Harvard Pilgrim Health Care Inc.--which was recently placed under state supervision in Massachusetts--is the latest example of an HMO failing as a result of overly aggressive expansion strategies that were not supported by adequate pricing or capitalization.
Massachusetts placed Harvard Pilgrim Health Care under state receivership Jan. 4 when the company reported that its 1999 loss estimate was 77% larger than previously projected.
Massachusetts has a managed-care penetration of nearly 40%, and the market is dominated by Harvard Pilgrim, Tufts Health Plan of New England Inc. and Blue Cross/Blue Shield.
Massachusetts' Supreme Judicial Court issued the receivership ruling, fearing that Harvard Pilgrim's cash reserves were insufficient to protect patients. Harvard Pilgrim announced that it expects to post year-end 1999 losses of more than $177 million, up from the $100 million originally expected. Based on these events, A.M. Best Co. downgraded its prior Vulnerable rating on Harvard Pilgrim to E (Under Regulatory Supervision).
Harvard Pilgrim's move into receivership is the result of an overly aggressive expansion strategy that was not adequately capitalized to support its growth. The Massachusetts Hospital Association estimates that Harvard Pilgrim owes state hospitals $312 million.
The largest HMO in the state, Harvard Pilgrim, currently has about 1 million members, approximately 45% of the Massachusetts' HMO population. In recent years, its membership nearly doubled, from 464,000 members in 1994 to 892,000 in 1999.
Elsewhere in the region, Tufts Health Plan of New England is currently being liquidated, after being placed under state receivership Nov. 22. Both Harvard Pilgrim and Tufts tried to expand outside of state borders. But with rates too low to keep up with medical cost inflation and limited capital, they were overextended and folded back into single-state HMOs within weeks of each other.
An additional factor in the Harvard Pilgrim and Tufts crises was their significant enrollment growth. Harvard Pilgrim had an 18% annual enrollment growth rate over the past four years, and Tufts' was 26.6%. The national enrollment growth rate was 12.5% for the same period.
Not Just a Local Event
Nationally, 16 HMOs failed in 1999. This is more than in the past four years combined and a 78% increase from the nine failures in 1998. Poor management and a lack of equilibrium between pricing and medical-cost inflation, combined with weak capital bases, caused many of these failures.
Based on publicly available information, there is a strong indication that Massachusetts will work with Harvard Pilgrim to correct the situation. In December, the state said it would float $147 million in bonds to buy Harvard Pilgrim's eight medical centers through a nonprofit affiliate, Civic Investments.
In early February, Boston newspapers reported that Harvard University is one of 13 potential investors interested in the health plan. But even as it presented its rescue plan, the state warned that liquidation or sale to a for-profit HMO still were possibilities.
If Harvard Pilgrim is forced to liquidate, Massachusetts faces a serious crisis, as no local HMO can handle a rollover of nearly 1 million members.
The overall financial outlook for HMOs is guarded right now. HMOs will need to get pricing in line quickly to recover losses and become profitable. With rate increases spread over 12-month periods, it will be increasingly important for HMOs to predict proper rates, allowing prices to catch up in the inflationary medical-care environment.
The HMO market in Massachusetts is definitely contracting. But there are still a significant number of new entrants nationally that are better capitalized with more competitive rates. Unfortunately, the number of companies able to offer multistate products is decreasing nationally
Profitability: Harvard Pilgrim vs. all HMOs Year Harvard Pilgrim National 1994 +$120 million +$3.0 billion 1998 -$34 million -$1.2 billion 353% decrease 250% decrease Harvard Pilgrim is expected to post a $177 million loss for year-end 1999.
HMOs Placed Under State Supervision in 1999
Health Power Inc.
MedFirst Health Plans of Louisiana
Suburban Health Plan
American Preferred Provider Plan
Comprehensive Health Services of Texas Inc.
WellChoice Health Plan
HIP Health Plan of New Jersey
HIP Health Plan of Pennsylvania
Select Health of South Carolina Inc.
Xantus Healthplan of Tennessee Inc.
Community Health Plan
Wellcare of Connecticut
Certus Healthcare LLC
NorthMed HMO Inc.
Greater Pacific HMO Inc.
