Summary

Department of Managed Health Care: Assessments for Specialized and Full-Service HMOs Do Not Reflect Its Workload and Have Disparate Financial Impacts May 2002 2001-126 rotiduA etatS ainrofilaC S T I D U A E T A T S F O U A E R U B The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the Bureau of State Audits at the following address: California State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, California 95814 (916) 445-0255 or TDD (916) 445-0255 x 216 OR This report may also be available on the World Wide Web http://www.bsa.ca.gov/bsa/ The California State Auditor is pleased to announce the availability of an online subscription service. For information on how to subscribe, please contact David Madrigal at (916) 445-0255, ext. 201, or visit our Web site at www.bsa.ca.gov/bsa Alternate format reports available upon request. Permission is granted to reproduce reports. � � � ��������� ���� ������ ������������� ������������������� ������������ ����������������������� May 28, 2002 2001-126 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report concerning assessments that the Department of Managed Health Care (department) charges to health maintenance organizations (HMOs) licensed in accordance with the State’s Knox-Keene Health Care Service Plan Act of 1975. This report concludes that the assessments for specialized and full-service HMOs do not reflect the department’s workload and have disparate financial impacts. The proportion of the overall assessments that are charged to specialized HMOs, at 48 percent, exceeds the 22 percent of work attributable to them based on data identifiable by class of HMO. The report recommends that the Legislature consider changing the assessment structure to reflect the proportion of documented workload devoted to specialized and full-service HMOs, and to reduce disparities in financial effects on HMOs. The report also finds that the department has 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 previously carried out by the Department of Corporations. Nevertheless, the department is having difficulty completing financial examinations and notifying HMOs of its decisions regarding requested health plan changes on time. Respectfully submitted, ELAINE M. HOWLE State Auditor Enclosure ������������������� �������������������������������������������������� ���������������������������������������� ������������������ Department of Managed Health Care: Assessments for Specialized and Full-Service HMOs Do Not Reflect Its Workload and Have Disparate Financial Impacts Blank page inserted for reproduction purposes only. CONTENTS Summary 1 Introduction 7 Chapter 1 The Current Assessment Model Does Not Reflect the Workload Attributable to Specialized and Full-Service HMOs 15 Recommendations 27 Chapter 2 The Department Is Generally Effective in Meeting Deadlines, But It Must Improve the Timeliness of Financial Examinations and Its Responses to Requested Plan Changes 29 Recommendations 39 Appendix A 41 Appendix B 43 Responses to the Audit Business, Transportation and Housing Agency, Department of Managed Health Care 45 California State Auditor’s Comments on the Responses From the Business, Transportation and Housing Agency and the Department of Managed Health Care 55 1 SUMMARY 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 Audit Highlights . . . Managed Health Care (department) are not distributed equitably. The assessments do not reflect the different levels of effort that Our review of the assessment the department devotes to each class. This is not surprising, structure of the Department of Managed Health Care found since the assessments are charged almost entirely on a per that: enrollee basis, with little recognition that full-service HMOs, þ The portion of which provide medical, vision, psychiatric, and other care, are assessments charged to likely to require the department’s services more frequently than specialized HMOs, at specialized HMOs, which provide only one type of care. As a 48 percent, exceeds the result, these assessments are causing disparate financial impacts. 22 percent of identifiable On average they amount to a substantially larger percentage of workload attributable to specialized HMOs. the premiums of specialized HMOs than of full-service HMOs. þ The current assessment The proportion of the overall assessments that are charged to structure results in disparate financial specialized HMOs, at 48 percent, far exceeds the 22 percent of impacts with specialized work attributable to them based on data identifiable by class of HMOs charged about HMO. In charging these assessments, the department is simply nine times more per implementing the rate structure established by the Legislature dollar of premiums than full-service HMOs. in August 1997. We were unable to find any documented ratio- nale for the rate structure, but we believe that it was designed to þ Alternative methods could reflect the relative costs of protecting the enrollees of specialized better align assessments with workload and reduce HMOs and full-service HMOs. In reviewing the percentage of disparities in financial premiums paid in assessments, we found a wide disparity in the impact. effect on HMOs. Specifically, full-service HMOs pay on average In addition, our review of six about 0.04 percent of their premiums to the department, while core operating units found that: specialized HMOs pay 0.37 percent of theirs, or about nine times more per dollar of premiums. The impact is even more severe þ Four units are meeting deadlines and/or have for specialized HMOs providing vision, psychological, and greatly expanded services. certain other coverage. These specialized HMOs pay more than 0.50 percent of their premiums to the department. For example, þ Two units, Financial a specialized, chiropractic HMO with premiums of $79 million Oversight and Licensing, are often late issuing was assessed about $1.5 million for fiscal year 2001–02, while financial examination a full-service HMO with $82 million in premiums was assessed reports and sending written only $44,000. notifications to HMOs regarding material changes in health care plans. Alternative assessment methods could reduce these inequities by taking the disparate workload into account or by basing assess- ment rates on premiums as a surrogate for both the number of 1 enrollees and the breadth of care provided. We offer two alterna- tives 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 2 3 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. 