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Katy Grimes

Politically connected HealthCare Partners sidestepped licensing for 10 years

Part One of a series

May 3, 2013

By Katy Grimes

One of the original pioneers of the Obamacare patient networks, HealthCare Partners, has been operating in California without the required state license. But according to health care experts and a new lawsuit, the California Department of Managed Care has known this, and allowed it for 10 years, saving HealthCare Partners millions of dollars.

HCP has flown under the radar of the California Department of Managed Health Care regulatory authority by claiming it’s a medical group, while in fact operating as an unlicensed Health Maintenance Organization. It has done so by taking standard HMO global risk for the patient — hospital care, medication and physician services.

The Affordable Care Act, also known as Obamacare, works through a network of Accountable Care Organizations providing managed health care services to all people throughout the country. Health care experts have said all along there is not enough money in the system to do what the ACA purports it can do.

The acronyms are confusing. What’s the difference between an HMO and an ACO? “ACOs amount to little more than the old HMOs of the 1990s — which Americans detested — and will yield lower-quality, centralized care that ends up costing patients more,” Sally Pipes wrote in Forbes magazine; she is president, CEO, and Taube Fellow in Health Care Studies at the Pacific Research Institute,’s parent think tank, and the author of the book, “The Truth About Obamacare.”

House of cards

HealthCare Partners, one of the original pioneer ACOs, appears to have been built on a house of cards. Charges of illegal operations, providing unlawful hospital networks, and repeated denials of care at the patient level are just some of the issues.

HealthCare Partners, hand picked by the Obama Administration, allegedly has been operating in California for one decade without the required state license, according to charges filed last September in a class action lawsuit by lead plaintiff Juan Carlos Jandres (lawsuit pdf here).

Charges include shoddy, substandard care to more than 675,000 patients in Southern California, including a disproportionate number of Latinos in East and South East Los Angeles.

The lawsuit was filed by the Johnny Cochrane law firm on behalf of Juan Carlos Jandres, a hospital worker in Orange County, and a class of other patients allegedly harmed. Jandress was denied access to a quality hospital and oncologist by HCP for nearly three years. Finally, his Human Resources department changed his medical group from HealthCare Partners to Monarch, and Jandres was allowed to go to UCLA, where doctors found a malignant tumor in his mouth.

Class action charges include that HealthCare Partners had illegally taken payments from the HMO for hospital care, and created its own substandard network of community hospitals, and then forced patients to go use its network.


HCP also has been charged with not putting aside the millions of dollars in reserves required, according to a Feb. 11, 2013 statement delivered by Our SALUD Community Advocates Nestor Valencia and Elba Romo, as delivered to the Financial Solvency Standards Board. (See Document 1, reprinted below.) Our SALUD is a health activist group whose official name is: Somos Aliados Latinos Unidos por la Dignidad (Latino Allies United for Dignity).

Advocates for Our SALUD announced Tuesday they are calling on the Department of Managed Health Care to deny an application from Los Angeles-based HealthCare Partners medical group for a Knox-Keene Act license.

Our SALUD learned only last weekend that HCP filed an application for a Knox-Keene Act license on Thursday, April 25, with the DMHC. Our SALUD has raised allegations during the past year that HCP has illegally operated as a health plan, without a Knox-Keene Act license, for more than a decade.

“The DMHC should deny HCP’s application and should immediately ban the medical group from accepting institutional risk in the future,” said Our SALUD Community Advocate Nestor Valencia. “If the DMHC approves this license, and hands down no penalty action for operating without one, then it’s a slap in the face to the nearly one million HCP patients in Southeast and East Los Angeles. HCP has put profits over patients for far too long.”

In avoiding the Knox-Keene license, HCP has also been allowed to avoid paying hefty annual fees to the DMHC, or provide regular audits to the agency, as required under state law. The Knox-Keene Act of 1975 protects health-plan members.

