FHP International Corporation

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FHP International Corporation

9900 Talbert Avenue
Fountain Valley, California 92728-8000
U.S.A.
(714) 963-7233

Public Company
Incorporated: 1961
Employees: 9,800
Sales: $1.6 billion
Stock Exchanges: New York

FHP International Corporation is a vertically integrated health care provider that operates in five western states and on the island of Guam. The company operates health maintenance organizations in several forms, which it markets to employers, and is the nation’s second-largest Medicare contractor, providing health care to senior citizens for a flat fee prepaid by the U.S. government. Through strict cost controls, FHP has remained steadily profitable, despite the risks inherent in providing Medicare coverage.

FHP got its start in 1961 in Long Beach, California, when a local physician, Robert Gumbiner, converted Plaza Medical Group, his group practice, into a nonprofit corporation he named Family Health Program. In doing so, Gumbiner became a pioneer in the health maintenance organization (HMO) industry. Under a traditional medical insurance plan, a patient paid a premium to an insurance company for coverage, went to a doctor’s office or hospital when he or she needed care, paid the bill for care received, and then was reimbursed by the insurance agency. With an HMO, the patient prepaid a flat monthly rate, and the HMO provided whatever medical care was necessary to that patient, from an annual checkup to open-heart surgery. A hallmark of HMO care is an emphasis on prevention—encapsulated in the idea of health “maintenance”—as it is less expensive to treat problems early, before they require costly hospitalization.

The HMO idea first developed out of a medical plan set up by the Kaiser Company for its employees in the 1930s. By the end of the 1950s, recalled Gumbiner in an article in the Orange County Business Journal, “there were only a few dozen HMO’s around the country.” When he inaugurated his new venture in 1961, Gumbiner had 2,000 clients enrolled; the patients prepaid an affordable flat fee in order to use the Family Health Plan’s medical center, where they were cared for by a staff of plan employees.

Within six years the Family Health Plan had enrolled an additional 8,000 members and outgrown its original facility. The company opened a second medical center, dubbed “Central,” in Long Beach. The following year, in 1968, the Family Health Plan expanded further, opening a third medical center in the town of Fountain Valley in Orange County, California.

In 1969 Family Health expanded the services it offered to include a prepaid prescription drug program. Tapping one of the largest markets for health care, the company also put together a pilot program to allow California Medicaid recipients to enroll in the Family Health Program plan. Under this program, the state made Medicaid payments to Family Health, who then provided health care to its low-income participants. The following year the company also inaugurated dental coverage.

By the time it celebrated its tenth anniversary in 1971, Family Health had enrolled 30,000 members. The company grew steadily throughout the early 1970s, opening additional medical centers in Compton, California, in 1971, and Santa Ana, California, in 1973. Also that year Family Health made its foray outside the state of California, leaping all the way to the island of Guam. The company introduced prepaid group medical programs to the area and opened a health care center in Tamuning.

Family Health inaugurated Health Maintenance Life Insurance in 1973 as well. This plan, which paid an indemnity in the event of injury or death, provided Family Health Plan members a broader range of health care choices than the simple HMO. While Family Health was expanding the number of options it offered to its customers, the HMO industry on the whole was undergoing a watershed event that would ultimately result in its dramatic expansion. When the U.S. Congress passed the HMO Act of 1973, the industry first began to take its place as a major component of health care in the United States. The law required large companies to offer their employees the option of HMO care as part of their medical benefits packages as well as to pay toward HMO coverage an amount equal to what it paid for insurance. In this new climate of business, Family Health opened its seventh medical center in Anaheim, California, in 1974. In addition, the company moved its administrative offices into a new corporate building next to its original clinic in Long Beach.

Two years later Family Health made its second move outside the California market when it purchased the Utah Group Health Plan. The company began operations in Utah with two health centers, located in Salt Lake City and Midvale. After becoming a federally qualified health maintenance organization on July 29, 1977, Family Health opened a public affairs office in Washington, D.C., to lobby legislators on behalf of the company’s interests. This government seal of approval meant that Family Health had met federal standards for the range of services it offered and for its financial stability. In turn, the company was eligible to provide care and receive reimbursement under federal health care programs, such as Medicare and Medicaid, and it was empowered to force employers to offer its plan in addition to traditional health insurance under the provisions of the 1973 HMO law.

