UPMC Health Plan aptly titled its year 2000 annual report Flying in the Face of Convention. At a time when humbled hospital systems are hastily retreating from ill-conceived managed-care ventures, the for-profit subsidiary has turned a modest profit and is contributing to the overall financial health of its parent, not-for-profit UPMC Health System, Pittsburgh.
In fact, the 16-hospital system's success in establishing the health plan as a force to be reckoned with was at least part of the rationale behind the A+ rating Standard & Poor's assigned to $250 million in bonds issued on behalf of UPMC that sold on May 15. The health plan emerged "as a positive contributor to the excess income margins" for the health system, according to S&P.
"Provider-sponsored health plans have typically been such a drain (on their systems) that being break-even at this point is a positive," said Martin Arrick, a director in public finance for S&P.
For the first time since it was founded in 1995 as a defensive measure against the behemoth Highmark Blue Cross and Blue Shield, the 300,000-member health plan showed a profit: $91,700 on $444.7 million in revenue for the year ended Dec. 31. In 1999, the health plan lost $17.9 million on $264 million in total revenue.
This year's profit is not much, but for now the money will help bolster the health plan's surplus, said Tony Pasquale, director of corporate communications and public affairs for UPMC Health Plan. Once the surplus reaches a comfortable level, profits will go back into the health system to help it fulfill its charitable mission, said Jane Duffield, a UPMC spokeswoman. Meanwhile, red flags are raised at the state insurance department only when a surplus is too high or too low, and that is not an issue at UPMC, said Rosanne Placey, a spokeswoman for the Pennsylvania Insurance Department.
How did the health plan do it? By flying in the face of the conventional wisdom that physicians are incapable of making medically sound decisions that are also financially sound, Pasquale said.
"We call ourselves an accountable provider model," Pasquale said. "We've gotten rid of the `Mother, may I?' approach."
The same approach has allowed the plan to control prescription-drug costs. In 2000, UPMC Health Plan shaved 5% from what it paid for medicines during the previous year. That runs counter to the 19% increase in prescription-drug costs experienced on average by health plans across the country.
Meanwhile, UPMC Health Plan premiums increased a "reasonable and predictable" average of just more than 6% for the past three years, Pasquale said. And the health plan, which has a network of 5,000 physicians at 54 hospitals covering 21 counties, kept its administrative expenses last year to 11.1% of the premium dollar compared with the 13.4% national average.
The plan also has bucked conventional wisdom about getting into the Medicare HMO business, launching a product in January that targets rural seniors (Nov. 23, 2000, p. 6). Enrollment stands at a modest 420 people.
After five years of following an unconventional business model, the plan saw total enrollment reach about 250,000 a year ago in June-about the same time it started turning a profit. It helps that the plan draws more than 25% of its members-63,000 subscribers-from UPMC and the University of Pittsburgh; the plan is the only one offered to their employees.
Though the health plan is still merely an annoyance to 2.8 million-member Highmark, its presence could give its UPMC parent some leverage when it negotiates hospital rates, S&P noted. Highmark accounts for about 25% of UPMC's patient revenue, according to S&P.
"No doubt they are a formidable competitor, as are some others, because they are a well-respected and high-quality health system. That's why we have their hospitals in our programs," said Michael Weinstein, a Highmark spokesman.
UPMC Health Plan officials boast that simply by existing, the plan serves the public as a regional asset that has added a measure of much-needed competition. As proof, they point to a bidding war last fall over the health insurance contract with the Pittsburgh Board of Education. Highmark bid $114 million and UPMC countered with $94 million for a reportedly comparable package of benefits. Highmark then reconsidered and said it could insure the school district's 5,000 employees for $99 million.
The school board eventually went with Highmark, but UPMC was victorious in the eyes of some. An editorial in the Pittsburgh Post-Gazette praised the "feisty upstart" for "kicking sand in the face of its near-monopolistic competitor," saying that the consequent $15 million savings in health benefits allowed the board of education to give teachers a raise and avert a strike.
"Does it keep schools open that might have closed? Does it shrink class size? All of those things are important to the health of our communities," Pasquale said.