Healthy HPA Out to Make Money, a Name for Itself : Medical: Orange’s little-known, nonprofit Health Plan of America ends financial woes and moves toward becoming a for-profit operation.

ORANGE —  Unlike rival health management organizations, Health Plan of America does not advertise on television, radio, billboards or the backs of buses. It probably would do dismally in a consumer recognition poll.

Although HPA provides medical care to 125,000 members throughout California, the Orange-based company also is largely unknown in the medical business community, largely because it is a nonprofit organization associated with the also nonprofit St. Joseph Health System.

Moreover, until recently the organization hasn’t been in much of a bragging mood. For much of the 1980s, HPA was hunkered down struggling to reverse steady financial losses.

But now the HMO is emerging into a new era. HPA has reorganized, gotten its financial house in order and is launching an ambitious marketing drive in an effort to increase its membership to more than 200,000 in the next two years.

The company also will soon become a for-profit enterprise. On Tuesday it filed an application with state officials to change its nonprofit status. Then, HPA is likely to tap private investors and possibly the stock market to finance its expansion.

HPA started making waves last year when some of the state’s largest employers, including Pacific Bell and Wells Fargo & Co., decided to retain it as a health-care benefit option for their employees while dropping other HMOs that they considered less desirable.

“I was aware they (HPA) were in the market, but they got my attention when they made the Pac Bell short list,” said Russell Coile Jr., president of the Health Forecasting Group, a consulting firm that forecasts conditions in the health care field.

But the biggest boost to HPA’s reputation came in December with the release of a comparative study of HMOs by A. Foster Higgins & Co. for the California Public Employees Retirement System (CalPERS). HPA came out ranked No. 2 in Southern California.

The study came at a time when many large employers are reducing the number of HMOs that they offer their employees in an effort to lower administrative expenses. The process is expected to spur a shakeout in the industry.

Foster Higgins recommended that CalPERS, which administers health benefits for 327,000 state employees, discard seven of the 19 plans that it now offers state employees. The system ultimately decided not to eliminate any HMOs in response to protests that the study was based on incomplete data.

Nonetheless, the publicity benefited HPA. The little-known company was not only recommended for retention by CalPERS--over larger players such as Maxicare Health Plans Inc. and FHP International--but it scored very high on a wide variety of performance criteria.

“They did everything well,” said Robin Weiner, a Foster Higgins consultant who helped prepare the study.

The report noted that among HPA’s most significant strengths was its quality assurance. Weiner said the company carefully screens the credentials of private physicians and hospitals that serve its members.

“Without doubt, they have good hospitals and good (physician group) networks,” she said, adding that unlike some of competitors, HPA tracks the outcome of the medical care that it delivers.

HPA has come a long way since 1979 when it was founded in Emeryville in the Bay Area by the California Assn. of Catholic Hospitals. The operation grew slowly. By 1985 it was serving about 25,000 members affiliated with 26 Catholic hospitals in the state. And it was losing money.

In stepped St. Joseph Health System. The nonprofit organization owned by the Sisters of St. Joseph of Orange acquired HPA and immediately hired an HMO management firm to try to turn around the struggling operation.

Walter W. (Bill) Noce Jr., now chairman of HPA and executive vice president of St. Joseph Health System, said the hospital group hoped the management firm would provide the expertise that it lacked in the HMO business. But the losses continued to mount.

So Noce said the system, which operates seven hospitals, including St. Joseph Hospital in Orange and St. Jude Hospital in Fullerton, canceled the consulting contract and recruited an administrator who would concentrate all his energies on solving HPA’s problems. In September, 1986, Lawrence Kugelman, former chief executive officer of CIGNA Healthplan of California, was hired to run HPA.

Kugelman, who had just sold an HMO he co-founded in Virginia to Hospital Corp. of America, embarked on a plan to make HPA more cost-effective by consolidating administrative functions, slashing back a large advertising budget and moving the company’s corporate headquarters from Emeryville to Orange.

Until the company was operating more efficiently, there was no reason to beat the bushes for new members, Kugelman recalls. “With our cost structure we were losing money on every member we brought in,” he said. The company decided it would be more effective to sell its services directly to employers, rather than individuals.

But by far Kugelman’s most controversial move was to force physician groups and hospitals with which HPA contracted to switch from being reimbursed for each service they provided to receiving a flat monthly fee from HPA. The monthly fee was based on the number of patients they served.

This so-called “capitation” payment program, which was designed to encourage doctors to keep costs down, was strongly resisted by many HPA physicians, some of whom contended that the quality of care would be jeopardized.

“Moving physicians and hospitals throughout the state to capitation was a very long, arduous process,” Kugelman said.

Eventually, about 70% of the HPA physician groups converted to the new system and the remainder left. The physician defection from HPA, he said, was heaviest in northern and central California.

Only about 52% of the hospitals in the HPA system ultimately converted to a monthly fee. The company, however, did not force any hospitals out of its system.

Kugelman said the loss of medical groups could have proved fatal for HPA, which was already in trouble. “The extent of the changes was so dramatic that the company could have collapsed on itself,” he said. “That was a very real business risk.”