2 3 RECOMMENDATIONS To ensure more equitable assessments of HMOs to support the department’s activities, we recommend that the Legislature: • Consider changing the department’s assessment structure to reflect the proportion of the documented workload that the department devotes to specialized and full-service HMOs and to reduce disparities in the financial effect on HMOs, and • Require the department to report triennially to the Legislature on the proportion of assessments charged to each class of HMO and the proportion of the documented workload related to each class of HMO. To ensure that enrollees have up-to-date departmental analy- sis 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 straight- forward 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 addi- tional 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 com- ments at pages 57 through 59. 4 5 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. n 4 5 Blank page inserted for reproduction purposes only. 6 7 INTRODUCTION BACKGROUND C alifornia’s Department of Managed Health Care (department) began operations on July 1, 2000, assuming certain responsibilities from the Commissioner of Corporations and the Department of Corporations and adding new functions to expand the regulation of health care service plans known as health maintenance organizations (HMOs). The State’s Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act), as amended, provides authority for oversight of HMOs. The department’s stated mission is to work toward an accountable and reliable managed health care delivery system that promotes healthier Californians. Its focus is on assuring the accessibility and availability of medically-necessary health care that is delivered with appropriate oversight of quality through financially sound managed care systems. To meet its mandate, the department licenses HMOs to operate in California and enforces laws and regulations applicable to them. In helping to protect consumers, the department conducts medical surveys and financial examinations of HMOs and also receives and resolves consumer complaints, as directed by the Knox-Keene Act. HMOs include full-service plans that provide most medical services and specialized plans that focus on limited medical services such as dental or vision care. As Figure 1 on the following page indicates, since fiscal year 1998–99 the number of HMOs in California has declined, but their revenues and number of enrollees have grown. As of September 2001, the department regulated 107 HMOs throughout California, consisting of 48 full-service HMOs and 59 specialized HMOs. For fiscal year 2001–02, the department has a budget of approximately $32.4 million and 334 authorized positions. 6 7 FIGURE 1 Comparative Statistics on HMOs Fiscal Years 1998–99 and 2001–02 ������������ ��� ��� �� ���������� ������������ ������� �� ������������ �� �� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � ���������� Source: Department summary reports for fiscal years 1998–99 and 2001–02. THE DEPARTMENT INCLUDES FOUR CORE OPERATING DIVISIONS THAT FOCUS DIRECTLY ON REGULATING HMOs OR ASSISTING HMO ENROLLEES Four core operating divisions of the department focus directly on regulating HMOs or assisting HMO enrollees and take responsibility for ensuring that HMO enrollees have adequate protection from violations of the Knox-Keene Act by HMOs. These divisions are the Office of Health Plan Oversight (Plan Oversight), HMO Help Center (Help Center), Office of Enforce- ment (Enforcement), and Office of the Patient Advocate. Figure 2 shows these divisions, as well as support divisions, and the relative size of each. For the department as a whole, support staff—those employees not directly providing services to HMOs or HMO enrollees—make up about 50 percent of the personnel budget. The ratio of support staff to line staff—those employees working directly with HMOs and their enrollees—varies from 8 9 FIGURE 2 Budgeted Expenditures Fiscal Year 2001–02 (In Millions) �������� ���������� ��������� ��� ���������� ��������� ��������� �������� ���������� ����������� ������������� ��������������� �������� ��������� �������� �������� ������������� ����������� �������� �������� �������� ������������������� ���������������������� �������� ��������� Source: Department expenditure reports as of December 31, 2001. division to division, however. See Appendix A for Types of Medical Surveys information about the breakdown between support Routine—These surveys evaluate staff and line staff in each division. compliance with state statutes and regulations concerning an HMO’s quality Plan Oversight has extensive responsibilities that assurance procedures, grievances and appeal systems, as well as its enrollees’ include licensing HMOs, reviewing requested access to health care services and its changes in HMO operations, and monitoring provision of continuity of care. The Knox-Keene Act requires surveys to be both the financial well-being of HMOs and the conducted at least once every three years. quality and