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The HMO blastoff.

Arkansas Health Maintenance Organizations Kick In the Afterburner for Market Penetration

THE MANAGED HEALTH care business in Arkansas is about to rocket into orbit.

Last week, the state's two largest health maintenance organizations -- Health Advantage and HMO Arkansas -- announced plans to merge into a juggernaut of 47,000 enrollees, 600 physicians and 17 participating hospitals in central and western Arkansas.

With the stroke of a pen, the merger will give the new Health Advantage a two-thirds share in the state's HMO market. A lead like that would seem insurmountable.

But it's not. With President Clinton emphasizing HMOs in his proposed health security plan, the market is likely to experience frenzied exponential growth over the next few years, spreading into more rural areas and giving at least three other companies a shot to capture hundreds of thousands of new HMO customers in the state.

"The title of the story should be 'The Race for the State,'" says Rob Herndon, an account executive for Complete Health Care of Arkansas Inc. who is watching the battle develop from the trenches.

In the end, Health Advantage might need every stride of its head start to stay in the race against national insurance companies.

The Prudential Insurance Co. was authorized in June to launch an HMO, and a company spokesman already projects it will capture 15,000 enrollees in its first year and 75,000 by 1997.

Complete Health, a subsidiary of Birmingham, Ala.-based Complete Health Corp., is making inroads with its HMO. Starting from scratch in 1992, Complete now has about 6,400 members and is shooting for 11,500 by Jan. 1.

And St. Vincent Infirmary Medical Center is joining with HealthSource Inc. of New Hampshire to form a new HMO called St. Vincent HealthSource, headed by the well-traveled Bill Bowen -- lawyer, banker, and one-time chief of staff to then-Gov. Bill Clinton.

Battle of Two Hospitals

Health Advantage is currently run by the Baptist Medical System, and HMO Arkansas is administered by USAble, a wholly owned subsidiary of Arkansas Blue Cross and Blue Shield. Through the end of the year, HMO Arkansas is using Baptist competitor St. Vincent Infirmary Medical Center as its flagship hospital. If the merger is approved, Baptist Medical Center will be the focal point of medical care in the HMO and USAble will run the sales operation, leaving St. Vincent to go its own way.

"I think it was just a natural parting of the ways," says Bob Shoptaw, president and chief operating officer of Blue Cross, in explaining the split with St. Vincent. "Our strategy is a little more statewide."

The new Health Advantage will be half-owned by USAble. Twenty-five percent will be owned by the Baptist Medical System, and the remaining 25 percent interest will belong to a group of Health Advantage physicians.

It became clear that something was brewing between Baptist and USAble in late 1992 when the two HMO competitors laid down their swords to cooperate on a new preferred provider organization (PPO) called Arkansas' FirstSource.

Neither of the two merging HMOs were setting the world on fire, but the Baptist plan had significantly outpaced the USAble offering for several years.

As it stands right now, HMO Arkansas TABULAR DATA OMITTED has about 19,000 enrollees. The company had its second straight profitable year in 1992, but its net income of $14,022 amounts to only 75 cents per enrollee, and the profit is insignificant compared to the HMO's $23.02 million in revenues. However, having repaid subsidies from Blue Cross, HMO Arkansas claims it will break through this year with a projected net income of $1.5 million.

Health Advantage is holding steady with about 28,000 enrollees, having turned a 1992 profit of $675,634, or a relatively impressive $25.10 per enrollee. The HMO reported $28.8 million in revenues for 1992.

In light of those modest figures, it is mind-blowing to consider that the new Health Advantage intends to generate $250 million in revenues and to sign up 150,000 people by 1998. That would be a five-fold increase in revenues, supported by only a three-fold rise in membership.

Most of the entrants in Arkansas' HMO contest were in the game long before President Clinton announced his plans for health care reform. But now that he has spoken, the managed care industry is wiggling with anticipation.

A Defining Moment

An HMO is an organization designed to hold down health insurance costs by restricting its coverage network to hospitals with which low per diem rates have been negotiated, and to physicians who accept annual per-patient "capitation" fees to perform covered services. To this point, only 3 percent of the state's 2.4 million residents belong to HMOs.

