Mining for Medicare : O.C.-Based HMOs Spend Millions to Sign Up Seniors


Surrounded by old photographs, handmade dolls and other cherished mementos of her past, Gloria Williams considered her future.

Williams, who will be 65 in May, sat at the dining room table of her cozy Midway City mobile home and listened intently as FHP International representative Linda Kadlac explained how the health maintenance organization would provide her with a primary care doctor, a hospital and 100% medical coverage in exchange for her newly acquired Medicare benefits.

“It’s depressing to think about all this,” said Williams as she signed up for FHP’s Senior Plan. “But I guess I should, huh?”


HMOs are spending millions of dollars to make sure that Medicare recipients like Williams do, indeed, think about how to pay their future medical bills.

With their so-called commercial plans--health care coverage offered through employers--approaching the saturation point in Southern California, HMOs are focusing on the only population segment from which they can still recruit large numbers of new members: the elderly.

Another factor in HMOs’ enthusiasm to sign up senior citizens is that the Medicare system is not likely to change much under pending national health care reform. Thus, seniors already enrolled in HMOs will be a continuing source of revenue for HMOs, regardless of changes in other areas.

To attract Medicare recipients, FHP, based in Fountain Valley, and Cypress-based competitor PacifiCare Health Systems Inc., which offers the Secure Horizons senior plan, are spending heavily for television, radio and print advertisements. They are also using billboards, telemarketing and direct mail to reach potential members across Southern California and are sending out salespeople such as Kadlac to make the pitch one on one.

HMO executives will not say how much money they are spending to advertise their Medicare plans. Some analysts suggest that as much as 12% of the Medicare premiums they receive from the federal government go for marketing.

“It’s no accident that FHP and PacifiCare are so large,” said Kimberly A. Purvis, a health care analyst with the brokerage Donaldson, Lufkin & Jenrette in New York. “They have devoted hefty resources to the product.”


FHP and PacifiCare are far and away the leaders in the field. FHP, with 316,000 Senior Plan members, boasts the largest Medicare membership in the nation, while PacifiCare, with 311,000 Secure Horizon members, is No. 2. In California, FHP and PacifiCare together account for almost 60% of the state’s 760,000 Medicare recipients.

Though their big marketing budgets cut into their profits, HMO officials say, the money is well spent. “If you aren’t in the Medicare business,” FHP administrator Marguerite O’Toole said, “you aren’t in the medical business.”

Such programs are attractive to managed-care companies because for each Medicare member they sign up, they receive a set monthly payment from the Health Care Finance Administration, the federal agency that oversees and disburses Medicare funds.

Also, faced with uncertainty about how a national health care system will affect them, health care providers are eager to find guaranteed sources of revenue. Most experts say that the rules for Medicare risk HMOs--health plans in which Medicare recipients sign over their benefits in return for a package of services--are not likely to change much.

Senior plans have become “a very important component to HMOs,” said Peter Boland, a Berkeley health care consultant.


The elderly also represent a virtually untapped resource for managed-care companies. Figures from the Health Care Financing Administration show that only 10% of Medicare recipients nationwide belong to HMOs.


To woo more senior members, managed-care companies’ strategy has been to demonstrate the advantages of particular programs--no easy feat given that all plans operate on set budgets and are federally mandated to offer certain services.

HMO officials admit as much. “Benefit for benefit, there really is very little difference between the plans,” said Tracy Tellefson, a sales representative for PacifiCare’s Secure Horizons plan.

Proponents of managed care say that HMO senior plans are advantageous for the patients--and even for the federal government. Medicare recipients can go to a single office for most of their health care needs without having to pay deductibles or a percentage of treatment costs--20% under the typical conventional insurance plan. And the government spends an average of $400 a month for each Medicare patient enrolled in an HMO, compared to $421 under conventional plans.

But with heavy emphasis on marketing, elderly rights advocates and others have questioned whether the HMOs might be tempted to misrepresent themselves. FHP was sued in 1991 by three elderly San Fernando Valley women who alleged that sales representatives did not fully explain the benefits provided by the company or various limitations of coverage. That same year, two investors filed a suit against FHP alleging that the company padded its Medicare enrollment figures.

The investors’ suit was settled out of court, and a settlement of the women’s lawsuit is being negotiated, said Kurt Eggert, the plaintiffs’ lawyer.

Those two cases, however, spurred the federal government to investigate FHP. The probe found no evidence of wrongdoing, but questions about the potential for abuse prompted Group Health Assn. of America--the Washington-based organization that oversees the 335 HMOs in the United States--to issue strict guidelines for advertising and sales pitches.


