Experimental Setback

For more than a decade, Sam Ervin has struggled to ensure that his modest experiment in health care--a program to keep people out of nursing homes for as long as possible--would survive in the rough-and-tumble managed-care industry.

While SCAN Health Plan, the small, not-for-profit HMO that Ervin heads, has certainly survived, it has not flourished. And when Ervin tried to jump-start his company’s growth recently by converting it to for-profit status, state regulators objected.

So SCAN, based in Long Beach, has temporarily shelved its attempted conversion. Ervin, SCAN’s chief executive, says the company is considering whether to submit a new proposal to the state.

SCAN is a unique type of HMO for Southern California Medicare recipients that, in addition to regular Medicare benefits, provides long-term care services for disabled or chronically ill patients. It is one of four original “social HMOs” authorized by Congress in 1982 as an experiment to see how the frail elderly would benefit from access to a broader range of social services.

“We think of ourselves as the most comprehensive health plan available,” says Ervin. “We make every effort to keep people in their own homes and out of nursing homes as long as possible.”

While the plan serves all types of Medicare recipients, it specializes in “those people who have difficulty performing some of the activities of daily living, the people other health plans don’t want to enroll,” notes SCAN Vice President Stuart Byer.

SCAN’s 13,000 Medicare members get all the benefits of regular Medicare HMO members--physician care, hospitalization, prescription drugs--plus long-term care services not offered under regular Medicare or Medigap policies.

Those extra services include skilled nursing home and home health services, as well as social services such as adult day care, home-delivered meals and free transportation to medical appointments--tasks that would otherwise fall on family or friends.

While SCAN officials believe that their program’s extra benefits give it an edge over regular HMOs that serve Medicare recipients, the plan’s growth has been hampered by federal limits on expansion of social HMOs.

Until two years ago, SCAN’s membership was not allowed to exceed 7,500 members. Its growth picked up after federal approval to expand its operations in Los Angeles and Orange counties and, last year, to begin enrolling members in Riverside and San Bernardino counties.

Though SCAN has been in business since 1984, it is relatively unknown among the public. The plan has no billboards and does little advertising. Its marketing efforts are dwarfed by much-bigger rivals, such as Cypress-based PacifiCare Health Systems, the nation’s biggest Medicare HMO.

SCAN had hoped that switching to for-profit status would help it remain independent at a time when other HMOs are being swallowed up in mergers, Ervin says. It hoped to raise capital to bolster advertising and expand its physician network.

But SCAN’s plan ran into trouble after the California Department of Corporations raised numerous questions about its proposal--the first under a new state law that sets rules for nonprofit HMOs seeking to switch to for-profit status. In particular, state regulators questioned SCAN’s proposal for setting up a health-care charity as required by the new law and the future market viability of a small, specialty HMO.

Ervin says SCAN’s directors decided to suspend the conversion plan after deciding that the company couldn’t respond quickly enough to regulators’ concerns.

“It’s not impossible for us to remain a nonprofit, and that’s one of our options,” Ervin insists. “But we were converting for a reason, and those reasons still have merit.”