By RHONDA L. RUNDLE
Staff Reporter of THE WALL STREET JOURNAL
COMPTON, Calif. -- As an obstetrician in this beaten-down part of Los Angeles, Silas J. Thomas has witnessed his share of drama. During the 1992 riots, he spent the night at a nearby hospital and delivered the baby of a woman who was hit by a stray bullet. Just the other day, a patient he hadn't seen in 15 months showed up at his clinic with a dead fetus in a box.
But nothing has prepared Dr. Thomas for the shock of dealing with California's fraying system of managed health care. First, lower reimbursements squeezed his income, and the number of patients he saw plummeted. His paperwork grew exponentially. And then, just over a year ago, he suddenly was stuck with $250,000 in unpaid claims.
To keep his practice afloat, he has taken out a $130,000 loan and cut his own salary by more than a third. He also sold his 4,200-square-foot "dream house" in an affluent Long Beach neighborhood and moved into a downtown condominium less than half its size.
No one has much sympathy for physicians, Dr. Thomas says during a quiet moment at his clinic, a pink stucco building surrounded by thrift shops and liquor stores. "We're all supposed to be rich." But, he adds, "I would probably be better off financially today if I had stayed in the pharmacy business."
Not so long ago, California managed care was hailed as a model for containing America's fast-rising medical costs. And for a while, it seemed to work. Premium costs stabilized at levels far below those common in other states, and even dipped slightly in the mid-1990s. The number of Californians enrolled in health-maintenance organizations surged to more than 20 million, about 60% of the state's insured residents.
But today, the system is in the sick bay -- and, some say, nearly on its death bed. Annual premium increases are soaring into double digits again. Employers are resigned to spending more. But the heaviest costs by far are being borne by doctors like Dr. Thomas. The California Medical Association says that nearly a third of the state's 350 medical networks have shut down or entered bankruptcy in the past three years. It says two of them alone owe the state's doctors about $100 million.
Managed care around the nation is under attack, of course. But in California, the industry has created a "chaotic and discombobulated environment," says Henry Loubet, who until July headed UnitedHealth Group's western operations. "The large medical group system isn't functional; hospital margins are among the lowest in the country; and there is too little money all around," says Mr. Loubet, now an Internet entrepreneur.
So what's gone wrong? Policy experts, doctors and managed-care executives agree that the fundamental problem lies in the peculiar structure of the California system itself. At its core is a network of medical groups that act as intermediaries between individual physicians and HMOs. HMOs pay these groups a set monthly fee per member, a so-called capitation fee. In return, the groups are supposed to provide all the care patients need.
Many doctors initially welcomed the medical networks because they offered big, up-front fees and more control over medical decisions than did HMOs. And the HMOs hoped the arrangement would curb costs. But the networks have evolved into bureaucracies that suck money out of the system without necessarily improving care. After all intermediaries take their cut, California's doctors now get only about $13 of every $120 collected by HMOs from employers and patients, says a PricewaterhouseCoopers report.
Moreover, the capitation fees that looked so attractive a few years ago turned out to be inadequate to cover doctors' costs. The fees themselves weren't based on any actuarial calculations of medical costs. Instead, they reflected what HMOs were willing to pay, at a time when they were under pressure from Wall Street to achieve savings. The result: HMO premiums were set much too low.
Over the past six or seven years, average premium rates in California have fallen 35% to about $29 per member per month, according to PricewaterhouseCoopers. But medical costs in the last two years have spiked, rising an estimated 7% each year, in part because of higher drug prices. That has left HMOs and the medical networks below them without any cushion -- or enough money to pay doctors.
"We're at a crossroads -- and we can't continue the way we have been," says Patricia Powers, executive director of the Pacific Business Group on Health, which represents 30 large California employers.
In fact, it is already too late for some doctors. Raleigh Saddler, once one of the busiest family doctors in his area, abandoned his Lynwood practice last year and went to work for the Los Angeles County sheriff's office. "It wasn't something I wanted to do, but after I paid all my employees, there wasn't anything left for me," Dr. Saddler says.
Dr. Thomas, the obstetrician, says he didn't go into medicine to get rich. But he never imagined that, at age 61, he would be forced to take out a loan to finance his practice, instead of planning for retirement. One of eight children, he always wanted to be a doctor, but there was no money for medical school. He graduated from Drake University with a pharmacy degree, got married and bought the drugstore where he had worked through school. But he didn't abandon his dream: after starting a family, he enrolled at Northwestern University Medical School, where he was the class of 1976's oldest student.
