State Analyst Says HMOs Won’t Reduce Medi-Cal Cost

The state’s legislative analyst has challenged the Deukmejian Administration’s assertion that health maintenance organizations can treat Medi-Cal patients more cheaply than private physicians can.

The legislative analyst’s office, relying upon statistics from the California Department of Health Services, has concluded that last year it cost the state an extra $1.68 a month for every Medi-Cal beneficiary who voluntarily received his or her treatment from an HMO rather than from private physicians.

Just what ramifications this might have for the proposed Medi-Cal pilot project for the San Fernando Valley area and San Diego County will be one of the issues explored Tuesday at Los Angeles Valley College. The Joint Committee on Medi-Cal Oversight will hear testimony there from David Maxwell Jolly, a Medi-Cal expert in the analyst’s office, and from opponents and supporters of the experiment.

Officials at first said that the Expanded Choice program, which will force recipients to switch from their private physicians to HMOs, would save the state 5% of the cost of treating Medi-Cal patients. Now officials say that the program might not save any money during its first year but that they expect to save money later or at least to slow the rate of increase of Medi-Cal costs.

About 87,000 Medi-Cal recipients in the Valley and Glendale areas and 165,000 in San Diego would be enrolled in prepaid health plans under Expanded Choice, which is expected to begin sometime next year. Now, 224,500 Medi-Cal beneficiaries out of 3 million have chosen to obtain their medical care from 14 participating HMOs across the state.

These prepaid health plans have proved to be economically superior, according to state figures. In 1981, the HMOs saved the state $14 million when contrasted with the medical costs generated by private physicians, commonly called the fee-for-service system. In 1982, the HMO savings was $10 million, but the savings dipped to $3.8 million in 1983. Last year, for the first time, there was no savings.

The legislative analyst’s office, in the “Report of the Legislative Analyst to the Joint Legislative Budget Committee,” released earlier this year, further contended that the prepaid health plans were paid at a higher rate than allowed by law but that this was hidden by the Department of Health Services through accounting maneuvers.

Paying such a premium to the prepaid health plans “might be appropriate if it could be shown that California’s PHPs offer higher quality or more accessible health service or that enrollees are healthier as a result of PHP care” than are comparable users of the fee-for-service system, the report said. “We are not aware of any evidence, however, that California’s PHPs offer such advantages” over the Medi-Cal fee-for-service system, it said.

Jack Patwell, chief of the department’s rate-development branch of the Medi-Cal policy division, acknowledged that there were no HMO savings in the Medi-Cal program in 1984, but he denied that the HMO rate of reimbursement exceeded the costs of the fee-for-service system. State and federal law prohibit HMO reimbursement rates higher than those of fee-for-service.

Despite the legislative analyst’s figures, Patwell said the department believes that HMOs would be more cost-effective if they were used by a greater number of Medi-Cal recipients.

State and HMO officials are also emphasizing that HMO-style medicine is highly desirable, regardless of how much money is saved, because of its emphasis on preventive medicine and its built-in ability to cut down on the use of emergency rooms for routine medical treatment and on the sometimes harmful practice of shopping for cures.

The legislative analyst’s figures came as a shock to many health-care experts in the state Capitol, who have assumed that prepaid health plans would continue to be cheaper than traditional medicine, said Assemblyman Burt Margolin (D-Los Angeles), chairman of the Joint Committee on Medi-Cal Oversight.

There are many reasons why fee-for-service and HMO costs are nearly identical, and they do not reflect badly upon the operations of HMOs, health-care experts agree. Critics of Expanded Choice suggest that the economic changes triggered by the Legislature’s massive Medi-Cal reforms in 1982 have necessitated a careful examination of the governor’s longtime goal to eventually require all or most Medi-Cal recipients to enroll in HMOs.

More Economical

Such a goal may no longer be valid because Medi-Cal reform has made the fee-for-service system more economical, said Margolin. He said that right now he favors preserving a Medi-Cal patient’s right to chose between an HMO or a private physician.

Expanded Choice, Margolin said, was “set in place in a different era, in a different time with a different set of facts.” Acknowledging that it is difficult to get state officials to rethink their goals, he said, “We’re trying to get people to adjust to a new reality.”

The California Medical Assn. also questions why a health-delivery system that has become a lot leaner in the past three years needs to be tinkered with.

“Fee-for-service, by the very numbers of the state analyst, is a very competitive system to what they are now trying to compose,” said Jack Light, the association’s vice president.

The HMOs have felt the financial squeeze because their Medi-Cal rates can never surpass fee-for-service costs, which have been declining. The fee-for-service system’s costs have shrunk primarily because of lower hospital rates brought about by Medi-Cal reform. The California Medical Assistance Commission, created by the reform legislation, has been successful in negotiating cheaper hospital rates for Medi-Cal patients, but HMOs have to pay the market rate--sometimes $200 to $300 higher per day per patient.

HMO executives say their costs will obviously decrease if they are given access to the Medi-Cal hospital rates that the fee-for-service system enjoys.

“I think it will become increasingly difficult for PHPs to continue to operate as long as fee-for-service has advantages,” said Joseph K. Klinger, vice president and chief counsel of Cigna Healthplan, which endorses Expanded Choice.

A bill sponsored by Margolin would give HMOs access to the better hospital rates, but it would not include HMO participation in Expanded Choice. The purposes of the bill would be to strengthen voluntary enrollment in HMOs by Medi-Cal patients, and to hold down costs of prepaid health plans, which are eventually passed on to the state.

The oversight committee hearing will be from 9:30 a.m. to 1 p.m. Tuesday at Monarch Hall at Valley College in Van Nuys.