A $25 million IOU

By Berkeley Rice
Senior Editor

Thousands of Illinois doctors and hospital administrators are wondering whether they'll ever collect their share of $25 million or more in claims from an HMO called American Health Care Providers. In the state capital of Springfield alone, American owes $2.5 million to Memorial Health System, $375,000 to Prairie Cardiovascular Consultants, $250,000 to the Orthopedic Center of Illinois, and $240,000 to SIU Physicians & Surgeons. The doctors' chances of collecting those debts are slim, because American is bankrupt.

The company was founded in 1984 by Asif Sayeed, who had previously run a medical lab testing business in Chicago. American grew rapidly during the 1990s, acquiring several smaller or troubled HMOs and enrolling 22,700 Medicaid members, plus 18,000 state employees, retirees, and their dependents.

The company's success at gaining those state contracts may have been helped by Sayeed's contacts. From 1994 to 1999, he contributed nearly $70,000 to the campaigns of the state's governors and several top legislators. He also hired the former director of Illinois' state insurance department as American's lobbyist in the state capitol.

At its peak in 1999, American was one of the largest HMOs in Illinois, with $300 million in annual revenues, 127,000 enrollees, and more than 8,000 participating physicians. About 300 employees worked at the company's three-story headquarters in Richton Park, a Chicago suburb. Today, American's affairs have been taken over by the Illinois Department of Insurance. The HMO's head office is mostly vacant, and a sublet sign stands out front. All 300 employees have been laid off, and American's former enrollees are looking for other coverage.

Could Illinois doctors have protected themselves against American's collapse? Perhaps (see "Signs of a shaky health plan" and "One source for independent HMO ratings" below). But they certainly didn't get much warning from their state insurance department or medical society. What's more, American's demise is hardly unique; many other HMOs around the country are also in shaky financial condition.^* For that reason, the story of American's rise and sudden fall offers valuable lessons for doctors.

Few heed early signs of trouble

Despite its apparent success, American showed early signs of trouble, particularly the number of complaints—from doctors as well as patients—to the Illinois Department of Insurance. In 1998, IDI received many more complaints against American than against any other HMO. In 1999, the number of complaints against American increased nearly five-fold and accounted for almost one-fourth of the total against all HMOs in the state.

In March 1999, some physicians in Springfield informed their patients that they were dropping out of American because the HMO wasn't paying their claims. As the office manager for one primary care group recalls, "American paid much more slowly than other HMOs, and we always had difficulty getting anyone there to talk about those unpaid claims. We finally canceled our contracts with American. We were lucky we got out when the HMO owed us only $20,000. A lot of other groups in town are stuck with much bigger losses."

Ronald R. Romanelli, a Springfield orthopedist, also remembers payment troubles with American. "Their reimbursements were very low, and often very late," he says. "When our group's office manager called about the late payments, she'd get funny answers. Even our clean claims weren't being paid. Our problem was that many of our patients had chosen American because we were in its network. And since American had the contract for state employees here in Springfield, we had to belong in order to get referrals from our primary care network docs."

Concerned about the growing number of complaints, IDI fined American $300,000 in September 1999 for excessive delays in paying provider claims and for not responding to subscriber complaints. Unfortunately for American's doctors and patients, IDI didn't publicize that fine or several "corrective orders" it issued against the HMO for troubling financial reports.

In fact, American's financial troubles didn't become public until February 2000, when IDI filed a request for liquidation in state court, alleging that American's debts at that time amounted to $25 million more than its assets. As IDI Director Nathaniel Shapo later explained, "American was massively insolvent and operationally dysfunctional . . . . In such a situation, there was no other solution beside liquidation."

Sayeed denied his company was broke. In May, however, after protracted litigation between the state and the HMO, the court granted the liquidation order, shutting down the company. That left about 90,000 enrollees with no coverage, and thousands of doctors and dozens of hospitals with claims totaling at least $25 million. Under state law, HMO network physicians cannot bill patients directly for those claims.

Charges for medical services delivered after American's liquidation will be paid, up to $300,000 per patient, by the Illinois HMO Guaranty Association, which is funded by the state's solvent HMOs. (Ironically, the association's chairman at the time of American's demise was none other than Asif Sayeed.)

As for the roughly 35,000 outstanding claims for services rendered before liquidation, even a partial payment depends on the resolution of American's tangled finances. Any funds recovered by IDI will first be used to pay the administrative and legal expenses involved in the liquidation. Out-of-network doctors and hospitals will then be paid before the HMO's contracted providers.

