Medical Bankruptcies

IPAs' Financial Problems May Leave Physicians Out of Luck

Texas Medicine Logo(1)

Medical Economics Feature -- October 2001  

By Walt Borges  
Associate Editor

With the announcement in July that an independent practice association (IPA) in Fort Worth and a medical group in San Antonio were filing for bankruptcy, there was a feeling of déjà vu for a number of physicians, especially those familiar with what happened to IPAs in California.

The key question is whether the bankruptcies of Medical Select Management (MSM), Fort Worth's largest IPA, and Quantum Southwest Medical Associates, one of San Antonio's largest medical groups, are mong the first in a wave of bankruptcies that will plague Texas as they have California. Already this year, the Corpus Christi Network of Physicians, the last IPA in that Gulf Coast city, closed its doors with $1.2 million in debt, most owed to the 100 doctors who were the last remaining members of the network that once included 200 physicians.

MSM has more than 1,700 physician members. Quantum manages two medical practices encompassing 40 primary care physicians in San Antonio and has about 1,500 specialists associated with its network.

Quantum, which processed claims for PacifiCare Health Systems, may end up owing physicians, medical groups, and hospitals as much as $50 million, according to staff estimates from the Bexar County Medical Society (BCMS). At the time of the bankruptcy filing, Quantum initially reported debts totaling $27.3 million and assets of only $15.4 million.

MSM, which processed and paid claims for Aetna U.S. Healthcare and PacifiCare, may leave physicians and hospitals as much as $21.2 million in the hole. Another $15 million is owed to other businesses and individuals.

MSM has about $14.5 million available for paying claims, according to representations the IPA made in bankruptcy court, but physicians are likely to compete with other businesses for that money.

The Texas Medical Association and the Tarrant and Bexar county medical societies are monitoring the bankruptcy proceedings to make sure physicians are paid for services rendered. TMA President Tom B. Hancher, MD, and Tarrant County Medical Society President James L. Norman, MD, called on Insurance Commissioner José Montemayor to act quickly to "expedite payment, even partial payment" to physicians and medical groups dependent on MSM for claims payment.

Physicians affected by the bankruptcies should carefully evaluate their options under the contracts they hold with the bankrupt IPAs and with the insurers. Most physicians have agreed in their contracts to continue to provide medical services to patients while the bankruptcy court sorts out the finances of the IPAs, even though there are no guarantees that the IPA will pay all of the claims submitted to it.

"First and foremost, the patients need to be taken care of," said Robert Gunby, MD, chair of TMA's Council on Socioeconomics. Once the bankruptcy judge begins supervising the case, physicians who are not being paid should not assume they can refuse to treat patients, Dr. Gunby says, because the contract is still in effect. In addition, the judge may order the contract to be honored.

TMA's second concern is making sure the physicians get paid, Dr. Gunby says. TMA believes state law makes health maintenance organizations (HMOs) responsible for paying the claims of the bankrupt IPAs, he says.

HMOs are required to monitor the IPAs that handle their claims, explains TMA General Counsel Donald P. Wilcox, JD. The Texas Insurance Code also specifies that an HMO cannot lawfully avoid responsibility for complying with state laws and regulations by downloading its duties -- including financial responsibility -- to a delegated network of physicians, he says.

Insurers are certain to balk at that interpretation. Having already made capitation payments to cover expected medical expenses, covering the unpaid claims would amount to paying twice, they argue.

The Texas Department of Insurance (TDI) has not signed off on TMA's interpretation of the financial responsibility of insurers for their contracted IPAs, but neither are regulators prepared to say that interpretation is wrong, a TDI spokesperson said.

"We are studying existing law and the new law in House Bill 2828 [which enacted the nondelegation language]," said TDI spokesperson Lee Jones. "There could also be court cases that are relevant."

For Dr. Gunby, the MSM and Quantum bankruptcies "just illustrate to physicians that they have to be concerned about [the flow] of payments and about the contracts they sign."

Select Trouble  

Both Quantum and MSM sought Chapter 11 bankruptcy, which anticipates that an organization seeking protection will wipe out or discount its debts but continue to conduct business. Often, that means the bankrupt organization sets aside debts that accumulated before the filing and begins with a clean financial sheet.

The other common form of bankruptcy, Chapter 7, results in the liquidation of the debtor organization, with no continuation of the business.

Before filing for bankruptcy on July 23, MSM and the company that performed its claims processing and utilization review, Medical Pathways Management-Texas Inc., were placed under supervision by TDI. The public orders for the supervisions did not specify the exact nature of the companies' financial problems.

Testimony during an Aug. 6 hearing in Fort Worth suggests that physicians might receive only some of the money MSM had set aside to pay Aetna claims. Creditor Bank of America has a secured interest in $7 million offered by MSM as collateral on a loan, which means the bank will be paid before nonsecured creditors such as the doctors are paid.

The court hearing also revealed that MSM served 183,000 enrollees of the Aetna and PacifiCare plans. MSM was collecting $14 million each month from the insurers to pay medical claims and $1.5 million from the insurers to administer the claims processing by Medical Pathways. According to news reports, Aetna and PacifiCare paid $269 million to MSM since the beginning of 2000 to cover claims and claims processing. 

