NEWS ANALYSIS : State Reforms Don’t Address Problems of Doctor Groups : Health care: Lawmakers focused on requiring added services. But with more bankruptcies of physician organizations expected, a crisis may be looming.

Despite the Legislature’s action late last week to craft an ambitious plan to reform managed care in California, little attention was paid to the network of doctor groups that form the backbone of the state’s HMO system.

Yet the physician organizations, which provide care to 23 million Californians, are so deeply troubled that they will cease to exist--or be vastly changed--within two years, many in the industry predict.

Right now it’s impossible to say whether the changes, when they do occur, will be harsh and disruptive, or incremental and merely inconvenient.

But this is fairly certain: Patients will experience changes in the way they access care. And prices--to consumers, employers and the health plans who pay for care--will go up.

These doctor groups are the foundation of managed care in California. When consumers choose a primary-care physician in this state, they must generally see only specialists in that doctor’s group, and use only the hospitals affiliated with it.

The groups serve as quasi-insurance companies, accepting fees from health plans and using the money--after taking a cut--to pay their physician members for treating patients.

Yet within the next 18 to 24 months, industry observers and others predict, most groups will be bankrupt, squashed under a combination of poor management and inadequate payments from health plans.

Those that remain are likely to take on very different forms--perhaps no longer operating for profit, perhaps serving only as loose affiliations of doctors.

“The attorneys, the accountants all knew this was coming,” said Peter Boland, a Berkeley-based health-care consultant. “The only question was when.”

But during this past legislative session, lawmakers showed little interest in the admittedly arcane question of doctor group solvency. They focused instead on requiring the health plans and medical groups to provide more services.

Among the reform package that was approved was a compromise bill setting up minimal financial regulations. But they are not expected to be enough to stem the tide of bankruptcies that is looming, potentially leaving hundreds of thousands of Californians in a no-man’s land as their doctors struggle to reorganize.

How will the 23 million Californians in managed care get to their doctors when the groups fall apart or morph into something else?

Already, 115 physician groups have declared bankruptcy or gone out of business in the state, bringing the ranks to about 300 from its peak in 1996. The California Medical Assn. predicts another two dozen will fall by the end of the year.

Consider the caseload of Gerald Hinkley, a San Francisco-based health-care attorney with the firm Davis Wright Tremaine.

Seventeen years ago, Hinkley was on the cutting edge of the euphoric explosion of managed health care in California, doing deals that created the large physician groups that would form the foundation of the system in this state.

But these days, Hinkley is mostly taking groups apart.

“There were a lot of high hopes,” Hinkley said. “And the unwind is very sad.”

Some of the collapses have been spectacular. Medpartners Provider Network and FPA Medical Management provided care for 1.4 million Californians between them and fell within months of each other, thrusting the mounting financial crisis among the state’s physician groups into the spotlight.

Other groups have gone quietly, ending contracts with health plans one by one. Some patients would show up for their appointments only to learn that the doctor was no longer on their plan and wouldn’t see them without a cash payment. Others received a card from their insurer informing them that they had been shifted to new doctors or new groups.

The solvency portion of the legislative package sets up a grading system for physician groups and requires the groups to make their grades public.

But in order to win Gov. Gray Davis’ approval of the package, state Sen. Jackie Speier (D-Daly City), who pushed hard for the solvency requirement portion of the bill, was forced to omit several key provisions, including the details of the grading system itself. Now the job of developing and enforcing the grades has been passed on to state regulators and Davis’ yet-to-be-named managed-care czar.

In addition, provisions that would have required the groups to open their books freely to health plans--and which held the plans responsible for contracting with shaky groups--were omitted after lobbying from both sides.

If the grading system is set up properly, Speier and others said, consumers will be able to check the health of the medical groups to which they belong. And the health insurance companies, fearful of a shareholder backlash if they are seen to be contracting with troubled provider organizations, might be prodded to offer the medical groups larger monthly payments.

Regardless, Speier said, “I don’t think the medical group model is long for this world.”