MedPartners Provider Network Inc.
Patients Choice Inc.
Harvard Pilgrim Health Care, New England
Owensboro Com. Health Plan HMO Inc.
Premier Healthcare Inc.
Tufts Health Plan of New England
Sunstar Health Plan Inc.
HMO Failures Point to Lack of Guaranty Funds
New Jersey, which does not have a guaranty fund for health maintenance organizations, is engaged in a spirited debate about how doctors and hospitals should be paid for services following the failure of two HMOs. HIP Health Plan of New Jersey went belly-up about nine months ago, while American Preferred Provider Plan went bankrupt more than a year ago. They left an estimated $150 million in unpaid bills.
Only a handful of states have HMO guaranty funds, which are created by state law to make good on unpaid claims when HMOs become insolvent. They are financed with contributions from insurers operating in the state.
New Jersey state legislators are debating Assembly Bill 1890, a bailout plan backed by Gov. Christine Whitman, in which the estimated liability would be shared equally by taxpayers, existing HMOs and health-care providers who are owed the money. The health insurance industry opposes the bailout while the health-care industry supports it. The alternative would be for the health-care providers to seek payment in bankruptcy court.
Having been voted out of the Assembly Banking and Insurance Committee, the bill still must clear several legislative hurdles.
The issue of who pays for insolvent HMOs is a pertinent one in the United States. Last year, 16 plans failed, up from nine in 1998 and more than in the previous four years combined. Eight other HMOs were placed under state supervision last year but remained in business.
HIP was the largest HMO in New Jersey, with about 165,000 members. Harvard Pilgrim Health Care, the largest HMO in Massachusetts, with about 1 million members, is in state receivership.
Guaranty funds for HMOs are so few because HMOs are designed differently than traditional health plans, said Vern Rowen of the Health Insurance Association of America, Washington, D.C. Guaranty funds are designed to protect the plan member or policyholder. When a traditional indemnity health plan becomes insolvent, a fund protects enrollees from the claims of providers, Rowen said.
Members of HMOs are not subject to that liability. If an HMO fails, enrollees are not on the hook for any claims. Instead, Rowen said, the risks--and the rewards--are shared by the health plan and health-care providers.
The intended model for risk sharing is that doctors, hospitals and insurers would work together to reduce unnecessary health-care costs, said Gary S. Carter, president of the New Jersey Hospital Association, who supports the HIP bailout. But risk sharing doesn't exist in New Jersey, Carter said, because health insurers set prices, and hospitals and doctors "can take it or leave it."
"HMOs believe that if they go under, we should stand in line in bankruptcy court," he said. "But in New Jersey, we have to treat everybody who presents themselves, even as losses mount and bottom lines diminish."
Carter sees a guaranty fund as a safeguard that state regulators can use to keep the system working. "With HIP, the state aggressively moved to fix the problem, but it steamrolled out of control. A guaranty fund establishes a floor," he said.
The hospital association figures that premiums might increase about one-third of 1% if HMOs pay the $50 million the bailout bill would require.
Six states have some mechanism for dealing with claims after an HMO becomes insolvent, but they are not like traditional life/health guaranty funds and don't necessarily pay provider claims, Rowen said. Some only assess remaining HMOs in a market to cover the state's cost of finding a replacement insurer for plan members, he said.
Illinois' HMO guaranty fund is the closest in design to a traditional fund, but it doesn't pay all provider claims. Rowen said that fund pays only for providers who are not part of a health plan's network.
In New Jersey, the HIP plan technically did not fail Rowen said. Instead, it was an intermediary group that became insolvent. That group had been paid by the health plan, but failed to pass along payments to providers with whom they had contracted. "The legislators are now trying to find a way to pay those providers," Rowen said. "That would cost consumers. They paid their premiums already. In other businesses, those suppliers wouldn't have a bailout from the taxpayers."
Paul R. Langevin Jr., president of the New Jersey Association of Health Plans, testified against the bill.
"It proposes moving hospitals and doctors under contract to these two health plans from a position of unsecured creditor to a position of secured creditor in a bankruptcy at a cost to New Jersey taxpayers and purchasers of health coverage of $100 million, all without the benefit of a certified audit of the debt," he said.