Copyright © 2002 Allan Baumgarten.
George Halvorson, CEO of HealthPartners, the second largest HMO in Minnesota, has been named chairman and CEO of Kaiser Permanente, based in Oakland, CA. To give readers a sense of what Halvorson brings to Kaiser, this trend note presents background information on the Minnesota market, HealthPartners and Halvorson's role there.
Introduction and History
The two health plan companies share some historic roots, but HealthPartners has gone off in a much different direction. It was one of the early HMOs in Minnesota and was formed in the 1950s as Group Health Plan by a core of labor union leaders, University of Minnesota faculty and others who wanted to create a model of pre-paid health care in Minnesota. They faced strenuous opposition from organized medicine and skepticism from employers and consumers. (An Enduring Mission, an authorized history of Group Health, was published in 1991 and is a charming telling of the early years of the organization.) Group Health aroused strong feelings of loyalty and disdain in the past, but that is much less so today.
The health plan grew, but so did its competitors. During the 1970s half a dozen new HMOs were formed in the Twin Cities area. Many large employers in Minnesota endorsed HMOs as a vehicle for improving quality and saving money, and many public employers offered HMO options to their employees. In 1977, Group Health had 107,000 members, half of all HMO enrollees in the state. By 1986, Group Health had 206,000 enrollees out of 1.1 million HMO members in the state. For context: the population of the seven-county Minneapolis-St. Paul area is about 2.5 million, and the total state population is about 4.8 million.
Halvorson joined Group Health in 1986 after working as a journalist and then an executive at two other Minnesota HMOs. His predecessor at Group Health was Leonard Schaeffer who left Minnesota for California to head Blue Cross of California and what is now Wellpont Health Systems.
In 1992, Halvorson engineered the merger of Group Health and MedCenters Health Plan in order to provide more comprehensive regional coverage and to compete with the other major health plans in the area. Both Medica and Blue Cross Blue Shield were marketing total replacement plans and were getting contracts with large public employers and others. Group Health and MedCenters had formed a consortium to make a successful bid to the Buyers Health Care Action Group (BHCAG), a coalition including more than a dozen large, Minnesota-based corporations like Dayton's (now Target), Norwest Bank (now Wells Fargo), Carlson Companies, 3M and others. That group sought proposals for a health plan that would provide geographically comprehensive coverage and shared the employers' commitment to quality improvement and other goals.
MedCenters was built around the Park Nicollet Medical Center, a large multi-specialty group practice, plus some other group practices and IPAs. Group Health was strong in St. Paul and its suburbs, while MedCenters was stronger in the western half of the metropolitan area.
The new company was called HealthPartners, almost the same name as a Minnesota HMO that began and quickly went bankrupt in the late 1980s. It took several years to integrate the health plan products and medical management systems of the two HMOs. Under most products, Group Health members could now go to MedCenters groups and MedCenters enrollees could go to Group Health clinics.
Exhibit 1 shows enrollment in HealthPartners from 1996 to September 2001. At HealthPartners and other Minnesota HMOs, enrollment in insured plans has been flat or down in the last five years. Enrollment in Medicare HMOs has declined steadily since the late 1980s and only two HMOs, HealthPartners and UCare still operate Medicare+Choice plans. Many employer groups have migrated to self-funded plans, often administered by one of the large HMOs.
Exhibit 1- Enrollment in HealthPartners, 1996-2001
Year Commercial Medicare Public Programs* INSURED TOTAL Self-Funded TOTAL
1996 420,475 34,446 37,045 491,966 184,065 676,031
1997 423,587 35,517 39,149 498,253 256,023 754,276
1998 444,961 38,773 41,605 525,339 261,625 786,964
1999 434,696 37,331 36,471 508,498 281,000 789,498
2000 387,286 33,963 39,596 460,845 189,155 650,000
September 2001 354,643 38,982 42,969 436,594 Not available
Public programs include Medicaid, General Assistance and MinnesotaCare, a subsidized insurance program for low-income households that do not qualify for Medicaid. Includes enrollment in Central Minnesota Group Health Plan, 1996-1998
HealthPartners began to serve self-funded groups in significant numbers when it began administering the Choice Plus plan for the companies in the Buyers Health Care Action Group. It administered that plan as it evolved during the 1990s. Beginning in 1997, BHCAG began its strategy of direct contracting with care systems of physicians and affiliated hospitals. (In Minnesota direct contracting refers to employers or government bypassing health plans to contract with physician organizations. In California, direct contracting usually refers to health plans bypassing physician organizations to contract with individual physicians and clinics.) BHCAG contracted with 15 care systems in the Twin Cities area and nine others in outstate Minnesota. In the past year, both California PERS and the Pacific Business Group on Health seriously considered moving toward a care-system model for organizing benefits, but have largely set that idea aside.
