Attack of the PPO.

Baptist and USAble Call HMO Cease-Fire to Launch a "Preferred" Health Care Plan

JUST WHEN WE ALL understood the meaning of "HMO," here comes another alphabetical entry for the Arkansas health insurance glossary.

Personnel managers, you might want to write this down:

The letters "PPO" stand for "preferred provider organization" -- not to be confused with "health maintenance organization" (HMO), which is a horse of a different color.

Soon, PPO also will be synonymous here with USAble Corp. and the Baptist Medical System, powerful partners in a new, as-yet-unnamed PPO that is sure to energize the state's health coverage business.

The PPO concept bands together a network of regional hospitals--anchored by Baptist Medical Center--along with a statewide panel of doctors.

The point of the venture is to provide physician choice for people who don't feel comfortable with the restrictions of an HMO. You decide: save money on the "preferred" doctors, or pay a little more for someone outside the system.

This development is especially noteworthy because it represents a partnership between two competing interests in the state's managed care industry.

Baptist administers the state's most successful HMO, called Health Advantage, and funnels all hospital services in the plan through its two hospitals in Pulaski County.

With more than 22,000 members at the beginning of 1992, Health Advantage is in direct competition with HMO Arkansas, a similar but less popular plan. HMO Arkansas has just more than 16,000 members administered by USAble with St. Vincent Infirmary Medical Center in Little Rock as the exclusive hospital.

The two plans have hammered it out since 1985, so one might think there would be some professional animosity between the companies. But there's no sign of bad blood here -- only the scent of opportunity.

"There are a limited number of employers who will accept the HMO concept," says Russ Harrington, president of Baptist Medical System.

"Pro-competition initiatives that began back in the mid-'80s are beginning to come to maturation," says Bob Shoptaw, executive vice president and chief operating officer of Arkansas Blue Cross and Blue Shield, the parent company of USAble.

Both men are optimistic that the new PPO won't cut into the profits of the two existing HMOs. Instead, they hope it will find a totally new managed care market, currently dominated by standard health plans.

To a layman, the distinctions between the HMO and PPO can seem obscure.

Essentially, an HMO revolves around a large panel of doctors, including general practitioners and specialists, affiliated with one or more hospitals.

In most cases, the traditional family doctors serve as "gatekeepers." They are the initial point of contact. Patients may not see any medical specialists without first being referred by the gatekeeper.

These gatekeepers are paid only a set fee by the HMO -- $8-$15 per month -- for every patient who lists that doctor as his or her primary care physician upon joining.

Typically, about 20 percent of that fee is withheld by the HMO until the end of the fiscal year. If the HMO makes money that year, the doctors get back the withholding.

HMOs please many employees because they can visit their doctors for only $10. A similar arrangement is made for prescriptions.

The low fees for doctor visits encourage many members to seek preventative care, rather than waiting until they are mired in sickness to see their doctor.

But the doctors' fee caps may provide a strong disincentive for providing the kind of quality care the members are looking for.

"I think HMOs are a poor way for medicine to be practiced in this area," says a Little Rock doctor of internal medicine, who asked that his name be withheld.

"Physicians who participate in primary care are encouraged not to do thorough diagnostic reviews of new patients," he says. "The incentive is to do as little as possible. In fact, the incentive is to not see the patient at all. You are considered a money-maker if you don't see any of the patients in the Health Advantage system."

The doctor holds stock in Health Advantage, but he recently dropped out of the HMO's gatekeeper list because of his misgivings.

"It doesn't even pay my costs to see those patients," he says. "They turn out to be the kind of patients who want to be seen more frequently, because they realize they are getting a hell of a deal.

"It simply isn't worth it."

Doctors Have Misgivings

The doctor plans to remain as a specialist in the plan because 90 percent of his standard fees are paid when he receives specialist referrals under the HMO.

Dr. Jack T. Fendley of the Arkansas Internal Medicine Clinic in North Little Rock participates in Health Advantage, but he will not accept any new patients who are covered by the plan.

"The reimbursement is low enough that if your practice is all HMO, you are at their mercy when they change ... what they pay for," he says.

Fendley sees a good side to HMOs, but potential trouble as well.

"I do think that the medical care provided by the HMO is pretty good in our area," Fendley says. "But I do think it does put the health care provider in a position that the patient is more dependent on his ethics."

