Every rule has an exception, and for the moment at least, two investor-owned hospital chains are proving that hospital systems can run HMOs.
As hospitals around the country are selling money-losing HMOs (See story, below), Vanguard Health Systems is jumping into the Medicaid HMO fray in Arizona in the hope of feeding patients to its hospitals in the Phoenix area.
Earlier this month, Nashville-based Vanguard got the go-ahead to acquire Phoenix Health Plan, a 43,572-enrollee Medicaid HMO, as part of its $39 million purchase of not-for-profit PMH Health Resources in Phoenix. The deal, expected to close May 1, received approval from U.S. Bankruptcy Court in Phoenix. In addition to the health plan, PMH includes 195-bed Phoenix Memorial Health System.
With the acquisition, Vanguard would join Iasis Healthcare Corp., Franklin, Tenn., as the only other major investor-owned hospital chain to operate a Medicaid HMO. Iasis' HMO, called Health Choice, is also a Medicaid managed-care plan and has about 42,273 enrollees in Arizona, according to state figures. The 15-hospital chain inherited the plan from Tenet Healthcare Corp., Santa Barbara, Calif., when it bought Tenet's Arizona hospitals.
Both plans are profitable, according to the Arizona Health Care Cost Containment System, which monitors Medicaid health plans in the state.
Keith Pitts, executive vice president of Vanguard, said operating a Medicaid HMO is probably not a business strategy Vanguard would like to replicate in its other markets.
"There are very few exceptions," he said. "This would be one of them."
Other for-profit hospital chains have either not entered or have exited the managed-care business in recent years.
"We just have never been in the health plan business," said Patricia Ball, spokeswoman for Triad Hospitals, Dallas. "That's not our core business."
HCA-The Healthcare Co. spokesman Jeffrey Prescott said the nation's largest hospital chain doesn't own any HMOs. Harry Anderson, spokesman for Tenet, said the only reason Tenet operated the Arizona managed-care plan was because it inherited it from OrNda HealthCorp when it bought that company in January 1997. "That's never been our line of business," he said.
Universal Health Services operates PPOs in Nevada and Louisiana in partnerships with some of its physicians, but it doesn't operate any HMOs or Medicaid managed-care plans.
But in Arizona, it may make more sense now than before to operate a Medicaid HMO. Last November, voters approved a ballot initiative, called Proposition 204, that earmarked the state's $3 billion in proceeds from the national tobacco settlement for expanding the state's Medicaid managed-care program to those earning 100% of the federal poverty limit, where previously only those earning up to 34% were covered. Pitts said that could mean an additional 180,000 enrollees statewide in the next year or two.
Arizona has the oldest Medicaid managed-care program in the country, dating to 1982. Vanguard already owns three hospitals in or around Phoenix, and they serve a high percentage of Medicaid-eligible and uninsured patients, Pitts said, which factors into the desirability of owning a Medicaid managed-care plan.
"With the kinds of markets we serve it makes a whole lot of sense for us to have a related or affiliated health plan," he said.
Though it is not a high-margin business, PMH's Medicaid HMO has been slightly profitable, Pitts said. According to figures provided by the AHCCCS, Phoenix Health Plan reported a profit of $3.1 million on total revenue of $106.5 million for the fiscal year ended Sept. 30, 2000.
In fact, its historical profitability got its parent, PMH, into trouble. Frank Lopez, spokesman for AHCCCS, said the state agency last year limited the HMO's enrollment when it discovered the health plan had been lending money to the money-losing hospital. PMH Health Resources filed for Chapter 11 bankruptcy protection on Feb. 1.
Whether there is room in the Phoenix Medicaid HMO market for both the Iasis and Vanguard plans remains to be seen. Iasis spokeswoman Eve Hutcherson declined to discuss Iasis' future plans for its HMO or the relevance of the managed-care business to Iasis' overall business strategy.
According to the AHCCCS, though, the plan reported a profit of $1.9 million on total revenue of $88.7 million for the fiscal year ended Sept. 30, 2000. Iasis also disclosed in a February prospectus filed with the Securities and Exchange Commission that the plan accounted for 11% of Iasis' total net revenue for fiscal 2000. Coincidentally, some of Vanguard's top executives, including Pitts and Charles Martin Jr., the company's chairman, president and chief executive officer, were executives at OrNda when it owned the HMO that now belongs to Iasis.