![]() ![]() |
![]() ![]() At the Brink:How Harvard Pilgrim Got in TroubleIssue Brief No. 33
State Shores Up Plan During the due diligence process for the proposed financing, Harvard Pilgrim discovered a serious accounting error. Adjusting for the error made its losses much larger than previously believed, causing the bond issue to be canceled and forcing the state to take over the plan under the receivership law that had just been enacted on an emergency basis. Three months later, buoyed up by rosier projections of Harvard Pilgrims revenues and costs, the state announced that the plan could enter rehabilitation under limited state supervision. In lieu of selling the plan to a for-profit insurer, liquidating the plan or bailing it out, the state found a way to address Harvard Pilgrims most significant problem-a lack of statutory capital. By creating a plan to restructure Harvard Pilgrims debt and allowing an accounting change that permits the plan to carry the value of its health centers at current market value, the state made it possible for the plans balance sheet to show strongly positive net worth. Since then, the plan has taken solid steps toward recovery by raising premiums and lowering administrative costs. Five key reasons for HPHCs problems emerged from HSCs interviews with leaders in Bostons health community and accounts of the story that were widely reported in the press. The causes of HPHCs decline can be found in factors that were unique both to the plan and the environment in which it operated:
Transition Away from the Staff Model
In other communities across the country, staff model plans have fallen out of favor with consumers who want broader choice of physicians and more conveniently located offices. In addition, staff model plans have been at a competitive disadvantage relative to network models, which have been able to expand into new service areas rapidly and negotiate contracts with network physicians at deeply discounted rates, resulting in lower costs than those of plans with salaried physicians. Examples include the Group Health Cooperative of Puget Sound moving to a mixed model in 1993, and Kaiser Permanente contracting with independent physicians more recently. Internal Management Problems
Integration issues affected other critical management areas, as well. Harvard Pilgrim had maintained predecessor organizations as substantially separate businesses, which made combining operational processes difficult, created barriers to merging the Harvard and Pilgrim cultures and resulted in a very complicated organizational structure. Eventually, the lack of integration led to duplication of efforts and caused problems with management accountability. For example, the plan reportedly maintained a number of individual offices for managing provider contracts, and because there had been some overlap between the Harvard and Pilgrim provider networks before the merger, many physicians continued to have multiple provider numbers and contracting options after the two plans combined. At the time the plan was forced into state receivership, Harvard Pilgrim was in the process of reducing 20 different payment arrangements that had been customized for medical groups and hospitals into just three options. Problems with financial information systems resulting from mergers or rapid internal growth of health plans are not limited to HPHC. Harvard Pilgrims problems are particularly reminiscent of those of New Yorks Oxford Health Plans in which rapid growth overwhelmed its computer systems and led the plan to underestimate its costs and overestimate its revenues. In the Aetna/US Healthcare merger, a strategy to bring Aetnas business rapidly to US Healthcares information systems platform led to widespread customer service problems, including lost membership cards and claims backlogs. With its more recent acquisitions, Aetna has adopted a phased-in approach to integrating operations in an attempt to avoid such disruptions and disarray in the future. These examples point to problems that can develop when the strategy for integrating the operations and systems of merging plans occurs either too slowly or too rapidly. Yet, as Harvard Pilgrims experience shows, a lack of information systems that can communicate among merging partners eventually leads to an inaccurate or incomplete financial picture of the new organization. Rapid Geographic Expansion
Geographic expansion by local health plans is seen widely throughout the country, although the local circumstances differ. For example, New York Citys Empire Blue Cross and Blue Shield and New Jerseys Horizon Blue Cross Blue Shield have expanded into each others traditional territories. Some local plans have merged with plans that serve areas that are not adjacent. PHP in Syracuse, N.Y., merged with Health Care Plan of Buffalo, and Anthem Blue Cross Blue Shield in Indiana acquired Blue Cross Blue Shield plans in Connecticut, New Hampshire and Maine. In some cases, such as Harvard Pilgrim moving into southern New Hampshire, the expansions are pursued to meet the needs of employers whose workforces are spread over increasingly broad areas. But in other cases, expansion is driven more by a perceived need to gain scale economies. Some plans have expanded into markets that are not contiguous with their existing markets, and many of these moves have not achieved their objectives. Harvard Pilgrims disappointments in geographic expansion are not unique, except perhaps for the degree to which they compromised the plans ongoing viability. For example, a number of Kaisers expansions in the east, such as Miami, North Carolina and Albany, N.Y., have not been successful, and Tufts Health Plan cited higher administrative costs than expected for withdrawing from some New England markets. Market observers have been skeptical about the prospects for other expansions throughout the nation, particularly those that are not contiguous. Underwriting Cycle
