Knight Ridder/Tribune Business News
May 19 -- In a sign that small health insurers are increasingly unable to compete against mega-rivals, struggling Sacramento-based health maintenance organization Omni Healthcare said Tuesday it's going out of business.
The HMO, owned by hospital chains Sutter Health of Sacramento and St. Joseph's Regional Health System of Stockton, said it will cease operations no later than Dec. 31.
Employers have 180 days to pick a new health plan, and the HMO has designated Blue Cross of California as its successor. However, employers are under no obligation to choose Blue Cross, said officials of both organizations.
Omni covers about 124,000 Northern Californians, the majority in Sacramento, San Joaquin, Stanislaus and Placer counties. Its rolls include 15,000 members of the California Public Employees' Retirement System, whose contract runs out Dec. 31. PERS will pick another plan this fall.
Nearly half of Omni's members are Medi-Cal recipients, who will be transferred to Blue Cross pending approval from the state Department of Health Services.
At one time Omni represented the trend toward hospital ownership of HMOs and other health insurance plans. More than 1,100 hospitals nationwide own their own plans.
Omni struggled the last two years, though, losing $196,000 in 1997 and $2 million in 1998. It lost $22,000 the first quarter of this year. Last spring Sutter and St. Joseph's tried to sell the HMO but pulled it off the market after none of the eight bidders came close to meeting Omni's asking price.
Last December the HMO said it was undertaking a turnaround strategy that would include rate increases, an exit from rural markets and a 'measured growth' philosophy.
Last Friday, however, the two owners decided to pull the plug. 'It was a unanimous decision,' said Bill Gleeson, spokesman for Sutter.
Robert Fahlman, the chief executive of Omni, said the HMO was too small to compete. Without significant fresh investment from Sutter and St. Joseph's, or a substantial rate increase, the HMO couldn't move 'to the next level,' he said.
Major health plans can spread their costs over a greater number of enrollees, enabling them to price their policies more competitively, he said. 'For a small, regional player, it's more complicated and more difficult to compete,' Fahlman said.
Gleeson said 20 regional HMOs have been consolidated into six major players in recent years. 'That's Omni's dilemma,' he said.
Omni also may have hurt itself because of the 'one-dimensional' nature of its policies, said Dale Waters of Benefit Insurance Services in Sacramento.
Waters said Omni struggled because enrollees in the Sacramento area could only use Sutter hospitals and doctors. By contrast, other health plans gave enrollees the opportunity to select from a wide variety of medical providers, he said.
Also, in an effort to jump-start its business in the early '90s, Waters said Omni got into an expensive rate war with Foundation Health Corp. (now Foundation Health Systems) that left Omni with a slew of 'bad business' -- that is, employers with a lot of sick employees.
When Omni raised its rates to offset its losses, employers switched to other health plans, Waters said. As a result, its demise 'is not earth shattering' to the Sacramento health care market, he said.
Blue Cross spokeswoman Rhonda Seaton said her organization is confident many Omni members will choose Blue Cross. 'We're going to do whatever we can to facilitate a smooth transition,' she said.
The enrollees would pay Blue Cross rates, which Waters said are 'a tad less costly' than Omni rates.
Blue Cross is paying Omni an undisclosed fee for the right to take over the Omni accounts. The fee will be based in part on how many of the commercial (non-Medi-Cal) enrollees choose Blue Cross, said Susan Bitar, a spokeswoman for Omni.
Omni has 110 employees in Sacramento and 70 in Stockton.
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