It's like buying back a used car that stranded you on the highway-and getting an entire used car lot thrown in for free.
"This just cuts out the intermediary and improves our ability to medically manage their care. We want to be at the top of the healthcare food chain," Arthur Porter, M.D., president and chief executive officer of Detroit Medical Center, said in explaining his announcement last week that the system is buying OmniCare Health Plan of Michigan. OmniCare includes a 32,000-enrollee Medicaid HMO that it acquired from DMC last year.
When DMC dumped the Medicaid HMO, called the DMC Clinic Plan, the seven-hospital system just ended a year in which it lost $109 million on operating revenue of $1.6 billion. To right its financial ship, DMC sold off unprofitable physician practices, reduced its workforce by 4,700 employees, outsourced its information system and got out of the Medicaid HMO business.
Porter, a DMC cancer specialist and past president of the American College of Radiation Oncology, was hired by turnaround firm the Hunter Group in 1999 to run the system. Porter replaced David Coats, a Hunter consultant, who had served as interim CEO since February 1999, when David Campbell resigned from the post.
DMC rebounded. The system reduced its loss to $8 million last year and expects to post a $44 million profit this year.
That's what makes DMC's decision to get back into the managed-care business so jaw-dropping, especially when hospital after hospital is getting out of the health insurance business after losing their shirts. In fact, late last week General Health System in Baton Rouge, La., said it was giving away its money-losing HMO (See story, p. 12).
In 1999, its last year operated by DMC, the DMC Clinic Plan lost $1.8 million on revenue of $70 million, said Minneapolis healthcare information consultant Allan Baumgarten, who tracks HMOs in eight states. OmniCare, in total, lost $13 million on total revenue of $173.3 million in 2000, said OmniCare President and CEO Gregory Moses.
Twenty-six-year-old OmniCare operates metropolitan Detroit's second-largest Medicaid HMO with 67,000 members, including the DMC Clinic Plan's original 32,000 enrollees. OmniCare also operates a commercial HMO with 32,000 employees and family members covered by the United Auto Workers union and the Michigan state employees' health plan.
DMC essentially gave its Medicaid HMO to OmniCare for free in a no-cash transaction. DMC, in turn, will get all of OmniCare for free. Again, officials said no money will change hands. However, DMC will be liable for an $11 million loan made to OmniCare by a for-profit management company operated by OmniCare to keep the plan solvent. The sale is expected to close by May 1.
The for-profit management company, United American Healthcare, will continue to operate a Medicaid HMO in Tennessee.
Porter attributed the system's curious action to a fortuitous combination of new circumstances that included:
* Improved Michigan Medicaid reimbursement rates.
* DMC's successful financial turnaround.
* The opportunity to directly contract with the state of Michigan and medically manage the care of its Medicaid patients without middleman interference.
Some 60% to 70% of OmniCare's enrollees already use DMC hospitals and physicians for their healthcare, Moses said.
Porter said acquiring OmniCare might look like a risky financial move from the outside. But he thinks the HMO can become profitable and can benefit patients and DMC providers.
"The numbers look quite satisfactory," he said.
He said DMC does not require the high management fees and administrative costs incurred by OmniCare, leaving more of the already limited Medicaid reimbursement dollars to the healthcare providers. And Porter said that while Michigan Medicaid pays every 30 days, OmniCare took as long as four months to pay DMC hospitals and physicians, increasing the system's accounts receivable, reducing cash flow and angering its 3,000 affiliated physicians.
"We're structuring our business to bring cash and services closer together and reducing the role and the amount of money going to the middleman," Porter said.
Baumgarten confirmed that OmniCare's administrative costs were high. In 1997, the average Michigan HMO spent $15.81 per member per month for administrative costs. OmniCare spent $23.58 per member per month that year.
"Because of where we're located and the size of our (emergency room) departments, we're going to cover those lives anyway," Porter said. "We're committed to taking care of this population of patients and it would be best if we could get the biggest portion of the premium dollar in the shortest possible time with the fewest delays. If you accept that you'll be taking care of that business, then the acquisition makes sense."
Porter said if DMC didn't buy OmniCare, a large portion of those Medicaid dollars would go instead to a corporation not providing care.
Baumgarten said he remains skeptical.
"I've heard those words before," he said. "I'm frankly pretty surprised DMC is going back into the Medicaid HMO business. They must be doing it to prevent a rival from serving those enrollees. But most hospitals got out of that line of business, and they did it for a lot of good reasons."