"This company was very badly overextended," says Dan Orth, the guaranty association's executive director. "So, realistically, I doubt whether there's going to be much in the way of assets to pay prior claims from contracted doctors. It's like this because the association was created to protect the HMO's covered enrollees, not doctors and hospitals."

As a result, many of these providers will probably have to write off their claims. Consider the nine-doctor Orthopedic Center of Illinois, stuck with about $250,000 in claims dating back to early 1998. Asked about the odds of being paid, Ronald Romanelli replies, "Pretty slim to poor. We'll be lucky to get 10 cents on the dollar."

Did fraud contribute to the HMO's demise?

After analyzing American's financial records, IDI's investigators concluded that the HMO's financial troubles stemmed from more than routine mismanagement. Last September, the department filed a civil suit against Sayeed and his wife (who served as the HMO's corporate secretary), accusing them of filing false and misleading financial statements, breach of fiduciary duty, fraud, and reckless mismanagement that led to the company's insolvency.

The state also charged the Sayeeds with "looting" millions of dollars from American for their own benefit. According to the suit, the couple accomplished this through Shaheen Leasing, a separate company set up and wholly owned by the Sayeeds, but financed by American, and with American as essentially its only client. In 1996, for example, American bought a new computer system for $1.2 million, then sold it the following year to Shaheen Leasing for the same price. After leasing the system for some time at what the suit termed "a grossly inflated fee," American bought it back, paying Shaheen Leasing $2.3 million—nearly double the original cost.

Also, according to the suit, American paid Shaheen Leasing nearly $1 million for two Bentleys, a Lamborghini, a Ferrari, and a Mercedes, which were used mostly by the Sayeeds. American also leased a $5 million corporate jet from Shaheen and paid the salaries of its pilots. While Sayeed insisted that American had used the plane for business trips to its subsidiaries in Indiana and Arkansas, the suit claimed it was used primarily for the Sayeeds' personal travel.

In 1996, the suit asserted, American bought a condo apartment in a luxury building on Chicago's "Gold Coast" for $675,000, purportedly for business use. Two years later, Sayeed had the condo's ownership transferred to himself, then sold it for nearly $1.3 million. After paying American back the original purchase price, he allegedly cleared more than $500,000 on the deal.

During the years when those transactions occurred, overdue claims from thousands of Illinois doctors piled up at American. In interviews with Tony Cappasso, a reporter for Springfield's The State Journal-Register, former executives at American revealed that every claim of $5,000 or more automatically went into a "pending file." The ostensible purpose was to allow the HMO time to gather evidence that the treatment involved was covered and medically necessary. But, in fact, those claims typically languished for months and even years with little effort to investigate their validity. "It was basically a way to delay payment," one former manager admitted. "Providers had to beg to get paid."

According to IDI investigators, American also managed to avoid millions of dollars in capitation payments to doctors because thousands of subscribers—11,000 by late 1999—were not assigned to any primary care physician. These included new patients as well as those whose doctors had quit the HMO—typically because their claims weren't being paid. Without assigning those patients to other network doctors, American simply continued to collect their premiums.

The civil suit was settled last December, when Sayeed, without admitting to or denying the suit's allegations, agreed to pay the state about $1.5 million.

Could public disclosure have limited the damage?

During a court hearing on the liquidation, an IDI official revealed that American had been under "special scrutiny" since the end of 1997. Based on the company's subsequent financial reports, the department kept American under "extra regulatory review" from then on. It issued several orders in 1999, in addition to the fines it levied, demanding that the company correct its business and financial practices.

Unfortunately for American's patients and physicians, Illinois law prohibits the state insurance department from revealing such actions. According to IDI spokesperson Nan Nases, the agency can only give out HMOs' financial statements and complaint history. Releasing too much information, she points out, could cause panic and critically damage an already shaky enterprise. "Our goal is to protect policyholders," says Nases.

Patients and doctors weren't the only ones in the dark about American's financial troubles. The secrecy even extended to other state agencies. In October 1999, only months before the liquidation request, the state's Department of Public Aid decided to transfer thousands of Medicaid patients from another HMO to American. Before doing so, an official from that agency checked with IDI to find out whether American had any financial or regulatory problems. Since he wasn't informed of any, the agency authorized the transfer.

In an editorial prompted by American's liquidation and the revelation of how long the state insurance department had known of the HMO's financial troubles, The State Journal-Register commented: "It is obvious that the current state law is better at protecting foundering HMOs than it is at warning the consumers these companies are entrusted to serve . . . . Obviously the scale tips way too far in favor of protecting private companies at the potential cost of the public."

American's collapse may help to correct that imbalance. The state legislature recently passed a law raising the financial standards for Illinois HMOs. The law also gives the state insurance department authority to monitor their finances more closely, and to take earlier action upon signs of trouble. However the new law won't result in earlier disclosure of such problems.

