How to evaluate a managed care organization's financial health.

A health plan that fails less than a year after offering a tempting array of services for bottom dollar is not a good value. Many companies rely on CPAs and other financial executives to help choose which health insurance plans to offer employees. CPAs and others responsible for selecting health care plans for their firms or their client's company should factor in the plan's financial health; a plan that is not financially sound is apt to raise its premiums significantly or cut quality of care.

Most companies want good value for their health care dollar--quality care at an affordable price with a comfortable amount of flexibility for their employees when it comes to health care tradeoffs. Employees usually care a great deal about their health plan options, especially when they share the cost of premiums and have to make significant co-payments. All employees--including those CPAs recommending which plans to offer--want to be able to count on their plan being there when they need it.

Gary Davis, Esq., a partner at the Miami-based law firm Steel Hector & Davis, says, "I have always viewed a contract with managed care entities as similar to an investment portfolio. As such, it should be managed with the same diligence that one would use to manage a 401 (k) or stock portfolio."

MERGERS EVERYWHERE

That task gets more difficult every year. Exhibit 1, page 39, lists some factors that might affect a health plan's stability. At the top of the list: mergers and acquisitions. In a highly competitive market rife with mergers and acquisitions and frequent price changes, any health plan's future will be difficult to predict. A CPA considering a new plan should get answers to some questions first.

Exhibit 1: Is This Health Plan Financially Stable?

What to consider...

Mergers and acquisitions. Is the resulting company adequately financed? Do the organizations have compatible cultures and strategies?

IT capabilities. Can the company's IT systems accommodate expected growth?

Physician turnover. Do participating doctors stick with the plan or leave after a year or two?

Rates. Are the rates charged in line with other similar plans in the region? What might cause premiums to rise faster or slower than other comparable plans?

Size. Is the organization large enough to survive moderate setbacks?

Longevity. How long has the organization been offering similar services? Where?

Plan activities and the volume of those activities. What sort of routine care does the plan offer--how many well-child visits, annual physicals, mammograms, colon cancer screenings and the like? Has the plan taken on more than it can handle? Claims processing speed. Are claims taking longer and longer to process?

Customer service. Is the plan keeping your employees on hold? Does it process paperwork on new enrollees promptly? Answer questions fully?

Policy on potential liabilities. This includes provider selection and credentialing, open vs. closed formulary (the list of drugs that can be prescribed) and fiduciary functions such as stop-loss insurance. Is the plan being sued by dozens of unhappy customers denied coverage? Are the participating doctors and hospitals inadequate or the best in the region?

* Does management have an aggressive acquisition agenda? Can the balance sheet support such ambitions?

* Might the company be acquired by another? If so, how soon?

As the sector consolidates, ill-considered acquisitions could drive up premiums. Even if the merger partners are financially sound, the financing for the transaction can weaken the combined company's balance sheet. Also, a plan that was solvent the previous year may merge with another that has a different business strategy, or it may miscalculate costs when making a Medicare bid and put itself at much greater financial risk. Accordingly, any merger should signal to CPAs and others that it is time to reevaluate a particular plan's solvency.

Pamela Hymel, director of medical services and benefits for El Segundo, California-based Hughes Electronics Corp., an aerospace subsidiary of General Motors, says, "Sometimes an acquisition brings greater stability, other times it makes things worse." Hymel arranges health coverage for approximately 15,000 employees in California, Colorado and the mid-Atlantic region, with each enrolled in one of 10 different managed care organizations (MCOs).

One of them was FHP, a company based in Santa Ana, California. When PacifiCare, also based in Santa Ana, acquired FHP's California operations in February 1997, Hymel found the change positive. PacifiCare is a financially strong MCO, and at that time FHP was fiscally overextended and having financial problems associated with a merger between its parent, Foundation Health Corp., and Health Systems International. That merger had failed to bring about desired operational efficiencies and had disrupted access to care.

Another, Hughes Electronics on the East Coast, had offered its employees NYL Care, which was acquired in 1998 by Hartford, Connecticut-based Aetna/USHC, now the largest health plan in the country. Hymel is concerned about potential difficulties for her company's employees as NYL Care is assimilated by a company that has been formed by a recent amalgamation of disparate care cultures and delivery systems. Only a short time ago, Aetna was a relatively old-fashioned indemnity-style insurer, which contrasted with USHC's reputation for being lean and mean. Hymel says, "They are going slowly at NYL, and we are diligently monitoring that situation." However, the difference is large--between fee-for-service medicine and a tightly controlled HMO.

Hymel says, she will take action if it is warranted. "I am used to a certain level of customer service and administrative performance. If I'm not getting the level I expect, I will try to renegotiate the rates or consider switching plans"

PHYSICIAN TURNOVER

Exhibit 1 raises other issues to consider as well. A revolving door for doctors may signal impending financial problems. For example, Aetna/USHC has had contract trouble with its physicians, who complain that the company imposes terms unilaterally, that payments are very late, and that Aetna/USHC reserves final say on whether a medical procedure should be authorized and paid for until after the service has been given. Last October, those problems caused 400 doctors to defect en masse, leaving 45,000 Aetna/USHC members in the Dallas market scrambling for new physicians.

CPAs who manage employee benefits may also want to think about why Louisville, Kentucky-based Humana withdrew in August 1998 from a proposed $5.5-billion merger with Minnetonka, Minnesota's United HealthCare (UHC). UHC, which industry observers long considered one of the strongest national players, incurred a $900 million charge against earnings in the second quarter of 1998, shortly before the merger fell through. Even though UHC sought and got rate increases of 8% with most of its customers in 1997 and 1998, because of rising medical expenses, it does not seem to have fully resolved its struggles toward profitability.

Patricia Abbey, senior vice-president of human resources for Marketing Management, Inc., a 250-person distributor of coffee to retail chains based in Fort Worth, Texas, sums up the health plan merger climate, saying, "Eventually, there will only be a few major players." That would leave employees with fewer choices and employers with less negotiating power.

PREMIUM INFLATION

According to Business Insurance magazine, CPAs and other benefits managers can expect health insurance premiums to increase an average of 8% every year for the next two to three years. Another survey, conducted by Mercer/Foster Higgins (www.wmmercer.com), the Boston healthcare and group benefits practice, found an average budget increase of 7% in 1999 for health plan premiums. The survey covered nearly 4,000 companies nationwide in a variety of industries.

However, rapidly rising premiums are not a good indicator of solvency. Costs may be going up even faster, especially if the company is growing quickly. To evaluate a plan's financials, an observer must see both halves of the picture.