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Will this medical brownout ever end?


Doctors in California?long a health care bellwether state?are seeing a glimmer of light at the end of the managed care tunnel.


Will this medical brownout ever end?

Jump to:
Choose article section...Despite gains, the pain persists Attrition could lead to a severe shortage Grim times in the emergency department Managed care isn't going away—at least in California How surviving doctors have coped Heading off trouble at the pass

Doctors in California—long a health care bellwether state—are seeing a glimmer of light at the end of the managed care tunnel.

By Michael Parrish
Contributing Writer

If California doctors were to write a book about their current situation, they might be tempted to borrow the title of Richard Fariña's 1966 novel: Been Down So Long It Looks Like Up to Me. While Golden State doctors and their medical groups continue to be squeezed by rising costs and inadequate reimbursements—and some IPAs are still floundering—a tiny measure of stability is returning to the state's health care system. Some doctors have even seen modest pay hikes in the past year and a half.

"I'm a little more optimistic than last year," says family practitioner Ronald P. Bangasser, medical director of Beaver Medical Group, a 132­physician IPA based in Redlands. Beaver Medical receives 82 percent of its income from managed care capitation contracts.

"Nobody's getting rich or fat," says Bangasser, who is also speaker of the House of Delegates of the California Medical Association (CMA). "But groups like Beaver are doing okay." One big improvement, he contends, is that more California physician groups are talking to each other—not to discuss fees, which could violate federal antitrust law, but to exchange war stories about how to cope with what managed care has wrought.

"Some groups are still having trouble," Bangasser acknowledges. "But they might be brought back to health if we can just get to some of them, to discuss how other groups are dealing with problems like pharmacy or injectables risk." (The latter refers to HMOs' efforts to get physician groups to accept capitated payments for drugs injected in their offices. Not only are the prices of these drugs as difficult to control as other pharmaceuticals, but patients typically don't fork over a separate copay as they do when they fill a prescription at a pharmacy. Typical injectables that can be big money-losers for physicians who take on this risk include child vaccinations, chemotherapy drugs, and drugs for the elderly.)

The death toll of medical groups has slowed. During the first seven months of 2001, of the more than 300 surviving groups in California, three went bankrupt, three closed, and one was sold—a far less bleak litany than the 94 bankruptcies and closures cited by CMA between 1996 and 2000.

Ultimately, Bangasser says, if the health plans fairly share the current wave of employer premium hikes with their medical groups, "we may be able to preserve most of the delegated model, which we think has a lot of advantages. There is potentially enough money in the system if everybody would sit down and make sure that it's directed to the right place at the right time to do the right thing."

Even at ground zero of managed care country, some doctors are cautiously hopeful. California's Sacramento County has the highest market penetration by HMOs of all large US counties—almost 75 percent. "Much as I hate to be rosy," reports endocrinologist Jennifer A. Nuovo, "reimbursements from health plans have been better this past year."

Nuovo, who is associate medical director of the 120-doctor MedClinic of Sacramento Medical Group, credits the group's belt-tightening and tougher strategies negotiating with the plans. "They've been a bit shaken," she says, "by medical groups closing their doors and saying, 'Here you go, health plan; here's your 10,000 people back.' " According to Nuovo, MedClinic and other groups around Sacramento are finally drawing a line in the sand and refusing to take money-losing managed care contracts.

FP Edward M. Yu, of the Camino Medical Group, in Mountain View in the Silicon Valley, sees an upside to the tumult of recent years. "There hasn't been adequate replacement of retiring physicians in our community," he reports, "so primary care doctors have the luxury of cherry-picking insurance types—enabling us to fine-tune our practices with more PPO, indemnity, or fee-for-service patients."

Despite gains, the pain persists

The California health care system is still underfunded, says Donald H. Crane, president of the California Association of Physician Organizations. Though premiums paid by employers have increased, the plans have passed only a small part of that along to doctors. And the gain hasn't been enough to keep pace with rising costs—"most notably," he says, "pharmaceuticals, injectable drugs, new technology, and unfunded government mandates such as vaccines for children."

