- 8 -
with HMOs, collected capitation fees paid under those contracts,
and distributed them to member physicians. UHMG contracted with
a third-party administrator to perform the latter two functions
for a fee of 15 percent of receipts. UHMG performed no other
consolidated functions for its member physicians, such as other
billing, patient record keeping, appointments, employment of
staff, etc. Its member physicians continued to operate
independent practices and to directly bill fee-for-service and
preferred provider organization (PPO)7 patients.
III. Decision To Affiliate
A. Necessity of Affiliation
By approximately late 1992 or early 1993, several factors
prompted petitioners to consider affiliating with a larger health
care organization. The penetration of the HMO model into the
Davis area had become substantial. The principal employer in the
Davis area, UC-Davis, faced with burgeoning costs in providing
conventional fee-for-service health insurance coverage, arranged
to have HMOs among the health insurance options for its employees
6(...continued)
although UHMG's approximately 70 shareholder/members also
included physicians who did not participate in the transactions
at issue.
7 A PPO is an organization created by an insurer consisting
of physicians and/or other health care providers who individually
contract with the insurer to provide medical services to its
insureds for reimbursement at a discount. The insureds have an
incentive to use the insurer's "preferred providers" because the
out-of-pocket costs of doing so are reduced.
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