State takeover of Lifeguard worries doctors and employers

Peter Kuhn started working around the clock last week, helping his clients find new health care providers after the state announced Sept. 13 that it is taking over business operations at Lifeguard, a San Jose-based health maintenance organization.

The California Department of Managed Care appointed a Los Angeles conservator to evaluate Lifeguard and decide if the company should continue to operate.

The state has stopped the sale of any new business at Lifeguard as well as all contract renewals, a sign of a company's impending demise.

"I see Lifeguard's membership all going away by January," says Mr. Kuhn, health insurance broker with IBP Insurance Services in San Jose. "We are treating this as a very serious crisis."

Mr. Kuhn says he has 125 employer clients with Lifeguard and expects to have them moved to other health insurance carriers within a few months. He's already provided 100 of those employers with proposals from other insurance companies.

IBP Insurance Services, with 17 employees, is a Lifeguard member.

The state last year took over the operations of three health plans, all located in Southern California. Of those, Maxicare and Tower Health have been shut down. The third, WATTS Health Foundation Inc., is still under the management of a conservator.

Lifeguard had entered into an agreement to partner with Blue Shield of California, both nonprofit health plans. But after due diligence, the deal in August quickly fell apart.

As Lifeguard struggles financially, medical providers, hospitals and physicians are increasingly concerned about getting paid for services rendered. State law requires doctors and hospitals to continue treating Lifeguard members who are already receiving medical care. However, physicians have the right to refuse care to Lifeguard members who have are seeking medical care for the first time.

"I think it took all physicians by surprise," says San Jose urologist Dr. David Noller, who has contracted with Lifeguard for 25 years.

While he will continue to see existing patients who are members of Lifeguard, he says he will no longer take any new patients.

"We have a loyalty to our patients," Dr. Noller says, but "I hope that if the insurance doesn't pay us, then the patient will feel [that] the moral thing for them to do is pay us."

By law, doctors may not demand payment from patients for unpaid services by an insurance company.

Many physicians and hospitals in Silicon Valley say they liked dealing with Lifeguard because the company is smaller and easier to work with than other statewide or national health plans.

"They are one of our lowest payers compared to other health plans in the market, but we liked them and our doctors liked them," says Bill Piché, CEO of Good Samaritan Hospital.

Lifeguard's debt is about $8 million for the three HCA Inc. hospitals in San Jose — Good Samaritan, San Jose Medical Center and Regional Medical Center. About $6.5 million of that total debt is at Good Samaritan alone, says Mr. Piché.

Lifeguard's financial woes, which have been worsening in recent years, spiraled downhill in the last three months, according to records filed in the courts.

The company is required by law to maintain a cash reserve of $17.2 million to pay providers for medical services delivered to members. But that reserve dipped to $16.1 million in May. Then in June cash reserves fell to $12.8 million; in July reserves dove to $5.9 million.

Employers aren't waiting until conservator Richard Diamond of Danning, Gill, Diamond and Kollitz decides what to do with Lifeguard and its 168,000 members. The city of San Jose is one of Lifeguard's largest accounts, with 2,000 members.

Deputy City Manager Kay Winer says city employees have two other health-care provider options — Blue Shield of California and Kaiser Permanente. Health plan open enrollment for city employees starts at the end of October. A majority of valley employers, both private and public, have open enrollments in the fall.

Ms. Winer says the city was informed about Lifeguard's financial troubles several months ago, but was told the company had asked the state for more time to get its cash reserves up. That application was denied.