California's risk-bearing medical groups and IPAs are in such dire financial condition that the state recently passed a law requiring physician organizations to meet certain financial solvency standards before accepting risk contracts.
The financial collapse of the physician practice management firms FPA and MedPartners garnered much media attention, but their failures are only part of the story. The California Medical Association recently released a report highlighting the dismal state of all of California's medical groups. According to the CMA, 13 physician organizations have received limited Knox-Keene licenses since 1995. The license allows physicians or hospital groups to assume full risk, provided they contract with a licensed HMO.
Of those 13, one has filed for bankruptcy, one has been placed in conservatorship in state court, two have surrendered their license due to insolvency, one is on monthly fiscal watch, and only one seems to be doing fine.
The report declares that better financial oversight of physician organizations could have avoided such financial disasters as the MedPartners bankruptcy.
The new legislation creates a financial solvency standards board. That board will be responsible for the oversight of all risk-bearing organizations, including small groups that accept risk on a limited basis. Under the legislation, beginning July 1, 2000, any organization accepting risk will be required to furnish financial information, such as an annual audited financial statement or monthly summary activity, to any health plan it accepts risk from.
Eventually, all risk- bearing organizations' financial solvency will be graded, based on the groups' ability to pay claims on time, estimate incurred but not reported claims, maintain positive tangible net equity and maintain positive working capital.
In turn, the health plans must turn over to the physician organization financial information of their own, including enrollee data on a monthly basis, and data on risk arrangements (such as information on withholds) on a quarterly basis. In addition, health plans will be required to pay all risk arrangements within 120 days after the close of the fiscal year.
The Legislature also voted to create a Department of Managed Care. Up to now, California's managed care organizations were under the umbrella of the state Department of Corporations. The director of the new Managed Care Department will sit on the financial solvency standards board and appoint seven other members.
Many California providers welcomed the new legislation but were disappointed another bill that would have increased capitation rates failed.
"I believe risk-bearing organizations need to be solvent, but at the same time they need to have sufficient revenue so they can bear the risk," says Michael Abel, M.D., president of Brown and Toland, a 2,300-physician IPA in San Francisco. Brown and Toland had until recently accepted risk for 260,000 patients, but the IPA earlier this year surrendered its limited Knox-Keene license and got out of the global risk business.
"In order for a provider organization to be financially solvent, the health plans have to pay enough money. They can't just pass the risk without passing on the reasonable amount of money to ensure you can provide care," he says.
Frank Matricardi, principal of Los Angeles- based Phoenix Healthcare Consulting and a lobbyist for the IPA Association of America, agrees that the legislation is a small step forward but said it also leaves major questions unanswered.
"There's a huge economic imbalance between the power of the health plans and the power of the provider organizations," he says. "We think the solvency standards discussion is a good first step toward restoring the economic balance of power between these organizations, but we need to find a way for the plans to get the risk pool monies to the providers so that this will help them to meet the solvency standards."
