2 Dozen Doctor Groups in State Near Failure : Health care: California faces ‘epidemic’ of bankruptcies, medical association official says.

The physician groups that form the backbone of managed care in California are in crisis, some hemorrhaging as much as $500,000 per month, and at least two dozen are expected to go out of business between now and the end of the year, according to figures to be released today by the California Medical Assn.

Already, 15 such organizations, including one last week in Ventura County, have gone under this year, bringing the total since 1996 to 115. Two of the largest, MedPartners Provider Network and FPA Medical Management, represented 1.5 million patients between them.

The shaky financial health of the medical groups, long reported anecdotally, is significant because coverage for most of the 20 million Californians enrolled in managed-care plans is organized around them.

“We face an epidemic of physician organization bankruptcies unless we fix a very broken system,” said CMA executive vice president Jack Lewin, who will present the figures at a daylong meeting on the crisis in Sacramento today.

The plight of California doctor groups has national implications, as physicians across the country weigh whether to set up similar structures. In Texas, where physician groups have been an increasing presence during the last several years, several are under financial strain or have gone bankrupt. And in New York, doctors are experimenting with setting up physician groups as a way to wrest control of patient care away from the health plans.

For consumers, the poor health of physician groups holds dire consequences, said Peter Lee, executive director of the Center for Healthcare Rights in Los Angeles, because as the groups lose money they tend to ration patient care more tightly.

“When a medical group is not doing very well financially, there is additional pressure on the doctors to look at cost instead of quality,” Lee said. “When medical groups are at the edge financially, that is the point at which you’re going to see them denying elective surgery and being less apt to refer people for expensive diagnostic tests.”

In addition, when a physician group goes under, patients may find themselves assigned to a new primary-care doctor or to the same doctor but in a different medical group with different specialists.

The new figures, part of a report commissioned by the CMA from the actuarial firm PricewaterhouseCoopers, show that even as the cost of living and health-care costs rose steadily throughout the 1990s, the amount of money paid by health plans to physician groups to take care of patients dropped, from a high of $45 per patient each month in the period from 1990 to 1993 to a low of $29 from 1997 to 1999.

The report comes at a time when the California Legislature is embroiled in tense negotiations about managed-care reform, including the testy question of whether to regulate physician groups.

All but 30 of the more than 300 groups remaining in the state are completely free of government regulation, and it is impossible for anyone except powerful health plans--which can demand information as a condition of doing business--to review their books or check their financial health without their consent.

On Wednesday, state Sen. Jackie Speier (D-Daly City) said she completed plans for a bill to bring the groups under the state’s umbrella, despite a decision by Gov. Gray Davis not to include them in his health-care reform package. But in the face of tremendous pressure from health plans and the medical groups themselves, key provisions of the bill have been toned down.

“We are developing a whole process around identifying those medical groups that are fiscally solvent, at risk or fiscally insolvent,” Speier said. “The bill that I’m carrying creates an early-warning system to register all medical groups in the state and to grade them.”

The California Medical Assn., which represents doctors, is lobbying to advance its members’ interest, which include protections for the physician groups.

In the absence of state regulation, most health plans have begun to police the physician groups themselves, demanding to see an organization’s books before contracting with them.

For example, HealthNet, one of the state’s largest HMOs, routinely audits the groups with which it does business, and it has placed several on a heightened financial watch similar to the one required by the state for those few groups that are under regulation by the Department of Corporations.

Aetna U.S. Healthcare, the nation’s largest managed-care company, goes a step further, taking back certain privileges--such as the right to pay claims--from groups believed to be in shaky condition.

In California, Aetna has 25 medical groups on “very serious” financial watch, said Tom Williams, president of Aetna’s Western division.

So many groups are in trouble, though, that several top industry officials predict their demise as the predominant structure for managed care in California.

The physician organizations in question, for the most part, are not the group practices of yesteryear, in which a few doctors banded together to share office space and some patient-care duties. Rather, they are companies formed by entrepreneurial doctors operating as middlemen between managed-care companies and individual physicians.

In California, they function as quasi-insurance companies, taking a monthly sum from a health plan to care for patients and bearing much--in some cases all--of the financial risk.

The lure of such groups is easy to understand: Doctors like the idea because it means they, not insurance companies, make medical decisions for patients. Entrepreneurs like them because they see a layer of profit to be made by helping member doctors with billing and negotiations with health plans. And health plans like them because the risk of insuring patients gets passed on to the groups.

But in California, at least, it hasn’t worked out as planned. According to the PricewaterhouseCoopers report, just $13 of the average $36 paid to a physician group makes it into doctors’ salaries. The group, in an effort to pay its own administrative cost and make a profit, keeps $6, and doctors pay $17 to nurses, landlords and other expenses.

“The physician groups are not making it financially,” said Charisse Skeba, who worked on the report for PricewaterhouseCoopers.

The reasons, she said, are manifold: Employers and the federal government, the main purchasers of health insurance, pushed down premiums. Then health plans, desperate for business, offered more services for less money and reduced their monthly payments to doctor groups. And the groups, anxious for business and seduced by the idea of wresting medical decisions away from insurance companies, took on more risk.