Sierra Health Services, Inc.
Sierra Health Services, Inc.
Sales: $295.8 million (1994)
Stock Exchanges: New York
SICs: 6324 Hospital & Medical Service Plans; 6311 Life Insurance; 8082 Home Health Care Services; 6719 Holding Companies, Not Elsewhere Classified
Overseeing the largest and oldest health maintenance organization (HMO) in Nevada, Sierra Health Services, Inc. is the parent company for a collection of subsidiaries that provide comprehensive managed health care and administrative services. Sierra Health’s subsidiaries during the mid-1990s included: Health Plan of Nevada, Inc., an HMO based in Las Vegas; Sierra Health and Life Insurance Company, Inc., a subsidiary licensed to provide health and life insurance in 23 states; Sierra Healthcare Options, Inc., an administrative services company specializing in workers compensation services; Southwest Medical Associates, Inc., Nevada’s largest multi-specialty medical group practice; Family Healthcare Services, Inc., a home health care agency; Family Home Hospice, Inc., a hospice available to all terminally ill members of Sierra Health’s plans and to the general public; and Behavioral Healthcare Options, Inc., which arranged for and managed the delivery of mental health and substance abuse services. Supported by these primary subsidiaries, Sierra Health occupied a dominant market position in Nevada, with its full range of managed care plans and facilities ranking it as one of the leading companies of its kind in the nation.
During the 1980s, the number of individuals enrolled in HMOs in the United States increased fourfold, rising from less than ten million to more than 35 million, constituting by the end of the decade roughly 15 percent of the nation’s population. Although HMOs had been in existence for more than three decades by time their membership ranks began to swell, their share of the medical care market had always been negligible, dwarfed by the conventional “fee-for-service” approach in which patients submit insurance claims to pay for their medical care. HMOs and other managed-care programs did not begin to rise in popularity until health care spending began to spiral uncontrollably upward, forcing those who bore the brunt of escalating health care costs—business and government—to search for more economical alternatives to fee-for-service medicine. One cost-containment alternative was directing employees toward HMOs, which realized savings by limiting a patient’s choice of physicians, purchasing medical care wholesale, and eliminating unnecessary procedures. As a result, the number of HMOs in the country increased considerably during the 1980s, jumping from slightly more than 200 in 1980 to more than 600 midway through the decade. Though their increased presence in the health care industry did not arrest mushrooming health care spending in the country—the United States in 1990 spent 40 percent more per capita on health care than Canada, the second biggest spender, and 70 percent more than the third biggest, Switzerland—the emergence of HMOs and managed-care plans gave birth to a new niche within the health care industry: companies whose twin goals were to provide quality medical care and to make a profit.
Early 1980s Incorporation
One of the numerous managed-care companies to begin business during the 1980s was Sierra Health, incorporated as a holding company in 1984 for the express purpose of acquiring Health Plan of Nevada, Ltd., a Nevada partnership, and four affiliated Nevada corporations, Southwest Medical Associates, HPN, Inc., Rancho Surgical Plaza, Inc., and HPN Pharmacy, Inc. The two primary components of the Sierra Health system at its outset were Health Plan of Nevada, an HMO that had been established in 1981, then began enrolling members in October 1982, and Southwest Medical Associates, a group medical practice headed by Anthony M. Marlon, M.D., the founder of Sierra Health.
With Marlon serving as president and chief executive officer, Sierra Health entered the HMO arena at what appeared to be an auspicious time, its formation occurring just as the movement toward increased usage of HMOs was beginning to gain momentum. Conditions within the HMO industry were not, however, as they appeared at first blush. Though the 1980s witnessed the rise to prominence of HMOs within the U.S. health care industry, many of the companies that competed in the burgeoning market during the decade suffered through difficult years, Sierra Health included, as operators struggled to market their new brand of medical care.
