U.S. HEALTHCARE, INC. History

Company History:

U.S. Healthcare is one of America's largest health maintenance organizations, serving over 1.3 million members in eight northeastern states. The company provides managed health care plans to employers and senior citizens on Medicare, stressing rigid cost controls, stringent quality assurance systems, and preventive measures to maximize each dollar spent on medical expenses. U.S. Healthcare has grown rapidly in its short history to reach a leading position in the health care industry.

U.S. Healthcare got its start in 1975, two years after the United States Congress passed the landmark Health Maintenance Organization (HMO) Act of 1973. This law mandated that large employers offer their workers the option of signing up with an HMO instead of a conventional insurance company in their employee benefits packages. In this way, companies would prepay a flat fee to an HMO for all medical coverage that an employee might need, instead of taking out an insurance policy that would reimburse the employee for any medical expenses incurred. In addition to this measure, the law insisted that payments to HMOs be no lower than those to insurers.

The provisions of the new law sparked the imagination of Leonard Abramson, a drug salesman for pharmaceuticals maker Parke, Davis & Company who had grown up in Philadelphia and earned degrees in pharmacology and public administration before going on to start two small businesses. Convinced that he could deliver health care more efficiently than traditional providers, Abramson borrowed $2.5 million from the federal government to start his own company.

In 1976 the Commonwealth of Pennsylvania granted Abramson a license to operate his new enterprise, called the Health Maintenance Organization of Pennsylvania, or HMO-PA. In June 1977 the company qualified for federal certification. At that time, HMO-PA was a nonprofit community-based organization, with less than 20,000 members enrolled.

HMO-PA grew steadily throughout the late 1970s, as members were attracted by Abramson's operating philosophy, which stressed personal care given by doctors in their own offices. Instead of a 'staff-model' HMO, in which patients saw a staff of medical care providers in a plan's clinic building, Abramson built a system of 'individual practice associations,' or IPAs, which allowed HMO-PA members to choose their own physician from a list of approved doctors, avoiding the impersonal clinic experience associated with more traditional HMOs. Although the physician autonomy and individual care given to patients often made IPAs less cost-effective than staff-model HMOs, Abramson instituted a number of innovative measures that helped to keep HMO-PA's expenses in tight control. The company gave cash bonuses to mothers for going home early from the hospital after giving birth, and set up financial incentives for doctors who made fewer expensive referrals to specialists.

On December 20, 1982, HMO-PA converted from a not-for-profit corporation to a profit-earning entity, and took United States Health Care Systems, Inc., as its formal name. By that time, the plan had grown to include more than 126,000 members, making it the fastest-growing HMO in the country. In the following year, U.S. Health Care made its first public offering of stock.

With the funds it earned from its stock offering, the company undertook a geographical expansion from its home base in the Philadelphia area. In March 1983 U.S. Health Care offered its HMO plan to employers in the central and southern New Jersey areas. The company looked even further afield the following year, when it moved into the midwestern market. Following a stock offering in August 1984, U.S. Health Care purchased 51 percent of Chicago Health Care Systems, and the company formed HMO Great Lakes in the fall of that year. With 15 HMOs already operating in the area, the Chicago market was crowded, and U.S. Health Care found it difficult to get a firm foothold. By the summer of 1985, the company was forced to reduce its prices in an effort to attract members, but it still failed to meet its enrollment goals. As the company's profits fell, its stock prices slipped as well.

In September 1985 U.S. Health Care opened up another avenue for expansion when the company received permission from the federal government to provide health care programs to senior citizens eligible for Medicare benefits. In this way, Medicare recipients could receive care through the company's network of physicians, and their enrollment fees in the program would be paid by the federal government. U.S. Health Care offered its Medicare alternative as a pilot program in the Philadelphia region, but scaled back its promotion of this program when initial costs of health care for this elderly population proved higher than expected.

Three months later, in an effort to gain further penetration of the Chicago market, U.S. Health Care announced that it would form an alliance with the Lincoln National Corporation, an Indiana-based insurance holding company. Despite its difficulties in Chicago, the company finished 1985 with record profits of $24.5 million, an increase of 127 percent from the year before, making U.S. Health Care the most profitable publicly owned HMO. The company had grown 85 percent a year every year since 1982, fueled by the addition of new members in Pennsylvania, New Jersey, Illinois, and Florida. U.S. Health Care's enrollment had reached 542,000 by the end of 1985, with a very large percentage of its membership concentrated in its home states of Pennsylvania and New Jersey. This market strength enabled the company to bargain effectively with health care providers in the area for favorable rates, helping to keep costs down and profits high.

