At An Hmo Giant, Critical Questions

Westcott W. Price, co-chief executive of FHP International Corp., had good reason to celebrate on June 10. That's the day shareholders in his health-maintenance company, based in Fountain Valley, Calif., approved the acquisition of TakeCare Inc., another California HMO, headquartered in Concord. The $1.1 billion deal is the biggest HMO merger ever. More important, it transforms FHP into a $3 billion titan with 1.7 million members.

Still, the merger wasn't the only FHP deal that had a successful outcome: Just weeks before, the company had quietly hammered out a settlement with Genevieve F. Kinnard, a 68-year-old real estate broker who sued FHP in 1992. She alleged in the lawsuit that the HMO denied her critical medical treatment, agreeing to pay for less than two weeks of badly needed physical therapy at a local hospital instead of the six weeks recommended by her physicians after a hip replacement in October, 1991. As a result, Kinnard says she had to pay for her continued stay at Casa Colina Hospital, as well as additional therapy, out of her own pocket. Both sides reached a settlement on April 26. But the details have been sealed by the court until July at FHP's request. Neither Kinnard nor FHP will comment.

These two events sum up the challenges facing FHP these days. With HMOs around the country scrambling to broaden their share of the health-care industry, FHP's acquisition strategy is clearly focused on one of the market's more lucrative segments: the $159 billion that the federal government spends each year on Medicare.

At the same time, the HMO is facing troubling questions about the quality of its senior care. And it's not just patients such as Kinnard who are complaining. Health-care experts, physicians--including some who used to work for FHP--and former FHP executives allege that the company uses aggressive sales tactics to sign up seniors and then, in many instances, denies them necessary care in order to maximize its profits. "They manage dollars, not care," says Dr. Julie Madorsky, Kinnard's physician at Casa Colina, who says she is speaking in broad terms about FHP's practices.

Kinnard's experience, in any event,

isn't unique. A class action filed in November against the U.S. Health & Human Services Dept. (HHS) charges that the agency failed to regulate HMOs that provide care for Medicare beneficiaries. Although the suit alleges instances of inadequate care provided by five HMOs, eight out of the 15 cases involve FHP. In one, the suit alleges that Gregoria Grijalva, a 71-year-old grandmother in Tucson, was forced out of hospitals and nursing homes last August by FHP while still suffering from complications related to diabetes and a recent leg amputation. Grijalva even alleges that her own FHP- employed "gateway" physician, Dr. Frank Gomez, urged that she remain hospitalized. Gomez won't comment.

WIDER PROBLEMS. Even some of FHP's own staff doctors concede that quality of care is an issue. Dr. Orlin Wry, who works for FHP in Tucson, says some of the details in the class action are "probably true." But Orlin says FHP isn't to blame: As a society, "there are limited funds, and we are producing more elderly than the system can handle."

While the numbers of documented cases aren't huge, critics believe other instances of inadequate care have gone unreported. Health-care experts say most seniors are unaware of their rights as HMO members. Nor do they have the time and stamina to appeal their cases to outside review panels--a process that can take up to four months. "The magnitude of the problem is just beginning to be known," says Geraldine Dallek, director of the Center for Health Care Rights in Los Angeles.

FHP will not comment about any of the cases in the class action because it involves ongoing litigation. Moreover, the company points out that only HHS has been named as a defendant. For its part, HHS won't comment on the lawsuit but has filed a motion to dismiss the action, claiming that the plaintiffs have yet to exhaust their administrative appeals at the agency. Price insists FHP delivers quality care and claims FHP's own surveys show that its members are satisfied. Price also points out that FHP is fully accredited by the National Committee for Quality Assurance, an industry-sponsored group that sets HMO standards. Often, Price says, HMO members who complain don't realize that companies have to hold costs down to prosper. Suits filed against HMOs about care often are "meritless and ludicrous," he says. "If they want to receive more benefits, they are going to have to be willing to pay for them. If you pay for a Chevrolet, you don't expect to receive a Mercedes."