But Clinton wants to require employers to offer an HMO as part of their menu of health insurance options.

Bingo.

Prudential, backed by the strength of its well-known national organization and more than 4 million managed care members, is guaranteed to be a major player in the Arkansas market.

The company just initiated its HMO in Arkansas, but since 1987 Prudential has operated a successful central Arkansas "point-of-service" plan -- essentially a more open-ended HMO -- called Prudential Plus, which has attracted 215 companies and 30,000 enrollees.

Norine Yukon, executive director of Prudential Health Care Plans of Arkansas, says her sales staff will be offering the new HMO as a less-expensive, more restrictive option to existing clients. She also projects that roughly 15,000 new customers will come on board with the HMO in its first year.

"We kind of like to think of ourselves as one-stop shopping," Yukon says.

"We have a lot of national accounts that Prudential sells across the country. Sears is a national account of ours, for example. They may become a customer."

The new Prudential HMO will be affiliated with St. Vincent, unlike Prudential Plus, which uses Baptist Medical Center.

"The other thing that really distinguishes us is the portability," Yukon says. Prudential enrollees can receive covered care all across the country through its large system of participating physicians and hospitals.

Right now, the Prudential HMO is licensed to operate only in Pulaski, Saline, Lonoke and Faulkner counties, but the company has plans to expand into Jefferson, Garland and White counties.

The expansion of Health Advantage will not harm Prudential's competitiveness, Yukon says, because company surveys indicate Prudential has an outstanding record of customer satisfaction.

"Our lapse rate is lower than 1 percent," she says, "and our turnover rate for physicians is about 3 percent."

Complete Health is another company that relies on a large, out-of-state system to control its costs.

"You have to spread those expenses over a larger number of people," says Jim Denman, company chief executive officer. "We need to learn from the Wal-Marts of the world. We too can live on margins that thin."

Imports Flood Market

The company operates in Arkansas, Louisiana, Mississippi, Tennessee, Georgia, Florida and Alabama, and claims to be the largest independent managed care company in the Southeast, with 250,000 HMO members. Complete Health has been established in Arkansas since 1990 but didn't generate any revenues from its HMO until 1992.

That year, the company garnered 2,215 enrollees in Arkansas and suffered a net loss of more than $158,000. The tide has turned, however.

The company reportedly became profitable this year at the point when it reached 4,000 enrollees. Now, Complete's tally has risen to more than 6,400 enrollees, and the company is as ambitious as any competitor in the market.

Complete is still small, but it has the largest geographic coverage area in the state, serving 19 counties. The company is shooting for 43 counties by the end of the first quarter of 1994 and plans to open a separate office in northwest Arkansas during the same quarter. Complete also has the largest physician panel in the state, with 900 medical professionals.

Denman says his company's strict focus on the HMO concept sets it apart from the competition.

"Many of our competitors embrace the Preferred Provider Organization |PPO~ concept," he says. "Complete Health feels that HMOs work for the purchaser, and, if done well, they can work for the provider. PPOs work well for the provider and they don't work for the buyer."

PPO plans, offered by USAble, Prudential and St. Vincent HealthSource, are a more liberal alternative to HMOs that allow consumers to go out of the approved physician panel or use another hospital at the risk of paying more money for their health care. Having a PPO and HMO together in a package is often enticing to employers who want to offer a selection to their workers. Denman says there is huge potential for expansion in Arkansas' HMO market. "If in two years we have federal reform, I'd be hard-pressed to think of many people who won't be in a managed care program in five years. We feel in five years we could be serving several hundred thousand people."

Complete Health has established a network of 14 hospitals in Arkansas so far, including St. Vincent, Doctors Hospital, the UAMS Medical Center and Arkansas Children's Hospital. In contrast to the other HMOs, Complete does not have customer service operations in Arkansas. Instead, enrollees call a toll-free number at the corporate headquarters in Birmingham, where they are patched through to a team that works specifically on Arkansas contracts.

St. Vincent Countermove

St. Vincent HealthSource is, at this point, merely a proposal before the state insurance commissioner. But a partnership between two such accomplished entities as St. Vincent and HealthSource Inc. is likely to secure a healthy portion of the market.

