CIO Tries to Revive Harvard Pilgrim HMO

Louis Gutierrez couldn’t imagine who in the world would be calling him at work at 8:30 in the evening.

Most of the other Federal Reserve Bank employees in Boston had long since gone home on this March evening, and the building was silent and dark but for the light in his office.

Gutierrez answered his phone and immediately recognized Charlie Baker’s voice on the other end. For three years as CIO of the Commonwealth of Massachusetts, Gutierrez had reported to Baker, who was the state’s former secretary for administration and finance. “I’ve been asked to take over as the chief executive officer at Harvard Pilgrim Health Care,” Baker said. Gutierrez congratulated his former boss, but as Baker continued, Gutierrez began to realize that this wasn’t simply a “Here’s where I’ll be, let’s keep in touch” kind of phone call. Baker gave Gutierrez a brief rundown on the situation at Brookline, Mass.-based Harvard Pilgrim, New England’s oldest and most prestigious nonprofit health maintenance organization. It was bad. Things at the health-care plan were seriously amiss.

Then Baker got down to the business at hand. “I’d like you to come join me,” he said. Gutierrez was stunned.

He had become deputy director of Federal Reserve Information Technology at the Federal Reserve Bank just six months ago, after nearly 20 years of working his way up the IT career ladder?from programming and systems analyst positions at IBM in the early 1980s to CIO of the Commonwealth of Massachusetts in 1996. He’d gone back to school in 1990 and earned a master’s of science in management, specializing in information technology and finance at MIT’s Sloan School of Management. Now 40, why would he even consider leaving the Federal Reserve?

“This could be scary,” Baker had said, and to Gutierrez that sounded like an irresistible challenge from a boss for whom he had loved working.

Gutierrez said he’d think about the offer. Baker said he would keep him posted “as the situation unfolds.”

All Hands on Deck

The situation at Harvard Pilgrim continued to unfold. And unfold. In follow-up late-night phone calls, Baker filled Gutierrez in. Incorrect estimates had been made in the HMO’s revenue projections, in large part because of how revenue and claims accounting were being handled?or rather mishandled. During one of these calls, Gutierrez accepted Baker’s offer.

“Although my stomach was kind of roiling, I knew that that’s what I wanted,” Gutierrez says. “Regardless of my ambition [at the Federal Reserve Bank], I really did want to rejoin Charlie in some endeavor.”

Then the storm struck. In April 1999, Harvard Pilgrim reported an unprecedented and devastating $54 million net loss and an operating loss of $94 million for the previous year. The news hit the papers, and shortly afterward, CEO Allen Greenberg and CFO Thomas Brophy resigned. Baker stepped in as CEO on May 24, 1999. He brought in Bruce Bullen as COO and Eileen Winterble as the new CFO. CIO Debra Speight soon resigned. Gutierrez tied up loose ends at the Federal Reserve and joined Harvard Pilgrim in July. Baker also hired turnaround consultants from Time Zero, a Cambridge, Mass.-based division of Perot Systems, a Texas consulting and outsourcing company owned by former presidential candidate H. Ross Perot.

Gutierrez and the rest of the new senior management team hit the ground running, working almost around the clock, seven days a week, to save the sinking HMO. The small group of senior officers formed a turnaround steering committee, chaired by Bullen, and held intense, late-night planning sessions twice a week. Several significant decisions emerged from these sessions, including one to renegotiate contracts with physician groups to obtain better rates.

The new management team blamed part of Harvard Pilgrim’s woes on its mishmash of information systems, which had been cobbled together as the HMO gobbled up other health plans in mergers. Beginning in 1986, the HMO (then called Harvard Community Health Plan), which had 240,000 members, acquired MultiGroup, a regional New England HMO with 105,000 members. In a pattern that would continue, Harvard Pilgrim did not integrate the two health plans’ claims and enrollment systems. For the next 11 years, the HMO continued to acquire smaller regional health plans, including Rhode Island Group Health Association and Neighborhood Health Plan, and also expanded into the Maine market. In its largest merger with Pilgrim Health Care in 1995, Harvard Pilgrim gained 350,000 new members. But because senior executives failed to appreciate the importance of IT, Harvard Pilgrim never fully integrated all of the different systems.

So Gutierrez inherited a gargantuan mess of more than 55 separate core application systems, including four claims processing systems that left the HMO incapable of tracking claims or setting accurate premiums. “When corporations neglect to fully mop up after each merger, it leaves a tangled mess in the hands of whomever comes afterward, with duplicative systems that aren’t feeding well into consolidated financials and a degraded operational capability,” Gutierrez says.

