California's seizure of a second health plan in recent months and the financing difficulties of one of the largest plans in the West raise questions about whether health plans are indeed as strong as assumed.
The California Department of Managed Health Care took control of UHP Healthcare (WATTS Health Foundation), a Los Angeles-based HMO, in August. The plan has 96,000 enrollees. State officials say the plan has $59 million of debt and is $10.5 million below its tangible net equity. DMHC officials use tangible net equity to indicate financial solvency.
In May, the department took control of financially troubled Maxicare Health Plan.
Those seizures, coupled with mixed signals about PacifiCare's financial strength and yet another quarter of losses from the nation's largest insurer, Aetna, create the appearance that the managed care industry, especially in California, remains troubled.
California's health plans in general are healthy, says Donna O'Rourke, analyst with Palm Beach Gardens, Fla.-based Weiss Ratings, an organization that provides independent financial ratings of HMOs. But there are some, including the ones put in receivership, that haven't performed well financially for a while, she says.
"Overall, the industry (nationwide) from a profitability standpoint has done very well this year. However . . . about 45% are still losing money through 2000," O'Rourke says.
"There's definitely a lot of problems in the industry," she adds.
But industry experts and health plan officials caution against making too quick a leap. "I think you cannot say a whole industry is in trouble because there are some in trouble," says Mohit Ghose, spokesperson for the American Association of Health Plans. "Healthcare, like other industries, has market changes and has cyclical changes within the market."
Ghose and others point to a recent study that found that in 2000, for the first time since 1996, the health plan industry turned a profit, earning a combined $990 million.
Weiss Ratings found that plans with at least 500,000 enrollees were more profitable than their smaller counterparts.
Among those that could be classified as vulnerable is PacifiCare, a dominant player in the Northwest. The company was forced to regroup after dropping plans in July to refinance $705 million in debt. Its stock price dropped to $15.64 in late August from a 52-week high of $56.12.
PacifiCare failed to get $1 billion as part of that plan to arrange a $400 million loan to refinance the bank debt due to mature in January. After abandoning those plans, PacifiCare got a one-year extension in late August on its debt.
Company officials say the plan continues to be profitable and hasn't lost any money.
O'Rourke says plans can be profitable while not being strong financially.
Factors including capitalization, liquidity and stability affect a company's financial health, she says. On the other hand, some plans that lose money can be financially strong if the other factors are positive.
The Maxicare and UHP receiverships confirm the stresses in the state system, says Bobby Pena, spokesperson for the California Association of Health Plans.
California plans charge an average of 30% lower premiums than other plans around the country, and that impacts all players, including the plans themselves, he says.
"We've long talked about the stresses in the system," he says. Although most people think physicians are the only group affected, the health plans also face financial pressure because of lower premiums, Pena says.
"I don't think what's happened with Maxicare or UHP is any sign of things to come for other plans," Pena says. "I don't think in this instance it would be appropriate to make that kind of leap."
But the possibility of more plan closures worries physicians, says Jack Lewin, M.D., CEO of the California Medical Association.
"We're down to five major plans outside Kaiser Permanente that have 90% of the market," Lewin says. "We don't think competition, creativity or innovation will be benefited if we get down to fewer choices. I think it's in everyone's best interest to keep the diversity in the marketplace.
"The California miracle of lower-cost healthcare is not quite a miracle as many people touted a few years back."
Plans and physicians are in the same boat, Lewin says.
"It's too bad we're so separated and fighting with each other rather than trying to address the problem collectively to help preserve some of the plans in California. There are others beyond PacifiCare that don't have rosy futures."