Western Health Plans’ Financial Ills Worsen
To a doctor, Western Health Plans’ mounting financial woes would probably appear to be fatal.
The San Diego-based operator of the Greater San Diego Health Plan, the second largest health maintenance organization in the county, has hemorrhaged $21.5 million in red ink during the last three years, reducing shareholder equity to a negative $8.7 million.
There is “substantial doubt about (Western’s) ability to continue as a going concern . . . (because of) recurring losses from operations . . . a working capital deficiency, and . . . a net capital deficiency,” according to a recent Western filing with the federal Securities & Exchange Commission.
If left untreated, Western’s working capital shortfall “will jeopardize the maintenance of its license to operate its HMO business under California law,” according to the filing. Western managers did not return several telephone calls in the past two weeks.
Western’s financial woes also threaten to swamp Western’s Greater San Diego Health Plan subsidiary, which had 153,639 enrolled members as of June 30 in San Diego County. GSDHP has so far maintained the minimum regulatory capital requirements established by the state Department of Corporations.
Operating Changes
But GSDHP’s continued viability is now questionable because of operating changes agreed upon by Western and state regulators.
Because of those operating changes, GSDHP could fall short of regulatory net equity requirements unless external financing is arranged, according to the recent SEC filing. That capital shortfall could occur “within the near future,” according to the filing.
Western has other problems: Its insolvency insurance coverage expired Nov. 30, and the company has been unable to find a replacement, a development that will “adversely affect (GSDHP’s) qualifications to act as an HMO,” according to the SEC filing.
The American Stock Exchange might drop Western from its listings because of its financial problems. And Western’s woes probably would keep it off the NASDAQ over-the-counter exchange, according to the filing.
There is a magic bullet that would force Western’s financial ills into remission, however.
Management believes that a $7.7-million cash infusion would eliminate the company’s capital deficiency. Western has hired a Los Angeles-based investment banking firm to find that capital--as well as to attempt to arrange a sale of the beleaguered company.
Declined to Comment
Western declined to comment on the status of an initial $21-million buyout offer made by a consortium of San Diego-based hospitals that includes the Sharp HealthCare, Scripps Memorial, Palomar-Pomerado, Grossmont and Children’s hospital organizations.
Western on Nov. 18 rejected the $21-million offer, but “there’s still a chance that something will be worked out,” according to Warren Barnes, supervising attorney for the Department of Corporation’s health-care services plan.
Those hospitals are attracted to Western because “they’re looking at the potential business that Western’s doctors could steer to them,” according to a health-care industry source. “The doctor is very much the gatekeeper in this business, and patients generally go where their doctors tell them to go.”
The hospital consortium is “now re-examining its interest in the transaction,” according to a spokeswoman at Sharp HealthCare.
During the early 1970s, Congress passed legislation that encouraged the spread of HMOs, largely on the assumption that HMOs would be better able to contain health-care costs than traditional health-care programs.
HMOs provide comprehensive medical care, including doctor and hospital care, to members for a fixed, prepaid fee--regardless of how much care is provided. HMOs control costs by directing those members to select physicians, hospitals and pharmacies that, in return, provide care and services for favorable rates.
But even HMOs seem unable to contain spiraling health-care costs: Nearly half the nation’s HMOs are losing money, according to industry experts.
Two weeks ago, Los Angeles-based Maxicare Health Plans--once the nation’s largest HMO with 2.3 million customers in 26 states--reported a $169.7-million net loss for the third quarter ended Sept. 30, and a $250.5-million net loss for the nine-month period ended Sept. 30.
Maxicare has been selling off assets, largely its health plans in 13 states, to stem losses generated by a heavy debt and rising costs. That asset sale has left Maxicare with 1.6 million customers in 13 states.
And, like Western, Maxicare has hired an investment banking firm to help it find new capital.
Regulators are closely following financial developments at Maxicare and Western, Barnes said, “to reduce the possibility of a disruption of care to members.”
For example, the state Department of Corporations recently issued various cease-and-desist orders aimed at protecting members of Maxicare. However, regulators have yet to take similar steps to protect Western’s members.
Profitability Undermined
While Western’s GSDHP subsidiary has remained sound, Western’s profitability has been undermined by losses in other health care businesses such as its ill-advised expansion into Nevada and a clinic in San Diego. Western is “the real weak link in the health plan’s delivery system,” Barnes said.
The operating changes to be instituted “reduce the risk factor for consumers,” Barnes said.
But the operating changes “don’t answer the question of continuing losses,” Barnes said. “The company has to develop an approach to stem its losses and/or get added capital.”
There seems to be less protection available for Western’s shareholders.
Although a buyout probably would keep medical care flowing to members, Western’s shareholders probably won’t see a return on their investments, according to observers of the health-care industry.
“If I were (a shareholder) I’d write (Western) off as a bad investment and a bad idea,” said one medical industry source, who suggested that the health plan should be closed down. “But that probably won’t happen because there are a lot of egos involved.”
The “egos” are the 1,100 San Diego doctors who own about 75% of Western’s outstanding shares. More than a year ago, several observers contended that Western’s doctors-shareholders should try to sell the company when Western’s financial problems weren’t as severe.
But those doctors “have different objectives” than typical stockholders, according to an industry analyst who last year stopped following the company after its second straight year of net losses.
Although many publicly and privately held HMOs in the nation are losing money, few are like Western in that they are owned largely by the doctors who provide the care--and who would want to recoup fees owed to them before the company is forced to shut down.
That scenario is a far cry from the vision that a group of San Diego doctors had when they formed Western in 1980. Then, they thought that a doctor-owned HMO could “build a fence that would protect them from the nasty old world,” one San Diego-based expert on the health-care industry said.
But the doctors who expected to be sheltered from often-curt treatment by publicly owned HMOs were shocked because “Western treated them as rudely as any other HMO” when it came to negotiating fees and paying those fees on time, the source said.
Western’s losses were in part linked to rapid expansion, ever-increasing benefit costs, increased competition and the company’s inability to attract needed capital.
Last year, Western took a $1.7-million charge to cover costs associated with its decision to abandon its fledgling HMO in Nevada.
In August of this year, Western took a $5-million write-off on a San Diego-based clinic that had failed to turn a profit since it was created two years ago.
Apparently, Western’s profitability has also been hurt by overpayments to hospitals. The company had hoped to recover nearly $5 million in overpayments, but so far has recovered only a “small portion” of that money, according to Western’s SEC filing.
Western had 153,639 enrolled members at the end of its June 30, 1988, fiscal year, up from 136,177 during the previous year. On June 30, 11 employers accounted for 51% of Western’s premium revenues, with General Dynamics generating 17.9% of total premium revenues.
Western competes in San Diego against Kaiser, the state and nation’s dominant HMO, which has 305,000 local enrollees. Western’s health care is provided under contract by 1,550 doctors and health-care professionals, various pharmacies and 23 independent hospitals.
