History has shown that most hospital systems can't run their own HMOs. So what happens when one hospital system hires another to manage its struggling health plan? In one case, at least, a lawsuit.
"In most cases it's probably a bad idea for a provider system to own its own health plan, and I think the notion of contracting with another provider organization to administer a health plan . . . compounds the problem," said Allan Baumgarten, an independent healthcare finance analyst in Minneapolis who studies managed-care trends.
Two hospital systems in the Southeast have proven that axiom with a lawsuit and countersuit over the failure of 90,000-enrollee Gulf South Health Plans earlier this year.
General Health System in Baton Rouge, La., started Gulf South in 1986. But after years of operations, General Health turned over management of the plan to Adventist Health System in Winter Park, Fla., in 1998. General Health also hired Adventist to manage its 371-bed hospital in Baton Rouge, the 104-bed Bluebonnet satellite campus also in Baton Rouge, five extended-care facilities, and behavioral and home health programs. Not-for-profit Adventist operates 32 hospitals in nine states and Puerto Rico.
General Health chose Adventist because of its "extensive experience with HMOs," and assurances that Adventist had the resources and operational expertise to manage the system.
But things didn't work out as planned.
After Gulf South lost about $10 million on revenue of $225 million for the year ended Sept. 30, 2000, and General Health couldn't find a buyer for the plan, the system transferred members to other HMOs in May. The Louisiana Department of Insurance assumed control of Gulf South in June, and the department is assessing how much Gulf South owes to whom and how much its hospital owners are responsible for. The hospital system has proposed making quarterly payments to Gulf South, as well as using the proceeds from facility sales, to pay off the estimated $41 million in debts. A hearing to approve the payment plan is scheduled for Nov. 5 in state court in Baton Rouge.
But that's not the only court proceeding that may result from the HMO's failure.
Adventist sued General Health in April in U.S. District Court in Baton Rouge-choosing federal court because the matter involved interstate commerce-for breach of contract, alleging that the system owes Adventist $1.1 million for management fees, which Adventist says General Health stopped paying in August 2000. General Health says it stopped paying Adventist because of its poor record in managing the HMO. General Health countersued Adventist last month in a state trial court in Baton Rouge, alleging negligence and holding Adventist responsible for Gulf South's failure.
General Health is seeking more than $68 million in damages. That figure includes $6.1 million that General Health says it paid Adventist under the management contract; $12.3 million that General Health said it poured into Gulf South to meet Louisiana's minimal capital requirements for health plans; and $50 million to cover losses General Health suffered because of the HMO's insolvency.
"(Adventist) agreed that it would be held responsible to assure that the expectations of General Health's board of trustees were met and competent leadership was acquired for Gulf South. Adventist management breached these representations and agreements," the lawsuit claims.
General Health's 38-page lawsuit provides a litany of detail on the failure of Gulf South, arguing that Adventist made a series of errors that caused the plan's demise.
For example, Adventist unwisely pursued new enrollees for the health plan knowing that because of the negative trends in the industry in that region, such a move was bound to be unprofitable, according to the lawsuit. "Much of this additional business proved unprofitable for Gulf South due to (Adventist's) poor management."
Adventist denies the allegations. "Our role in the management relationship was to make recommendations and provide information to the board, which we did exceptionally well," said Kevin Edgerton, an Adventist spokesman. "Because of the collapse of Gulf South Health Plan, (General Health) is seeking a deep pocket to help pay for that."
In a letter submitted to a Baton Rouge newspaper but that had yet to be published as of Modern Healthcare's deadline, Adventist President and Chief Executive Officer Thomas Werner argued that Adventist provided "management support and advice" but that all strategic decisions about Gulf South were "the responsibility of the General Health System board and its chairperson."