When FPA Medical Management filed for Chapter 11 bankruptcy protection in July 1998, some creditors expected to recover at least some of what they were owed.
After all, this was a physician practice management company that less than a year earlier had enjoyed a market value of $1.37 billion on Wall Street.
But as it turns out, such hopes were over-optimistic, given a reorganization plan that is scheduled to be completed this week.
The sales of FPA's remaining assets netted a mere $108.2 million-a pittance compared with the 27,000 unsecured claims totaling more than $3 billion.
As it stands, the thousands of physicians, dozens of hospitals, multiple health plans and others who have claims outstanding can't count on getting a dime.
Many assets were sold for far less than the company originally paid. The deflation is blamed on a depressed market for physician practices. In addition, questions are being raised about whether FPA overpaid for assets in sweetheart deals.
In fact, there is so little remaining that the lawyers, accountants and other professionals who worked on the case swallowed a 15% fee cut to free cash to meet certain legal obligations required to bring closure.
Banks, which stand at the front of the line to collect recovered assets, will receive only about $4 million in cash plus accounts receivable, which could be worth a few million more. That compares with their total claims of $319 million.
What unsecured creditors will get is about $2.1 million to administer a trust that will have the authority to pursue certain claims. The claims include fraudulent transactions in which FPA may have overpaid for assets, claims against directors and officers liability coverage, and the voiding of certain transactions that occurred after the company declared bankruptcy.
But there is no guarantee, or even probability, that any money will be recovered, much less a sum large enough to make a dent. What's more, the process could take years.
Nevertheless, Keith Shapiro, a lawyer representing the unsecured creditors, called the appointment of the trustee "a great beginning."
"Relative to what assets are there in the company, the unsecured creditors, we think, have done extremely well," says Shapiro, who's in the Chicago office of Greenberg Traurig. "The good news is, the trust has the resources to go out there and make the analysis, which is often not the case."
Jeff Brownawell, vice president for managed care and government reporting for Houston-based Memorial Hermann Healthcare System, who sits on the unsecured creditors' committee, acknowledges that recovery could be zilch.
"Certainly, I wanted more, but after looking through it and being involved in it, I think this was the most the unsecured creditors could ask for," he says.
While not giving an exact figure, Brownawell says the 13-hospital system is owed millions of dollars from an FPA physician network, which failed to fund a shortfall in a capitated risk pool for hospital services. The system has total annual revenues of $2.5 billion.
As a result of its experience with FPA, Memorial Hermann has changed its capitation arrangements with physicians to try to identify financially troubled groups earlier and protect itself if a group does file for bankruptcy. "We will be asking for more financial information (from groups) than what we were getting from FPA," Brownawell says. In addition, he says, physician groups are required to set aside money in escrow or sign letters of credit.
Nationwide, FPA had 7,900 physicians in its networks, most of whom claim they are owed money.
Greater Houston Anesthesiology, a 140-physician practice, is owed about $650,000, compared with annual group revenues of about $60 million, but only some of its physicians had contracts with FPA. "There are some it hit quite substantially," says David Brooks, the group's director of managed care.
"I think in the beginning we all had our hopes for a lot more recovery. I don't think anyone ever anticipated (the situation's) getting this bad," Brooks says. "We've pretty much moved the money off the active accounts receivable."
According to Brooks, some of his physicians are scrutinizing other payers in the community to make sure they are solvent.
When FPA filed for bankruptcy protection, company officials said they expected the organization to emerge from bankruptcy protection as a smaller company. It doesn't appear that will happen.
Bernard Katz, a partner at J.H. Cohn, an accounting and consulting firm headquartered in Roseland, N.J., acted as the financial adviser to the unsecured creditors' committee. He says there was little that could be done to stop the hemorrhaging and save FPA, which he calls a sick company in a sick industry.
"In another industry, you could usually correct your top line, your sales line, by charging more money, or you can change products or change the mix of what you're manufacturing," he says. PPM firms, he says, cannot control prices or costs.
Physicians have pressured health plans in several states, including California and Texas, to pay doctors who are owed by FPA. But Shapiro says physicians owe payers such as Humana and Prudential HealthCare a debt of gratitude for waiving claims worth $2 million and $3.5 million, respectively. Humana also assumed $3.5 million in liabilities in connection with a buyback of some of its assets, and Prudential co-chaired the unsecured creditors committee, Shapiro says.
"The payers were very sensitive to how their actions would be perceived in the medical community. I think they did everything they could to generate a result for the unsecured creditors," he says.
But such gestures are unlikely to let insurers off the hook with medical societies.
Paul Handel, M.D., immediate past president of the Harris County (Texas) Medical Society, for one, says the society will continue to negotiate with some insurers to recover money for physicians.
"We feel we're obligated to our membership to pursue all of the options that we possibly can," he says.