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San Diego Union-Tribune
May 25, 1999
by Craig D. Rose
Critics Say 'Little HMOs' Bear More Risk Than They Can AffordOne consumer advocate calls them "HMOitos," using the Spanish diminutive to characterize them as little HMOs. Despite the cutesy connotation, the advocate says there's nothing endearing about the growing number of mini-HMOs.
In fact, says Jamie Court, advocacy director at the Foundation for Consumer and Taxpayer Rights, such groups present a growing financial risk to health care in California.
"We've accused the HMOs of practicing medicine without a degree," Court said. "Now we have physician groups practicing insurance without a degree."
Like HMOs, these groups receive premium dollars and pay their doctors for providing care to plan members. But should medical costs rise unexpectedly -- say, from a severe flu season -- these mini-HMOs typically do not have the deep reserves of major insurance companies to deal with the surge.
FPA Medical Management, once among the highest-flying mini-HMOs, went bankrupt here last year, leaving physicians unpaid, patients scrambling to keep their doctors and employees without paychecks.
The same thing almost happened again this year. MedPartners Inc., which provides care to a million plan members in the state, ran into financial difficulty and the Department of Corporations moved in to avoid a replay of FPA.
Those crashes echoed in the state capital.
The Senate Appropriations Committee yesterday considered legislation that would impose a moratorium on so-called limited Knox-Keene licenses, which allow smaller groups to function much like HMOs, which hold full Knox-Keene licenses.
The bill was introduced by Sen. Jackie Speier, D-San Francisco.
"All of these different entities are accepting health-insurance risk and passing this risk to another entity below them, " said Michael Ashcraft, an aide to Speier. "Who is responsible for the risk is becoming more and more blurred and not well defined in law."
This is more than a legal technicality, as FPA's patients learned here last year.
"Patients should be concerned because limited Knox-Keene licenses have created an illusion of safety that has turned out not to be true because of incompetent regulation," said Steven Thompson, vice president for government relations of the California Medical Association.
At the same time, Gov. Gray Davis says he wants a different entity to oversee regulation of HMOs, currently under Department of Corporations purview.
Despite such government moves, nearly two dozen groups have applied for limited Knox-Keene licenses, including two in San Diego.
Scripps Clinic, a group of 320 doctors, recently received such a license. Scripps Care, an organization encompassing the six Scripps hospitals, is seeking one of its own.
Both insist their business models are fundamentally different from FPA's.
But San Diegans might still be skittish about the prospects of new HMOitos here. Most FPA patients had little understanding that the financial risk for providing their care had been transferred by the well-known HMOs they signed with to the now-bankrupt medical group.
While it was based in San Diego, FPA was using premium dollars and aggressive stock plays to pursue a fast-growth strategy now seen by some as reckless, while managing health care for more than 1 million people, including 350,000 in California.
When it went broke, the state's big HMOs -- the large companies which most consumers think of as their insurers and which collect premiums and pay medical groups for patient care -- insisted they had fulfilled their responsibility by paying FPA for health-care delivery.
But physicians within FPA said millions of dollars remain unpaid and insist that HMOs are ultimately responsible. Nearly a year after FPA's bankruptcy, some $60 million in bills remains outstanding, according to the California Medical Association. The matter is unresolved.
"Our position has been, and hasn't changed, that health plans have already paid in full to FPA," said Ron Yukelson, a spokesman for Health Net.
But Thompson of the CMA said the big insurers, as holders of full Knox- Keene licenses to operate health plans here, should be seen as general contractors, and medical groups such as FPA should be regarded as subcontractors.
"When the subcontractor fails to perform, that is still the general contractor's responsibility and every contractor knows that," Thompson said.
That may be more true in Nevada, where PacifiCare says it has paid $34 million twice -- once to FPA, which did not pass along payments to doctors, and a second time directly to the physicians.
The problem could be growing even bigger here. Thompson says MedPartners may have bills of $400 million outstanding to doctors and hospitals.
In San Diego, Marc Reynolds, president of Scripps Clinic Health Plan Services Inc., said the group sought its limited Knox-Keene license to streamline the delivery of medical care. The license allows the Scripps Clinic group, a physician group previously paid only for its professional services, to collect and disburse funds for hospital care as well.
The change will nearly double revenues per patient collected by the Scripps Clinic group.
"It allows us to contract more efficiently with health plans," said Reynolds, whose group provides care to 325,000 people. "The limited Knox- Keene allows us to have one contract. We get to manage all care under one roof."
But managing both payments comes with a risk: Scripps Clinic's new contract with Cigna Health Plans, for example, has it accepting a fixed payment in exchange for providing all medical needs of Cigna's 6,000 members.
The big HMOs like these relationships because, after taking their cut of the member's premium, they pass the balance and all financial risk to the medical group. The new relationship puts the physician group in a new role.
"You are an insurance company," said Joseph Sebastianelli, executive director of Scripps Care, the group of 1,400 doctors and six hospitals that is seeking a license.
Sebastianelli admits to unease about the current licensing environment, adding he is not sure Scripps Care will actually use its license, should it be awarded one. But he says the hospital group seeks a license because some large insurers -- which recruit plan members -- may require a limited Knox- Keene license to contract with the hospital system.
"Scripps' vision is not to be an insurance company but to have the capacity if that's what the market says," he said.
In California, the cash reserve requirement for smaller HMOs can be as little as $1 million, Sebastianelli said. From an insurance perspective, however, groups covering smaller numbers of people face more unpredictable medical costs than larger groups, where statistical averages tend to hold.
Sebastianelli surely knows the difference. He formerly was president of Aetna, which insured 16 million people and had reserves in excess of $5 billion.
Asked if the reserve requirement for smaller HMOs in California is adequate, Sebastianelli said, "I'd prefer not to comment."
The California Medical Association, whose members have lost millions from the flameout of FPA and MedPartners, has no such inhibitions.
"The Department of Corporations' ability to oversee limited Knox-Keene plans may be one of the worst regulatory performances in the history of the state," said Thompson, the CMA vice president.
He added that the disruption to patients from MedPartners' problems may be greater than that from FPA, because MedPartners oversees care to so many more patients.
Thompson says physician groups -- many of which say they are financially hard-pressed because of limited payments by HMOs -- seek limited Knox-Keene licenses because of an illusion.
"The physician groups that run into financial trouble believe they can save themselves from insolvency if they also manage the hospital dollars," he said. "But when they get into the business, they find the hospital (side) has already been screwed down."
Some fear the question may be raised repeatedly if the window remains open for limited HMO licenses. Statewide, there are 22 applications pending for limited Knox-Keene licenses, which allow groups to function as HMOs in every regard except marketing.
But Reynolds of Scripps Clinic says licensing won't change much.
"Physician groups already manage much of the risk, anyway," Reynolds said. "We have managed professional risk for 15 years and we've managed some portion of the hospital risk for a similar period of time. And we've done that fairly successfully. Licensing is not that great a leap."
Critics are not assured.
"We'd like our doctors and hospitals to remain in the business of medicine, rather than insurance," Court said. "These HMOitos are becoming more like the HMO corporations they hate."
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