Whenever an industry expands as fast as the HMO business has, historians debate
whether the boom was shaped by economic events in the background or by a
handful of entrepreneurs who made the trends happen. Both points of view
generally contain considerable truth. It could be argued, for example, that
corporate demand for cheaper health care, the nationwide surplus of hospitals
and medical specialists in the early 1990s, and the rip-roaring stock market of
modern times made the emergence of a rich, rapacious managed-care industry
almost inevitable. Still, it is hard to imagine that HMOs would have caught on
so fast--or would have pushed the marriage of capitalism and medical cost
control so audaciously--if it weren't for a handful of trailblazers.
The boldest and most controversial barons of austerity are the doctors who
decided to stop seeing patients and start managing populations. Those MDs
brought an intensity, a stubbornness, and a knowledge base to the HMO business
that nonmedically trained executives often lacked. Many of the
physician/executives, though they originally seemed unlikely recruits, became
the most zealous champions of managed-care principles. Some of these doctors in
pinstripes also displayed a raw hunger for wealth that shocked competitors. In
all those respects, the front-runner has been Malik Hasan, a stocky Pakistani
immigrant in his late 50s.
Born into a rich family, Dr. Hasan came to the United States in 1971 after
completing training in neurology in England. He spent a few years as an
assistant professor at Rush-Presbyterian-St. Luke's medical school in
Chicago, then started his own private practice in Pueblo, Colorado. Pueblo,
a steel town 110 miles south of Denver, was a medical backwater. But that was
fine. "I wanted to go to an area that was neurologically underdeveloped," Dr.
Hasan later recalled. "I felt it was somewhere that I could make my mark. That
was what appealed to me. There was nothing there!"
The unwritten rule of private practice in the mid-1970s was "bill a lot," and
colleagues at the time believe that Dr. Hasan quickly mastered it. When he
learned that local hospitals lacked the high-tech equipment that a good
neurologist needed, he set up investment vehicles so he could acquire the
machines himself. One Hasan partnership bought a CAT scanner, a $500,000
machine that provides three-dimensional X-ray images of internal structures,
including the brain, neck, and spine. Another Hasan partnership bought a
magnetic resonance imaging (MRI) machine, a $1 million device capable of even
better soft-tissue scans. When patients with seizures or headaches needed
sophisticated tests, Dr. Hasan referred them for examination with his
machines.*(Such self-referral was legal at the time and tolerated by
professional societies. In recent years it has been labeled a conflict of
interest and has been sharply curtailed.) He soon became known as one of
the hardest working doctors in southern Colorado, putting in long hours in
Pueblo, then driving into ranching towns 100 miles away to conduct once-a-month
clinics for people with neuralgic problems. Those visits improved care in rural
areas that otherwise would never see such a learned specialist. They also
improved Dr. Hasan's income. Some of his rural patients were told to travel to
Pueblo for a brain scan on his machines. "Malik always knew how to maximize the
system," a Pueblo hospital administrator cheerfully recalled. "Anybody that got
referred to him got a CT scan."
Then the unwritten rules changed. HMOs in the early 1980s began making inroads
in Colorado. It became clear that the only people who would thrive in this new
system were those who got managed-care contracts, made sure that frugal
medicine was practiced--and pocketed the difference. That was such an alien
idea at first that when a small HMO tried to enter Pueblo in 1982, Dr. Hasan
led local doctors in a successful attempt to repel the intruder. A few years
later he was ready to switch sides. Managed care wasn't so bad after all, he
told colleagues. In fact, it was inevitable. "We could see the writing on the
wall," Dr. Hasan later recalled. "There was a feeling that this thing was going
to be unstoppable. We, the specialists, were going to be run out of town if we
didn't do something."
In 1985, Dr. Hasan helped form Qual-Med, a tiny HMO with 7,000 members in
southern Colorado. He didn't get much backing from fellow doctors; he asked 100
physicians to invest with him, and 94 turned him down. But the few doctors who
did pitch in were wowed by Dr. Hasan's conviction that he was about to start a
great business. Pueblo physician Robert Dingle put up a few thousand dollars,
mostly on the strength of Dr. Hasan's personality. "He promised us investors
that we would realize more than we could dream," Dr. Dingle warmly recalled.
When Qual-Med's growth in Colorado proved slower than Dr. Hasan had expected,
he started acquiring other HMOs. First he snapped up a New Mexico health plan
that appeared to be in such bad financial shape that the seller paid Dr.