In April of 1986 United States Health Care Systems changed its name again, simplifying it to U.S. Healthcare, Inc. In the following month, the company put into practice its agreement with Lincoln National, when the two companies inaugurated an HMO called HealthWin. HealthWin took over U.S. Healthcare's existing HMO operations in Illinois and Florida. In addition, the company made plans to offer conventional health insurance, and preferred provider plans, as well as an HMO, to enrollees in the Baltimore/Washington area, Dallas and Houston in Texas, and in five cities in Florida--areas where Lincoln National already had an established presence.

Although the HealthWin alliance did allow U.S. Healthcare to make some headway in its midwestern operations, the company also had to split its profits 50-50 with its partner in the joint venture. By the end of the year, it had become clear that the venture would not return high enough profits, and U.S. Health Care sold its interest in HealthWin back to its partner Lincoln National on the last day of 1986 for $100 million. In doing so, the company divested itself of its operations in Chicago and Florida, and returned its focus to its initial base, the Northeast. 'We learned some lessons in Chicago,' Chairman Abramson told Business Week.

U.S. Healthcare got an opportunity to put those lessons to work in its next target for expansion, New York City. In early July 1985 the company announced its intention to operate an HMO in New York, and within seven months, it had signed up 200 doctors and 38 hospitals to participate in its plan. U.S. Healthcare began the second phase of its campaign in February 1986 when it started advertising in the New York market, in an attempt to convince New Yorkers, notoriously wary of the HMO concept, that they wanted to take part in the U.S. Healthcare program. Although Abramson's company was one of the earliest for-profit contenders in the New York HMO arena, it faced stiff competition from the well-established Empire Blue Cross and Blue Shield, as well as more than 40 other HMO plans, and start-up costs were estimated to exceed $5 million. This investment paid off in the long run, however, as New York-area enrollments grew to reach 40 percent of the company's total membership growth within five years. In addition, U.S. Healthcare ended 1986 with record revenues, posting $35.8 million in operating profits. Proceeds of the sale of U.S. Healthcare's interest in HealthWin pushed its net to $75.8 million.

In April 1987 U.S. Healthcare announced that it would branch out from its core business of HMO operation to form a pharmaceutical subsidiary, to be called U.S. Bioscience, Inc. The main mission of this company was to research and develop drugs for the treatment of cancer. The company committed $10 million to the project, which it was also counting on to package generic anticancer drugs for the HMO's patients. Also in 1987, U.S. Healthcare began offering dental services to its patients.

One month later, U.S. Healthcare announced further geographical expansion, when it began offering its services to patients in Delaware. In addition, the company made a push to increase its share of the Philadelphia market. In September 1987, U.S. Healthcare announced that it would increase its reserves of cash markedly to offset rising medical costs. This resulted in a sharp drop in the price of the company's stock, and U.S. Healthcare finished up the year by posting an operating loss of $4.45 million.

U.S. Healthcare made a second move into the midwestern health care field when it joined with the St. Louis-based Blue Cross and Blue Shield of Missouri insurance companies to manage a new HMO that the Missouri Blues would own. BlueChoice got its start in January 1988, and became profitable in August 1989. The partnership was dissolved in January 1992 when U.S. Healthcare received a $3 million settlement from the Missouri Blue Cross companies.

In early 1988 U.S. Healthcare also began an effort to assure that patients received high quality care from its private doctor contractors, instituting a physician quality incentive program. Each of the program's doctors was rated on four criteria: patient satisfaction, as determined by surveys; rates of patients transferring from one doctor to another; physician compliance with prevention programs; and reviews of medical charts, to determine if proper procedures had been followed. Doctors who did well on the four scales were rewarded with higher payments, and those who did not measure up to the average were penalized. 'Our goal is to integrate quality and cost into a reimbursement model that rewards physicians for managing both well,' U.S. Healthcare's medical director told Hospitals magazine.

In 1988 U.S. Healthcare's enrollment reached 900,000 members, and it posted net income of $3.63 million. By the end of 1988, the company had also expanded into an additional two states, putting Connecticut and Massachusetts on its roster. U.S. Healthcare created a new subsidiary to serve another segment of the medical services market when it inaugurated Corporate Health Administrator. This branch of the company was designed to assist self-insured employers with claims processing, patient management, and access to some of the company's network of health care providers. In this way, U.S. Healthcare extended its principles of managed care to a wider range of employers, helping them to reduce their medical care costs.

