oxhp.com
the_new_york_times
The New York Times
December 10, 1997
OXFORD HEALTH TO SHOW A LOSS FOR THE YEAR
by Reed Abelson
NEW YORK -- Oxford Health Plans, a managed care company that
enjoyed running advertisements questioning why competitors were not
matching its consumer-friendly brand of health care, admitted
Tuesday that it had sorely underestimated the cost of that care.
Under pressure from the New York State Department of Insurance,
Oxford confirmed fears Tuesday that it had misjudged its costs,
with the announcement that it would take a substantial charge to
fourth-quarter earnings and show a loss for the year. It described
the insurance department's review of the company as "continuing."
The full size of the charge was not disclosed. But at least $164
million of it will go just to bolster reserves for medical claims
submitted on behalf of New York policyholders, the core of its
business. The company, based in Norwalk, Conn., said it will set
aside an additional amount to cover customers outside of New York.
Largely because of the charges, the company said it is estimating a
$120 million net loss in the fourth quarter and a loss for the
calendar year. Final numbers will not be available until February,
the company said.
"We make this addition to our reserves to remove any doubts about
our stability," Stephen Wiggins, Oxford's chairman and founder,
told Bloomberg.
In the announcement, Wiggins said the company was "cooperating
fully" with insurance regulators. "In addition, we believe these
steps will enhance our prospects for returning to profitability,"
he said.
Investors, who had an inkling that it might be a bad week for the
once-high flyer, will not have a chance to fully digest the news
till Wednesday. Trading in the company's stock was halted in late
afternoon before the announcement was made and had not resumed by
the time the market had closed. The stock last traded at $20.0625,
down $1.3125 from Monday's close and light years away from the $89
peak it hit in July.
For Oxford's investors, the last few months have been painful to
watch. The company has been late in processing hundreds of millions
of dollars it owes doctors and hospitals, blaming its new computer
system.
It stunned investors in late October, when it warned that its
third-quarter earnings would disappoint, and the stock lost more
than $3 billion in a day.
About a week later, actual third-quarter results came in worse than
expected. That same week, the company disclosed a plan to improve
management, expand its board and hire some computer consultants, at
the urging of New York's insurance department.
While some Wall Street analysts had been predicting yet another
shoe to drop, some were surprised by its size, which will be even
larger than the $94 million, after-tax charge taken for the third
quarter.
"I didn't expect the shoe was going to be this heavy," said Gary
Frazier, a managing director at Bear Stearns who had been among
those waiting for another charge.
Until Tuesday, analysts had been predicting that Oxford would earn
$12.7 million, or 16 cents a share, for 1997, and the company had
felt comfortable with estimates that it might earn at least $1.30
next year. In a hastily convened conference call with analysts
Tuesday, the company was no longer entertaining projections for
1998.
Kenneth Abramowitz, an analyst with Sanford C. Bernstein, described
the loss as "obviously disappointing, but not shocking." He noted
the industry's history of having trouble estimating its reserves.
--
Copyright 1997 The New York Times Company
the_wall_street_journal
The Wall Street Journal
December 10, 1997
HOW NEW TECHNOLOGY BECAME A SERIOUS PROBLEM FOR OXFORD
by Ron Winslow and George Anders
Staff Reporters of THE WALL STREET JOURNAL
The annals of business are filled with Frankenstein
stories -- -- tales of technology run amok.
But the computer-system horrors at Oxford Health Plans, Inc.,
take the genre to a new level.
Only two months ago, Oxford was basking in Wall Street
admiration for its blazing growth. This week, the health-
maintenance organization disclosed that it will post a loss of
$120 million or more for the current quarter, on top of
a surprise third-quarter loss of $78.2 million -- its first
loss since going public in 1991.
Oxford's shares closed Wednesday at $17.1250, down $2.9375, or
15%, on the Nasdaq Stock Market. Wednesday's closing stock
price was down 75% from its level just before the company first
revealed its troubles in late October.
How did disaster strike so quickly? As Oxford's business was
faltering, it never saw the warning signs. One reason was a
long list of troubles with a computer system that went on-line
last year: how it was designed, how it was installed and how
Oxford executives managed it.
The computer problems left Oxford unable to send out monthly
bills to thousands of customer accounts and rendered it
incapable of tracking payments to hundreds of doctors and
hospitals.
In less than a year, uncollected payments from customers
tripled to more than $400 million, while the sum Oxford owed
care-givers swelled more than 50%, to more than $650 million.
For any company grappling with new information systems, Oxford
offers a lesson in how not to proceed -- and in how hotshot
technology can create even worse problems than the ones it was
intended to solve.
