Medi-Cal Contractor Faces Dramatic Cut in Funding

Federal authorities have moved to severely restrict funds for one of the state’s largest Medi-Cal managed care contractors--an action that raises concerns about the company’s financial future as well as the state’s ability to handle a massive, unprecedented shift of poor people into managed care.

The federal action comes as a blow to Long Beach-based Molina Medical Centers, a scrappy company with a mixed regulatory history that began as one clinic 18 years ago and has become a major player in Medi-Cal managed care.

Because of the federal move, Molina could be limited to providing outpatient services only, calling into question the company’s ability to fulfill its contract to provide full-scale Medi-Cal managed care services in Riverside and San Bernardino counties.

The federal move has consumer advocates, physicians and others questioning state officials’ diligence in regulating Molina and other contractors serving the poor.

“I question what part the state had to play in this and their ability to monitor plans” in general, said Lourdes Rivera, an attorney with the National Health Law Program, a consumer protection group.

Molina, the largest Latino-owned managed care company in the state, currently serves 135,000 Medi-Cal recipients, but was expected to take on about 300,000 more by next year. Many of these potential beneficiaries are in Riverside and San Bernardino counties, where Molina won a $1.7-billion, six-year contract to serve as one of two regional Medi-Cal plans. Molina also is slated to serve Medi-Cal patients as a subcontractor to Foundation Health in Los Angeles County. The company already is a Medi-Cal contractor in Sacramento County.

In an April 17 letter to state health officials obtained by The Times, the federal Health Care Financing Administration, which administers the federal half of the Medi-Cal program, warned the state that Molina had not fulfilled a key term of its contract.

The contract requires HMOs serving Medicaid (Medi-Cal in California) to attract enough private patients to make up at least 25% of their caseloads. The requirement is designed to serve as a rough measure of quality, preventing health programs for the poor from becoming so-called “Medicaid mills” that isolate poor patients and provide inferior care, said Bruce Merlin Fried, director of the federal program’s office of managed care and the author of the letter.

“This is a consumer protection statute, and we are obligated to enforce it,” he said. “The law is very clear.”

On Thursday, Molina blamed the state, consumer groups blamed both the state and Molina, and officials from the state and federal governments put the responsibility squarely on Molina.

Molina officials said that the state Department of Health Services was supposed to apply for waivers from the federal requirement and failed to do so. Officials then misinformed the company about their compliance deadline, said Kassy Perry, spokeswoman for Molina. The company was informed by the state that it had until next year to comply, Perry said.

Federal officials say Molina had until this month.

“It is the state’s dereliction of duty that got us into this,” Perry said. “They’ve got to get us out.”

A state health department official, however, said that although the state did not make a formal request for a waiver for Molina, it had a verbal understanding with federal officials that the company would have three years to comply with the rule. The three-year period has now expired.

The official said that even if a formal waiver had been obtained, it would only have covered the three-year period that has expired.

Perry acknowledged that less than 2% of Molina’s patient base is private, but said the federal law is “unrealistic” in the highly competitive managed care marketplace that California has become. She noted that President Clinton, in this year’s budget proposal, is seeking to abolish the 25% requirement in favor of other quality measures.

Molina’s representatives recently returned from Washington, where they are pushing for a change in federal law that would give the company some breathing room. Key congressional Democrats, however, were skeptical about the proposed change.

Fried said Molina showed no evidence of even trying to comply with the law.

“If they were 22, 23% maybe,” he said. “But they aren’t even close.”

Everyone involved said officials would make great efforts to avoid disruption to patient care. Late Thursday, state officials announced they have offered to convert Molina to a more restricted status as an outpatient-care provider, allowing it to remain eligible for at least some limited federal and state reimbursement.

“We are fast approaching resolution of this matter. We are offering Molina a new contract, which we think will adequately resolve this issue,” said Doug Porter, deputy director of Medical Care Services. “Our goals are to avoid any disruption of services to beneficiaries and to avoid the loss of federal reimbursement. This resolution does both.”

Perry, however, said the state has not yet come up with an acceptable proposal.

The proposed change in Molina’s status could severely hurt its financial condition and raise questions about its ability to fulfill contracts in Riverside and San Bernardino counties. The state says its requirements for those contracts dictate that participants be full-service HMOs, although Molina disputes that interpretation.

One option for the two counties would be to replace Molina with the bidder that finished second, which was Blue Cross’ California Care.

As an outpatient-care provider, Molina would not be required to meet the 25% private-patient ratio. But the change would cause a dramatic reduction in the cash value of its contract. For each Medi-Cal patient served by an HMO, the state pays roughly $80 a month. By contrast, for each one served by a outpatient provider, it pays $30 a month.

Consumer groups and other Medi-Cal managed care critics Thursday acknowledged that the 25% requirement is an imperfect gauge of quality, but they say it is, for now, the only one in place. And they were critical of the state for allowing Molina to operate so far below the target for three years.

Many community activists described the news about Molina as the latest state gaffe in a rushed and clumsy attempt to save money on the poor population. Many activists have urged the state to slow down and reconsider, in particular, its use of “two plan models” such as those in Los Angeles and the Inland Empire.

Under those models, the state provides Medi-Cal beneficiaries with a choice of two HMOs--a locally run organization and a commercial plan.

One of the two plans serving Los Angeles, the LA Care local initiative, is up and running; the commercial half, Foundation Health, is set to open in July, although it is uncertain now what role, if any, Molina will play as a subcontractor.

But the federal Health Care Financing Administration recently delayed start-up of a key element of the Los Angeles plan because it does not believe consumers have been adequately prepared and educated.

Consumer groups say the Molina matter is more evidence of state bungling. “I think what it says is that the state has not been pulling its responsibility to effectively manage the Medicaid managed care transition,” said Guillermo Rodriguez, executive director of the Latino Issues Forum in San Francisco.

The issue, he said, is not Molina, which he described as one of the more accommodating organizations toward community groups. Instead, Rodriguez said, the federal action is symptomatic of wider, systemic problems in the state’s concept of managed care for the poor.

“I think their problems are bigger than this [federal waiver], and getting rid of Molina is not going to solve it.”

Rivera was equally critical. “The state should have known all along [Molina] was out of compliance. Where is the oversight that is supposed to be happening here?”

Times staff writers Virginia Ellis in Sacramento and Faye Fiore in Washington contributed to this story.