Although much of the controversy has focused on FHP, which operates one of the biggest senior-care programs in the country, health-care experts contend that the company's practices are symptomatic of wider problems in senior care. All HMOs have to juggle costs and premiums to make money. In Los Angeles County, for instance, the federal government will pay an HMO $530 a month for each of its senior members. That's roughly 95% of what Washington figures it would pay through traditional Medicare and far more than the monthly $110 the average HMO member pays. The higher premium reflects the elderly's need for more care. But it also promises big profit margins for HMOs that can keep their costs down, health-care experts contend.

MARBLE BUILDINGS. Recent studies suggest that seniors obtain better care through traditional Medicare than by using HMOs. A February, 1994, study of 1,632 cases by the Center for Health Policy Research in Denver funded by the Health Care Financing Administration (HCFA)--the HHS division that oversees federal health programs for the elderly--found that seniors who depended on Medicare to pay their doctor bills received superior home care to those using an HMO. "FHP is not inherently evil," says Stewart Grable, a member of the Pima Council on Aging, an Arizona nonprofit group that works with the elderly. "The evil is in the system, and I don't see FHP trying to head off the problems."

Founded in 1961, when HMOs were virtually unheard of, FHP is a pioneer in the managed-health-care industry. It started with a suite of medical offices on a 16-acre lima-bean field in then-rural Orange County. Today, the landscaped FHP campus houses a gleaming monument to the HMO ideal: a series of sparkling marble-floored buildings that offer an array of medical services, from neonatal care to its own pharmacy. Under the tutelage of Price, 54, a 13-year FHP veteran and CEO since 1990, the company has grown enormously. Last year, Mark B. Hacken, 58, a former drug chain executive, was named co-CEO to manage the expansion of FHP's pharmacy business. FHP now employs 800 of its own doctors and contracts with 13,000 others to treat members in 11 states, with its biggest markets in California, Colorado, and Arizona.

Much of FHP's recent success has to do with its pursuit of the lucrative senior market. Seniors account for just 35% of the HMO's members but fully 60% of its $2 billion in revenues. Through the TakeCare acquisition, FHP hopes to bolster its position in the elder-care market. FHP already has 326,000 Medicare members. And TakeCare could add 70,000 more seniors by 1996, according to analyst Thomas Hodapp of Robertson Stephens & Co. That would give it the clear lead over other for-profit HMOs that are aggressively chasing the market. After the acquisition, Hodapp estimates FHP's earnings could grow 43% in 1995, to $82 million, as its revenues climb 72%, to $4.3 billion (charts).

And FHP's target market is just beginning to take off. Peter Boland, a Berkeley (Calif.) health-care consultant, estimates that less than 10% of the country's seniors have joined an HMO. But that's changing as seniors increasingly warm to the plans. By signing up with FHP, seniors are able to enjoy such additional benefits as prescription-drug programs not offered under Medicare. And as HMO members, they don't have to buy additional insurance to supplement their Medicare coverage. FHP estimates that by joining, seniors save about $1,200 annually in out-of-pocket expenses. "There's a lot of gold in this population," Boland says.

FREE MEALS. Previous FHP efforts to tap this potentially rich vein have run afoul of regulators. HCFA criticized FHP in 1988 and again in 1991 for allegedly misleading potential customers about its senior plan. Among the problems: Regulators said that FHP salespeople were telling seniors, falsely, that they could continue to use their own physicians. Not surprisingly, many seniors became disenchanted with FHP. A study released last year by the Center for Health Care Rights found that in 1991, 20,000 seniors dropped their FHP plans. Without new enrollments, FHP's membership would have declined 17% in 1991, the study says. That was double the withdrawal rate at PacifiCare Health Systems Inc., FHP's biggest competitor. FHP claims its disenrollment rate is now down to 1.4%

At the time, FHP attributed its marketing problems to overzealous sales representatives. Without acknowledging any wrongdoing, FHP agreed to suspend its marketing efforts for six months in 1991 while it revamped its sales practices. Among the changes: FHP said sales representatives would lose commissions if seniors leave the plan in fewer than 120 days. The company also tied bonuses to low cancellation rates. Nowadays, Price also says that new members receive mandatory follow-up phone calls to explain their plans in detail. "We stubbed our toe and learned," he says.