U.S. Bankruptcy Judge Barbara Houser did not grant an MSM motion that would have let it use its accounts to pay claims. Nor would she allow the IPA to honor outstanding checks, the number and amounts of which MSM could not estimate.

Claims for Aetna enrollees for medical services provided after July 1 are to be paid and processed by Aetna, the judge ruled. Claims for patients covered by PacifiCare who received medical services between July 24 and Aug. 31 are to be paid by Pacificare and processed by Medical Pathways. The handling of claims after Aug. 31 was the subject of an Aug. 30 hearing.

Some physicians with Aetna contracts have threatened not to see Aetna patients, Aetna attorneys told Judge Houser. Mr. Wilcox says physicians who are contracted to provide service and who wish to terminate the contract should review the termination with their attorneys because this option is addressed in the contract. Bankruptcy does not necessarily result in the voiding of contracts the debtor holds, Mr. Wilcox says. In fact, under the supervision of a federal bankruptcy judge, contractors with the debtor may not be released from their agreements without the consent of the debtor and the court, and may be legally penalized for failing to do what is required under the contracts.

"Once an IPA enters bankruptcy, the contract alone won't govern the physician's rights," said Mr. Wilcox. "It's what the judge orders."

"Bankruptcy court judges want to get the doctors, medical groups, and hospitals paid if they go forward under their contracts," explains Robert Provan, JD, an Austin attorney who is tracking the bankruptcy proceedings for some of the physicians owed money by MSM. "The judges are concerned first that patients must be served and, second, that physicians get paid forward from the filing."

Quantum Failings  

Quantum filed for bankruptcy protection on July 18. Unlike MSM, the San Antonio IPA had not been placed under TDI supervision, and TDI officials told BCMS representatives that the bankruptcy filing was a surprise because there were few complaints about the IPA.

PacifiCare spokesperson Dan Miller said that "the actions taken by Quantum are needed to guarantee uninterrupted access to health care for members."

Quantum processed PacifiCare claims for a network of 40 primary care physicians located in 18 health centers around San Antonio. Those physicians provided medical services under capitation contracts for 34,000 patients.

Estimates of how much is owed to San Antonio physicians and hospitals range up to $50 million, says Carrye Harris-Franzel, director of socioeconomics and medical practice relations for BCMS.

PacifiCare guaranteed payment for medical services provided between July 18 and Sept. 7. At press time, it was uncertain whether the guarantee would be extended further.

U.S. Bankruptcy Judge Leif Clark, at a July 27 hearing, held that physicians contracted to Quantum must abide by the contracts and cannot diminish service or bill patients for the balance of unpaid PacifiCare claims. Doing so will result in contempt of court, the judge said.

BCMS President Gerardo Ortega, MD, says the Quantum bankruptcy has identified one of the major problems with the health care system.

"Obviously, money has been paid to the IPA for the services physicians will provide," Dr. Ortega said. "It's also obvious that physicians have provided services to patients but have not been paid. The problem is made worse because there doesn't seem to be an agency that is monitoring the IPAs and their payment practices. When something like this happens, you can't turn around and say you won't pay those whom you owe. All you can do is go to the bank for a line of credit to pay those debts."

Another Path  

Mr. Provan is working with TMA lawyers to develop another way for physicians to be paid. He already has been asked to represent 12 Johnson County physicians who may sue to ensure they are paid for services they provided within the MSM network.

"We are developing a litigation strategy with the cooperation of TMA to find a way for doctors to get their pre-petition claims paid by the HMOs or the third party administrators," Mr. Provan said. "My goal is to see that the physicians get paid for what they've done," he said.

Mr. Provan is looking at several IPA bankruptcies. He says his strategy is not just aimed at the IPAs, which often are shell companies with few employees and no money. IPAs assemble networks of physicians, which are a necessity for HMOs that must show regulators that they have well-stocked networks of physicians in each locale in which they operate. IPAs are sometimes nonprofit entities.

Most claims-processing and payment functions that IPAs undertake for health insurers are delegated to a separate entity, usually a for-profit management services organization (MSO) that hires personnel for claims processing and utilization review.

HMOs and other managed care organizations pay IPAs capitated fees, which are then distributed to physicians as either fee-for-service payments or capitated payments for primary care. Mr. Provan says MSOs are the focal point for the money flow, and it is there that money may have been taken out as profit while doctors went unpaid.  

Mr. Provan said he intends to hold the HMOs and MSOs responsible for the payments that never reached the doctors.

"It's our theory that HMOs delegate functions, not responsibility," he said. "Allowing them to delegate financial responsibility is against the public policy of the state in our view."

Mr. Provan says that the 12 physicians who hired him may soon be joined by many others who went unpaid because of the MSM bankruptcy.

"It's a potential class action that could encompass 1,700 doctors who were owed money by MSM," he said.

What Mr. Provan wants to prevent is a repeat of the California IPA experience, which he says was a disaster.