Even so, he had no idea just how wild the roller-coaster ride during the next two years would be. His assignment would involve not only taking over IT but also claims processing. And he would be responsible for overseeing the outsourcing of both functions, a massive project that would require him to give up his traditional CIO duties. When Gutierrez picked up Baker’s gauntlet in July 1999, he also had no idea that Harvard Pilgrim would become the poster child for the ills of the entire HMO industry.

A Doctor on Board?

Just a couple of days into the job, Gutierrez received his first assignment from Baker: The new CIO needed to decide whether Harvard Pilgrim should outsource IT, claims processing, both or neither. Teamwork between these two departments was crucial to the survival of the HMO, yet finger-pointing and infighting were epidemic, Baker said. For instance, whenever claims got in trouble for the time it took to sort through provider claims that came in a second time, it blamed IT and vice versa.

Gutierrez had two weeks to make the decision. He was stunned at the tight time frame. “I cannot remember a time in my life when there was so little time to process,” he recalls.

During the next two weeks, Gutierrez spent time with his new staff in both technical and claims operations, asking for their advice while simultaneously trying to keep operations afloat. Some board members who had gone through a similar outsourcing decision years before voiced concern. They were worried the outsourcing might be done too hastily without adequate attention paid to operational needs. “This could spell a lot of trouble,” they said.

Even so, Gutierrez decided: Harvard Pilgrim would outsource both claims processing and the technology functions, which included data center operations, network infrastructure and programming. “We wanted a common accountability of IT and claims processing,” he says. He also believed that the only way to transform the claims adjudication function was to change the way both the technology and employees worked, to make them a cohesive unit with common goals.

Perot Systems met many of the criteria Gutierrez believed he needed for the job and most important, it also had the largest number of Amisys specialists of any qualified competitor. This was important since Amisys was the HMO’s primary operating software. Because there was no time to prepare an RFP, Gutierrez and his team decided to proceed immediately in negotiations with Perot Systems. “We locked ourselves in a conference room every day for as long as we could stand it,” Gutierrez says.

At 2 a.m. on Saturday, Oct. 2, 1999, the team emerged with a handshake deal. “After this we drove our legal team to an all-night diner in Boston where we stood out as the stodgy business set amongst the avant-garde youth crowd in fishnet stockings,” Gutierrez recalls. He saw the legal team off on a plane to New York and then drove the contract to Baker’s house that morning. That afternoon, over Chinese food, Baker signed the 10-year, $700 million contract.

As a result, 826 claims processing and IS staff members would be outsourced, staying at their desks but becoming employees of Perot Systems rather than Harvard Pilgrim, effective Oct. 15. There were no layoffs related to the outsourcing transaction. “This was not some subterfuge for a bevy of pink slips,” Gutierrez says. He decided to keep the 40 staff members in charge of data warehousing, e-commerce strategy, security policy and technology process reengineering under his direct control.

In the beginning, there was a clash between the very disciplined, almost military-style Perot Systems and the less institutionalized culture at Harvard Pilgrim. New requirements by Perot Systems, such as employee drug screenings, didn’t go over well.

As the transition bumped along, Gutierrez and his staff still had to stay on top of routine IT operations and claims processing work. The new CIO was overwhelmed by the sheer magnitude of work. It reached the point where Gutierrez dreaded picking up his phone, which rang constantly. “Every day was a series of bonfires and some larger forest fires,” he says. “Every phone call added something else, and it was like juggling a bunch of balls and a number of them were bound to fall. There was a sense of guilt, and I felt desperate to believe I was keeping the right balls in the air.”

Keeping Harvard Pilgrim Afloat

Before gutierrez knew it, it was mid-October?only two months away from the Y2K deadline. Although Harvard Pilgrim’s Y2K program, begun under former CIO Speight’s leadership, was active and well-funded, it had some gaps?primarily in the Medicare remediation system?and there wasn’t much time to plug the holes. November and December turned into a blur of frenetic work to meet the Dec. 31 deadline, including a couple of last-minute scares about whether the core claims processing engine would meet the criteria for Y2K com-pliance.

Then, in the early morning of Jan. 1, during the first few hours after the turn of the century, Gutierrez experienced what he calls a transcendent moment. Around 6 a.m., he called two of the Perot Systems management team consultants and his deputy director for a status report and was told they were on the roof of the building. Puzzled, Gutierrez went up there. “At the moment of the sun rising on the new century, the three of them were out there up on the roof smoking cigars,” he says. “It stays with me as one of the more beautiful moments of my career. It seemed as if a lot of things had gone right. The outsourcing was in place. We’d made the Y2K change with the new century. It was a new sunrise, a new millennium?a glorious moment.”