accessibility of the care they provide. The Knox-Keene Act requires the department Follow-up—These surveys evaluate an to conduct on-site evaluations, called medical HMO’s efforts to correct deficiencies identified in the public report for the surveys, of all HMOs once every three years. A routine medical survey. The Knox-Keene medical survey ends with the department’s release Act requires the department to conduct of a final, public report describing the survey’s these surveys within 18 months of the department’s release of the public report. results. If the department identifies weaknesses during a routine medical survey, the report will Nonroutine—The department typically disclose those deficiencies and any actions the conducts these surveys when it has information indicating that a health plan HMO has taken or plans to take to correct the has committed a significant violation of the problems. Knox-Keene Act. 8 9 To ensure that enrollees are protected from HMOs Types of Financial Examinations that are financially unsound, the Knox-Keene Act also requires the department to review the Routine—These periodic examinations financial status of every HMO at least once every evaluate an HMO’s fiscal and five years. These reviews are called financial administrative affairs once every five years. examinations and are conducted by Plan Oversight These exams are also used to determine whether the plan is in compliance with staff. The culmination of a financial examination those state regulations for which the is also a public report. department has oversight responsibilities. In addition, they assess whether the plan maintains proper internal controls to Yet another consumer protection function the detect and prevent the misstatement of its department administers is responding to enrollee fiscal operations and any non-compliance with regulatory requirements. complaints about their HMOs. The Help Center directly assists consumers with health care issues, Nonroutine—These exams are typically helping to ensure that patients receive the medi- performed as a follow up to determine cal care and services to which they are entitled. whether certain deficiencies noted in a routine examination have been corrected, The Help Center is responsible for answering when there is a concern regarding the enrollee telephone questions, resolving enrollees’ plan’s ability to continue operations, or when significant complaints involving the complaints, and obtaining independent medical plan have been received from the public or reviews at the request of enrollees. health care providers. The Help Center receives complaints from HMO enrollees. Based on its review of a complaint and the information obtained, the department decides whether an HMO has violated the Types of Help Center Assistance law. If the department determines that a Written Complaints—HMO enrollees violation has occurred, it may refer the HMO file formal complaints when they have an issue with their HMOs regarding to another division within the department billing, quality of care, benefits and for enforcement action. The Knox-Keene Act coverage, or other issues. The Help Center reviews and resolves these requires the department to send written notices complaints. indicating the final resolution of the complaint to affected parties within 30 days of receipt of Independent Medical Reviews (IMRs)—Enrollees receive IMRs when the complaint. When the department’s director they are dissatisfied with their HMO’s believes that additional time is needed to fully decision concerning denial, delay, or modification of service or denial of and fairly evaluate a complaint, the director can reimbursement of claims. authorize an extension of the 30-day deadline. The Help Center is also responsible for ensuring Call Center—The Call Center maintains and operates a toll- that enrollees receive an independent medical free telephone number to receive review when they question an HMO’s decision to consumer complaints regarding HMOs regulated by the department. deny, delay, or not reimburse them for services. Internal and contracted staff are available 24 hours a day, 7 days a week to help consumers resolve The Office of the Patient Advocate is a new problems with their HMOs. division within the department. Its mission is to act as an advocate for enrollee rights, and thus 10 11 promote healthier Californians by recommending enforcement actions, introducing new legislation, interacting with consumer advocacy groups, and bringing visibility to the department through educational outreach. It is responsible for producing an annual publication for the public with information on individual HMOs and the quality of their services. It is also responsible for educating the public regarding enrollee rights and the department’s services. Although Plan Oversight, the Help Center, and the Office of the Patient Advocate are responsible for monitoring or regulating HMOs under the provisions of the Knox-Keene Act, these divisions do not impose fines or take legal action against HMOs. Instead, this responsibility rests with Enforcement, which handles the litigation needs of the department, representing the department in actions to enforce the managed health care laws and in actions that are brought against the department. Plan Oversight, the Help Center, the Office of Patient Advocate, and other divisions may refer cases to Enforcement. HMOs PROVIDE THE BULK OF THE DEPARTMENT’S FUNDING THROUGH ASSESSMENTS The department receives most of its funding from assessments paid by all HMOs licensed under the Knox-Keene Act. Fees for licenses, reimbursements from HMOs for the cost of certain services, fines, and interest provide the remaining revenues. Ninety-four percent of revenue is raised through the annual and special assessments described in the Knox-Keene Act. For the annual assessment, full-service HMOs are assessed a flat fee of $12,500 plus between $0.45 and $0.65 per enrollee, and specialized HMOs are assessed a flat fee of $7,500 plus between $0.24 and $0.48 per enrollee. The department establishes the special assessment rate to provide the department with sufficient revenues to support the operations of the department and a prudent reserve. The department also charges individual HMOs for the cost of any nonroutine examinations and for the contracted cost of independent medical reviews, and it exacts fines for violations of the Knox-Keene Act. The department does not receive any state funds. Figure 3 on the following page shows the various sources of revenue for the department. 