But in time the gamble paid off. The company posted a loss of about $10 million in its fiscal year ended June 30, 1987, and sustained the loss of another $2.9 million in fiscal 1988. A decade after it was founded, the company in 1989 edged into the black, earning about $49,000. Last year, it had net income of $2.3 million.

HPA officials, saying that the robust financial growth is continuing, project that HPA will report more than $5 million in net earnings on revenue of about $125 million for fiscal 1991.

Kugelman said that in the hard times HPA benefited substantially from its association with the St. Joseph Health System, a well-established organization with $750 million in annual revenues. He said the hospital system contributed financial support and a sense of stability to HPA that assured clients the HMO would not fold. That is one reason that the HMO’s debt is a relatively small $28 million, all owed to its parent.

Jim Burke, assistant vice president of product development for the Pacific Mutual Life Insurance Co. subsidiary that provides group insurance, said that company participates in a joint marketing program with HPA in part because of the good reputation of the St. Joseph hospital and health system.

HPA has continued to expand gradually by recruiting more physician groups and hospitals to its statewide network, as well as by adding new members. The company has 80 medical groups in its plan and 125 hospitals, about 30% of which are Catholic.

But HPA has stayed lean, Kugelman emphasizes. The company has fewer employees than it did in 1986, although in the same time its membership enrollment has more than doubled.

“Five years ago we had 193 employees and 60,000 members and now we have 184 employees and 125,000 members,” he said.

Besides cutting costs, Kugelman said, he concentrated on improving customer service and developing a sophisticated data tracking capability so that HPA can tell individual employers the kinds and costs of services their employees are using.

“We spent about $1.25 million on new computer equipment and software programs,” he said.

HPA, which is among a dozen HMOs participating in a UCLA and Rand Corp. project to develop measurements for comparing the medical quality of HMOs, hopes its computer data can be used to prove the quality and cost-effectiveness of its operations.

“Large employers now ask for cost and utilization data,” he said. “Two years from now, I think they will ask for a quality measurement.”

After reshaping HPA’s internal organization, Kugelman said, he is now looking to expand the HMO more aggressively.

To prepare itself for future expansion, the company recently converted its license from the state Department of Insurance to the Department of Corporations--a necessary first step in its goal of switching from nonprofit to for-profit status. As a for-profit company, Kugelman said, HPA could raise capital by courting investor groups or selling its stock in the stock market.

HPA also expects to continue to derive membership growth from the increasing selectivity of large employers. Last year, Kugelman said, HPA was retained by three of four major companies that thinned out their HMO rosters. Only Bank of America dropped HPA.

HPA hopes its attractiveness to large employers will spur its growth at the expense of competitors. After Pacific Bell removed several competing HMOs from its benefits offering, HPA’s enrollment of the utility’s employees more than tripled from 5,800 to 17,500.

But Kugelman said HPA also is turning its marketing efforts to small employers. For the first time, he said, the company is courting businesses with only five to 25 workers. HPA has contracted with Word & Brown Insurance Marketing, a general broker based in Orange that last month has begun marketing HPA’s small business plan throughout Southern California.

“We think the smaller employer group represents a market with less competition and good upside potential,” he said.

While HPA will continue to rely heavily on brokers, company officials say they also plan to develop name recognition for HPA among consumers, possibly with the aid of electronic advertising.

Weiner of Foster Higgins said she thinks HPA has suffered by shunning public advertising. “We’ll go to a client with two choices and show that HPA is clearly the leader but the other HMO will get picked because the CEO doesn’t know who HPA is,” she said.

The Health Plan of America * Business: Health maintenance organization. * Location: Orange. * Affiliation: St. Joseph Health Care System, owned by the Sisters of St. Joseph of Orange. * Founded: 1979; St. Joseph Health Care System acquired HPA from the California Assn. of Catholic Hospitals in 1985. * Membership: 125,000. * Employees: 184. * Top officials: Lawrence Kugelman, president and chief executive officer; David M. Horn, executive vice president in charge of marketing and service; Dr. John Austin, executive vice president and medical director. * Structure: Independent physician association model. Contracts with 80 physician organizations and 125 hospitals. * Major services: Basic medical benefits, including vision care and pharmacy. * Service areas: Most of California, with concentration in the major metropolitan areas. * Major clients: Pacific Bell; California Public Employees Retirement System; Rockwell International; McDonnell Douglas; Fresno County; Wells Fargo & Co.; federal government employees; United Food & Culinary Workers Union; Fluor Corp., and Lockheed Corp. Source: Health Plan of America.

HPA’s Membership

Health Plan of America has grown steadily since 1985, when it was acquired by St. Joseph Health System. The company projects that membership could hit 142,000 by the end of 1991. Year: Members 1985: 25,000 1991 (As of January): 125,000 Source: Health Plan of America.

HPA’s Financial Performance

Health Plan of America is a private, nonprofit organization. However, financial data provided for the company indicate that it has operated in the black for the last two years.

In millions of dollars. Fiscal years end June 30.

Fiscal Net year earnings Revenue 1987 -$10 60 1988 -2.9 70 1989 .049 84 1990 2.3 105 1991 * 5.0 125

* Projected

Source: Health Plan of America.