QuagMeyer: A cautionary tale of a failing medical practice

An Illinois medical group is in bankruptcy court after a 10-year streak of business decisions gone wrong put it in a multimillion-dollar hole. The doctors affiliated with that group likely will never see the money they're owed.

By Bob Cook, amednews staff. Oct. 7, 2002.

Meyer Medical Group died in September at the age of 89. There's some question whether the cause of death was murder or suicide. But it's clear that the group left no inheritance.

The southwest suburban Chicago medical group filed for Chapter 11 bankruptcy reorganization on May 8 with $36 million of claims against it -- $31.6 million by physicians. On Sept. 5, the group threw in the towel by electing to liquidate. Meyer lists $4.4 million in receivables and claims against insurers as potential saleable assets. With bankruptcy law placing physicians in line behind attorneys, banks and the Internal Revenue Service, it is virtually assured that none of the doctors will ever see the money they're owed. Some physicians' claims ran into the hundreds of thousands of dollars.

89-year saga
What went wrong?
Region: Midwest

The Meyer bankruptcy is a case study in how business issues can wreck a practice. Meyer tried to stay ahead of the managed care curve, but instead their efforts got them swallowed up in infighting, court battles and mountains of debt.

"If nothing else, this has been an education," pediatrician Martin Borenstein, MD, said ruefully.

Dr. Borenstein, who left Meyer in July to start his own practice, put in a claim for $220,000 of unpaid salary and benefits.

Meyer's president, pediatrician Michael DeStefano, MD, blames HMOs, particularly BlueCross BlueShield of Illinois, for his group's troubles. According to U.S. Bankruptcy Court filings, the Blues represented about 75% of the group's $40 million-plus annual revenue. Dr. DeStefano said the Blues' capitation payments -- quoted in court documents as $40 per member per month -- were insufficient. In court documents, Meyer said the practice would need $60 per member per month to break even. Citing complaints from specialists who hadn't been paid for Meyer referrals, the Illinois Blues terminated its contract with Meyer effective July 31.

Physicians hold $31.6 million of $36 million in claims against Meyer Medical.

"I don't want to say too much, because we will be in litigation against [the Illinois Blues]," Dr. DeStefano said in his office in Meyer's Merrionette Park, Ill., headquarters, which now has only one of four exam centers in use and a "space for rent" sign in front. "But you never want to become too dependent on a single source of revenue for your business."

But the Blues plan -- and even some Meyer-affiliated physicians -- blame the group's fall on its leadership. The inability to pay specialists, said Blues spokesman Tony Rau, "was mismanagement" -- a charge Dr. DeStefano denies.

Dr. Borenstein was one of a trio of physicians who in 1999 sued, unsuccessfully, to stop a Dr. DeStefano-led group from acquiring the practice from the University of Chicago Health Systems, which was selling it after an ill-fated, money-losing 5-year marriage. "After the physicians bought it back, a lot of physicians thought [Meyer] would be viable," Dr. Borenstein said. "And it turns out it wasn't."

For now, the group is functioning, but it's down to 13 doctors from a high of more than 50. Dr. DeStefano has incorporated a new group that hopes to acquire Meyer's assets out of bankruptcy.

Bankruptcy is rare among physician practices. About the only other notable large-group bankruptcy this year is a Chapter 7 liquidation filing in April by the 40-physician Lansdale (Pa.) Medical Group. But its filing was merely a way to break the multispecialty group apart into single specialties. "Most people just work through these problems," said Gary Janko, president and chief executive officer of Access Partners, a Boston-based physician consulting firm.

But problems had been building in Meyer for 10 years before the bankruptcy filing -- problems that ended up being too big and expensive to just work through and problems that most Meyer-affiliated physicians contacted by American Medical News didn't want to have to ever talk about again.

Riding the managed care trend

The irony of Meyer perhaps being killed by managed care was that it was one of the first groups in Chicago to embrace it.

Meyer was founded in 1913, and physicians describe the longstanding business culture as one that was conservative -- don't spend money until you have it. On the other hand, John Meyer, MD, the son of the founder, was not shy about what he saw as the benefits of managed care, especially its promise of wellness treatment. "He was an advocate of preventive care," said F. Wilford Germino, MD, a pediatrician who joined the group in 1982. "A lot of health insurance 20 years ago didn't pay for routine screenings and wellness exams."

Meyer grew from 8 physicians in 1980 to 43 by 1993.

Being among the few groups taking managed care contracts meant that Meyer could get a lot of them, and that required the group to grow -- from eight physicians in 1980 to 43 by 1993.