After completing his residency in 1980, he took over the practice of a Compton obstetrician who had died. Back then, most of his patients were on Medi-Cal, a program for low-income people. It didn't pay well, but reimbursements were regular. Best of all, in hindsight, he had only one paymaster, the state of California.
Then, in 1996, Los Angeles County began shifting its patients into managed care, and Dr. Thomas wasn't reimbursed for treating patients who weren't assigned to him by the state. Yolanda Grell, Dr. Thomas's nurse, says his number of patients dwindled from as many as 60 to 70 per day to 25 or 30.
Dr. Thomas realized he would have to change with the times. He signed contracts with HMOs and physician networks that in turn had contracts with the state of California. To supplement his income, he reluctantly accepted an offer to deliver babies two mornings a week for an obstetrician linked to American Healthcare Systems Inc., a management company that contracted with several HMOs. Dr. Thomas received a flat fee of $450 per delivery, compared with the about $1,000 he got from Medi-Cal for prenatal care and delivery. "It was a deep, deep, deep discount, but I thought it would help to augment my own practice," he says.
When he signed his first managed-care contract a few years ago, Dr. Thomas studied it carefully. But after a while he stopped reading the contracts because there was no real opportunity to negotiate, he says, acknowledging that he signed many unfavorable agreements.
Suddenly his paperwork mushroomed. Because managed care has replaced traditional Medi-Cal, his staff has to cope with the varying demands of a dozen different payers. It doesn't help that their addresses and phone numbers are constantly changing, as some go out of business and others sell out to former competitors.
"If we bill $30,000, we're lucky to get a third of that back," says Donna Augustus, Dr. Thomas's longtime office manager. Ms. Augustus routinely submits claims over and over again. "I have a stack of claims there going for the second and third time," she says, pointing to a pile of folders on a corner of her desk.
California law requires HMOs to pay doctors within 45 days after receiving a claim, but the requirement is largely ignored, doctors say. On the 44th day, a letter from the plan frequently arrives stating that some piece of documentation is missing, so the claim is incomplete. That starts the clock ticking all over again.
'The Nightmare Began'
Soon, Dr. Thomas's problems extended well beyond the maze of paperwork. To supplement his income, he began spending half his time seeing AHI patients, who were members of two dozen private employer-sponsored health plans. In 1997, AHI was taken over by FPA Medical Management Inc. From the start, FPA was slow to pay. When it fired staff and stopped returning phone calls, "the nightmare began," says Ms. Augustus. Dr. Thomas took to calling FPA himself, but he had no inkling of any serious financial strains.
In July 1998, FPA filed for protection from creditors under Chapter 11 of the Bankruptcy Code. Dr. Thomas had $250,000 in outstanding claims against the San Diego medical group. The FPA patients that Dr. Thomas treated were members of 24 HMOs, including WellPoint Health Network Inc.'s California Care and a unit of PacifiCare Health Systems Inc.
Most of the HMOs have refused to pay Dr. Thomas and other doctors like him; they say they already paid FPA and shouldn't have to pay twice. Dr. Thomas thinks the HMOs are liable because FPA was their middleman, and so does the California Medical Association. The association has sued eight HMOs, accusing them of ducking their fundamental responsibility to pay for patient care.
Dr. Thomas has joined 100 other doctors who have filed a collective $9 million claim against FPA in the bankruptcy court. Stephen Dresnick, a physician entrepreneur who took over FPA just before it collapsed, says that, "on a personal level, I feel terrible. FPA was a sick company in a sick industry."
These days, Dr. Thomas is taking a more active role in billing and collections. A second big network that has run into trouble, the California unit of MedPartners Inc., owed him about $56,000 earlier this year, and Dr. Thomas feared a replay of the FPA debacle when the MedPartners unit entered bankruptcy proceedings. After making several rounds of calls, he eventually received some partial payments, and has since been paid in full. (The state medical association says MedPartners, which recently changed its name to Caremark Rx Inc. after selling its physician-management business, still owes about $50 million to California doctors.)
But the struggle has taken a toll on Dr. Thomas's finances. He says his annual salary now is somewhat below the $200,000 average for California obstetricians. After leaving their Long Beach home, which sold earlier this year for more than $1 million, he and his wife, Ann, still are adjusting to their new circumstances.
Even so, Dr. Thomas takes pride in knowing that he has "never been one day late" in paying his own employees. He also is continuing to fund a profit-sharing plan. "I'm trying to put this behind me and avoid another catastrophe," he says.