The Hostile Provider Takeover Of A Not-For-Profit HMO



The program bills this presentation as “Physicians Health Plan Experience.”  Clearly an understatement – and one on the same order as Gary Hart talking about his Florida boating experience, or Governor Martinez talking about his recent legislative experience.  There is no doubt about it, rarely has a managed-care company felt the fiscal – and its employees felt the psychological pain – that PHP of Minnesota did in 1986-87.  Managed care was no longer a money-splendored thing.  There was among the physician providers a mutiny of the bountiful, and the corporate purchaser was trying to find a cheaper way of making medical history.

To experience the “Physicians Health Plan Experience” was to experience a hostile takeover.  The only case of a hostile takeover of a not-for-profit company in the history of United States business, I have been told.  Takeover of a not-for-profit – much as if dissident stockholder group taking over the United Way.

This morning I would like to attempt to bring you the perspective of a sitting board member during the experience.  Where it is possible I will try to relate my feelings, and the feelings of my board colleagues at the time that it was happening.  I will try to not let hindsight or present knowledge cloud my recollections.  This is important, obviously because if it happens to you, you will experience the same emotion:  gut-wrenching feelings of having been sold out.  If you are also a provider to the plan, you will experience definite ambivalent feelings that will cause you to become either an agent-in-place for the dissidents, or a staunch corporate supporter.  You will not – you cannot – be indifferent.

Briefly, let me set the stage.

PHP was founded in 1974 by the Hennepin (Minneapolis) County Medical Society as a way to protect its membership from encroachments anticipated by staff-model HMOs – principally Group Health in our market.  As our market began to develop – and a near insolvency of PHP occurred, it became obvious that professional management was needed.  PHP hired a young man by the name of Rich Burke and charged him with putting it all back together.  Mr. Burke was a believer in the independent practice of fee-for-service medicine and therefore, the IPA model.  He managed with the philosophy that the only way to protect practitioners was to have a strong, aggressively managed company.  He provided strong, aggressive leadership!

The total market penetration of managed care in the Twin Cities in 1983 was 31% and by 1986 had grown to 44%.  During that same period PHP had grown by a factor of three:  from 115,000 to 356,000 enrollees.  The number of physician providers had not significantly changed during that time.  Clearly, managed care in general, and PHP specifically, was a significant part of physician practices and therefore ever on the providers’ minds.  Every policy or administrative foible was magnified by the significance of managed care in our market.

The market was laissez faire capitalism at its best for managed health care during this period.  Rate competition was the driving force for many decisions that ultimately effected providers.

As competition decreased operating margins for managed care, reimbursement levels were effected.  Our premium yield at PHP increase in 1982 by 18.4%, 1983 by 13.3%, 1984 by 6.7%, 1985 by 2.3% and in 1986 was a negative 0.1%.  Although the board of directors had increased physician fees by about 5% in 1983 & 1984, in 1985 there was no overall increase and in 1986 there was a net fee decrease.

In spite of this seemingly minor change in physicians’ fees, PMPM medical costs increased by 21% between 1983 and 1986 to a large extent due to utilization.

PHP uses a physician’s contingency reserve (PCR) in part to encourage cost-effective management by its physician providers.  To the extent that the plan had surpluses at year end the physician received a return of PCR based on overall performance of the plan and the relative performance of the provider to his or her specialty group.  This PCR was returned in full every year through 1985.  There was no return in 1986 or 1987.  The magnitude of the non-returned PCR in 1986 was $31 million and in 1987 was $30 million.  And, was in itself to become one of the triggers for physician rebellion.

To summarize the environment:  a great number of patients whose care was affected by managed care. More PHP patients, the reimbursement for whose services were actually being cut because of market competition and increased utilization.  And, $61 million in PCR that was not returned over a two-year period.

This occurred at the same time that Mr. Burke was receiving publicity about his corporate and personal success within the industry.  The physicians began to charge chare conflicts of interest because Mr. Burke had started and was a principal in United Health Care – the company that managed PHP.   It is much like Mencken’s definition of a puritan:  “A person who has a sinking feeling that somebody, somewhere is having some fun.”  The physicians were the puritans in this case and they resented that the person managing a plan upon which they relied was making more money then they were and having fun doing it.

The market was tinder dry.

