Column: Molina Healthcare goes to war with its founding family, affecting coverage for 79,000 patients

On May 2, 2017, Dr. J. Mario Molina, the chairman and chief executive of Molina Healthcare, stepped into the company’s Long Beach boardroom loaded for bear.

Molina was about to meet with the independent directors of the healthcare and insurance company his father, C. David Molina, had founded in 1980. In his hands was a memo explaining why he wanted them to fire Chief Legal Officer Jeffrey Barlow, whose conduct was relevant to an ongoing lawsuit filed by a former company counsel alleging gender discrimination and sexual harassment.

He also was prepared to inform the directors, whose average compensation exceeded $372,000 in 2016, that they were overpaid and underqualified for the task of helping to manage a growing company in the rapidly changing environment of the Affordable Care Act.

Molina never got a chance to make those points. Almost immediately after he entered the room, he was informed that the board had voted to fire him and his brother, John, who then was serving as chief financial officer.

“I didn’t see it coming,” Molina told me this week. “It was sort of a palace coup. The entire board meeting took about 10 minutes.”

That very day, the hastily appointed new chairman, Dale Wolf, told investment analysts that the change in management was necessary to achieve “operational and financial improvement.”

Since that moment, the company and Mario Molina have been at war.

The principal battleground is a network of 16 clinics Mario Molina purchased from Molina Healthcare after he was fired, serving mostly Medicaid patients. (In California, the program is known as Medi-Cal.) In the Medi-Cal system, the state contracts with health plans, which in turn contract with physician groups and hospitals to provide services, paying them a portion of Medi-Cal fees as reimbursements.

Mario Molina says the company imposed an unusually low reimbursement rate for 2018 on the clinics, which operate under the name Golden Shore Medical Group. That has resulted in massive losses over the last year. With negotiations on a renewal for 2019 having reached an impasse, Molina Healthcare apparently has decided to let the contract lapse entirely as of Feb. 1.

According to documents Molina Healthcare filed with the state Department of Managed Health Care, that means the vast majority of the clinics’ nearly 79,000 Medi-Cal patients must be assigned new doctors or find replacements on their own. Only about 8% of Golden Shore’s Medi-Cal patients are seen by primary-care physicians with network affiliations other than Molina Healthcare, so 92% will have to change to other insurers or change their doctors.

Almost none of the patients know this, because Molina Healthcare hasn’t sent them notifications or made any public announcement of the change; none is expected to go out by mail until Dec. 31. Although state officials discourage notification to individual patients to avoid “confusion” in case the changes don’t become necessary, nothing prevents the company from making a general announcement that a change may be pending. This column may be the first inkling most of them receive that their healthcare arrangements will be upended a mere six weeks from now.

A transfer of patients on that scale may be unusual, if not unprecedented. While medical groups and health plans routinely file transfer applications affecting even larger patient populations, those are filed while contract negotiations are ongoing and seldom result in the transfers happening. That doesn’t seem to be the case here, where there seems to be little prospect that the dispute will be resolved.

“That is a very large population of folks left out in the cold,” says Jerry Flanagan, litigation director at the advocacy group Consumer Watchdog. He notes that chronically ill patients, those awaiting surgery, pregnant women and children could be especially hard-hit. “Giving patients 30 days’ notice to find a new doctor during the holidays is like putting a lump of coal in a stocking and then lighting it on fire,” he says.

Molina and his brother were subject to a nondisparagement clause under the terms of their severance packages. The gag clause expired Nov. 2, and they’re now talking.

They say politics may contribute to the bad blood between them and the company. In early 2017, Mario Molina was virtually the sole health insurance chief executive in the country speaking up for the Affordable Care Act and against a Republican House measure to repeal it. When the CEOs of Aetna and Anthem sucked up to the GOP by praising the bill, Molina called them out for being “afraid” of President Trump.

“I couldn’t see anything that was good for the industry or for the patient in the bill,” Molina told me soon after the measure was defeated. “They were going to take money away from healthcare and use it to fund tax cuts for basically wealthy people.”

Molina says his outspokenness made the board uneasy. That was a problem, because although Molina had appointed the board members, the family’s shareholdings had shrunk to only about 25% and it therefore lacked control.

Molina pointed specifically at board member Ronna Romney, a longtime Republican Party official who is Mitt Romney’s former sister-in-law and the mother of Ronna Romney McDaniel, a Trump ally who became chairwoman of the Republican National Committee in January 2017.

Molina says Romney asked him several times to tone down his remarks and “say something nice about Trump.” Romney didn’t reply to several messages left at phone numbers listed in her or her family’s name and seeking comment.

