Government Closes Probe of FHP Sales
Federal health officials have closed an investigation of FHP International Corp.’s marketing of its senior citizen health plan, saying they found isolated instances of improper sales tactics but no systematic violations of federal guidelines, FHP announced Monday.
In a letter to FHP, the federal Health Care Financing Administration said it would also allow the company to expand sales of its senior plan into new territories. HCFA had imposed a halt on expansion after receiving complaints from seniors that they did not understand what they were signing when they joined the health maintenance organization.
Seniors, doctors and some FHP salespeople have charged in past interviews that the elderly were sometimes not told that joining the HMO might mean that they would no longer be able to visit their longtime doctors or that forms they were asked to sign would commit them to enroll. And some who changed their minds about membership in FHP’s Medicare substitute program were allegedly not removed from the rolls promptly upon request.
After a visit to FHP in July, federal inspectors concluded that “while there were a number of anecdotal instances of improper sales practices being used by individual sales representatives, there was no confirmation of systemic violations of federal requirements,” HCFA’s letter said.
HCFA also found that FHP did not have adequate controls to ensure that Medicare beneficiaries were receiving enough information to make an informed decision about whether to enroll with FHP or that they were told they could cancel if they changed their minds within the first 90 days, the letter said.
But FHP corrected the problems, HCFA said. By November, the number of seniors who dropped out within the first 90 days had declined, HCFA said, concluding that the company is now in “in full compliance” with federal regulations.
Nick Franklin, FHP vice president for governmental affairs, said the company has taken a number of steps to improve controls.
Sales representatives now receive a bonus if a senior citizen stays in the HMO for at least 90 days, Franklin said, a move that would discourage quick-sale tactics. The company has also hired a full-time auditor to review enrollment and sales procedures. And it has adopted a new verification procedure to confirm that elderly customers understand what they are buying, Franklin said. Verification is no longer performed by the salesman but by a separate department after the sale is complete, he said.
FHP plans to deepen its penetration of the lucrative senior market in Southern California and expand into Northern California and Nevada, Franklin said.
Under the FHP plan, the HMO receives from the government a guaranteed monthly payment averaging $350 per Medicare patient. The government saves an average of 5% in medical costs per patient, and members save about $100 a month because of discounts on prescriptions and lower deductibles.
As of Oct. 31, the HMO had 344,000 members in California, of whom 154,000 are Medicare recipients, the company said. FHP also has operations in Utah, Arizona, New Mexico and Guam, for a total enrollment of 648,000, of whom 221,000 receive Medicare, the company said.
Monday’s announcement came after the stock market closed. FHP stock, which has been battered by a general decline in the share value for HMOs, finished at $11.75, up 62 cents from Friday. Trading on the NASDAQ exchange was 358,200 shares, more than double Friday’s volume.
FHP spokeswoman Anna Marie Dunlap said the original announcement of the HCFA investigation July 5 had little impact on the price of the stock, which dropped from $23.75 to $23.50 on the news. By the end of July 6, the stock was trading at $26.
But bearish reports about the entire California HMO industry began to depress the stock in August, Dunlap said. In October, after FHP announced first-quarter earnings would be sharply lower than expected, the price plunged 28%, to $12.75. Next, two shareholders filed separate lawsuits against the company, and by Nov. 1 the stock had hit bottom at $10.375.
The shareholders alleged that FHP knew that HCFA was unhappy with its sales practices but failed to disclose that fact when it issued 4.5 million common shares for $23.25 per share on May 3. FHP has denied wrongdoing and said it would vigorously defend itself against the suits.
It was unclear Monday what if any impact the end of the investigation would have on the shareholder actions.
FHP Stock Prices Week’s closing prices on FHP stock: 6/21/91: $24. 1/2 12/20/91: $11 1/8