Providing quality care and maintaining profitability were formidable and, to some, contrary objectives to pursue, a corporate mission made more difficult by the inferior image of HMOs as second-rate medical care programs. To succeed Sierra Health would need to convince potential customers that managed-care plans, with their restricted lists of physicians, were not impersonal, substandard health care plans, but instead were plans designed to contain medical costs without sacrificing the quality of medical care offered. In pursuing this objective, Sierra Health had a head start of sorts, at least in terms of already having a core customer base when it began operating in 1984. Health Plan of Nevada had been operating in the Las Vegas area for roughly two years by the time Sierra Health began its corporate life, drawing its initial membership from the gaming casinos in the gambling mecca of the United States. Using the business relationships with casino employers in Las Vegas cultivated by Health Plan of Nevada, Sierra Health expanded into other gambling locales in Nevada during its inaugural year, establishing offices in Reno and Carson City, where it secured the bulk of its business from casino employers in search of more inexpensive health care for their employees.
Expansion and Retreat during the Mid-1980s
From there, Sierra Health entered into other, out-of-state markets, establishing managed-care plans in New Mexico, Colorado, and Arizona. During this expansion into states neighboring its headquarters in Las Vegas, Sierra Health became a publicly owned corporation, selling common shares for the first time on the American Stock Exchange in 1985, but those investors who tied their investments to the Nevada-based company were soon disappointed. Sierra Health recorded a net loss of nearly $9 million for the year following its public offering, then barely eked out a small profit the following year, in 1987. Changes were in the offing, as the company was reeling in its third year of business from a debilitative drain on its profits.
Following the disastrous $8.8 million loss in 1986, Marlon and the rest of Sierra Health’s management reassessed their company’s position and initiated sweeping changes, deciding to narrow the focus of their operations. In 1987, the HMOs in New Mexico, Colorado, and Arizona were divested, leaving the company with only its medical care plans in Nevada. By the end of 1987, the first signs of an encouraging recovery were evident. The company climbed out of the red in 1987, posting $218,000 in profit on $140.3 million in revenue, a promising return to profitability that would have been more remarkable without the money-losing, out-of-state HMOs. Together, the HMOs in New Mexico, Colorado, and Arizona lost $3.7 million in 1987, checking what otherwise would have been a more resolute rise in profits, but once the company had retreated from its presence outside of Nevada, it occupied more tenable ground, supported by its strong position in its home state.
The sale of the three floundering, out-of-state HMOs were not the only changes effected in the wake of 1986’s substantial financial loss, as Sierra Health took further steps to ensure that another precipitous drop in net income would not occur again. The company instituted controls and incentives to contain costs, revised its multi-option health insurance plan to include financial incentives for enrollees to use selected hospitals and physicians, and purchased Family Health Care Services in 1988, a provider of home health care services. Despite the improvements, divestments, and the acquisition of Family Health Care, which provided services to the company’s HMO and insurance plans in southern Nevada, Sierra Health once again saw it profits plummet, recording a $3.4 million loss in 1988 on a modest gain in annual revenue. Consistent financial growth was eluding the company, but aside from its fluctuating net income and lackluster revenue growth there were several positive aspects of Sierra Health’s business that fueled hopes for future financial growth. The company’s medical loss ratio, the percentage of revenues spent on medical expenses, hovered in the low 70s, appreciably less than the mid-80 percent figure that was typical in the HMO industry, and its presence in Nevada was encouragingly strong. Though the company marketed a health insurance plan through its Sierra Health and Life Insurance Co. subsidiary in New Mexico, Arizona, and Colorado, the bulk of its business was conducted in Nevada, where the company ranked as the largest and oldest HMO in the state.
At the heart of its operations in Nevada was the company’s Southwest Medical Associates subsidiary, the largest specialty group practice in the state with seven full-service medical centers, each of which provided care for Sierra Health’s HMO and insurance enrollees. In total, Sierra Health had roughly 123,000 HMO enrollees and approximately 1,600 HMO enrolled employer groups by the end of the 1980s, relatively small figures when compared against larger HMOs in the nation, but in Nevada Sierra Health’s magnitude was virtually unrivalled.
