State’s Physicians Pained by Loss of Medical Groups

When Nina Leslie took over as chief executive of troubled Pacific Health Care Medical Group in Pleasanton, Calif., in December 2000, she looked over the finances to assess its chances for staying in business. What she found wasn’t encouraging.

The group’s office lease was up and it didn’t have enough money for moving expenses, much less for the sky-high rents in the Bay Area. The chief financial officer, on the job for only two weeks, quit four days after Leslie came on board.

Pacific Health was far behind on paying claims and in implementing a new computer system. The company had no cash reserves to speak of, largely due to a practice of distributing excess cash at the end of the year to the group’s doctors. Leslie, with 32 years of management experience, told the doctors that the excess money would be needed to build reserves.

When the doctors refused, she said, she saw little future for the group. “I knew this was going to be a sad story and I had to be the bearer of bad news,” said Leslie, who now works as a part-time consultant for Arcadian Management Services in Oakland.

The 36,400-patient Pacific Health Care Medical Group, which completed its shutdown Jan. 31, is one of seven California medical groups that had ceased to operate through March 31--and three more are in Chapter 11 bankruptcy proceedings, according to data from Cattaneo & Stroud Inc., a Burlingame, Calif., consulting firm that tracks the financial indicators of medical groups. That’s roughly on par with the pace in 2001, when 26 California medical groups shut down. Thirty-four closed in 2000.

Closings and consolidations among California’s medical groups continue as the economic forces roiling the health-care industry push doctors into ever-larger groups in the search for cost savings and bargaining power with insurers.

Estimates of the number of remaining medical groups in California vary from a low of about 250 to 380.

It’s not a statistic that is closely tracked, but the state Department of Managed Health Care has some context for the changing landscape, noting that the number of medical groups with HMO contracts dropped 25% to 300 in the last year, from about 400 in 2000. The change includes failures and mergers as well as medical groups that were dumped by HMOs.

Several experts say the trend of medical-group failures will continue unless smaller medical groups can gain some contract-negotiating clout through mergers and acquisitions.

“The business reality we see is that it will be very hard for a medical group with 20,000 members or even 50,000 members to operate in California as a separate entity,” said Gregger Viggen, a spokesman for Mercer Human Resource Consulting.

Others say the situation was inevitable.

“There are simply too many medical groups in the state,” said Albert Lowey-Ball, president of a Sacramento management consulting firm. “They will need much better financial management and an increasingly strong reserve requirement to survive.”

Making matters worse for medical groups, say other experts, are rising costs driven by new medical devices and technology and reduced funding from Medicare and Medi-Cal.

In some ways, the medical groups have been self-defeating, building up administrative bureaucracies that cut into the money for doctors, Leslie said. The doctors demand more and leave the group when they can’t get it.

“The HMOs take 10% to 20% off the top and give a low payment to the medical group. But the medical group or IPA gets another 10% to 14%, leaving less for the doctors.” Leslie said. (IPAs are physician-directed networks in which participating doctors enjoy the benefits of a larger organization while controlling their own practices.)

Many more medical groups are in deep trouble, such as the University Affiliates Medical Group IPA in Alhambra and the Emergency Physician Medical Group at the St. Francis Medical Center in Lynwood.

“We’re doing terribly. We’re in a major crisis,” said Dr. Daniel Higgins, medical director for emergency services for the St. Francis group. The group lost millions in unpaid bills when the medical groups for which it performed emergency services went bankrupt, Higgins said. Only 7% or 8% of its bill payers are current, said the group’s billing service. The rest are in arrears and 40% of those are 120 days or more overdue.

University Affiliates was locked in a struggle to obtain higher payments for its doctors from Blue Cross of California, which is part of powerful WellPoint Health Networks Inc., one of the nation’s largest insurers. It was a mismatch. Blue Cross said no, and University Affiliates will have to survive without Blue Cross, which accounts for 45% of its business, if its next negotiating session fails.

Dr. Sam J.W. Romeo, University Affiliates president and chief executive, said health plans are putting medical groups out of business with low payments so they can “continue funneling premium dollars into the pockets of their well-heeled executives and shareholders.”

Blue Cross of California said Romeo’s charges are “a desperate last-ditch effort from a medical group suffering from systemic financial losses and years of operating difficulties.”

Sudden health-plan bankruptcy filings, most notably by Tower Health and Maxicare in 2001, also were fatal for some medical groups that had too much, if not all, of their business with one insurer.

That was true of Bay West IPA and Bloodless Options Medical Group, both formerly of Woodland Hills. Bloodless Options closed in August 2001; its sole contract was with Maxicare, said Kimberly Carey, who worked as an administrator for both groups under a contract with her employer, Medpoint Management Inc. Bay West had much of its business with Tower Health, Carey said.

“They had no chance,” she said. “In the old days, a medical group could have a relationship with just one HMO. Not anymore.”

For their part, HMOs are expanding their use of direct contracts with individual doctors instead of or in addition to reaching agreements with medical groups. That would allow higher payments to doctors, say the health plans, because they won’t have to pay for the high administrative costs of the groups. The health plans also say it’s a better move for patients, because it ensures that they will be able to remain with their doctor if the medical group fails.

But critics say managed care is responsible for some of the administrative overhead it decries, and that patients will not be helped when their doctors leave an organized medical group.

“Managed care has meant that the medical groups have had to hire more clerks to deal with more paperwork to get approvals. Doctors and nurses spend their time on the telephone to finally nail down referrals, tests, medication,” said Peter Boland, a health-care industry expert.

Having doctors working on their own isn’t necessarily good, some say.

“Going back to a cottage industry of individual doctors’ practices would be a detriment to patients,” said Viggen of Mercer Human Resource Consulting. “There won’t be a well-thought-out asthma treatment that a medical group would have, and access [will be reduced] to the kind of technology that can monitor whether your patient bought the inhaler you prescribed. Individual doctors lose touch with the rest of the medical system.”

Most doctors have multiple affiliations and can move their patients to another medical group without disruption in care or costs. But there are times, medical experts say, when a patient arrives at the doctor’s new office only to find that the new medical group isn’t affiliated with the patient’s health plan. The patient then must choose between switching doctors or paying a greater out-of-pocket expense for seeing an out-of-network physician.

That’s another reason some physicians, such as Romeo and Dr. Jack Lewin, chief executive of the California Medical Assn., say medical group failures must be prevented and that the state’s Department of Managed Health Care should intervene.

But Daniel Zingale, director of the health-care department, said his office’s goal is preserving the ability of patients to continue to see their doctors, not “intervening in a dispute to see that one side or the other gets a bigger share of profits.”

The California Medical Assn. is sponsoring a bill in the Legislature, AB 1600, that it says would require Zingale to step into such disputes to ensure that contracts and reimbursement packages between medical groups and health plans are fair.

But the sad part, Boland said, is that “most medical groups haven’t the foggiest notion of whether they will be well off or not. The doctors’ offices are no longer profitable. For most, the best is break even.

“It’s just not clear how this is going to work out.”