At the Brink:

Originally published as Issue Brief No. 33 by the Center for Studying Health System Change (HSC), December 2000. Authors: Linda R. Brewster, Paul B. Ginsburg. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

How Harvard Pilgrim Got in Trouble

In January 2000, the Massachusetts insurance commissioner placed Harvard Pilgrim Health Care (HPHC) in receivership after large projected losses left the nonprofit health plan with a deeply negative net worth. As the largest health plan in the Boston market, Harvard Pilgrim owed significant sums to hospitals and physicians, and its financial collapse sent shockwaves through the local health care community. The story drew national attention as well, given the plan's prominence and its long-standing reputation for quality care. HSC tracked the Harvard Pilgrim saga closely through its ongoing monitoring of Boston, one of 12 Community Tracking Study sites visited every two years, and was able to place the crisis in a broader industry context. Many of the problems that brought Harvard Pilgrim to its knees could be found in health plans elsewhere across the country.

The State Steps In to Rescue the Plan

As Harvard Pilgrim's losses mounted in late 1999, Massachusetts passed emergency legislation giving the insurance commissioner authority to take over a failing health plan -- authority the state had previously lacked. At the same time, the plan's CEO was working to raise capital through bonds issued by a state public funding authority for the sale and leaseback of HPHC's health centers. The due diligence process for that financing uncovered a serious accounting error that made the plan's losses far worse than anyone had realized. The bond offering was canceled, and the state moved to take control under its newly enacted receivership law.

Three months later, with more favorable projections of revenue and costs in hand, the state announced that Harvard Pilgrim could move from receivership into rehabilitation under limited state supervision. Rather than selling the plan to a for-profit insurer, liquidating it, or arranging a taxpayer-funded bailout, state officials devised a restructuring plan. By allowing HPHC to reorganize its debt and carry the value of its health centers at current market prices on its balance sheet, the state restored the plan to positive net worth on paper. Harvard Pilgrim then began a genuine recovery by raising premiums and cutting administrative expenses.

Moving Away from the Staff Model

Since the early 1990s, Harvard Pilgrim had been working through a difficult transition from a staff-model HMO to a mixed-model plan with a large physician network. This shift, carried out partly through mergers, created internal strains. Health center physicians pushed for greater control over their working conditions, enrollment growth at the centers stalled, and customer service ratings slipped. It took until 1998 for the plan to spin off its health centers, giving physicians 50 percent ownership and the freedom to contract with other plans. Across the country, staff-model plans had fallen out of favor with consumers who wanted broader physician choice and more convenient office locations. Network-model plans held a competitive edge because they could expand into new areas quickly and negotiate discounted rates with physicians, producing lower costs than plans that employed salaried doctors.

Management and Information System Failures

Compounding the transition difficulties were serious internal management problems, particularly around financial information systems. These deficiencies likely caused the plan to set its premiums too low without realizing the error. When Harvard Community Health Plan and Pilgrim Health Care merged in 1994, integrating their information systems was not treated as a priority. It was not until the turnaround effort began in mid-1999 that Harvard Pilgrim signed a 10-year contract with Perot Systems to build a modern information platform.

The integration problems extended well beyond technology. The merged organization maintained its predecessor plans as largely separate operations, which created duplicated efforts, complicated the organizational structure, and hindered management accountability. The plan kept multiple offices for managing provider contracts, and because the Harvard and Pilgrim physician networks had overlapped before the merger, many doctors retained multiple provider numbers and contract arrangements. At the time of receivership, HPHC was still working to consolidate 20 different payment arrangements with medical groups and hospitals down to three. These problems echoed those at other health plans: Oxford Health Plans in New York had been overwhelmed by rapid growth that outpaced its computer systems, and the Aetna/US Healthcare merger had produced customer service disasters from a too-rapid systems migration.

Overextension Through Geographic Expansion

While struggling with internal issues and the model transition, Harvard Pilgrim was simultaneously pursuing aggressive geographic expansion across New England. The drive into the broader Boston market had been a primary motive behind the original Harvard-Pilgrim merger. The plan subsequently grew through acquisitions and organic expansion into western Massachusetts, New Hampshire, Vermont, and Maine. Local observers described these expansions as a financial drain and a significant contributor to HPHC's problems. The plan also had not anticipated the fierce competition from large national for-profit insurers already operating in these markets. Geographic overreach was a common pattern across the industry: Empire Blue Cross in New York and Horizon Blue Cross in New Jersey had expanded into each other's territories, and Kaiser Permanente's eastern expansions in markets like Miami and North Carolina had not gone well.

The Underwriting Cycle at the Worst Possible Time

The health insurance underwriting cycle of the 1990s proved more severe than similar cycles in earlier decades. When underlying costs dropped unexpectedly early in the decade, premium increases lagged behind, making health plans highly profitable. Plans responded by competing aggressively for market share through low premium increases and geographic expansion. When every plan in a market pursued the same strategy, profit margins collapsed. Boston's market dynamics made the cycle especially punishing. Three locally based nonprofit plans -- Harvard Pilgrim, Tufts Health Plan, and Blue Cross Blue Shield of Massachusetts -- dominated the market, and none was willing to cede ground. The timing was devastating for Harvard Pilgrim: the most financially challenging phase of the cycle arrived just as the plan was spending heavily on its delivery system transition and new-market expansion, and its broken information systems prevented it from detecting how badly it was underpricing its products.

Political and Regulatory Pressures

Massachusetts officials played an unusually active role in the health system, both through formal regulation and through informal pressure on health care organizations. Harvard Pilgrim had generally been responsive to political demands, but as its financial situation deteriorated, it was forced to push back. When the plan tried to trim its unlimited prescription drug benefit in its unprofitable Medicare+Choice product, the secretary of state publicly criticized HPHC and threatened to revoke its nonprofit status. The resulting negative publicity triggered calls for more regulation and further weakened the plan's position. Historically, Massachusetts had maintained only limited oversight of health plans, largely because the dominant plans were local nonprofits. The state lacked minimum net worth requirements for plans and did not require disclosure of detailed financial records across all lines of business -- gaps that allowed Harvard Pilgrim's problems to grow undetected until they reached crisis proportions.

Sources and Further Reading

This Issue Brief was based on interviews with Boston health care leaders and press accounts conducted as part of HSC's Community Tracking Study. Related research included HSC's 1999 Community Report on Boston and Issue Brief No. 31 on the health insurance underwriting cycle. The research was conducted by Linda R. Brewster and Paul B. Ginsburg of the Center for Studying Health System Change.