Some doctors say the only reason they joined an HMO was to retain their clients who are on the plan.

PPOs differ in several ways.

For starters, doctors receive no set fees. They are paid only when they provide services, in amounts slightly less than their standard medical fees.

There is still a panel of doctors to choose from, but a PPO allows patients to go outside the panel at the risk of paying more. In the new USAble PPO, the cost difference is 15-20 percent.

And the greatest difference: a network of hospitals.

The new PPO will use the Baptist system as its primary hospital base but expand beyond Pulaski County by creating a scattered network of regional hospitals. Referrals for major medical procedures would be made to Baptist Medical Center.

The new PPO will cost slightly less in premiums than the existing HMOs, but it will require more out-of-pocket expenses for patients, with traditional deductibles of about $300.

USAble is working feverishly to set up a network of 10-12 hospitals and to enlist physicians around the state for its "blue book." But it's early in the game, and no hospitals have come on board.

No one wants to predict how successful the new PPO could be, but the organization will require far less capital on the front end than did the HMOs.

Historically, HMO operations in Arkansas are only marginally profitable, if they make money at all.

Razor-Thin Margins

For example, HMO Arkansas busted into the black just last year with net income of only $2,017. On a monthly basis, that amounts to one penny of profit per patient.

Health Advantage did much better, posting its second profitable year with net income of $924,097. The HMO collected more than $22 million in premiums that year, compared to about $19 million for HMO Arkansas.

The growth pattern appears headed solidly in Baptist's direction.

The number of members enrolled in Health Advantage jumped 70 percent to 23,489 from 1989-91, as HMO Arkansas' enrollment sank 16 percent to 16,396.

Shoptaw attributes much of the numerical decline to reduced operations in Fort Smith and the decision in 1989 to make St. Vincent the exclusive hospital of HMO Arkansas.

When that occurred, a horde of doctors who did not have St. Vincent credentials were dropped from the plan, he says. Many of their patients went with them.

The number of physicians participating in HMO Arkansas fell from 1,033 at the end of 1988 to 692 at year-end 1989.

National trends show HMOs consolidating and becoming more open-ended, with the biggest HMOs becoming even bigger.

Harrington concedes that it really takes 35,000-40,000 members to run an efficient HMO. He is not sure if Health Advantage can make it to that level before industry trends level out growth.

Would a merger between Health Advantage and HMO Arkansas be a prudent move?

"I'd say it's not out of the question, but we're not working on that yet," says Harrington.

If the HMO market is about to flatten out, why is there a rush on for out-of-state HMOs to set up shop in Arkansas?

Complete Health of Arkansas, owned by a Birmingham, Ala., company, leaped into the fray this year by grabbing the Dillard Department Stores Inc. accounts in central Arkansas.

Since then, the company has been picking up clients steadily. It now stands at 2,100 members.

The company is licensed in Pulaski County and six other surrounding counties. Plans are to set up a statewide network.

Complete Health is affiliated with Doctors Hospital, Arkansas Children's Hospital, Rebsamen Regional Medical Center and University Hospital in Pulaski County. It has contracts with other hospitals in Saline, Pulaski, Faulkner and Sebastian counties.

The company's rapid growth has it ranked 85th this year in Inc.'s list of the fastest-growing companies in the country.

On at least one occasion, Complete Health has offered unsuccessfully to buy Health Advantage.

American HMO, based in Illinois, also has a presence in the state's managed care market. But it was stung by the recent loss of the Pulaski County employees contract after allegations that many claims went unpaid.

On the horizon for the new year is an HMO being put together in Arkansas by The Prudential Insurance Co.

Prudential is already on the attack, stealing away former HMO clients with its Prudential Plus plan, which combines popular elements of HMOs, PPOs and traditional health plans.

Thomas Feurig, chief executive officer of St. Vincent, says there are at least 24 entities seeking a place in the Arkansas managed care market.

"It's going to intensify dramatically," he says. "I would expect there are going to be three to four significant HMOs in the next few years."

St. Vincent's contract with HMO Arkansas expires in a year. Feurig has no predictions for what comes next, but he believes his hospital will be well-positioned, due in part to its existing, 21,000-member PPO involving other hospitals across the state.

With health plans popping out of the woodwork, it will be interesting to see which ideas sink and which float as the Bill Clinton administration floods the industry with regulations.

But that is next week's story.