Questions arise about how this could have happened under the regulatory overview of the Department of Managed Health Care, the state agency charged with the oversight and regulation of health groups. The department also is in charge of the health care exchanges set up by the state to comply with Obamacare.

And this raises some serious issues at the state level surrounding Health Maintenance Organizations, Accountable Care Organizations (similar to HMOs) and other health care providers.

“I believe that HCP had always intended to get the needed Knox-Keene license to operate as an ACO and held off as long as possible [more than 10 years] to save millions of dollars,” one health care expert told me. “Those resources were used to acquired additional medical groups, allowing them to grow so big and so fast, they could merge with DaVita — a $4.4 billion merger.” DaVita is a dialysis specialist.

The merger occurred last year. Reported the Los Angeles Times, “HealthCare Partners, a privately held company led by founding physician and Chief Executive Robert Margolis, is becoming the latest big medical group swept up in a consolidation wave triggered by federal government efforts to tame rising healthcare costs.”

Health care and politics

Margolis has moved the company into the position of being the biggest ACO participating in the Affordable Care Act / Obamacare. Margolis is a well-known, politically connected campaign contributor in Democratic circles.

Obamacare was sold as a way to reduce costs through the creation of ACOs: groups of doctors, hospitals and other health care providers, “who come together voluntarily to give coordinated high quality care to their Medicare patients,” according to the federal government.

Focused on Obamacare implementation in California, HealthCare Partners has become a darling of Obamacare officials and Democratic politicians.

“The challenge ahead will be to join with other like-minded physicians and healthcare organizations to lead the transformation of the country’s health care delivery system to assure quality, access, and affordable care for all,” HealthCare Partners’ 2010 annual report said.

But four of my sources inside the health care system warn that HealthCare Partners is not what it seems. They charge that HCP worked a deal with the DMHC when the agency was first established in 2000, by which the state willfully neglected to license HealthCare Partners for more than 10 years. The DMHC is just now scrambling to get the giant health care company licensed before it becomes the largest Obamacare provider in the state.

Given that HealthCare Partners just made a formal application for licensure from the Department of Managed Health Care a week ago Thursday, some are asking why this is necessary since HCP claimed it didn’t need a state license for 10 years.

So what’s the problem?

A Feb. 28 letter (See Document 2, reproduced below) from Senate Minority Leader Bob Huff, R-Brea, to Brent Barnhart, director of the California Department of Managed Health Care, addressed some of these issues. “I am particularly interested in the Department’s intended approach to regulation of Accountable Care Organizations, and other new risk-bearing entities that will be created as a result of the Affordable Care Act,” Huff said.

“Even the slightest appearance of impropriety, whether deserved or not, can damage a regulator’s reputation and seriously hinder its effectiveness.”

Huff reiterated Our SALUD’s concern with the department’s lack of enforcement of HealthCare Partners, which has “operated for some time as an unlicensed health plan.”

Huff also stated Our SALUD’s charge either “HCP hid this from the Department, or the Department is complicit in HCP’s activities.”

There is ongoing litigation involving HCP, but Huff was more interested in how a health plan in California could possibly go unregulated for more than 10 years.

“In order for the Department to move forward and focus on the critical task of ACA implementation, it is critical that you provide a prompt, complete and detailed response to the allegations leveled by Our SALUD,” Huff said.

On April 9, DMHC responded to Huff (see Document 3, reproduced below):

“Since the enactment of the ACA on March 23, 2013, the DMHC has undertaken numerous activities to ensure that health plans are complying with the provisions of both California law and the ACA.”

Our SALUD involvement

“Our SALUD initially became involved in what now appears to be the Enron of health care when they learned of the plight of Juan Carlos Jandres, a victim of HCP’s illegal hospital network scheme,” according to Valencia of Our SALUD. Valencia also was the whistleblower in the scandal involving the city of Bell.

“HealthCare Partners, a darling in Democratic fundraising circles and one of the pioneer Accountable Care Organizations that the Affordable Care Act is predicated on, has played a shell game with its financials,” Valencia explained in Feb. 8 statement made with Elba Romo.

