Are your payers looking for suitors? Don’t be the one left heartsick
Are your payers looking for suitors? Don’t be the one left heartsick
Traps to avoid when your HMO boosts its curb appeal’
The recent national attention to the financial problems of the Harvard Pilgrim and Tuft’s Health Plan of New England are symptomatic of the challenges facing many managed care organizations across the country, say experts. In fact, 16 HMOs filed for bank ruptcy last year, which is a 78% leap from 1998 and more than the total number of combined failures over the past four years, reports A.M. Best Company, the Oldwick, NJ, credit rating service.
Reacting to the increasingly eat-or-be-eaten reality of the managed care marketplace, an increasing number of HMOs and insurers are quietly looking for suitors they can sell to or merge with to achieve the economics of scale needed to compete successfully.
"In the last five years, there has been a lot of consolidation in the HMO market," says Paul Feldstein, who holds a chair in health care management at the University of California, Irvine (UCI). "HMOs that were here before are no longer here. For example, Take Care merged with FHP, which then merged with PacifiCare. There’s definitely a trend toward consolidation, which most experts see continuing."
At a recent UCI managed care conference, attendees voted PacifiCare and Health Net the most likely major HMOs to either merge or be sold to another plan in the near future.
Like homeowners preparing to sell their residences, health plans considering putting themselves up for sale begin by trying to make repairs to their financial statements to improve their "curb appeal" to prospective buyers. And when HMOs try to make their earnings look as good as possible, that can be bad news to providers waiting to get paid, says Charles Brown, president of ZA Consulting in Jenkintown, PA, and a director of the Medical Group Management Association. Also, expect health plans to "start demanding agreements that are very aggressive, even unsustainable, over the long term, because [they are] trying to maximize short-term profits in order to increase [their] potential market value," he warns.
Indicators that may signal an HMO you deal with is preparing itself for sale include these:
• The problem: percent of premium. "Predictable, stable earnings are valued by Wall Street," Brown notes. One way a plan positioning itself for sale tries to achieve at least the appearance of stability is to lock-in its medical expenses by increasing the use of risk contracts. "If successful, this means the HMO’s profits improve from day one of the contract — but possibly at your expense," he cautions.
Brown says contracting entities like physician hospital organizations (PHOs) or independent practice associations (IPAs) should pay special attention to HMO-proposed percent of premium arrangements in which the plan attempts to tie capitation to the amount of premium it charges its customers. "If the HMO then turns around and lowers its premium to increase its market share, the PHO’s or IPA’s revenue — and its affiliated practices’ revenue — will drop proportionately," he points out. Depending on the specifics of the contract, that could mean a reduction in performance incentives, no return of withholds, or, in some extreme cases, a situation in which the provider ends up owing the HMO money.
• A solution: If you are involved in a PHO that is considering a percent of premium arrangement, make sure the contract with the HMO contains a floor, or a minimum capitation amount, below which provider payments cannot drop, he stresses.
• The problem: reduced services. To beef-up its bottom line, an HMO may look for ways to reduce its administrative expenses. For example, if the HMO has negotiated a risk contract with your organization, it no longer has the same incentive to provide medical management support as it did before signing the deal. You might start seeing cuts in staff and services that you were relying on when you agreed to take risk, notes Brown.
For example, it could reduce the customer service staff available to answer questions about referrals, eligibility, benefits, or other issues, resulting in long waits on the telephone.
"Even if the HMO does not deliberately cut staff, it still may lose employees to the fear and uncertainty caused by internal uncertainty the organization is experiencing," he says.
• A solution: Negotiate a clause in your contract that specifies minimal service standards to which the plan must abide.
• The problem: assumption of contract. If two health plans merge, and one plan’s provider contracts are significantly less favorable, you can bet post-merger providers that had contracts with both companies will be told the contract most favorable to the insurance company now applies to all of the merged company’s enrollees.
• A solution: Avoid this by negotiating language into your agreement that says the contract can be assumed by another HMO only with your prior written permission.
Doing business with an HMO looking to sell out also can work to your advantage. Consider these points:
— An HMO is more attractive to a potential buyer if it can deliver a quality provider network. If it is critical for the HMO to keep your organization in its network, that gives you added negotiating leverage.
— "If you are disputing a reconciliation or the amount of money owed you with the HMO, this is a good time to settle the issue," Brown says. One reason is you now have some additional negotiating strength because it is in the HMO’s best interest to get a defined liability on its books rather than deal with the uncertainty of open disputes. "Whoever is looking at acquiring the HMO will want to know what its liabilities are, and any uncertainty may make it a less attractive purchase," he says.
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