In This Corner, It's U.S. Healthcare...

Now, the successful HMO has to fend off the insurance giants

In an industry of quiet and restrained managers, Leonard Abramson is as startling as an icy stethoscope. The combative chief executive of U.S. Healthcare Inc. rankles administrators by claiming hospitals are too costly because of overstaffing. Doctors spooked by litigation, he says, drive up prices by overtreating patients. Worst of all are insurance companies, the "dinosaurs" whose relentless rate hikes are unsettling corporations and employees alike. "They are running a losing race," he says. Theirs is "a dying world."

Abramson's cocky style would be a lot harder to stomach if his company weren't doing so well. His fast-growing health maintenance organization, now operating in such high-cost locales as New York and Pennsylvania, as well as in six other Northeastern states, is thriving by offering a lower-cost alternative to traditional medical care. Over the past three years, membership has surged nearly 50%, to 1.33 million. Profits last year soared 95%, to $151 million, on a revenue rise of 28%, to $1.7 billion. This year, analysts say profits could rise by an additional 20% or more as revenues top $2 billion, double the 1989 level.

For the short term, U.S. Healthcare will remain hard to beat. But sustaining the momentum of the past few years will be tricky. For one thing, the company, based in Blue Bell, Pa., may become a victim of its own success. In December, New York regulators, concerned that maybe U.S. Healthcare is a little too profitable, denied its bid for a 10.7% rate increase, permitting only a 9% hike in the first quarter for new or renewing companies. "If we feel a company is doing well and they don't need an increase, we will not grant them an increase," says New York State Insurance Dept. spokesman John Calagna.

HITTING BACK. Even more worrisome are new competitive threats. Once lumbering insurance rivals such as CIGNA, Aetna, and Prudential have awakened to the managed care approach, in which patients choose from a pool of doctors in return for lower costs. The insurers are assembling their own networks of physicians and hospitals. But they boast of more flexibility by allowing employees to use out-of-network doctors as long as workers pay more of the cost. "We've transformed ourselves," says William H. Sharkey Jr., a senior vice-president at CIGNA Employee Benefits Co.

The insurance giants stand a good chance of clobbering regional HMOs such as U.S. Healthcare. They offer vast numbers of programs, with differing deductibles and levels of benefits tailored to each employer. And because U.S. Healthcare operates in only eight states, it's at a disadvantage in wooing employers with its far-flung facilities. "Companies that are national in scope only want to buy from companies that are national in scope," says Robert D. Eicher, a health plan consultant with A. Foster Higgins & Co. of New York.

In New Jersey, Prudential is signing up enough employers to nip at Abramson's heels: The Pru added 53,000 managed care members last year to hit 203,000, about half the number U.S. Healthcare serves. "The neat thing is there is competition out there," says Patricia Coyle, benefits manager at Rohm & Haas Co. Her Philadelphia company, now a U.S. Healthcare client, is thinking about adding managed care programs from others.

But U.S. Healthcare isn't checking into the intensive care ward just yet. It is responding with more flexible programs, such as a "versatile HMO" that lets employees use out-of-network medical services with written permission from their primary U.S. Healthcare doctors. Similar to the insurers' plans, patients pay annual deductibles of $500 per family and foot 25% of the bill for these extra services, compared with out-of-pocket costs of $2 per visit to primary-care doctors within the network. Such programs help draw skeptical employees into managed care networks, according to an upcoming report from InterStudy, a Minnesota health policy group.

As might be expected with an aggressive boss like Abramson at the controls, U.S. Healthcare is a tough competitor--sometimes maybe too tough. To slam Prudential Insurance Co. of America, U.S. Healthcare executives recently circulated a letter from the insurer telling a corporate client of an 87% rate hike. What U.S. Healthcare didn't say was that it had already refused to bid on serving the client, citing insufficient financial data. Also, the client worked out a better deal with the Pru in the end.

Wall Street evidently isn't too worried about U.S. Healthcare's future. Its shares rocketed from 21 in September to around 56 earlier this year, then slipped a bit with the rest of the market in March (chart). The main reason for investor enthusiasm seems to be that U.S. Healthcare still has lots of growing room. It serves only 1.8% of New York metropolitan-area residents, for instance. But then, its competitors are going to be chasing those same customers. If Abramson isn't careful, the insurance "dinosaurs" may yet make the ground around him tremble.