Staff Reporter

It seemed like such a good idea at the time.

Form a company that would own medical clinics, contract with physicians to work in those clinics and then use those physicians' combined clout to negotiate favorable payment rates from HMOs.

Birmingham, Ala.-based MedPartners Inc. did just that four years ago by opening a "physician practice management" subsidiary in California.

At one point, the PPM unit, called MedPartners Provider Network Inc., owned 117 clinics with some 1,000 contract doctors serving 1.3 million patients statewide.

But earlier this year, things started going drastically wrong.

In March, the state's Department of Corporations seized the company and forced it to file for Chapter 11 bankruptcy protection. Last week, MedPartners and the state reached an interim agreement that would return clinic control to the company, under strict government supervision, until a bankruptcy settlement is reached.

The failure is symptomatic of the bind the industry now finds itself in. Profit margins for HMOs are so low that there is no room for subcontractors like PPMs to enter the market with much hope of remaining viable.

MedPartners was not the first PPM to fall by the wayside FPA Medical Management Inc. of San Diego hit rock bottom last year, dropping 400,000 patients with no notice and unless profits increase, it won't be the last.

The collapse of these PPMs is especially discouraging to the doctors who were hoping that, by pooling their interests, they could gain leverage in negotiating favorable payment rates from HMOs. Those payment rates have often forced physicians to take on a maximum number of patients some say to the detriment of treatment.

But MedPartners was never able to develop a consensus among its physicians, with the result being a complex hodgepodge of HMO deals among its network of clinics, according to Glenn Melnick, a USC professor and consultant at Rand Corp. in Santa Monica. The company believed it could profit nonetheless, due to the sheer volume of patients treated by its contract physicians but that didn't work out, he said.

"They grew way too fast," Melnick said. "They never invested in human resources and the management infrastructure. They had thousands of doctors spread out over hundreds of clinics, but they were never able to accumulate their market share into a single block."

Public hearings on the state's seizure of the company drew standing-room-only crowds, filled with stunned doctors who felt betrayed at the turn of events. Several MedPartners physicians declined to comment for this story, citing concerns about the pending bankruptcy settlement. State officials did not return calls for comment.

"A lot of physicians in California are in shock," Melnick said. "I think doctors are feeling particularly vulnerable right now. Most physicians thought at least that MedPartners was a model that would be able to provide countervailing force to managed care plans."

Just the short-term financial losses are considerable. MedPartners owes $100 million to dozens of creditors, according to its bankruptcy filing. As part of the interim agreement with the state, the company's clinics will be sold and the proceeds estimated at about $50 million are to be put into a special account to pay off creditors.

Several former MedPartners doctors in Los Angeles have banded together to try to buy as many of the clinics as they can. Their newly founded entity is called the Pacific Physicians Alliance Medical Group Inc.

"We understand that restructuring will be needed and that financial viability is crucial," said Dr. Nathana Lurvey, a board member of the group. "(We) firmly believe that the interests of physicians and patient care will be best represented if the practicing physicians are in control of the (MedPartners clinics)."

Gary Hagen, who headed the health plan division of the Department of Corporations when FPA went under, said that the administration of Gov. Gray Davis obviously learned from that failure and moved much more quickly when MedPartners started heading toward insolvency.

"You can't have a situation of meltdown where you have failures of entities that are responsible for a million-plus people," said Hagen, now senior vice president of Managed Care Resources, a consulting firm in Princeton, N.J. "There needs to be a focus on solvency."

MedPartners Inc. is in the process of reinventing itself but many of its executives remain bitter about their dealings in California.

At the time of the takeover, MedPartners executives insisted that the state was acting irrationally and that the company already had plans to fix its California network. Indeed, the company in November 1998 had announced its intent to sell all of its California clinics by 2000.

"The state went out of their way to make life difficult for them," said analyst Kenneth Abramowitz of Sanford C. Bernstein. "Now it's like the state is going to let them do what they were going to do anyway."

Since the state's takeover, MedPartners' stock has been on a roller-coaster. On March 10, the day before the state takeover, it was trading at $5.50. A week later, it had fallen to $3.18. By May 10, the stock had regained ground and was trading at $5.80.

Abramowitz attributed the rebound to MedPartners' announced intention to get out of the PPM business and transition into pharmaceutical coverage plans for employers. To facilitate that, MedPartners has formed a new company, Caremark Inc.

For reprint and licensing requests for this article, CLICK HERE.