Small-business employers in California were hit with premium increases of more than 17 percent in 2000 and almost 20 percent this year, according to Managed Care On-Line. In 2001, midsized companies saw 4.5 percent hikes; large employers, more than 7 percent; and individuals, almost 9 percent. State legislators raised reimbursement for Medi-Cal—the low-income health program matched 50-50 with federal Medicaid money—by an average of 17 percent in 2000, according to CMA's calculation. But any raise in 2001 has been blocked by budget deficits from the state's energy crisis. Medicare rates in California rose an average of 4.5 percent in January.

All this gives some relief to the Golden State's health care system, but it doesn't change a larger problem: Insurance premiums are going up around the country, as well. California's premiums remain 30 percent below the national average, says the CMA, and this leaves the state behind—47th nationally in overall physician compensation.

Meanwhile, many California doctors are wondering where the new money is going. Ronald Bangasser's Beaver Medical Group, for instance, provides care for Aetna patients and buys its own staff health insurance from the same company. This year, Beaver saw a 12 percent hike in its insurance premium but only a 4 percent increase in capitation from Aetna. "We still haven't seen the trickle-down," Bangasser observes.

Beaver's cash crunch, in high-cost-of-living southern California, puts continuing pressure on the group. To make ends meet, Beaver doctors see 28 patients a day, up from 24 in years past. They've had their pay cut 10 percent since the mid-1990s. Doctors are allotted just two exam rooms each, and some share offices. The nursing and administrative staffs have been cut back. The group lost its best GI specialist—who was performing twice the national average of procedures, but getting paid at 80 percent of what colleagues in other states earn. Other productive doctors have left Beaver Medical for the same reason. And hiring replacements has been tough. The group has been trying to attract a dermatologist for the past three years.

As with other California physician groups, Beaver has found itself paying for new drugs and technology not covered by most health plans. Prevnar, the pneumococcal vaccine for kids, costs the group $2 million a year. The group has 18 patients taking Enbrel, for rheumatoid arthritis, at $1,400 a month per patient—more than $250,000 a year. Insulin pumps have been provided for a dozen patients—at $60,000 in all. Hepatitis A vaccinations have cost the group $500,000.

Adding insult to adversity, HMOs have become more interested in keeping their members happy than controlling providers' costs, says Bangasser. In 2000, for example, Beaver's HMOs approved gastric bypass for obesity—a $50,000 procedure that capitation doesn't begin to cover—for only 18 patients. In 2001, pressed by its HMOs, the group is doing three gastric bypasses a week, though more than half these procedures have complications and 18 percent have to be reversed—at the group's expense.

"Almost everything a patient wants, he gets," says internist Stephen Deutsch, medical director of Cedars-Sinai Medical Care Foundation in Los Angeles, parent to two physician groups. "A lot of the utilization review process that was supposed to save money by not allowing inappropriate medical procedures has evaporated, which puts more financial pressure on the physicians."

Other snapshots from around the state tell a similar story:

• Stanford University School of Medicine is having trouble attracting pediatric specialists in rheumatology, asthma, hematology, nephrology, and neurology, despite an offer of 3.5 percent home mortgage loans and other inducements. Doctors there are paid $80,000 less per year than they could make elsewhere.

• The last neurosurgeon in Redwood City, in northern California, doesn't expect to be replaced when he retires next year. His income is half the national average in a town where houses in a decent neighborhood cost $800,000.

• Childrens Hospital Los Angeles has had serious difficulties attracting faculty. "California is losing good people to other states because they simply can't afford to live here," says neurologist Rebecca Hanson, president of the Association of California Neurologists.

• One GP in northern California, who asked that his name not be used because he would be embarrassed to have his colleagues read this, saw his retirement savings evaporate when his solo practice was forced to take managed care. He now gets by in retirement solely on $1,700 a month in Social Security. And he says he knows of other retired doctors in the same fix.

