State Regulators to Carve Up ‘Holistic’ Community Group
As head of the WattsHealth Foundation, Clyde Oden oversees a nonprofit agency that runs clinics, substance-abuse programs and a health maintenance organization--UHP Healthcare--that has earned high marks for its service to a community often denied decent medical care.
But last month, state regulators seized control of the foundation after UHP Healthcare fell more than $20 million in debt. A report from the State Department of Managed Health Care shows that thousands of claims submitted to the HMO by service providers, including physicians and hospitals, routinely went unpaid for months.
Now the red ink and state scrutiny threaten to undo Oden’s long-held vision of attacking central-city problems with what he calls a “holistic” approach--one that included using HMO funds to gain a controlling interest in a bank and to support other business-development efforts.
“The HMO is part of a system, and this has been a unique vehicle for community empowerment and development,” said Oden, 56, an optometrist turned businessman and the driving force behind the creation of the WattsHealth Systems Inc. network of companies.
“It’s about trying to improve the lives of the persons we serve. And we’ve discovered over the more than 30 years that we’ve been addressing these needs that health care goes beyond treating people for their presenting illness.”
Although they praise Oden’s efforts to address social ills, state regulators took issue with the way the HMO was managed.
They point out that though health-care providers were going unpaid, WattsHealth affiliate companies were being paid millions of dollars for administrative and property-management services. And, in a move that one regulator deemed “questionable,” the HMO six years ago lent $3 million to WattsHealth Systems to buy a controlling interest in Family Savings Bank, one of the oldest and largest black-owned banks in the nation.
Daniel Zingale, director of the Department of Managed Health Care, said his agency is not certain what effect the relationships with affiliate organizations had on the HMO’s troubles.
“That was a factor mainly in that it made it difficult to get an in-focus picture of [the HMO’s] financial condition,” Zingale said. “I don’t know how much of a factor it was in contributing to the financial down-slide.”
Zingale, however, suggested the social service goals of WattsHealth might be “more properly funded by grants”--especially in light of the organization’s debt load.
Well-regarded in the community, UHP Healthcare was rated the “best overall plan value” among Medicare HMOs in Los Angeles County in a report released this summer by Consumer Reports Online and the California Healthcare Foundation.
Economics Harsh for HMOs
Its finances were a different story. The Department of Managed Health Care found that from October 2000 to March 2001, 4,763 medical claim payment checks, totaling $33 million, were not sent for an average of 16 days because of insufficient cash funds in the HMO accounts, according to an Aug. 7 report.
Zingale said, however, that the actual delay was typically months, because claims were routinely not acted on for months. He said the 16-day delay referred to the amount of time the checks were held after they were cut.
During that same period, nearly $13 million was paid to WattsHealth Systems and WattsHealth Property Management, according to the report.
As of June 25, 2001, the HMO “was holding $9.5 million in claims in the system and was two months behind in entering claims into the system,” according to the report.
“The plan is not able to demonstrate fiscal soundness [in part] because it routinely withheld the release of claim payments . . . while making payments to its affiliates for the reimbursement of the plan’s administrative expenses and those of its affiliates,” according to the report.
Oden, who joined WattsHealth in 1979 as executive director, said the payments to the WattsHealth Systems and property management companies went to cover expenses ranging from utilities and payroll to data processing and legal services, and to keep the operation running.
He added that many claims were paid during that period but admitted there was a backlog.
Zingale said slow payments ultimately could jeopardize health care, as health-care providers might be reluctant to extend services to new patients if they fear they would not get paid.
Oden said the flow of funds to the affiliates had “very little” to do with the dire straits of the foundation, an outgrowth of the former South Central Multipurpose Health Services Center. The foundation offers adult day care, HIV counseling, mobile mammography and a variety of other health-care services. About 80% of the foundation’s revenue came from the HMO.
Oden said the HMO fell into deep water because of unexpectedly high costs for hospital care, pharmaceuticals and “other medical care” for plan patients. Zingale agreed that played a role, and health-care analysts acknowledged times have been tough.
Costs are growing at an estimated annual rate of 15% to 20%, said Laura Jacobs, senior vice president of the Camden Group, an El Segundo health-care consulting firm.
She noted the economics are particularly harsh for HMOs that rely on government funding. UHP serves nearly 100,000 low-income patients, most of them Medicare and Medi-Cal recipients.
“Medicare rate increases generally are capped at about 2% a year,” Jacobs said. “So you can easily do the math and compare that with increases in medical costs and see that there’s going to be a problem.”
And when problems arose for the foundation, Oden said, that affected “everything else related to” the foundation, including other members of the WattsHealth Systems network.
That network, created by Oden in 1989, would eventually come to include the bank, the Los Angeles Black Business Expo and Trade Show, the property management company, WattsHealth Charities, partial ownership of Pacific Federal Insurance Co. and more than two dozen health-care programs and medical groups.
In 1995, WattsHealth Foundation, using premium dollars from the HMO, lent $3 million to the parent to purchase a controlling interest in the bank, which President Wayne-Kent Bradshaw said is in “superb shape,” with more than $190 million in assets.
Creating a ‘Coherent Fabric’
This year, UHP paid $75,000 to be the title sponsor of the Black Expo, an event organizers said can bring in more than $600,000 in revenue. WattsHealth Systems took over operation of the expo in the mid-’90s, Oden said.
Creating a broader network around the HMO, Oden said, was better than the piecemeal solutions he said were doing little to address the overall issue of “community health.”
“What we’ve done is to uniquely piece together pieces of programs into a coherent fabric,” Oden said. “That’s the genius of the WattsHealth family.
“The bank was part of the overall effort to make credit, or mortgages, available to people in the community so people could live in better homes,” Oden said. “There’s a connection between the shelter of the people and their health status.”
But Zingale said regulators found the loan “questionable.”
“It looked like an unusual flow of money for an HMO,” Zingale said. “Traditionally, it’s the bank that would loan money to the HMO.”
Oden said the loan was approved by the state Department of Corporations, which had oversight for HMOs before Zingale’s department began operating in July 2000. A Department of Corporations spokesman was unable last week to confirm that approval.
In mid-July, WattsHealth signed a stipulated accord with the state, agreeing to repay the loan, with interest, for about $4.3 million. In fact, half of the items in the stipulated agreement put restrictions--or a prohibition--on future payments to the affiliates.
Under the agreement between WattsHealth and the state, the HMO will be spun off into a separate corporation, as will the two clinics and two dozen programs that are funded by government and private grants and contracts and that fall into the WattsHealth Foundation group.
Those services, the expo and the bank may not end up under the WattsHealth umbrella, Oden and state officials said.
“The business model is being changed, and we will evolve into a new business model,” Oden said. “This is still a good idea, but good ideas can be worked better.”
