Regulators Seize Control of Watts Health Foundation

State regulators Wednesday seized Watts Health Foundation, whose troubled HMO covers 96,000 mostly poor and elderly people in Los Angeles, Orange and San Bernardino counties.

The action came two weeks after the foundation agreed to protect the HMO’s finances by spinning off the 70 clinics it operates. It also agreed to other accounting reforms.

But the Department of Managed Health Care said the changes would have done little to improve the HMO’s “severe cash flow and liquidity problems.”

“The debt overwhelms the assets,” said Daniel Zingale, the department’s director. “No matter how you shuffle the deck, it does not add up to a stable environment.”

The president and chief executive of Watts Health, however, accused the department of acting prematurely. Clyde Oden Jr. said the debt was manageable and that the reforms would have worked. “We are greatly shocked and disappointed the DMHC took this action,” he said.

Watts Health, a 34-year-old nonprofit, does business as UHP Healthcare. Almost 80% of the HMO enrollees are in Medi-Cal and 10% are in Medicare. The seizure of Watts Health is not expected to affect the HMO’s patients.

Watts Health is the second HMO to be taken over by state regulators since May, when they seized Los Angeles-based Maxicare Health Plans. The health insurance industry has been hurt by rising health-care costs.

Asked whether other HMOs face possible seizure, Zingale said: “I don’t see this as the start of a trend.”

Documents released by the department said Watts Health had current liabilities of $59.1 million on June 30, and current assets of $15.9 million. For the first six months of 2001, it reported a loss of $3.1 million.

The DMHC said Watts Health fell consistently behind in paying insurance claims. It said it was two months behind in entering claims into its system; state regulations require HMOs to pay claims within 45 days in most cases.

The DMHC faulted the HMO for making payments to two affiliates that provide property management and administrative services. Watts Health paid the affiliates a total of $20 million between Sept. 30, 2000, and May 31, 2001, according to the DMHC.

Oden blamed delays in claims processing on glitches that resulted from a conversion to a new payment system. He said the problems were being worked out.

He said that he expects Watts Health to post a surplus in 2001. But to satisfy regulators, the foundation agreed to seek DMHC permission to pay affiliates.

“They had no patience,” Oden said.

The DMHC named Frank Stevens of Los Angeles-based Peterson Consulting as conservator. He is charged with overseeing the HMO’s operations until the DMHC can assess Watts Foundation’s condition.