• Cardiologist Armand J. Wohl practiced for 21 years in San Diego without accepting HMO payments. "I saw my practice eroding like everyone else's," he says, "by about 35 percent in the past five years." In April, he moved to Kona, HI, to open a new practice.

Attrition could lead to a severe shortage

A media buzz developed in April when the Center for the Health Professions at the University of California San Francisco, released a study showing that physicians per capita have actually risen in the state—from 177 per 100,000 residents in 1994 to 190 in 2000. That's still below the national average of 198 physicians per 100,000 residents.

But the CMA argues that the UC San Francisco study used faulty figures—including part-time doctors, California-licensed doctors now practicing outside the state, and retirees—to arrive at their total of 89,507 active California doctors. "UCSF's numbers are at least 11,000 too high," says CMA spokesman Peter Warren.

Doctors themselves have no doubt that many of their colleagues are leaving the state or retiring early. In July, the CMA released a survey that found that 43 percent of California physicians plan to stop practicing in the next three years; another 12 percent expect to reduce their time spent in patient care; 58 percent reported difficulty attracting doctors to join their practice; and, tellingly, two-thirds wouldn't recommend a career in medicine to their children.

Some doctors have taken to the streets, in white jackets and stethoscopes, in "code blue" demonstrations in Sacramento and San Diego. Family practitioner Jack C. Lewin, CMA's chief executive officer, says that the current shortage in certain specialties is only the beginning. He predicts an overall scarcity of doctors in the next five years.

Urologist Donald Van Giesen, former president of Redwood Empire Medical Group, which entered Chapter 7 bankruptcy last December, estimates that 30 to 50 specialists in his area have either retired early or left the state—and most haven't been replaced. "If we can't attract young specialist physicians to Sonoma County, in the middle of the wine country, with the best weather in the world," says Van Giesen, "you know something's really wrong." Meanwhile, in some practice environments the pain is even deeper.

Grim times in the emergency department

"There is going to be a major meltdown in California, and it is starting in the emergency department," says S. Daniel Higgins, an ER physician and director of emergency services at St. Francis Medical Center in Lynwood. Higgins is also medical director of his 11-doctor group, based at the inner-city hospital. "We've got people dying in the waiting room. We've had people on respirators who can't be transferred anywhere. As a colleague said, 'We're one celebrity death away from a solution here.' People won't know how bad it is until a celebrity dies and puts some focus on this. It's a terrible thing to say."

Health care for the poor is grossly underfunded in Los Angeles County, where 30 percent of patients are uninsured, says Higgins. Hospital doctors won't sign up for call panels because they often don't get paid. Only one ENT physician is currently taking calls for an area of 11 postal ZIP codes, comprising 1 million residents.

The situation has taken a heavy toll on Higgins personally. In 1998, when FPA Medical Management went bankrupt, costing California doctors $60 million, Higgins says that his tiny group lost about $900,000.* "That year, I sold my beautiful home," he says. "My wife and I don't drive fancy cars anymore. I'm 54 years old and still work a 60-hour week, just to hold things together."

Since 1990, 12 percent of California's emergency departments have closed, the CMA estimates, and it's not hard to see why. Doctors and the press have referred to the greater Los Angeles trauma network, where Higgins practices, as a "Chernobyl of health care." Statewide, in fiscal 1999, hospitals and doctors lost more than $400 million providing uncompensated trauma care—with ER physicians absorbing $100 million of that loss.

Managed care isn't going away—at least in California

Out of the chaos of California have come surprises. Many of the state's doctors now believe that an improved form of managed care, including capitation, represents a better alignment of patients' and doctors' interests than fee-for-service medicine. So even as HMOs lost nearly 1 million members nationally from mid-1999 to mid-2000, California HMOs increased their membership by more than 1 million, according to InterStudy, a St. Paul, MN-based research firm that has tracked HMO data for the past three decades. "California HMOs are also significantly more profitable than HMOs in the rest of the country," says Jason Brenden of InterStudy.