Early in 1989, U.S. Healthcare's stringent efforts at cost control prompted legal action against the company by six former members of its Pennsylvania plan. In a class-action suit, U.S. Healthcare was charged with defrauding its enrollees by producing advertising and promotional materials that omitted mention of company policies that discouraged U.S. Healthcare doctors from referring patients to specialists. Among these practices were a fund for payments to specialists and hospitals, which was divided among the company's doctors if it remained unused, and bonuses paid to doctors for treating patients at home instead of admitting them to an acute-care facility. U.S. Healthcare maintained that its operations complied with all state and federal regulations. In October 1989 U.S. Healthcare signed up its one millionth member, and the company ended that year with revenues that broke the $1 billion barrier for the first time, yielding a net income of $28 million.

In a further effort to keep costs down while maintaining quality, U.S. Healthcare established a subsidiary called U.S. Quality Algorithms Corporation in May 1990. With a staff of doctors and statisticians, the new company set out to study the patterns of medical practice and billing of the health care providers who had contracts with U.S. Healthcare. Eventually, the company planned to make statistical analyses of the performance of hospitals, laboratories, and physicians available to a broad variety of health care consumers, such as corporations, insurers, and governmental regulators. U.S. Healthcare planned to make such statistical ratings the basis for its future determination of whom to contract with for services.

The company also announced its intention of negotiating longer contracts with hospitals to cut down on the administrative costs associated with annual renewal of agreements.

In mid-1990 U.S. Healthcare announced that it was beefing up its sales staff in the New York area, in an effort to recruit a large number of new members. These measures paid off in the next year, as New York enrollment rose by almost 30 percent in the 12 months ending in June 1991. In the fall of 1990 U.S. Healthcare opened a state-of-the-art customer service facility to accommodate its ever-growing membership. The building, located in the company's hometown of Blue Bell, Pennsylvania, a suburb of Philadelphia, made use of a number of futuristic computers, including a mail-delivering robot, to track employees' productivity and urge them on to greater accomplishments. In an effort to remove impediments to effectiveness in its corporate culture, U.S. Healthcare banned memos and meetings during the business day, and eliminated the use of titles within the organization. At the end of that year, U.S. Healthcare announced the formation of a mental health and substance abuse subsidiary, U.S. Mental Health Systems. The new subsidiary was also assigned to administer the company's employee assistance programs. By the end of 1990, U.S. Health's profits had tripled from 1989 levels, reaching $78 million.

In the early 1990s United Healthcare moved to further contain costs by implementing broad preventive measures among its membership. The company introduced aggressive cholesterol screening and early breast cancer detection programs, as well as weight control and anti-smoking services. In the wake of success in these areas, U.S. Healthcare added similar programs for colorectal cancer and high-risk pregnancy. These measures helped to maintain the company's high rate of profitability, which resulted in earnings of $151 million in 1991, an increase of 95 percent over the previous year. The company significantly increased its staff in 1991.

With revenues running at $1.7 billion, the New York state insurance department saw no need to grant U.S. Healthcare the 10.7 percent rate increase it requested in December 1991. In January 1992 it was granted a nine percent increase instead. By that time, U.S. Healthcare had inaugurated service in two new states, New Hampshire and Maryland. The company's rate of membership growth had continued at a steady clip for the last three years, reaching nearly 50 percent. To attract still more employers and their staffs, U.S. Healthcare began to develop more flexible HMO programs in an effort to compete with the large national insurance companies that were belatedly getting into the HMO field. Given its record of steady growth and strong, innovative management, the future for U.S. Healthcare appears bright.

Principal Subsidiaries: Corporate Health Administrators, Inc.; U.S. Health Care, Financial Services; United States Health Information Systems, Inc.; United States Home Health Care Systems, Inc.; U.S. Mental Health Systems; United States Physicians Care Systems, Inc.; U.S. Quality Algorithms Corporation.

Further Reading:

• Carpenter, Kimberly, 'Can a Pioneering HMO Crack the Tough Markets?,' Business Week, February 10, 1986.
• Johnsson, Julie, 'Physician Bonus: HMO's Reward High-Quality Care,' Hospitals, November 5, 1989.
• Rice, Faye, 'America's Hottest HMO,' Fortune, July 15, 1991.
• Weber, Joseph, 'In This Corner, It's U.S. Healthcare ...,' Business Week, March 23, 1992.

Source: International Directory of Company Histories, Vol. 6. St. James Press, 1992.

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