PacifiCare ordered to pay $6.9 million to bankrupt IPA

Physicians who have waited years to receive compensation from a now-defunct Dallas IPA could have a better shot of at least seeing some of that money because of an arbitrator's decision that PacifiCare Health Systems owes the IPA about $7 million.

Heritage Southwest Medical Group Inc., forced into bankruptcy three years ago and caught up in protracted litigation ever since, was told by the arbitrator that it's entitled to the money from PacifiCare in part because the Cypress, Calif.-based insurer improperly terminated its contract with Heritage before it began negotiating separate contracts with many of the IPA's 700 doctors in 2001.

In August, a Texas arbitrator said PacifiCare owed Heritage $6.9 million, ruling that PacifiCare didn't give Heritage the required 120 days notice before ending the contract.

The arbitrator also determined that the IPA was misled by PacifiCare because Heritage didn't have enough information on profit potential or how capitation rates were determined, said Devan Beck, an attorney for the IPA.

A PacifiCare spokesman declined to comment, saying the matter is still being litigated.

In 1998, Heritage had signed a contract with PacifiCare for its primary doctors, specialists and hospitals to treat the managed care company's HMO members in the Dallas-Ft. Worth area.

Within two years, many delays reportedly occurred in the payment of monthly capitated fees from the IPA to doctors, causing a local health plan, two medical groups and three physicians to sue Heritage in an attempt to hasten payment.

The situation was complicated when PacifiCare cancelled its contract with Heritage in June 2001, halting its capitated payments to the IPA and drying up Heritage's main source of funding. This prompted the IPA to declare Chapter 7 bankruptcy within a few months.

Heritage sued PacifiCare in response, claiming the insurer backed out of the contract with insufficient notice.

PacifiCare later countersued, charging that Heritage owed it about $20 million in claims paid out to the IPA after the termination of the contract.

But the Texas attorney general filed its own suit against PacifiCare in 2002, accusing the plan of having failed to monitor Heritage as well as two other troubled Texas IPAs to be certain they were reimbursing physicians correctly and on time.

PacifiCare ultimately paid Texas $4.25 million in fines, administrative costs and legal fees to settle the state's suit and agreed to arbitration.

PacifiCare can bring the arbitrator's decision before a judge to try to get it set aside.

The $6.9 million consisted of more than $2.1 million for unpaid capitation payments, more than $3.5 million in lost profits, and about $1.2 million in legal fees, Beck said.

It is unclear exactly how much money doctors awaiting payment from Heritage may ever see from the arbitration award because any funds held by the IPA will be tied up in bankruptcy court pending final liquidation, Beck said.

The net effect of the arbitrator's decision, if it stands, will probably be to give the bankruptcy trustee about $2 million in additional funds from which to distribute money to physicians, attorneys for Heritage said.

Heritage also has asked a state judge for an additional $9.4 million in damages and interest, Beck said. That request is pending, but if approved, could increase payments to doctors further, he said.

Mark Altenau, MD, an otolaryngologist in Dallas and one of the physicians who sued Heritage in 2001, said he is still owed about $49,000 by the IPA. He is pessimistic about any future outcome.

"The lawyers get their money, and I don't expect to receive anything," he said. "I won't get a dime. I won't hold my breath."

Attorneys acting as trustees for the bankruptcy case could not be reached for comment.