Legislature considers two HMO-reform measures.

Overhead would be limited to 15% of premium dollars

California doctors are sponsoring two bills to reform health maintenance organizations. One would cap HMOs' profits; the other would require a state panel of experts to examine how HMOs decide which medical treatments to cover.

The California Medical Association, a Sacramento-based trade group that represents doctors, asserted the bills are necessary in an era of health care reform to protect consumers from HMOs.

According to the association, HMOs have been "reducing reimbursement rates and increasing premiums" while "profits and administrative costs are going through the roof."

One of the bills, AB 3801, authored by state Assemblyman Burt Margolin, D-Los Angeles, would require HMOs to spend at least 85 cents of every premium dollar on medical treatment. Administrative costs, commissions and profits could not exceed 15 cents of every premium dollar.

"The theory is, when consumers pay out this money, they should have a reasonable expectation that the bulk of the (money go to medical treatment) ... not to corporate profits," Margolin said.

To comply with the bill, managed health plans with non-medical expenses in excess of 15 percent of total premium dollars would be pressured to reduce the amount of resources allocated to such overhead expenses and redeploy those resources toward expanding benefits, said Danielle Walters, a spokeswoman for the California Medical Association.

Or, another strategy HMOs could use to come within the 15-percent cap would be to reduce premiums. Thereby the same dollar amount of non-medical expenditures would constitute a smaller percentage of total premium dollars.

"If (HMOs) comply with the 15 percent (cap on non-medical costs) by reducing premiums, that would mean close to $600 million statewide that would be returned to consumers and businesses," Walters said.

According to a recent financial study of HMOs by the physicians' association, the state's largest HMOs spent between 4 and 31 cents of every dollar on administration costs, taxes, advertising and executive compensation in fiscal 1992.

Pasadena-based Kaiser Foundation Health Plan Inc., California's largest health plan, used only 4.7 percent of its premium dollars on administrative costs. But Wellpoint Health Networks Inc., a subsidiary of Blue Cross of California, used 30.9 percent of premium revenues for administrative costs and profits.

The California Medical Association's study gathered data that HMOs had reported to either the state Department of Corporations, which regulates health plans, or the Securities and Exchange Commission, which regulates public companies. It focused on "medical loss ratios," which measure the portion of insurers' revenue that goes toward patient care, as compared to various administrative costs.

HMO officials dismissed the significance of the study, saying it was "full of flaws and inaccuracies," that it only looked at one year of time and showed profits before taxes.

Deborah Kelch, director of policy for the California Association of HMOs in Sacramento, said HMO premium increases have been "controlled." Kelch elaborated that the rate at which HMO premiums have been increasing has been declining significantly over the past five years.

Specifically, the average HMO premium nationwide in January 1994 was 5.6 percent higher than a year earlier, while the average premium in January 1993 was 8.1 percent higher than the year earlier, according to Group Health Association of America, a non-profit group that monitors HMO premiums and other statistics. Kelch added that no other segment of the medical community has a cap on profits.

"Study after study has revealed that quality of care (given by HMO physicians) is at least equal to the care provided by (fee-for-service physicians)," she said.

Margolin, chairman of the Assembly's Health Committee and a long-time advocate of consumer protection health care reform issues, also is running for state insurance commissioner.

About 11 million people in California, roughly one-third the of state's population, are enrolled in HMOs. The increasing movement toward such managed care plans has been causing the market share of fee-for-service care providers to shrink.

Margolin's other bill, AB 3571, would create a state panel of medical and scientific experts to determine whether certain procedures, drugs, services or devices may be excluded from coverage by health plans and insurers on the grounds that such measures are experimental or not medically necessary.

"This is a logical, rational way to determine what services should and shouldn't be covered," said Walters of the California Medical Association. "These decisions now are generally being made in the courts...unfortunately, usually after the patient has passed away. And it's the families bringing these claims up."

Margolin said the bill was prompted by a case involving Woodland Hills-based Health Net, the state's second-largest HMO. In January, a Riverside County jury awarded $89 million in damages to the family of a woman who died after Health Net refused payment for a controversial bone-marrow transplant to cure her breast cancer.

While Health Net deemed the transplant an "experimental" procedure and, thus, not covered by her policy, the jury concluded the company refused to approve the claim merely because it wanted to save money.

Margolin said the face of HMOs has changed since the 1980s, when most were not-for-profit. Today, a growing number of managed health plans have switched to for-profit status and many are now publicly traded companies.

"We don't want to have a system where the plans make their money by denying or delaying expensive surgeries," Margolin said. "We want someone rooted in medical science, not economic self interest, making that judgment."

HMO officials said they also opposed AB 3571, but that they do not necessarily oppose the idea of an establishing an expert panel to decide which health care measures will be covered.

"We do acknowledge that there may be some value at looking at how the decisions should be made," said Kelch, but added, the association favors a national board that would make decisions.