Health Care Pioneer FHP to Change Direction in Major Restructuring
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 people who aren’t part of its health maintenance organization.
The Fountain Valley company, a pioneer HMO that provided its members with FHP hospitals and FHP doctors, 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, would operate 57 full-service clinics in five states and Guam. About 3,500 FHP nurses and other support staff people would also move to the new company, and Comprecare would operate the hospitals until they can be sold, which FHP hopes to do within the next year.
FHP would also lay off 500 administrative employees, or 3.6% of its 14,000-member work force. Nearly all the layoffs, which include 80 headquarters employees, would occur this week, said Westcott W. Price III, the company’s president.
The changes would be costly. The company is taking a $75-million charge against earnings and said its net income over the next six months will probably be flat, contrasted with last year’s $29.9-million profit over the same period.
Comprecare must await approval of the California Department of Corporations before it can start operations here. Price said it hopes to gain necessary approvals by California and other states so it can begin business Jan. 1. FHP also has members in Arizona, Utah, New Mexico, Nevada and Guam.
While few of FHP’s 1.8 million members would notice much of a change, the reorganization marks a fundamental difference in the way the company will conduct its business.
It would gut the so-called staff model that Dr. Robert Gumbiner helped create when he founded the company in 1961. But his voice at FHP lately was the lone one favoring a company owning everything from its pharmacies to its hospitals and using 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 has been 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. 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 Tuesday to close 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 that the company’s changes would do much.
“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 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.
Once it began full operations, Comprecare would have 350,000 members and $350 million in revenue. It would 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.
“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 pointed out, is that FHP doctors, through Comprecare contracts with other organizations, could end up providing medical care to members of rival HMOs.
