Drop at HMO Worries Creditors

Watts Health Foundation Inc., a nonprofit health plan in Inglewood, has steadily lost membership since filing for bankruptcy protection three months ago, raising concerns over whether the HMO can survive in the long run, an attorney for its creditors said Monday.

At the time of its bankruptcy filing, Watts Health’s UHP Healthcare covered more than 90,000 low-income and elderly Southern Californians, but by early August the health maintenance organization’s membership had dropped to 86,756, the state Department of Managed Health Care said.

Watts Health is losing more than 1,000 members a month, said Richard Diamond, a Los Angeles attorney representing the company’s creditor committee.

“The creditors would like to see this company survive,” Diamond said. “But they have some real concerns about the decline in enrollment.”

Gary Klausner, a Century City bankruptcy attorney representing Watts Health, acknowledged a decline in membership, but he disputed that it was a consistent problem.

“We’re still operating and we’re still paying our expenses,” Klausner said. “Our members are being cared for; no providers are refusing our members.”

Watts filed for bankruptcy protection May 31 owing more than $44.5 million to about 1,000 creditors, mostly doctor and hospital groups. The bankruptcy petition came after a 30% decline in membership this year, a lack of control on hospital and other medical costs and concerns that the company was rapidly burning through cash, state regulators said.

The health plan is negotiating a bankruptcy reorganization plan, but it is unclear whether the company will emerge intact or sell off some divisions. Watts Health said it was still evaluating its plan. The next meeting with creditors is Sept. 6.

“The creditors would like to see some direction about whether the company will reorganize or sell off some of its business -- sooner rather than later,” Diamond said. “It’s not a situation that will improve in time.”

As of June 30, Watts Health had $29.7 million in cash and total medical liabilities of $42 million, according to the state.

Its reorganization plan may include some attempts to modify existing agreements with doctor and hospital groups to reduce expenses and improve profit margin, Klausner said.

Since the bankruptcy filing, Watts Health has retained its management team, including UHP Chief Executive Curtis Owens, who came aboard last year.

Diamond said creditors were concerned about current management at Watts Health and “whether this management team can turn the business around.”

Watts Health provides medical and dental care. Most of its members obtain their coverage through Medi-Cal, the state-run medical plan for low-income residents, and Medicare, the federal program for the elderly.

When the company filed for protection through Chapter 11 of the U.S. Bankruptcy Code in May, it was the third time in three decades that it had been in financial turmoil. Watts Health filed for bankruptcy protection in 1987, emerging two years later, only to be seized by state regulators in 2001. It emerged from state control in 2003.

Centinela Freeman Health System Inc. is one of Watts’ largest creditors, and the hospital operator said its first bills since the bankruptcy filing were becoming due this month.

“We’ve had no major complaints so far,” said Cyndee Woelfle, director of business development for Centinela Freeman Health System. “But we are watching to see if the amount settled on under our contracts is being paid.”

The company’s Centinela Hospital Medical Center in Inglewood is owed more than $4.5 million in unsecured debt.