The spark came when PHP proposed a restructuring of its Medicare hospital network:  necessitated by the low federal capitation rates and the need to switch risk from physicians to hospitals.  This proposal was seen to be redirecting 53,000 Medicare enrollees to a restricted hospital network.  Since all providers did not have privileges at these select hospitals, it was thought that many of them would loose patients.  There was also a fear that this presaged a similar consolidation in the physician network. Such a physician network consolidation was in fact being considered.

In late April 1986 a letter went out to the physician community on the letterhead of “PHP Oversight Committee” – a group that we had never heard of before this letter.  Its steering committee was the chiefs of staff of five of the level-two hospitals in the new program.  This letter questioned whether the PHP board and the management company had always acted in the best interest of the HMO.  The PHP board was of the opinion that the matters addressed in the letter had been subjected to close scrutiny and approval by the Department of Health, Department of Commerce, a bevy of consultants and the PHP board.  Therefore, we felt the letter was an unfounded attack on the credibility, integrity and reputation of the plan, its directors and officers.

On 14 May 1986 the board members and officers received a letter from the “PHP Oversight Committee:”  the letter’s stated purpose was to :ascertain whether the board of directors of Physicians of Minnesota and its subsidiaries have discharged their responsibilities under the law.”  This letter contained twenty questions pertaining to the manner in which the plan had been operated, with demands for supporting documentation.  The questions addressed such areas as director compensation, approval of administrative service agreements, leases for offices, stock options of corporate officers, matters in the divorce proceedings of the CEO, SEC filings, and on and on.

Also, on 14 May the local business paper “City Business” had a front page story headlined “PHP Doctors Challenge Founder, Management:  doctors claim Richard Burke and United Healthcare profited at PHP’s expense.”  The story was positioned immediately next to a larger than headline picture of a cemetery cross, with its own headline “the Plot Thickens.”  (It was an article on cemetery marketing.)

This was but the beginning of an extensive public relations effort, orchestrated by a PR consultant retained by the Oversight Committee.

The constant media coverage began to give the community the feeling that PHP was having financial problems.  We were, but we were no worse than any other plan in the market – actually we were better positioned than most.  In addition, the physician providers began to talk with patients about the providers’ concerns thereby causing extensive enrollee questions, which ultimately came back to the employer sponsors. 

We had become stragers in paradox:  the more successful we were, the more good we did, the numbers we enrolled – the more criticism we received and the more unloving our critics became.  The third law of reciprocity came into play:  never leave any good turn un-stoned.  If Moses had come down from Mt. Sinai in 1986, the two tablets he would be carrying would probably have been aspirin!

Our board saw the press attention and the de-marketing activities of providers as directly affecting our ability to market our products.  On 2 June 1986 PHP filed a suit against “PHP Oversight Committee” and its principals:  charging, among others, intentional interference with contracts, defamation, improper proxy solicitation, deceptive practices and misrepresentation.  “Oversight” counterclaimed on 24 June, denying the allegations, seeking access to records and injunctive relief.

On 19 September PHP sued Oversight’s attorney charging him with interference with contractual relations, and defamation.  This was brought about by the fact that PHP felt him to be acting independent of “Oversight,” especially in that he was holding press conferences.

The of summer of ’86 brought a derivative shareholder action with “Oversight” filing against Burke, Charter Med, Physicians of Minnesota and PHP.  The suit charged breach of trust and contract and they sought restitution to PHP by United and Charter Med.

Our provider member board elections were slated for the fall, and “Oversight” began to collect proxies for the election.  We did not know the validity of proxy in this case but we were very fearful that with their 1500 proxies they could take over the entire board.

During this time the Oversight Committee had asked to meet with a group of selected physician members of our board for the purpose of discussing the issue.  The board responded that the issues would be addressed by the whole board or a representative group of the board – consumer as well as provider members.  (By statute our board was 40% consumer and 60% provider.)  We believed it would be inappropriate to exclude any class of board member from the discussions on the matter.  Eventually the executive committee representing the board began to meet with the Oversight Steering Committee. It was my feeling that these meetings were of little value and were being used for the political benefit of “Oversight” and the detriment of the plan.  The meetings stopped when the Oversight delegation failed to show for a planned session.

