KPS Health Plans in Washington state last week became the latest physician-run insurance venture to falter.
But unlike many failed doctor-owned plans, KPS has been a pioneer in managed care, not a vehicle for fighting it.
The 53-year-old plan buckled under unprofitable state contracts, including a Medicaid managed-care program it helped to start.
The plan, also known as Kitsap Physicians Service, was seized last week by state Insurance Commissioner Deborah Senn's office for failing to meet a statutory net worth requirement of $3 million.
The 72,000-enrollee plan lost $2.8 million on premium revenues of $98.7 million last year.
A spokeswoman for Senn, Barbara Stenson, said KPS erred by underbidding for state contracts, causing losses in 1996, 1997 and 1998 totaling $12.1 million.
KPS board Chairman Mark Adams, M.D., acknowledged that the plan was reluctant to let go of its long-held state contracts, even after it realized they were money-losers. The plan has about 75% of enrollees in state managed-care programs in the largest county in its service area, Kitsap, and is the only state provider in Jefferson County, he said.
More than one-third of the plan's enrollees are Medicaid recipients or state employees, or participate in a state program for the working poor (See chart).
But Adams said the state is partly to blame for changing benefits after contracts were in place and being less than clear about its reimbursement levels. Other plans also reported losing money under the programs (March 8, p. 60).
"We had 30,000 people in those state . . . programs, and we felt that it was difficult to abandon them. We also felt we had some obligation to our physician members. (The state business) was part of their practice business," said Adams, who is also president of the Washington State Medical Association.
KPS was one of many medical "bureaus" formed by local medical societies to facilitate fixed-fee contracting between employers and physicians. Many of the bureaus affiliated with the state's Blue Shield plan and eventually relinquished physician control. KPS, on the other hand, remained independent and evolved into a full-fledged PPO. Its open physician panel served as an alternative to Group Health Cooperative of Puget Sound, a staff-model HMO.
Health plan competition heated up in the 1990s, and larger plans moved into the Olympic Peninsula. In 1995, KPS contributed $2.5 million to capitalize a statewide HMO that was being launched by the Washington State Medical Association, called Unified Physicians of Washington. KPS hoped to benefit from ties with a statewide network, but Unified flopped within two years.
Early this year, KPS looked for a merger partner, but none would agree to take its unprofitable state contracts along with the lucrative commercial business, Adams said.
The plan has managed to break even since January, but regulators were impatient to correct its net-worth deficiency. Given 90 days to act, the plan's physician owners agreed to pony up $10,000 apiece, or a total of $3.25 million, to recapitalize the plan and reluctantly agreed to drop the state contracts, Adams said.
But the state filed a petition for receivership before the plan could present its rehabilitation proposal, Adams said.
Three Washington hospitals-Harrison Memorial in Bremerton, Jefferson General in Port Townsend and Mason General in Shelton-made a last-minute appeal to Senn's office to hold off until they could evaluate the rehabilitation proposal.
Adams said providers supported the plan partly because of its commitment to Medicaid managed care, which has kept patients from overwhelming emergency rooms and certain physicians' offices. In the late 1980s, KPS launched a pilot Medicaid managed-care program that was replicated statewide.
Stenson said regulators intend to rehabilitate KPS and keep it operating, although specific steps hadn't been decided last week.
The local healthcare community has little confidence that the plan will survive intact.
Dave Gitch, president and chief executive officer of Harrison Memorial, said local hospitals have asked to meet with Senn's staff. He called the plan "an important component and collaborator" on local health issues.
"There's certainly a lot of community apprehension that once (state regulators) have intervened, it becomes a downward spiral," Gitch said.