officials told the attorney general they would be interested in participating in a bailout.
In a statement, university officials say that they are "one of many institutions that have been approached by the attorney general's office . . . Harvard Pilgrim is not part of Harvard University nor has it ever been. Harvard (University) is not and has never contemplated becoming the principal investor in any Harvard Pilgrim recovery plan."
Among organizations believed to be interested in Harvard Pilgrim are three for-profit plans--Cigna, Anthem Insurance and Oxford Health Plan--and not-for-profit Massachusetts Blue Cross Blue Shield. None of the organizations would comment. A Blues purchase of Harvard Pilgrim would make it the largest HMO in the region.
If a for-profit suitor is deemed most worthy, Harvard Pilgrim would become the region's largest for-profit HMO, and that isn't necessarily a good thing, Harvard University's Turnbull says.
"There's a concern that for-profit plans, because they have shareholders, will be more concerned with short-term earnings and short-term returns on investments," Turnbull says.