Health Care Logic Pays Profits : How Fountain Valley’s FHP Keeps Tight Control of Costs : DR. ROBERT GUMBINER

As founding chairman and chief executive officer of FHP International Corp., Dr. Robert Gumbiner has guided the Fountain Valley-based health maintenance organization for 27 years through the industry’s roller-coaster ups and downs.

In 1985-87, when intense competition and other economic pressures forced many HMOs to scale back or shut down, FHP sustained a loss in just one financial quarter--a net loss of $1.7 million in the fourth quarter of fiscal 1987. The company then bounced back in an industrywide resurgence.

“(FHP’s) performance has been substantially better than the HMO industry as a whole,” said Larry Selwitz, vice president of research for the Los Angeles-based securities firm of Bateman Eichler, Hill Richards.

In the first nine months of fiscal 1988, the company reported that its net income rose by 20%, to $10.4 million. It was $8.7 million for the same period last year. As of March 31, the number of enrollees in FHP’s prepaid health plan had grown 21%, to 360,000 people.

Health industry analysts say FHP has achieved exceptionally tight control of its costs, in large part because of its “staff model” organization, under which it hires most of the doctors it needs and owns most of its own medical facilities and a wholesale drug purchasing operation.

Although FHP contracts with some hospitals and groups of independent practitioners in new marketing areas, 77% of its members receive their medical care in facilities owned or operated by FHP. The company owns a hospital in Fountain Valley, manages Charter Community Hospital in Hawaiian Gardens and runs 34 medical and dental centers. It has 4,500 employees systemwide.

Also, FHP has taken a leadership role extending HMO membership to the elderly by contracting with government Medicare and Medi-Cal programs.

In 1961 Gumbiner, a graduate of Indiana University School of Medicine and formerly a practicing physician, established FHP as a nonprofit corporation, with an initial enrollment of 2,000 members. Gumbiner and 17 other FHP employees formed a holding company that acquired FHP in 1985 for $38.6 million in cash and notes after the company had been converted to a for-profit entity. The next year the new owners took FHP public.

In a recent interview with Times staff writer Leslie Berkman, Gumbiner discussed what he considers the keys to FHP’s success and the future of health care in the United States.

Q. Why has your company avoided the major losses suffered by other HMOs in recent years?

A First of all we are an experienced company. We have been around almost 30 years now, and we have seen the ups and downs. Secondly, we are a staff model health maintenance organization, fundamentally a provider of care, whereas all the other public HMOs are fundamentally individual practice associations (networks of independent physician practices and hospitals). IPAs are really middlemen making contracts on one hand with the consumer and on the other hand with the providers. In our organization we have more control over costs because the doctors work for us for a salary and we own our own hospitals and facilities. We are not buying drugs from one organization that makes its own profit and hospital care from another organization that makes its own profit. . . . We are not subject to the vicissitudes of profit-taking and conflicting objectives you have with an IPA.

Another thing is our management. We have been training management for 20 years. We have six to 10 MBA graduates in our training group at all times. We have a special training program for our medical directors and our middle managers with the University of California School of Management at Irvine. We have probably twice the management of anybody else.

Q. Isn’t that expensive?

A. It is cheap. In the end when you have better management, it is less expensive than if you don’t. We are supposed to be managed health care. Where we effect the greatest savings for the consumers and profitability for the company is to move people out of expensive hospital care and into less expensive ambulatory care. Hospital care in Southern California is around $1,100 a day, and our hospital inpatient care is $600 a day. Aside from that, we use less than half the number of hospital bed days per thousand patients (contrasted with non-FHP hospitals). The (objective) of the hospital industry is just the opposite. They try to fill beds, and they try to do more things for people to raise the hospital bill.

Q. Some hospital administrators express concern that they are being asked to release patients too early for the sake of savings. Is that a risk?

A. I’m glad you asked that question. If we were to do that, our plan would not grow because people would not like the service and the next moment they would quit the plan. On top of that, if we pushed people out of the hospital and they had complications and came back to the hospital, it would be more expensive for us. What happens in the fee-for-service system (where patients or insurance companies pay doctors and hospitals for each service, as opposed to paying a flat monthly fee to the HMO) is a person doesn’t go to the doctor. He figures the doctor is going to cost $20, and so I want to be $20 sick before I go to the doctor. By the time he goes to the doctor he may be really sick and has to go to the hospital.