But the moment was brief.

Just days later, as the Harvard Pilgrim financial team was working to close the books for 1999 by reconciling results from two financial systems and evaluating a large claims inventory, it discovered additional losses of between $60 million and $70 million. All totaled, the HMO would report a $227.4 million loss for 1999.

“The sky was falling in,” Gutierrez says. On Jan. 4, under the state’s new insolvency law, the Massachusetts commissioner of insurance took action. The court placed Harvard Pilgrim into temporary receivership, which put the failing HMO under state control to reorganize it and prevent it from going bankrupt and protect payments to physicians and hospitals so that members’ care and coverage would not be disrupted. The state attorney general’s office set up a Harvard Pilgrim task force to examine the problems and analyze solutions. One of the members of the task force, Alan Sager, a professor of health services at the Boston University School of Public Health, who cowrote the report “How Can We Fix Harvard Pilgrim’s Problems Without Making Ours Worse?” says that two factors caused Harvard Pil-grim’s crisis: high costs and low revenues. Specifically, he cites revenue constraints from public and private employers, expensive efforts to expand into adjacent New England states, and the cost of the Harvard-Pilgrim merger in 1995. The report also cited “bad management, self-sanctification and a measure of arrogance” on the part of top managers.

Nationally, Harvard Pilgrim wasn’t the only HMO in bad shape?some 20 other health plans were placed in receivership or became insolvent in 1999.

Harvard Pilgrim senior management and consultants worked with the insurance commissioner to develop a turnaround strategy. Under the plan designed by Harvard Pilgrim’s new leadership, the HMO would save an estimated $70 million by closing down its Rhode Island affiliate, restructuring operations, reducing the workforce and continuing the effort to write new contracts with all Massachusetts physician groups. Gutierrez and Perot Systems set out to tackle the claims processing mess: four systems that routinely failed and crashed under the avalanche of transactions. The team eliminated all but one system, Amisys, upgraded it to a newer version to address scalability problems, and brought in a stronger hardware platform. Gutierrez says the Perot Systems team’s greatest contribution has been in the claims processing operation, where claims inventory has declined and significant improvements have been achieved in the time it takes to process and pay claims. Harvard Pilgrim achieved all of that without investing heavily in technology, Gutierrez says. The group also has been working to integrate accounting general ledgers, along with cash management, project accounting, treasury, HR and payroll. However, the HMO still has more than 50 different unintegrated systems.

No Rest for the Weary

In Gutierrez’s cubicle sits a large, red stop sign that says “Stop the Chaos.” The seemingly unflappable CIO, however, appears to thrive on chaos. His only regret is that during the past two years he has not spent as much time with his two children, now 3 and 6, and his wife, who is an attorney and also works long hours, as he would have liked.

Although Harvard Pilgrim was taken out of receivership in June of last year and its financial picture is rosier today, the health plan is still in the red. For 2000, it reported a net loss of $9.7 million?a huge improvement over the $227 million net loss it reported in 1999. Unprocessed claims have been reduced from more than 800,000 to under 175,000 (less than one week’s worth of claims), and turnaround time has improved.

New obstacles keep arising as the HMO struggles to turn around its financial problems. At press time, Harvard Pilgrim was in the midst of negotiations with Partners Health Care over the renewal of a long-term contract that could boost the HMO’s payments to the multihospital system and its affiliated physicians by more than 25 percent over three years. The HMO has also seen a dramatic drop in membership, from 1 million members last year to 780,000 as of May 2001. Gutierrez is obsessed with ensuring that Harvard Pilgrim not only survives obstacles both old and new but also achieves positive financials during his tenure. In March 2001, he was named chief technology officer to increase his focus on IT and architecture issues, including data architecture.

When will he feel he has successfully accomplished the mission he accepted during that March phone call from Baker two years ago? “Personally, [if we can turn the health-care plan around] I will have been part of the team that successfully brought Harvard Pilgrim into positive financials by the end of 2001,” he says. “As a corporation, we can’t claim success without several years of these positive financials and positive reserves. History is going to ask, ’Did this new management team create a prolonged period of profitable operations for Harvard Pilgrim?’”

On Gutierrez’s one-year anniversary last July, one of his colleagues praised the CIO, saying he is “the living example of the quotation that he takes all of the bricks thrown at him and builds a foundation.” In spring 2002, when the final financials for Harvard Pilgrim for 2000 are announced and if the HMO is back in the black, Gutierrez will have cemented his already solid career foundation, brick by hard-won brick.