Regulators Take Over Another HMO

California regulators Friday seized control of financially troubled Lifeguard Inc., a not-for-profit HMO with 168,000 members mainly in Silicon Valley.

Lifeguard is the fourth HMO to be taken over by the Department of Managed Health Care in the last two years. Its financial woes reflect the particularly acute pressures that smaller, regional HMOs face in this climate of soaring health costs.

Although regulators said none of the state’s other health maintenance organizations are in violation of state financial requirements, industry analysts and reports indicate that several other smaller health plans are struggling. The number of HMOs in California and nationally has been shrinking, a trend that analysts expect will continue as more smaller health insurers are acquired or dissolved because they don’t have the negotiating power or capital to compete.

“In many areas, consumers are faced with a lack of choices as it is now. And it’s only going to get worse,� said Melissa Gannon, an analyst at Weiss Ratings Inc., an independent insurance rating firm in Palm Beach Garden, Fla.

San Jose-based Lifeguard, which has been around since 1977 and catered to high-end employers such as IBM and Hewlett-Packard, lost $24 million last year. In recent months, its financial condition was rapidly deteriorating. At the end of July, its net tangible assets were $11.5 million short of the capital required by regulators.

“They were reaching a point where if we waited any longer, patient care could have been threatened,� said Steven Fisher, a deputy director at the Department of Managed Health Care. He said the takeover and the appointment of a conservator would not immediately affect any Lifeguard members.

Executives at Lifeguard did not return calls Friday.

The department’s action came less than a month after Lifeguard’s deal to merge with Blue Shield of California fell apart. The merger would have given Lifeguard immediate access to credit and the resources of a large, stable health plan. Neither side said why the deal collapsed.

Regulators said the conservator for Lifeguard, attorney Richard Diamond, would assess the HMO’s business and make decisions about the company’s future, including its ability to continue. Two of the three HMOs taken over by the department, Tower Health and Maxicare Health Plans, eventually closed their doors. The third, Watts Health Plans, remains in conservatorship.

Lifeguard is unusual among HMOs in California because it pays its doctors on a fee-for-service basis, instead of capitated or monthly per-member fees other HMOs pay to doctors’ groups. But that arrangement also made Lifeguard more vulnerable at a time of rapid cost increases. Lifeguard also lacked the size to manage and spread its risks over a wider pool of members.