When regulators seized WATTSHealth Foundation Inc. last month, it was the second HMO the state had moved against since May when it took control of Maxicare Health Plans Inc.
In both cases, regulators with the Department of Managed Health Care cited acute solvency problems and a need to protect the public in appointing conservators to oversee operations of the locally-based health plans.
But while both plans faced the kinds of stresses the managed care industry is grappling with statewide including rising costs, stiff competition and providers’ demands for greater reimbursements that’s about where the similarities end.
Maxicare, a publicly traded for-profit that once operated nationwide, was a shell of its former self when it was seized May 25 with some 250,000 members, but still remained a player, if a bit one, statewide.
WATTSHealth Foundation, which did business as UHP Healthcare, was a unique local non-profit, with some 100,000 members, the vast majority of which were in its Medi-Cal line. Intrinsic to its operations were an assortment of community health programs, including clinics that served the uninsured that were partially dependent on funding from the health plan.
“I would say it’s a volatile situation for the managed care industry overall, but (the two HMOs) are very different animals,” said Daniel Zingale, director of the state’s managed health care agency.
Prior bankruptcy
Maxicare is an object lesson in how failing to keep pace with the rapidly changing healthcare industry can spell doom for even a profitable company.
Its California subsidiary declared bankruptcy just hours after the state seized its parent and is now operating under U.S. Bankruptcy Court protection,
The company had been in trouble before, declaring bankruptcy in 1989 after a failed attempt to aggressively expand nationwide. Even after it restructured and pulled back, it was still a big player in the California market. Another subsidiary was the largest managed care insurer in Indiana.
But during the past decade, it failed to find a partner as other insurers consolidated. Moreover, profitable but small operations it retained in Wisconsin, Illinois, Louisiana and the Carolinas after its bankruptcy began losing money when market pressure shrunk premiums nationwide in the mid 1990s. The company decided on an exit strategy, but not before losing millions, said Greg Crawford, a health care analyst with Fox-Pitt Kelton.
At the same time, provider groups rebelled against full-risk, capitated contracts that ensured them fixed payments per member but made them responsible for ensuring that the costs of care did not outstrip that revenue, said Susan Blais, the chief operating officer of Maxicare, who was brought in to help turn the company around in 2000.
Those types of contracts, which required actuarial expertise the groups did not possess, were one of the reasons over 100 providers groups failed in California over the last few years.
The groups demanded changes that would shift the risk burden when a patient was hospitalized to the insurer, so-called “shared risk” contracts. However, Maxicare had antiquated information technology and a lack of personnel to properly manage that risk, and tried to stay with full-risk contracts as long as it could, Blais said.
A year ago Blais and the new management team committed the insurer to a seven-year $70 million information-system upgrade that would provide the kind of immediate and reliable information to manage such contracts.
However, earlier this year, a large provider group in Indiana failed, leaving Maxicare’s subsidary there responsible for huge claims. It turned out to be the falling domino that took out the entire company.
The company was bleeding cash by the time it was seized, posting a net loss of $18.4 million in the first quarter ending March 31. As of June 30, it reported assets of $74.9 million, and liabilities of $91 million.
Maxicare, which is managing its existing membership in bankruptcy court, is being sold off piecemeal. Last month it sold its L.A. County Medi-Cal contract to another insurer for $15 million.
WATTSHealth is not being sold off. Rather, the state has ordered it to be restructured into two separate entities, so it can continue offering both its managed care products and its health programs.
State regulators say the combination of these two services into one organization is one of the reasons the organization got into financial trouble, falling behind on a growing number of claims payments.
The company was using the revenues generated by its insurance arm to relieve a cash crunch caused by a delay and lack of government reimbursements for its indigent and other health care operations, said Frank Stevens, the state-appointed conservator.
“This organization is delivering a very unique set of services for a community and often times the grant funding is not covering the level of expenses,” he said.
The challenge now is for WATTSHealth to find new sources of income for its dozens of community programs, now that it can no longer subsidize them with the HMO revenue.
WATTSHealth also was pinched by higher-than-expected claims in its small groups operations serving individuals and small businesses, as well as rising pharmaceutical costs in its Medicare product, he said.
Dr. Clyde Oden, president and chief executive of the foundation, said the HMO was also hit hard by “aggressive pricing practices” of hospitals, which have found ways to raise rates not covered under contract.
