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Ailing Doctor Groups in Critical Need of Remedy

Health: As more of these HMO-related businesses fail, putting care in California at risk, some urge overhauling how they are paid and organized.


The doctor groups that form the backbone of managed health care in California, which have been collapsing at an alarming rate in the last two years, appear to be at a new crisis point, threatening the entire system.

Last month Family Health Care of Ventura County, which managed 130,000 patients, suddenly folded and began liquidating its clinics and equipment, leaving as many as 50,000 people with little or no access to their doctors for several days.

Family Health Care was the fourth major group to go out of business during the last six weeks and the 126th to crumble since the California Medical Assn. started keeping records about four years ago.

That medical groups have been struggling, failing and consolidating over the last two years is well known. They are being crushed by their very purpose: As middlemen between health maintenance organizations and doctors, these groups pay for all aspects of patient care out of a set monthly fee from the health plans. But many miscalculated the cost of care and agreed to inadequate HMO fees.

To make matters worse, many groups are for-profit and attempted to take management fees out of the already inadequate payments from the HMOs.

Now the precarious state of the physician-group system is threatening the entire structure of managed care in California.

"We're going to see a whole lot more of this in California and especially in Southern California," said Peter Boland, a Berkeley health-care consultant. "The health-care delivery system is going to be significantly destabilized."

If a solution is not found quickly, chaos for patients and financial trouble for doctors, hospitals and HMOs could ensue. But examples already are mounting.

The likelihood of several more groups going under before the end of the year has prompted one of the biggest health insurers, PacifiCare Health Systems, to set aside $25 million to help prop up troubled doctors' groups.

In September, 16 health plans chipped in to provide a bailout of more than $30 million to one of the largest medical groups in California, KPC Medical Management of Anaheim. Two other large California groups are also teetering near bankruptcy or closure, as health plans and state regulators wrestle with whether they too should be saved.

When a managed-care medical group goes under, doctors must quickly sign up with another group affiliated with their patients' health plans if they want to be paid. Patients, meanwhile, must find out which group, if any, their doctors have joined, and make sure the new group is affiliated with their health plans.

Discussions are taking place throughout the health-care field as to whether it's time to find a new way of paying and organizing physician networks.


At the state level, regulators do not have the clout or the authority to force health maintenance organizations to bail out groups or pay them more. Still, a new state commission is developing financial standards for medical groups in California.

A coalition of health plans, employers and physician-group executives is trying to devise what it calls a "new HMO" that would be built on the assumption that patients might be willing to pay more if they knew they would be receiving stable, high-quality care. The success of such an effort, however, is far from certain.

In the meantime, the system--which serves nearly 18 million Californians--continues to crumble.

"The theory was that these medical groups would be more responsive to consumers . . . but in reality they're using the same kind of financial incentives [to doctors to keep costs down] that an HMO would use," said Earl Lui, a senior attorney at Consumers Union who specializes in health care. "And if that's the case, do we really need this clunky structure?"

Many contend that it's the HMOs' fault that the medical groups are failing, because the HMOs have used their clout in the marketplace to get doctors to accept low fees.

Others say the system is too dependent on medical groups for them to be allowed to fail.

Arranging financial bailouts gives the groups a cash infusion and enables patients to continue to see their regular doctors.

"It stabilizes a very acute problem," said Dr. Brian Roach, president and chief executive of Mills-Peninsula Medical Group, the only remaining medical group in San Mateo County, where four competitors have gone out of business in the last year.

But others, notably the chiefs of some of the state's largest physician organizations, say the bailouts are a big mistake.

Steve McDermott, president of San Ramon-based Hill Physicians, says he believes in the medical-group system because it provides better care with doctors in charge.

But McDermott, who said he makes a modest 1% profit caring for the 400,000 members of Hill Physicians, warns that propping up failing groups is bad for consumers as well as business. A better approach, he said, would be to let well-managed, financially solvent groups take over for the ones that are struggling.

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