California is moving more with the national flow in the growth of PPOs over indemnity plans and fee-for-service, Brenden also reports. The expectation, he says, was that capitation would sweep the country, but "we haven't seen that happen." Today, he notes, "capitation in California is much, much higher than it is elsewhere."

So why are HMOs still growing in California? "Working in a fishbowl, with everyone trying to get outcomes data and the like, has been beneficial," says Stephen Deutsch of Cedars-Sinai Medical Care. "And a group can do things in terms of disease management, particularly chronic disease, that a solo practitioner never could. There's another phase of managed care coming, and I think the plans are going to start rewarding us for quality."

How surviving doctors have coped

GP Ivan G. Althouse, "quasi-retired" from his Sunnyvale practice, now fills in for vacationing primary care doctors. "I felt like I wasn't getting paid on a basis that matched the rest of the economics of the village," he says. Althouse didn't want to make ends meet by bringing ancillary businesses into his office—like selling pharmaceuticals, or hiring massage therapists—as other physicians have done.

Many physician groups have stayed afloat because of staff cutbacks and doctors' willingness to accept lower pay. "We own the organization, we run it, and we've chosen to try to work within the system," says internist Glen L. Hollinger, chairman of the board and medical director of 400-doctor Good Samaritan Medical Practice Association, in Los Angeles. "The only reason we're financially sound is because our physicians have agreed to accept significantly lower reimbursement. It's a day-to-day thing, but we think we're going to survive."

Jennifer Nuovo, in Sacramento, notes that MedClinic lost 22 doctors out of 130 two years ago, when 15 to 20 percent pay cuts seemed imminent. In the end, the group kept that down to 5 to 10 percent. Still, Nuovo says the group has no money in the bank for a rainy day, or to replace equipment; she hasn't had a raise herself since 1991.

Most surviving groups have been tougher negotiators with health plans. Many have rid themselves of pharmacy risk. Current battles focus on physicians' reluctance to accept injectables risk. Some have made deals only with higher-paying HMOs. Others are rejecting all HMO contracts.

"Santa Monica Bay Physicians medical group stopped taking new HMO patients about a year ago. The group was going under," says FP Bernard J. Katz, co-CEO of the group's parent, SMBP Health Services. In 1999, 77 percent of the group's income was from HMO patients. Now it's down to 63 percent. Katz thinks that 50 percent HMO patients—with the rest PPOs, indemnity, workers' compensation, and Medicare—would be a good mix. "We've passed the low point, and we're on the upswing now," he reports.

Heading off trouble at the pass

The CMA has several bills in the state legislature—all, in the end, aimed at keeping physicians from leaving the state. Meanwhile, in mid-May, the new state Department of Managed Health Care received its first mandated quarterly financial reports from physician groups. The results: 56 percent failed one or more of the four basic measures of solvency and 25 percent were in serious trouble, with assets worth less than 70 percent of their debts. One out of five not only had a negative net worth but hardly held any assets at all.

Meanwhile, some of the plans themselves are doing more to intervene when one of their physician groups is in trouble. "We tend to get involved very early," says Robert A. Allen, an internist and ER physician, and senior medical director for network operations, West Coast, for Cigna HealthCare. The plan conducts its own audits of medical groups and steps in when signs of distress appear—overdue payments to specialists and other providers, specialists ending their relationships with a group, or IPAs denying patients high-cost procedures. But Allen, too, has seen fewer solvency problems in Cigna's doctor groups in the past year.

The CMA's Ronald Bangasser hopes for more from the Department of Managed Health Care. Though its primary mission is to protect patients, the new agency could do this by hosting corrective-action negotiations between troubled physician groups and the health plans, to help bring more openness about where the money is going in the system. "They're doing a good job so far," says Bangasser, "but there has to be a convener. I think that's where they can be a real help."

*See "The PPM meltdown: How FPA's implosion buried its doctors," Jan. 25, 1999.


Michael Parrish. Will this medical brownout ever end?. Medical Economics 2001;19:33.

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