Report 2001-126 Summary - May 2002

Department of Managed Health Care:

Assessments for Specialized and Full-Service HMOs Do Not Reflect Its Workload and Have Disparate Financial Impacts

HIGHLIGHTS

Our review of the assessment structure of the Department of Managed Health Care found that:

In addition, our review of six core operating units found that:

RESULTS IN BRIEF

The annual assessments paid by two classes of health maintenance organizations (HMOs)-specialized and full-service-to support the operations of the Department of Managed Health Care (department) are not distributed equitably. The assessments do not reflect the different levels of effort that the department devotes to each class. This is not surprising, since the assessments are charged almost entirely on a per enrollee basis, with little recognition that full-service HMOs, which provide medical, vision, psychiatric, and other care, are likely to require the department's services more frequently than specialized HMOs, which provide only one type of care. As a result, these assessments are causing disparate financial impacts. On average they amount to a substantially larger percentage of the premiums of specialized HMOs than of full-service HMOs.

The proportion of the overall assessments that are charged to specialized HMOs, at 48 percent, far exceeds the 22 percent of work attributable to them based on data identifiable by class of HMO. In charging these assessments, the department is simply implementing the rate structure established by the Legislature in August 1997. We were unable to find any documented rationale for the rate structure, but we believe that it was designed to reflect the relative costs of protecting the enrollees of specialized HMOs and full-service HMOs. In reviewing the percentage of premiums paid in assessments, we found a wide disparity in the effect on HMOs. Specifically, full-service HMOs pay on average about 0.04 percent of their premiums to the department, while specialized HMOs pay 0.37 percent of theirs, or about nine times more per dollar of premiums. The impact is even more severe for specialized HMOs providing vision, psychological, and certain other coverage. These specialized HMOs pay more than 0.50 percent of their premiums to the department. For example, a specialized, chiropractic HMO with premiums of $79 million was assessed about $1.5 million for fiscal year 2001-02, while a full-service HMO with $82 million in premiums was assessed only $44,000.

Alternative assessment methods could reduce these inequities by taking the disparate workload into account or by basing assessment rates on premiums as a surrogate for both the number of enrollees and the breadth of care provided. We offer two alternatives based on workload and HMO premiums that would bring the assessments for specialized HMOs more into line with the demonstrated workload and would reduce the differences in financial impact.

We shared our findings regarding the assessment structure and alternative assessment methods with the department and asked for its perspective on these matters. The department did not directly respond to questions regarding how the current assessment method factors in the extent of the department's services to specialized and full-service HMOs; why large disparities in assessments between specialized and full-service HMOs are not harmful; what overhead costs support if not core operations; and why the number of enrollees, rather than identifiable workload or HMO premiums, provides a better basis for allocating overhead. The department did assert, however, that the current assessment does not create a financial burden for any HMO and that the department's "infrastructure" is built on the premise of serving all enrollees equally regardless of the class of HMO. In addition, it responded that it has no preference as to the methodology used to assess plans. It said that its only concern is that the approach chosen provide a proper and timely mechanism to obtain the funding necessary for the department's budget, and secondarily that the method be straightforward and simple to administer.

Nevertheless, the department presented us with another alternative assessment method that would basically yield the same results as the current system. We do not consider this alternative to be equitable because the split between assessments for full-service and specialized plans would continue to poorly reflect the split in identifiable workload, and large disparities in financial impact would persist among HMOs. Absent a direct response to the questions we posed to the department, we have no basis to conclude that methods that do not factor in the extent of services provided to specialized versus full-service plans or that have a large disparate financial impact among HMOs are equitable.

The department has improved the timeliness and/or the breadth of services provided by four of the six operating units we reviewed when compared to operations previously managed by the Department of Corporations (Corporations). It has significantly increased the output for some of its core functions, has introduced several new services for HMO enrollees, and is generally better at meeting statutory deadlines when compared to the same functions carried out by Corporations until June 2000. For example, in the first half of fiscal year 2001-02, the department's Division of Plan Surveys (Medical Surveys) completed 20 routine medical surveys (surveys) and ended calendar year 2001 with only 4 backlogged surveys. In contrast, Corporations had an output of 7 surveys in the first half of fiscal year 1998-99 and had 40 backlogged surveys at the end of calendar year 1998.

For two other units-the Division of Financial Oversight (Financial Oversight) and the Division of Licensing (Licensing)-the department needs to improve the timeliness of its work. Financial Oversight is having difficulty completing financial examinations on time. Its backlog of 13 examinations at the end of calendar year 2001 compares unfavorably to the backlog of 2 examinations that Corporations experienced at the end of calendar year 1998. When reports become backlogged, the public does not receive up-to-date departmental analysis of the financial health of HMOs. The backlog is primarily caused by a surge in financial examinations related to HMOs that were newly licensed in the mid-1990s, staff vacancies, and additional nonroutine work the department had to complete when several HMOs experienced financial difficulties. Financial Oversight is implementing recommendations made by a consultant that may help it reduce its backlog through better planning and the elimination of less effective review procedures, and it plans to fill staff vacancies and hire a contractor to keep up with its workload.

Similarly, Licensing has not promptly informed HMOs of its decisions to disapprove, postpone or deny significant proposed changes to their plans, referred to as material modifications. During 2001, Licensing was late in sending written notifications for 42 of the 122 material modifications it received. Slowness in notifying the HMOs can delay changes in operations that the HMOs believe are significant. In part, these delays may have resulted from a poor tracking system that contained incomplete data and that lacked triggers to alert managers to overdue items. Licensing has recently implemented a new information system that, among other improvements, may help it to better monitor the processing of HMO filings, but it is too early to tell whether the new system will help resolve the problem of late notifications regarding material modifications.

RECOMMENDATIONS

To ensure more equitable assessments of HMOs to support the department's activities, we recommend that the Legislature:

To ensure that enrollees have up-to-date departmental analysis on the financial status of HMOs, the department should establish deadlines for the publication of financial examination reports and should closely monitor the success of its efforts to meet deadlines for these reports.

To ensure that HMOs are notified promptly of the status of their requests for material modifications to their plans, the department should closely monitor the time elapsed between the receipt of requests and the notifications it sends to HMOs and should make it a priority to send written notifications within the statutory deadline. AGENCY COMMENTS

The department says that it has no position at this time on the formulas used to assess HMOs. Its only concern is that the chosen assessment formula provide a proper and timely funding mechanism for the department's needs, and that it be straightforward and simple to administer. The department is, however, concerned that a change in the existing formulas may impact some plans adversely. In addition, the department says that the Legislature should be advised of all different methodologies and their impacts, and suggests that the report should provide additional options for legislative consideration. We, however, believe no value is added by presenting numerous additional methods that do not meet our criteria, as we discuss in detail in our comments at pages 57 through 59.

With regard to the timeliness of financial examination reports, the department says that it has sometimes prioritized actions to protect consumers over issuing final reports. It also reiterates steps taken to improve its financial examination operations. With regard to the timeliness of written notifications related to material modifications, the department says it has sought to improve communications with HMOs by providing more informal forums for sharing information. Nevertheless, the department also reiterates efforts it has taken to ensure on-time performance.