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Commentary: Not Everything Oxford Did Needs Repair


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COMMENTARY: NOT EVERYTHING OXFORD DID NEEDS REPAIR

On Feb. 24, Oxford Health Plans Inc. unveiled its bid for salvation. The health insurer that plunged from grace last year found a rescuer in Texas Pacific Group, a Fort Worth investment house that agreed to pump in $350 million in new capital, and a new CEO in Norman C. Payson, a doctor who once headed Healthsource Inc.

The prognosis remains murky. It's not clear that the bailout, including another $350 million that Oxford plans to hunt down in the debt markets, will pay all the bills. Oxford lost $291 million last year on $4.2 billion in revenues and still owes physicians hundreds of millions of dollars in unpaid fees. Cash flow will suffer at least through 1998 because Oxford is locked into premium prices too low to cover anticipated medical costs. Oxford has "a black hole" in terms of future earnings, says Paul S. Goulekas, a senior vice-president at insurance consultants Conning & Co.

LOSS OF CONTROL. This is the legacy of founder Stephen F. Wiggins, who resigned as chairman as part of the TPG deal. "I'm an entrepreneur first, a professional manager second," Wiggins told BUSINESS WEEK last August. (Oxford declined to make him available after his resignation.) Indeed, Oxford insiders and analysts blame Wiggins for misjudging the complexity and expense of a crippling computer-systems changeover and, more important, for losing control over the costs of medical claims.

But Wiggins also leaves important assets. He is responsible for innovations that have changed managed care for the better. These are moves that set the Oxford brand apart from rivals and can--if retained--leave a foundation to rebuild upon.

What made Oxford different? Wiggins recognized early on that patients hated the limits of traditional HMO networks. So he bet the company on a more expensive product that let members seek care outside a core network of physicians. It wasn't a new concept, but Wiggins was the first to make it a key part of his business. The payoff: Oxford's enrollment grew eightfold from 1993 through 1997.

OPEN EAR. Wiggins also understood that customers would pay more for decent service--an aspect of the business that insurers were infamous for ignoring. Modeling Oxford's marketing after consumer giants such as American Express Co., Oxford studied what its members wanted, and listened. One masterstroke: an alternative-medicine initiative that led members to discounts on such services as acupuncture. It cost Oxford almost nothing, but gained widespread attention.

Oxford still must clean up Wiggins' very ugly operational mess. "We've got some work ahead of us," Payson admits. Yet Oxford remains a vibrant presence in the market. For all the bad news, membership grew 8% between last Sept. 30 and Jan. 1, to 2.1 million. Give Wiggins some credit: If Oxford can survive the financial pitfalls of the next year, the legacy of his market savvy promises to help it make a full recovery. By Susan JacksonReturn to top

ONLINE ORIGINAL

A TALK WITH OXFORD'S NEW BOSS

Oxford Health Plans Inc. in Norwalk, Conn., a former star in the managed-care firmament, lost control of its expenses last year and on Feb. 24 announced a yearend loss of $291 million on $4.2 billion in revenues. On Feb. 25, Dr. Norman C. Payson was named CEO of Oxford -- and Stephen F. Wiggins, founder and ex-chairman, stepped down -- as part of a bailout package that includes a $350 million loan from investors Texas Pacific Group. TPG will get a 22% voting stake in the company and four board seats. Payson agreed to buy $10 million in Oxford stock at an undisclosed price. A medical doctor, he was a founder and former CEO of HealthSource Group Inc., a health maintenance organization (HMO) that was bought by CIGNA Corp. last summer. Business Week Connecticut Correspondent Susan Jackson spoke with Payson the day after he was named CEO. Q: Give me an overview of your task.

A: We have a company that has an excellent franchise and market position in metropolitan New York. That is not only an outstanding market but an underpenetrated one for managed-care products. Oxford has a very strong product with an excellent group of hospitals.

Its problems are twofold. The company expanded very rapidly and entered other lines of business and had financial reverses. As a result, it is currently losing money, not so much because of its primary business but from expanding into other states [Oxford has nascent operations in Florida and Chicago that it is likely to sell off], government business [it's a fairly new entrant into Medicaid and Medicare coverage].

The second problem with such an enormous growth rate is that the infrastructure and systems had difficulty keeping pace with the growth and complexity of the company. The information-systems conversion caused a lot of problems.

And there are related problems: The share price [which has lost almost 90% of its value since the summer] and earnings drops adversely affected shareholders. Some other core constituencies are also disappointed [15,000 doctors are suing for back payments in New York alone]. That reflects back on the business. Doctor relationships are important to the well-being of the company.

It's an excellent company that grew too rapidly for its back office to keep up. And it got into related products that didn't have inherent profitability. Q: What is the status of the businesses?

A: The commercial business in metropolitan New York is primarily sound, but some of the governmental business has been less profitable or not profitable.

It's important to stay in Medicare to maintain strong relationships with the medical community. The government will ultimately get out of traditional Medicare, and it will essentially be privatized. We want to prepare for that.

Medicaid is more problematic. Oxford's products and programs are primarily designed for working populations and their providers -- Medicaid providers have not been its expertise. These programs are also under financial stress and can put pressure on premium pricing. [Oxford will get out of Medicaid in some areas, starting with Connecticut. Payson declined to comment on Medicaid programs in New York, New Jersey, and Pennsylvania.]Q: Oxford's enrollment grew 800% between 1993 and the end of 1997. Will growth continue to be a goal?

A: We need to fix a lot of problems first. This is a midcourse correction. Growth is important -- it's just not as important. We have to make sure the business is working well for current customers before we focus on getting additional ones. When the company is growing at warp speed and things change every second, it's hard to detect problems. And when you've grown, you need different systems and different management.Q: What about research?

A: The company has a fairly high administrative cost structure including research, and we have to look at that in a very sober way. Q: Is this a chance for you to redeem yourself after financial problems at HealthSource?

A: [HealthSource had problems] primarily due to an industrywide phenomenon -- the market cap of most companies at that time went through similar contraction because of an imbalance between premium pricing and costs.

We did create substantial shareholder value and sold the business for $1.7 billion in cash. [Payson himself made $94 million on the sale.] We introduced managed care to a lot of areas that never had any. In retrospect, I wish the operating margins had been better, but it's not like company collapsed or something draconian happened.Q: How long before Oxford is profitable?

A: We've got some work ahead of us. I'm hopeful that next year will be in the black. Return to top


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