Wash. insurance commissioner gets tough with financially troubled doctor-run HMO
WA Dr.- Run HMO
October 31, 1997
Washington State’s insurance commissioner will oversee the managed care plan created by the Washington State Medical Association (WSMA) until the plan is "financially rehabilitated" and has built up its reserves to meet the state’s $1 million requirement. The cooperative agreement between Insurance Commissioner Deborah Senn and Unified Physicians of Washington (UPW) replaces an earlier court action, which allowed the commissioner to seize control of the plan and to take steps to place it in receivership.
The challenges facing Unified Physicians of Washington highlight the capitalization and administration hurdles faced by other plans in California, Florida, New Jersey and elsewhere that have been launched by physicians seeking more control over how they practice medicine.
In the case of UPW, state insurance commissioner Deborah Senn moved aggressively when she became concerned about the health plan’s solvency. "We wanted to be sure consumers were protected," said Jim Stevenson, spokesman for the commissioner’s office.
The commissioner issued a warning to UPW this summer to build up its reserves after they were determined to be inadequate. When, after three months, the plan’s financial condition worsened,
Ms. Senn’s office intervened.
UPW is now working to reorganize its management (its chief executive officer and chief financial officer have left), cut administrative expenses, and restructure its financial operations under the direct oversight of the Office of the Insurance Commissioner. UPW also is looking for a new partner and investor.
The company’s problems stem from a variety of sources, according to Thomas Curry, UPW’s interim director. He said start-up expenses and problems with
the way claims were handled by a third-party administrator, resulted in unanticipated costs of about $1 million in the first year. In a lawsuit against the TPA, Unified claimed that it did not provide information in a timely fashion when doctors ordered more tests and office visits than the industry average. Unified expects to receive a settlement of more than $3 million.The challenges facing Unified Physicians of Washington highlight the capitalization and administration hurdles faced by other physician-run plans.
As the plan tries to get more control over utilization, physicians will have less freedom than was originally intended. In a major change in policy, beginning in January, all scheduled surgeries and non-emergency hospital stays will have to be authorized by the plan on the basis of medically necessity instead of being left up to the discretion of the attending physician.
With claims exceeding premiums, Unified has been losing $325,000 a month on operations and is about $1.5 million in debt, company officials say. Last year, Unified lost about $5 million.
"The capital requirements are always more than you think," said Rob Levy, senior associate in the health care and group benefits division at William M. Mercer in Atlanta GA. "Most start-up businesses, whether HMO or otherwise lose money in the first couple of years...they don’t have the economy of scale of a large established organizations, they are buying new systems, hiring new staff and trying to establish credibility as an HMO," he said.
A market can change very quickly, said Mr. Curry of Unified. "Adequate capitalization is key because the ramp-up time is so long and markets change change quickly. These plans must be fleet of feet."
John Ramey, the outgoing CEO of California Advantage, a physician-run HMO backed by the California Medical Association that has had difficulties of its own, said raising capital is the one hurdle all of these plans have in common.
Physician HealthCare Plan, the first MD-directed HMO in New Jersey, recently sold out to Blue Cross/Blue Shield of New Jersey, because it lacked the financial resources to compete. PHP tried to grow too fast and was undercapitalized for its market, several health-care analysts said. The Department of Insurance was starting to raise questions as to whether they could continue operation without becoming insolvent. Joseph Billotti, MD, who chaired PHP’s board and was one of its founders, said the company was having difficulty being a viable player in the marketplace without a partner.
No doubt, largely because of concerns about its finances, Unified also has lost its biggest clients. The Medical Assistance Administration recently rejected Unified’s bid to renew its Medicaid contract, Healthy Options, which covers 35,000 enrollees and accounted for more than 70% of the company’s revenues. A year ago Unified officials said that the Medicaid contract enabled the plan to grow more slowly in the commercial market.
At the same time, the Health Care Authority (HCA) rejected Unified Physicians’ bid for a contract to care for 2,000 low-income residents enrolled in the Basic Health Plan, an insurance subsidy program. The HCA won’t say why it spurned Unified’s request, but financial status is one of the key factors on which contracts are awarded.
That leaves Unified with only some 4,500 enrollees, but Mr. Curry, a WSMA board member who has taken a temporary leave of absence from his job as executive director of the association to oversee Unified, said he isn’t discouraged. "Our strategy all along was to increase the commercial product and move away from Healthy Options, which is a low-margin business. Events simply accelerated that process," he said. He said that Unified expects to add 15,000 commercial enrollees by year’s end.
UPW is facing yet another problem: Starting Jan. 1, 1998 health insurance companies in the state will need to keep $1.5 million in reserves from $1 million currently. The required reserves will climb to $2.25 million in 1999 and $3 million in 2000.
Unified said it can meet those requirements but the company has to raise a significant amount of capital to keep that promise. Unified was started in 1994 with a $7 million infusion of capital from more than 2,000 state physicians and physician assistants. It’s doubtful that more physicians will kick in funds, however. Earlier this year, Unified officials tried to raise $1 million in a stock offering to state physicians, osteopaths, and physician assistants. But, by early September, the company had raised only about $26,000. The company is looking for a new partner who would be willing to invest in the company.
About 5,550 doctors in the state are providers for Unified. The company got its insurance license in 1995, and since 1996, has been marketing a preferred provider organization, a point-of-service product, and a closed-panel HMO option.
Oversight by commissioner
Ms. Senn said she is satisfied that the company, with the help of her office, has drawn up a plan for raising the $1 million net worth requirement called for under state law. Ms. Senn’s office will be overseeing Unified’s effort until it is satisfied with its financial rehabilitation. Although regulators need to be vigorous in ensuring these plans stay solvent, Ms. Senn said her office’s aggressive intervention should not be viewed negatively. These plans can help enhance competition and choices for the consumers, she said. "I truly want to see them succeed."
This is the second time that the state insurance commissioner has assumed control of a health care plan. In 1994, the Office of the Insurance Commissioner became the receiver for Bellevue-based Pacific Association HealthCare.
— Janet Firshein
Contact Mr. Stevenson at 360-586-4422.
Wash. insurance commissioner gets tough with financially troubled doctor-run HMO
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