State Demands Financial Data of Physician Groups

Taking its most aggressive action to prop up troubled physician groups, the state’s new managed-care agency is demanding detailed financial reports from them as it works on ways to slow their failures.

The Department of Managed Health Care will use a standardized reporting form to help it evaluate troubled physician operations and then lean on health maintenance organizations and other managed-care plans to try to keep the doctors solvent.

Physician group failures in the last two years have disrupted care and caused confusion for more than 2.5 million patients statewide.

“We want to get a better picture of just how bad the situation is and [figure out] the next steps we might want to take,” said Daniel Zingale, the agency’s director. “Our goal is to protect consumers, who get hurt when medical groups fail.”

But his department faces a daunting challenge. Shortly after it opened in July, the agency intervened to try to keep KPC Medical Management in Anaheim solvent. Health plans provided loans of $30 million and increased fees, and about half of KPC’s patients were moved to more stable groups. But KPC still went bankrupt in November, leaving 250,000 people temporarily without medical care.

The department now hopes its action leads to a more orderly system as it reacts to reports that a majority of physician groups are financially troubled. According to the California Medical Assn., about 80% of the groups are believed to have serious financial problems.

KPC was among 34 physician groups last year that went bankrupt, closed their doors or sold themselves. That brought the total number of failures to 130 in the last five years. Last month, Napa Valley Physicians Group Inc. in Napa, with 25,000 members, went bankrupt.

Physicians blame their plight on fixed HMO payments--a set monthly amount per patient regardless of the care needed. The payment method has been under fire, and many insurers are moving away from it.

In demanding financial reports from medical groups, the state also requires HMOs to reveal to doctors the ages and sex of members along with other proprietary information that could be used in contract bargaining.

“For the first time, medical groups are not flying blind when they enter into negotiations with HMOs,” said Scott C. Syphax, chairman of the new Financial Standards Solvency Board, an advisor to the managed-care agency.

Although both sides applaud the state’s effort, each has separate concerns.

The requirements could create financial hardships for some smaller physician groups because annual certified audits could cost $30,000 or more, said Aileen Wetzel, associate director of the California Medical Assn.

“Some groups are worried this could evolve into regulating medical groups,” said Dr. Arthur M. Southam, executive director of the California Assn. of Physician Organizations in Los Angeles.

Also, physician groups fear the department could publicly release the financial reports, information that could be easily misinterpreted, Southam said.

Zingale said the state has yet to decide whether to keep the data confidential.

On the other side, HMOs worry that divulging proprietary information may undermine their ability to negotiate contracts with physicians. In addition, Walter Zelman, president of the California Assn. of Health Plans, the main HMO trade organization, said he fears “the state might hold us responsible for medical groups failing” after insurers provide required information to them.

Though the new state agency does not regulate physician groups, a recent law gives it authority to require the groups to provide financial statements. The law, however, does not provide any sanctions for failing to turn over the data.

Most HMOs and managed-care companies already require that the medical groups under contract provide them with financial reports. Such reporting, though, is often incomplete and varies greatly in the amount of information provided, an agency spokesman said.

The state agency now will mandate detailed quarterly reports and audited annual statements from the 400 physician groups, which provide care to most of the 20 million Californians enrolled in HMOs or managed-care plans.

With authority over HMOs, the agency then plans to push them to take steps to help prop up ailing medical groups or sever ties altogether.

Under state law, HMOs must guarantee that their members receive quality care from the medical groups serving them and find new doctors for members whose physician groups fail. HMOs also recognize that a key to retaining members is keeping their doctors on board.

But the state’s action could backfire if it leads insurers to terminate contracts more often and force into bankruptcy some medical groups that could be saved. Even state officials worry that their effort could become a self-fulfilling prophecy. “That’s why we’re proceeding cautiously,” one official said.

Christopher C. Ohman, president of Berkeley research firm CapMetrics, said he doubts the state’s effort would lead HMOs to pull the plug prematurely. Insurers would rather help stabilize a faltering group than have to find new doctors for their members, he said.

The financial information the state gathers could later be used to grade the fiscal soundness of physician groups and to provide those grades to the public, Zingale said.