Special E-Mail Bulletin #2
October 2000
Saying "NO" to a bad deal
Special E-Mail Bulletin
Hi, everyone.
Over the past couple of years I've written numerous times in my journal articles and on the website that it makes no sense to accept or keep a managed care contract that doesn't bring you a reasonable volume of financially profitable patients. Here's a recent item from Medical Data International (via the internet) describing a major health system that's saying "no" to a deal that no longer makes sense. It's worth reading and remembering that this is not rocket science. If you lose money per patient you can't make it up on volume.
Gil Weber
Prominent Indianapolis Hospital System Rejects Maxicare Indiana
Date: Thursday, October 26, 2000
Companies: Community Hospitals Indianapolis; Maxicare Health Plans, Inc.
Category: Managed Care NewsPerspectives
A MAJOR INDIANAPOLIS HEALTH SYSTEM SAYS IT NO LONGER WILL ACCEPT MAXICARE PATIENTS, WHICH COULD SPELL DOOM FOR THE FINANCIALLY STRUGGLING INSURER
By Michael Casey, Managed Care Analyst
Medical Data International
SUMMARY:
One of the largest hospital systems in Indianapolis announced in mid-October 2000 that it will not accept patients who receive their health insurance coverage through Maxicare Indiana, the largest HMO in the state, beginning January 1, 2001. Community Hospital Indianapolis and its group of 700 physicians are believed to be displeased over the low reimbursement fees paid by Maxicare, although no official reason was released. The four-hospital system is the latest in a growing number of providers nationwide that are going on the offense and no longer are willing to accept the low rates paid by insurers to treat patients.
SITUATION:
Community Hospitals Indianapolis (CHI), the third-largest health system in the Indianapolis Metropolitan Statistical Area (MSA), has decided to stop accepting Maxicare Indiana, the largest HMO in Indiana. The announcement was made October 19, 2000, three months after CHI first notified Maxicare that it would not be participating in its plan. The change takes effect January 1, 2001.
The decision made by CHI affects four acute care hospitals--three in Indianapolis and one in Anderson--as well as several metro outpatient clinics and the ProHealth Network, which comprises Community hospitals and about 200 primary care physicians and 500 specialists. In addition to its affiliation with ProHealth, CHI and most of the doctors are members of a California-based network called CCN Managed Care Inc., which so far has not severed its ties with Maxicare.
Established in 1973, Los Angeles-based Maxicare Health Plans, Inc. contracts with 500 acute care hospitals and 21,760 primary care physicians and specialists in both Indiana and California, providing managed care services to 452,000 enrollees. Maxicare appears to be making a comeback after struggling financially for years and being regarded as one of the weakest players in the HMO industry. The company posted first-quarter 2000 income of $50,000, compared to a $7.7 million loss over the same period in 1999, while its stock price rose more than six-fold during a two-month stretch over this past summer to nearly $5 a share.
ANALYSIS:
For the more than 20,000 Hoosiers who receive their health insurance coverage through Maxicare, the loss of services at Community Hospitals Indianapolis is a devastating blow. The health system is known locally for having many of the finest doctors in the state. In a recent survey, CHI was voted No. 17 on a list of Top 100 integrated health networks in the country--the only network listed in Indiana. And, in September 2000, CHI announced a partnership with local physicians to build the first and only freestanding heart hospital in the state on its northeast campus. The $60 million Indiana Heart Hospital is slated to open in late 2002.
Yet, while Maxicare has been operating in Indiana for nearly two decades, it should come as no surprise to local health experts that Community Hospitals has decided to separate itself from the struggling insurer.
The Community system originated with a single large facility on the city's east side and has expanded to include acute care hospitals at four sites in the Indianapolis region, as well as several urgent care centers and specialized clinics. Conversely, since 1998, Maxicare has been selling or closing its money-losing health plans in Wisconsin, Illinois, North Carolina, South Carolina and most recently Louisiana. Those five states have combined to lose nearly $20 million for Maxicare in the past two years.
In early 2000, Maxicare officials announced a strategic reorganization to improve its chances of turning a profit by year-end 2000 or 2001. In July, the company planned to cease offering its Medicare option HMO for seniors, called Max65plus, statewide in Indiana and in several counties of southern California, effective January 1, 2001. The pullout will effect approximately 6,100 members in the state of Indiana.
