While Washington and Sacramento attempt top-down reforms of the healthcare industry such as the patient’s bill of rights and the state department of managed care, some OC companies are in the forefront of what could become bottom-up changes in the way Americans receive medical care.
Orange-based St. Joseph Health System has embarked on a much-watched attempt to redefine the relationship between its hospitals and health maintenance organizations. The Talbert Medical Group in Fountain Valley is growing by stressing quality care and patient satisfaction over short-term bottom-line issues. And Newport Beach’s TriZetto Group Inc. is bringing technology to bear to integrate doctors, hospitals, insurers and employers into a single data and communication network.
St. Joseph’s New Deal
The highest profile belongs to St. Joseph, which operates St. Joseph Hospital in Orange, St. Jude Medical Center in Fullerton and Mission Hospital Regional Medical Center in Mission Viejo, three of the top 10 OC hospitals in terms of net patient revenue (see list on page 42). St. Joseph fired its first shot in October, trimming its HMO network from more than 20 carriers to five and insisting that those five sign contracts that share the burden of increases in the costs of providing care.
“This new model mitigates the financial risks that have caused us and other providers to sustain huge losses,” said Joe Randolph, St. Joseph chief financial officer.
Healthcare observers said they wouldn’t be surprised if more hospitals in California and elsewhere moved to re-examine their managed care deals in the wake of St. Joseph’s move.
“Things started here in terms of managed care. We initiate trends. More and more hospitals will do what St. Joe’s did,” said Dr. Jack Thomas, a Long Beach physician who formerly practiced at Unicare in Garden Grove.
Some months after the paring, St. Joseph chief executive Richard Statuto discussed his system’s action in a newsletter published by Deloitte & Touche. Statuto said that he came to believe “a provider cannot be successful catering to 20 different payer systems.”
St. Joseph officials also said they came to a point where they could no longer work with HMO contracts that they believed put too much risk on their shoulders. They said the system was losing around $45 million annually on its HMO pacts because they included fixed, or capitated, reimbursement rates while the hospitals’ costs for equipment, drugs and staffing were rising, sometimes sharply.
Under the old arrangement, St. Joseph was fully at risk for the healthcare of about 400,000 enrollees, according to Statuto. He said the system found “that a lot of that risk was uncontrollable.”
Nevertheless, St. Joseph’s OC facilities were operationally profitable in 1999 and 2000.
St. Joseph’s move was not uncontested by the HMOs. The hospital operator originally planned to go with six carriers, but Cypress-based PacifiCare of California Inc. balked at the demand that capitation be abandoned. St. Joseph stuck to its guns, however, and the two OC companies parted ways in a spate of dueling press releases.
PacifiCare said the relationship ended because St. Joseph wanted rate increases that local employers weren’t willing to absorb. In a letter to insurance brokers, PacifiCare of California Chief Executive Chris Wing said, “We know how important St. Joseph’s is to your clients and their employees.
“We also know your clients value the ability to anticipate their health care costs and St. Joseph’s has challenged our ability to do this by demanding significant increases outside the normal contract cycles. Ultimately, PacifiCare cannot allow consumers and employers to be held captive to a provider who is using their market share in Orange County to drive up health care costs,” Wing wrote.
St. Joseph later signed pacts with Aetna, Blue Cross of California, Blue Shield of California, Cigna HealthCare and Health Net.
Last month, however, Health Net said it would sever its ties with the health system at the beginning of next year, for reasons other than the new contract regime (see accompanying story).
Talbert’s Long View
For years, the delegated physician group model, where doctors accepted responsibility for caring for HMO patients, has been an accepted model of delivering healthcare services in California. The model has worked for some and has gone up in flames for others, most spectacularly in the bankruptcy of KPC Medical Management Inc. of Anaheim.
As KPC was blowing up, officials at Talbert Medical Group were breathing a sigh of relief.
Some 18 months before KPC’s demise, Dr. Keith Wilson, Talbert’s chief executive, led a fight against its then-parent MedPartners Inc., not to be included in a sale of MedPartners assets to KPC founder Dr. Kali Chaudhuri. Chaudhuri eventually acquired 72 MedPartners clinics after state regulators dropped the hammer on a MedPartners subsidiary and forced it into bankruptcy. But he didn’t get the Talbert group, whose doctors had pooled their money and secured bank financing to go it alone.
KPC filed for bankruptcy in November, in the wake of highly publicized management problems and several contracting spats with health plans.
Wilson said he didn’t care much for KPC Medical’s business model, which looked to grow through acquisitions rather than developing its core practices. Wilson also said that KPC Medical was “a bad model to extrapolate from in the first place” because it inherited MedPartners’ flaws, such as pressure to generate cash flow.
“If you remember the MedPartners days, MedPartners grew by acquisition,” Wilson said. “It never did anything to rebuild the infrastructure of the practices it acquired.”
Talbert, on the other hand, was determined to create business by making sure that the infrastructure worked and by paying attention to how it served its patients.
“Our priority is still patient care, which is different than a corporate entity providing insurance services. That translates into better patient satisfaction, better ability to retain patients,” Wilson said.
“Talbert is a medical group. KPC managed IPAs,” said Dr. Bryn Henderson, an Orange County physician and healthcare analyst. Doctors who participate in IPAs, or independent practitioner associations, don’t have the same vested interest as doctors in staff-owned medical groups such as Talbert, Henderson said.
Other reasons for the differing fates of Talbert and KPC are Chaudhuri and Wilson’s “dramatically different management styles” and the fact that KPC took on a heavy debt burden when it purchased the MedPartners clinics, according to Henderson.
TriZetto’s Technology
The marriage of healthcare and technology, at best, has been a rather uneasy one. But some Orange County companies are forging ahead with attempts to get the worlds together.
One is TriZetto Group Inc., a Newport Beach healthcare software service provider. TriZetto is building its business by helping health plans, benefits administrators and doctors manage data.
“The first thing to understand is that it’s not just about doctors embracing technology, but that the healthcare industry is a community of payers, providers and patients,” said Jeff Margolis, TriZetto’s chief executive. “If you think about anyone embracing the use of technology, you have to think about how do you make it simple.”
TriZetto, however, did have to battle the tech sector crash last year.
Along with Internet companies, TriZetto had seen a big run-up in its stock after going public in late 1999. As the valuation bubble reached its peak, TriZetto proposed to buy Westport, Conn.-based IMS Health Inc. for $8.2 billion in stock. That proposition was savaged by analysts who called it a bad fit, which led many investors to cut and run.
TriZetto ultimately abandoned the transaction, but by then the firm was caught up in the general market downturn.
TriZetto also had to fight off a stigma as a cash-burn victim, a perception triggered by the firm’s inclusion in the now-famous survey published in Barron’s that predicted the dot-com flameout. Margolis, in other published reports, said he believed the Barron’s article and a similar one in Fortune, while untrue, affected the investment community’s attitude toward the company.
But that was then.
TriZetto’s stock, which reached 88.5 in its high-flying days, has settled in to the 10-to-20 range for most of the past 12 months, and the firm boasted a market capitalization of $543.2 million as of the middle of last week. In the winter, Margolis said he was content with TriZetto’s share price, given market conditions, and also believed that analysts now have a good read on the company.
“They recognize we’re not a dot-com waiting for a million eyeballs to show up to our Web site,” Margolis said. n
