"HMO Bankruptcy: Don't Get Left Holding the Bag"
Here's how to protect your practice from insolvent payors.
by Gil Weber, MBA
Adapted with permission from Review of Ophthalmology
© Copyright, 1999. All rights reserved.
For Northern California practice administrator Jan McEwen, the first sign was the independent practice association's late payments stretching out past 30 days. When she called, she was told that the organization was having "computer problems" and that it was "changing software." She noticed that IPA's administrative requirements also seemed to be growing more and more burdensome. Then it happened. All the IPA's physicians received a letter saying that unless they agreed to an immediate, retroactive, 21-percent reduction in fees, the IPA would cease operations and declare bankruptcy. The physicians refused, and now Ms. McEwen's practice is facing a $20,000 write-off. Says she, "We never really saw it coming. The warning signs were there, but it all happened so quickly that we had no chance to take corrective or protective action."
Physicians who think the same scenario couldn't happen in their practices should probably think again. All across the nation, managed care organizations are in financial trouble. Many have declared bankruptcy, and others probably will soon. When they do, there is an excellent chance that provider physicians—including ophthalmologists—will be left holding the bag. Not only will these physicians not get paid in full for services rendered. Some may be responsible for providing additional services to the HMO patients if a payor files for bankruptcy protection—even if there's little or no chance to recover past due money.
The only way to eliminate all the risk is to refuse to participate in managed care altogether. But failing that, here are a few steps you can take to protect your practice:
The best way to protect your practice is to sign up only with reputable managed care plans. I realize this advice may sound trite, but I see doctors continuing to ignore it when they perceive threats to their patient base. Just remember that, in the end, winning the battle (i.e., signing contracts and gaining access to patients) makes no sense if you lose the war and are not paid for your work in a timely manner.
To avoid signing up with bad plans, learn as much as you can about the entity offering the contract, particularly its financial history, stability and membership retention rates. This information is available for publicly traded companies. For privately held companies, you'll have to do some "sniffing around." Talk with colleagues who already contract with the organization. Ask about payment timeliness and administrative hassle. Ask if the payor consistently meets its obligations under the provider agreement or if staff is continuously battling to get what's due. Do some research, either in the library or on-line, and see if the company or any parent company has had financial troubles in the past year or two. You should be able to weed out many problematic payors.
Use provider agreements to your advantage
Unfortunately, if a solid company runs into trouble later, the deal can still turn sour. That's why I recommend getting your attorney to add certain stipulations to your contract.
- Insist that any change of terms provisions in provider agreements be predicated on your prior review and approval. This way, before your contract automatically renews for another term, or before the payor can unilaterally make any changes (including reimbursements), you have the right to review and approve such changes. If you're in the middle of an unsatisfactory contract, you don't want the payor to have the right to obligate you to renew that contract under the same, or worse, terms. If the payor refuses this request (which costs it nothing), consider not signing.
- Insist on an "early-out" with-cause provision. For example, if the payor does not meet its financial obligations in the time frame specified in the agreement, you can give with-cause notice and get out of the contract almost immediately (typically in 30 days or less). This is much faster than the 90-day notice normally required for without-cause termination at the contract's anniversary date, allowing you to exit before receivables accumulate to an unreasonable level. It also helps you avoid expending more resources on additional surgeries and costly care for which your payments are uncertain. Again, if the payor says "no," that's an immediate red flag.
It is reasonable for the plan to request that this provision contain a cure or "cooling-off" period. This will give the payor a set amount of time to fix the alleged breach. If it does, then the agreement continues as if nothing happened. It also gives you the opportunity to reconsider the termination threat, as well as determine if the financial "transgression" was an aberration or an ongoing pattern.
- Keep on top of your financials. Monitor your books proactively. If your receivables start to stretch out, investigate immediately. Once you know that there's a problem, contact the payor to arrange an immediate sit-down meeting to discuss and resolve it. Don't let this go; if you do, you'll never catch up, and you and your staff will spend valuable time chasing payment rather than seeing patients.
- Know your responsibilities in case of termination or insolvency. Under some contracts, if an MCO declares bankruptcy, you must still continue seeing its patients, perhaps without any guarantee of payment. In some cases, this is unavoidable; governing law stipulates it. In some instances, however, you may be able to cut your losses—or protect those claims currently in process—by notifying the plan that you'll no longer see non-urgent cases but will continue to see emergency/urgent care.
This is exactly what Ms. McEwen's practice did. The practice notified the IPA by fax and certified letter that it was canceling all non-urgent appointments and elective surgeries, and that it would only see urgent and emergent cases. That notification was very important, because when patients learned that their appointments and surgeries had been canceled, they called both the IPA and HMO to complain. Without following proper protocols, the group could have been at additional financial and legal risk. (Before taking this type of action, ask your legal counsel to review it. You must avoid any violation of the provider agreement or any appearance that you're abandoning patients.)