FHP is not the only company whose strategies have been questioned. In a report last year, the Medicare Advocacy Project in Los Angeles stated that many elderly people are “extremely vulnerable to misleading marketing by HMOs.” The report went on to suggest that some HMOs could yield to the temptation of cutting care to increase profits and that the federal and state governments should play a stronger role in protecting Medicare recipients.

“Given the competitive nature of the HMO industry . . . and the rapid expansion of Medicare HMOs to new areas, the potential for future marketing abuse continues to exist,” the report stated.

Geraldine Dallek, executive director of the project, said she still has some concerns but that larger HMOs such as FHP and PacifiCare have matured to the point that there are few, if any, complaints against them now.


Health care analysts say that, those issues resolved, HMOs can now concentrate on expanding their business and increasing their profits. Part of their latest strategy is to add members through mergers and acquisitions with other care providers.

FHP cited its desire to expand its Medicare membership into Northern California and Colorado as the chief factor in its recent failed attempt to purchase TakeCare Inc., a Concord-based HMO that has a strong presence in each of those areas. PacifiCare, which already provides managed health care to a large number of seniors there, has also reportedly made an offer for TakeCare, setting up the possibility of a bidding war to capture the estimated 145,000 Medicare recipients in the Bay Area.

Expanding into the Medicare business can be an expensive proposition for HMOs hoping to be new players in the industry, though. The needs of the elderly are much different from those of younger patients, said Doug Sherlock, a Philadelphia-based health care analyst and publisher of Pulse, an industry newsletter. Refitting clinics to accommodate wheelchairs, contracting with home health care agencies and hiring doctors with geriatric experience can make such a venture a money-losing proposition, he said, at least for the short term.


But once a company passes the 50,000-membership mark, the profits begin to show.

“There are some drawbacks,” said Sherlock, who was formerly the administrator of a Medicare program for an HMO. “But that is a decision HMOs have to make.”

Nevertheless, the number of players is growing. In California, Kaiser Permanente, Health Net, Aetna, Care America, QualMed and Foundation Health are among managed-care companies that have started Medicare HMO plans in the past few years. Most of those companies, however, have only a few thousand members enrolled in their plans so far.

Mike Lombardi, administrator for PacifiCare’s Secure Horizons plan, acknowledged the increasing competition but said that trying to catch up with FHP and PacifiCare will be a daunting task, given the two companies’ head start in marketing.

Secure Horizons, he said, “does a nice job” of identifying potential customers and putting on social events that draw crowds of retirees, some of whom are sure to enroll. It has also developed a network of “ambassadors”--Secure Horizons members who volunteer to help enroll other elderly people.

On Valentine’s Day, PacifiCare sponsored a “sweetheart breakfast” at St. Joseph Hospital in Orange for more than 30 local members of Secure Horizons. While a saleswoman gave a presentation and answered questions, Secure Horizons ambassador Clarence Leonardo stood at the door and welcomed guests.

A 70-year-old retired controller for a local concrete firm, Leonardo has been a Secure Horizons member for four years. He offers his services to the company for free, he said, because “it gets me out of the house.” Just as important, he said, is that he believes in the plan. “I’ve never been much of a salesman, but Secure Horizons really does sell itself,” he said.


At least four people were persuaded to sign up on the spot. Others were more cautious.

Nima Al Babar, 77, of Orange, said he was curious enough to be drawn by the invitation he received in the mail, even though he has been a member with rival FHP for eight years. He didn’t switch yet but said he is thinking about doing so.

“FHP are very good people,” he said. “But these are good people too.”

California Stronghold

In 1982, Medicare recipients were given the option of switching from fee-for-service providers to health maintenance organizations. The latter choice is becoming increasingly popular, especially in California, where HMOs have established a stronghold. Medicare recipients’ membership in the top five HMOs:

* Southern California PacifiCare: 226,882 FHP: 204,444 Kaiser Permanente: 127,077 Aetna: 48,556 CareAmerica: 17,239 * United States FHP 316,352 PacifiCare 311,300 Humana 274,255 Kaiser Permanente 219,104 United Health Care 89,216 * Western Membership

The Health Care Finance Administration’s western region--California, Arizona, Nevada and Hawaii--has the nation’s highest concentration of Medicare HMO members, and 80% of them are in California. Since 1991, the number opting for HMO membership in the region has increased 91%.

1994: 927,000 * Source: Health Care Finance Administration; Researched by JANICE L. JONES / Los Angeles Times