National Medical Enterprises Inc., embracing a marketing tactic that has distressed the insurance industry, has signed an agreement to buy a San Francisco insurance firm in hopes of using the business to attract more patients to NME's medical facilities.
The proposed acquisition of Assured Investors Life Co., which is expected to be completed this spring, would be NME's first purchase of an insurance company. Terms for Assured--a privately held subsidiary of Denver-based Woodmen of the World, a fraternal society--were not disclosed.
Meanwhile, NME reported Wednesday that it achieved record results for its third quarter ended Feb. 28 and for the first nine months of its current fiscal year.
Operating revenue for the third quarter rose to $773.5 million, a 20% increase from the same period a year ago. Net income rose 17% to $36.8 million, or 49 cents a share, including a one-time charge of 2 cents per share from non-recurring costs associated with the acquisition of Rehab Hospital Service Corp. on Jan. 28.
In interviews earlier this week, NME officials said they expect Assured's health insurance operations in California and 12 other states to further brighten NME's bottom line by helping the Los Angeles company direct more patients to its more than 53,000 beds in 450 acute, psychiatric and long-term care facilities.
"The insurance business is in a position to say where patients are going to receive care," said William K. Piche, president of NME's health care systems and services group, "so hospitals are increasingly interested in having their own insurance company." Piche added that, since Assured operates in cities where NME has facilities, his company will be able to offer "lower-cost (health plans) to consumers."
This marketing concept has intrigued many of NME's competitors.
Last October, for example, American Medical International Inc. of Beverly Hills acquired Fidelity Interstate Life Insurance Co., which offers health, life and accident insurance in 45 states and the District of Columbia. Humana Inc. of Louisville, Ky., and Nashville, Tenn.-based Hospital Corp. of America are also in the process of acquiring insurance companies.
But the trend has upset the $80-billion-a-year health insurance industry.
Geza Kadar, assistant Washington counsel of the Health Insurance Assn. of America, a Washington-based group that represents 350 insurance companies, believes hospital-owned insurance firms will cater to only "affluent patients" and ignore others that major insurers serve.
"If that is done in significantly greater degree than is currently done now," he said, "we will have a national problem on our hands."
Added Mutual of Omaha Insurance Co. spokesman John Fullerton: "The goals of some of these organizations (hospitals) who offer insurance is simply to keep the beds full and make a profit."
With 43% of the nation's 1 million hospital beds empty, according to the Chicago-based American Hospital Assn., hospitals are under pressure to boost revenue. That, in part, explains their new interest in the insurance business, which they view as a method to fill the empty beds.
For example, hospitals can offer discount plans appealing to employers who now shoulder their own insurance costs. They could also use insurance as a springboard for marketing prepaid medical plans such as health maintenance organizations.
"It's going to end up being a lot cheaper" for consumers to buy health insurance because of the hospital competition, said Steven Reid, vice president and health analyst for Bateman Eichler, Hill Richards Inc., a Los Angeles investment house. It will also be a financial boon for hospitals, which he said "are buying (insurance companies) to lock in clientele for their hospitals."
In its earnings report, NME said operating revenue for the nine months rose 19% to $2.2 million. Net income rose 22% to $108.6 million.
Richard K. Eamer, NME's chairman and chief executive, said the company's third-quarter results reflect a 21% increase in its acute- and primary-care operating revenue, an 18% gain in long-term care revenue and a 20% increase in psychiatric and substance-abuse revenue.
He added that the company's Psychiatric Institutes of America subsidiary achieved substantial increases in admissions, and its Hillhaven long-term care subsidiary reported significant gains in patient days and private patient utilization.