The California Department of Corporations on Tuesday ordered the Watts Health Foundation to stop soliciting members for the foundation's HMO, which provides medical care for about 74,000 people, most of them elderly and poor residents of Los Angeles County.
The action against the United Health Plan health maintenance organization came one week after the 20-year-old parent foundation filed for protection from its creditors under Chapter 11 of the federal Bankruptcy Code.
Neither action will immediately jeopardize health-care operations at the Inglewood-based HMO, officials said, or at the foundation, which was founded after the 1965 Watts Riots as a way to address community complaints of inadequate health care in South-Central Los Angeles.
"I think it's an overreaction," Clyde W. Oden, president and chief executive of the Watts Health Foundation and president of United Health Plan, said of the Corporations Department's order. "We have requested to meet with the Department (of Corporations) to address their concerns, but they have not yet responded."
The 74,000 people enrolled in the United Health Plan will still be able to seek care from about 1,200 physicians affiliated with the HMO, officials said.
Another 120,000 patients served by other Watts Health Foundation programs will be able to continue receiving treatment at 11 medical clinics and outreach programs serving Los Angeles County, as well as part of northern Orange County, officials said. The foundation has its headquarters in a modern, $6.7-million complex at 10300 S. Compton Ave. in Watts.
George A. Crawford, an attorney for the Department of Corporations' Enforcement Division, said the department's order was issued "to protect the public until such time the foundation is financially able to continue in business. . . ."
"We are not preventing them from continuing to provide services to existing enrollees. We just want to make sure any new members are not getting themselves involved with a company that will have insurmountable financial problems," he said.
Until four years ago, the foundation appeared to be riding high on the strength of an aggressive marketing plan that had boosted United Health's membership 42% in 1984 and by 1985 was producing revenue of $80 million a year.
The HMO has been the financial mainstay of the foundation and its ability to maintain a network of health-care programs in a community where many patients are often too poor to pay for services, Oden said. About 80% of the foundation's $100-million annual budget in 1985 came from the HMO, he said, and the rest came from the state and federal governments.
The foundation's financial problems were an outgrowth of actions by the federal government in 1984 to encourage HMOs to compete for the business of Medicare recipients. The Health Care Financing Administration began allowing HMOs to market lower-cost prepaid health-care plans that paid 100% of hospital charges, as opposed to Medicare's usual 80% reimbursement formula.
The cost savings enabled United Health Plan and many other HMOs to sign up thousands of Medicare recipients. However, many Medicare patients who signed up with the HMOs continued to present their red, white and blue Medicare card to their regular doctor or the nearest hospital.
As a result, United Health Plan members unwittingly ran up millions of dollars in unauthorized medical bills that Medicare insists must be paid by the health plan.
In part, the confusion may have stemmed from United's marketing techniques, officials said.
Last May, for example, the Department of Corporations obtained a court order forbidding United Health from engaging in false or misleading sales pitches.
That action came after state attorneys alleged that telephone and door-to-door sales representatives told prospective customers that the state or county endorsed the health plan and that they would lose some or all of their government-paid medical benefits if they did not enroll.
United Health, without admitting or denying the allegations, did not fight the court order.
On Tuesday, Oden acknowledged that United Health officials were not vigilant enough in making sure that both Medicare and Medi-Cal recipients understood the changes in their health insurance required by the United Health Plan benefits package.
"The action by some of our salesmen was unacceptable to us, and we took appropriate action," Oden said, adding that the activity of Medicare recipients, "was absolutely a contributing factor" to the foundation filing for Chapter 11.
Under Chapter 11, a company may continue to operate while it attempts to regain its financial health under the supervision of a Bankruptcy Court. Ordinarily, the company tries to negotiate with its creditors to extend payment of debts.
In its filing with the Bankruptcy Court, the foundation listed assets of $31.8 million and liabilities of $28.8 million.
Several of the foundation's creditors indicated Tuesday that they were willing to help United work out its financial problems.
Charter Suburban Hospital in Paramount, one of United Health Plan's 20 largest creditors, is "continuing to provide services to United Health Plan patients as before," said David Hutchinson, the hospital's controller.
"They had a meeting with us last Friday morning," Hutchinson added. "United Health Plan is still in business. . . . All this means is that it will take a little longer to get our money than we had planned."
Martin Luther King Jr.-Drew Medical Center in Watts, the foundation's largest creditor, said it too will continue to serve United Health Plan members even though the foundation owes the hospital $826,969, according to the Chapter 11 petition.
"We are not going to deny care simply because a patient is a member of their plan," said Helen Fullenweider, assistant hospital administrator.