Report 97118.2 Summary - April 1999

Department of Corporations' Regulation of Health Care Plans:

Despite Recent Budget Increases, Improvements in Consumer Protection Are Limited


Despite receiving a $6.5 million budget increase in August 1997 to enhance its regulation of health care service plans (health plans), the Department of Corporations (department) has shown only limited improvements in its efforts to protect health plan enrollees from inadequate medical care. Our audit revealed that, during fiscal year 1997-98 and the first half of fiscal year 1998-99, the department failed to produce appropriate reports and to resolve promptly enrollee complaints against their health plans. Furthermore, evidence from our review suggests that the lack of competent leadership during these periods contributed significantly to the poor performance in the department's Health Plan Division (division), which is largely responsible for ensuring that health plans comply with the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act). This Act includes laws designed to ensure the provision of adequate health care by financially sound health plans. Further, our audit disclosed that the department's Health Plan Program (program) did not spend millions of dollars in its budgets for fiscal years 1996-97 and 1997-98 partly because the program did not meet intended staffing and performance levels. Because health plan fees comprise a substantial part of the revenues the department collects to cover the costs of regulating health plans, these budget surpluses indicate that health plans paid more fees than necessary for their regulation.

During the period we reviewed, the department's complaint and enforcement functions have shown improved performance in their work to protect health plan enrollees. However, during fiscal year 1997-98 and the first half of 1998-99, the medical survey and financial examination functions continue to have backlogs in the reports they publish covering the department's reviews of health plans. The medical survey function protects consumers from inadequate health care resulting from health plan violations of the Knox-Keene Act. Through the financial examination function, consumers avoid disruptions in health care caused by financially troubled health plans. Weaknesses we identified include the division's failure to complete by the mandated deadline nearly half of all required medical surveys. Also, at the time we conducted the audit, the division had a modest backlog of six follow-up financial examinations it had not yet conducted. Further, as of March 5, 1999, more than 200 complaints from enrollees were still open even though the department had exceeded the statutory 60-day deadline for resolving such complaints.

Various conditions at the department illustrate that a shortage of adequate leadership is at the core of the division's shortcomings. These conditions include the lack of a position to manage one major function, a vacant managerial position for another function, the division's inconsistent reviews of existing policies and procedures for all major functions to evaluate whether changes would improve effectiveness, high vacancy rates for some positions, poor workload estimates, and such other factors as weak administrative controls. Without the necessary focus, direction, and vision provided by qualified leadership, the department cannot ensure that health plan enrollees receive the level of protection expected by law.

Not only is the department failing to fully protect health plan enrollees, but health plans have paid more for the cost of their regulation than the department actually spent. Specifically, we observed that the program had not spent large portions of its budget by the end of fiscal years 1996-97 and 1997-98, and this fact had repercussions for health plans. The program includes the division and positions in the department's other divisions whose work relates directly to health plans. For these two fiscal years, the program's ending balances exceeded desired levels by $2.6 million and $5.9 million, respectively. Because the department's primary source of revenue for health plan regulation is the fees it charges health plans, year-end balances higher than desired indicate that health plans have paid more than necessary for the costs of the program's operations. According to the department, its year-end balances were too high for several reasons, including an underestimation of revenues and an overestimation of expenditures for the program. RECOMMENDATIONS

During our audit of the department's performance since it received its budget increase, we encountered issues leading us to conclusions similar to those we reported in an earlier audit during which we compared the department's responsibilities with those of other state entities to determine whether one or more of the other entities could administer and enforce the Knox-Keene Act. Therefore, it seems appropriate to reiterate for legislative consideration the following recommendation that appears in our 1998 report: The Legislature should move the division's responsibilities for regulating health plans from the Business, Transportation and Housing Agency and the Department of Corporations. If the Legislature determines that no appropriate agency or department currently exists within the State's organizational structure, the Legislature should create a new agency or department in which to place these responsibilities.

In addition to repeating this recommendation, we recommend that the State's new governor help correct the concerns we identify in this report. Specifically, the administration should promptly appoint to leadership positions within the department qualified individuals who will provide the necessary direction, focus, and vision to the staff responsible for regulating health plans. We also recommend that the team of experts assembled at the direction of the governor consider our findings and recommendations when preparing its options "for more effective regulation of the managed care industry."

Further, the department should take the following steps to ensure that health plan enrollees receive adequate care:

  • Fill the vacant leadership position within the medical survey function as soon as the department can find a qualified individual. The department should also promptly create and fill a leadership position for the financial examination function.

  • Examine in depth and revise as necessary the policies and procedures used by staff of the medical survey and financial examination functions.

  • Reassess and revise as necessary the department's workload estimates for the medical survey, financial examination, and complaint resolution functions and adjust its budget accordingly. Also, the department should promptly fill those positions necessary for providing consumer protection.

  • Establish sound administrative controls, including the development and implementation of adequate workload tracking systems, to ensure the department's compliance with applicable laws concerning the issuing of reports for routine medical surveys.

Finally, to ensure that health plans do not pay more than necessary for the department's costs to regulate the plans, the department should develop and use more accurate estimates of its resources and expenditures.


The Business, Transportation and Housing Agency (agency) agrees that operational problems exist within the department's Health Plan Division. The agency states that the backlogs for the medical survey and complaint functions are unacceptable and that it has instructed the department to aggressively manage the workload and to redirect resources to eliminate the backlogs. The agency has also directed the department to make filling the critical positions a top priority.