Molina also hints at a board cabal aligned with Barlow, the chief legal officer. He says he had become increasingly mistrustful of Barlow’s leadership and judgment, concerns he was planning to share with the directors. Those concerns intensified after Erin Hiley, a former company attorney, filed a lawsuit in January 2017 alleging that Barlow had retaliated against her after concluding erroneously that she had filed a discrimination complaint against him with the company’s human resources department. In fact, the complaint was filed by a different woman.

Hiley alleged that Barlow blocked her promotion and repeatedly made disparaging remarks about her work. She also alleged that Barlow discouraged his staff members from bringing discrimination complaints to the HR department. The company eventually settled Hiley’s lawsuit on undisclosed terms. Barlow is still its chief legal officer. The company declined to comment on Molina’s assertions about Barlow.

To be sure, there could have been more traditional grounds for the board’s disaffection with the Molinas. Under their leadership, the company had grown to about 4.7 million members in 12 states and Puerto Rico, including about 600,000 enrolled in Affordable Care Act plans and an additional 673,000 in Medicaid expansion plans under the ACA. The company’s approach to the ACA resembled its traditional strategy of serving a lower-income population, especially through Medicaid.

But in late 2016 and 2017 the company fell prey to the same maladies affecting bigger insurers in the ACA universe — sabotage by the Trump administration and uncertainties resulting from relentless Republican efforts to repeal the law cut into profits.

For all of 2017, the company reported a loss of $512 million on revenue of nearly $20 billion. Investors wondered if Molina Healthcare might be too small to compete effectively in the new healthcare landscape; the company’s shares gained more than 26% in the two days following the ouster, in part because of speculation it might be sold. But that didn’t happen.

Following his ouster, Mario Molina put up about $2 million of his own money to acquire 17 clinics from Molina Healthcare in Sacramento, Los Angeles, Riverside and San Bernardino counties. One was later closed. The clinics’ patients are virtually exclusively Molina Healthcare members.

Molina says the company dithered at length before closing the deal and presenting him with a contract for 2018, leaving him little time to examine its terms before signing, if he wished to keep the clinics open. Eventually he realized that the contract saddled the clinics with an unusual level of risk and unusually low reimbursements. Among other provisions, it transferred responsibility for paying for cancer drugs and dialysis to Golden Shore, which increased the clinics’ medical costs by $9.5 million compared with a year earlier and contributed to a loss of $29.7 million for 2018, compared with a loss of $4.2 million in 2017.

The company rebuffed him when he tried to negotiate better terms for 2019, Mario Molina says. Molina Healthcare says through a spokesman that it has offered Golden Shore “reasonable, market-based rates that are on par with the rates we pay to other physician groups as well as the rates that are part of our existing contract” with the clinics.

That’s not the conclusion of David V. Axene, a Temecula healthcare actuary hired by Mario Molina to examine the contract. He concluded that the contract was materially inferior to typical contracts offered to physician groups by other insurers in the region.

Molina Healthcare paid Golden Shore less to treat patients and made the clinics responsible for a greater share of services, a double-whammy that resulted in Golden Shore receiving about half as much in reimbursement as would be appropriate.

Axene says he advised the clinics that “a substantial increase would be appropriate in terms of the level of their responsibility and what’s going on in the marketplace.” Molina Healthcare says that the rate increase Golden Shore sought for 2019 was “insupportable.”

Talks between the two sides broke down just after Thanksgiving, according to correspondence between them provided to me by Mario Molina. So at this point it seems almost certain that the patients will have to make new arrangements. Golden Shore is working on contracts with other insurers so that patients will have an opportunity to keep their doctors by changing health plans.

Molina Healthcare has been doing better since the ouster — in the first six months of 2018 it earned a profit of $309 million on $9.5 billion in revenue, compared with a loss of $153 million on $9.9 billion in revenue a year earlier. That’s due in part to a stabilization in the ACA marketplace that has benefited other insurers serving those customers. The company’s strategy of focusing on the lower-income end of the market hasn’t changed.

But the company also has run into headwinds, including the loss of Medicaid contracts in New Mexico and Florida. (The Florida contract was restored, though in more limited regions, after an appeal.)

Resolving the conflict between the company and its founding family seems to be far off. Of the company’s refusal to improve contract terms for the clinics, Mario Molina says: “It appears to be not so much a business decision, but a spiteful, personal decision. They’re effectively trying to drive us out of business.”

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

Return to Michael Hiltzik’s blog.