Valley-Based Health-Care Firms Setting Pace : Medicine: Executives agree that the HMOs and PPOs are well-positioned for Clinton Administration health-care reforms.
While no one knows for sure what’s coming in President Clinton’s health-care reform, most everyone agrees that the changes will step up the shift toward health maintenance organizations.
That bodes well for many Southern California health-care companies because, unlike most other parts of the country, this region is already thriving in HMOs. In Los Angeles County, one-third of the population is now enrolled in HMOs, compared with one-sixth of the population nationwide.
“In California, the future’s already here,” said Roger Greaves, president and chief executive officer of Health Net Inc., an HMO based in Woodland Hills.
HMOs and to a lesser extent preferred provider organizations, or PPOs, are the two main forms of “managed care,” which has been credited for best controlling medical costs and is the probable model for Clinton’s proposals. Under managed care, health-care providers tightly control costs by joining with a network of doctors and hospitals who agree to offer discounted fees and clear major treatments with providers. Unlike traditional fee-per-service indemnity insurance, managed-care operators usually pay a flat fee per member to participating physicians.
Health Net, CareAmerica and WellPoint Health Networks--three for-profit HMOs and PPOs based in the San Fernando Valley--show why Los Angeles is ahead in the race for managed care, and also provide clues about what health-care reform will bring. Over the last five years, their combined enrollment has grown by almost a million, to 3.4 million members. All three are profitable.
Still, some of Clinton’s expected proposals, such as caps on employee deductibles and co-payments and other price controls, could mean lower profits for managed-care plans. And worries abound about who will pay for universal health-care coverage, a key goal of the White House.
But most analysts agree that companies like WellPoint, Health Net and CareAmerica are well positioned for the upcoming overhaul. One major reason: All three are relatively big or tied into big organizations, as CareAmerica is through its parent firm, UniHealth America of Burbank, which recently announced a merger with Blue Shield of California--a move made in anticipation of national health reform.
“They’re all 800-pound gorillas in the health-care field,” said David Langness, vice president of the Southern California Hospital Assn. And that gives them clout with medical suppliers, doctors’ groups and hospitals as well as other economies of scale.
Here is how these three companies have prepared for health-care reform, and what the national changes may bring to their businesses:
WellPoint Health Networks
WellPoint, formed in 1992 as a subsidiary of nonprofit Blue Cross of California, got ready to battle in the new world of managed care by raising $517 million in an initial stock offering in February. Behind rave analyst reviews, the Woodland Hills company’s stock soared within days, from the initial offering price of $28 to $39 a share.
But by late February, amid news about health-care reform, WellPoint’s stock plummeted to $23. While its shares have lately climbed back to the low $30 range, what happened to WellPoint and other health-care stocks point to the uncertainties of health-care reform.
But Leonard Schaeffer, WellPoint’s chairman and chief executive officer, says one thing is certain: “To do well, you have to be high quality and low cost.”
Schaeffer, 47, has been cutting costs at Blue Cross ever since he came on board in 1986. By slashing Blue Cross’ employment from a high of 6,000 in 1986 to 3,500 currently, and by revamping products, Schaeffer has turned around an organization that in the mid-1980s was on the verge of insolvency.
With 2.3 million members, WellPoint is now the largest for-profit managed-care health operator in the state. In 1992 WellPoint earned $175 million on total premium revenue of $2.2 billion.
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In May, WellPoint cut specialists’ fees by between 5% and 6% for various surgical, obstetrical and other procedures. It was an aggressive step affecting 40% of the 35,000 physicians under contract with WellPoint’s PPO.
Though perhaps an ominous sign of what’s to come for doctors, it was nonetheless good news for the 1.8 million members who belong to WellPoint’s PPO, called Blue Cross Prudent Buyer Plan. A PPO is a middle ground between traditional indemnity plans and restrictive HMOs. PPOs allow members to go to any doctor and be reimbursed a set percentage, although PPO patients who see doctors on a “preferred provider” list pay a smaller fee than those who go to physicians and hospitals not on the list.
