Possible state cuts threaten UCare's ability to survive

UCare has made a point of saying it's gone to court to fight for the well-being of its members in two public health programs now that the state's decided to send those people elsewhere for their health insurance.

Not only is it a hardship to have hundreds of thousands of people switch to a new health insurer, UCare has argued, but it's UCare that really knows best how to serve people in these programs. A lot of them don't speak English very well, for example, which is why nearly one-third of UCare's customer service and clinical services staff is bilingual.

What UCare's executives haven't come right out and said is that the fight is for the insurer's very life. Perhaps that's because it's so obvious that it doesn't even need to be said.

Unless a Ramsey County District Court this week temporarily stops the transition, come January UCare will have lost most of its members and more than half its annual revenue.

In conversations this week with consultants who specialize in corporate turnarounds, opinions were split on whether the odds favor UCare managing to remain a competitive health insurer after it has to cut itself in half. Even the most optimistic pointed out how difficult the road ahead will be.

Minneapolis-based UCare had been growing nicely and is the fourth-largest nonprofit health plan in Minnesota. But in July, in an announcement that came from the governor's office, UCare came out the loser in a competitive process that involved both cost and an evaluation of service and other factors. It was going to go from 370,000 members in these public health programs to zero. These members had generated 54 percent of UCare's revenue.

The company hasn't belabored just how devastating this will be to its organization, although CEO Jim Eppel did tell a Minnesota Senate committee hearing that maybe half its 900 employees would likely lose their jobs.

The thing that's important to understand is that he's not exaggerating. In looking at the financial statements of the company, at least that many people will need to be laid off to get UCare back to a cost structure that makes sense at the far lower level of revenue.

The company has said that if the state's plan goes ahead, it will take the company back to about the size it was in 2009. That's when UCare had revenue of $1.46 billion. Its cost of doing business that year came to a little over $100 million.

By 2014 revenue had jumped to more than $3 billion, but the cost of doing business had more than doubled, to nearly $229 million. If 54 percent of the revenue walks out the door in a few months, that means the management task that lies ahead will be finding ways to cut more than $120 million of annual expense out of the organization.

Most managers don't have to face that kind of challenge, and hitting even far smaller cost-cutting goals can be daunting. The right approach to take varies depending on how much has to be cut, according to the authors of a memorable 2010 article in the Harvard Business Review.

The authors laid out what to do if faced with a need for a 10 percent cut, a 20 percent cut or even a 30 percent cut. This article is actually a pretty good guide to an unpleasant part of management, but it's not going to be of much use to UCare. That's because the authors didn't say what to do if the cut had to be more than 50 percent.

Some of the things to do on their list of cost-cutting ideas sound sensible, like combining training with company celebrations. Another idea was to hold down salary increases.

But with a cost-cutting task as large as what UCare would face, managers will have to jump right to figuring out how many employees to let go and in which departments.

In addition to the painful task of laying off staff, this is the time when excess office space will have to be vacated and subleased as soon as possible. Office furniture has to be sold along with excess computer equipment and phone equipment, because it takes time and money even to store and keep track of that stuff.

UCare will also need to stop doing some of the things the company does now. It won't be enough to do everything it does now more efficiently.

Here's where it gets tricky, because UCare has other insurance products and has no intention of closing up shop if the courts let the state's plan proceed. The cost cuts have to be swift and deep but still have the company remain recognizably the same UCare that clients have come to know. The remaining UCare members can't be left to wonder if the phone will get answered next time they call.

In a memo written in support of UCare's motion for a temporary injunction, its attorneys explained that members in the other UCare plans have already been calling to ask whether they should switch insurance companies.

This memo also explained that all this cost-cutting would mean UCare "will also be challenged to maintain its state public programs administrative infrastructure, certain provider networks and the employee talent needed to participate in future procurement processes."

In other words, if this change goes into effect as planned, the next time the state goes looking for health maintenance organizations to serve people receiving medical assistance, it maybe shouldn't count on getting a proposal from UCare.

That's even if an independent UCare manages to still be around.

lee.schafer@startribune.com • 612-673-4302