HealthPartners provided administrative services through the end of 1999. In 2000, its enrollment in self-funded plans declined, although it still serves groups like the State of Minnesota employees through self-funded plans.
Since then, HealthPartners has treated Choice Plus as a competitor. It snatched away a few groups from the coalition by offering better pricing to those companies if they would deal directly with HealthPartners rather than buying access to HealthPartners clinics through the Choice Plus product. It also announced that it would make its clinics available to employers already participating in Choice Plus but not new groups. Thus, when the University of Minnesota began to offer Choice Plus to its employees in 2002, the HealthPartners clinics were not offered as a care system option. University employees that wanted HealthPartners clinics (and many of them had been loyal patients there for many years) had to sign up for the HealthPartners HMO plan. For additional details on the results of the University's recent open enrollment, see an Industry Note at my web page: http://www.allanBaumgarten.com/cfusion/view_news.cfm?id=33
While Kaiser in California is largely a self-contained system, HealthPartners relies heavily on outside providers. Out of about 650,000 enrollees in different products at HealthPartners, about 250,000 see physicians in the HealthPartners clinics. The others are served through an extensive network of contracted clinics and physicians. Many of those physicians are also tied to competing hospitals or health plans. Most of those groups are capitated for physician services, and a few, such as Park-Nicollet health care, have global capitation arrangements with HealthPartners.
Group Health never owned its own hospital. It developed strong ties with Fairview Riverside hospital in Minneapolis and Methodist Hospital in St. Louis Park. In 1993, HealthPartners acquired St. Paul Ramsey Medical Center, the general hospital in the St. Paul area. Ramsey County continued to provide money for uncompensated care, although the amount of support declined over time. HealthPartners is also tied to another hospital, when Regions Hospital entered into a management agreement with Hudson Medical Center in Hudson, Wisconsin. The doctors practicing in the HealthPartners clinics have designated St. Paul Ramsey Medical Center (since renamed Regions Hospital) as their primary hospital in the eastern part of the region and North Memorial hospital in Robbinsdale as their west metro hospital.
Health plans are highly consolidated in Minnesota, and HealthPartners is one of the "Big Three" health plans that dominate the market. Three HMOs enroll 88% of the 1.2 million Minnesotans enrolled in an insured HMO plan. The Big Three are also the dominant administrators of PPO plans in Minnesota, unlike other markets where national insurance carriers like Aetna, CIGNA or United HealthCare are the large PPOs in the state.
The other two large HMOs are Medica, which until last year was part of the Allina integrated system along with numerous hospitals and clinics, and Blue Cross Blue Shield of Minnesota. Medica is the largest HMO in the state, with about 455,000 insured enrollees, and it administers PPO plans for about 550,000 enrollees in self-funded employer groups. Blue Cross Blue Shield of Minnesota has about 1.2 million Minnesota enrollees, of which about 190,000 are in its Blue Plus HMO. Blue Cross Blue Shield is the dominant health plan outside of the Minneapolis-St. Paul metropolitan area, with about 65% of the health insurance market there. Both HealthPartners and Medica have only a small presence outside of the Twin Cities area. The fourth major health plan in Minnesota is PreferredOne, a provider-sponsored PPO that also has about 25,000 enrollees in an HMO product.
