Health Care System Faces Deepening Fiscal Crisis

The nation’s private health care system is on the verge of a multibillion-dollar financial crisis that could lead to bankruptcies and closings of hundreds of physician groups, government supervision of others, and temporary disruptions of medical services for millions of Americans.

The scale of the problem is dramatically illustrated by California’s seizure Thursday of the giant MedPartners Provider Network Inc., whose 1,000 doctors provide care for 1.3 million Californians through its contracts with health maintenance organizations and other insurance carriers.

It is estimated that 50% to 90% of all medical providers in the state are experiencing financial troubles, according to testimony Wednesday before the state Senate Insurance Committee. Just last year San Diego-based FPA Medical Management, a physicians management group like MedPartners, collapsed without warning, leaving more than 400,000 patients without provision for health care.

Until now, consumers and lawmakers have considered the main problem of the health industry to be inadequate care and have directed much of their lobbying and legislative efforts in that direction. Now lawmakers will increasingly address the industry’s financial instability, which is attributed in part to mismanagement, overly aggressive expansion and low reimbursement rates.

Experts in health care economics say the financial soundness of health care providers ranging from hospitals to physician groups has been seriously undermined nationwide.

During the last year, state takeovers of sick HMOs and physician management groups have become increasingly common.

Only this week, a New Jersey judge dissolved HIP Health Plan of New Jersey, the state’s oldest HMO, sending 82,000 members scrambling to other plans for emergency health coverage.

In Texas, the state Department of Insurance last month took over a financially unstable HMO after the company became insolvent, jeopardizing care for its 17,000 members.

Recently, cash-strapped health care firms have filed for bankruptcy or have been taken over by state regulators in Florida, Arizona, Maryland and Mississippi.

Medical and legal experts familiar with the problem say patients’ access to adequate care is not likely to be permanently affected.

But as the crisis unfolds, there are sure to be:

* Serious disruptions of care for thousands, if not millions, of patients forced to find new doctors after their medical groups fold or lose insurance contracts.

* Severe pressure on state and federal lawmakers to improve regulation of health care companies of all kinds.

* Changes in the economics of U.S. medicine that could dwarf those provoked by the rise of managed care in the 1990s.

“Does this mean a number of medical groups will go belly-up?” asked Peter Boland, the head of Boland Health Care, a Berkeley-based consulting firm. “The answer is yes. There will be many MedPartners.”

To be sure, some health care experts believe the MedPartners case reflects circumstances peculiar to California that are unlikely to be widely duplicated nationwide.

“There are some unique circumstances to the MedPartners situation,” said James Robinson, a health economist at UC Berkeley and a national expert in managed care. “The consolidation and amalgamation of medical groups in Southern California went further than anywhere else in the country. At the same time, [insurance] premiums have been held to lower levels in California than in any other state.”

Boland and others say the signs are already clear that the financial crunch afflicting California medical groups is being replicated around the country.

In the last year, 20 major hospital, physician management and HMO firms have filed for bankruptcy and dozens more have been virtually taken over by their lenders.

Banks and other financial institutions specializing in health care financing have set up teams of accountants, lawyers and bankers to help their clients stay afloat.

Joel B. Zweibel, a New York attorney who represents some of the nation’s top lenders to health care firms, said his clients are becoming increasingly worried about the instability of many health care companies.

“Many banks now consider the health care industry problems as their top priority,” said Zweibel, a partner with O’Melveny & Myers. “They’re worrying.”

Risks Shifted From Insurers

The roots of the crisis can be found in the rise of managed care in the late 1980s and early ‘90s, when health maintenance organizations and other health plans promised to control spiraling costs by closely monitoring how doctors provided service to patients.

In many such cases their preferred technique was known as “global capitation.” The health plans paid medical groups a set monthly fee per patient and ceded them the responsibility for providing all the care that patient needed--whether that meant no care at all for a healthy member, or a long bout of costly kidney dialysis for a diabetic.

In effect, this system shifted the risk of unexpected health costs from the insurer to the doctor groups. That placed an unprecedented strain on the managerial skills of those groups and jeopardized the soundness of any that miscalculated their potential costs.

“If you haven’t properly estimated the cost and service profile for a group [of patients],” said Boland, “then you’re hoping to make out based on luck and happenstance.”

Medical groups that are poorly capitalized--that is, those without enough of a financial cushion to ride out months-long delays in insurance reimbursements or other payments--are at particular risk.

The financial implications of the rise of managed care first led to a surge in mergers among small and medium-sized medical groups hoping to spread their risks over larger populations of patients. Some of these groups became large enough to negotiate preferential contracts with health insurers. But others were forced to accept risky deals simply to stay open.

“Sometimes just to get the HMO contract is a survival issue,” said Gerald Hinkley of the San Francisco law firm of Davis, Wright, Tremaine, which represents many health care companies.

Health care experts say the crisis could lead to dramatic changes in the structure of U.S. health care, as healthy medical groups buy up failing ones to improve their bargaining positions with similarly consolidating managed care plans. Other groups may choose to treat only fee-for-service patients--that is, those who can afford to pay for medical care out of pocket or whose medical insurers pay a larger share of physicians’ fees.

“We’re going to see some providers just bolt away from managed care completely,” said Glenn Meister, principal and chief of the health care practice for the Los Angeles office of William M. Mercer, an employee benefits consulting firm.

Others say the problems may refocus public attention on the policies of HMOs and other health plans. In some areas of the country, including California, managed care plans did succeed in lowering premiums for employers, in part by reducing per-patient payments to doctors and hospitals.

Although premiums have been creeping back up in recent years, medical groups say the health plans have not passed on their gains to the doctors and hospitals to help them cover the rising expense of high-tech therapies, new drugs and other factors.

For their part, the health plans argue that medical groups are suffering financially because their management systems are antiquated and unable to deal with the demands of medicine as a competitive business.

“If there’s a crisis,” said Ron Williams, president of Blue Cross of California, “it’s a crisis of management.”

Times staff writers Stuart Silverstein, Sharon Bernstein and Alissa Rubin contributed to this story.

SICK STOCKS: The trouble at MedPartners only exacerbates the turmoil that’s sent shares of health-care providers sharply lower in recent months. C1