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.

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