Will big HMOs stamp out competition? - includes related article on the different kinds of health maintenance organizations - Cover Story

Business & Health, Oct, 1995 by Steven Findlay

Amid a frenzy of mega-mergers and giant HMOs, start-ups are cropping up in record numbers in the nation's small cities and towns.

The year is 2002 and the Federal Trade Commission has just approved the merger of U.S. Healthcare and United HealthCare Corp. The new mega-HMO will serve 22 million people in 40 states, knocking Kaiser-Prudential Health Plans Inc. into second place with 18 million enrollees. Meanwhile, Aetna and CIGNA negotiate merging their managed care plans, and the 40 remaining Blue Cross and Blue Shield plans continue to build their base among the 85 million Medicare and Medicaid enrollees. All told, Blues HMOs enroll 30 million people.

Exaggerated though this scenario might be, it is rooted in current trends. Like the banking, telecommunications and entertainment industries, health care has been struck with bigness fever, raising new strategic issues for employers and benefit managers.

At the core of this transformation is the incredible growth of HMOs. Enrollment soared from 2 million in 1970 to 20 million in 1985 to 51 million in 1995 and is expected to reach 65 million by mid-1997, encompassing one in four Americans. An even bigger boom in enrollment is expected if Congress votes this fall to bring the Medicaid and Medicare programs into the era of managed care. Some analysts forecast that HMO enrollment could exceed 100 million by the early part of the next century.

As managed care expansion accelerates, a shrinking band of insurers and HMO companies is controlling a growing percentage of the HMO market. Some 25 to 30 companies now control two-thirds of all HMO enrollees. And many small HMOs appear ripe for acquisition or merger. While there are just under 600 HMOs nationwide (down from a peak of 695 in 1987), three-quarters have fewer than 100,000 enrollees and 60 percent have fewer than 50,000.

Among the major players:

* Kaiser Permanente with 6.6 million enrollees in 16 states and a base that's rapidly spreading east. After stalling for several years, Kaiser added 56,000 enrollees in the first few months of this year.

* Prudential (PruCare) with about 2.2 million members and 32 HMOs nationwide and plans to market aggressively in key cities.

* United HealthCare Corp. with 3.7 million enrollees in 20 HMOs and another 13 million covered lives resulting from the recent purchase of MetraHealth.

* U.S. Healthcare with about 2 million enrollees and over $1 billion in cash on hand.

* FHP International Corp. with 1.7 million members and a new strategy that opens its clinics to other HMO and PPO enrollees and Medicare beneficiaries. Last year FHP bought TakeCare Inc. for $1.1 billion.

* Humana with 1.5 million HMO enrollees and a keen eye on the senior and Medicaid markets. Its purchase in August of Emphesys Financial Group, an insurer serving the small-group market, adds another 1.3 million covered lives.

* CIGNA Health Plans Inc. with 1.2 million enrollees, 40 HMOs and deep pockets for acquisitions.

* Aetna Health Plans with 1.2 million members and 25 HMOs.

Blue Cross-Blue Shield, once the personification of indemnity coverage, has emerged as an HMO giant as well. The 67 independent Blues plans nationwide own or operate 76 HMOs in 43 states, collectively covering 7.6 million people. But the Blues bring a huge base of covered lives--62 million, including nearly 26 million in managed care--to the table of any merger or acquisition.

Many Blues plans have, in fact, begun to spin off their HMO and managed care entities into for-profit ventures to better compete with the commercial insurers and managed care companies. California's Wellpoint Health Networks Inc. was a Blues spinoff, for example, and Wellpoint's recent merger with Health Systems International was one of last year's biggest HMO deals at $1.6 billion.

So far this year, 12 HMO mergers or acquisitions worth some $3.6 billion have taken place, according to Douglas Sherlock, president of the Gwynedd, Pa.-based Sherwood Co., a managed care consulting firm that keeps close tabs on the industry. That includes the $2.3 billion purchase of MetraHealth, the company formed last year by MetLife and the Travelers Group. And the pace has been picking up: Among the 145-plus publicly traded HMOs, 13 acquisitions worth $4 billion occurred in 1994, up from five in 1993. Sherlock's prediction: "The biggest mergers are still to come."

TRACKING HMO GROWTH

HMO expansion is proceeding on two distinct but intersecting tracks, however. One is occupied by big HMO firms in the major markets growing even bigger, gaining market share through aggressive growth, mergers and acquisitions. The other, less well-known track encompasses the accelerated growth of managed care enrollment and the increasing number of start-ups "in the countryside." At least 10 small cities, for example, already have HMO penetration exceeding 40 percent, according to an analysis by Inter-study, the Minnesota based HMO research firm. Among them are Wausau, Wisc. (70 percent), Ashland, Ore. (60 percent) and Wheeling, W.Va (50 percent). Many more are likely to follow in the next few years.