Carolinas HealthCare System, one of the most dominant and market-share-hungry hospital systems in the South Atlantic, finally may have bitten off more than it can chew.
Carolinas, which controls 17 acute-care hospitals from its Charlotte, N.C., headquarters, confirmed last week that it wants to get rid of its money-losing HMO, the Wellness Plan.
"Carolinas is getting back to its core business, which is taking care of patients," said Alan Taylor, a Carolinas spokesman.
The pending divestiture illustrates once again that even the strongest of hospital systems aren't immune to the potential perils of the managed-care business.
Carolinas' failure in the HMO business stands in sharp contrast with the experience of its chief rival in the region, Novant Health, which is one of the few hospital systems nationwide to make a go of the managed-care business.
Seven-hospital Novant, based in Winston-Salem, N.C., operates 287,887-enrollee Partners National Health Plan. Partners recently agreed to buy Generations Family Health Plan, an HMO co-owned by WakeMed, a two-hospital system in Raleigh, N.C., and UNC Health Care, a six-hospital system in Chapel Hill, N.C. (Sept. 18, p. 16). That sale is expected to close by Nov. 1.
But while Partners earned $5.6 million on premiums of $312.4 million for the first six months of this year, the Wellness Plan lost $8.2 million on premium revenues of $76.9 million.
Carolinas entered the managed-care arena in 1996 with high hopes of being a dominant player in the area's Medicaid and commercial HMO market.
Carolinas officials partnered with the then Detroit-based Wellness Plan in 1996 to start a Medicaid managed-care plan under a state pilot program in Mecklenburg County, N.C. In 1997, it expanded into the commercial business, which currently makes up about 75% of the enrollment. Carolinas then bought out the Wellness Plan in 1999 for $3.5 million.
The state backed away from its initial plan to roll out the Medicaid HMO program in other counties, which thwarted Carolinas' growth strategy, Taylor said.
"So it has not been performing as well as we would like it to, and we have been deciding what to do with it," he said.
Of its 84,124 enrollees, 58,349 are covered under a commercial plan and 25,775 are Medicaid enrollees. Many of its commercial enrollees are government employees and employees of Carolinas hospitals.
Carolinas, once a lone public hospital, is now a not-for-profit--but profitable--regional system overseen by the Charlotte-Mecklenburg Hospital Authority. The company owns six acute-care hospitals, a retirement community and three nursing homes. It leases three other acute-care hospitals, a behavioral hospital and three nursing homes; it manages eight other hospitals. In addition, it owns a physician network that has more than 540 primary-care physicians.
Carolinas spokesman Scott White said the system reported net income of $57.2 million on net patient revenue of $1.1 billion last year.
While Carolinas once saw the HMO as a way to protect its significant Medicaid business, it now sees it as a drain on resources.
Timothy O'Brien, the president and chief executive officer of the Wellness Plan, said the HMO business has faltered because both pharmaceutical and medical expenses exceeded expectations.
Robert Seehausen, senior vice president of managed care for Novant, said Partners' success has been based on its separation from the hospital business and also from its broad geographic reach.
While the Carolinas plan is confined to the Charlotte area, Partners operates in the three major metropolitan areas in the state: Charlotte, the Triad region, and the Research Triangle Park area.
Charlotte is an extremely competitive managed-care market. Carolinas, whose flagship hospital is the 736-bed Carolinas Medical Center, and its rival, 853-bed Presbyterian Hospital, owned by Novant, have for years forced HMOs to decide between the two when forging contracts.
Carolinas has been the most aggressive in demanding exclusivity in its HMO contracts.
"The Charlotte market is a somewhat unique market in that it's largely dominated by two large health systems," said Walter Cherniak, spokesman for Aetna U.S. Healthcare, which has about 80,000 HMO members in North Carolina, many of those in the Charlotte market.
"We on the Aetna U.S. Healthcare side have an arrangement with Carolinas. For a long time in Charlotte it was very difficult to contract with both."
David Sturkey, vice president of western North Carolina for UnitedHealthcare, a Minneapolis-based managed-care company, agreed.
"Charlotte is probably the most competitive city in the state in that every payer in the state is here," he said.
Carolinas spokesman Taylor explained it by saying, "If you bring us your entire book of business, we will give you a better price. We cannot give you that price if we are not guaranteed to get all your patients."
But insurers are beginning to challenge the exclusivity arrangements.
Earlier this month, Blue Cross and Blue Shield of North Carolina--which has had an exclusive HMO contract with Carolinas--signed a two-year contract with Presbyterian Hospital. Now Carolinas has 90 days to decide whether to continue its contract with the Blues, and the other managed-care players in the area are beginning to approach Carolinas with similar requests.
"We're looking at it because it's a competitive market," Sturkey said. "We want to understand how our rates are going to be affected."
Carolinas has not disclosed whether it has any potential takers for its managed-care business, but representatives from Aetna, Cigna HealthCare of North Carolina, Coventry and UnitedHealthcare of North Carolina said they either were not interested or had not engaged in negotiations so far.
Lynne Garrison, a spokeswoman for the North Carolina Blues, said, "We don't respond to rumors and we don't discuss acquisition plans."
Stuart Veach, vice president of Partners, said his organization has not been approached but would consider buying the competing organization's HMO.
"If the numbers are right and it makes sense, we'd do it," he said.