Q. How do you determine how long a person should stay in the hospital or any other health facility?

A. The physician does. We have 360 physicians working for us full time. There is no way you could have a conspiracy among 360 physicians not to give good care.

Q. If those same physicians working for you were instead working in the regular fee-for-service system, would they be keeping patients in the hospital longer than necessary?

A. Let’s look at it this way. If you made a living by the more services you rendered, the more you made, wouldn’t you be tempted to keep a patient in the hospital so you could visit him another day? After all, what is one more day? It doesn’t cost you anything nor the patient because insurance picks it up. And wouldn’t you be apt to order a few extra tests or X-rays? Changing the incentives alone will change the cost situation.

Q. Do you have difficulty finding doctors who want to work in an HMO environment? Isn’t it the nature of doctors to be independent?

A. No. It is not their nature. Doctors prefer to work in this environment. First of all they have the big bad malpractice costs out in the fee-for-service sector. It costs them as much as $80,000 a year. (FHP carries malpractice insurance that protects its doctors.) Second of all, they have a lot of business problems, paper work to contend with and insurance claims and government regulations. They would like to get out of that. Our doctors would prefer to practice medicine rather than to try to be small-business men, for which they are not prepared. In fact, our doctors look down upon the fee-for-service doctors as sort of money grubbers. Most young doctors do not want to go into private fee-for-service practice because it is expensive, complicated and competitive. In some of our non-surgical specialties, such as pediatrics and internal medicine, we have waiting lists of doctors wanting to get in.

Q. Why did FHP decide to concentrate so much of its resources on serving senior citizens when a lot of HMOs consider senior citizens too risky?

A. They don’t know what they are doing. It is simple as that. If you are not in the Medicare business, you are not going to be in the medical business, because over 50% of government medical expenditures and 19% of all medical expenditures are for people over 65. There are about 30 million people over 65 in the country, and they use about four times as much health care per person as the rest of the population.

Q. In 1982 FHP signed its first contract with the federal government to provide comprehensive health care to Medicare recipients for a flat monthly rate, and now Medicare represents about 27% of your business. Doesn’t that make you very dependent on the federal program?

A. We are very deep into Medicare because, one, there is a deep need and, two, it is reasonably profitable and, three, there are only three competitors in the Los Angeles area in Medicare, while there are 27 competitors in the market serving employee groups. The three are ourselves, PacifiCare and Kaiser.

Q. How is your relationship with Medicare structured?

A We have a risk contract with the federal government. We provide all the Medicare-covered services at 95% of what the government would pay the service sector. The government automatically saves 5%. Then we have added to the basic Medicare service prescription drugs for $3 per prescription and have taken away the deductibles for doctor visits and hospitalization. Our seniors generally pay $5 for a doctor’s office visit. By contrast, in the fee-for-service sector, the doctor can bill the patient for the difference between what he charges and what Medicare feels is a reasonable fee for service. Medicare covers an average of about 50% of what health care costs after you subtract what the patient must pay in deductibles. Under Medicare, the patient must pay the full cost for prescription drugs.

Q. Your finances were helped this year by a 13% rate increase from Medicare. If it hadn’t been for that, would you have been in financial trouble?

A. No. We would have been all right. We just did a lot better with it.

Q. Will FHP become a specialist in managed care for senior citizens?

A We are pretty well balanced. We just have an emphasis on seniors because that is where there is the biggest need.

Q. Is there a danger that as senior citizens get older they will get sicker and cost you more money?

A. We get paid more for older seniors under the government risk contract. Besides, if they have been in our program for a while and have had access to preventive care, they probably are not going to be as sick as they would have been. Studies indicate that our seniors are healthier than the cross section of seniors in general.

Q. Is that because you select the healthy ones or they select you?

A What happens is that when we first enroll people in our plan, the amount of care is excessive, because they have a lot of unmet health needs. Then it levels off as they get their health care met.

Q. Do you put your senior centers where the healthier and more well-to-do senior citizens live?

A. No. Our first center was in downtown Long Beach. Our next was in a middle-class area of Anaheim. The next was in Huntington Beach. Now we have another center in Hawaiian Gardens, which certainly is not an affluent area.

Q. Are you looking into providing skilled nursing care for seniors?

A We are looking into that and a lot of different areas encompassing services we formerly paid for. For instance, in the last year or so we put in a home nursing unit. We also put in a psychiatric hospital unit and an infant intensive-care unit.

