With providers nationwide fretting over the effects that Anthem's pending mega-merger with rival WellPoint Health Networks could have on their bottom lines, one healthcare system is jumping back into the HMO ownership business, at least partly to protect its patient base and bargaining clout.
UW Health, which encompasses the University of Wisconsin-Madison's hospital, physicians and medical school, this month announced its intent to acquire 76,000-member Unity Health Plans Insurance Corp. under a purchase option established in 1994, when the Sauk City, Wis.-based HMO was originally formed.
At that time, UW Health sold its U-Care HMO to then-not-for-profit Blue Cross and Blue Shield United of Wisconsin, which combined it with the former HMO of Wisconsin to create a health plan serving the state capital and the surrounding south-central and southwestern counties.
UW Health, the Wisconsin Blues and a group of rural providers called Community Health Systems have continued to jointly operate Unity through its owner's various incarnations: In March 2001, the Wisconsin Blues shed its not-for-profit status and merged with its publicly traded affiliate. Then last year, it was acquired by out-of-state insurance giant WellPoint for $906 million.
But with WellPoint now merging with Indianapolis-based Anthem in a $16.4 billion deal that would create the nation's largest health insurer with 28 million members, UW Health decided it needed to act now to secure its financial future in the local market, said Jane Barnett, chief executive officer of University Health Care, the not-for-profit corporation representing UW Health's three sponsor organizations.
UW Health has agreed to buy Unity at its book value, which at the end of 2003 was about $30 million, she said. The deal is expected to close by year-end pending approval from the state insurance commissioner.
"With so much change and uncertainty ... we decided it was better for us to own the HMO independently than to have it operate within the WellPoint-Anthem framework," Barnett said. "Acquiring Unity will help us stay more directly involved in the decisions that affect patient care and (provider) reimbursement issues."
UW Health's decision runs counter to a national trend, in which health systems have been steadily shedding their insurance plans in recent years to refocus on their core business of providing medical care (Feb. 9, p. 24).
Gaining clout through consolidation
During the 1980s and early 1990s, when managed care was in full swing, health insurers were quickly gaining market clout through consolidation. Hospitals and doctors soon began to push back, first by teaming up into larger health systems, and then by launching their own HMOs to protect their patient volume.
But within years, many providers realized they lacked the insurance savvy needed to make the business work, and began to shutter or sell off their HMOs, usually in the face of mounting losses. According to the American Hospital Association, the number of hospitals owning plans dropped 44% to 1,835 in 2001 from 3,277 in 1996.
Wisconsin is somewhat of a national anomaly in that 10 of its 21 HMOs remain at least partly provider-owned. Still, UW Health's purchase of Unity could signal the beginning of a second wave in provider-owned HMOs as the health insurance industry-led by Anthem and WellPoint-continues to consolidate (April 12, p. 18).
According to Paul Ginsburg, president of the Center for Studying Health System Change, many of the economic conditions that existed during the heyday of provider-owned HMOs have reappeared.
"The insurance business looks particularly attractive at this moment because profit margins are at a high again" and employers are once again exploring more-limited provider networks to hold down healthcare costs, Ginsburg said. "If this is going to be a trend, it makes sense that it would start (in Wisconsin)," where system integration is still a competitive advantage.
Much remains unclear about how, if at all, providers will be affected by the merger-a deal that has already been approved by both companies' shareholders, the U.S Justice Department and regulators in nine of the 10 states directly involved, including Wisconsin. Full completion of the deal remains held up by California, where regulators are still addressing public concern that the merger would result in higher premiums, fewer services, lower reimbursement rates and excessive compensation for WellPoint's top executives.
California Insurance Commissioner John Garamendi said this month that he would approve the deal only if WellPoint agrees to plow $200 million to $600 million-an amount equal to what the insurer's executives stand to receive in bonuses and severance pay once the deal closes-into public programs to help the state's uninsured. Regulators in several other states have since said that if WellPoint were to make such a concession, they would likely be forced to re-evaluate the deal to ensure that their states would not somehow bear the financial burden.
Anthem and WellPoint have said they expect the merger to save them up to $250 million a year but contend that those savings would be achieved through greater efficiencies and shared information technology-not by skimping on reimbursements. They point out that because the two companies do not directly compete in any markets, the merger would not bolster their contracting clout on the local level.
