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LOS ANGELES-Foundation Health Systems Inc., a giant managed care company created last month from the union of Foundation Health Corp. and Health Systems International, is growing far beyond the company's California roots as it digs into less saturated markets in the Northeast.
For Los Angeles-based FHS, partly penetrated managed care markets of the Northeast represent the new company's jumping-off point to expanding its network of health maintenance organizations and preferred provider organizations across the nation.
To plan sponsors, FHS executives say, the creation of another supersized network of networks will eventually offer efficiency, stability and more care options.
FHS, which expects to generate $9 billion in revenues during 1997, has completed or begun several acquisitions of regional managed care operations in the past two months. The largest and most recent deal occurred only last week, when FHS announced a definitive agreement to buy Shelton, Conn.-based Physicians Health Services Inc., a 440,000-member physician-controlled managed care company. Physician Health Services primarily serves Connecticut and New York City, and hopes to market in New Jersey.
The $280 million acquisition, which still must be approved by regulators, is expected to be completed by year's end. The purchase was the latest of several embarked upon by Health Systems International before the merger with Foundation Health Corp. was completed April 1.
FHS's plans for the next 12 to 18 months will be expansion of customer bases in the Northeast, the Midwest and Florida, according to Jay M. Gellert, who became president and chief operating officer of the company last week after serving as president of HSI.
In other management changes last week, Dr. Malik M. Hasan, former chairman and chief executive officer of HSI before the merger, was named chairman and CEO of the newly merged company. Daniel D. Crowley, former chairman and president and CEO of Foundation Health Corp. and briefly chairman of the newly merged FHS, will step down as chairman to become a member of the board and consultant to FHS for three years. He will receive a severance amount of about $8.4 million. These changes were to occur a year after the merger, but in a statement released Friday Mr. Crowley said he was not hesitant to give up his top post because FHS was "firmly in the capable hands" of a new management team.
The company also plans to compete for the business of Medicare beneficiaries in the Northeast who spend winters in Florida, Texas and Arizona, which also are among the 17 states that the network serves, he said. FHS also will work on "completing our strong position" in California, Arizona, Washington and Oregon, Mr. Gellert said.
"We have a clearly defined strategy of concentration in the Northeast and concentration in existing markets," he said.
Despite the recent expansions, Mr. Gellert said that FHS for the next 12 months will concentrate most of its energies on integrating existing plans and not building empires. He said the flurry of HMO deals in recent weeks was the fruition of HSI projects long in the works.
FHS will not be aggressively seeking new acquisition opportunities during the next year, he said.
Plan sponsors with FHS contracts will gradually notice administrative improvements, stronger partnerships with providers and a larger choice of specialty managed care services, such as behavioral health options, dental plans and pharmacy benefit management, Mr. Gellert said.
Among the merger advantages for plan sponsors will be more extensive networks-giving members more choice-and the ability of multistate employers to cover far-flung workers under the same plan, he said.
"The most important thing a large managed care company has to do in order to be successful is to prove there is advantage to size," Mr. Gellert said. "We have to prove to our customers there is demonstrable advantage to these kinds of mergers."
Buyers should not expect, however, that economies of scale achieved through mergers will be reflected in lower HMO or PPO premiums, Mr. Gellert said. "The era of reductions is over," he said. "The challenge is to provide reasonable and predictable increases over a period of time."
Health plans in the Northeast that cover fewer than a million lives have a tough time competing, said Robert Natt, president of Physicians Health Services. PHS posted its first quarterly gain in financial performance last week after three consecutive quarters of losses.
A takeover by FHS was necessary "to get us into the pack of the leaders," said Mr. Natt, whose health plan has been trying to turn its luck around by renegotiating provider contracts.
"Their size allows you to draw tremendous efficiencies from administrative costs, and it gives you clout in the provider community to demand the kind of pricing you need to be successful," said Mr. Natt, who is staying on as head of FHS' Northeast operations.
HSI in March 1995 bought another managed care network in Connecticut, M.D. Health Plan. Enrollment in that plan has mushroomed, and combined Connecticut membership for both plans will be about 400,000. "They're going to be a more than credible force in the hottest managed care marketplace in the country now," Mr. Natt said.
Other recent FHS deals in the Northeast include a $51.7 million investment on May 2 in FOHP Inc. of Red Bank, N.J., owner of First Option Health Plan of New Jersey, an HMO. With 254,000 HMO and PPO members in New Jersey and licenses pending in New York and Pennsylvania, the cash-starved plan-like PHS in Connecticut-accepted FHS's offer in search of long-term survival and to avoid erosion of its competitive position.
Another part of FHS's Northeast strategy already was in place: In April, FHS completed the $12.5 million purchase of Pittsburgh-based Advantage Health, a managed care company with 40,000 members, $56 million in 1996 revenues and markets in Pennsylvania, Ohio and West Virginia.
FHS also agreed last month to purchase PACC, a 116,000-member health plan based in Portland, Ore., as part of its continual shoring up where the company already is strong.
When FHS goes back to the market looking for deals, the Northeast is surely where Foundation will continue to focus attention, especially in light of market saturation on the West Coast, said Rick Shaw, financial analyst for A.M. Best in Oldwick, N.J.
"They're focusing on densely populated areas where they can get the most bang for their buck, where they can dramatically increase enrollment," he said.
Buyers of health care coverage aren't sure whether the debut of FHS will have strong positive effects on their companies or employees, said Patricia E. Powers, executive director of the San Francisco-based Pacific Business Group on Health. PBGH is a non-profit coalition of West Coast employers that negotiates on behalf of its members with managed care companies, including FHS, for better rates and quality.
"We have sort of mixed feelings about these mergers and feel it will take another year to see how it turns out," she said.
Plan sponsors could benefit by increased efficiencies, expanded networks and closer ties between FHS and providers, Ms. Powers said. The possible risk, she added, would be the creation of a managed care oligarchy consisting of FHS and a few other vast HMO and PPO networks.
"The jury's out on whether a small, regional plan will survive," she said. "If you're looking at overall trends, certainly bigger is better in the eyes of the payer."