Maxicare derives 27% of its income from Medicare, but with the government cutting back on the premiums it pays for senior members, many investors have shied away from HMOs that rely heavily on Medicare. Yet, Medicare reimbursements account for 45% of Community Hospitals' revenue, so Maxicare's move to reduce Medicare coverage would have adversely affected the health system's annual revenues anyway.
Community Hospital officials are trying to reduce costs by $10 million to $15 million by the end of 2000, including offsetting Medicare revenue of between $8 million and $10 million combined in 1998 and 1999. It is projected to lose up to $5 million in 2000. Community also wants to standardize supplies across its four-hospital network and reduce labor costs. But unlike Maxicare, which is divesting itself of non-core operations and making huge cuts in services and labor, CHI is adding services to keep pace with demand.
With a work force of 7,500 full-time employees, Community has seen a 2.5% increase in inpatient volume and another 5% in outpatient visits. Community is investing heavily in new technologies and business innovations, including a new "shared services" structure, which puts several back-office functions such as finance, human resources, information technology, legal services and materials purchasing into a separate, not-for-profit subsidiary.
In a coup for Community Hospital South, CHI recently launched a new technology called "Smart View," available at only five hospitals across the country, with Community South the only one in Indiana. Smart View uses a CT scanner to take continuous pictures and display them on a computer screen in the scanner room during a procedure. For patients, this means that biopsies can be performed faster, increasing comfort and reducing the chance of complications. Another innovative service, the Center for Integrative Medicine, was launched in 1998 at CHI to provide alternative or holistic medicine.
Moreover, the addition of a world-class heart hospital in the growing northeast side of Indianapolis not only brings another revenue-generating facility to CHI but will make the system more valued among consumers.
While some may term Community's move to eliminate Maxicare from its network as "risky," CHI actually joins an increasing number of health systems nationwide that are refusing to buckle under recent payment terms of managed care organizations. National hospital companies with superior negotiating leverage, such as HCA--The Healthcare Company (Nashville), the nation's largest hospital chain, are taking a tough stance with HMOs and are willing to give up business, if necessary, rather than accept a bad deal.
In Florida, HCA (formerly Columbia/HCA) threatened to pull its 53 facilities from Humana's provider network until the HMO relented and agreed to increase fees through a new two-year contract signed in April 1999. More recently, HCA says it wants higher reimbursements and uniform statewide contracting from Blue Cross and Blue Shield of Florida for its Florida hospitals. HCA's contracts begin expiring in December 2000, meaning that if negotiations between the two fail, 2.7 million Floridians will be affected.
Just a week ago, a non-profit health system similar to CHI--the three-hospital St. Joseph's Health System in Orange County, CA--announced it will jettison 12 managed care plans over the next few months largely because it was losing $45 million a year on HMO contracts. This will affect as many as 150,000 patients who will be forced to switch doctors or change health plans. The insurer most affected by the action is PacifiCare of California, with some 114,000 members cared for by St. Joseph's 500 physicians.
PacifiCare, the nation's largest Medicare HMO, is facing a financial crisis of its own after seeing its stock drop more than 80% in the past five months.
LOOKING AHEAD
Maxicare officials say they hope to resolve the situation with Community Hospitals by the December 1 deadline, despite what health system officials maintain is their final decision. If Maxicare does lose CHI, it could be a significant blow to Maxicare's turnaround hopes, possibly signaling a deathblow to the struggling health insurer.
It is doubtful that Maxicare can grow significantly in either the southern California or Indianapolis markets. Southern California is an extremely competitive marketplace and HMOs have fallen out of disfavor with many consumers because of their lack of choice, continuing denials for treatment and low reimbursement payments to providers. And in Indiana, the 1999 formation of the HealthCare Group, comprised of four of the state's largest locally owned and operated managed care systems, likely will prevent Maxicare from becoming much larger than it is now.
One HMO that might profit from Maxicare's misfortune is HealthPoint, the state's first provider-sponsored HMO. HealthPoint was created in 1999 when Community teamed with several hospitals throughout Indiana. Each founding member of HealthPoint contributed $500,000 in start-up capital. The goal was to offer their own statewide HMO as a way to do battle against the lucrative contracts demanded by Indiana insurers. HealthPoint had hoped to offer a Medicare risk product in the near future.
Whether it does, remains to be seen. And if Maxicare loses CHI, it will be interesting to see if HealthPoint can accomplish its goal.
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