Fallout from A Failed Health Insurer

Katy Tamura's liver transplant didn't happen when it should have. Andrea Hudson can't get the fertility treatment she needs. Dr. Julie Quakenbush said goodbye to 600 of her patients. One local medical group alone is owed $2.4 million.

When a major insurance company goes under nowadays in California's strained health care system, the reverberations run deep. Lifeguard Insurance shut down for good on New Year's Eve, dispatched swiftly by state authorities who seized control of the San Jose-based non-profit organization in September.

But for one family, an especially bitter taste lingers. Tamura's husband believes Lifeguard stalled the partial liver transplant she needed as its business wound down. Now the Morgan Hill schoolteacher is very ill and needs a full transplant.

"I'm angry," said Irving Tamura. "Katy was with Lifeguard for five years, and when she really needed them to come through, they didn't."

The few remaining Lifeguard officials, including CEO Mark Hyde, did not return calls from the Mercury News.

Some of Lifeguard's 168,000 patients who scrambled for new insurance this fall found they would have to pay more for skimpier coverage, although everyone was able to find a new insurance plan, according to state officials.

And observers say the real losers are South Bay physicians and hospitals, who are owed millions of dollars but expect to be paid little for vaccinations, chemotherapy and other care they provided. Sixty percent of Lifeguard's patients were based in Santa Clara County.

"It's bad for the marketplace, bad for employers and bad for employees," San Jose insurance broker Peter Kuhn said of Lifeguard's demise. "The health care system is on the brink of a very severe breakdown."

Doctors and patients alike have been deeply dismayed by the collapse of Lifeguard. Well-regarded for much of its 25 years because it provided flexibility for patients and paid doctors relatively well for a health-maintenance organization, Lifeguard was long considered an honorable player in the much-despised managed- care industry.

For many South Bay physicians, Lifeguard was the only HMO they would accept.

But the company fell victim to unexpectedly expensive health care claims, a high-priced new claims processing system and a failed merger with Blue Shield.

In September, the state Department of Managed Health Care took control of the financially strapped insurer to avoid a collapse that could suddenly have left tens of thousands of people without health coverage.

A state-appointed conservator, Los Angeles attorney Richard Diamond, quickly ordered Lifeguard to shut down Dec. 31 to be able to pay its creditors. A company subdivision that sold life insurance and preferred provider health insurance was also forced to close.

Now, Lifeguard has only about $57 million on hand to pay the $91 million it owes creditors, according to the Department of Managed Health Care. The company owes $70 million in medical claims alone. Most of its 380 employees left or were let go, with only a skeleton staff of about 25 workers remaining, primarily to process claims.

Lifeguard's closing could have been much more disastrous if the company insured patients individually, rather than through their employers.

Fortunately, patients did not have to face the open marketplace in finding other insurance; they could rely on the bargaining clout of their employers for replacement coverage. All Lifeguard patients found other insurance by the Dec. 31 deadline, said Steven Fisher of the Department of Managed Health Care.

Still, the shutdown took place in a dismal year for health care that also saw the bankruptcy of the largest medical group in Santa Clara County, health care labor strikes and other battles between insurers and hospitals that left consumers in the lurch.

Many former Lifeguard patients have found it difficult to replace a unique HMO that kept costs low, substantially subsidized prescription drugs and allowed more choice than other insurers for patients to select doctors and see specialists. Employers scrambled to find new options for employees such as Blue Shield and Kaiser Permanente, but the new plans don't always stack up.

Andrea Hudson, a San Jose woman who was insured through her husband's company, was never a big fan of managed care, "but Lifeguard was pretty good for an HMO," she said.

Hudson and her family had to choose a new plan -- a Blue Cross HMO -- in November. She wishes they had picked more generous coverage despite the cost: Hudson, 34, who wants to have a baby, now needs potentially expensive fertility treatment that isn't covered by her new insurer, and she will have to pay the full costs herself.

Hudson had hoped for a less restrictive preferred provider insurance plan, or PPO, but her husband, a car dealership finance manager, worried that paying the higher 20 percent deductible for Hudson's health care could be prohibitive. HMOs typically cover more expenses. What's more, she has to find new specialists for back pain so bad it required surgery last year, although she was able to keep her primary care doctor.

"I call the doctors in the Blue Cross book, and they say they don't deal with HMOs anymore," Hudson said. "I'm really frustrated. Unless it's absolutely essential I've been blowing things off as far as seeing a doctor."

As patients make the transition to new and sometimes less palatable health plans, doctors and hospitals, laboratories and insurance brokers are quietly writing off Lifeguard losses large and small. Lifeguard has paid the bulk of its claims filed after Sept. 13, the takeover date, said a representative for conservator Richard Diamond.

But the insurer still owes millions to health care providers, most of them in the South Bay. Sunnyvale-based El Camino Medical Group is owed $2.4 million, while Regional Medical Center of San Jose, San Jose Medical Center and Good Samaritan Hospital are collectively due $8 million.

Private doctors were hit hard as well -- and they are furious. State law prevents them from refusing to see patients covered by HMOs in financial straits or billing patients directly when an HMO won't pay.

San Jose urologist Dr. David Noller doesn't expect to see a dime of the $80,000 he is owed. "We've continued to see patients free of charge, which is much more moral than what executives at Lifeguard were doing," he said. "They're just a bunch of scumbags."

Quakenbush, a Los Gatos internist, accepted Lifeguard for 14 years. It was the only HMO her two-doctor family practice would allow. Some physicians refuse to take HMO plans, favoring other types of plans they believe pay higher reimbursements and require less paperwork.

"The only reason we hung in there with Lifeguard was for our patients," she said.

Now, 600 of her 2,700 patients have been forced to choose other doctors -- and Quakenbush, like Noller has vowed never to accept another HMO. She is owed about $5,000, but "it's about the emotional, personal level, not the finance level. It's the people you've taken care of for years, and now they're gone. We had this huge history together."

Insurance brokers, too, are owed thousands, including Peter Kuhn, whose San Jose company IBP Insurance Services handled 5,000 employees on Lifeguard.

"We're disappointed they weren't more candid with us about how desperate their situation was," Kuhn said.

No one is expected to be paid until the fall for claims filed before Sept. 13, according to the conservator's representative. But at the very least, state health officials were able to prevent a local crisis and ensure that creditors get paid at least a little of what they're owed. Other insurance company shutdowns in recent years have left patients and creditors completely in the cold.

"We took over because of a real threat of a health care disaster," said Steven Fisher of the Department of Managed Health Care. "We understand this is not an ideal situation, but it's light- years ahead of what could have happened."