Still, doctors and hospitals nationwide fear that the combined company will use its massive bargaining leverage to beat down payment rates (Nov. 3, 2003, p. 6). "Anthem's reputation as a hardball negotiator precedes them," said Chris Queram, CEO of The Alliance, an employer-owned healthcare purchasing cooperative in Madison, Wis. "Wherever they go, they're known for trying to extract every concession possible on the price side."
Anthem's contracting prowess could have a particularly big impact in Wisconsin, which traditionally has been dominated by large healthcare systems that have held the upper hand during negotiations with insurers, said Tammie Miller, a vice president at Grace Matthews Inc., a Milwaukee-based mergers-and-acquisitions adviser. That balance of power, she said, could shift dramatically once the Wisconsin Blues falls under the control of the new Anthem-WellPoint, which plans to centralize the bulk of its key operations in Indianapolis.
"The further away you take the decision-making process from Wisconsin, the less and less tolerance there's going to be for local politics. Anthem-WellPoint is going to say, `This is what we're offering you. If you don't like it, we'll just carve you out of the network.' I think local providers are even more concerned about that happening with Anthem than they were when WellPoint entered the market."
Because the Unity joint venture is renewed every five years, UW Health had to pursue the acquisition this year or risk being locked into a potentially unfavorable contract with Anthem until 2009, said Linda Brei, the system's vice president of marketing and public affairs.
The last time UW Health renegotiated its role in Unity was in 1999, when the HMO was still owned by the state's not-for-profit Blues. But even then, talks snagged over how much the Blues would share financial risk with its provider partners. Although the contract's terms were improved, Brei said, the agreement still proved to be a "strange one," in which UW Health has had little say over Unity's operations and has "gotten no profit from it."
UW Health and WellPoint held extensive talks to renew the Unity venture again this year but failed to find enough common ground, Brei said, declining to provide specifics. Both UW Health's 476-bed University of Wisconsin Hospital and Clinics, Madison, and 900-physician UW Medical Foundation will remain network providers for other WellPoint products.
"The fact that (UW Health) is exercising their purchase option is an indication that they believe they hold a cultural philosophy and set of values that differ from those exhibited by Anthem and WellPoint," Queram said.
The deal certainly stands to benefit UW Health. Unity has grown rapidly in recent years and is now Wisconsin's fourth-largest HMO based on 2003 revenue. Last year, it earned $9.4 million on revenue of $232 million, up from net income of $4.4 million and revenue of $197 million in 2002, according to data from the National Association of Insurance Commissioners.
Traditional managed care is still a viable business in Madison and surrounding Dane County where roughly 60% of the insured population is covered by HMOs. This is largely because state employees are paid incentives to enroll in HMOs rather than higher-priced PPOs and because HMO enrollment is mandatory for Medicaid beneficiaries in most Wisconsin counties, including Dane. System integration remains a competitive advantage in the Badger State, where UW Health's two crosstown rivals-289-bed St. Marys Hospital Medical Center and 374-bed Meriter Hospital-both operate HMOs, and all three Madison hospitals have exclusive contracts with their affiliated plans. Owning Unity outright could help UW Health stay competitive while keeping closer tabs on its patient base, Brei said.
Meriter's Physicians Plus Insurance Corp. earned $8 million on revenue of $235 million last year. Dean Health Plan, co-owned by St. Marys' parent SSM Health Care, earned $1.8 million on $592.6 million. On the flip side, the sale of Unity may be a bit of a setback for WellPoint's Wisconsin Blues unit, which has been shooting to double its statewide market share to 30% from about 16% today. The sale leaves the company with no HMO presence in the Madison/Dane County area.
The Wisconsin Blues lost 88,000 members last year, including some it shed intentionally to boost profitability, said Allan Baumgarten, an independent healthcare consultant. It now covers 730,000 members through several insurance plans.
Meanwhile, WellPoint's main national rival, UnitedHealth Group, effectively boosted its Wisconsin enrollment more than 50% to 387,000 members in April, when it agreed to acquire the 187,000-member HMO business of provider-owned Touchpoint Health Plan, Appleton, Wis., for $40 million.
Baumgarten said the company could try to expand its CompCare Blue HMO, which now serves northern and southeastern Wisconsin, into Dane County. But to gain a competitive foothold there, it would likely have to offer members access to all three of Madison's leading hospitals-something to which UW Health may not agree.
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