The story of how Thomas-Davis Medical Centers died is one of unbridled growth, dubious business strategy and bad management.
The final chapter was written by FPA Medical Management, which finally ran the venerable Arizona clinic into the ground, physicians say.
FPA last month decided to shut down Thomas-Davis, which it acquired in December 1996 from Foundation Health Systems. FPA, which filed Chapter 11 last month (see story on page 3), views Tucson as a money-losing market. Thomas-Davis and another former Foundation clinic in Sacramento, Calif., lost a combined $5 million in the first quarter of 1998.
The 800 Thomas-Davis employees in Tucson and Phoenix will be jobless as of Aug. 31.
The clinic's 140 doctors -- 90 in Tucson, 50 in Phoenix -- are negotiating with FPA to buy back their practices so they can reorganize Thomas-Davis or separate into their own clinics. Thomas-Davis already was surviving in name only; since FPA took over, the clinic had been ravaged by physician defections.
The ill will continues to fester. The Federation of Physicians and Dentists, the union representing Thomas-Davis doctors, has contacted the Department of Labor with the allegation that FPA skimmed doctors' 401(k) retirement money, union Executive Director Jack Seddon says. FPA denies the charge.
Also, Seddon says, the company's failure thus far to give employees formal notice of termination could violate a plant-closing law that requires companies to give employees 60 days' notice before termination.
Whatever happens, the closure is an economic and spiritual blow for Arizona, especially Tucson. That's where Thomas-Davis was founded in 1920 -- eight years after Arizona achieved statehood.
"I've been going there since I was a kid," says Tucson Vice Mayor Jose Ibarra, 28. "It was kind of like our neighborhood health center."
Thomas-Davis doctors are blaming FPA's poor management for the clinic's demise.
"It was sort of a slash-and-burn, rape-and-pillage company that came in and decimated a place and is leaving," says Keith Dveirin, M.D., a pediatrician and leader of the union movement who left Thomas-Davis in May. "There is nothing that would have saved Thomas-Davis."
According to many Thomas-Davis doctors, the clinic first was dealt a lethal blow by previous owner Foundation, which set up low-paying contracts to bolster its HMO bottom-line at the expense of the clinic. When FPA took over, it continued to negotiate poor contracts and was a bad manager to boot.
FPA Chairman Stephen Dresnick, M.D., was not available for comment. However, Foundation officials dispute the doctors' version, saying Thomas-Davis' clinical operations were losing money even before their company bought it in 1994.
"It's easier for the doctors to say, 'It was the other companies, not us,' " says Donna Kreutz, communications manager for Intergroup, Foundation's subsidiary in Arizona.
Intergroup is at the heart of how Thomas-Davis got to where it is today.
In the early 1980s, when many medical groups jumped into the HMO business, Thomas-Davis, a clinic with a sterling reputation throughout the Southwest, and another medical group, Tucson Clinic, jointly started up their own HMO, called Intergroup.
Intergroup proved to be quite popular, growing throughout Tucson and into Phoenix. Following the staff-model HMO structure that was the standard at the time, Thomas-Davis and Tucson Clinic would add doctors and clinics as the insurance plan grew.
Thomas-Davis, which in 1989 bought out Tucson Clinic's 50% share, continued to expand Intergroup, eventually opening 18 clinics to serve customers in Tucson and Phoenix. In 1994 Intergroup expanded north into Utah, as a 60% investor in a joint venture with two Utah hospital systems, which operated the affiliated clinics.
Thomas-Davis doctors were satisfied with Intergroup's growth but unhappy about growing management and financial demands.
"We, as a bunch of physicians, were running an organization that was growing faster than we could handle it," says Don Hill, a Thomas-Davis oncologist until 1997. "Intergroup was prosperous. But we decided, let's get back to basics."
Thomas-Davis doctors sold the clinical and insurance operations to Foundation, a Woodland Hills, Calif.-based insurer, for $720 million in stock. The deal closed in November 1994.
Thomas-Davis' financial picture looked rosy, until one examined the insurance and clinical operations separately.
When Foundation took over, the HMOs it acquired went into one subsidiary, and the medical groups were under a different subsidiary, Kreutz says. "At that point, the financial picture was very, very clear because the two companies were separated," she says.
But doctors say it was Foundation putting Thomas-Davis in a world of financial hurt. Later, court documents in an unrelated legal battle would show doctors accusing Foundation of lowering capitation payments and charging exorbitant prices for services from the parent company.
By the time Foundation decided to sell its clinical operations in 1996, Thomas-Davis was losing $2 million per month.
That year, FPA was growing rapidly by purchasing others' money-losing operations. Eventually, it would take clinics out of the hands of Oxford Health Plans, WellPoint Health Networks and Prudential HealthCare. In the end, buying such money-losing clinics would contribute to the company's downfall.
In 1996, Foundation, wanting to get out of managing clinics, sold its practices in Arizona, California and Florida to FPA for $200 million. At that time, Thomas-Davis had 220 doctors. When discussions began with FPA, doctors got worried. They felt the company didn't have enough experience running a multispecialty clinic; most of FPA's other practices specialized in primary care. Also, doctors say they feared FPA would slash their salaries. On Dec. 5, 1996 -- five days before FPA's purchase closed -- doctors organized under the FPD.
It took a National Labor Relations Board lawsuit in September 1997 for FPA to recognize the union. Contract negotiations were about "90% complete" when FPA announced Thomas-Davis' closure, says Seddon, the FPD's executive director.
Doctors say they saw the downward spiral coming. "It was kind of a worst-case scenario," says Paul Koss, M.D., an internist at Thomas-Davis since 1985. "It seems some type of record in mismanagement to take a premier multispecialty clinic and in a year and a half run it into the dirt."
