MedPartners Deal in Peril, Officials Say

The unprecedented $240-million settlement negotiated by the Davis administration with troubled health care manager MedPartners Inc. is in danger of falling apart, and state officials are working furiously to salvage it.

Progress toward finalizing the deal reportedly stalled two months ago when MedPartners (now known as Caremark Rx) stopped making payments on debts owed to doctors, hospitals and health plans. The intent of the settlement was to avoid a wave of health industry bankruptcies that would disrupt future service to patients.

The rescue plan bogged down, several sources said, because in their haste to declare victory, the participants left some sticky legal and financial issues out of the initial deal--ostensibly to be settled later.

A breakdown would have broad political, financial and consumer fallout, potentially triggering deep losses for doctors and hospitals that could affect the care of patients in Southern California.

“The attorneys were going back and forth week after week, and the physicians weren’t being paid, and this thing just wasn’t coming together,” said Elizabeth McNeil, head of medical policy and economics for the California Medical Assn., which has been negotiating for doctors. If a resolution isn’t reached within the next few days, she said, “I think the deal could blow up.”

Even though MedPartners has sold off its health care operations in California, if the settlement fails, patients could once again have their care disrupted, as doctors reduce staff or leave managed care to cope with the losses.

The impasse points up the stunning lack of leverage that the state has over the troubled financial side of the managed care business, a shortfall that will only be minimally addressed when Gov. Gray Davis’ highly touted package of reforms takes effect next year.

The MedPartners agreement, the first real test of Davis’ ability to deal with the financially ravaged physician groups that form the foundation of managed care in California, has not been finalized, administration officials admit. They and others say the company has failed to pay as much as $60 million in back claims to physicians since early August.

Davis Touted Plan as Sign of His Savvy

Collapse of the settlement could prove a great embarrassment to Davis, who last week signed the reform package and has touted the MedPartners agreement as a sign of his savvy and mettle in dealing with the industry.

For many in health care, MedPartners has become a symbol of the deep financial woes of physician groups and medical management firms in California and other states. Fully 115 of these organizations, the backbone of managed care in this state, have gone out of business or declared bankruptcy since 1996, and two dozen more are expected to fail by the end of this year.

Further complicating the situation is the continued worsening of the financial condition of MedPartners Inc., which last month changed its name to Caremark Rx as a way of distancing itself from its failed physician management operations. (The firm’s bankrupt California unit continues to use the MedPartners name.) In its June 30 quarterly report, the company revealed that it had only $8.6 million in cash, down nearly two-thirds from the $23.1 million it had six months earlier. An effort to sell securities to raise money last week brought in less than the company had hoped.

For its part, Caremark says it cannot release payments to the 1,000 doctors it owes because the agreement has not been finalized and implemented. “The payments stopped on Aug. 2 because up to that point, we were hoping that we were going to be able to complete the deal by the end of July,” said spokesman Joel Weiden. “When it became apparent that was not going to happen, we stopped.”

It is quite possible that the settlement will ultimately succeed--a key insider gave it a 50-50 chance--and most of the players say they are committed to finding a solution.

Deal’s Failure Would Likely Yield Lawsuits

If the deal collapses, the doctors, and hospitals who are owed money by Alabama-based Caremark would have to sue in order to get paid, a process that could drag on for years and yield puny results.

In March, Davis personally approved a dramatic takeover of the firm’s California division, a middleman company that managed doctor groups owned by the parent company, because the state was worried about its financial health. The division that was taken over, MedPartners Provider Network, contracted with health plans and clinics to provide care for 1.3 million Californians. Davis appointed an aggressive conservator, Eugene Froelich, to oversee the operations. Froelich immediately forced the subsidiary to file for bankruptcy.

But in later negotiations, the state agreed to oust Froelich and return control of the provider network subsidiary to the company in exchange for regulatory control over the firm’s clinics and a promise that the parent would pay the debts of the clinics and the network.

Those decisions, along with a dearth of strong state regulations governing health care providers, left the governor’s hands tied when the settlement bogged down.

Another problem is in the context of the settlement itself. For it to succeed, all parties must sign on--and agree not to sue each other.

But there’s the rub. Caremark doesn’t want to start paying doctors until the doctors agree to the settlement. The doctors don’t want to give up the right to sue until they get the money--or at least are convinced it’s on the way. By signing on, they will forfeit the right to sue not only Caremark but the health plans that contracted with the company as well.

The hospitals do not want to give up their right to sue either. And the health plans say that unless the doctors and the hospitals sign on, they certainly won’t, because providers could turn around and sue them if the company doesn’t come up with the money.

Mark Abernathy, the monitor overseeing the MedPartners Provider Network bankruptcy for the state, put it this way in a recent report: “This case brings together old adversaries, as plans, hospitals and physicians have historically had relationships that have been fraught with distrust and animosity.”

Despite the obvious tensions inherent in such a scenario, the process for getting all or most of the participants to sign on to the settlement had not been worked out when it was announced in June.

After the heady excitement of crafting a settlement that--in its intent, at least--broke ground by obtaining a voluntary commitment from the foundering company to fully pay off its debts, the groups began to retreat.

“There was some buyer’s remorse,” said Donna Campbell, deputy secretary of the state Business, Transportation and Housing Agency, who is attempting to push the agreement forward. “People fell back into their own self-interest.”

Pressure from Campbell and agency Secretary Maria Contreras-Sweet got the talks moving again, Campbell said. The renewed efforts bring the settlement’s chances of success “to about 50-50,” said Donald Crane, attorney for the Catholic Healthcare West hospital chain.

Still, he said, the deal faces serious hurdles. “I don’t think it will explode, but I do think it could languish into oblivion,” he said.

Because of Campbell’s efforts, the company last week offered to pay doctors $7 million of the oldest claims. But the promise has a rather hefty string attached: By cashing one of the paychecks a doctor automatically signs on to the settlement agreement. And that means giving up the right to sue even if the doctor disagrees with the amount of future payments.

“I would never in a million years cash that check,” said Elisabeth Kennedy, administrator for a Los Angeles oncology firm that provided chemotherapy services to MedPartners patients.

Kennedy said her company, Metropolitan Oncology Group, is owed about $150,000 by Caremark and as a result was forced to lay off a doctor. “His last day is today,” she said Thursday.

Such views are in stark contrast to the position of the California Medical Assn., which strongly supports the settlement and is urging members to sign.

Because the agreement requires Caremark to pay 100% of claims owed rather than the small amount a doctor might get in a bankruptcy claim or suit, physicians are better off trying to make the settlement work, said Jack Lewin, the medical association’s executive vice president. The organization is hiring a marketing company to help persuade doctors that if enough sign on, Caremark will release the money.

If the money starts flowing, most participants agree, the deal is much more likely to succeed.

Dr. Stephen Wan, who said Caremark owes his Torrance podiatry practice $20,000, said he will probably sign the check if he gets one.

“I would just cut my losses,” he said. “I would be willing to settle and just chalk it up as a very expensive life lesson. And not ever deal with these wolves again.”