Halvorson has criticized consolidation by provider systems in Minnesota, which has occurred in three ways. First, the hospitals in the Twin Cities have formed three large systems, although their influence is somewhat offset by the presence of independent hospitals. In outstate Minnesota, about 10 multi-specialty group practices have come to dominate medical care in places like Duluth, St. Cloud, Mankato, Moorhead, Grand Forks, Willmar and Mankato. The Mayo Clinic in Rochester is the largest and best known of these groups, and it has extended its reach by acquiring clinics and hospitals across southern Minnesota, northern Iowa and western Wisconsin. Some of the other groups are also tied to hospitals, such as the Duluth Clinic. The third development with physician consolidation has been the growth of large, single-specialty groups in areas like oncology, gastroenterology and cardiology. For example, where there were once four large oncology groups in Minneapolis in St. Paul a few years, now three of them are part of the same organization. The net result is that hospitals and physician organizations now have regained a good deal of the economic power they lost to HMOs during the 1980s and 1990s.
Financial Performance In each year from 1996 to 2000, HealthPartners lost money on HMO operations. In three of those years, it earned enough on investment income to post a net profit for the year.
Exhibit 2: HealthPartners Financial Summary, 1996-2000
Year Operating Revenues Operating Profit/Loss Investment Income Net Profit Margin
1996 917,069,000 -8,135,000 14,426,000 6,291,000 0.7%
1997 951,127,000 -21,597,000 11,736,000 -9,861,000 -1.0%
1998 1,142,196,000 -17,627,000 11,945,000 -5,682,000 -0.5%
1999 1,196,663,000 -1,464,000 11,523,000 10,059,000 0.8%
2000 1,272,108,000 -4,373,000 12,919,000 8,546,000 0.7%
Includes revenue and profit/loss from Central Minnesota Group Health Plan, 1996-1998. Margin is calculated as Net Profit divided by Operating Revenues.
HealthPartners marketed its own version of a care system plan, called Ultimate Choice. Despite a significant marketing push, that product never took off. Today, HealthPartners advertises "defined contribution" plans, although it is using the term in different ways than other organizations in the market. Basically, it tells employers that at certain levels of premium and employee contribution, employees can get different combinations of provider networks and cost-sharing arrangements. If they want, employees can then buy up at their own expense to have more provider choices or less cost-sharing.
In February 2001, HealthPartners announced that it would lay off 220 employees from its Twin Cities area clinics. Previously it cut 200 administrative staff positions. Among the clinic staff losing their jobs were several physicians. HealthPartners has moved to offering same-day appointment in its clinics. As a result of changes in scheduling, it became apparent that some doctors were not attracting patients like their colleagues. Some of those doctors lost their jobs. The clinics have also made changes in compensation practices, putting more emphasis on rewarding productive physicians.
HealthPartners has launched several initiatives in recent years that are intended to demonstrate a commitment to accountability for quality improvement. For example, it announced goals for reducing rates of certain common illnesses or conditions and steps that it would take to try to achieve those goals. It has posted comparative information on enrollee satisfaction and some clinical measures about care systems and hospitals in its network. It also announced a series of 10 commitments by which HealthPartners would seek to make health care more consumer-friendly and make the workings of health plans more transparent to consumers. These initiatives have generally been executed with a high level of public relations skill. Additional information about these initiatives can be found on its web site, http://www.HealthPartners.com/
HealthPartners has now come under the scrutiny of the Attorney General in Minnesota. During 2001, Minnesota Attorney General Michael Hatch conducted an extensive investigation of the Allina health system, including the Medica HMO. Although no one was charged with any crimes, the investigation documented an extensive pattern of lavish executive perks, spending on consultants and other acts that the Attorney General determined were inappropriate for non-profit organizations. With that investigation complete, the Attorney General announced that he would launch similar investigations of HealthPartners and Blue Cross Blue Shield of Minnesota. HealthPartners responded that it welcomed the examination and that it was confident that it had never committed similar excesses.
Despite common roots, HealthPartners and Kaiser Permanente are very different organizations operating in much different environments. HealthPartners makes extensive use of the same physicians and hospitals that competing health plans use. Much more than Kaiser, it also markets self-funded plans for employers. While Kaiser's major competitors are national, investor-owned companies, HealthPartners competes in a state where only nonprofits and governments are allowed to have HMOs. (I would suggest that this distinction is less important than it appears.)