Maybe so. But FHP remains an energetic marketer. Like other HMOs, it spends heavily on radio and TV ads to attract seniors to its programs. And throughout Southern California, FHP sponsors "senior days" in parks and other public places, handing out small gifts and free meals at FHP booths. Price defends his company's right to market aggressively because of the highly competitive nature of the market. HCFA also says it can find nothing wrong with FHP's current marketing practices.

Still, it's the quality of care delivered by FHP that most concerns health-care experts and physicians. Take Beatrice Bennett, who was recuperating from a stroke in a Tucson hospital for two weeks in November, 1992, when her daughter, Sharon, was suddenly told that her mother would be discharged, according to the class action filed in November. Sharon persuaded FHP to transfer her mother to a nursing home. In January, that coverage was also halted, the suit alleges. Bennett eventually qualified for state aid, but not before depleting $65,000 in savings. "It's too late to do anything for my mom," says Sharon Bennett. "FHP is willing to take advantage of a system that doesn't function." FHP won't comment on the Bennett case.

Some physicians also allege that FHP isn't afraid to overrule their health-care recommendations to restrain costs. A Tucson cardiologist who severed his relationship with FHP in 1992, says the company would often deny cardiac-rehabilitation procedures, such as exercise and diet classes after surgery, which are guaranteed Medicare benefits.

LITTLE PRESSURE. Another Tucson physician, who worked at an FHP facility until last year, claims the company also limits the use of pricey drugs. He says it discouraged doctors from prescribing Prozac. Instead, it recommended a cheaper antidepressant, Elavil. Although HMOs negotiate different prices for drugs, Elavil typically costs about one-tenth the price of Prozac, says Jerrold Rosenbaum, a pharmacologist at Harvard Medical School. Elavil is widely considered in the medical community to pose more risks for the elderly. Among the possible side effects: confusion, sleepiness, and cardiac problems. "There's a tendency to think to yourself, well, the patient will probably be O.K., even though you know you're not prescribing the right drug," says the Tucson physician. Price denies that FHP interferes with doctors' decisions on care, including cardiac rehabilitation. And he insists that FHP doesn't discourage the use of any drugs because of costs.

So far, critics say FHP is under little pressure to change. HCFA, for one, isn't seeking major reform. It says it received only 4,125 complaints about care from members of all senior HMO plans in 1993. That's less than 1% of all Medicare HMO beneficiaries and far fewer than the number of complaints recorded under traditional Medicare insurance. But health-care advocates say that low rate underscores their argument that seniors aren't familiar with the appeals process and aren't sure what kind of care they are entitled to.

And managed-care experts, including those at HCFA, admit that the HMO industry has been slow to develop quality measures. "We have not moved aggressively in quality measurements in the HMO arena," concedes Dr. Rodney C. Armstead, director of HCFA's Office of Managed Care. HCFA is now working with HMOs to develop tighter quality controls. Until it does, the friction over FHP's practices is likely to remain--even as the company continues to grow.


1988 Health Care Financing Administration alleges numerous marketing violations by FHP sales staff, including misleading seniors about coverage and choice of doctors. Without admitting wrongdoing, FHP submits a plan to correct problems and agrees to bimonthly meetings with HCFA auditors.

1990 A survey conducted by an employee-benefits firm for the California Public Employees Retirement System ranks FHP last among 10 large managed-care companies. The survey measured quality control, member services, and methods for choosing doctors, among other criteria.

1991 The HCFA launches a new investigation into FHP's Medicare plan after level of complaints about FHP's sales tactics doubles from 1990. Without admitting wrongdoing, FHP agrees to overhaul marketing methods.

1993 Center for Medicare Advocacy in Tucson files a class action against the Health & Human Services Dept., charging that it failed to enforce regulations governing Medicare HMOs. Eight of 15 named plaintiffs are members of FHP's senior plan. Charges range from denying home health care to terminating care with no warning to failure to notify members of their right to appeal decisions. FHP won't comment.