Todd Richter, a health-care analyst with the New York brokerage Dean Witter, said he expected WellPoint to make acquisitions in and out of state. And he said WellPoint’s cost structure will enable its PPO to grow, even though most experts believe PPOs will not fare as well as HMOs under health-care reform.
“The answer is not HMOs or PPOs,” said Schaeffer. “It’s meeting people’s needs.”
Health Net
Ever since Health Net converted to for-profit status last year, analysts have been wondering when the Woodland Hills-based HMO would sell stock to the public or otherwise raise cash to make acquisitions.
Greaves, 55, Health Net’s chief executive, won’t tip his hand. “We have our eyes open,” he said. But Health Net could also be gobbled up by bigger companies such as Qual-Med and Humana, which have made bids for Health Net.
Why all the rush to get bigger? Because the Clinton plan is likely to establish a standard benefits package, meaning health-care firms will compete largely on the basis of price and marketing. “And that will benefit established plans,” said Jeff Goldsmith, a health-industry consultant in the Chicago area.
Health Net is already the state’s second-biggest HMO after Kaiser Permanente, with more than 900,000 members who work mainly for large employers. Last year Health Net earned $27.5 million on revenue of $1.2 billion.
Health Net contracts with a network of 19,000 doctors and 350 hospitals. As with many HMOs, Health Net’s participating physicians receive bonuses for meeting cost goals.
Consumer advocates say these are the wrong incentives to give doctors, worrying some could cut corners or pass up costly procedures for financial reasons.
Greaves argues that the incentives are intended to encourage everyone--patients, doctors, hospitals--to be efficient and avoid unnecessary care. And he says that’s behind Health Net’s strategy to focus more on wellness, or workplace fitness programs, so members don’t get sick in the first place.
Health Net has also been trying to identify high-risk patients early to save costs of catastrophic care. And in the last year, Health Net has developed programs, for example, to manage the care of diabetic and AIDs patients.
Said Greaves: “The answer to the problem is keeping people healthy.”
CareAmerica
If seen by itself, CareAmerica would appear to be a tiny company that would be ripe for takeover. Yet the Chatsworth-based operator, which has 207,000 members, mostly in its HMO, has never really functioned like a small firm.
That’s because CareAmerica is owned by UniHealth, a $3-billion nonprofit outfit that owns other HMOs and PPOs as well as a dozen hospitals, including Northridge Hospital Medical Center and Valley Hospital Medical Center in Van Nuys.
UniHealth invested $7.7 million to start CareAmerica in 1986. Since then, CareAmerica’s revenue has grown from $1.3 million to $230 million, largely by tapping into UniHealth’s big network of hospitals and doctors. CareAmerica’s customers can go to 70 hospitals and 9,000 doctors. The company earned $2.8 million last year.
The proposed merger between UniHealth and Blue Shield should strengthen CareAmerica. In fact, CareAmerica’s HMO is likely to be merged with Blue Shield’s HMO, which has 200,000 members, said John Edelston, president of HealthPro Associates, a health-care consultant in Woodland Hills.
Kandis Larkey, CareAmerica’s senior vice president, said the merger will enable CareAmerica to offer a comprehensive plan--a goal of Clinton’s health reform. For instance, CareAmerica does not have a dental HMO, but Blue Shield does. “This merger will position us favorably for health-care reform,” Larkey said.
But even before the merger announcement, Dr. Arthur Southam, CareAmerica’s chief executive, says his company had been preparing for health reform. In 1991, for example, CareAmerica invested $1.3 million in a computer system to store and retrieve patient data and records. Southam says the system has saved expenses equal to hiring 25 employees and reduced paperwork by some 900,000 pieces.
Southam, 36, sees big opportunities in Clinton’s plan to insure the 37 million Americans who are currently uninsured. That includes about 3 million people in California who work for small employers--CareAmerica’s primary market.
“It opens up an entirely new arena for us,” Southam said. “And we have the skills and relationships in that market.”
