A new breed of health plan that’s covering hundreds of thousands of Californians is turning out to have an astronomically high fatality rate.

Called “limited license” plans, they represent physician groups and hospitals in their contract negotiations with health maintenance organizations.

In theory, they provide doctors and hospitals with more leverage in their dealings with HMOs. But in an effort to undercut their competitors and grab market share, limited license plans have been slashing their rates, often far below the level needed to cover costs.

The result: several bankruptcies and hundreds of thousands of Californians left in the lurch without care.

“The problem is that at a certain point, these plans cannot deliver the service that the California patients demand,” said Scott Syphax, associate director of the California Medical Association. “They are going to drive themselves into bankruptcy unless something is done to address the underlying financial problems.”

A CMA report released this month contains alarming information about the industry’s financial plight.

Of the state’s six limited license plans that have been in operation for more than a year, only one the Heritage Provider Network, which serves more than 130,000 patients in the Antelope Valley is operating in the black, according to the report.

Among the others, two have declared bankruptcy, two have surrendered their licenses due to insolvency and one has been placed on “fiscal watch” by the state.

The most noteworthy bust so far was MedPartners Provider Network Inc., which left more than 1.1 million Californians wondering about the viability of their coverage when it declared bankruptcy in March.

The CMA puts much of the blame on the Department of Corporations, which licenses these plans, for not keeping a closer eye on the bottom line.

“It’s indicative of the situation that the Department of Corporations was not aware of the fact that MedPartners was a shell corporation until they put them into conservatorship,” Syphax said. “They didn’t know that MedPartners’ out-of-state parent had full control of the operation.”

Limited licensed plans are not full-service health maintenance organizations. Instead they are allowed to subcontract with HMOs provided they assume full risk for the costs of physician and hospital services.

They work under a system of capitation fees, in which they receive money up front to pay for treatment to be rendered in the future. Because actual costs of future health care are uncertain, these fees may be inadequate to cover the cost of care given to patients.

The CMA is supporting legislation that would require such plans to undergo independent financial review and make sure their rates are high enough to sustain themselves.

The Department of Corporations argues that the financial problems result from financial mismanagement on the companies’ part not because of lack of oversight.

“We do monitor these plans,” said DOC spokeswoman Julie Stewart. “We do our job.”

But some officials disagree, noting that last year the state told FPA Medical Management of California Inc. to keep a closer eye on its bottom line instead of taking the health plan into conservatorship. Four days later, the company declared bankruptcy.

Stewart said she could not address the specifics of the CMA report because the department had not received a copy for review.

Some believe that the problem is not government oversight, but the limited license model.

“There are all these Byzantine relationships between entities and affiliates,” said Gary Hagen, senior vice present of Princeton, N.J.-based trade group Managed Care Resources. “Providers have been entering into agreements predicated not on costs of services but on market strength. There isn’t adequate compensation.”

Syphax questions if the issuing of limited licenses is even legal. “It is on suspicious legal ground,” he said. “The category itself was something that was not invented by statute but by the Department of Corporations under what it calls the ‘broad powers of the commissioner.’ ”

The CMA is using its report to advocate a bill that it says would keep consumers and physicians better informed on the financial status of the state’s health plans.

AB 918, introduced by Assemblyman Fred Keeley, D-Monterey, would require all health plans to have their finances checked annually by an actuary. It was introduced in a similar form in 1998 and vetoed by Gov. Pete Wilson.

“AB 918 should have been enacted years ago,” said Dr. Jack Lewin, CEO of the California Medical Association. “Its time is past due.”

The California Association of Health Plans opposes the bill, arguing that financial review is moot because the fate of these health plans will be determined by the whims of the market.

“(Actuarial review) is based on a myth and it’s effectively impossible to do,” said Walter Zelman, CEO of the HMO lobbying group. “The only way you can justify that kind of rate regulation is to assume there’s a monopoly and/or there’s collusion which there is not. The market is far better to determine the prices of these services.”

FPA Medical Management of California Inc. was the first limited license plan to go under. It filed for bankruptcy protection in July 1998, leaving 400,000 patients statewide in the lurch without health care.

This March, MedPartners became the second to bite the dust, filing for bankruptcy protection and leaving more than 1.1 million patients in California stranded.

The two plans that surrendered their licenses earlier this year were the California Pacific Medical Group, also known as the Brown & Toland Medical Group, and the Monarch Plan, also known as the Freedom Plan. Together, these two limited license plans had 225,000 enrollees throughout California.