Q. What do you do now if a senior citizen needs long-term convalescent care?

A Unfortunately Medicare does not cover convalescent care. Neither do we.

Q. So what happens?

A. If they spend all the money they have and become impoverished, they go to Medi-Cal for convalescent care.

Q. Is there anything you can do?

A. We are studying the problem. We can sell them long-term insurance or build our own convalescent hospitals.

Q. Do you operate any differently now that you are a for-profit institution than you did when you were a nonprofit organization?

A. Not much. The only difference is in the past we didn’t have shareholders or pay a profit. We just generated a net difference between income and expense and put it in the bank.

Q. Has the construction of your Fountain Valley hospital improved your profitability?

A Yes. Before we had a hospital base we were less profitable because we were having to pay for the contracting hospitals’ profit and mismanagement.

Q. Are you saying that the community hospitals you contracted with weren’t as efficient as your own hospital?

A. Why should they be efficient? They get paid for being inefficient. They just pass the costs on. I’ll give you an example. A doctor can do a diagnostic procedure at a hospital for $100 and give 10% of the cost to the hospital. But if you have a new machine, the procedure may cost $200, and at a 10% charge the hospital will get $20 instead of $10. So why wouldn’t you as a hospital want more expensive technology and procedures if you are making a percentage off them?

Q. Does your hospital in Fountain Valley have high-tech equipment?

A We have the high tech that we need. But we don’t have something standing in the corner just to show people.

Q. Is yours a full-service hospital?

A. We probably have more intensive-care beds than any other hospital the same size in Orange County.

Q. Do you do open-heart surgery?

A. No. We don’t do open-heart yet, and we don’t do neurosurgery. We refer those cases to hospitals that specialize in them. We also contract with other hospitals in Albuquerque and Phoenix, where we don’t have our own hospitals.

Q. Do you have any expansion plans in Orange County?

A We plan to open two more medical centers, in Garden Grove and Irvine. And we are adding 125 beds to our Fountain Valley hospital, doubling bed capacity.

Q. Why are so many hospitals in the county expanding when there are high bed vacancy rates?

A Because they are all competing with each other. They are cannibalizing each other. Each thinks it will be the only one who will end up with the patients and the other guy will go away.

Q. But aren’t you doing the same thing?

A We have an HMO program, so we are not competing for the same patients. They are all competing for an ever-decreasing pool of people, which is crazy.

Q. What will happen?

A. They will go broke.

Q. What kind of membership growth are you forecasting for FHP?

A Our membership has been growing at about 20% per year over the past five years, and it looks like we will be able to continue that in the new fiscal year, which began July 1.

Q. Will most of that growth be in Southern California?

A We have an ambulatory-care center about finished in Salt Lake City and another under construction in Provo, Utah. But Southern California is still our biggest market. We were the first ones in the Medicare market here and the first to develop a Medi-Cal market back in the late ‘60s. We are expanding geographically from our existing Southern California bases toward Riverside and the San Fernando Valley. We are also expanding up the coast to Torrance and down the coast toward San Diego.

Q. Is there a reason why you want to stay rather concentrated geographically?

A It is easier to manage. That is why we are more successful than companies that try to manage all over the country.

Q. So you don’t plan to become a national organization?

A We totally reject the idea as erroneous that you have to be a national organization. We want to be a very successful, well-managed, Western regional organization that is profitable and fun to work at.

Q. What if some of your members get sick out of your geographical area?

A If someone gets sick out of our area, we have an insurance coverage for them that we pay for. The chances that someone is going to get sick or hurt in the short time they are out of the area are relatively low. If they are transferred to jobs in another city, they have to give up our program and get another HMO or get an insurance company.

Q. What do you think is the future of private indemnity insurance?

A Bleak.

Q. Will private indemnity insurance be limited to serving an elite group that can afford it?

A. I think private health and medical insurance companies will go out of business. It is a reasonably short step to national health insurance by just extending Medicare.

Q. Won’t there always be some people who want the ability to to choose any doctor they want?

A. With national insurance, you can choose a doctor--within limits.

Q. Do you think eventually all health care will be delivered by HMOs?

A. I think it will be all some kind of managed health care system, maybe under a national health insurance program.

Q. With the system reimbursing the HMOs?

A. Right.