Turnaround Strategies: Harvard Pilgrim Health Care Finds a Remedy

The Problem: Lack of integration.

The HMO went on an acquisition spree starting in 1986, ending up with a hodgepodge of systems. Louis Gutierrez, CIO from July 1999 to January 2002, 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. Red ink started gushing in April 1999, when the HMO reported an unprecedented $54 million net loss and an operating loss of $94 million. Harvard Pilgrim became the poster child for the heath-care industry’s ills. A new management team, which included Gutierrez, blamed part of the woes on the mishmash of information systems. Gutierrez decided that Harvard Pilgrim would outsource both claims processing and the technology functions including data center operations, network infrastructure and programming. The HMO signed a $700 million, 10-year contract with Perot Systems in October 1999. But the moment of respite that followed that decision was brief. In January 2000, the HMO discovered additional losses of between $60 million and $70 million. A court placed Harvard Pilgrim into temporary receivership, which put it under state control, to reorganize it and prevent it from going bankrupt.

The Solutions: Systems integration.

Cost-cutting across the board. A large outsourcing deal.

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 and brought in a stronger hardware platform. With help from consultancy Cap Gemini, Perot Systems and its own IT staff, Harvard Pilgrim began to install Oracle financials, HR and payroll in February 2001. All internal claims systems were then repiped into Oracle through an operational data store, which served as a staging area for all operational data from claims systems and third-party service providers such as pharmacies.

Harvard Pilgrim spent $75 million to $80 million a year on IT during the turnaround, but Gutierrez says that while IT was an important factor, he attributes much of the turnaround success to overall cost-cutting. “Many of the key levers were decidedly nonsystems fixes,” says Gutierrez, who left Harvard Pilgrim in February for the Exeter Group consultancy. “A lot of the progress was in tighter management and better business processes. I learned a lot from that. We were very smart about what we did to clean up on the IT side, but it’s just not the case that one can point to massive new systems as the solution here.”

The Situation Now:

Harvard Pilgrim’s situation has stabilized, and the financial picture has improved. Most recently, the 750,000-member HMO reported an operating profit of $5.8 million on $442.3 million for the second quarter of 2002, posting positive results for the eighth straight quarter. On the IT side, CIO Norton is in the middle of moving from an IBM DB2 data warehouse to a Teradata data warehouse, which will allow a greater number of users to access data and information via Web browsers. “Louis and the team had done the bulk of the work by the time I took over,” Norton says. “Now our task is to respond to challenges of the future.”

Leadership:

Gutierrez left Harvard Pilgrim in January 2002. Deborah Norton, former vice president for corporate management, is the current CIO.

Challenges Ahead: Although Harvard Pilgrim has a strong brand, it can’t afford any more major troubles. “We don’t want to have a recurrence,” Norton says. “We need to pay our claims accurately and on time and make sure our systems are secure with backup and redundancy.” To achieve that, the HMO is creating a second data center. Another challenge will be to decide whether to do a major upgrade to its HP3000 operating system (which Hewlett-Packard has said it won’t support after 2006), or to look for a new platform altogether.

“The turnaround was like a battle, where people were working for the good of the whole,” says Norton, who was vice president for corporate management at the time. “The challenge now is to keep complacency from creeping into the organization.”

What the Experts Say: “It appears that Harvard Pilgrim has turned itself around in holding down costs, boosting revenue, ceasing to price money-losing accounts aggressively to build volume and also with internal efficiencies from IT,” says Alan Sager, a professor of health services at the Boston University School of Public Health. Sager also notes that firing a lot of people helped.