State Questions Fiscal Health of MedPartners

MedPartners Provider Network Inc., which provides health care for 1.3 million Californians, may not have sufficient cash to pay new claims and has not proved to the state that it is fiscally sound, according to a state report.

The company’s cash reserves have been depleted by $21.5 million as a result of overpayments to hospitals, according to the report, which was issued last week by the state Department of Corporations after the company failed to fully respond to questions raised in an audit. It is so slow in processing claims that 200,000 remained unpaid as of September, prompting some health plans that contract with the company’s clinics to withhold their regular monthly payments.

As a result of the concerns raised in the report, state regulators on Friday ordered the company to immediately stop sending money to its Alabama home office and has begun a new financial examination of the troubled company.

The California action is meant to ward off the kind of health-care catastrophe experienced by patients and doctors when a health plan goes out of business or runs into trouble. In New Jersey last year, the state was forced to go in and take over clinics that had been abandoned by a health maintenance organization.

And in California, regulators, health plans and doctors are still fighting over the fallout from last year’s collapse of FPA Medical Management--like MedPartners, a company that manages doctors’ groups.

The cease-and-desist order bars the company from taking funds out of California until there is enough money in the state to ensure that MedPartners’ financial troubles do not leave patients without health care and doctors unpaid.

MedPartners’ enrollment has dropped dramatically in California, from 3.9 million to 1.3 million in just nine months, as the company sold operations and patients and doctors dropped out of the system. MedPartners spokesman Robert Mead said that company officials met with regulators on Monday to work out a solution.

He said that the company was fiscally sound and would prove so to the state.

“We were surprised by the order and are working with them to determine exactly what their concerns are and how we can address them,” Mead said.

MedPartners’ troubles in California and elsewhere have been building for several years, as the company tried to position itself as a leader in the very difficult business of physician practice management. In physician practice management, a company earns a set amount each month per patient, called a “capitation fee,” from health plans. The company then doles the money out to doctor groups to provide care for patients.

By September, its losses for the year already at $49 million, MedPartners announced that it was selling or spinning off the entire physician management portion of its business. By the end of the year, the cost of that division--which the company reported as a discontinued operation even though the clinics are still open--was $1.23 billion.

MedPartners stock, which was trading at about $32 a share at its height in 1996, closed the day Monday at $4.88, down 13 cents from Friday, on the New York Stock Exchange.

The state report detailed several areas of concern to regulators.

Most pressing seemed to be an accounting of assets and cash that every health plan licensed to operate in California must keep in order to continue to do business. That figure, which the report did not specifically name, has been insufficient since June 1988.

But when regulators asked the company for more details, it did not provide any.

In addition, under state law every health plan operating in California must have a fiscally sound operation and be protected from the threat of insolvency by reserves or other assets.

In practice, this means that the company must bring in enough money each month to cover expenses, and must have cash put aside to pay for unexpected and unprocessed claims or other emergencies.

According to the report, MedPartners was deficient in both areas.

There is not enough money coming into the operation to pay expenses, the report said, because some health plans are withholding funds. In addition, the company has failed to collect on overpayments to hospitals for three years running, and is short $21.5 million as a result, the report said.

To further complicate matters, the company underestimated the value of its outstanding claims, the report said, and as a result would have to spend more of its cash than anticipated.

In addition, the company’s plan for running a fiscally sound operation is hampered because its capitation rate is not sufficient to cover costs.

Finally, the report said, many of the doctor groups and other professional organizations affiliated with the company have “negative cash flow that may impair the financial viability of the plan and the parent company.”

Another significant requirement under state law is that a health plan have a strong administrative arm to take care of patient needs.

But MedPartners technically has no employees of its own, the report said. Rather, the parent company, MedPartners Inc., is supposed to handle administrative services and day-to-day operations.

However, when regulators probed further, they discovered that only one person had been assigned the responsibility for most of the company’s accounting functions.