Hasan's company $2.5 million to take the business off its hands. Then he
acquired medium-sized HMOs in Washington, Oregon, and California. Pretty soon
he was running a 200,00-member health plan that was earning more than $1
million a month.
People who watched him in action say that Dr. Hasan embraced deal making with
even more passion than he showed for his first professional love, neurology.
Sometimes he got his way through sheer stamina, turning a two-hour afternoon
meeting into an eight-hour haggling binge that broke up late at night only when
the other participants were too sleepy to resist. On other occasions, elaborate
politeness worked in his favor. One hospital administrator kept a secret tally
of the number of times Dr. Hasan referred to him as "my very good friend"--in
the midst of a high-pressure attempt to cut the hospital's prices by 20
percent. And in acquisition negotiations Dr. Hasan could adopt the classic good
cop/bad cop strategy all by himself. One moment he would praise a seller's
business and talk about how well they could work together if a deal were
completed. The next moment he would protest that the seller's terms were "very
steep," even if Dr. Hasan knew he was being offered a bargain.
One of the most potent tributes to Dr. Hasan's skills came from Boston venture
capitalist Robert Daly, who served for several years on Qual-Med's board
Their friendship had its rocky moments; Daly's firm at one point sued Dr. Hasan
over a contract dispute, which was eventually settled out of court. In the end,
though, Daly's firm made more than five times its original investment in Qual-Med. And
Daly referred to Dr. Hasan as "the most brilliant HMO executive I've ever met."
After acquiring an HMO, Dr. Hasan would install an aggressive medical director
and tell him or her to shrink the medical-loss ratio. The results offended some
patients and doctors, but the approach was a financial success for Qual-Med.
One executive, emergency physician James Riopelle, took a 50 percent pay cut to
work for Qual-Med in New Mexico, but got stock and options that a few years
later were worth $5 million. With such compensation packages, medical
directors naturally did what was best for Qual-Med shareholders. If an
obstetrician wanted to keep a new mother in the hospital for a second or third
day after delivery, Qual-Med's medical directors would say no on the grounds
that it wasn't medically necessary. If an orthopedist wanted to order a second
MRI, he was told no as well, on the same grounds. Even neurologists were told
to stop practicing in their old, extravagant ways. Physicians and patients
sometimes squawked about Qual-Med's rules, but the HMO's managers shrugged it
off. Qual-Med insiders believed that their system was providing good,
cost-effective care. Besides, it was making a fortune for those who were lucky
enough to own stock.
In June 1991 Qual-Med went public in a massively oversubscribed
stock sale. The transaction created 13 instant millionaires, all physicians who
had invested modest amounts in the company early on and then had watched the
value of their holdings soar. The supreme winner was Dr. Hasan, whose modest
investments had skyrocketed to a market value of z$67 million. As a practicing
physician, Dr. Hasan's biggest indulgence had been the purchase of a
Rolls-Royce: the mansion in Beaver Creek.
Many entrepreneurs might have slowed down for a year or two to savor those new
riches. But that wasn't Dr. Hasan's style. In mid-1991 he began stalking Health
Net, a major nonprofit HMO in California. Qual-Med already operated a 100,000
member HMO in the state and Dr. Hasan feared that the 900,000 member
Health Net might soon become strong enough to crush his local health plan. His
solution: a hostile $300 million bid to acquire the bigger rival. When Health
Net executives resisted, Qual-Med sued.
In that suit Dr. Hasan zeroed in on Health Net's weakest point. Health Net
executives in 1991 were feverishly trying to convert their HMO to for-profit
status, a move that would clear the way for top managers to make millions in
the company's stock. But under California law, such switches can be carried out
only if the converting HMO properly compensates the "public interest" that it
previously served as a not-for-profit company. That compensation usually
involves creating a public interest foundation, bankrolled with stock or cash
equal to the appraised value of the HMO at the time of conversion. Hoping to
get state approval of the conversion, Health Net initially proposed to put $127
million into a new foundation that would promote the use of seat belts,
campaign against smoking, and pursue other wellness initiatives. When state
regulators deemed that amount too small, Health Net in early 1992 raised the
foundation's funding to $300 million. But Qual-Med in its suit protested that
even $300 million was not a full valuation for the company. Californians
deserved more for having allowed Health Net to thrive for years as a nonprofit
company that didn't pay taxes, it argued. Until that time few people had
expected a for-profit HMO to show a deep interest in such issues. In mid-1992,
however, Qual-Med proposed to direct $325 million or more into a "Wellness
Foundation" if its own higher bid prevailed.
