Ailing Doctor Groups in Critical Need of Remedy

The doctor groups that form the backbone of managed health care in California, which have been collapsing at an alarming rate in the last two years, appear to be at a new crisis point, threatening the entire system.

Last month Family Health Care of Ventura County, which managed 130,000 patients, suddenly folded and began liquidating its clinics and equipment, leaving as many as 50,000 people with little or no access to their doctors for several days.

Family Health Care was the fourth major group to go out of business during the last six weeks and the 126th to crumble since the California Medical Assn. started keeping records about four years ago.

That medical groups have been struggling, failing and consolidating over the last two years is well known. They are being crushed by their very purpose: As middlemen between health maintenance organizations and doctors, these groups pay for all aspects of patient care out of a set monthly fee from the health plans. But many miscalculated the cost of care and agreed to inadequate HMO fees.

To make matters worse, many groups are for-profit and attempted to take management fees out of the already inadequate payments from the HMOs.

Now the precarious state of the physician-group system is threatening the entire structure of managed care in California.

“We’re going to see a whole lot more of this in California and especially in Southern California,” said Peter Boland, a Berkeley health-care consultant. “The health-care delivery system is going to be significantly destabilized.”

If a solution is not found quickly, chaos for patients and financial trouble for doctors, hospitals and HMOs could ensue. But examples already are mounting.

The likelihood of several more groups going under before the end of the year has prompted one of the biggest health insurers, PacifiCare Health Systems, to set aside $25 million to help prop up troubled doctors’ groups.

In September, 16 health plans chipped in to provide a bailout of more than $30 million to one of the largest medical groups in California, KPC Medical Management of Anaheim. Two other large California groups are also teetering near bankruptcy or closure, as health plans and state regulators wrestle with whether they too should be saved.

When a managed-care medical group goes under, doctors must quickly sign up with another group affiliated with their patients’ health plans if they want to be paid. Patients, meanwhile, must find out which group, if any, their doctors have joined, and make sure the new group is affiliated with their health plans.

Discussions are taking place throughout the health-care field as to whether it’s time to find a new way of paying and organizing physician networks.

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At the state level, regulators do not have the clout or the authority to force health maintenance organizations to bail out groups or pay them more. Still, a new state commission is developing financial standards for medical groups in California.

A coalition of health plans, employers and physician-group executives is trying to devise what it calls a “new HMO” that would be built on the assumption that patients might be willing to pay more if they knew they would be receiving stable, high-quality care. The success of such an effort, however, is far from certain.

In the meantime, the system--which serves nearly 18 million Californians--continues to crumble.

“The theory was that these medical groups would be more responsive to consumers . . . but in reality they’re using the same kind of financial incentives [to doctors to keep costs down] that an HMO would use,” said Earl Lui, a senior attorney at Consumers Union who specializes in health care. “And if that’s the case, do we really need this clunky structure?”

Many contend that it’s the HMOs’ fault that the medical groups are failing, because the HMOs have used their clout in the marketplace to get doctors to accept low fees.

Others say the system is too dependent on medical groups for them to be allowed to fail.

Arranging financial bailouts gives the groups a cash infusion and enables patients to continue to see their regular doctors.

“It stabilizes a very acute problem,” said Dr. Brian Roach, president and chief executive of Mills-Peninsula Medical Group, the only remaining medical group in San Mateo County, where four competitors have gone out of business in the last year.

But others, notably the chiefs of some of the state’s largest physician organizations, say the bailouts are a big mistake.

Steve McDermott, president of San Ramon-based Hill Physicians, says he believes in the medical-group system because it provides better care with doctors in charge.

But McDermott, who said he makes a modest 1% profit caring for the 400,000 members of Hill Physicians, warns that propping up failing groups is bad for consumers as well as business. A better approach, he said, would be to let well-managed, financially solvent groups take over for the ones that are struggling.

Even the California Medical Assn., which pushed hard for the KPC bailout and tried to coordinate one for Family Health Care, has expressed doubts that bailouts alone will solve a medical group’s problems or return a group to stability. It even suggested that KPC itself would not prevail as a going concern.

“We are now doubtful that KPC . . . can survive given the financial hole created by past woefully inadequate [HMO monthly] rates and months-long delays in the loan packages promised to KPC,” Jack Lewin, the organization’s chief executive, wrote to state officials.

Instead, Lewin wrote, the state should better regulate HMOs and require them to reimburse doctors for services if the medical groups fail to do so.

The most obvious new model would be similar to the one pursued by Aetna Inc., which requires all HMO doctors to sign contracts as individuals, being members of a medical group.

That way, if the group goes out of business, the doctors are still affiliated with Aetna and can see patients and receive fees. In most cases now, when a doctors’ group goes under, physicians must join new groups that contract with the same health plan in order to be paid for seeing their old patients.

At the state level, the new commission on medical-group solvency is considering regulations aimed at making sure health plans only contract with medical groups that are financially stable.

So far, the commission’s proposals are fairly modest: that medical groups be required to have at least $50,000 worth of reserves and $25,000 in working capital; that they pay doctors within four months of receiving their bills; and that they regularly estimate the amount of money they owe to doctors who have not yet sent in their bills. The responsibility for monitoring the groups would fall to the health plans, which would be held liable for contracting with unstable organizations.

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The health plans say the requirements are not enough, that under these proposed rules some medical groups that failed spectacularly in the past would appear to be solvent. And they chafe at the idea of being held liable, arguing that current regulations do not allow them to look closely enough at a medical group’s books.

In the meantime, health plans are monitoring the doctor groups on their own.

“When medical groups are having difficulty we know about it, because we monitor them on a fairly regular basis,” said Health Net President Cora Tellez. Like other companies, Health Net has instituted regular audits of doctor groups. The company also lends its expertise to medical groups that need help managing and paying for care. Health Net’s head of pharmacy services recently helped a group set up a system for managing prescription drugs, Tellez said.

But in reality, there is little a health plan can do, short of refusing to contract with a group in the first place, paying it higher fees or providing a bailout when financial trouble surfaces.

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When the situation turned grave for Family Health Care, health plans knew about it and, at the request of state regulators, considered a bailout.

But Daniel Zingale, the state’s top managed-care regulator, said the state could not order the plans to save the medical group. Instead, he said, he told the HMOs that if the group went under, they had to ensure that patients had access to their doctors.

The plans declined to pitch in, and Family Health Care closed its doors the next business day.

A better solution, said McDermott and others, would be to change the way health plans pay physician groups. Instead of offering financial incentives to groups that save money, for example, plans could pay groups more if their medical results are better. That way, groups would be encouraged to pay their doctors on time and to treat them well and would not ration care.

To that end, Kaiser Permanente has said it will offer bonuses to employees if the department in which they work shows improved medical results or offers service that is rated highly by patients.

Not only should health plans pay more to doctors who offer higher-quality service, they should pay more to doctors whose patients are sicker and more expensive to care for, Boland said.

The purchasers of insurance--consumers and employers--might also be willing to pay more if they know care will be consistent and of high quality, said Greger Vigen, a health-care actuary with William M. Mercer Inc. consultants.

“Small employers are still interested in a cheap product, but I think large employers could really drive that type of change,” Vigen said. Researchers at Mercer, he said, are trying to “create a better HMO” that does use doctor groups but that, for a modest amount of more money, offers better coverage.

Dr. Robert Crocker, medical director for Blue Cross of California, predicted that sooner or later the overall system will change.

“We will see new models emerge in the industry as a result of some of the market forces right now,” Crocker said. “But I don’t know that any of us has the answer.”