With the coming of a new year, California physicians, particularly members of IPAs, are keeping their fingers crossed, hoping that 2001 will bring better times.
After all, the past few years have been particularly bad from an economic point of view.
True, there was some good news by year's end: A few physician organizations reported modest profits, while others were able to negotiate higher capitation rates from payers. In November, HCFA announced 2001 Medicare rate increases averaging 4.5%, with specialists getting higher boosts. Health plan premiums also are once more on the rise--10.3% in 2000 and the same percent projected for 2001, according to the Pacific Business Group on Health. Some of that money is likely to be passed along to doctors in the form of higher capitation rates.
Still, the overall prospects are bleak.
Although precise figures are impossible to come by, most observers agree that a disturbing number of IPAs have gone belly up in the past few years. According to Grant Cattaneo, a principal of the Burlingame, Calif.-based healthcare consulting firm Cattaneo & Stroud, 27 California IPAs have failed since 1998.
Other sources claim that as many as one-third of the state's estimated 350 IPAs declared bankruptcy between 1997 and 2000.
The California Medical Association says scores of medical groups and IPAs went out of business.
And "there are more going under every week," says Albert Holloway, CEO of Oakland-based The IPA Association of America.
For each IPA that formally declared bankruptcy, an unknown number of others teetered on the brink, reporting black ink only through creative bookkeeping.
Whatever the true number, the culprit is said to be inadequate capitation rates.
It's an issue that raises the question of whether California's IPA experience is a bellwether for the nation. Even experts disagree, primarily because the issue involves more than a little crystal-gazing. Risk-bearing IPAs have arisen in other states, but after some failures, notably in Texas and Colorado, the model is in retreat or under suspicion. On the East Coast, the risk-bearing model never achieved the popularity it has in California. But some analysts believe that, as managed care continues its penetration, the risk-bearing delegated model--and the risks and problems it poses--will arrive as well.
It seems safe to say, however, that the California experience has chastened those in other states who fear managed care or whose responsibility it is to regulate and minimize its negative impacts. The backlash in California, as evidenced by the CMA's angry posture, is bound to influence physicians elsewhere.
The New England Journal of Medicine reported in April 2000 that capitation payments paid by HMOs to California physician groups fell by as much as 25% between 1997 and 1999. This loss has been particularly crippling under California's delegated model, in which the IPA assumes most of the risk from the health plan. And, according to Nancy Oswald, past president of the National IPA Coalition, 90% of California IPAs are capitated by the plans with which they contract. According to one anecdote making the rounds, capitated California pediatricians are getting an average of only $10 a month per child--less, it's said, than the cost of the vaccines they must administer to the children.
Observers expect things to get worse before they get better for California IPAs.
Even with billions more dollars flowing into the system, "Doctor groups remain at the bottom of the feeding chain," says TIPAAA's Holloway. "Everyone else will take their profits, and if there's anything left--a big if--only then will it be shared with the groups."
The failure rate "may slow down a little bit, but I think it will continue," says Penny Stroud of Cattaneo & Stroud. "I just don't think there's enough money in the system."
Sam Romeo, M.D., is president and CEO of Alhambra-based University Affiliates IPA, one of the largest in California, with 3,000 physicians who provide care for 88,000 patients. "The HMOs are making money, but they're not passing it on to providers," he says. "We have to remove the gougers from the food chain."
Angriest and most pessimistic of all is the CMA's chief executive, Jack Lewin, M.D. He flatly declares, "The worst is not yet behind us with respect to IPAs." There are signs, he says, that HMOs are boosting cap rates to physicians, but "I'm not sure the increases will keep up with the increasing cost of labor, housing and the cost of living in California." Stroud says the "benchmark for managed care contracts (in other states) averages 250% of Medicare. Here in California, it's between 120% and 150%. No wonder IPAs are losing money."
To add insult to injury, the astronomical price of real estate is creating serious physician recruiting and retention problems, Stroud says. "When a three-bedroom ranch house costs a million bucks, doctors are becoming increasingly aggressive about demanding what they want," says Darryl Cardoza, chief operating officer of Hill Physicians, a San Ramon-based IPA with 2,200 doctors. "And if an IPA feels it has to grant those wishes (for higher salaries), it spends itself into bankruptcy."
