Capping a year of upheaval at the nation's largest Medicare HMO, PacifiCare Health Systems last week named Robert O'Leary its new president and chief executive officer. He succeeds Alan Hoops who announced his plans to step down amid management and financial turmoil early this year.
O'Leary, former chairman of the San Diego-based Premier hospital alliance and a well-traveled healthcare executive who has headed everything from the Illinois Hospital Association to American Healthcare Systems, said he plans to tap his experience with providers, acquisitions and electronic commerce to reinvent a still-struggling PacifiCare.
"With respect to managed care, I'm enough of an insider to understand the complex challenges facing the industry, and yet I'm enough of an outsider that I can bring new skills and perspective to the table," the 56-year-old healthcare veteran said.
A fresh perspective, some say, is precisely what's needed at the Santa Ana, Calif.-based health plan, which during the past two years has seen its stock pummeled and Wall Street grow disenchanted with the key elements of its business model.
Even Hoops, who during his tenure grew PacifiCare's Secure Horizons plan into the nation's largest Medicare HMO with 1.1 million members, admitted his retirement was "not a tough decision" for either himself or the board. Retooling the insurer so that it survives the changes ravaging the managed-care industry and regains investors' favor will be a long process, one best left to a new management team, he said.
"When I announced my retirement about six months ago, I had two main objectives in mind," Hoops, 52, said last week during a media conference call announcing O'Leary's appointment. "I wanted to leave the company in good shape and in strong hands. I believe I've done both."
During the past 10 months, PacifiCare has lost its chief financial officer, demoted its chief operating officer and has now replaced Hoops, who was himself stripped of the chairman title last fall. The insurer also embarked on a plan to expand its non-Medicare business and laid off hundreds of workers in California and other states.
All the while, PacifiCare has managed to improve its bottom line. Recovering from losses in 1997, the company reported $278.5 million in net income last year, up 38% from $202.4 million in 1998. And it predicts another 25% earnings rise this year.
The reasons why this financial turnaround hasn't translated into a higher stock price lie in two key areas of PacifiCare's business.
Investors have been skittish of the 4 .1 million-member insurer's heavy involvement in the Medicare business even after the government reduced funding for the program. In addition, the company continues to cling to its capitated business model, in which providers receive a set monthly fee to cover all aspects of patient care. The financial risk involved has led to the collapse of several medical groups and hospitals in recent years.
How much O'Leary will actually change once he officially takes over on July 17 remains to be seen.
Earlier this month, PacifiCare announced plans to quit the Medicare business in Kentucky and Ohio, and said it may decide to pull out of other markets by July 3.
"There's no question that Medicare is one of the largest and most successful parts of our business, and yet the market has not adequately rewarded us for that," O'Leary said. "We won't do anything precipitous, but we will continue to re-evaluate our position in various markets."
As for capitation, O'Leary said it's too early for him to comment on the insurer's future course. But Brad Bowlus, president and CEO of PacifiCare's health plans division and an early contender to succeed Hoops, said the company intends to fine-tune its current model, not drop it.
"The art of capitation in the future is not whether it is going to survive en masse, but how it can be applied intelligently," Bowlus said.
While PacifiCare has begun paying for more hospitalizations and drug costs, it still retains some of the industry's strictest payment controls. In April, University of California Irvine Medical Center in Orange, dropped the health plan because its fees were so low they didn't cover medical expenses, and the hospital was losing $1 million a year.
That's where O'Leary's strong ties with doctors and hospitals could come in.
"It's all about relationships," he said. "We have to become stronger partners with providers to make it a real win-win situation."
Another asset O'Leary brings to PacifiCare is his commitment to e-commerce. Under his chairmanship, Premier rapidly acquired new Internet technologies that have since helped the not-for-profit alliance of 1,800 hospitals run more smoothly.
O'Leary sees several e-commerce opportunities for PacifiCare, not the least of which is its participation in MedUnite, an emerging online venture among six of the nation's largest health insurers. MedUnite could ultimately make it easier for patients to enroll in health plans and choose doctors, reduce paperwork, cut business costs and smooth relations with disaffected physicians by speeding communications, he said.