PLAN FOR GROWTH: Oxford's dazzling growth was both its
distinction and its undoing. The HMO began planning the new
computer system in 1993, when it had just 217,000 members. The
system didn't rev up until October of last year, by which time
the HMO's membership had swelled to about 1.5 million. Thus,
the new system was already outdated and outmanned.
Problems popped up immediately. Processing a new member sign-up
was supposed to take just six seconds but instead took 15
minutes (a lag that later was fixed). And even as Oxford's
backoffice infrastructure was overwhelmed, the company continued
signing up hordes of new customers that its system couldn't
handle -- more than half a million new members in the past year.
"If you drive a train at 150 miles an hour without good tracks,
you derail," says David Friend, a global director at Watson
Wyatt & Co., Bethesda, Md.
TAKE BABY STEPS, NOT BIG ONES: Build your new information
highway from exit to exit, not coast to coast. Oxford locked
into a design for the entire system in late 1993, which made it
difficult to adjust to subsequent technological improvements as
the project moved forward. Moreover, it tried to convert the
bulk of its membership-billing database in one fell swoop --
-- some 43,000 accounts covering 1.9 million members.
Computer specialists say that such a sweeping conversion is far
too difficult; companies should switch just the records for,
say, one county or one business group at a time. "Put all of
your small customers on the new system and see how it goes,"
suggests John Salek, of REL Consultancy in Purchase, N.Y.
Oxford's all-or-nothing approach misfired, making it all the
harder to do further repairs without creating even bigger snags.
Stephen F. Wiggins, Oxford's founder and chairman, acknowledges
that a more incremental conversion would have been preferable.
BEWARE OF "DIRTY DATA": Oxford's old software was riddled with
seemingly innocuous errors in member records that turned out to
cause enormous problems in the new system. For instance, the old
VMark uniVerse database tolerated errors that let a patient's
Social Security number be entered in a box reserved for date of
treatment. But the new database, from Oracle Corp., spit out
such inconsistencies and refused to process the data until they
were corrected.
The new software is "very unforgiving. If you don't get it
right, you don't get it in," says Seth Lefferts, an
information-systems manager at Oxford.
So when the program detected a single mistake in, for example,
a 1,000-member account, it kicked out the entire group --
-- delaying billing and claims processing for all 1,000 members.
When technicians fixed the error and re-entered the account, the
new software would spit it out yet again when it detected the
next mistake in a member's record. And so on.
The volume of individual mistakes "wasn't huge," says Paul
Ricker, Oxford's vice president of information systems. "But the
effect was rather extreme."
Oracle says it continues to work with Oxford and the HMO's
other vendors to get the system working optimally.
DON'T LOSE TRACK OF RECEIVABLES: Once the Oracle software began
balking at the old system's erroneous data, Oxford was forced to
stop billing some customers for months at a time and often sent
flawed invoices to many others. The HMO had no backup system,
not even a platoon of pencil-wielding clerks, to fill the gap.
Yet the company, following standard accounting practices,
continued booking the unbilled income as quarterly revenue.
Then came the rub: When Oxford started to catch up on
long-overdue accounts, contacting customers for the first time
in months, many refused to pay and others said they had quit the
HMO long ago. Hence, the company had to write off $111 million
in uncollectable bills and admit it had overestimated its
membership by 30,000.
Mr. Wiggins now says he should have "hired an army of temps,
put them at a bank of IBM Selectrics, and had them type out
bills. That would have made sure that everybody that owed us
money had a slip of paper saying so."
DON'T FORGET THE LITTLE GUY: When the data overload swamped
Oxford, the company focused first on trying to catch up with
its biggest customer accounts and major providers. That seemed
to make sense: Why not place top priority on fixing the biggest
sources of your revenue and costs?
The risk of such logic, as Oxford now concedes, is that small
customers are the ones most likely to disappear when service
gets bad. They don't yelp; they simply stop paying and sign up
elsewhere. As it turned out, the vast majority of the $111
million hit for uncollectable accounts came from small groups
and individuals.
DON'T IGNORE PAYABLES: Oxford's failure to process claims on
time angered many of the star physicians and renowned teaching
hospitals whose participation was a key selling point of the
HMO. Some providers say they still haven't been paid for care
they delivered well over six months ago. A big doctor group at
Columbia University's respected College of Physicians and
Surgeons was owed $16 million at one point; New York Cornell
Medical Center was owed as much as $17 million earlier this
year.
