KPC Medical Management rolled the dice in August 1999 when it purchased the troubled MedPartners Provider Network in Southern California and inherited some of the lowest monthly reimbursement rates in the state.
KPC, which hoped to turn a profit within about 14 months, instead lost its gamble in mid-November, folded all of its remaining 38 medical clinics, laid off about 450 doctors and left about 250,000 patients scrambling for care.
Once the largest medical group in the nation's most-populous state--with 72 clinics, more than 900 doctors and 1 million members--the Anaheim, Calif.-based KPC is expected to file for Chapter 11 bankruptcy protection, according to the California Medical Association.
KPC officials declined to comment, but CMA officials confirmed clinics were closing.
KPC continued to lose huge sums of money despite receiving a bailout of about $30 million in loans three months ago from the eight HMO plans that contract with the medical group.
Even a 33% increase in monthly capitation rates wasn't enough to rescue KPC, which reportedly fell $20 million in debt in the days before its startling decision.
The company was created by Kali Chaudhuri, M.D., an orthopedic surgeon, to purchase the string of clinics operated by Birmingham, Ala.-based MedPartners, which left millions of dollars in unpaid bills when it sold its California operation to KPC.
Jack Lewin, M.D., chief executive officer of the California Medical Association, said KPC was saddled from the beginning with "unreasonable" capitation rates as much as 25% below costs. After the reeling medical group negotiated increased monthly rates about a month ago, Lewin said, health plans reneged on the deal and refused to pay, triggering the impending bankruptcy.
Lewin flatly accused some of the health plans of trying to "undermine (KPC) from the beginning."
"The fact that the plans crafted a definitive agreement one month ago to resolve the problems, and then failed to meet their contractual obligation, in essence, put this company into bankruptcy," Lewin said. "An agreement was reached. It was not honored."
He said KPC's bankruptcy will likely result in lost jobs for many physicians and the transfer of "hundreds of thousands of patients" to other doctors at "substandard capitation rates."
Health plans contacted for comment dismissed any notion that they drove KPC out of business.
"The California Medical Association recently alleged that the health plans gain by KPC's demise," said Susan Blais, executive vice president of Maxicare Health Plans. "From Maxicare's perspective, this is not true. It is not in our best interests to have KPC fail because of the disruption this causes to our members and to our internal operations. Our major concern is the overall continuity of care of our membership."
Steve Campanini, a spokesman for Maxicare, said the HMO moved about 18,000 of its members to other physician networks once it became clear that KPC would close.
Group practices haven't fared well in California. Since 1996, about 125 independent practice associations have closed or gone bankrupt, according to the medical association.
Just weeks before KPC's announcement, the Ventura, Calif.-based Family Health Care Medical Group, which had about 900 doctors and 135,000 members, closed its doors. It could owe as much as $20 million to about 200 creditors, including doctors throughout Ventura County and the San Fernando Valley.
California officials, already struggling with the closure of Family Health Care, say they have been working with the eight health plans that contracted with KPC to ensure that all clinic patients receive proper care.
"It's definitely a very serious problem," said Joy Higa, assistant director for plan and provider relations with the state's Department of Managed Health Care, which was created in July.
She said the state has "encouraged" the HMOs to file contingency plans for a "worst-case scenario" that quickly turned into grim reality.
"We wish there were a way the disruption could have been avoided," she said, "but, we feel confident the plans are working together."
Michael Chee, spokesman for Wellpoint Health Networks, which operates Blue Cross of Southern California, said, "We have a home for all of our members" who were affiliated with KPC.
KPC has been losing money since the day it paid $24 million to purchase the network from Long Beach, Calif.-based MedPartners, which later changed its name to CaremarkRx and focuses on pharmaceutical services.
In the 18 months before last week's announcement, KPC had closed about 30 clinics and eliminated 2,400 jobs.