However, when all plans in a market tried to build market share by keeping premium increases low, the result was lower profit margins, or even losses. As a result, health plans have experienced poor financial performance recently and generally have stopped entering new markets and withdrawn from selected markets. Health plans in Boston experienced this underwriting cycle. The Tufts Health Plan expanded rapidly in the early 1990s. Boston also saw the geographic expansion of both HPHC and Tufts at that time. More recently, during the subsequent phase of the underwriting cycle, both plans withdrew from unprofitable markets, such as Rhode Island, New Hampshire and Maine. The underwriting cycle was timed unfortunately for Harvard Pilgrim. The financially challenging part of the cycle came at the same time as the plan was spending heavily to reduce its reliance on its staff model delivery system and expanding into new markets. Its problems with monitoring its finances developed just when its competitors were setting premiums low in relation to cost, so that any inadvertent setting of premiums too low added to losses rather than diminished profits. The fact that Boston is dominated by three locally based nonprofit plans- Harvard Pilgrim, Tufts and Blue Cross and Blue Shield of Massachusetts- likely made the underwriting cycle more extreme. This could have occurred because of the absence of plans based elsewhere or plans owned by provider systems that were more willing to withdraw from the market when health plan capacity was in greatest excess. Since providing health insurance is such a core activity for all three Boston plans, there might have been great reluctance for any or all of the plans to give up market share. In contrast, in Seattle, which also is dominated by local nonprofit plans, plans owned by a hospital system and a large physician group practice left the market during this phase of the underwriting cycle. Political and Regulatory Climate
Like other nonprofit health plans in the state, Harvard Pilgrim had been generally responsive to pressures from the political environment. As the plans financial problems began to mount, it was forced to challenge the state despite the threat of regulatory action. For example, when Harvard Pilgrim sought to reduce the unlimited prescription drug benefit, required by state law, in its unprofitable Medicare+Choice product, the secretary of state criticized HPHC severely and threatened to revoke the plans nonprofit status. Fallout from the prescription drug coverage controversy set off a wave of negative publicity that led to calls for increased regulation of health plan services. While the debate continued, Harvard Pilgrims financial condition deteriorated further, causing the state to place the plan under supervision. This move still did not enable the state to anticipate the severity of HPHCs financial problems, however, because neither the plan nor the state was aware of the full extent of the losses that the inadequacies of HPHCs information systems had concealed. Historically, Massachusetts has maintained only limited monitoring and oversight of health plans, largely because the three dominant plans are local players, all of them nonprofit. When Harvard Pilgrims financial difficulties first surfaced, the state did not have the regulatory authority to take over a financially troubled health plan. Also lacking were minimum net worth requirements for plans, which most states had already enacted, and disclosure of detailed financial records for all lines of business. Harvard Pilgrim operated in an environment where the states role and authority in monitoring health plans was smaller than elsewhere and left the plan unchecked when its financial performance faltered. Harvard Pilgrim also may have been affected by pressure from the Massachusetts Healthcare Purchasers Groups (MHPG) annual challenge to limit premium increases. The market clout of Boston purchasers traditionally has been limited because of a reluctance to risk antagonizing highly skilled employees with changes in health plans that contain costs. Boston plans greater responsiveness to MHPGs pressure to hold down premium increases in recent years may be a reflection of the current policy environment and the strong antimanaged care sentiment expressed in state and national politics. To the degree that premiums were held below costs as a result of political pressure, this would have contributed to Harvard Pilgrims financial problems. Whatever contribution the regulatory environment may have played in causing the plans financial distress or failing to make a timely diagnosis of its losses, the formal and informal processes undertaken by the public sector in crafting a solution to its insolvency showed creativity and leadership. As of this writing, state officials are convinced that Harvard Pilgrims turnaround plan is working. Moreover, premium increases have started to kick in, bolstering the plans cash position and enabling overdue provider claims to be paid. By allowing the accounting adjustments that shifted millions of dollars to the plans asset base and restored Harvard Pilgrims statutory net worth, Massachusetts avoided a bailout that would have entailed an injection of state funds, loans from major creditors and other stakeholders, sale of the plan to a for-profit entity or liquidation. Each of these alternatives was fraught with implications for the health care system. A Postscript
For more information about the Boston health care market, see “Market Stablilizes around Five Large Organizations,” Community Report, Winter 1999. ISSUE BRIEFS are published by Health System Change. President: Paul B. Ginsburg |
||
![]() |
|||