Capital Community Health Plan, a joint venture of five District of Columbia hospitals, is ending its once-ambitious push into Medicaid managed care, fearing that anticipated government rate changes would send it into a financial tailspin.
The not-for-profit Medicaid HMO agreed last week to be acquired by another such plan, publicly traded Amerigroup Corp., Virginia Beach, Va. The deal would more than triple Amerigroup's district membership while reducing the number of Medicaid HMOs in the area to four. Financial terms weren't disclosed.
Capital Community was formed in 1996 by area hospitals Children's National Medical Center, Greater Southeast Community Hospital, Howard University Hospital, Providence Hospital and Washington Hospital Center to meet the needs of the district's poor and uninsured. By last year, the plan had 28,500 members and turned a "modest profit," officials said.
But when Capital Community recently hired two actuarial firms to study the potential impact of the Medicaid rate changes that the city is expected to implement by August, the HMO discovered that it stood to lose from $3 million to $10 million annually, said Sister Carol Keehan, Community Capital's chairwoman.
"The hospitals determined that it was unreasonable for them to subsidize the city's program," said Keehan, president and chief executive officer of 570-bed Providence. "We felt that we should sell now before we had an asset that was no longer valuable and would drain the finances the hospitals need for medical care, payroll and other core functions."
Keehan said a multistate firm such as Amerigroup, with large economies of scale, would be better equipped to weather what amounted to "significant rate reductions." Amerigroup serves 472,000 people receiving state-sponsored benefits in the district, Illinois, Maryland, New Jersey and Texas.
But Herbert Weldon, the district's Medicaid director, disputed the notion that the rate changes amounted to cuts. He said it is difficult to determine the net change in the rates because they now cover new services such as mental healthcare.
"It's a different rate structure this year, but we believe the changes are actuarially sound and appropriately reflect inflation and other cost trends," he said. "HMOs see them as reductions because they're worried about their profit margins."
The district spends about $150 million per year on Medicaid HMOs, or an average of $160 per month per member, he said.
According to Weldon, the district is not concerned that the number of HMOs participating in the Medicaid program is shrinking. "Four HMOs is still a lot for a city with 80,000 Medicaid recipients," he said.
In many respects, Capital Community's sale to Amerigroup is a sign of the times.
Several provider groups have retreated from the managed-care business after being burned by mounting losses in recent years. MedSpan, a 73,000-member HMO run by 12 Connecticut hospitals, agreed in December to be acquired by Hartford, Conn.-based Oxford Health Plans after more than a decade in business. And last October, WellCor America, a six-hospital joint venture based in Oklahoma City, announced that it would pull the plug on the 55,000-member HMO it launched in 1995. The Medicaid managed-care business has proved particularly challenging for many. Several states have curbed their reimbursement increases as Medicaid has begun to eat up a larger part of their budgets. That's left health plans paying medical bills with far less in premium revenue than they had originally planned for.
Amerigroup, which went public last November, has become a sort of consolidator, buying Medicaid businesses from other companies. In 1998, the company bought Oxford's New Jersey Medicaid unit in the midst of Oxford's turnaround. A year later, it bought Prudential Insurance Company of America's Medicaid members in Maryland and the district. Prudential later sold the rest of its Medicaid business to Aetna. And last year, Amerigroup added two Medicaid HMOs in Texas, 18,000-member MethodistCare and a 23,000-member plan owned by Humana.
As a result, the company's net income jumped 38% last year to $36.1 million, or $2.08 per share, from $26.1 million, or $1.55 per share, in 2000. Revenue climbed 35% to $891.2 million from $659.5 million. It expects earnings to rise another 20% this year as it continues to expand its membership rolls and control costs and overhead.
Amerigroup's purchase of Capital Community will boost its District of Columbia membership to 40,000 from 12,500, making it by far the largest Medicaid HMO in the area. The next-biggest companies are D.C. Chartered Health Plan, with some 26,000 members, and Advantage Health Plan, with 9,000 members.
The deal is expected to close in early July, pending approval by the District of Columbia Department of Insurance.
Amerigroup officials say the company plans to continue its acquisition streak by adding one or two health plans each year in markets where it already has a presence and by entering new markets every 18 months. It is currently studying 20 to 30 prospects, they said.