Byline: Laura B. Benko
It was 1985, and Ochsner Clinic Foundation needed to ensure its survival.
With managed care gathering steam, officials at the renowned New Orleans-based healthcare system feared the insurance industry would soon be dominated by a few large, highly restrictive HMOs. So rather than risk losing large numbers of patients if excluded from a prominent network, Ochsner launched its own health plan-one that's since become Louisiana's largest HMO, with a 38% market share, and the state's No. 3 insurer overall.
Ochsner's original prediction, however, never quite panned out. By 1995, consumers had begun to demand greater access; insurers have been scrambling to broaden their networks, expand their coverage areas and launch more flexible plans ever since, says Patrick Quinlan, chief executive officer of not-for-profit Ochsner Clinic Foundation, which comprises 439-bed Ochsner Foundation Hospital and 25 clinics throughout southeast Louisiana.
'Ochsner Health Plan was formed (by the clinic side) as a proactive move to protect our large patient base,'' Quinlan says. 'But today, with the market having moved predominantly toward open access, we've recognized that the fundamental assumption behind that business decision is no longer accurate.''
It was that realization that prompted Ochsner in January 2003 to put its HMO on the auction block and refocus on its core business of providing medical care. After nearly a year of soliciting bids, the quintessential integrated delivery system agreed in December to sell its 188,000-member Ochsner Health Plan to Humana. Terms of the pending sale were not disclosed, but an analysis by investment firm Wachovia Securities pegged the for-profit HMO's value at $48 million to $92 million.
In many respects, Ochsner's decision to sell its HMO reflects a national trend in which providers have been shedding their insurance plans in recent years, usually in the face of mounting losses. According to the American Hospital Association, the number of hospitals owning plans dropped 44% to 1,835 in 2001 from 3,277 in 1996.
But unlike many of the provider-owned HMOs sold or shuttered before it, Ochsner Health Plan has become an increasingly valuable asset, accounting for about 40% of the system's total revenue. According to unaudited figures, the HMO's profits jumped 64% to $13.8 million in 2003 from $8.4 million in 2002. Revenue reached $700 million last year, up 2.4% from $683.9 million in 2002.
'We hung in there longer than most (providers) because our HMO is profitable and continues to grow,'' Quinlan says. 'But over the last few years, we've been consciously and methodically distancing the health plan from our provider operations.''
Strengthening its position
Indeed, Ochsner is in the midst of a $200 million, five-year expansion and reorganization plan designed to strengthen its position as the region's top provider and enhance its reputation as an internationally recognized healthcare system. Since August 2001-when Ochsner Clinic formally merged with Ochsner Foundation Hospital-the system has opened a new surgery center and a multispecialty clinic, added psychiatric, rehabilitation and skilled-nursing services, rearranged its inpatient departments and recruited 100 new doctors. It plans to open a pediatric-care clinic later this year and add three new floors to its hospital by April 2005.
Ochsner holds the No. 21 spot in this year's 'IHN 100'' ranking of integrated healthcare networks conducted by research firm Verispan (Feb. 2, p. 25).
'It all comes down to where you are going to direct your resources,'' says Warner Thomas, Ochsner Clinic Foundation's chief administrative officer. 'We've decided to put our resources back into facilities, technology and people instead of redirecting those resources into the insurance business.''
The HMO's sale comes as Ochsner is enjoying a financial upswing. With its newly added capacity, the system has been able to treat greater numbers of patients and no longer has to divert ambulances to other facilities as it routinely did in 2000 and 2001, Quinlan says. As a result, total patient discharges rose 12% to 22,746 in 2002, while total patient days rose 10% to 116,735. Revenue increased 14% to $1.07 billion in 2002 from $934.4 million in 2001. Ochsner has not yet released 2003 results, but Thomas says he expects to see continued growth.
'We're selling (the HMO) from a position of strength,'' Thomas says, adding that the deal with Humana includes a long-term provider agreement that guarantees continued patient revenue through the plan. He also notes that Ochsner-which has long catered to Spanish-speaking patients, mostly from South and Central America-could benefit from Humana's strong presence in Puerto Rico, where it now covers some 504,000.
But Ochsner's decision to unload its health plan also comes as consumer and employer interest in traditional HMOs has begun to wane. Nationally, total HMO enrollment has fallen nearly 12% to 71.8 million from a peak of 81.1 million in 1999, according to research firm InterStudy Publications. In Louisiana, 12.1% of residents were enrolled in HMOs in 2002, down from 14% in 2001 and a peak of 17.7% in 1998.
Over the past two years, national players Aetna and Cigna Corp. have pulled out of Louisiana, while two other HMOs-82,000-member The Oath and 9,100-member AmCare Health Plans-were liquidated after state regulators discovered they were deeply in debt. Ochsner Health Plan is now among just five remaining HMOs in the state, and one of only two that offer a Medicare+Choice plan for seniors.
Meanwhile, the state's most dominant insurers-972,700-member Blue Cross and Blue Shield of Louisiana and 400,000-member UnitedHealth Group-continue to lure customers with broader PPO products and new consumer-driven coverage options. UnitedHealth's total enrollment, for instance, has climbed by about 80,000 members during the last 18 months, even as its HMO has lost about 10,000 members.
'We're seeing a lot of shift toward more flexible products and products that would be called consumer-based,'' says David Lewis, CEO of UnitedHealth's Gulf states region, which includes Louisiana.
