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Special E-Mail Bulletin
April 2001
More on Downstream Risk

Special E-Mail Bulletin

Hi, everyone.

Over the past few months I've sent you information on some of the problems physicians are having getting paid by third party intermediaries, most typically IPAs. Here's updated news on what's happening in California where the "patient" is critical.

This is from the April 23 issue of AMNews.

Gil Weber

California begins asking physician groups about finances

Physician groups say the state's new solvency standards might put them out of business, but state officials say they simply want basic accounting principles followed.

By Leigh Page, AMNews staff. April 23/30, 2001. Additional information

After years of helplessly watching physician groups go out of business, California is beginning to phase in the state's first financial solvency standards for an estimated 350 to 500 independent practice associations and others that accept insurance risk.

The new rules are milder than those being developed in states such as Colorado and New York, but executives at many California groups worry that the cure will be worse than the illness and may drive some of them out of business.

The California Assn. of Physician Organizations, which represents 70 affected groups, estimates that one-third of all groups won't be able to meet the standards, which apply to all capitated groups with claims-processing responsibilities.

Rule phase-in starts with a May 15 deadline for reporting financial data and should be completed some time next year, when the state starts grading groups and requiring low scorers to improve their finances. But CAPO wants the state to postpone full implementation for at least three years so groups can accumulate reserves and not have to worry about low scores scaring away HMOs and patients.

"We have been making money the past three years, but I can't say we would pass all the parameters," said Frank Federico, MD, president and CEO of Lakeside Medical Group in Glendale, Calif., a group practice-IPA hybrid that covers 80,000 lives.

But CAPO's request only exasperates Scott C. Syphax, chair of the Financial Solvency Standards Board of the California Dept. of Managed Health Care, which is creating the standards. 85% of physician groups in California are near insolvency.

"I have no sympathy for [CAPO's] position," he said, explaining that the managed care department, which will carry out the rules, has to act fast to protect patients and subcontracted doctors from being harmed by more group failures.

Syphax added that his board is applying generally accepted accounting principles, and "if the rest of the world has to comply with them, why shouldn't" the doctor groups?

The state rules require groups to ensure assets exceed liabilities, pay subcontracted physicians on time, and track what they will owe on bills that haven't been submitted yet.

Under the standards, assets have to be at least $1 in the black at all times -- a far lower standard than in New York, where regulators have proposed requiring large groups to put 12.5% of their total revenues into reserves.

Like California, other states are just beginning to codify standards. After a slew of group failures across the country in recent years, 20 states are considering bills or proposing regulations on "downstream risk" held by physician groups, the National Conference of State Legislatures reports.

But California is the litmus test. It has the most risk-bearing groups, covering 20 million patients, and its failures and shaky conditions far surpass any other state's. The California Medical Assn. reports that 125 groups there have gone out of business in the past five years and it estimates that 85% of the remaining ones are at or near insolvency. HMOs contend the figures are lower but still troubling, ranging from 8% to 60% depending on the plan.

Although the health plans blame these problems on poor financial practices, the CMA blames low capitation rates, which it maintains are at least 40% less than those in many other states. "I'm not sure we've hit bottom yet," said John Whitelaw, MD, CMA board chair. "It's worse for IPAs. I think there are some IPAs out there that are hanging on by a fingernail."

Changing with the times

But for all their criticisms of the standards, California groups are relieved that the state is trying to create order out of a chaotic payment climate.

"I wouldn't call [the new rules] a good or a bad thing -- they're a necessary thing," said Ira Davidoff, MD, chair and medical director of Bay Valley Medical Group in Oakland.

Under fee for service, Davidoff said practices can have simple finances, distributing all earnings at the end of each year to avoid paying taxes on them. But now that they have insurance risk and are responsible for paying thousands of subcontracted physicians, they had to behave more like insurers -- socking away reserves "to weather the bad times" and keeping track of their payments, he said.

With the state's introduction of specific standards, "the bar has been set and it's a business imperative to meet it," said Arthur Southam, MD, executive director of the physician group organization.

As further help for the groups, the state is requiring health plans to regularly update member eligibility information and provide doctors with the methodology used to set fees for each of their products.

The plans generally applaud state standards, despite the extra reporting they need to do.

"We want to see financial statements based on generally accepted accounting principles," said Seth Jacobs, senior vice president and general counsel for Blue Shield of California.

But the IPAs and groups have a range of concerns. Some grouse about state-required annual audits costing up to $30,000. And with key aspects of the rules still to be determined, they worry the final package expected in the fall will be too intrusive.

For example, the board still has to decide whether the grading system should be simply "pass/fail" or involve several grades, perhaps with supporting information. And it also must decide whether the corrective action plan should be drafted by health plans and groups or developed as a standard format by the state.

The groups want to keep reporting as simple as possible, craft their own recovery plans and bar access to financial information that could betray their reimbursement rates or create panic about their finances.

"I'm a free-marketer," said Bob Margolis, MD, CEO of Health Care Partners, a hybrid in Torrance, near Los Angeles. "I believe that a health plan is making a decision [that a group is financially solvent] when it contracts with the group."

Syphax replied that "we're trying hard not to be so intrusive within the physician community [that we] make it impossible to operate."

ADDITIONAL INFORMATION:

You will be graded on the following

California authorities are asking groups that bear insurance risk to report by May 15 whether they meet the following four standards. Groups will later be graded, and low scorers will have to sign corrective action plans.

Tangible net equity: Assets such as cash, securities and long-term receivables must be greater than liabilities.

Working capital:  Assets such as cash, marketable securities and short-term receivables must exceed liabilities.

Follow IBNR:  Track "incurred but not reported" claims -- money owed for bills that have not yet been submitted.

Pay claims promptly:  Pay 95% of clean claims within 30 to 45 days.

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