Much of Ailing MedPartners Unregulated, State Says

MedPartners Inc. carefully structured its managed-care business so that key parts--and most of the money--are beyond the control of California regulators, making it difficult for the state to ensure care for the 1.3 million patients enrolled in its health plan, state officials said.

The company kept just enough money in the regulated portion of its business, MedPartners Provider Network Inc., to meet state requirements, masking huge losses in its clinics and other operations, sources said.

The California Department of Corporations took over the provider network last week and immediately placed it in Chapter 11 bankruptcy protection. On Wednesday, MedPartners, a physicians practice management company that runs 117 clinics with 1,000 doctors, filed two court actions in Los Angeles intended to overturn the state’s takeover.

“They very cleverly constructed a corporate organization that circumvented the ability of the Department of Corporations to control it,” said Peter Wolfson, the state-appointed attorney hired to oversee the bankruptcy proceedings.

The state is particularly frustrated that it cannot regulate the clinics the company runs under a separate corporate division, sources said. Doctors and administrators at the clinics have said that many of their suppliers have not been paid by MedPartners’ parent company, which is not within the state’s jurisdiction. Bankruptcy documents indicate the plan owes hospitals and other providers at least $73 million, a figure that may be grossly understated, a source said.

Far from allowing its unregulated businesses to founder, the company pumped money into clinics, said Mac Crawford, chairman and chief executive of the Alabama-based parent, MedPartners Inc.

“How could I exploit something when I have not taken a single nickel out of California and I’ve put in $256 million?” Crawford said. “I think this company has gone above and beyond what anybody would expect to ensure that this [health plan] remains in place and these patients get treated. I don’t know how we exploited anything.”

The oversight problem, far from affecting just MedPartners, appears to be systemic: The managed-care business has grown and changed so rapidly that California regulators have not been able to keep up, said Donna Campbell, deputy secretary for Business, Transportation and Housing in California.

Campbell said the Gray Davis administration is attempting to bring the laws up to date. The state currently regulates only health plans, not physician groups or other hybrids of managed care, so MedPartners--and possibly other companies--was able to hide troubles at its clinics and parent company.

HMO Oversight a Work in Progress

MedPartners vigorously denies the state’s contention that it deliberately shielded assets or operations from state control.

Ross Stromberg, the company’s lawyer, said MedPartners inherited its corporate structure from several companies it purchased to set up its California operations.

He blamed the state’s complicated regulatory climate for encouraging such a patchwork structure. Because the company believes the state’s takeover was unwarranted and disruptive, he said, MedPartners officials are glad the state could not reach portions of its businesses.

Campbell said it is not clear how many other companies--if any--are also out of regulators’ reach.

The state’s oversight of managed care has for years been parked at the Department of Corporations, which was set up to regulate companies that sell securities and other types of financial services. Critics say the department has been lax in enforcing laws overseeing the health-care industry.

In other states, such companies are typically regulated by experts in insurance or health care.

Oversight of health maintenance organizations is so new that the law allowing officials to take the company’s ailing health plan did not go into effect until January, Campbell said. And according to Department of Corporations spokeswoman Julie Stewart, a key provision in MedPartners’ license--invoked to prevent the California operations from funneling money out of state--was not included until last year, after another company did just that.

MedPartners’ structure is important because some of the company’s problems have surfaced in parts of the corporation that are not under the state’s control.

According to physicians and administrators who crowded a public meeting on the company’s travails Tuesday, MedPartners has fallen behind in payments to vendors, and a number of suppliers have threatened to withhold needed equipment from the company’s clinics.

An administrator at one of the company’s Los Angeles clinics said a vendor of radiology supplies has threatened to cut the facility off, a move that could shut down radiology services. A pediatrician said he feared that hospitals--some of which are owed as much as $7 million, according to bankruptcy documents--would refuse to take children referred by MedPartners’ clinics.

But neither the clinics nor the corporate entity that is supposed to pay for their doctors and supplies is regulated by the state.

The health plan itself has no employees, and all of its business administration is handled by the parent company, which is also not under state control.

Concerns Blamed on Forced Bankruptcy

According to bankruptcy documents, creditors include most of the region’s major hospitals and range as high as $6.7 million owed to Whittier Hospital Medical Center. Some of the debts are as old as 1995, the year MedPartners entered the health-care business in California, a source close to the case said.

Crawford defended the company’s practices, saying he is personally working with vendors to make sure bills get paid.

He blamed the concern about vendors on the bankruptcy, saying that whenever a company enters bankruptcy, suppliers fear they won’t get paid.

He said that as far as he knew, any payments owed to vendors were at or near the current cycle and part of the normal course of doing business.

“It’s not that people are not getting paid,” Crawford said. “When you hear the word ‘bankruptcy,’ people get very confused and it’s not unusual for vendors to say, ‘I am not going to deliver services until I get any bills that I have outstanding paid.’ ”

The company also struck back for the first time against the state’s takeover, filing two court actions designed to keep regulators at bay.

In one, filed in Superior Court in Los Angeles, MedPartners has requested an injunction against the state’s takeover. The company argues that it is not insolvent, as the state has claimed, and that the takeover has hampered the firm’s ability to properly pay doctors and other providers.

In a second action, filed in U.S. Bankruptcy Court in Los Angeles, the company contested the decision by Eugene Froelich, the conservator appointed by state regulators to run MedPartners Provider Network, to put the health plan into bankruptcy.

“The impact of the conservator’s unauthorized and precipitous action was immediate and devastating,” the company’s lawyers said. “The stock price of the debtor’s parent, MedPartners Inc., plummeted. Its lender relations were strained to a breaking point.”