Many HMOs Running a Financial Fever
Health maintenance organizations are having a rough time financially.
In 1987, the last year for which complete figures are available, only 30% of 722 HMOs studied by American International Healthcare, a Potomac, Md., health care consulting firm, were profitable. In total, HMOs lost about $895 million.
Why all the red ink?
Fifteen years ago, the federal government created a ready market for HMOs by requiring companies with 25 or more workers to offer membership in a health maintenance organization as an insurance option.
But in the face of skyrocketing medical costs, HMOs are losing many of the cost advantages they once held over traditional medical insurance plans.
The one cost savings HMOs could claim--fewer hospitalizations--is fast eroding, said Dr. William B. Schwartz, a professor at Tufts University School of Medicine in Boston, because traditional health care providers are doing the same thing.
Preventive Care
Also, he said, HMOs have not demonstrated claims that they save money because they practice preventive care.
Overall, the rate of increase in cost “has been indistinguishable from that in the fee-for-service sector,” said Schwartz, an expert on health maintenance organizations.
Compounding the problem, said Peter Boland, a Berkeley health care consultant, is that HMOs made “some fairly dramatic misjudgments” about premiums and the cost of medical services.
Fearful of losing market share, many of them were reluctant until recently to raise premiums charged to subscribers. The result was a tide of red ink.
There were any number of bad management decisions. A prime example cited by industry analysts was Maxicare’s decision in 1986 to take on massive debt to acquire other HMOs already in poor financial condition. Ultimately the bubble burst, and Maxicare sought refuge in federal bankruptcy court.
Some HMOs have proved inefficient in their processing and paying of claims, leading to extremely high administrative overhead, said Albert-Lowey Ball, a Sacramento-based health care consultant.
These high administrative expenses are a particular worry to Dr. Ronald Bronow, executive vice president of Physicians Who Care, a group critical of HMO operations. “If you take 25% off the top for administration, there’s not enough money for health care unless you ration care,” said Bronow, a Los Angeles dermatologist.
California regulations forbid HMOs from spending “an excessive amount” of premiums on administrative cost--including the cost of marketing--but excessive is not defined. More may be spent if the money is obtained from other revenue.
A sample of plans reporting to the state in 1988 showed administrative expenses as a percentage of total revenue, ranging from 4.9% for Cigna to 20% for FHP Inc.
Complete figures for 1988 are not available, but a look at records at the California Department of Corporations does not present a picture of an industry in the pink of health.
At least four of the 10 largest health maintenance organizations, which together represent about 90% of HMO membership in the state, lost money in 1988.
Short-Term Woes
For consumers, the challenge is to determine which among the companies losing money are having short-term difficulties and which are in serious jeopardy.
“We think more HMOs are going out of business,” said Daniel C. Rowland, director of employee benefits at Bank of America, which offers its employees across the nation a choice of 40 HMOs. “Our job is to identify those that are likely to (go out of business) and avoid them,” he added.
Health Net of Woodland Hills and Cigna Healthplans of California have reported millions in losses in the last two years, but neither is considered to be in imminent danger because of the plans’ strong asset bases and their access to capital. Cigna, a unit of the giant insurance concern Cigna Corp., said its California operations will do better in 1989, primarily because of increased premiums.
“We will not lose money in 1989,” said Beverly Fittipaldo, Health Net’s vice president for administration. The nonprofit company has no debt in 1988 and $90 million in reserve, she said.
Western Health Plans, the parent of Greater San Diego Health Plan, and Maxicare’s California unit are a different case, however.
Western Health, which is in the process of closing all of its operations except Greater San Diego, has said it needs a $15-million cash infusion to stay in business. An affiliate of Mercy Hospital in San Diego has agreed to provide the funds in exchange for about 45% of the company, but the transaction has not been completed. Western Health has reported $24 million in losses in recent years. For the first half of the current fiscal year, the company reported a $4.2-million loss. The Greater San Diego unit, which had reported a profit in the last fiscal year, lost about $849,000 in the first half of the year, which ended Dec. 31.
Provider Network
Maxicare’s California unit had been considered one of the company’s healthier units, but it lost $4.2 million in the first nine months of 1988. Perhaps more worrisome, according to health care analysts--is the stability of Maxicare’s provider network. They believe Maxicare’s sudden Chapter 11 filing has alienated members of its critical health care provider network and employers who had contracted with Maxicare. The HMO, which does not provide medical services directly, owes millions to California hospitals, clinics and doctors for services rendered before the March 16 bankruptcy filing. Under bankruptcy law, those debts are frozen indefinitely.
According to articles in trade publications, some providers believe that Maxicare filed for bankruptcy protection in March to avoid paying bonuses due in April to cost-effective providers. Maxicare’s actions “are creating an additional and very forceful basis for further erosion of some of its local business where the company was already shaky,” Washington health care consultant Robert F. Atlas recently told the trade journal Managed Care Outlook.
Maxicare said it was forced to file the bankruptcy petitions in March because its lenders vetoed a crucial cash infusion. The company has moved to shore up its provider network by paying some of them in advance for current services. But last week Maxicare decided to dismantle its Texas unit because too many providers were refusing to offer services there.
Meanwhile, some health care consultants who advise employers on selecting HMOs are closely watching Foundation Health Plan of Sacramento. The plan is profitable, according to its latest quarterly report filed with the state, but some analysts are worried about possible repercussions from the condition of Foundation’s parent, Foundation Health Corp. The parent company has a heavy debt burden because of a leveraged buyout. Last month, the state Department of Corporations ordered Foundation Health Plan to cease making payments toward the debt obligations of the parent company because the department believed the transfer of funds depleted the Sacramento plan’s net worth.
State Order
The state issued a similar order to Maxicare California last fall.
Steven Tough, president of Foundation Health Plan, said in a statement that subscribers need not be concerned about the state’s order or the condition of the parent company. “Foundation Health Plan is a financially successful company. Our earnings are continually rising, and our cash flow is extremely positive,” he said.
But the parent company has had major difficulties processing claims for a contract to provide services for the federal government’s Civilian Health and Medical Program of the Uniformed Services. The company said it has hired an outside claims processing company to solve the problem. It also said it is selling plans in other states to concentrate on the federal contract and its California operations. The New Jersey insurance commissioner recently took control of the Foundation plan in that state after a potential purchaser withdrew.
The financial condition of one of the state’s large HMOs is difficult to assess. CaliforniaCare of Van Nuys is part of nonprofit Blue Cross of California, but the California Department of Insurance, which regulates Blue Cross, does not require a separate filing on the HMO. Overall, Blue Cross lost about $9.1 million in California last year.
