After rethinking its decision to get back into the managed-care business, the Detroit Medical Center decided against jumping back into the pool where it nearly drowned.
Last week, the state of Michigan placed 97,000-member OmniCare Health Plan of Michigan under state control after the seven-hospital DMC backed out of its plans to purchase the HMO.
Ingham County (Mich.) Circuit Judge James Giddings declared OmniCare insolvent and ordered the Michigan Office of Financial and Insurance Services to oversee the HMO's rehabilitation and maintain member services.
DMC had been in due diligence for its proposed acquisition of OmniCare, announced in March, and as of late June still planned to acquire the troubled HMO. The acquisition would have been a homecoming of sorts for the not-for-profit system, which had transferred ownership of its 31,000-member Medicaid HMO to OmniCare in March 2000.
When DMC dumped the Medicaid HMO, called the DMC Clinic Plan, the system had just ended a year in which it lost $109 million on operating revenue of $1.6 billion. DMC sold off unprofitable physician practices, trimmed 4,700 employees, outsourced its information system and exited the Medicaid HMO business.
Arthur Porter, M.D., was hired by turnaround firm the Hunter Group in 1999 to run the system, which rebounded, cut its loss to $8 million in 2000, and expects to post a profit this year.
The 26-year-old health plan that DMC nearly acquired has been under state supervision since 1998, but the state had not taken control of the plan until last week. The rehabilitation order is Michigan's first financial action against an HMO since the 1980s.
Gene Farnum, executive director of the Michigan Association of Health Plans, said other Michigan plans will be watching the OmniCare rehabilitation closely. He said after suffering net losses of more than $180 million from 1997 to 1999, Michigan HMOs are finally turning an aggregate profit and will earn $51.9 million on 2000 revenue of $5.5 billion.
"We've seen a turnaround, and OmniCare looks like an isolated incident," Farnum said. "We're finally starting to make some money."
DMC and the state began negotiating a solution to OmniCare's troubles after OmniCare's debts proved far greater than expected, said Porter, DMC's president and chief executive officer.
The rehabilitation plan guarantees DMC, OmniCare's largest single creditor, at least some of the $20 million it is owed by the HMO. In addition, DMC will receive capitated payments in advance to care for OmniCare members, a deal that Porter said would protect the system from assuming unknown liabilities.
"We're comfortable with this," Porter said. "This puts the burden on the state to solve the problems of a Medicaid HMO. It's going to be challenging, as it would have been for the DMC."
OmniCare reported a financial balance of negative $8 million at the end of fiscal 2000 and lost $5.8 million in the first quarter ended March 31, according to the state insurance office.
Earlier this year, the HMO's Detroit-based parent, United American Healthcare Corp., said it would no longer cover the health plan's losses after investing $18 million in the plan during the past three years. OmniCare has 66,000 members in its Medicaid managed-care products and 31,000 commercial members.
Gregory Moses, president and CEO of OmniCare and United American, said the company was surprised by the state's action.
"We were not informed, and it wasn't something we were involved in," Moses said. "Frankly, this is not a bad deal for us. We think this is a positive resolution of the problem. The rehabilitation order allows us to continue providing healthcare services to our members, and the state intends to honor all contracts with members and providers."
Moses said OmniCare's financial woes are not uncommon in the HMO business. "We have very tight margins, and we were trying to do something impossible: be in the Medicaid and commercial HMO business at the same time in a very tight marketplace," he said. "We were and are undercapitalized. We've been attempting a turnaround for the past 31/2 years, and we've made tremendous strides. But we ran out of time ,and we ran out of money."