Southern California's largest practice management company struggled to stay on course late last month, helped by the promise of a last-minute cash infusion from major HMOs in the state.
State managed care officials worked frantically at month's end to nail down a package of loans that would allow KPC's founder and chairman, Kali Chaudhuri, M.D., to stave off bankruptcy--at least for the immediate future.
California Medical Association CEO Jack Lewin, M.D., who participated in the discussions, said he and Chaudhuri were increasingly optimistic that help was on the way from Blue Cross, Cigna, HealthNet and PacifiCare Health Systems, which Lewin said account for about 90% of KPC's patients.
Still, KPC's long-term prospects, as well as those of the thousands of physicians whose practices it manages, are far from clear.
In addition to a short-term $30 million loan package, Chaudhuri appears to have gotten as high as a 30% increase in the capitation rate paid to the company by as many as a dozen health plans that care for more than 700,000 Southern California residents.
The money will help KPC pay off its debts, mainly to providers and vendors.
Chaudhuri also restructured his long-term contracts with the health plans in ways that he says will dramatically reduce KPC's administrative costs and other expenses. Neither Chaudhuri nor plan representatives would provide details, but an exhausted, jubilant Chaudhuri said minutes after the outlines of a deal were reached on Aug. 11, "We are back; we are here to stay!"
Ever since Chaudhuri purchased the former MedPartners groups in August 1999, skeptics have doubted his ability to keep them afloat. Yet Chaudhuri insisted all during 1999 and 2000 that he had a recovery plan.
After all, he is a fighter with a proven track record. The son of Indian parents, Chaudhuri set out for medical school in the early 1960s in Calcutta with the equivalent of $1.10 in his pocket. By the mid-1990s, he was living in Southern California and had given up his orthopedic surgery practice to become a managed care businessman. After leading a medical group in Riverside County, Chaudhuri founded a company, Global Healthcare, that contracted with physician groups all over Southern California. Along the way, Chaudhuri engaged in pitched corporate battles with his foes and won every time. He was aggressive, ambitious and, in his own view, utterly dedicated to letting doctors regain control of their own destinies.
Yet the former MedPartners' groups continued to hemorrhage money. The health plans with which they contracted, under enormous financial pressures themselves, steadfastly refused to increase their capitation rates. And providers, both doctors and hospitals, found themselves waiting longer and longer to get paid--if they got paid at all.
It looked like the MedPartners debacle all over again.
"It was very tough," says Ernie Meth, M.D., a Murrieta nuclear medicine physician who contracted with KPC until quitting early last summer. "They owed me, personally, in the low six figures. They kept promising to pay me, but finally I told them I just couldn't do it anymore."
By July, two major California health plans, Cigna and Blue Shield, canceled all or part of their contracts with KPC, throwing the healthcare of 86,000 enrollees in doubt.
On July 27, the increasingly alarmed CMA issued a warning to its members strongly urging "affected physicians to review their individual situations and contracts (in consultation with an attorney, if necessary) to determine their best plan of action." The warning, sent under Lewin's name, called KPC's situation "untenable" and "grave."
California's new Department of Managed Health Care, which officially opened for business July 1, became involved, using all the leverage at its disposal to bring about a solution.
The DMHC's director, Daniel Zingale, says he told health plans in individual conversations that KPC could not be allowed to fail.
"(Although) I was always very careful to stop short of prescribing specific solutions because the DMHC was not created to be a big new bureaucracy to micromanage the healthcare industry," Zingale says, "it is fair to say we're holding the industry to a new and higher standard."
California law gives the DMHC the power to ensure there is no disruption in patient care. Violations are punishable by fines, and while there is a lot of gray area in determining what constitutes a "disruption in patient care," Zingale implies that he was willing to step in, and go to the courts if necessary, to test the limits of DMHC's nascent authority over health plans.
Besides, as Zingale notes, the department has control over their licenses.
In an interview, Chaudhuri insisted that the $30 million (which he says is not a bailout) is of secondary importance since it is only a short-term fix. Far more important, he says, are the renegotiated contracts, which despite the lack of publicized details appear to shift some of the administrative costs from KPC's groups back to the health plans.
Chaudhuri says the plans agreed to the improved contracts "because each one of them audited our numbers and found them to be true and so now they have come to support our system." In particular, he points to the new computer information systems that KPC has been putting in place for the past year, which are expected to increase efficiencies and save money for both the plans and KPC's groups themselves.
As for the matter of capitation rates, Chaudhuri would say nothing other than "this is very much improved in all aspects" and "if everyone keeps their word" then KPC's long-term viability is assured.
KPC's general counsel, William Thomas, is guarded but also says that in his opinion the rate negotiations had "a very positive outcome." The health plans have been closed-mouthed about the new rates they granted KPC. Several spokespeople indicated that the reason for the silence was because the plans want to avoid the appearance of antitrust collusion.
But a number of sources said that Chaudhuri succeeded in getting about a 30% increase, and this number was verified by the CMA's vice president, Elizabeth McNeil, who says, "A ballpark figure would be around a $10 increase per member per month." That would raise KPC's average PMPM payment from around $32 to around $42.
Chaudhuri himself predicts the capitation rate increase will henceforth become "the gold standard" in California when other physician organizations and practice management companies negotiate with health plans.
Meth now is hoping he'll see the money that KPC owes him and says he might even consider rejoining KPC "if they gave me a retainer I could draw against, say, $70,000 every two months." That's an idea Chaudhuri doesn't like. "The HMOs don't give me a retainer!" he says.
Another KPC physician, Pasadena anesthesiologist Ed Morgan, M.D., calls the deal "salvation for KPC. We really thought the prospects were bleak and beyond hope, and were ready and preparing for their demise." Morgan adds that the deal also "eliminates the possibility that all these patients will have to be redistributed to other medical groups," which makes him happy.
On the other hand, Morgan has become skeptical enough to worry that what appears to be a solution today may turn out to be smoke and mirrors. Without a radical overhauling of state or federal laws, "the plans will continue playing all the medical groups off each other until they're close to collapse, and then put them on life support," he says.
Steven H. Heimoff is an Oakland, Calif.-based heatlhcare business writer.