Legal Aspects of an IPA’s Insolvency are Complex

By Phillip J. Goldberg, Esq.

QJ1 September 19, 2000 San Mateo County Medical Association’s legal counsel Phillip J. Goldberg, Hassard Bonnington LLP, San Francisco, spoke with members about IPA’s insolvency. The presentation was prompted by the closure of San Mateo IPA. However, Mr. Goldberg’s comments are applicable to IPA insolvency in other contexts as well. Mr. Goldberg prepared the following synopsis of his remarks.

Introductory Disclaimer

Term and Termination of Contracts

The demise of San Mateo IPA has created an impetus for health plans to enter into direct contracts with physicians for the provision of services to their HMO patients. Physicians may take some comfort that contracts with health plans, as opposed to an independent practice asso­ciation, are less likely to terminate because of the health plan's insolvency. This is a consequence of the fact that health plans are much more highly regulated than IPAs. Health plans have certain tangible net equity requirements they must maintain and are required to contribute to an insolvency pool, akin to an insurance guarantee fund. Nevertheless, the physician should carefully review health plan contracts to avoid the problems encountered in the past with IPAs.

Contracting vs. Non-Contracting

There is a potentially significant difference between being a contracting provider and a non-contracting provider when an IPA faces insolvency. California law prohibits a contracting provider from seeking payment from a patient when an IPA or the health plan fails to pay for services covered by the provider contract. A physician who has effectively terminated his or her contract with an insolvent IPA and who has no other contractual connection with a health plan, is not bound by this statutory restriction. The physician is free. to seek payment directly from patients for services rendered after termination of the contract. However, physicians need to be certain that they have no contract connection to the patient's health plan through a separate PPO contract with the Health Plan.

Closure vs. Bankruptcy

Bankruptcy Problems

If the physician has not effectively terminated his or her contract with an IPA when that entity files for bankruptcy, the provider contract becomes an “executory contract” that forms an asset of the bankruptcy estate to be used in the reorganization of the IPA. Once the bankruptcy proceeding is initiated, the physician cannot unilaterally terminate the contract, even if the IPA has breached it. Instead, the physician must ask the bank­ruptcy court to compel the IPA to assume or reject that contract. Although the court may order the IPA to cure all defaults (I.e., pay monies past due) before it can assume the contract, this proceeding can be time-consuming and expensive for the physician and limits his or her options.

Another potential problem is the possibility of facing a “preference action.” the law allows bankrupt IPAs to demand repayment of claims paid in the 90-day period prior to the initiation of the bankruptcy proceeding. Accordingly, physicians can find themselves in the situation of being compelled to pay monies back to an IPA that may continue to owe the physician substantial sums of money. There are defenses that may be asserted to this preference action. The physician may assert that the payments received in this 90-day period were received in the ordinary course of business, consistent with the prior relationship of the parties and industry standards. Additionally, since the alleged preference payments were received, the physician may have rendered other and additional valuable services to IPA patients that remain unpaid, creating a “new value” defense The application of these defenses depends on each physician’s particular circumstances.

Planning for Insolvency

Preserving Patient Relationships

Despite the inroads of managed care into the physician/patient relationship, that relationship continues to be the key to good health. Maintaining and preserving that relationship is also in the best interest of the physician from a financial perspective. Physicians are much more likely to receive prompt and adequate payment form health plans if their patients are advocating for that payment. For this and other reasons, physicians should take great pains to preserve their good relationships with their patients. Rather than demanding payment directly from your patients, it may be better to recruit the patient to your cause. Health plans and health plan regulators are much more sensitive to the demands of patients (referred to as members or enrollees in health plan parlance) than they are to entreaties of providers, no matter how compelling you may feel your claims are.

In conclusion, I want to reiterate that doctors should very carefully consider managed care contracts, which they may be asked to enter into in the future. They should also review their existing contracts, especially if they have any concern about potential insolvency of an IPA. I would also commend to you the California Medical Association's managed care contract review. For a nominal fee, the CMA will undertake a thorough review of your contract. It is a good idea to keep these reviews with your contract so that you may refer to them when problems arise.