State Lacks Plan to Follow Health Firm Takeover

After their unprecedented takeover of troubled MedPartners Provider Network Inc., state regulators acknowledged Friday that they do not have a plan for what to do next. They now must cope with how to guarantee continued care for 1.3 million patients and determine who will bear the costs of the firm’s liabilities.

William Kenefick, acting commissioner of corporations, acknowledged that he does not yet know how the health plan will be run now that his agency has forced its California division into bankruptcy.

The state’s vast regulatory system has no safety net for health care companies that suffer crippling financial breakdowns. There is no fund to bail out a troubled managed care company. And in the case of MedPartners, the state does not have a blueprint for how to run the company or solve its financial problems.

What went wrong with MedPartners and how might the state fix it? “That’s what we need to figure out,” Kenefick said.

Lawsuits against the company represent another complication for resolving the firm’s bankruptcy proceeding, filed Thursday in U.S. Bankruptcy Court. How long the state will be dealing with that problem is also unclear.

For years the state has been criticized for not taking more aggressive action to protect consumers. But now that it has taken such action, the next step is uncertain.

One day after regulators marched into the Long Beach offices of the company Thursday and took over, patients, doctors and creditors burned up phones lines in search of answers to the most basic questions: Can I still see my doctor? Who will pay my bill?

“If they end up closing,” said Erica Lopez, a patient at the company’s Friendly Hills medical clinic in downtown Los Angeles, “I will be the first to come down here and picket . . . because I like my doctor.”

How did such a critical health care provider, which operates 117 clinics and employs 1,000 doctors across California, end up in such a dire condition?

According to MedPartners, the answer is simple: The business model doesn’t work.

The idea seemed smart enough--collect fees from health insurers or health maintenance organizations and use the money to pay doctors. MedPartners would manage the front offices and the doctors would be free to practice medicine, said Robert Mead, spokesman for Alabama-based MedPartners, the parent of the California subsidiary.

But it didn’t work out that way.

The money coming in from the health plans was not enough to support the medical practices. And economies of scale, money saved by being part of a big centralized organization, never materialized, because each medical office needed its own local staff.

Company Expansion Came Too Fast

In addition to that, Mead said, the company expanded so fast that it couldn’t integrate all the medical practices that it bought.

“When it hit, it hit harder than anybody thought,” Mead said.

Many of MedPartners’ providers saw signs of trouble recently. Coast Plaza Doctors Hospital in Norwalk sued MedPartners’ parent and its California subsidiary Jan. 20 for failure to pay its customers’ hospital bills.

Coast Plaza Chairman Gerald Garner said MedPartners started to fall behind in its payments in October, and recently started to close accounts without paying the full amounts owed. For one recent bill of $449,270, he said, MedPartners sent $6,377 as “payment in full.”

All told, he said, the company owed the hospital $1.5 million. A hearing on the lawsuit is set for Monday in Los Angeles Superior Court.

Dr. Keith Schauermann, who works at a Rialto medical office that contracts with MedPartners, said he expects a fairly rapid decline for the company now that it has been taken over by the state. He predicted that health insurers will shift their members to other care provider groups and doctors like himself will leave to pursue their own opportunities.

“Physicians will be leaving faster than they have been,” Schauermann said. “This will really accelerate the process.”

Just last year, MedPartners’ parent company brought in new management, which tried to make a go of the tattered giant. But in November, chief executive officer Matt Crawford and his staff decided to exit the business altogether.

The company took a $1.3-billion charge against earnings from these operations--most of them in California--on its annual report announced this month.

That didn’t help. Documents released Friday by the Department of Corporations show that MedPartners had lost about $11 million over the six months ended Dec. 31, and its clinics and other affiliated businesses had bled $200 million over the past year.

Such losses, Kenefick wrote in the order to take over the company’s California operations, “threaten the stability of the health care delivery system operated by (MedPartners), thereby endangering access and health care to over 1.3 million enrollees.”

The seizure of MedPartners reflects a growing push in Sacramento by the Davis administration and legislative leaders to head off what some regard as a potential crisis in the health care industry.

“The Department of Corporations has issued more regulatory notices to HMOs in the last few months than in the previous 10 years,” said Steven Thompson, chief lobbyist for the California Medical Assn., which represents 35,000 doctors in the state.

The decision to take over MedPartners--an aggressive move that would have been unlikely during the Wilson Administration--had the approval of Gov. Gray Davis.

Regulators are so nervous about the legal ramifications that they are avoiding reporters’ calls and are reticent to talk with other state officials, sources said.

The takeover was conducted under such a shroud of secrecy that one state senator, Jackie Speier (D-San Francisco), sent her staff out of the room Tuesday when she was briefed by regulators and refused to discuss it with aides until after the action Thursday.

Martin Gallegos (D-Baldwin Park), chairman of the Assembly Health Committee, was not informed of the action in advance, but learned about it by telephone after the department seized the company’s assets.

“This was an aggressive action,” said Michael Bustamante, spokesman for Davis. “The governor has made it clear [that he believes there is] a need to protect the rights of the millions of Californians who are enrolled in HMOs.”

But a more active regulatory road--especially if it involves more takeovers--may be difficult.

Despite the difficulty, the state is committed to the course of action begun Thursday, with the arrival of the auditors and conservator at the doors of MedPartners’ California operations.

“We were compelled to act by the facts,” Kenefick said.

Times staff writers Kurt Streeter and Stuart Silverstein contributed to this report.