The High Price of Health
A Profile of Malik Hasan

Excerpted from 'Health Against Wealth: HMOs and the Breakdown of Medical Trust' by George Anders, Houghton Mifflin 1996. [Reprinted with permission of Houghton Mifflin]

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 of directors.

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 combined company.

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."

 

 
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