Spat between Cedars-Sinai, doctors' group illustrates new era challenges.

No case illustrates the dramatic changes taking place with national health care reform quite so well as the ongoing soap opera at one of L.A.'s premiere hospitals, Cedars-Sinai Medical Center.

Cedars remains entangled in a legal mess with a physicians' group, called Health Source Management Group, which was formerly affiliated with Cedars. The lawsuit threatens Cedars' access to the 60,000 patients enrolled with that physicians' group, which is one of the largest in California. The physicians' group claimed that it is not currently under any obligation to hospitalize patients at Cedars, but continues to do so.

On a related front, Cedars recently purchased a physicians' group called the Medical Group of Beverly Hills. Health care sources explained that Cedars' purchase of the physicians' group is a relatively unusual move. But such transactions have been becoming more common lately, as hospitals faced with an uncertain future attempt to retain and expand access to patients.

Completion of that sale is still pending approval by the Internal Revenue Service. The IRS would not comment on the purchase. But sources familiar with the deal said the IRS approval is needed because the physicians' group is probably being required to convert into a nonprofit entity to fold into Cedars, which is a nonprofit foundation.

Though still considered a large physicians' group, Beverly Hills Medical has only half as many enrollees as Health Source -- 16,000 managed care patients and 14,000 fee-for-service patients.

Several years ago, Cedars' staff doctors formed an independent physicians association, also known as an IPA, which is now known as Health Source. This was done to allow the physicians to sign on with health maintenance organizations and preferred provider organizations. When the IPA needed to hospitalize its patients it would do so at Cedars.

The doctors' ties to the insurance companies gave them access to patients who enrolled with those insurance companies' HMOs and PPOs. In turn, the hospital would be likely to benefit because those patients, when in need of hospital care, would be checked into Cedars-Sinai Medical Center.

The agreement was beneficial to both the physicians and the hospital. But, according to Michael Alper, chief executive officer of Health Source, Cedars went too far. The hospital, he said, tried to force the doctors into a new arrangement called a hospital-physicians organization. An HPO is a single corporate entity comprised of both doctors and a hospital that contracts with HMOs and PPOs. The catch was that Cedars wanted all physicians who worked with Cedars to be part of the HPO.

Under Cedars' HPO plan, according to Alper, the hospital would have a 50 percent ownership of the physicians' group in return for use of the hospital's facilities and provision of certain administrative services. Effectively, the physicians in the IPA would lose all control of their organization, said Alper.

Health Source refused to be folded into Cedars' HPO. Alper said the number of physicians in the group would have increased from 200 to over 1,000 if the group would have joined Cedars' HPO. When the Health Source first formed, not all physicians on staff at Cedars chose to give up their private practice to join the IPA.

Under the HPO plan, however, all Cedars' staff physicians would have been required to be members of the HPO.

The physicians did not want their group's membership to increase so dramatically because then each members' influence in corporate decision-making would be diluted. Furthermore, joining up with Cedars would give the hospital a role in making policy for the physicians. As it stands now, the doctors make all their own corporate policies, including which insurance plans to sign on with.

The case has been in the court since 1992, when Cedars first filed against Health Source. Last month, Health Source filed a countersuit against Cedars.

The hospital originally filed for breach of contract and sued for damages in excess of $5 million. Health Source's countersuit also alleged breach of contract, but demands more than $25 million in damages from the hospital. Sources close to the case said the two parties are currently in negotiations and a settlement is expected soon.

In court documents, Cedars alleges the physicians' refusal to allow new doctors into their group constituted a breach of contract. Cedars also alleges the physicians were under an exclusive agreement to hospitalize their patients at Cedars.

In its defense, Health Source states in legal documents that the hospital was at fault for damaging that relationship. It claims that Cedars failed to negotiate contracts with the insurance providers with which the physicians had contracts. Thus, the physicians assert, they were precluded from admitting some of their patients to Cedars.

Cedars is suing the physicians' group for more than $5 million. Health Source is countersuing the hospital for more than $25 million.

In a move separate and distinct from the lawsuit, but indirectly related, Cedars recently purchased a physicians' group called the Medical Group of Beverly Hills.

The Medical Group of Beverly Hills is, according to Chief Executive Officer Thomas Gordon, principally a primary care group. Several specialists are also members.

Gordon said the hospital bought the group lock, stock and barrel -- including all the group's medical equipment and other assets. Most likely, however, the hospital was primarily after access to the group's patients, according to health care sources.

Cedars refused to return repeated phone inquiries about its ongoing legal battles with Health Source and its recent acquisition of the Medical Group of Beverly Hills.

Alper contended, however, that both the lawsuits and the medical group purchase are part and parcel of the same problem. Even the most prestigious hospitals in the state are facing a future where they have little control over access to patients. Having a respectable name is not enough any longer because the insurance companies control which hospitals patients will be admitted into.

But hospitals, including Cedars, hope to retain and expand their access to patients by purchasing physicians' groups that have contracts with insurance companies.