About that time, Meyer began looking for a hospital partner, Dr. DeStefano said. In 1994, the group formed a joint venture with the University of Chicago Health Systems, creating a physician entity called Chicago Partners. For that, UC Health Systems paid $11.5 million, according to court documents in a lawsuit Meyer filed against the system in 2000.

Dr. Meyer was involved in early talks with hospitals, Dr. DeStefano said, but bowed out because of illness (Dr. Meyer died in 1997). Physicians give differing reasons why they signed on with UC Health Systems. Dr. DeStefano said it was driven by the desire to link with a strong hospital system. About that time -- 1994 -- many physician groups began to sell assets en masse to hospital groups or physician practice management companies, thinking that commanding market share would be key to business growth in a managed care environment.

"Everybody was in the process of developing practice management companies and trying to preserve market share by joining with university systems," he said. "Plus, then we could get subspecialty backup."

Dr. Borenstein has a different memory. With a leadership vacuum created by the death of Dr. Meyer, as well as the group's longstanding philosophy of making decisions in a democratic way, there was tension between physicians over the group's future. As Dr. Borenstein recalled, the debate was, "Should we grow and expand, or should we sell to a larger entity?" The physicians' agreement to link with UC Health Systems was, as much as anything, throwing in the towel on the idea that they could run their practice themselves, Dr. Borenstein said.

As with other hospital-physician group mergers, the UC Health Systems-Meyer deal didn't work out as planned, despite the venture's investment of millions of dollars in expansion and the hiring of 12 additional physicians. "The patients in the suburbs did not see the need to go to UC, unless they had a heart transplant or an odd malignancy," said Dr. Borenstein. "And the [UC] subspecialists weren't interested in coming to the suburbs."

Bankruptcy is rare among physician practices.

While not quite as harsh about the deal as Dr. Borenstein, Dr. DeStefano did agree that "we weren't able to develop the deal to its full potential."

So in 1997, UC Health Systems and Meyer tried another arrangement to salvage the partnership. The system paid $14 million for the stock in Meyer it didn't already own, and Meyer physicians became UC Health Systems employees, getting 5-year contracts with guaranteed incomes and noncompete clauses, according to documents in Meyer's lawsuit against UC Health Systems. The practice's ob-gyns didn't take the deal -- instead, they got a promise by UC of 125% of Medicare pay for referrals and other benefits to forgo their share of the purchase price.

By selling out, "we believed at the time we'd be able to devote all our time to the practice of medicine," Dr. DeStefano said. "We didn't want to devote our time to running a business. For the most part, that's the way it was."

But UC Health Systems still lost money.

Back to the doctors

UC Health Systems wasn't alone. Consultants at the time reported that at least 80% of hospitals lost money on their physician groups, mainly because the expected referrals didn't come, or because they sunk too much money into groups as reimbursements declined.

Why UC Health Systems sold the practice, as well as a practice it had in Chicago's northwest suburbs, to Dr. DeStefano and seven other Meyer physicians is in dispute. In a civil lawsuit filed by Meyer against UC Health Systems affiliates in 2000 in Cook County Circuit Court, the practice said the sale was made "under duress and under coercion" because it was the only way Meyer physicians could split from UC Health Systems and not be held to covenants restricting them from practicing within the Meyer coverage area. UC Health Systems denied the charge.

But a 1999 lawsuit filed in the Circuit Court of Cook County Chancery Division by Dr. Borenstein, Dr. Germino and internist Kevin Germino, MD, all with Meyer, alleged that the Dr. DeStefano-led group was eager to purchase the practice. The doctors sued UC Health Systems to stop the sale, claiming that the Dr. DeStefano group was undercapitalized and meant to cut the number of referring specialists, thereby harming patient care. But a judge refused to grant their request for a temporary restraining order (the lawsuit itself was dismissed in 2000), and the deal closed on April 1, 1999.

The deal wasn't a straight sale. Instead of an up-front cash payout, Meyer would instead pay $8 million, plus interest, over the next 10 years to Chicago Partners, a managed services organization controlled by UC Health Systems. The practice also would take on the HMO contracts that previously had been signed by UC Health Systems.

In a year's time, Meyer and Chicago Partners would sue each other. In a $9.8 million lawsuit against Chicago Partners, Meyer claimed that it was entitled to terminate its contract with the MSO because it overbilled the practice for services and mismanaged its finances, including an increase in accounts receivable to $3.8 million (from $1.5 million) and an increase to 117 days from 70 days in the amount of time it took to reimburse a claim.