These are troubled times for managed care payors and providers. The payors are not going to look out for your interests––they can hardly manage their own. Regulators are starting to get involved, but even they can't, and often won't, protect you from entering into a flawed deal or one that turns bad. It's your responsibility to know your contracting partners and to take proactive steps to limit your risks.
Insist on contractual provisions that protect your interests and allow you the flexibility to extricate yourself if a deal goes sour. Payors won't want to grant you such rights, but creating a level playing field costs them nothing except word-processing time. I tell clients that failure to grant physicians such protection speaks volumes to a payor's underlying intent and ethics.
Remember that in the final accounting, no contract is better than a bad contract. And that there's nothing worse than being locked into a bad contract.
The Best and Worst MCOs
Weiss Ratings (http://www.weissratings.com) publishes analyses of nearly every HMO in the nation. Last fall, it reported that 57 percent of HMOs lost money in 1997. In the same report, Weiss downgraded its ratings on 133 health plans while upgrading only 54. The group's ratings are based on factors including capital, historical profitability, liquidity, premium growth, affiliate companies and risk diversification. The report covered 506 HMOs, approximately 96 percent of those licensed in the US. Here's a snapshot of the best and worst HMOs in the country based on the 1998 report:
The Strongest HMOs
- Blue Shield of California
- Fallon Community Health Plan (Mass.)
- Health Alliance of Michigan
- Kaiser Foundation Health Plan, (Calif.)
- Kaiser Foundation Health Plan (Maryland)
- Partners National Health Plan (Colorado)
- Partners National Health Plan (North Carolina)
- Total Health Care (Michigan)
- Total Health Care Plan (Ohio)
- United HealthCare (Missouri)
The Weakest HMOs
- Beacon Health Plans (Florida)
- Certus Healthcare (Texas)
- CHA HOM (Kentucky)
- DayMed Health Maintenance Plan (Ohio)
- Horizon Health Plan (Kansas)
- Integrity Health Plan (Mississippi)
- North Medical Community Health Plan (New York)
- Physicians Health Services (New Hersey)
- Priority Plus of California
How Regulators Have Handled the Problem
Last fall, financial instability among Florida's health plans was so bad that the Department of Insurance decided to enforce tough new standards. The new regulations would have required the MCOs to triple their financial reserves, according to a report in the Orlando Business Journal.
In the past two years, five Florida HMOs have failed, while others were operating on scant financial reserves. At the end of 1997, three Florida HMOs had only one week of reserves, while three other plans had no reserves whatsoever. By the end of 1998's first quarter, five plans had no cash reserves. In fact, Prudential, which was acquired in December 1998 by Aetna, had a $42 million deficit.
California is another state with more than its share of financially strapped third-party payors that have abdicated responsibility for their debts. The biggest problem right now may be with FPA Medical Management, a physician practice management company. The California Medical Association estimates that physicians are holding $60 million in receivables from FPA. Other California PPMCs are in financial difficulty, as are numerous IPAs. They include the HMO operations of Medpartners of California, which now faces regulatory scrutiny because of financial problems. The CMA is attempting to get the state department of corporations to regulate these companies more aggressively.
In the past year, the problem has spread beyond the borders of California and Florida: HIP of New Jersey was declared insolvent and shut down early this year. In addition, two HMOs in Ohio, Healthpower HMO and Personal Physician Care, failed last year, while two HMOs in Mississippi and Georgia owned by AmeriCan Medical Plus also face bankruptcy.
Managed Care Profits: On the Rebound?
Although many managed care companies are struggling, some of the giants are on the rebound.
The fourth quarter reports for 14 of the largest HMOs show a 2.7 percent profit margin, a significant rise from the -1.7 percent loss posted in the fourth quarter of 1997, according to the most recent Managed Healthcare Market Report. MHMR reports that six managed care companies—Aetna U.S. Healthcare, United Health Group, Cigna Healthcare, Human, Wellpoint, and PacifiCare—reported combined profits of $488 million after taxes, almost twice that of 1997's $254 million figure. In addition, the Report forecasts smoother sailing for Kaiser Permanente, predicting that the HMO will recover from its 1998 loss of $288 million. The MHMR also predicts managed care organizations will benefit from rising drug costs.
Mr. Weber is a managed care and practice management consultant based in Viera, Florida. He is the former Director of Managed Care for the American Academy of Ophthalmology, and author or contributing author of 11 books and monographs on managed care and practice management.