Four years after it had opened its first medical center in Anaheim, Family Health moved its operations there into a new, larger facility. In 1979 the company brought on line two more primary care centers, in Laguna Hills, California, and Ogden, Utah. It now ran 11 comprehensive health care centers. A 12th was added in the following year, when Valley East Medical Center opened its doors in Salt Lake City.

In 1982 the Family Health Program became part of a federal project to restructure Medicare reimbursements. The company received a contract to develop a plan to provide prepaid care to patients over the age of 65, those eligible for Medicare benefits. Under the program proposed by Family Health, the government would pay a flat fee in advance and Family Health would provide all needed health care to a patient for a given period of time. In doing so, the company assumed the risk that the patient’s care might cost more than the flat fee that the government had paid. Family Health pioneered this “risk contract” concept for Medicare patients on the West Coast. As a reflection of the broadening scope of its patient base, Family Health Program changed its name to FHP, Inc. in 1982.

The newly named company put its Medicare plan into effect in 1983 when it inaugurated the FHP Senior Plan, in which Medicare paid for senior citizens to be enrolled in the HMO. In order to handle the influx of patients brought in by the Senior Plan, FHP purchased the Hippodrome Skating Rink building in Long Beach and converted it into a Senior Health Plan Center. The company opened a second medical facility dedicated exclusively to caring for senior citizens one year later in Anaheim.

The new population of patients that FHP began to serve under the Medicare project pushed both its membership and profits to startling levels of growth in the 1980s. The company added 100,000 members in the two years following 1984, bringing its total membership to 250,000.

Another source of growth during this time was FHP’s inauguration of “Individual Practice Associations” (IPAs), a new variant on the HMO model. In a classic HMO, care-givers are paid employees of the company, housed under one roof. Under the IPA plan, however, the company contracted with independent local physicians to provide services to its members in their own offices. IPAs were quicker to set up than a conventional HMO but carried higher costs, since they were more difficult to supervise and control. FHP set up its first such group in 1984 in San Pedro, California. A year later the company expanded the concept to two new states, launching IPA plans in the Phoenix, Arizona, and Albuquerque, New Mexico, metropolitan areas. In California IPAs were implemented in Los Angeles, Santa Monica, and throughout the South Bay area.

FHP’s traditional HMO business grew rapidly during the mid-1980s as well, as public acceptance of the prepaid health care concept grew. The company opened another medical center in Salt Lake City and introduced facilities in the Utah towns of Layton and Provo and in Downey, California.

In 1985 FHP moved its administrative offices to a new building in Fountain Valley. Later that year founder Gumbiner and 17 other FHP executives moved to convert FHP from a charitable trust to a for-profit corporation by purchasing the company for $36 million. The FHP investor group’s price was significantly lower than that of a competing California HMO, Maxicare, which offered $50 million for the company but was defeated in its attempt to take over FHP by adverse rulings in the California courts. In a nod to the company’s nonprofit past, it established the FHP Foundation to make charitable donations in the health care field.

Following FHP’s conversion to a profit-making entity, the company opened its first hospital, a 125-bed facility in Fountain Valley. A second hospital in California was taken over by FHP in July of 1986. Also during that month, FHP offered stock to the public for the first time and changed its name to the FHP International Corporation. The new name was a reflection of the company’s increasing global operations when FHP expanded from its base in Guam to the South Sea islands of Saipan and Palau. At the end of its first six months as a publicly traded company, FHP reported earnings of $5.8 million on revenues of $175.6 million, as the company added two new medical centers and two IPAs in its home state of California.

FHP continued to expand in 1987, adding four new IPA plans and its 25th conventional HMO medical center. The company increased its presence in Arizona when it opened a health care facility in Mesa. FHP suffered some initial difficulties in starting up its operations in Arizona, as some affiliated hospitals charged they were losing money acting as care-givers in its Senior Plan and as its balance of Medicare members and members from the general population tilted too far toward senior citizens, exceeding regulatory limits.

FHP also introduced a life insurance subsidiary, the FHP Life Insurance Company, in September of 1987; it, too, ran into difficulties with state regulators after its fast start-up, when its ratio of policies written seemed to exceed the concern’s capitalization. An infusion of additional cash from the parent FHP brought the company’s operations back into balance.

