Along U.S. 1 in central New Jersey, straddling the border of North Brunswick and New Brunswick, sit two low-rise office buildings whose financially downtrodden inhabitants have many questioning whether managed care is out of control.
In North Brunswick is the headquarters for HIP Health Plan of New Jersey. Next door in New Brunswick is the home base for Pinnacle Health Enterprises, a subsidiary of PHP Healthcare Corp., which in November 1997 acquired 23 HIP clinics for $73 million.
By March 31, both buildings likely will be empty. After determining there was no way to keep HIP afloat, the New Jersey Department of Banking and Insurance in February decided to sell the ailing insurer's assets and shut it down by the end of March.
Meanwhile, the U.S. Bankruptcy Court in Wilmington, Del., continues to hear the Chapter 11 reorganization of Reston, Va.-based PHP, as well as the Chapter 7 liquidation of its 600-doctor Pinnacle subsidiary. Both filings came last November, after the New Jersey insurance department took over HIP and canceled a contract for Pinnacle to provide care for HIP enrollees. The HIP contract represented 70% of PHP's business.
"It's not a happy situation," says Anthony Wright, program director for New Jersey Citizen Action, a consumer watchdog group.
Certainly not for doctors. The Medical Society of New Jersey and New Jersey Citizen Action are most prominent in warning that HIP's demise may be the start of an HMO meltdown in the state, although the New Jersey Association of Health Plans disagrees.
"We could be looking at 1929 all over again from the medical side," says Robert Conroy, attorney for the 8,000-member Medical Society of New Jersey.
Conroy points to several causes for alarm:
So far, the costs of the demise of the HIP-PHP deal include:
NationsBank, which is owed $80 million, is trying to fight the state's liquidation plan for HIP, saying PHP creditors may have first rights to receive proceeds from the asset sale. That could set up a battle between the state and federal courts over who gets paid when.
As of Feb. 18, the liquidation, which would have benefited doctors and other HIP creditors, was on hold pending more information from the state about how enrollees would be transferred to other health plans. Middlesex County Circuit Court Judge Jack Lintner, who is overseeing the HIP takeover, asked the state for the data and also wanted to know how the state would guarantee continuity of care to HIP enrollees.
And before approving the continuation of the 75% reimbursement cap for providers through March 31, Lintner made all the lawyers in his courtroom take out their cellular phones and call their clients to make sure they would agree to it. They did.
Two public-interest groups -- New Jersey Citizen Action and the Public Interest Law Center -- and 12 HIP patients on Feb. 16 filed a motion in Lintner's court asking for an investigation into how a not-for-profit HMO like HIP could strike an alliance with a for-profit company with little state scrutiny.
Wright of New Jersey Citizen Action says he wants the judge to determine whether the transfer of clinic management to PHP, approved by the insurance department, was a sale or a management contract. If it was a sale, the state should have had hearings over the transfer of HIP's HMO license and charitable assets, whose value was not disclosed, to a for-profit company, Wright says.
New Jersey doctors are not sure what to expect as the liquidation moves forward. Jay Bloch, M.D., a Voorhees urologist, says all the HIP-PHP problems nearly put him in bankruptcy court. He left a Pinnacle clinic in the fall to start a solo practice. He says he is owed $127,000 in back claims.
Doctors should be at the top of the list for getting paid back from any liquidation, Bloch says. "The state needs to prioritize paying out what little money there is," he says.
A growing concern for doctors and others is whether HIP's demise foreshadows bigger HMO problems in New Jersey or beyond.
Such concerns are shared by backers of two bills in the New Jersey General Assembly. Those bills, while different in some of their details, would create a guaranty fund, paid for by a surcharge on HMO premiums, that would ensure payment to anyone owed money by an insolvent or financially struggling HMO. Gov. Christine Todd Whitman's office backs the creation of a guaranty fund.
The bills may take effect retroactively to allow HIP to be included, but some legislative observers say that's no sure thing.
Republican state Sen. Jack Sinagra, a claims manager from Edison, introduced another bill that would set up a bailout fund for HIP only.
Sinagra, chairman of the Senate health committee, also has said he would like to conduct hearings into the HIP-PHP matter.
Sinagra's health assistant, Jamie Reedy, M.D., says the senator has not determined how the hearings would be conducted, assuming they take place. The earliest that could happen would be this month's scheduled committee meeting.
"I think (HIP) points out the need (to get more HMO regulation), given the far-reaching damage this could do, not only to the health of the public, but to the financial well-being of the state's infrastructure," says state medical society attorney Conroy.
Paul Langevin isn't quite so worried, even though he is one of 165,000 HIP members who under the state's liquidation plan would have until March 31 to enroll in another health plan without penalty. HIP is the state's fourth-largest HMO, and its rates, about $196 to $220 per year for a single person, historically have been the cheapest in New Jersey.
Langevin, president of the New Jersey Association of Health Plans, says more regulation is not necessary.
Under 1997 legislation, the state has the power to audit health plans. That's how American Preferred Provider Plans' problems were discovered; another two audited HMOs passed the state's muster. Five plans are scheduled for audits this year, says William Heine, an insurance department spokesman.
Also, Langevin says, the state's health plans have $250 million on deposit in case of emergency.
But he says HIP also proves something his group has said for years: Contrary to some doctors' belief, HMOs are not a high-profit business.
"The (profit) margin is only 3% to 4%," Langevin says. "(HMOs) are not flush with cash, but they are well-capitalized."
HIP's New York affiliate thought it had a plan to capitalize HIP New Jersey, but Lintner rejected it on Feb. 11.
Conroy says part of HIP New York's plan would allow it to forgive a $40 million note owed by HIP New Jersey. It also would have continued the 75% cap indefinitely.
HIP, whose plan was filed under a court seal, would not comment.
The New York State Insurance Department says it is closely watching the moves of HIP New York in relation to the New Jersey plan, although spokeswoman Allison Kimerman would not say exactly what the department is looking for.