Section 5 - Portrait of a modern HMO 

     FTP - 2000

FTP 2000 - The end game approaches

Things have gone well for Gekko.  Five years after assuming the helm, he has established FTP as the dominant HMO in 22 cities and is gaining ground in nine more.  FTP’s stock has split twice, and Gekko’s yearly personal bonuses have been rumored to be in the 10’s of millions. 

But Gekko sees the writing on the wall.  The vast preponderance of FTP’s growing market valuation has come from expansion into new cities, and especially from the acquisition of public assets.  But it’s getting harder and harder to find new areas in which to expand, and worthwhile community hospitals ripe for takeover are no longer growing on trees.  Worse, pressure groups have begun to make it difficult to negotiate favorably with state insurance commissioners.  Consequently, the valuations of public assets set by commissioners these days more nearly reflect their true market value.  It’s growing very difficult to make a killing through expansion.

Which means that if FTP is to continue making money, it will have to do so by delivering health care to actual patients.

This has turned out to be a lot harder than Gekko thought it would be.  Despite the fact that he continues to turn up the heat under his physicians – cutting their reimbursement schedule every year and raising the bar for getting their end-of-year payouts – FTP’s revenue from patient care is stagnant, and even shows signs of dropping. 

HMOs have penetrated the health care market so thoroughly that, in most of FTP’s cities of operation, the indemnity insurance plans are no longer players.  This means FTP isn’t competing against indemnity plans any more, so much as it is against other HMOs.  Consequently it has become very difficult for Gekko to keep his premiums as high as he’d like.  In a couple of cities, FTP has actually gotten into some very nasty bidding wars.  Gekko can’t count on artificially high premiums any more.

And now that the vast majority of Americans are already enrolled in HMOs, cherry-picking the healthy enrollees has become virtually impossible.  Even making the chronically ill feel unwelcome is no longer effective, since most sick people have finally realized that one HMO is pretty much like another. There’s no point in changing plans any more.

Patients in general are becoming more vocal, as are Congress and the state legislatures, about HMOs conducting themselves dishonorably.  Gekko fears that one or more of the various iterations of Patients Bill of Rights may end up taking away some of his remaining prerogatives for making money.

Even if the doctors can figure out how to actually manage health care efficiently, FTP will never be able to turn over the kinds of profits it’s enjoyed to this point.

Then there are the rumblings Gekko is hearing in high places about for-profit health care robbing society of its precious health care premiums.  It may be a long way off, but Gekko now thinks it’s possible that, some day, for-profits will be outlawed. That wouldn’t be fair, of course but Gekko’s a realist.  He doesn’t insist on providing fairness, nor does he insist on receiving it.  This is business, after all.

Gekko opens his desk drawer and pulls out that old report on “Risk Sharing.”  He has always felt risk sharing to be a dangerous game. If HMOs reduce themselves to serving only as middlemen – taking a big cut of the health care dollar as a “finder’s fee” but providing nothing of substance to health care itself – it will be only a matter of time before they are cut out of the industry altogether. 

But Gekko is rapidly coming to the conclusion that FTP and most other HMOs are reaching a point of diminishing returns. If risk sharing can garner for FTP three or four years more of high profitability before the end comes, he should go for it.

Gekko picks up the phone and calls a meeting.

HMOs - the end of the line?

No, not really.  But I personally wouldn’t buy any more stock in FTP.

I believe that HMOs will be around for a long time.  But I also believe that the heyday of the for-profit, Gekkonian-style HMO is coming to an end.

Some of the most prominent for-profit HMOs, organizations that were the darlings of Wall Street a couple of years ago, have been fading badly of late. In some cases, their failings have been attributed to poor management or even fraudulent practices.  If this were the whole story, there might be more hope for their recovery – bad management can be replaced, and fraud cases can be settled. 

But I maintain that whether or not their proximate difficulties can be worked out, the long-term prognosis of for-profit HMOs is grim.  Just considering the demographic facts of life outlined in Section 2, it is inevitable that, sooner or later, society will find it unconscionable for these organizations to continue siphoning off large proportions of the health care dollar as profit – especially when it is debatable whether they are contributing anything substantial to the actual delivery of health care.  Sooner or later, we will become very indignant about the for-profits.

But my guess is that the for-profit HMOs will fade from the scene on their own accord, well before the rest of us get exercised enough to do the job ourselves. Gekko has shown us why.

It is looking more and more as if there is a natural life cycle to for-profit HMOs. In their early years, their meteoric rise was not attributable to their managing health care, but instead to their rapid growth and subsequent consolidation, and to the acquisition and privatization of public assets.  As the opportunities for rapid growth dries up, as the opportunities to select the most desirable enrollees fades, and as public officials, government agencies, and the general public becomes wise to their ways, for-profit HMOs will find that their traditional methods for making money will no longer be feasible.  They will have no choice but to finally attempt to make a go of it by managing health care (that is, to go legit) – or to get out of the business altogether.

As is the case for FTP, very few for-profit HMOs have ever done well financially by managing the health care of their subscribers. My prediction is that they’ll find it so difficult to make a profit in this way  – at least enough of a profit to keep their shareholders happy – that that they’ll eventually get out of managed care on their own. 

This is especially likely, in my view, when you consider that the Clintonians have never gone away – they’re still there, still as active as they can be while waiting for their chance to assume their rightful, regulatory control of the health care system.  Imagine, if you will, the for-profits – seeing that their days are numbered – whispering in just the right places that, for the right price, they would be willing to consider selling their business to the government.  It wouldn’t be the first time the government assumed control of a formerly powerful industry, nor would it be the first time the owners of that fading industry would get one, final, huge windfall for their troubles. Remember the railroads?

Next: The meaning of the Gekkonian era

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