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State's Physicians Pained by Loss of Medical Groups

Closings and consolidations are symptomatic of financial ills as doctors seek cost savings and negotiating clout with insurers


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."

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