“The medical group bullied state officials to avoid oversight and regulation, denied care to patients, built their company through acquisitions to the point they could orchestrate a $4.4 billion merger with DaVita, an out of state corporation, thereby creating the largest health care company in the country. Put simply, DaVita bought a shell company with no business or employees,” Valencia and Romo said.

These charges and more have been confirmed by a high-level Department of Managed Health Care employee, who asked to remain anonymous out of fear of retribution.

A response from the DMHC was due April 25 about what the DMHC was going to do about HCP’s licensing. But sources inside the Capitol report Huff did not receive a response.

Serious allegations

The allegations are serious. According to Our SALUD and the anonymous DMHC employee, HCP and DaVita concealed the actual revenue streams allowing DaVita to purchase a shell company for $4.4 billion, of which 75 percent was debt. Then HCP’s largest shareholders cashed out.

HCP did not return calls about this.

Our SALUD tried to get Attorney General Kamala Harris to investigate, but never heard back from her.

Another issue was bubbling to the surface almost simultaneously with HealthCare Partners. Our SALUD had been trying to get to the bottom of the licensing issue with HCP after learning about Juan Carlos Jandres, who allegedly was prevented by HCP from receiving a proper cancer diagnosis, and the subsequent critical medical treatment. What should have been an early diagnosis of cancer ended up taking half of Jandres’ face.

HCP doctors continually referred Jandres to community clinics for treatment, instead of sending him to specialists. (Video of Jandres.)

During Our SALUD’s investigation, they discovered that Dr. Keith Wilson, regional medical director for HealthCare Partners, was also on the Board of Directors of the Financial Standards Board of the Department of Managed Health Care. “This disgrace is more evident in that Dr. Wilson has a hand in making recommendations to the Director on what licensure should be required of Accountable Care Organizations,” Our SALUD found.

When Our SALUD brought conflict of interest up with Barnhart, the director of the Department of Managed Health Care, it appeared the DMHC just got sneakier about its meetings.

“Your agency through FSSB sent out an announcement of next week’s FSSB meeting, without notifying Our SALUD,” the watchdog wrote in a Feb. 8, 2013 letter to Barnhart. They noted the Managed Health Care agency actually put the subject of Wilson’s conflict of interest on the agenda, but buried it in the middle, and neglected to notify the interested parties.

And the agency incorrectly identified Wilson as being affiliated with a different medical group — deliberately, charged Our SALUD, to minimize the conflict.

The question remains: How could a gigantic HMO have been allowed by the DMHC to operate in the state without a license?

Managed Care agency speaks

In the April 10 return letter to Huff, the DMHC acknowledged that HealthCare Partners Medical Group had been operating without a license, and tried to shrug it off as a legitimate technicality of the Knox-Keene Act.

“Some existing licensees have created products they have labeled ‘ACO,’” the DMHC wrote. “These products typically utilize narrow provider networks designed to control costs, improve quality, and keep premiums low while complying with the Knox-Keene Act. In practical terms, this is consistent with the intended purpose of ACO’s.”

The DMHC said that, because of this “practical” intended purpose, “there is no need for them to be separately licensed, although the products must be approved by the DHMC.”

The ‘Enron’ deal

According to a story in Business Wire, “HealthCare Partners acts like an HMO by creating a contracted network of hospitals, but is not licensed by the Department of Managed Health Care to provide medical and hospital services in California. HCP then forces patients to their substandard network of community hospitals to avoid the costs associated with other quality hospitals in the patients’ health plan network.”

HealthCare Partners has grown exponentially for years with little state regulation. According to Our SALUD and health care experts, this only serves to put HCP patients at a huge disadvantage. Hospitals cannot enter into contracts with HCP because it is unlicensed. HCP then directs patients to tiny HCP medical clinics and other facilities.

link HERE to see all of the documents

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