The HMO Death Watch
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We at have a new theory about HMOs, to wit: HMOs, at least the modern Gekkonian variety, have a natural life-cycle.  See our Portrait of a Modern HMO for details, but essentially it works like this:


As long as HMOs can keep growing, they tend to do just fine. This is because the growth is often accomplished by acquiring a community property (such as a non-profit hospital) for a mere fraction of its intrinsic value. The marketplace immediately takes the true value of this new acquisition into account, and the HMO's stock price rises.  Then, by quickly closing selected units and services, firing nurses and administrators, and enacting other similar "efficiencies" in its new acquisition, the HMO can further enhance its market valuation. For HMOs, growth is life.

The problem arises when the growth stops or slows. Because once the HMO stops expanding, the only way it can show a profit is by actually conducting its core business - that is, by managing health care. And here's where the trouble starts, and where our new theory comes in.  

Our theory is that HMOs have a natural life cycle. HMOs are born, mature and thrive for a while, then encounter senescence, and finally dwindle away and die. Indeed, it's beginning to look a whole lot to us like a new axiom is being formed. Namely, HMOs can't make money managing the health care of a population that includes actual sick people.  This proposed axiom is looking more and more solid as time goes by.  

Our main evidence is that when HMOs stop growing, they begin to fail.  

In 1998, American HMOs lost an aggregate of $490 million, and more than half of all HMOs lost money.  The money losers, for the most part, were the smaller HMOs.  Accordingly, in 1999 there were 16 HMO bankruptcies, and all were smaller HMOs with fewer than 200,000 enrollees. 

The HMOs that have stopped growing are in serious trouble.  The ones that are still growing, the real behemoths, are doing relatively well.  But not even the big HMOs can grow forever; and if our axiom proves correct, eventually they'll all be in serious trouble.

That's why we bring you: The HMO Death Watch.

HMO Failures - 1999

American Preferred Provider - New Jersey

Certus Healthcare LLC - Texas

Community Health Plans of Kansas

Comprehensive Health Services - Texas

DayMed HMO - Ohio

Greater Pacific HMO Inc. - California

Harvard Pilgrim of New England - Rhode Island

Horizon Health Plan Inc. - Kansas

NorthMed HMO - Michigan

Owensboro Community Health Plan - Kentucky

Patient's Choice - Louisiana

Premier Healthcare - Arizona

Suburban Health Plan - Connecticut

SunStar Health Plan - Florida

WellCare of Connecticut

Xantus HealthPlan of Tennessee

source: AMA News, 1-31-2000

HMO Failures - 2000

In January, 2000, the Massachusetts Insurance Commissioner placed Harvard Pilgrim Health Care in state receivership.

Harvard Pilgrim (whose Rhode Island subsidiary failed in 1999), is one of the the nation's most well-respected HMOs, and the second largest in Massachusetts with 1.2 million enrollees.  The non-profit HMO lost $177 million in 1999.

DrRich is sorry to see this one go. From everything he's read, Harvard Pilgrim did not fit the typical Gekkonian mold.  In general, most non-profit HMOs have had to behave pretty much like the for-profits during the past decade.  In order to acquire capital for expansion and improvements, non-profits can no longer rely on charitable contributions - the amount of money they need is simply too great.  Instead, they have to rely on the bond markets. And pleasing the bond markets is very similar to pleasing shareholders. Hence, the often Gekkonian behavior of non-profits. 

Some have suggested that Harvard Pilgrim wasn't ruthless enough to survive - they kept premiums too low, for instance, and eschewed cherry-picking.  Perhaps this explains why they failed despite their size (they were the largest HMO to fail, by a factor of 6, for over a year.)

In any case, while their demise may be considered premature, the failure of Harvard Pilgrim still underscores our life-cycle theory of HMOs.  It's just that, apparently, to live a rich full life HMOs had better take advantage of all the tricks available to them.  You know what they say about nice guys.

Health Care Entities declared a Bad Risk

The most recent Phoenix Lending Survey, a widely-followed measure of the mood of America's commercial lenders, says that the health care industry is (to quote from the revered Survey itself) "in the dumps." Of the 16 industries considered by the the 95 lending institutions participating in the survey, health care ranked as the "least attractive."  Indeed, health care had the distinction of finally displacing the still beaten-down retailers from the bottom of the list.

And health care earned this distinction convincingly. Normally when an industry is having financial troubles, analysts can find at least one or two sectors of that industry that show some promise. But in this case, the negative opinion expressed by the lenders toward health care extends to all sectors of the industry, including large, medium and small organizations, both domestic and international.  Lenders fully expect the profit margins of all players in the health care system to continue to shrink, and for the foreseeable future, for the already increasing number of bankruptcies and defaults to grow.

E. Talbot Briddell, president of Phoenix Management Services (the group that conducts the Phoenix Lending Survey) notes that "the sickest patient in the health care system may be the industry itself." 


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