This meant more than mere embarrassment. Oxford lost track of
its actual medical costs -- critical information for reacting to
surprise problems, setting reserves and projecting future
liabilities. That last item, known as costs "incurred but not
reported," or IBNR, is especially crucial in the insurance
business. Oxford executives "weren't getting the statistics and
data they needed to make accurate estimates on the IBNR," says
Rob Levy of consulting firm William M. Mercer & Co. "So they
were winging it. That's a disaster to any business."
Mr. Wiggins says that the company followed accepted practices
in estimating such costs and that it thought it was making
conservative projections. However, one particularly disturbing
trend went undetected: a sharp 14% rise in Medicare costs at a
time when Oxford's vaunted marketing machine was recruiting new
elderly patients at a rate of more than 100 a day.
FORTIFY RANKS OF 'PROPELLER HEADS': Hire a data chief who knows
how to manage a giant conversion. Many of Oxford's information-
system managers cut their teeth when the company was tiny, but a
wholly different pacing and organization are needed when a
project involves 150 programmers instead of a dozen.
Intermediate goals need to be spelled out precisely, and
multiple projects need to be coordinated.
Oxford dealt with data crises by piling more people onto the
trouble areas, but it didn't seem capable of anticipating the
next snafu.
Mr. Wiggins says his company is now looking for seasoned
managers for information systems, medical management and other
crucial areas of the company.
Copyright 1997 Dow Jones & Company, Inc.
All Rights Reserved
Bill H.
The Wall Street Journal wrote in article <97.dec....@wsj.com>...
> The Wall Street Journal
> December 10, 1997
>
> HOW NEW TECHNOLOGY BECAME A SERIOUS PROBLEM FOR OXFORD
> by Ron Winslow and George Anders
> Staff Reporters of THE WALL STREET JOURNAL
>
[snip]
>
> BEWARE OF "DIRTY DATA": Oxford's old software was riddled with
> seemingly innocuous errors in member records that turned out to
> cause enormous problems in the new system. For instance, the old
> VMark uniVerse database tolerated errors that let a patient's
> Social Security number be entered in a box reserved for date of
> treatment. But the new database, from Oracle Corp., spit out
> such inconsistencies and refused to process the data until they
> were corrected.
Now this seems like a pretty lame excuse. The same "consultants" who
advised them to convert to Oracle, and they're hiring to resolve their
difficulties, with the blessing of the State of New York, probably offered
up this plate-full. It's too bad the WSJ reporters aren't any more
technically literate than this.
> The new software is "very unforgiving. If you don't get it
> right, you don't get it in," says Seth Lefferts, an
> information-systems manager at Oxford.
>
> So when the program detected a single mistake in, for example,
> a 1,000-member account, it kicked out the entire group --
> -- delaying billing and claims processing for all 1,000 members.
> When technicians fixed the error and re-entered the account, the
> new software would spit it out yet again when it detected the
> next mistake in a member's record. And so on.
>
> The volume of individual mistakes "wasn't huge," says Paul
> Ricker, Oxford's vice president of information systems. "But the
> effect was rather extreme."
Haven't we heard this before? A few minor errors cause a $120 million loss
for the quarter! Who are they trying to kid?
> Oracle says it continues to work with Oxford and the HMO's
> other vendors to get the system working optimally.
Good Lord! We figured that. If their programmers and systems people can't
fix it then I suspect their marketing people (or lawyers) will!
> DON'T LOSE TRACK OF RECEIVABLES:
Now isn't this a unique thought. I'll bet it took an PhD to draw this
conclusion.
> DON'T FORGET THE LITTLE GUY:
They rarely pay of this mistake, so why expect any attention to be paid to
them.
> DON'T IGNORE PAYABLES:
(see 'Receivables')
> FORTIFY RANKS OF 'PROPELLER HEADS': Hire a data chief who knows
> how to manage a giant conversion. Many of Oxford's information-
> system managers cut their teeth when the company was tiny, but a
> wholly different pacing and organization are needed when a
> project involves 150 programmers instead of a dozen.
> Intermediate goals need to be spelled out precisely, and
> multiple projects need to be coordinated.
>
> Oxford dealt with data crises by piling more people onto the
> trouble areas, but it didn't seem capable of anticipating the
> next snafu.
>
> Mr. Wiggins says his company is now looking for seasoned
> managers for information systems, medical management and other
> crucial areas of the company.
Now this is, truely, a unique idea. I'll bet the same person who managed
this mess got his (I hope it wasn't a her) annual bonus. If they were
terminated, they should land a comparable job in some other Health Care
company. This happens to bankers a lot.