"A major earthquake occurred in California that has not been reported in the news media," Mr. Provan said. "It is financial, not geological. More than 178 IPAs have gone bankrupt in California, and 90 percent of the rest are poised for bankruptcy.

"The seismic waves are heading this direction, and we've already felt the first tremor," the lawyer continued. "Bigger waves are coming."

Walt Borges can be reached at (800) 880-1300, ext. 1385, or (512) 370-1385; or by email at Walt Borges.  


Signs of Trouble Should Prompt Action

Comedian Yakov Smirnoff, a native of Russia, once was asked to explain the differences between the Soviet Union and the United States. He summarized in two words: "warning shots."

Texas physicians who are contracted with independent practice associations (IPAs) probably would like to have a similar unmistakable notice of trouble ahead, but the signs of an impending IPA bankruptcy are much more subtle.

Texas Medical Association leaders and staff members identified several telltale signs of possible problems ahead:

  • The first and most important sign is whether a physician's bills are being paid on time. If clean claims are consistently paid after the 45-day prompt pay deadline and no explanation is offered, physicians and office staff would do well to call the IPA and the insurer who is paying claims through the IPA to see if there is a bigger problem. But as Robert Gunby, MD, chair of TMA's Council on Socioeconomics, points out, "There's so much delay in prompt pay that's intentional that it is hard to tell when they [payers] are in trouble."
  • Once you or your billing staff dials the IPA's number, be alert for signs of trouble. An IPA that doesn't answer the phone may suggest that further investigation is needed. Unanswered phone messages are another clue, as is a refusal to put you through to the IPA employee handling accounts payable.
  • If you get an answer, but the check is always "in the mail," it's time to worry.
  • One solid lead to the status of a troubled IPA is an offer from the IPA to pay you the amounts owed at a discounted rate. For example, the IPA may offer to settle its debt to you for 20 to 50 percent of what it owes you.
  • If the Texas Department of Insurance places an IPA under supervision, it doesn't necessarily issue a public notice of the action. But the local news media often catch wind of the action and report it. Sometimes, news organizations report that something is financially wrong at the company even before supervision is ordered, and physicians should take note.

Lee Spangler, JD, TMA's assistant general counsel, says the warning signs of IPA bankruptcy are similar to those of others who are unable or unwilling to pay their debts." Look for typical debt avoidance behavior of those who are trying to avoid paying their bills," he said. " Look for things like frequently changing phone numbers and addresses. "So what do you do?

If you suspect bankruptcy but the IPA has not filed, TMA leaders recommend several steps:

  • Investigate through the news media and financial news services. Order a Dun & Bradstreet report on the IPA's financial condition and check other financial sources. Do an Internet search of information about the IPA. Check the IPA Web site, if it has one. Another resource is the American Medical Association's Bankruptcies in Healthcare: A Physician's Guide . The guide, coauthored by TMA General Counsel Donald P. Wilcox, JD, is available at
  • Monitor accounts receivable . Accounts receivable that are older than 45 to 60 days are signals that an insurer, delegated network, or third-party administrator (TPA) may be having financial problems. Physicians should attempt to track payments back to an internal operational problem in their own office. Failing that, they should take immediate steps to contact the insurer, IPA, network, or TPA to address the problems.
  • Contact lawyers, financial, and practice management consultants. If signs of IPA financial instability are evident, you should consider contacting your attorney or financial adviser and reviewing your contracts to see what option you have. Several issues should be considered: What are your obligations to continue providing care to patients whose insurers process claims through the IPA? What is the financial exposure of your practice under the contract with the IPA? How long does the contract run? Can you afford to reduce your patient base by canceling the contract? One option for physicians is to seek to amend contracts with insurers to guarantee payment in the event the intermediary IPA is unable to pay for the services rendered.
  • Complain to the HMO or health plan whose claims are being processed and paid by the IPA. Don't be shy. TMA leaders say the Texas Insurance Code holds managed care organizations (MCOs) responsible for complying with all statutes and regulations, and holds the MCO accountable. Do not agree to allow the IPA to limit the MCO's accountability in its contract with you or your group. Call the MCO and complain about the IPA's delays in paying bills.
  • Keep TDI informed of your worries. Physicians concerned about the financial status of their IPAs can report those concerns by calling TDI's HMO division at (512) 305-6745. But don't expect TDI to express an opinion on the financial state of an IPA or the wisdom of doing business with it. IPAs are neither licensed by the state nor required to file financial information with TDI, and by law TDI cannot reveal information it uncovers during its investigation, says TDI spokesperson Lee Jones. For handling specific complaints about delayed payments, a complaint form can be downloaded from TDI's Web site. The complaint can be faxed to (512) 475-1771 or mailed to TDI at PO Box 149091, Austin, TX 78714-9091. TDI has designated a prompt pay ombudsman, Senior Associate Commissioner Audrey Selden, JD, of the consumer protection division. Ms. Selden can be reached at (512) 475-1760.

October 2001 Texas Medicine Contents
Texas Medicine Main Page