^*See "The HMO graveyard: What caused the biggest failure yet," Oct. 25, 1999.

Signs of a shaky health plan

Without an early warning from state regulators, what can doctors do to protect themselves against losses resulting from the sudden demise of an HMO? Those who were burned in the collapse of Illinois' American Health Care Providers say they'll keep a closer watch on their managed care accounts receivable in the future.

When pending claims to an HMO are more than 100 days old, they say, that's grounds for concern. When they're four to five months old, that's cause for alarm. While periodic late payments may indicate a short-term cash flow problem, continued delays may signal real financial trouble. So many HMOs are late with payments these days, however, that it's no longer a reliable evidence of instability.

If a particular HMO isn't paying your claims promptly, ask colleagues at other groups or local hospital administrators whether they're also having trouble getting paid. If they are, and your complaints to the HMO don't bring improvement, it may be time to terminate the contract. Groups that did so with American limited their losses.

Helen Helm, business manager for Physicians Group Associates, says her Springfield primary care group managed to get most of its overdue claims paid by American before its liquidation. "The squeaky wheel theory really works," says Helm. "HMOs are more likely to pay doctors who complain than those who are oblivious. We keep our doctors aware of accounts receivable, and they're willing to step in and get involved when HMO payments are late. We kept calling American about our overdue claims, and we told them we wouldn't renew our contract unless they paid them. They finally paid a substantial amount of what they owed us, but not 100 percent. So we terminated our contract. They still owe us $30,000, but compared with other groups in town, we were lucky."

When renewing contracts with late-paying HMOs, Helm suggests trying to negotiate a clause setting penalties, such as late fees or interest, on claims that are overdue beyond a certain period. However, that approach might work only for groups whose size, location, or patient base gives them sufficient bargaining clout.

While state insurance departments should be aware of an HMO's financial problems, such information may not be available to state medical societies or the general public. Illinois' insurance department, for instance, is restricted by law from disclosing details about an HMO's financial difficulties. The Illinois State Medical Society publishes an annual guide to the state's HMOs, including basic financial data. That data, however, comes from the insurance department, whose data is in turn based on what the HMOs themselves submit. In American's case, that information proved to be inaccurate.

Saul Morse, the Illinois State Medical Society's legal counsel, says that if an HMO is publicly traded, its financial information appears in its annual reports, which should be available in some libraries, from the SEC, or from the HMO itself. But as Morse points out, those reports are often difficult to interpret. Doctors should also be aware, he adds, that annual reports cover the previous year's activity, and may not accurately reflect the company's current financial condition.

If an HMO is privately owned, like American, it's not required to issue an annual report. In that case, you can check on its finances with the state insurance department, but the information it has generally depends on what the company submits. Some insurance departments conduct their own periodic audits of HMOs, but since state regulatory agencies are typically understaffed and underfunded, those audits may not be rigorous or frequent.

Another way to evaluate an HMO is to check the background of its senior officers. In many states, such information is available from the state insurance department. For example, four former top executives at American are now running another HMO in Cleveland.

Finally, the time to check on an HMO's financial health is before you sign or renew your contract as a participating provider. Once you sign, says Morse, you're obligated to continue treating any patients—including new ones—the HMO assigns to you for the length of the contract, whether you get paid or not.

One source for independent HMO ratings

If doctors can't depend on state insurance agencies or medical societies to warn them if an HMO is financially unstable, where can they go for such information? Try Weiss Ratings. Based in Palm Beach Gardens, FL, Weiss claims it's the only insurance rating service that's not paid by the companies it evaluates. Says Weiss's Donna O'Rourke: "Compared with many state insurance departments, we have very conservative criteria for evaluating the companies' financial safety."

Since 1994, Weiss had rated American Health Care Providers, the subject of the accompanying article, D or D-, meaning "weak." Early in 1999, one year before Illinois asked that the company be liquidated, Weiss dropped the company's rating to E+, or "very weak," and ranked it the weakest HMO in the state. By comparison, in September 1999, American received a B rating from both A.M. Best and Standard & Poor's, two popular rating services.

If you think American's financial troubles are unusual, think again. As of February, Weiss listed 76 HMOs as "very weak," including 21 rated E-.

Weiss ratings for individual HMOs are available by phone for $15 each at 800-289-9222, or online for $7.95 each at www.weissratings.com . Or you can order Weiss's Insurance Monitor Report by phone at $135 per year for quarterly ratings on up to five HMOs, or $159 for up to 10.

 

Berkeley Rice. A $25 million IOU. Medical Economics 2001;5:26.