On the other side, Chicago Partners claimed that Meyer missed its first payment of $1.2 million and had also racked up $3 million in back payments, late fees and interest to UC MedLabs, UC Health Systems' laboratory unit. The case has dragged on, with all parties denying the allegations against them, and was suspended once Meyer filed for Chapter 11 bankruptcy May 8. Bankruptcy offers protection from lawsuits.

Meanwhile, referring specialists were noticing that Meyer was getting worse about paying them and started refusing patients, Dr. Borenstein said. The specialists complained to BlueCross BlueShield of Illinois, which had signed its most recent contract with Meyer in January. On May 26, the Illinois Blues decided to cut ties with Meyer.

By that time, many of Meyer's physicians had left, and even the physician partners in 1999 were fighting among themselves. In bankruptcy court motions that were denied, three partners demanded to see audits of Meyer's finances because, they alleged, their individual $625,000 bank loans -- which all the partners took at the time of the acquisition -- weren't being paid down.

"Most doctors were giving [the Dr. DeStefano group] the benefit of the doubt, and some tried to dissuade us from our lawsuit," said Dr. Germino, one of three doctors who tried to block the 1999 sale. "The irony is, they left before we did." Dr. Germino formed a practice with his brother, Kevin Germino, MD, and Dr. Borenstein in March.

Now Dr. DeStefano is trying to form a six-physician practice, Merrionette Mokena Physicians Group, named after the two suburbs in which Meyer still has offices. The group once practiced out of eight locations.

Meanwhile, Meyer's fate continues to wind through bankruptcy court, with no end in sight.

ADDITIONAL INFORMATION:

89-year saga

1913: Meyer Medical Group founded in Chicago.
1980s: Meyer embraces managed care, based on the belief that it would lead to better preventive care. As a result of the increasing number of managed care contracts, the group grows rapidly, from eight to about 40 physicians.
1994: The University of Chicago Health Systems buys half of Meyer's stock for $11.5 million. The hospital system hopes for referrals from Meyer's primary care physicians; Meyer hopes for subspecialty backup and other opportunities from being linked with a well-known system.
1997: UC Health Systems buys the other half of Meyer's stock for $14 million. UC, losing money on the Meyer acquisition, wanted greater business control; Meyer physicians liked the idea of leaving the business to someone else. Meyer's ob-gyns, however, opt out of the deal.
1999: UC Health Systems, still losing money on Meyer, sells the group back to eight of its doctors, led by Michael DeStefeno, MD, for a promise of $8 million plus interest, paid over the next 10 years, to the UC-owned Chicago Partners managed services organization. Three Meyer doctors sue to block the deal, saying the group is undercapitalized and not equipped to run Meyer, but a Chicago chancery judge denies the request.
2000: Meyer and Chicago Partners sue each other after the group misses its first annual payment to Chicago Partners. Meyer claims it no longer owed Chicago Partners anything because it was overbilling the group and not providing services as promised; Chicago Partners claims Meyer had no right to cancel the contract and had also missed payments for lab services.
January 2002: Meyer renews its capitated contract with BlueCross BlueShield of Illinois, which represents 75% of its business. Soon afterward, specialists begin calling the Blues plan, demanding to know why they're not being paid, says a Blues spokesman.
May 8: Meyer files for Chapter 11 bankruptcy protection.
May 28: The Meyer-Chicago Partners lawsuits are suspended because of Meyer's bankruptcy filing.
Sept. 5: Meyer, which once was confident it could re-emerge from bankruptcy protection, files a liquidation plan in U.S. Bankruptcy Court in Chicago.

What went wrong?

Overheated growth: Meyer added 35 doctors over the course of a decade to its eight-physician group. Adding three or four doctors a year may not sound like much, but that can strain relationships, says Access Partners' Gary Janko. The problem is exacerbated if the physicians are spread around multiple sites -- at its peak, Meyer had eight.
Leadership issues: Meyer's philosophy since its founding was to have a democratically run organization, but a few physicians said that complicated things as the group grew. Meyer had firmer leadership in its final years, but not all the doctors trusted it, causing even more problems. "It takes a long time to build trust and collegial relationships," Janko says.
Reliance on one payer: About 75% of Meyer's business came from Blue Cross and Blue Shield of Illinois. The group said the Blues didn't pay enough, but the plan said it did. When the Blues pulled the plug on Meyer's contract because specialists complained of not getting paid, it virtually guaranteed that Meyer would never make it out of bankruptcy.