Watts Health Foundation Falls Ill for Third Time in 3 Decades

Watts Health Foundation Inc., a nonprofit health plan that covers about 90,000 elderly and low-income Southern California residents, has filed for bankruptcy protection owing an estimated $50 million or more to creditors, including doctors and hospitals.

It is the third time in three decades that the organization, which provides medical and dental care through its UHP Healthcare HMO, has been in financial turmoil. UHP filed for bankruptcy protection in 1987, emerging two years later, only to be seized by state regulators in 2001.

The health maintenance organization emerged anew from state conservatorship about two years ago. It attracted regulators’ attention again in late 2004 for rapidly burning through cash reserves.

The latest bankruptcy petition, filed Tuesday, nevertheless caught both hospitals and regulators by surprise. Watts Health failed to give the state 10 days’ notice before filing the petition as required by law, said Cindy Ehnes, director of the state Department of Managed Health Care.

Had it done so, the foundation’s management might have lost control of the organization. “We might have expressed concerns about the quality of the management and put in place a conservator -- and they forestalled that” by filing for bankruptcy protection without warning, Ehnes said.

She said the agency would nonetheless seek an active role in bankruptcy proceedings.

“Our concern is to protect the plan and to protect patients and to protect those who provide services to patients,” Ehnes said.

Watts Health executives declined to say why they failed to notify the state but they said they intended to work with regulators.

Gary Klausner, a Century City bankruptcy lawyer representing Watts Health, said the HMO would use bankruptcy protections to reorganize and conduct “business as usual” in the meantime, keeping its 300 employees and UHP Chief Executive Curtis Owens.

“We want our members to understand that they will still get coverage,” Klausner said. “Our management is in place, and we have sufficient cash reserves. We are working with our creditors to develop a business plan and hope to emerge from this within a few months.”

But state regulators, who have been watching the HMO’s finances deteriorate for several months, were less sanguine.

“We are very concerned about anything that has the potential to destabilize hospital or medical group finances in the area,” Ehnes said.

The HMO regulator had hired a consultant to scrutinize UHP after a financial report in December revealed a precipitous drop in cash reserves, Ehnes said.

Among Watts Health’s top creditors are 20 hospitals in Los Angeles, Orange and San Bernardino counties. In its bankruptcy petition, the foundation estimated that it owed them more than $15 million out of $50 million to $100 million in total debt. The hospitals are required by federal bankruptcy law to continue treating the HMO’s members, regulators said.

The list includes CedarsSinai, USC University and King/Drew hospitals. The biggest creditor, listed with more than $4.5 million in unsecured debt, was Centinela Hospital Medical Center in Inglewood.

“Because this is such a big surprise, we’re right now scrambling to find out what’s going on,” said Cyndee Woelfle, director of business development for hospital owner Centinela Freeman Health System Inc.

Three hospitals run by the nonprofit MemorialCare Medical Centers -- in Long Beach, Anaheim and Fountain Valley -- also are listed as creditors, owed about $2.4 million.

“We are concerned, because this is a major healthcare insurer in our community,” spokeswoman Susan Solomon said. “And we feel that this situation is reflective of the challenges that are experienced by healthcare providers, hospitals and doctors today.”

Watts Health covers 75,000 members in its medical plan and 15,000 in a dental plan, regulators said. Most of its members obtain their coverage through Medi-Cal, the state-run medical plan for low-income residents, and Medicare, the federal health insurance program for the elderly.

The HMO’s latest problems appear to stem in part from a 30% decline in membership in the last several months, regulators said. In addition, they said, UHP did not have the controls in place to monitor hospitalization rates and other use of services by members, leading to unnecessary costs.

In March, the Department of Managed Health Care required the HMO to submit a plan to turn its finances around. In that plan, UHP hitched its salvation to a contract it expected to win to cover 13,000 members of a local service workers union, regulators said.

The contract did not come through, but the HMO did not notify regulators of that loss until after it filed for bankruptcy, Ehnes said.

The roots of the HMO go back to 1973, when Watts Health launched a prepaid healthcare program for recipients of Medi-Cal. In 1979, Clyde W. Oden, an optometrist turned businessman, took over as chief executive, leading the organization for more than 20 years.

Oden created the Watts Health Systems network, which included the Los Angeles Black Business Expo and Trade Show, a property management company and more than two dozen healthcare and charity groups.

He resigned in 2002 after state regulators seized control of Watts Health when its health plan fell more than $20 million in debt. Regulators found that thousands of claims from doctors and hospitals routinely went unpaid for months.

At the same time, regulators complained, Watts Health Systems companies were earning millions of dollars for administrative and property-management services and the HMO lent $3 million to Watts Health Systems to buy a controlling interest in a bank.

“I’m extremely saddened” to hear about the bankruptcy, Oden said Thursday when reached at his Los Angeles home.

Oden, now a pastor at Bryant Temple AME Church in South Los Angeles, said he was still a member of UHP and “hopeful they will put their affairs in order.”

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Tangled history

1967 -- Founded as South-Central Multi-Purpose Health Services Center.

* 1973 -- Center becomes Watts Health Foundation Inc., a nonprofit based in Inglewood.

* 1973 -- Watts Health starts a healthcare program for Medi-Cal recipients that eventually becomes a nonprofit HMO called UHP Healthcare.

* 1979 -- Clyde W. Oden, an optometrist turned businessman, becomes head of Watts Health.

* 1987 -- Burdened by $12 million in debt, Watts Health files for bankruptcy reorganization under Chapter 11, emerging two years later. Also that year, the state Department of Corporations sues to win a cease-and-desist order, alleging that some HMO staff told prospective enrollees they could lose their Medi-Cal coverage if they didn’t join.

* 1989 -- Oden creates Watts Health Systems Inc., which at the time includes both for-profit and nonprofit organizations such as the Los Angeles Black Business Expo and Trade Show.

* 1995 -- UHP Healthcare lends $3 million to Watts Health Systems to buy controlling interest in Family Savings Bank.

* 2001 -- California Department of Managed Health Care puts the company into a conservatorship after it accumulates more than $20 million in debt. Regulators find the foundation routinely failed to pay doctors, hospitals and other creditors.

* 2002 -- Struggling financially, Watts Health sells Family Savings Bank. Also that year, Oden resigns and is replaced by a state-appointed trustee.

* 2003 -- Watts Health emerges from state control.

* 2004 -- Curtis Owens joins the company as president and CEO.

* 2005 -- Watts Health files again for bankruptcy reorganization under Chapter 11.

Sources: Times archives, Watts Health Foundation Inc.

Los Angeles Times