Bitter Medicine

How Naiveté, greed, and the new new thing brought Brown & Toland, San Francisco's largest doctors' group, to the verge of bankruptcy

As a boy living behind the Iron Curtain, Michael E. Abel obsessively read and reread The Stars of Eger, a novel about courageous Hungarians fighting off a Turkish invasion in the year 1552. Off on his own real-life adventure, young Abel immigrated from strife-torn Hungary to the United States in 1968, entered and completed medical school at Case Western Reserve University in Ohio, and made his way to San Francisco, where he created a successful medical practice as a colorectal surgeon. As if that weren't enough achievement for a lifetime, in 1992 the courtly doctor was invited to join the board of directors of an independent physicians' association based at San Francisco's California Pacific Medical Center. Four years later, Abel's organization renamed itself Brown & Toland Medical Group, and Abel, the doctor, became Abel, the prominent businessman.

He'd come a long way from teenage day dreams about saving a nation.

To form Brown & Toland Medical Group Inc., hundreds of doctors based at California Pacific and hospitals at the University of California at San Francisco joined together, and then aggressively recruited others. At the height of its influence, Brown & Toland's 2,000 doctors practiced in an area stretching from San Francisco to Stanford University in Palo Alto. About 30 percent -- or 1,400 -- of San Francisco's working physicians signed contracts with Brown & Toland, and 240,000 premium-paying patients followed their doctors into the orbit of the new medical group.

Because it negotiated as a collective force with the dozen health maintenance organizations that insure the San Francisco market, Brown & Toland could obtain better pay for its members than the individual doctors would have been able to secure by themselves. According to Abel, who more than any one person has shaped Brown & Toland, the doctors wanted to use their combined financial clout to reap profits that could be invested in other moneymaking businesses. That is, the doctors wanted to mimic the financial methodology of their longtime nemeses -- rich, highly diversified insurance corporations.

Abel hired Joe O'Hehir, who had worked in the business side of health care management for 20 years, to run Brown & Toland, and O'Hehir in turn hired an experienced senior executive, Louis J. Mautone, as chief financial officer. Working closely with the board of directors, O'Hehir and Abel sold other medical groups computerized services for billing, record-keeping, and data-crunching. They signed cooperative agreements with doctors in Modesto and expanded into San Mateo County. They set up a Brown & Toland branch office in the Central Valley. They even pulled a Hawaiian group into the network.

And then they entered into a lopsided $25 million deal with an Internet start-up, Healtheon Corp., and its charismatic leader, Jim Clark, whose risk-taking exploits have been popularized by the best-selling book The New New Thing. Among the new things Brown & Toland got from the Healtheon liaison were millions of dollars in losses, expensive record-keeping software that is now obsolete, and some questionable stock transactions that appear to have given Brown & Toland executives and board members large profits not available to Brown & Toland itself.

A series of financial miscalculations that were hardly limited to the Healtheon deal soon brought the medical group to the verge of insolvency, where it now remains. Just seven months after he started with Brown & Toland, Mautone was escorted out the door -- after accusing O'Hehir of asking him to falsify the books.

Now, if Brown & Toland fails, the doctors who once saw the group as a way to improve their financial lot may lose tens of millions of dollars. And if the medical group goes bankrupt, a quarter-million San Franciscans will be scrambling to find new doctors -- and, most likely, paying higher rates for medical coverage.

Medical groups, or independent physicians' associations (IPAs), became all the rage in California a decade ago. During the 1990s, California's doctors start- ed 300 such medical groups, hoping to negotiate better financial deals for themselves with HMOs. The medical groups moved into middleman positions; rather than paying physicians directly for services, the insurance companies started paying the medical groups, who paid the doctors after subtracting a cut for administrative expenses. This arrangement reflected startlingly different views of health care economics: The HMOs hoped to be able to cut their overhead costs by passing them on to the medical groups; the medical groups, on the other hand, hoped to use their leverage to negotiate increased HMO payments to doctors.

In general, the HMOs won, outnegotiating medical group after medical group -- including Brown & Toland -- in regard to per-patient payment rates. In this respect, then, Brown & Toland's financial problems are not unique. California's doctors are in trouble. A recent study by the California Medical Association shows that one-third of the state's IPAs have declared bankruptcy in the last three years, and 90 percent are in imminent danger of folding. The level of incompetent and questionable behavior surrounding Brown & Toland's decline seems, however, to put this medical group in a special class.

Brown & Toland bet on its future impulsively. The doctors took on the mammoth costs of treating a city full of patients in return for tens of millions of dollars in regular cash payments from HMOs. Buying into the doctors' gamble, the state of California licensed the medical group as a health care insurer, requiring it to keep only a few million dollars in reserve to cover potentially disastrous losses.

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