In the December 1999 issue, I wrote about claims downcoding and intentional payment delays, two troublesome and infuriating trends we're seeing from HMOs and other third-party payers around the country ("When Payers Don't Pay," page 31). Problematic as those trends may be, the payers eventually do pay most physicians, even if the amount is disputed.

But another, more frightening and dangerous trend is the financial collapse of some third-party intermediaries and their subsequent default on provider claims. Third-party intermediaries exist in many forms, including independent practice associations (IPAs), physician practice management companies (PPMCs) physician hospital organizations (PHOs), medical groups and single-specialty carve-outs, such as vision and eye- care networks.

As more of these agencies go out of business, physicians, physician groups and institutions have been left with stacks of unpaid claims amounting, in some cases, to millions of dollars. Because this is happening all around the country, it merits your attention and, perhaps, some pre-emergency planning.

When a third-party intermediary goes belly up, the providers naturally ask, "Who's going to pay my claims?" During the long months waiting for payments, providers have found that little, if anything, will be forthcoming from a failed intermediary. If any of its managers are still around, they're probably running in circles trying to deal with the chaos. So getting no satisfaction, the providers contact the health maintenance organization (HMO) for help.

Not surprisingly, the HMO's response runs something along these lines: "Our contract was with XYZ, not with you. We've already paid XYZ for your services (usually capitation). If XYZ could not manage utilization and costs, then we're sorry, but we've paid once. We can't be expected to pay twice for the same services. You need to seek redress against them -- they held your provider agreement."

And therein lies the sticky problem for physicians like you. When you're in one of these arrangements, you don't have a direct contractual link to the HMO and, therefore, it's historically been anything but clear if the HMO has a responsibility to you when its contracting partner fails. It's clear that many HMOs are signing risk agreements with inexperienced, undercapitalized third-party intermediaries that are unqualified to manage risk. But there's nothing to prevent an HMO from signing such deals. Oversight on this matter is woefully lacking in most states.

For physicians, the default problem really is a bifurcated dilemma:

• The nature of the relationship.
If you want to see patients from a particular HMO, you have no choice but to sign on with the intermediary. After all, the HMO is no longer executing individual provider agreements. Thus, you're forced into a relationship that, by its nature, distances you from the health plan. That's going to be a problem if the intermediary falters.
• Lack of control.
Unfortunately, you have no idea what kind of deal the intermediary has signed with the HMO. Did it negotiate for adequate funding to cover each month's utilization? Or did it "buy" market share with the contract, focusing on covering its own costs and profit margin -- and giving only secondary regard to what's left for claims?
Did the intermediary allocate adequate risk reserves? Did it secure solid historical utilization and cost data before signing a deal, which, ultimately, could put you at risk for unpaid claims if everything collapses?
The reality is that your success (survival) totally depends on things outside your control. That's a huge problem we see unfolding as more and more third-party intermediaries collapse.

Given that physicians wishing to see patients have no choice but to sign on with an intermediary that may be built on a very unstable foundation, is an HMO responsible when that duly contracted intermediary fails to meet its obligations? The answer appears to be yes, no and we'll see. In Maryland, the December 1999 answer from the Insurance Commissioner was "Yes, pay the claims including interest." In California, the January 2000 answer from a Superior Court judge was "no." In Colorado, the early 1999 answer from the Insurance Commissioner was "yes," but some HMOs have failed to make good on the claims.

Many other states are looking at the problem and trying to decide if action is needed at the regulatory or legislative level -- or at both levels. It seems clear that something is needed to hold HMOs at least partially accountable for their choices of intermediaries, or to at least limit those choices to intermediaries meeting a reasonable set of financial and management criteria.

Legislators are starting to appreciate that HMOs shouldn't be free to cut deals with third-party intermediaries without also assuring some reasonable measure of protection for the providers. These legislators recognize that providers ultimately bear the risk but have no say on the financial terms of the deal -- and have little or no say on how the contract is managed. HMOs will likely find that they can't walk away from all fallout and collateral damage.

Legislators are also starting to appreciate that a lot of poorly managed, undercapitalized third-party intermediaries have no business taking these contracts in the first place. Strong regulatory requirements or legislation should put many out of business and keep others from getting into the game. And there's probably nothing wrong with that.

After all, if HMOs are forced to pay twice, essentially removing the risk from poorly managed intermediaries (and, significantly, also from the providers), then the fundamental concepts of responsible risk contracting -- utilization/cost management and efficient use of resources -- fly out the door.

It seems clear that both HMOs and their intermediaries will be subject
to increased scrutiny. For example, California now requires that intermediaries disclose financial information that hasn't always been shared in the past with their HMO contracting partners. This means that the HMOs will have to pay some attention to factors other than cheapest price.

It's likely we'll see changes in the financial solvency and risk reserve requirements for intermediaries. These changes certainly will reduce the number of third-party intermediaries, and should make the playing field a little less dangerous for financially vulnerable providers (by limiting large-scale risk contracting opportunities to fewer, but likely more durable, candidates).

No matter what the future brings, it's still your responsibility to enter into contracts with eyes open. Understand your provider agreement and the risks associated with being a sub-contracted provider. Your rights and remedies aren't necessarily clear when you're not directly contracting with an HMO.

So pay attention to what's happening. If your receivables start getting out past 30 or 45 days, and if you're having consistent problems of any kind with an intermediary, perhaps it's time to exercise your termination options.

You may have nothing to lose. What good is it to continue seeing patients if it's increasingly likely you're not going to get paid? Better to walk, cut your losses and avoid future financial damage.