"No one (IPA) in the state is out of the woods," declares Marci Zwelling, M.D., treasurer of the Los Angeles County Medical Association. She sees no relief for IPAs in 2001 "unless something changes dramatically," but she says she doesn't believe health plans will willingly step forward with solutions.
Rather, Zwelling looks to the Democratic-controlled state Legislature and regulatory agencies for statutory relief. One item high on many physicians' wish lists is a proposal declaring that placing pharmacy risk on physicians and physician groups is illegal, but so far, no legislator has introduced such a bill.
Lewin, angry and increasingly politicized, warns that if health plans don't fork over more money, "There will be unprecedented outrage."
Indeed, on Oct. 30, 500 healthcare workers in San Diego, many of them physicians, took to the streets to protest against what they perceive to be too-low capitation rates. Marches and rallies are said to be under consideration in other California counties. Zwelling says the Long Beach Medical Association, as part of LACMA, is planning a similar rally, possibly in February.
Another hope is that the relevant sections of California's Health and Safety Code will be interpreted in a way that forces payers to make sure that providers receive the full amount for their services, even if intermediary organizations, such as physician practice management companies or IPAs, go bankrupt. So far, however, the courts and the administration of Gov. Gray Davis have showed few signs of interpreting the code that way.
If you ask the health plans if they're responsible for the IPA crisis, their answer is predictable. "We believe we're paying (the groups) adequately," says Bobby Pena, spokesperson for the California Association of Health Plans. In his analysis, IPAs are suffering because of two conjoining factors: inadequate Medicare rates by the federal government and the demand from California employers to keep premiums low. In fact, Pena points to a recent CAHP study that purports to show that "California physicians are receiving 24% more funding (from all sources) per California resident than the national average" and "Payments to (California) physicians have risen three times faster than health plan premiums during the past decade."
And on the matter of just how many IPA failures there have been, Pena charges the CMA with exaggerating its claims. "They quote these numbers (of failures and bankruptcies)," he says, "but I have never seen anything on paper" to substantiate them. In fact, Pena says, "In any industry, about 5% of businesses go under every year. I know that sounds callous, but this is just a business reality."
Oswald, the NIPAC past president, agrees that the actual number of IPA failures in California "is less than you'd think." She says she even told Lewin "that's not the case" when the CMA published in September 1999 a controversial report claiming that 90% of the state's medical groups were "poised for bankruptcy or closure."
Meanwhile, even the more stable medical groups are bracing for more tough times.
The Palo Alto Medical Foundation, which serves the Silicon Valley area and is held up as a model of fiscal success, is "doing fine," says its medical director, Terrigal Burn, M.D. He then amends his description: "I mean, we're doing adequately in a difficult environment." The Peninsula region where PAMF is based has been ground zero for some of the most spectacular IPA failures, including Family Medical Clinic of El Camino and San Mateo IPA. Even though PAMF, which has 209 full-time physician members and 220 affiliated physicians, seems to be weathering the storm, Burn expresses concern about groups that don't have enough market power "to get a sufficient amount of reimbursement for the care they provide."
"It's too early to tell if we have hit bottom," he says, adding, "I think we'll see more failures before we get through the next year or two."
Not everyone blames inadequate capitation rates for the problems of California IPAs, although no one (except the plans themselves) would go so far as to claim the rates are just fine. Craig Stern, president of Northridge-based ProPharma Pharmaceutical Consultants, which has many IPAs as clients, says flatly that the delegated IPA model in California is dying not only because of low cap rates "but because there has not been good governance of the groups. The groups came together to contract with the health plans and have negotiating clout, but they never really formed a cohesive unit that effectively self-governs itself."
It seems safe to say that the California experience has chastened those in other states. Some wonder whether things have gotten so bad for California IPAs that their very future as a species is endangered. Says Lewin, "IPAs clearly are not as stable or viable in the future as medical groups." They are "pitted against each other by HMOs," he says. It's a conspiratorial way of looking at things, but after the ravages of the past few years in California, it's no wonder physicians feel big insurance companies are out to get them.
Steven H. Heimoff is an Oakland, Calif.-based healthcare business writer.