So far, Ochsner's HMO has managed to offset its erratic enrollment-which has seesawed in recent years from 231,550 members in 1998 to 178,650 members in 2000 and back up to 204,000 in 2002-by controlling costs and raising premiums, says Terry Shilling, the health plan's CEO.
But to remain competitive in the long term, the plan would have had to invest heavily in new insurance products and expand its network into other regions, possibly even out of state, Quinlan says. Ochsner Health Plan currently contracts with 68 hospitals and 4,400 physicians, predominantly in southeast Louisiana.
Ochsner was already compelled last September to launch a third-party administrative service for self-funded employers, after nearly losing its single-largest contract covering 60,000 state employees in early 2003. The Louisiana Office of Group Benefits, which provides coverage for 250,000 state workers, had considered moving exclusively to a self-funded design but ultimately renewed its contract with Ochsner's HMO through 2006.
Ochsner also had planned by mid-2004 to introduce a consumer-driven option, which would have allowed members to pair a high-deductible insurance plan with a healthcare savings account. But it ultimately decided such efforts were better left to a company like Humana, with far greater resources and expertise in plan design. 'The increasing need (for insurers) to become larger and more diversified was going well beyond the original mission of our health plan,'' Quinlan says. 'Eventually we said, `Hey, do we really need to do this?' ''
For Humana, which covers 6.6 million members across 18 states and Puerto Rico, the addition of Ochsner Health Plan will fill a gap in the company's national operations and give it a new hub from which to expand throughout the burgeoning Southeast. The deal marks Humana's first significant acquisition since 1997.
'We plan to bring to the table all of our different plan designs and benefits,'' which include PPOs, self-funded options, Medicare and Tricare military products, a strong Medigap supplemental insurance line and its increasingly popular SmartSuite consumer-driven plan, says Humana spokesman Dick Brown.
Humana also will likely expand Ochsner's provider network throughout Louisiana and into neighboring Texas, leveraging the strengths of its existing 531,000-member health plan based in Houston. The company already contracts with more than 320,000 providers across all 50 states through its national ChoiceCare PPO network.
Network contracting should certainly prove far less tricky under the HMO's new stewardship. As a provider-owned HMO, Ochsner Health Plan has faced the awkward task of negotiating both payment rates and member services with rival health systems. 'Some providers have been reluctant to work with us because they see that as indirectly benefiting a competitor,'' Shilling says.
For example, the state's largest acute-care hospital, Baton Rouge-based Our Lady of the Lake Regional Medical Center, terminated its contract with Ochsner Health Plan in late 2002 after a protracted dispute over rates. The 626-bed hospital has since sued Ochsner, alleging the HMO owes it $2.8 million for services rendered to members after the contract lapsed. 'The suit is legitimate, and we suspect it will have to be settled or tried before the (Ochsner Health Plan) sale can go through,'' says Our Lady of the Lake CEO Robert Davidge.
The insurance business has often seemed innately out of step with Ochsner's efforts to expand patient access to medical care. Like all HMOs, Ochsner Health Plan has had to control costs by managing spending and use of services-a task that has required making difficult and sometimes unpopular financial decisions.
Last year, for instance, Ochsner Health Plan faced sharp criticism from consumers and state lawmakers when it exited all but two of its Medicare+Choice markets, forcing almost 6,000 Louisiana seniors to seek new coverage. Blaming inadequate federal funding, the HMO's Total Health 65 plan also eliminated prescription drug coverage for about half its remaining 37,000 Medicare enrollees in New Orleans and Baton Rouge. It was able to restore coverage of generic drugs by midyear but only after raising deductibles and copayments across the board.
(Like many other insurers, the HMO is once again 'beefing up'' its benefits, thanks to higher federal payment rates included in the sweeping Medicare reform bill passed in December, Quinlan says (Dec. 22/29, 2003, p. 30).
And in November, a controversial decision by Ochsner Health Plan to overhaul its sales commission policies prompted a statewide review into the way Louisiana's health insurers compensate their agents.
The state Insurance Department received a flurry of complaints from independent brokers after the HMO announced plans to pay agents less than half the going rate for signing businesses with fewer than 10 employees. Several other insurers have adopted similar payment methods designed to reward high-volume agents. But the department-fearing such arrangements violated state law by encouraging agents to discriminate against small businesses-is now conducting a review of Louisiana insurers' broker-payment methods.
'Having an insurance subsidiary can certainly be a distraction,'' Quinlan says. 'When you try to be everything to everyone, you tend to lose focus on what you do best.''
Ochsner certainly isn't the first provider to come to such a conclusion. Eager to quit the HMO business, General Health System, the parent of 436-bed Baton Rouge General Medical Center, transferred its money-losing, 45,000-member Gulf South Health Plans unit to now-defunct The Oath in 2001. Since then, General Health has shed other nonhospital operations, including two nursing homes and some of its laboratory functions.
The sale of Ochsner Health Plan is expected to close in the second quarter, pending regulatory approval. Shilling will step down once the deal is completed.
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'We've decided to put our resources back into facilities, technology and people instead of redirecting those resources into the insurance business.'--Warner Thomas, chief administrative officer, Ochsner Clinic Foundation * Ochsner Clinic Foundation is in the midst of a five-year, $200 million expansion. * Quinlan: 'Having an insurance subsidiary can be a distraction.'