A healthcare Internet technology company has joined the legions of hospitals and physicians across the country that are getting out of the managed-care business.
Earlier this month, CareFirst Blue Cross and Blue Shield, Maryland's largest health insurer, acquired the remaining 83% stake in the 85,000-enrollee Preferred Health Network based in Linthicum, Md., for an undisclosed price from a group of Baltimore health systems and the TriZetto Group, a Newport Beach, Calif.-based information technology company.
CareFirst has owned 17% of Preferred Health since 1997.
"We've been in continuing discussions since 1997 and, beginning this summer, we talked about increasing that share," said Jeff Valentine, CareFirst's director of corporate communications. "PHN's network very much complements our own."
CareFirst bought PHN from its founders: eight health systems in the Baltimore area. They are seven-hospital MedStar Health of Columbia, Md.; five-hospital University of Maryland Medical System in Baltimore; 246-bed Mercy Medical Center in Baltimore; two-hospital Adventist HealthCare in Rockville, Md.; 191-bed Suburban Hospital in Bethesda, Md.; 304-bed GBMC Healthcare; 565-bed St. Agnes HealthCare; and 160-bed Northwest Hospital in Randallstown, Md.
The systems, which started PHN in 1986, collectively owned 60% of the plan.
TriZetto Group owned 22.4% of PHN before the sale.
TriZetto inherited the stake in PHN last year when it purchased Novalis Corp., a healthcare software company that had owned the PHN stake since 1989. PHN served as a demonstration site for Novalis' managed-care programs.
TriZetto had planned to sell its stake in PHN eventually, because it doesn't own an interest in any other HMO, said Larry Bridge, TriZetto's senior vice president of application services for payers.
"From our perspective, (the sale to CareFirst) is very much in line with our longer-term strategy," Bridge said. "We didn't intend to be in the HMO business."
While terms of the sale were not publicly disclosed, CareFirst said it did promise to solve PHN's most pressing financial problem by agreeing to beef up the HMO's sagging financial reserves.
Maryland Insurance Commissioner Steven Larsen ordered PHN in August to increase its reserves to at least $2.8 million from about $44,000. Valentine said CareFirst would provide PHN with the $2.75 million necessary to meet Larsen's requirement.
The provider-owners sold PHN because they didn't want to cough up the capital needed to meet Larsen's requirement, said Bob Chrencik, chief financial officer at University of Maryland Medical System, which owned 15% of the plan.
"As the membership grew, the statutory reserve requirement grew significantly, but the plan was still hovering around break-even," Chrencik said. "The question became: Are you going to invest in your core business, or in the side show?"
For at least the last year, PHN has been losing money. In 1999, it lost $1.3 million on revenue of $102 million, Valentine said. In the first quarter of this year, it lost $161,000 on revenue of $33.8 million, Valentine said.
Despite that, Chrencik said, "This isn't one of those crash-and-burn stories at all. On the balance, it was a good investment. We're still getting business from the HMO, and we hope it's going to continue to grow."
Financial woes aside, Valentine said PHN was a good addition because of its popular "triple-option" product, which gives patients more choices outside the plan's provider network.
"It's very attractive to our small employer accounts, who want more choice," Valentine said. "That was something that CareFirst didn't have."
CareFirst expects PHN to become profitable now that it has stopped offering a large-employer group product that had sustained some losses.