State’s Pact With Seized Health Plan Charts New Waters

In the first major test of the Davis administration’s ability to handle a possible upheaval in the state’s health care system, California officials announced a settlement Wednesday with the troubled MedPartners Provider Network.

The state will return control of the bankrupt managed care plan to its parent company. In exchange, the company has agreed to allow the state to monitor the operations not only of the health plan--a “middleman” between HMOs and providers such as doctors groups and hospitals--but of the company’s 113 clinics in California. The company--MedPartners Inc.--also agreed to pay its debts in the state as it continues to divest its clinics and the plan itself, which provide coverage for 1.3 million Californians.

The state seized MedPartners Provider Network in March, citing concerns about the operation’s solvency and the need to ensure that the plan’s patients continued to receive appropriate care. But the move was unprecedented in the history of the state’s little-regulated managed care industry, and after the takeover, officials found they had no plan for what to do next.

This week’s settlement provides a blueprint for the state as it attempts to grapple with the huge disruptions in patient care that could result if, as many believe will happen, more operations like the MedPartners network get into financial trouble. The 78-page agreement was negotiated over the course of three rancorous months with participants from throughout the health care industry, including doctors, hospitals and health plans, under the direction of Gov. Gray Davis’ office.

“The health care industry, working with my administration, has forged a business solution designed to accomplish the objectives we set out at the beginning: uninterrupted access to health care services for patients in this network . . . and payment to providers,” Davis said in a statement.

The state Department of Corporations took over the MedPartners network--the only division of the parent company’s tangled operations over which California had legal jurisdiction--March 10, saying it was in poor financial condition. A conservator appointed by the state, Eugene Froelich, immediately placed it in Chapter 11 bankruptcy protection.

The seizure of the MedPartners network, the largest medical middleman in the nation, rocked health care in California, causing potential disruptions for more than 1 million patients and leaving suppliers, hospitals and doctors with more than $100 million in unpaid bills.

Clinics have been forced to switch suppliers to keep operating, as vendors have dropped out of the system. And about 100,000 patients who get coverage from MedPartners doctors through Blue Cross found themselves switched to new physicians, then switched back to MedPartners and then, in some cases, switched again.

MedPartners’ travails hold important lessons for the state, where health insurers rely on middlemen to a much greater extent than in the rest of the country.

Many of these enterprises, which take monthly fees from health plans and use the money to pay for nearly all aspects of patient care, are on extremely perilous financial ground. The MedPartners network was the second such California operation in less than a year to file for bankruptcy. And just last month, the Huntington Provider Group, a similar sort of middleman company known as an independent practice association, announced that it was closing its operations in the San Fernando Valley because of financial difficulty.

However, whereas some of MedPartners’ operations did fall under state jurisdiction, that was only because the network engaged in the buying and selling of health coverage in addition to its other activities. Most independent practice associations do not sell coverage, so they are unregulated under current state law.

On Wednesday, after months of difficult negotiations finally brought agreement in the MedPartners case, several leading health care organizations called on the Legislature and the Davis administration to better police these middleman companies and to study better ways of structuring the health care business.

“We now want to work with the governor and the administration to figure out a way to prevent other catastrophes like this from happening,” said Jack Lewin, executive vice president of the California Medical Assn., which represents doctors, “because there are still many large medical groups and independent practice associations that are on the brink of insolvency.”

Mac Crawford, chief executive officer of Alabama-based MedPartners Inc., predicted that the entire structure of managed care in California will change, with the role of the middleman severely diminished.

“We don’t think there’s enough room in the health care equation for as many people trying to take a piece of the [profit] margin as there have been,” said Crawford, whose company is quitting the physician practice management business, in which a firm serves as a middleman and also operates clinics. “You can only squeeze the dollar in so many ways.”

Crawford said the company plans to sell its California operations by year’s end and is likely to change its name to reflect its exit from physician practice management.

For its part, the Davis administration has used the MedPartners case to try out a fairly unusual approach dealing with a failing health care provider. First, with explicit approval from the governor, the state took over the provider network. Then Donna Campbell, a high-ranking official and counsel to the Business, Transportation and Housing Agency, was assigned the task of negotiating a deal.

With MedPartners Inc. clearly interested in winning back control of its assets, the company came to the table along with the hospitals and doctors to whom it owed money. Negotiations were arduous, and the deal nearly fell apart at several junctures, sources said.

“There was not a day that somebody didn’t walk away from the table,” said Jim Lott, vice president of the Health Care Assn. of Southern California, which represents hospitals and independent practice groups.

The participants kept negotiating, Lott said, because reaching a joint agreement was the only way to avoid years of wrangling in bankruptcy court over the amount of money that the MedPartners network owed to providers and others.

Under the settlement, which was signed by MedPartners and the governor’s office but not yet accepted in court, hospitals expect to receive about 85 cents on the dollar for the about $100 million owed by the provider network, Lott said. Although trade groups representing doctors and hospitals have also agreed to the deal, individual providers still must do so if they wish to be reimbursed under its terms.

Also, the firm agreed to allow the state’s monitor access to the network’s and clinics’ books during the transition period, which officials expect to last about six months.

The settlement still needs final approval from a judge, and the two sides will return to Superior Court next week. In a hearing Wednesday, Judge Alan Buckner expressed concern that the agreement was written in such a way that it might invite lawsuits from potential creditors.