The issue was kept alive within provider circles, as well as the public media, by the Oversight Committee. The feelings because so intense that a board chairman, a surgeon, found his referrals diminished so significantly that he took an early retirement from practice and left town.  The physician who was chairman in 1987 told the story of how his daughter’s boyfriend told her that his physician father would no longer allow them to date.  One of the plans executive’s children needed to see a physician and used his mother’s maiden sir name that than that of his well-known father.  The physician board members were constantly berated by their colleagues.  It was not nice in Lake Wobegon!  Love seemed to be the only really taboo four-letter word, and everybody seemed to go to bed angry at night.

In 1987, much of our staff was spending the bulk of its time on matters resulting from oversight onslaught. They could not manage the plan’s daily business.  It is my feeling that the non-return of the 1987 PCR was in large part caused by this distraction.  The CEO was out calling on prime customers trying to assure them that we were OK.  The report was that they felt we were OK as well, but they could no longer manage the level of concern with the plan that was being shown by their employees.  Many of our customers would probably leave at contract time unless the situation was immediately resolved.

In the summer of 1987 Mr. Burke resigned in an effort to remove himself as the issue and thereby allow the parties to address the real issues.  There was little movement on either side.  In a summer executive committee meeting I submitted that we were not going to resolve the matter as we were proceeding and proposed that we ask the governor to intercede.  The governor accepted our request and asked his Commissioners of Health and Commerce (insurance) to take up the matter.

On 20 August 1987 a negotiated settlement agreement was approved by the court.  The settlement provided that the derivative stockholder action be dismissed, the boar of directors would be replaced, “Oversight” would terminate proxy solicitations, PHP would pay “Oversight’s” costs of #350,000, “Oversight” would abandon the use of its name, there would be a joint press release and cooling-off period, “Oversight’s PR Council and attorney would be prohibited from similar actions, all actions would be dismissed and the records sealed.

On 7 December 1988 the Department of Health found that there was insufficient factual support for the allegations of the PHP Oversight Committee.

I learned several good lessons about corporate boards – particularly those involving health professionals:

  • It was important for a health plan to test the limits of reimbursement – to find out how low a reimbursement can be and still provide a successful provider network.  This testing can only be done empirically, in the marketplace.  PHP was well situated to do this.  Those who have had quantitative analysis in college chemistry will remember that as you titrate closer to the expected endpoint you slow down the titration.  We did not slow down, and we overshot the endpoint.  It is my belief that it is simplistic for a plan to put too much emphasis on provider fee structure rather than focus on utilization and appropriateness of therapy
  • One of the goals of managed care was to introduce competition into  the market.  This assumed that health providers were capable of responding to competition in the accepted ways:  such things as decreasing costs of doing business, managing receivables, and looking for alternative revenue sources.  Physicians, in particular, are not well trained for this.  There seems to be very few who even recognize the expense side of their balance sheet.  Those providers who hire financial and business managers seem to do a little better.
  • Several years ago, as the managed-care market penetration in the Twin Cities marched toward 50%, I began to lobby for the plan to encourage providers to limit the number of PHP patients they accepted, as well as the number of total managed-care patients.  It was then, and is even more so now, my belief that once we passed the balance where cost shifting would subsidize the plans discounted fees, the plan would need to increase the fees paid to providers in order to keep them viable.  And clearly we could not afford to do that for competitive reasons.  Managed care must limit practice penetration because it cannot meet either the needs or expectations of providers when greater than 50% of practices are subject o discounted reimbursement.
  • The majority of health benefits are purchased by benefits managers who are not well informed about the product they are buying.  As a result they were ill-equipped to defend the product they had purchased to either the employee-enrollee or their managers when we were having our “experience.”  Managed care has a lot of work to do with this group.  Benefits managers could become more of an asset in managing health costs then they currently are.
  • Health professionals, particularly physicians, see a corporate board much the same as they see a professional society.  It is very difficult to get a board that is dominated by health professionals to accept the authority and the responsibility of being a corporate director.
  • Health providers, and provider board members, will become predatory when things get rough – both inter- and intra-professional predation.
  • Finally, whenever you think in terms of control – remember, control is an illusion.

From a presentation given to Group Health Association of America, Boca Raton, Florida, 27 October 1989.  The author was vice-chairman of the Board of Directors at the time of these events. As board vice chairman, he survived the board replacement, and resigned a year later.

Physicians Health Plan went on to become Medica, still a leader in the Minnesota managed-care market.