The suit was a masterstroke. Consumer activists unwittingly helped Dr. Hasan's
cause by labeling Health Net's original and revised plans an asset grab by
management. Lawyers at Consumers Union said the state would be better served if
Health Net were sold at open auction. Eventually Health Net chief executive
Roger Greaves realized that his hopes for a management-led conversion to
for-profit were doomed. In a series of talks in 1992 and 1993, Greaves did the
unthinkable: he flew to Denver, shook hands with Dr. Hasan, and agreed to merge
their companies into a new entity, Health Systems International. In August
1993, the two men finally settled on a merger value of $725 million, reflecting
the steady improvement in both companies' prospects during the two-year
takeover battle. In an apparent sign that they were making peace as equals,
Greaves and Dr. Hasan decided to be joint chief executives of the
Within 18 months Greaves was out of a job and Dr. Hasan held sole command of a
1.8 million- member HMO. The power play left Greaves, a cheerful man who
believed he was the better strategist and marketer of the two, bewildered. But
Dr. Hasan had quickly seized the two most important levers of power within
Health Systems. He installed his own medical directors in crucial jobs and took
the steps needed to reduce Health Net's medical-loss ratio. And Dr. Hasan put
himself in charge of the hunt for more acquisitions. His most ambitious
project, an attempted $3 billion merger with WellPoint Health Networks, proved
impossible to complete. But when the deal looked imminent, negotiators
envisioned such a tiny future role for Greaves that the long-time Health Net
executive decided to quit.
Partway through 1995, Dr. Hasan rang up two smaller deals in Pennsylvania and
Connecticut, giving his HMO a coast-to-coast presence. With outright glee Dr.
Hasan later told how he had convinced executives of the Pennsylvania plan to
accept his $100 million bid, even though another suitor wanted to offer $115
million. "Anyone can pay top dollar," he explained. "But that's not what my
shareholders are paying me to do. They're paying me to get a better deal done
for better terms than anyone else." As Dr. Hasan bluntly put it, "I'm not
representing the other party's shareholders."
Because of his aggressive negotiating, Dr. Hasan became a symbol of HMO power
and strong-mindedness. But that didn't bother him, and at times he even played
to the image. After one especially bruising round of negotiating lower prices
with groups of physicians, Dr. Hasan accepted an invitation from the California
Medical Society to talk about his philosophy of managed care. It was a hostile
audience, but the HMO boss enjoyed the chance to match wits. After his talk a
plastic surgeon rose to berate him for profiting at physicians expense. Without
missing a beat, Dr. Hasan shot back, "There's nothing I can do to help you. I'm
a neurologist by training. You need a psychiatrist.
From 1991 onward Dr. Hasan was far too busy with HMO duties to treat individual
patients. Nonetheless, he remained intimately involved in treatment decisions,
thanks to an unusual two-shift workday that he developed. From late morning
till 6 P.M. or 7 P.M., he worked in a conventional office at Health Systems
headquarters in Colorado or California. Then he went home and began a second
shift, combing through computer printouts of patient care and calling up aides
at home if he saw something he didn't like. His workday continued well past
midnight, and he made no apologies for phoning subordinates after hours. "If
you don't want a phone call from me at 3 A.M., you'd better get everything
right," Dr. Hasan once remarked.
For his troubles Dr. Hasan collected $3.6 million in salary and bonus in 1994,
along with stock options initially valued at $5 million. It was a pay
package that incensed his critics, yet most of the time Dr. Hasan breezily
dismissed their concerns. "I get people asking me: 'How do you justify your
compensation? Aren't you denying care so you can have a larger salary?"' he
volunteered. "But I tell them most of the amount isn't cash, it's stock
options. The cash that I got doesn't amount to two cents per member per month.
To say that I deny care to have a high salary is sophistry. The link isn't
there. " At times Dr. Hasan even worried that he wasn't being paid well enough.
"We are being innovative, and we are helping to solve some very difficult and
knotty problems," he told one interviewer. "If we are successful, then I think
we deserve not only this, but more."
Every now and then, however, a trace of regret slipped into Dr. Hasan's
world-view. In Pueblo he had been a popular, even loved, physician. Patients
not only hurried to pay their bills, he remembered, they brought him small
presents and thanked him for his care and devotion. In his new career things
had changed. He did have national impact on the American health system, along
with more than $150 million in stock and options and a yearly pay package eight
times higher than what he had made in his best year as a practicing doctor. But
he had forfeited the public trust he once enjoyed.
"When you're a doctor, people constantly tell you that you're wonderful," Dr.
Hasan wryly remarked. "Now I sit here all day long, paying people. And I have
nothing but hassles."