The rise and fall of HSI

FORT COLLINS – Almost 60 years ago, several Fort Collins business people, physicians and the superintendent of what was then Larimer County Hospital got together and started Hospital Service Inc.

The small, not-for-profit insurance company gradually increased its membership and expanded its line of health plans to include PPO, EPO and HMO products, a Medicare supplement and an innovative wellness program.

For many years, HSI Health Plans Inc., as it came to be known, held its own alongside industry goliaths. But the harsh realities of a rapidly changing marketplace, with its increased regulation and demand for new products and state-of-the-art information systems, began to weigh heavily on the company.

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Rather than face an uncertain future, HSI began the search for a merger partner. The company talked with several prospects over the course of three or four years and found a match in Blue Cross and Blue Shield of Colorado. A deal was struck, and if the merger is approved by the Colorado Division of Insurance, by late June or early July, HSI will cease to exist, and Blue Cross Blue Shield will dramatically increase its presence in Northern Colorado.

“We don’t expect any glitches,´ said Chuck Mabry, chief executive officer of HSI. “We believe this is in the best interest of our members and employees, and we’ll try to complete the merger as seamlessly as possible for our customers.”

The next step will be a public hearing at which the commissioner for the Division of Insurance will hear any public concerns about the merger. Nancy Litwinski, assistant commissioner of financial regulation, said the commissioner requested notice of the hearing be listed in the Denver Post, the Rocky Mountain News and the Coloradoan at least seven days prior to the meeting date. The commissioner then has 30 days to approve or deny the merger.

“I think because of the frequency of these events, there is a heightened awareness of ensuring that the process is as public as possible,” Litwinski said. “Copies of the filing are available to the public through our office, HSI and Blue Cross Blue Shield.”

It is not yet known how the merger will affect HSI members. Employer groups and individuals with HSI plans will keep the same coverage and benefits until their policies expire, Mabry explained. At that time, a representative of BCBS will present options for renewal, which may include Blue Cross Blue Shield plans, HSI plans or some combination.

HSI employees will feel more-immediate effects. The merger will involve work-force consolidation, which means some HSI employees will lose their jobs. Even Mabry may lose his position in the company he has headed since 1989.

“BCBS has made a commitment to interview and evaluate every employee here and try to have a job for them either with the expanded operation in Fort Collins or in other places in the state,” Mabry said. “There will probably be some people there isn’t a spot for, but it’s been our goal to take care of the membership and customers first. Our employees are very important, but they are secondary.”

Mabry said the employees have responded well to the merger and will try to make the transition a smooth one.

BCBS is also looking for a smooth transition, said Steve O’Dell, BCBS executive vice president.

“In any merger of this sort there are always some stumbles and bumps in the road,” O’Dell said . “But it’s important to us to preserve the customer relations HSI has developed and also offer the advantages of what a bigger company can provide.”

BCBS was pleased that HSI came to them with the idea of a merger, O’Dell said.

“Combining the organizations under BCBS is a great opportunity for us to develop the northern tier of our business,” he said, adding that BCBS historically hasn’t grown through acquisitions, and another big acquisition anytime soon would be unlikely.

With the acquisition of HSI, BCBS gains a presence in Northern Colorado they haven’t been able to establish before. They’ll add about 21,000 new members to an existing Colorado membership of more than 360,000 and gain about $24 million a year in additional revenue, as many skilled employees as they have need for and a valuable piece of real estate in downtown Fort Collins.

As part of the package, BCBS also acquires Health Systems Management. HSM is the for-profit subsidiary formed by HSI in 1994 to raise capital to develop its HMO product. HSI contracted with HSM in 1995 to manage all of its affairs, then sold 83 percent of HSM’s stock to Poudre Valley Health Care Inc., which oversees Poudre Valley Hospital in Fort Collins.

“HSM gave PVH a breadth of expertise in administration needed to pursue their efforts to create an integrated system of providers and eventually its own insurance product,” Mabry said.

PVH’s recent affiliation with HealthCare Colorado, a group of 10 nonprofit, independent hospitals, helps fill the void left by the loss of HSM.

Another part of the equation is BCBS’s pending conversion from nonprofit to for-profit status. After a series of hearings, the commissioner of insurance will determine the value of the company, which will be transferred in cash into a wholly separate foundation focused on children’s health issues and the general health needs of Coloradans.

If the merger with HSI is approved, HSI’s value as a nonprofit entity will be added to the pot, O’Dell said.

HSI enjoyed several decades of prosperity. The company struggled to develop a regional health-maintenance-organization product with a competitive network of providers, but its preferred-provider organization and exclusive-provider organization with the auxiliary WellSteps program thrived.

The company’s plight, however, has become familiar. The challenge to provide new products supported by state-of-the-art information systems and comply with an increasing number of federal and state regulations, without pricing themselves out of the competition is often too difficult for small insurance companies with limited resources.

As HSI’s assistant vice president of marketing, Karen Johnson, points out, “Smaller companies shouldn’t be held to a lesser standard, but if the technological demands of the industry and means for compliance with policies and procedures remain the same for small and large companies, it will threaten the existence of smaller companies.”