Restructuring Shifts FHP Out of Ownership : Health care: The Fountain Valley-based firm will sell its four hospitals and move its 500 doctors and 95 dentists into a newly created physician management company.
FHP International Corp., abandoning its founder’s vision of providing company owned and operated health-care services to members, said Tuesday that it is embarking on a major restructuring that will allow it to serve those who aren’t part of its health maintenance organization.
The Fountain Valley company, a pioneer HMO that provided FHP hospitals and FHP doctors for its members, said it will sell its four hospitals and move its 500 doctors and 95 dentists into a newly created physician management company.
The new company, to be called Comprecare Medical Group, will operate 57 full-service clinics in five states and Guam. About 3,500 FHP nurses and other support staff also will move to the new company.
FHP said it hopes to sell the hospitals, including acute-care facilities in Fountain Valley and Salt Lake City, within the next year. Comprecare will operate the hospitals until they can be sold.
FHP also will lay off 500 administrative employees, or 3.6% of its 14,000-member work force. Nearly all of the layoffs, which include 80 headquarters employees, will occur this week, said Westcott W. Price III, the company’s president.
The changes will be costly. The company is taking a $75-million charge against earnings and said its net income over the next six months likely will be flat. The company had a $29.9-million profit over the same period last year.
The Comprecare company must win approval from the California Department of Corporations to start operations in the state. Price said he expects the OK by the end of the year. Comprecare also must be approved by officials in Utah, New Mexico, Nevada and Guam, but already is operating in Arizona.
While few of FHP’s 1.8 million members will notice much of a change, the reorganization marks a fundamental difference in the way the company will conduct its business.
It guts the so-called staff model that Dr. Robert Gumbiner helped to create when he founded the company in 1961. But his voice lately was the lone one at FHP to favor a company that owned everything from its pharmacies to its hospitals and used its own physician employees. Gumbiner, FHP’s longtime chairman, became chairman-emeritus two weeks ago and quit last week in frustration.
Like Kaiser Permanente, which also operates its own hospitals and clinics and uses doctors who work exclusively for the HMO, FHP is being squeezed in the highly competitive California health-care market.
Some industry experts see FHP’s changes as the wave of the future as HMOs become the latest part of the medical industry to face cost-cutting pressures.
“This is very different from what FHP’s mission, its corporate structure, has been,” said Peter Boland, a Berkeley health-care consultant. “This is a very bold strategy and is very much a future strategy. Will it work? Who knows? But it has enormous business potential.”
Stock analysts weren’t so sure, though. After the company’s announcement, Moody’s Investors Service, a bond rating agency, put $100 million of FHP notes due in 2003 under review for a possible downgrade.
“With the proliferation of many kinds of plans, the basic operations of FHP may continue to see difficulty in expanding,” said Dorothy Lee, a Moody’s senior analyst.
FHP stock fell 18.75 cents a share to close Tuesday at $23.3125 in Nasdaq trading.
FHP’s biggest concern, said analyst Mary C. O’Connell of Louis Nicoud Associates in New York, has been overcapacity--FHP doctors who aren’t seeing enough patients and facilities that aren’t being used enough by FHP members. She said she is not sure how much impact the company’s changes will have.
“One question is: How much more business can they get to flow through that delivery system to use the overcapacity that exists?” O’Connell said. “That’s still a fundamental problem, so they’re still at risk.”
The changes, however, are designed to utilize that overcapacity, Price said, by allowing non-FHP members to use the facilities, selling the hospitals and putting the doctors into a group that can treat both FHP members and other patients as well.
In addition, the company’s restructuring is expected to save $15 million a year. Its headquarters, spread through seven Orange County offices, will be centralized in Santa Ana after its Fountain Valley hospital-headquarters complex is sold.
Under its new organization, FHP will operate with a trimmed-down headquarters staff and three main lines of business: traditional life, health and workers’ compensation insurance; HMO services and Comprecare.
FHP will own 90% of Comprecare and its president, Jack Massimino, and other top executives and physicians will own the rest. As a stand-alone operation, Price said, Comprecare will have to seek money elsewhere to expand by turning to such possible financing options as debt securities, a public offering or a spin-off of certain shares to FHP shareholders.
Once it begins full operations, Comprecare will have 350,000 members and $350 million in revenue. Comprecare also will rank as one of the top three physician practice management companies--large groups of doctors offering a wide range of medical services under contract to hospitals, HMOs and the plethora of other health plans.
Such companies will be a growing force in health care because doctors still control essential health-care decisions, Boland said, despite the efforts of HMOs and other cost-cutting plans to exercise that control.
“The real power is the emergence of these large, multi-physician medical groups,” Boland said. “They will be the engine driving health care. What FHP is saying is that it’s going to be in the physician management business as its core product.”
The irony, he points out, is that FHP doctors, through Comprecare contracts with other organizations, could end up providing medical care to members of rival HMOs.
