St. Joseph Health System Won’t Take New HMO Patients

Squeezed by a low-paying managed-care system, Orange County’s largest health-care provider said Friday that it will not accept any new patients from health maintenance organizations and may sever ties with all 17 HMOs with which it contracts.

St. Joseph Health System in Orange, which consists of nearly 10% of the county’s doctors, said it is losing $45 million a year on its county HMO contracts and fears it could lose much more if other large medical groups in the area falter or fold, sending it more patients than it can handle.

The group will continue, for now, to serve 422,000 county patients who already are members of the HMOs.

“The health-care delivery system is basically broken,” said Joe Randolph, St. Joseph’s chief financial officer. “We’re not asking for higher premiums; we’re asking the HMOs to move more profits to the providers.”

The medical group, in what it said was an unrelated action, has exercised a so-called hardship clause in a step to terminate its contract with PacifiCare Health Systems Inc., one of the largest suppliers of the medical group’s patients. But the issue is the same: a dispute over reimbursements.

St. Joseph Health System is one of the largest health-care providers to stop taking new--and possibly any--HMO patients. Physicians nationwide are flexing their muscle against an increasingly unpopular managed-care payment system, which the medical profession insists is dramatically out of whack with the realities of medical costs.

A series of events locally and nationally have been shaking up the managed-care industry. Three months ago, UCI Medical Center said it will drop PacifiCare because fees it received to cover medical care were so low the hospital was losing more than $1 million a year.

HMOs themselves are upset with the low payments they receive from the federal government to cover costs of the elderly on Medicare. They said this week that they will cancel coverage next year for more than 700,000 people enrolled in Medicare HMOs nationwide.

Industry analysts and hospital and physician representatives gave resounding support for St. Joseph’s move.

“This is what we’ve been beating the drum over for years,” said Elizabeth McNeil, spokeswoman for the California Medical Assn., the profession’s trade group. “We want rates based on what it actually costs to provide health care. We also want hospitals and physicians to be able to negotiate fairly with HMOs.”

Executives at CaliforniaCare Health Plan in Thousand Oaks, an HMO under contract with St. Joseph, were shocked by the announcement. “We were really caught off guard by this,” spokesman Michael Chee said. “This is certainly consistent, though, with the trend in provider negotiations.”

PacifiCare officials could not be reached for comment.

Managed-care advocates, however, accused the St. Joseph system of simply trying to gain the upper hand in contract negotiations.

“This announcement seems to be intentionally very alarming, and I can’t help but think this is a negotiating tactic,” said Bobby Pena, spokesman for the California Assn. of Health Plans.

The managed-care system’s current practice of paying doctors and hospitals for their services on a monthly flat per-patient basis--called capitation--has long been a sore point.

St. Joseph executives said the $80 to $87 per patient the group receives from the HMOs does not cover the actual cost of medical care, particularly when it comes to paying for drugs and costly operations like transplants. St. Joseph wants HMOs to assume more of those costs.

The CMA says eight out of every 10 physician groups in the state border on insolvency, forcing healthier groups to assume the costs and responsibilities of troubled operations.

Randolph said his group has taken on an additional 150,000 patients over the last 18 months from physician groups that had failed, like FPA Medical Management, formerly in San Diego. He said St. Joseph decided to stop taking new patients because doctors were concerned about the predicted failure or bankruptcy of KPC Medical Management in Anaheim, which serves 100,000 Orange County patients.

St. Joseph plans to renegotiate contracts with its HMOs, Randolph said, and those that fail to change payment terms will likely be dropped when contracts are up for renewal. He said the groups also may trigger the hardship provision in its contracts to terminate agreements sooner.

For the fiscal year ending June 30, St. Joseph expects a 23% drop in net income to $40 million from the previous year. Revenue, though, is expected to grow to $2.25 billion from $2.1 billion the previous year.

Todd Richter, an industry analyst at Banc of America Securities in New York, said the payment plans for physicians that HMOs have required for years are coming home to roost. “The plans have been underpaying these physician groups, and finally these groups are feeling their oats a bit and striking back,” he said.