Superior Financial Growth in the 1990s
Entering the 1990s, Sierra Health’s management hoped to bring to an end what one Barren’s reporter referred to as the company’s “abysmal earnings history.” Sierra Health’s annual net income had dipped and dived during the 1980s, demonstrating an unpredictability that left potential investors wary of the company’s stock, but the 1990s would be entirely different. Consistent sales and profit growth, which had eluded the company throughout the 1980s, would arrive during the first half of the 1990s, marking the beginning of a more promising era in Sierra Health’s history and a period during which rapidly mounting U.S. health care spending captured headlines across the nation. As the debate over health care spending intensified during the early years of the decade, becoming an integral issue in the 1992 presidential election and casting HMOs as a possible solution for spiraling medical costs, Sierra Health recorded an impressive string of annual profit increases, beginning with the $3.2 million in net income it posted in 1990. Over the course of the ensuing four years, the company’s annual net income increased each year, rising to $10.8 million in 1991, $13.6 million in 1992, $17.5 million in 1993, and reaching $22.2 million in 1994, while annual revenue climbed from the $158.6 million generated in 1990 to $269.3 million by 1994.
The financial results in 1994 were records for the company, underscoring what had been a highly successful and productive year. Nearly without exception, the subsidiary companies owned by Sierra Health had performed remarkably well, with each expanding in different directions as its parent company prepared for the late 1990s. Health Plan of Nevada Inc., part of Sierra Health’s HMO and insurance operations, ranked as the largest HMO in Nevada, covering roughly 60 percent of all HMO members in Nevada, and was expected to increase its lead over competing HMOs by marketing its services in the northern section of the state in 1995. Sierra Health and Life Insurance Company, Inc., a health and life insurance company licensed in 23 states, was aggressively extending its service territory at the end of 1994, attempting to add to the more than 33,000 insurees it covered by expanding into northern Nevada, Texas, Mississippi, Louisiana, Missouri, and California. Southwest Medical Associates, Inc., Nevada’s largest multi-specialty medical group practice, opened its tenth medical facility in the Las Vegas area in 1994, and, as the subsidiary was entering 1995, was beginning construction of a new outpatient surgery center.
The success achieved by these and other subsidiaries enabled Sierra Health to conclude 1994 on a high note. The company’s stock price reached an all-time high during the year, highlighted by the completion of a stock offering that netted $45 million for the express purpose of funding the company’s expansion and new business development. Toward this end, Sierra Health signed a joint venture agreement with The Galtney Group, Inc. in 1994 to begin marketing an HMO plan in Houston in 1995, and reorganized its management structure, readying itself for anticipated growth in the future. Though any future changes to the nation’s health care system remained uncertain as Sierra Health entered the mid-1990s, the steady growth of the company during the first half of the decade augured a continuation of financial growth during the latter half of the decade, fueling hope that consistent growth throughout the 1990s would erase the memory of erratic growth during the 1980s.
Health Plan of Nevada, Inc.; Sierra Health and Life Insurance Company, Inc.; Southwest Medical Associates, Inc.; Family Healthcare Services, Inc.; Family Home Hospice, Inc.; Sierra Healthcare Options, Inc.; Behavioral Healthcare Options, Inc.; Southwest Realty, Inc.; HMO Texas, L.C. (50%)
“The Best of 1989 So Far,” Business Week, June 26, 1989, p. 112.
“Nevada-Based Firm Pulls Back, Builds on Home Turf,” Modern Healthcare, January 13, 1989, p. 38.
Payne, Chris, “Top Nevada HMO Expanding into Houston,” Houston Business Journal, May 27, 1994, p. 1.
Savitz, Eric J., “No Miracle Cure: HMOs Are Not the Rx for Spiraling Health-Care Costs,” Barron’s, August 5, 1991, p. 8.
“Sierra Health Services Seeks to Become Involved in Department of Defense Tricare Program,” PR Newswire, March 20, 1996, p. 32.
Zipser, Andy, “HMO Operator Shapes Up,” Barron’s, August 26, 1991, p. 32.
—Jeffrey L. Covell