"Usually after a few years in the market place we end up being the No. 1 or No. 2 HMO," says Chuck Schneider, executive vice president for HealthSource Inc., a publicly traded company.

The new HMO will be administered in Arkansas, and its customer service staff will be located here as well.

"The announced |Health Advantage~ merger is creating a fairly large HMO membership in the area, but a membership that is primarily focused around Baptist Medical Center," Schneider says. "There's another very successful institution in the area. We think there is a natural market for a managed care plan that builds around St. Vincent.

"If anything, I think the merger creates additional credibility for the concept of managed care in Little Rock."

Baptist and USAble executives say it takes as many as 50,000 covered lives for an HMO to operate efficiently and become actuarially sound, but HealthSource says that's not true of companies with large, multistate networks.

"Our own experience is that we typically break even 15 to 18 months out with membership well under 10,000," Schneider says. He says the company's HMOs in Maine and South Carolina both broke even near the 8,000-enrollee mark.

HealthSource provides managed care services for roughly 600,000 enrollees across the country and operates HMOs in Maine, Vermont, New Hampshire, Indiana, North Carolina, South Carolina, Tennessee, Georgia, Massachusetts and New York.

St. Vincent HealthSource will have its own statewide network of hospitals and physicians, and it plans to shoot the works all at once by becoming licensed in 52 of the state's 75 counties -- the most expansive effort yet.

Well before this partnership was formed, St. Vincent was running its own PPO with 28,000 statewide enrollees. The PPO now will be administered by the St. Vincent Health Source team.

"Before I accepted this job, I checked these partners out," says Bowen, chief executive officer of the new HMO. "I found HealthSource Inc. to be a remarkable company. I know of no company on the stock exchange that has done as well as they have done."

The company was begun with an investment of $2 million in 1986, and its stock price now suggests a value of about $720 million Bowen notes.

For now, all of the contestants will be gunning for Health Advantage.

"We're excited about the fact that this is two large, well-respected Arkansas-based companies coming together," says Russell Harrington Jr., president of the Baptist Medical System. "It brings together a strong insurer and a strong provider. We now have the opportunity to offer the customer whatever he wants."

There is one other competitor to keep in mind. American HMO, a product administered by American Health Care Providers Inc. of Illinois, also is affiliated with Baptist Medical Center, among other hospitals. The company does not supply specific Arkansas statistics, but the state Insurance Department recently said American HMO has 14,000-15,000 Arkansas enrollees.

Although the future looks very promising for Arkansas' managed care market, there are many uncertainties. Just how many HMOs can this market support? Will consumers prefer a home-grown product or invest their health care dollars with established regional or national firms? And ultimately, will Arkansans like the quality of care they receive from HMOs?

Right now, the HMO sales forces are launching major offensives to sway the balance of power in Arkansas managed care. The decisive factor, however, will undoubtedly be the quality of customer service, as the companies strive to put a friendly face on an industry most consumers are loathe to deal with.

Health Advantage Fact Sheet

Ownership: 50 percent USAble Corp., 25 percent Baptist Medical System, 25 percent Health Advantage physicians.

Number of Enrollees: 47,000 Participating Physicians: 600+ Participating Hospitals:

Central Arkansas

Baptist Medical Center, Little Rock Baptist Memorial Medical Center, North Little Rock Baptist Medical Center, Arkadelphia Baptist Rehabilitation Institute, Little Rock Conway Regional Hospital, Conway Rebsamen Regional Medical Center, Jacksonville Saline Memorial Hospital, Benton White County Memorial Hospital, Searcy

Western Arkansas

Booneville Community Hospital Crawford Memorial Hospital, Van Buren Fort Smith Rehabilitation Hospital Harbor View Mercy Hospital, Fort Smith Mercy Hospital of Scott County, Waldron Mercy Hospital-Turner Memorial, Ozark North Logan County Memorial Hospital, Paris Sparks Regional Medical Center, Fort Smith St. Edward Mercy Medical Center, Fort Smith

Source: Health Advantage
COPYRIGHT 1993 Journal Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:Arkansas health maintenance organizations prepare to capture bigger market
Author:Haman, John
Publication:Arkansas Business
Date:Oct 4, 1993
Words:2317
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