Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Department of Managed Health Care (2400)

The Department of Managed Health Care (DMHC) was created by Chapter 525, Statutes of 1999 (AB 78, Gallegos), to regulate health maintenance organizations. The Department of Corporations previously had this responsibility until DMHC began operations on July 1, 2000. (The Department of Insurance regulates health insurance companies.) The Knox-Keene Act specifies what regulatory activities the state must perform in this program area. These include (1) licensing health plans; (2) taking and investigating consumer complaints regarding health plans; (3) performing medical and financial exams of health plans every three and five years, respectively; (4) taking enforcement action against plans that are in violation of the act (up to and including taking over a health plan); and (5) providing an ombudsperson to assist in resolving complaints and providing information.

The budget proposes total expenditures of $30.6 million in 2001-02—$29.6 million for regulatory activities and $1 million for the Office of Patient Advocate.

Financial Examinations Proposal

We recommend that the Legislature delete the $300,000 request for consultant funds to increase the number of financial examinations of health plans performed annually because it does not provide sufficient resources to substantively increase the frequency of exams. (Reduce Item 2400-001-0933 by $300,000.)

The DMHC requests $300,000 in consultant funds to perform financial examinations of health plans more frequently. Current law requires DMHC to examine the financial status of each health plan at least once every five years. Department staff perform this function.

Citing the increasingly prevalent financial problems of health plans and the medical groups they contract with to provide medical care to patients, DMHC proposes to increase the frequency of these examinations. This would allow closer monitoring of health plans and should result in the department detecting and resolving financial solvency issues and problems sooner. This concept has merit; however, the budget proposal would make little progress toward meeting this goal. Based on information from the department, we estimate that the $300,000 would, at most, put health plans on an examination schedule of once every four and a half years instead of every five years. This marginal change in frequency would not appreciably increase the effectiveness of the department's oversight responsibilities.

In addition, this activity is an ongoing department responsibility for which department staff perform the examinations. The DMHC does not use consultants to perform financial examinations. Thus, it is not clear why this portion of the work would be contracted out.

An alternative discussed by DMHC in the document submitted to justify the budget proposal involved increasing the examination staff by 12 positions. This alternative would cost approximately $1.2 million but would increase the frequency of examinations to once every three years. This three-year frequency would address the goal of early detection and resolution of financial problems. With more detailed justification, this alternative may warrant legislative consideration.