Proposal could lift fee limits imposed on HMOs by state

The way that state regulators levy penalties and fees on HMOs is coming under intense scrutiny in the Capitol. And now one Democratic senator is trying to remove what is effectively a limit on fines against health providers.

The Department of Managed Health Care collected record fines of $4.8 million from the industry in 2007, but the department only budgets for a 5 percent reserve. If high fines are collected, and the department's budget reserve swells, the department lowers other fees that it collects from the industry to bring its reserve back under 5 percent.

The department is supported primarily by an annual assessment on each HMO. That fee is determined in part by other sources of income for the department, including money from fines. So, in effect, the more money the department collects in fines, the lower the annual assessments. Critics of the system contend the money is simply being returned to the same insurance providers who are being punished by the department.

"It makes as much sense as my old traffic tickets being credited toward my vehicle license fees," said Sen. Alex Padilla, D-Van Nuys.

The first major legislation on the issue is authored by Senate Budget Committee Chairwoman Denise Ducheny, D-San Diego. It would take about $2 million annually in DHMC-collected money and divert it to a program sponsored by the California Medical Association, which provides grants and loans to medical students in return for their agreeing to serve in areas where doctors are scarce. Medical students end up with big outstanding loans – averaging $85,000, by one estimate – and they gravitate toward patient-rich areas for pocketbook reasons.

But as politicians begin focusing on the fee structure of the DMHC, ideas have been proposed about how to spend the department's "extra" money.

"There's a lot of ways to spend that money to better improve health care for Californians, and Ducheny's bill is the first in that effort," said Padilla, a member of the Senate Rules Committee. "I would like to leverage that possible source of funds for obesity prevention, diabetes awareness, things like that."

Ducheny's bill would provide funds for a program that has been supported in the Legislature, but which is now out of cash as the state faces a tight budget year.

"When students are graduating with these enormous debt amounts, it makes it much more difficult to serve in communities where the salaries aren't that high, in the inner city or in rural communities," Ducheny said. "The concept behind the program was the same as for teachers, to provide student loans for teachers who agreed to serve in those communities."

The DMHC, like several other state agencies, is supported by industry licensing fees and is the state's primary managed health care regulator. But when the agency was created back in 2000, industry officials wanted assurances that the state was not simply creating a new state regulator with financial incentives to levy heavy fines against the industry.

Some consumer advocates say the urge to limit fines is an overreaction and unnecessary. "That seems really unfair," said Jamie Court of the Foundation for Taxpayer and Consumer Rights. "I can see why they originally didn't want to have an incentive for a regulator to come in and build up their budget with big fines. But with all the scrutiny, it's hard to see in this day and age why and how a regulator would do that."

The HMOs themselves, however, don't see it that way.

"Over the years, every year, the amount of the fines has continually escalated. Last year, there was a $1 million fine – that was a milestone," said Nicole Kasabian Evans, a spokeswoman for the California Association of Health Plans. "We don't see the concerns about the DMHC fee structure schedule or the way it functions. … It doesn't seem like the department has been reluctant to levy fines and penalties."

But using fees to help place doctors across the state has raised concerns from HMOs. "We're still reviewing that. But using state government funds that were there for the purpose of helping consumers and moving them over to support that program – is that the best use of these funds?" she said.

Padilla remained critical of the notion that fines were a deterrent.

"If we're still seeing violations of this magnitude, obviously not," Padilla said referring to the million-dollar levy. "For all the attention the record fines have been receiving, when you hold that up against the record profits from the industry, you have to ask yourself, ‘Is this enough?' Clearly, they are not the deterrent we thought they'd be."