FHP unveiled a third senior center in Huntington Beach, California, testifying to the company’s continued commitment to health care for those over 65, despite industry-wide skepticism about the ultimate profitability of Medicare business. “We’re going to move to Medicare strongly,” FHP president Gumbiner told the Orange County Business Journal in 1987. “If you’re not in Medicare, you’re not going to be in the medical care business,” he predicted. By 1988, FHP Senior Plan enrollment had passed 100,000, just five years after the program began.

FHP continued its expansion throughout that year, adding new members and new medical centers to serve them. The company’s earnings were briefly depressed by the expenses of advertising and marketing associated with its opening of new centers, but income continued to rise overall. The company credited its strong performance to extensive management training, which allowed it to keep costs down, and to its cautious growth policy. FHP also got a break in 1988 when the federal government announced it would increase payments to its Medicare contractors by 13.5 percent.

In 1989, in an effort to increase its level of vertical integration, FHP made two acquisitions outside its previous fields of operation. Believing that any money paid to outside businesses was money lost, the company tried to fulfill all its patients’ health care needs itself. To this end, it purchased a skilled nursing facility in Westminster, California, for patients well enough to leave the hospital but not quite well enough to return home. FHP also brought on line an optical lab, in Cypress, California, and began supplying members with its own brand of over-the-counter Pharmaceuticals. Furthermore, in addition to its two-year-old dental IPA, FHP introduced a Senior Dental Program; it also introduced Golden Health Care, an option tailored to members who had been enrolled through their employers but had then retired.

In 1990 FHP focused its efforts at expansion on Arizona, New Mexico, and Utah. The company purchased large tracts of land in both Arizona and New Mexico and announced that the property would become the sites of medical campuses. FHP also acquired another skilled nursing facility in California and, as a further step on the ladder of vertical integration, opened a Central Laboratory.

Also in 1990 Gumbiner stepped down from active involvement in the company. In the wake of his departure, FHP underwent two financial setbacks: it was hit with a large malpractice settlement, awarded by a jury in the premature birth of a child, and then given a raise in Medicare rates of only 1.4 percent, less than expected.

In late 1990 FHP began an aggressive expansion into the San Diego market, running advertisements to attract senior citizens to its program. In June of 1991, however, the company was sued by three elderly women, who contended the company had defrauded them in signing them up for its Senior Plan. By July, the company’s efforts in southern California to recruit senior citizens into its health care programs had come under scrutiny by the federal Health Care Financing Administration, the agency that regulates Medicare programs; the agency became suspicious after it received a high rate of inquiries about FHP and reports that an unusually high number of people who had signed up for the plan were later trying to get out of it. As a result of the agency’s investigation, FHP agreed in October of 1991 to modify some of its sales practices, and in December the firm was cleared of any deliberate pattern of abuses. With the resolution of the federal probe, FHP’s applications to begin operations in Nevada and southern California were cleared.

In May of 1991 the company announced that it would purchase a San Francisco area HMO, the Bridgeway Plan for Health, and the company completed a stock offering in a bull market that raised $87 million to fund further expansion. By August, however, plans for the merger with Bridgeway had been called off, as the two sides found themselves unable to reach agreement on reimbursement rates for hospitals and physicians.

Instead, FHP expanded by offering a range of new services to attract new members, including a Preferred Provider Organization, in which members choose their care-giver from a large directory of affiliated doctors and hospitals; a Workers’ Compensation program; Senior Advantage, which paid medical costs not covered by Medicare; and Ultra-link, a nationwide network of affiliated HMOs for the employees of companies with operations in different areas of the country. In addition, FHP opened new facilities in its areas of operation, including a hospital in South Salt Lake, Utah.

By the end of 1991, its 30th year of operation, FHP ran 50 different medical facilities, and its revenues had topped $1 billion. Of its 640,000 members, roughly a third were Medicare patients. In 1992, FHP began operations in Nevada, setting up an IPA to serve employers in Clark County. With its record of steady growth and solid management behind it, it appears likely that FHP’s expansion into Nevada, and any other future sites, should proceed smoothly and profitably.