Cash-Strapped Health-Care Firm Is Seized

In what appears to be the largest governmental seizure of an ailing health-care company, state regulators on Thursday took over MedPartners Provider Network, which covers 1.3 million Californians.

The state Department of Corporations immediately placed MedPartners in Chapter 11 bankruptcy protection but said care for patients would continue.

Regulators were attempting to forestall the possibility that the company would shut down without making arrangements to take care of patients, sources said. The physicians management company, which runs 117 clinics and employs 1,000 doctors in California, was accused last week by the state of not having enough cash to pay new claims.

The state action shocked officials at MedPartners, whose top executives had been told just that morning that the state did not intend to take control.

“We didn’t expect it at all,” said Robert Mead, spokesman for MedPartners Inc., the parent company of the Long Beach-based provider network. “We believe the actions are unwarranted, and we believe we’ve met our obligations to support the plan.”

It is the first time that California officials have taken over a struggling managed-care company. But it may not be the last.

At least two states, New Jersey and Mississippi, earlier this year seized near-bankrupt health-care companies, and other states are reportedly considering similar moves.

“The Department of Corporations has shown courage and decisiveness in taking action to protect consumers in California, hundreds of thousands of which may have had to immediately switch doctors if the situation had been allowed to continue,” said state Sen. Jackie Speier (D-Daly City).

The health-care business is in a dramatic state of transition, and any unexpected bankruptcies or shutdowns of troubled firms could leave patients without care and doctors without funds to run their clinics.

The takeover is likely to trigger debate about the proper role of state and federal governments in managing a growing crisis of many large health-care companies with severe financial troubles.

Last year, the state was embarrassed when FPA Medical Management, another doctors’ management group, declared bankruptcy just four days after regulators decided against taking it over. The state instead simply ordered the firm to improve its balance sheets.

Because FPA collapsed without warning, there was no one to pick up the tab for its patients. The state ordered doctors to care for them anyway, and now the California Medical Assn. is embroiled in a legal fight with regulators as well as health plans, demanding reimbursement.

“On the heels of the FPA bankruptcy last year, in which hundreds of thousands of consumers were affected and thousands of physicians were not paid for the services they provided, it is very important not to allow that situation to occur again,” said Speier, chairwoman of the Senate Insurance Committee.

MedPartners manages doctors’ groups by collecting fees from HMOs and paying physicians to care for patients in clinics the company owns. Mead, their spokesman, insisted that the company had planned to stick with its California division until it was sold.

To that end, he said, MedPartners had drafted a formal letter to the state on Monday promising to pay all costs associated with the clinics for at least 60 days.

In a letter sent to health insurers and employees, the state’s conservator, former Maxicare Chief Financial Officer Eugene Froelich, promised that medical care would continue uninterrupted at the clinics under the new plan.

“As conservator I have full authority,” wrote Froelich, who previously worked on a court-ordered bankruptcy recovery plan for Maxicare. “We anticipate that there will be no interruption. No employees will lose their jobs. In fact, we anticipate there will be many new opportunities for employment and advancement with the company.”

It was not clear late Thursday who would pay to operate the clinics--MedPartners or the state.

The Department of Corporations would not comment on the takeover.

Last Friday, the state said MedPartners had not proven that it was fiscally sound and forbade the company from sending money out of California to its parent company’s headquarters in Alabama.

The idea, Department of Corporations spokeswoman Julie Stewart said earlier this week, was to prevent a debacle like the one that accompanied the collapse of FPA.

A state report obtained by The Times showed that MedPartners had been significantly behind in processing claims and that its cash flow was impeded by failure to collect $21.5 million in overpayments to hospitals.

In addition, the report showed, several health plans had stopped making monthly payments to the company.

The state action could not come at a worse time for MedPartners, which last fall announced that it was exiting the physician management business and is now attempting to reposition itself as a provider of pharmaceutical care.

In its annual report released earlier this month, the company took a $1.3-billion charge against earnings for the physician management portion of its business, which it reported as discontinued.

The company is actively engaged in negotiations to sell its operations and just Thursday closed a deal to sell a network in Texas.

Shares of MedPartners rose 31 cents to close at $5.81 in New York Stock Exchange trading.