An industry coalition on medical group insolvency problems had recommended stronger medicine, including a provision that only fiscally sound organizations be allowed to serve as quasi-insurance companies, paying for patient care out of a set monthly fee. This structure is attractive to the doctor groups, because they would be freer to make their own decisions about patient care, while theoretically profiting from an administrative fee taken out of the regular monthly amount.

But this is extremely risky and has proved the undoing of nearly all of the groups that have so far run aground.

Health plans like the setup, of course, because it makes the doctor groups--instead of the plans--absorb the risk that there might not be enough money in the pot to take care of patients during an epidemic or a month when many patients are critically ill and need lots of care.

Beau Carter, who heads the industry coalition on insolvency, said a good set of financial regulations could slow or even forestall many collapses, and even save the medical group model.

What happens as medical groups fail? Some are sold to new owners, who bid frantically for the right to purchase sagging organizations at a fraction of what they were once worth.

“They think they have management expertise that the previous group didn’t have,” said Hinkley, who has handled several such sales. The practices, he said, are being sold so cheaply that “they’re almost free.”

Sometimes the new owners are the very doctors who sold out to the large groups in the first place, convinced that if they buy their practices back they can make the economics work.

But health-care experts aren’t so sure. It’s one thing for doctors to band together to share office expenses and some expertise, these experts say, but it’s far different to attempt a profit-making operation that takes the risk normally assumed by an insurance company.

And for the most part, that’s been the model for managed care in California.

“The model of large provider organizations accepting global risk has proven to be very problematic,” said Peter Kongstvedt, a health-care consultant with Deloitte & Touche in Washington. “It has not been of benefit to the provider systems or to the health plans.”

Most likely, predicted Kongstvedt, some large groups will dissolve altogether and in some cases reform, offering doctors economies of scale in purchasing supplies and added clout when negotiating with health plans.

“Physicians still want to practice in groups because they can manage patient care more effectively,” said Jack Lewin, executive vice president of the California Medical Assn.

They would not, however, be likely to serve as the middlemen they are today, paying for all aspects of patient care out of a set monthly fee from a health plan.

Some groups will be paid the old-fashioned way, with a fee provided by the health plan each time a doctor sees a patient. Others will assume only limited risk for patient care, paying for primary-care visits, for example, out of a monthly fee from a health plan but not for specialists or pharmaceuticals.

In other cases, doctors will contract directly with health plans, bypassing medical groups altogether. Already, Aetna U.S. Healthcare is requiring individual contracts with physicians even if they are members of groups, as a way of ensuring that consumers will not be bounced around if the group goes under.

It’s also possible that employers, which purchase most health care, will contract directly with the few remaining large medical groups to provide care for their employees, similar to the way Kaiser Permanente, the state’s largest HMO, operates.

Under such a scenario, there would be no health plan--only the medical group, and patients would see only doctors who belong to the group.

Another possible outcome is that the state and federal governments could respond to the failures with tight regulation, making health care more like a public utility or even setting up a so-called single-payer system in which the government pays for the care.

These changes will affect consumers in a variety of ways.

No matter what happens, premiums will probably go up. Health plans will have to charge more in order to keep troubled groups afloat, or doctors will have to be contracted individually--rather than as members of a group--a process that is simply more expensive than spreading risk around a large group of patients.

Another possible impact, once the dust settles, is that if a large number of doctors decline to join groups, some consumers will have greater choice in choosing specialists and hospitals. Rather than being limited to the doctors in a particular group, these patients will be able to access most of the physicians who have contracts with the health plan.

But the most immediate--and potentially most disruptive--impact will occur at the time a group goes under, declares bankruptcy or is sold.

At that time, healthy patients will have to scramble to find new doctors or find a way to modify their coverage so they can return to their current doctors, a process that generally takes about six months.

Sick patients might have a tougher go of it. Someone who is scheduled for surgery, for example, might suddenly need to wait until a new surgeon can be found.

Such situations are manageable if one or two small groups go under, said Boland, the Berkeley-based consultant. But if several fail at the same time, the situation could snowball, leaving tens of thousands of patients in limbo and eliciting a frantic and perhaps heavy-handed response from regulators.

“The bankruptcies and insolvencies mount, and it creates a head of steam,” Boland said. “I don’t think this can be turned back.”