Fearing that if it didn't step in, MedPartners would step out, the state of California seized the physician practice management company's contracting subsidiary and tossed it into bankruptcy court.
The California Department of Corporations says its takeover of MedPartners Provider Network was incited by the PPM's threats to shut down its operations -- including practices with a total of 1,000 physicians -- rather than continue to fund hefty losses in the state. The doctors aren't under state control.
California has seen this once before, when FPA Medical Management suddenly shut down its contracting and physician operations after filing for Chapter 11 bankruptcy last July.
One insurer, Blue Cross of California, has reacted by yanking its enrollees from MedPartners' practices. Meanwhile, the Birmingham, Ala.-based PPM is fighting the department's actions in court, claiming they were illegal.
The department has not yet determined how it will run the provider network, simply because this is the first time it has taken over a PPM's operations.
"We're going through a new phase here that no one's really been through before," says Sam Roth, a spokesman for the Orange County Medical Association. "It's an absolutely astounding situation."
The California Department of Corporations, which regulates health plans and contracting entities, on March 11 seized MedPartners Provider Network, saying it didn't have enough money nor the means to pay claims. The department noted that the network could not determine the payment status of 160,000 to 200,000 claims in its 1.3 million-patient network.
Conservator Eugene Froelich, appointed by the department to take over the network, immediately put it into Chapter 11 reorganization in U.S. Bankruptcy Court in Los Angeles.
The bankruptcy petition listed assets of $100 million and liabilities of $50 million to $100 million. However, department filings showed that MedPartners Provider Network recorded a loss of $6.4 million as of Dec. 31. The department also noted that MedPartners' physician practices lost $200 million in 1998. The top 20 creditors, mostly Southern California hospitals, posted claims of more than $40 million.
Every insurer except Blue Cross makes capitation payments to MedPartners physicians through the network, which also is used for paying hospitals.
Standard & Poor's, a New York-based credit-rating agency, says it is watching to see if California insurers' earnings take a hit because of the network's seizure.
The department feared that without a takeover of the network, MedPartners might pull the plug on all its California operations, which the company says it has spent $257 million to prop up.
In news releases, conversations with the department and a March 10 state Senate hearing, the company said it did not have a legal obligation to fund the doctors or the network.
MedPartners spokesman Robert Mead says the company is funding its practices and has no intention of suddenly pulling out. He says it wanted to soothe investors who sent MedPartners' stock value down to $3.25 per share March 15 from $5.81 March 11.
However, the state took MedPartners' words as a threat. In its March 11 seizure order, the department noted that on March 8, MedPartners threatened to shut down its California operations within 24 hours if the state didn't rescind a cease-and-desist violation letter sent to the provider network March 5.
The letter demanded that MedPartners Provider Network fix financial and administrative problems, including failure to pay and collect claims. The department seized the network after a March 8-10 review in which it determined MedPartners had not and would not fix them.
The state said its actions stabilized a money-losing operation. MedPartners argued in pleadings filed March 17 in the Bankruptcy Court and in Los Angeles County Superior Court that the seizure has done the opposite, causing suppliers to stop selling equipment and employees to quit.
Also on March 17, Woodland Hills-based Blue Cross sent a letter to 120,000 enrollees -- 10% of MedPartners' patient base -- informing them that they must change doctors because of MedPartners' shaky financial status. On March 18, the Department of Corporations sent a cease-and-desist order to Blue Cross, saying the insurer needed state approval to send the letters to enrollees, even though Blue Cross isn't part of the provider network.
The situation had not been settled as of Modern Physician's deadline.
Meanwhile, Presbyterian Health, a Whittier, Calif.-based physician and hospital system, has been running newspaper advertisements urging MedPartners patients to "jump ship."
MedPartners talked about the blow-up alternately as no big deal and as contributing to an atmosphere of frenzy.
Its court pleadings accused the department of having conducted a public smear campaign, including planting stories in local newspapers, to make itself look "heroic." They characterized Froelich as bursting into MedPartners' California headquarters in Long Beach, handing out fliers that said he was now in charge of "Medical Partners Provider Network."
At the same time a press release was telling stockholders the network seizure would have "no material adverse effect on the company," MedPartners' court pleadings referred to the financial effect of the state's actions as "an arson fire."
The department contends that MedPartners already is burning plenty of money. As of Dec. 31, the company carried $1.7 billion in long-term debt compared with $1.1 billion in assets, reduced to $586 million when accounting for charges related to MedPartners' decision to sell off physician practice assets.
MedPartners has hoped to reduce its debt by divesting its physician practice assets, part of a plan announced in November that would have the company focusing on its profitable pharmacy-benefit management business.
But the network's woes could put a crimp in those plans. That's because physicians' contracts with the network may be considered assets, and the Bankruptcy Court must approve all sales of assets. Froelich also says he might have some say in any sale as operator of the network.
At the least, observers say, MedPartners' troubles could reduce the price of its practices in California, which account for one-third of its physicians nationally. Attorneys involved in practice sale negotiations say the company has been willing to consider offers of up to 70% less than what the company paid for practices.
Both MedPartners and physicians have played hardball in negotiations. At least two Florida practices in March sued, claiming breach of contract by MedPartners, but the company says privately that the suits are bargaining postures.
According to court papers, the company reacted to one lawsuit by sending moving vans on March 5 to Miami Lakes (Fla.) Medical Center Associates with the intention of repossessing the office furniture and equipment, but someone forgot to bring a key. A MedPartners spokesman confirmed the event.
Despite the troubles, MedPartners struck a big sale hours before the department's actions. On March 11, MedPartners sold its 290-physician Kelsey-Seybold Medical Group of Houston for $150 million to the clinic, St. Luke's Episcopal Health System and Methodist Health Care System.
The sales of Kelsey-Seybold and other clinics have allowed the company to reduce its loan debt from $600 million in December 1998 to $200 million this month.
Meanwhile, MedPartners has an agreement with Riverside, Calif.-based KPC Global Care in which MedPartners will negotiate exclusively with KPC to purchase assets of the PPM's Inland Empire and Talbert Medical Group operations, consisting of 200 physicians and a hospital in Montclair, Calif.