10 11 FIGURE 3 Department of Managed Health Care Projected Revenues for Fiscal Year 2001–02 ������������ ��������� ���� ������� ����������� ����������� ������ ����� ����������� ������������ ����� Source: Department fund condition statement, estimated growth for fiscal year 2001–02. SCOPE AND METHODOLOGY The Joint Legislative Audit Committee (audit committee) requested that the Bureau of State Audits review the assessment mechanism used to generate funds for the Managed Care Fund, the fund that supports the department. Specifically, the audit committee asked us to determine the resources required by the department to administer and enforce the provisions of the Knox-Keene Act and to identify the resources required to regulate the different classes of HMOs. It also asked us to examine the fees and assessments paid by individual HMOs or classes of HMOs, to determine whether those fees and assessments reflect the level of regulatory activity associated with that HMO or class, and to determine whether those fees and assessments are needed to fund fixed costs that are unrelated to the workload. Finally, the audit committee asked us to propose alternative assessment structures, if necessary, that would more closely reflect the level of regulatory costs associated with the oversight of HMOs and ensure adequate funding for the department to meet its statutory responsibilities. 12 13 To examine the current assessment structure, we reviewed the Knox-Keene Act and other relevant laws and regulations. We also interviewed department administrative and budget unit staff and analyzed assessments for individual HMOs and classes of HMOs. To determine whether the current fee assessment structure reflects the relative costs of regulating each class of HMO, we obtained recent available workload data from cost accounting records, caseload and time tracking systems, and staff surveys; developed percentages of effort related to specialized and full- service HMOs; and applied these percentages to divisional costs. Specifically, we used: • Help Center reports showing the number of independent medical review cases for 2001 for each HMO. • Help Center reports showing written complaints received in 2000 and 2001 for each HMO. • Help Center reports showing total Call Center telephone call volume between July 1, 2000, and December 31, 2001, and the call volume for nine large specialized and full- service HMOs. • A survey of workers in the Help Center’s Division of Preventive Health Intervention and Division of Legal Case Review indicating the portion of time they devoted to the Call Center, independent medical reviews, written complaints, or other functions between July 2001 and March 2002. • Enforcement reports showing the number of hours spent on legal cases in 2001, identified by individual HMO. • Departmental accounting records showing the number of personnel dollars assigned to specialized and full-service HMO functions, based on timesheet data, for the first half of fiscal year 2001–02. We estimated the split in workload for the department as a whole by adding together the divisional costs and comparing the totals for the two classes of HMO. We determined that the current assessment structure does not closely mirror the workload for each class of HMO and results in disparate financial impacts on HMOs. To develop alternative 12 13 assessment methodologies, we interviewed department staff; interviewed staff and reviewed laws for three other regulatory agencies in California: the Department of Corporations, the Department of Insurance, and the Department of Health Services; and interviewed staff and reviewed laws for the state agencies regulating HMOs in Florida, Illinois, New Jersey, and Texas. To determine the effect of alternative assessment methodologies, we obtained department databases that show the number of enrollees and the premium, Medicare, and Medicaid receipts (premiums) for individual HMOs. We used this data to calculate the average assessment per enrollee and the average assessment per premium dollar for each HMO class, and the division of assessments between the two classes of HMO. We presented our alternatives and our rationale for evaluating them to the department for its response. To determine whether there is adequate funding to ensure that the department meets its responsibilities, we reviewed the performance of six functions in the department’s two largest operating divisions—Plan Oversight and the Help Center. Where appropriate, we reviewed the volume of outputs and the timeli- ness of those outputs, generally for the first half of fiscal year 2001–02, relative to deadlines set by statute or by the depart- ment. We compared the results to performance indicators for the first half of fiscal year 1998–99 that we compiled for our 1999 audit of HMO regulation under the Department of Corporations. For the same periods, we also compared the number of labor hours or dollars, depending on the availability of data, that core staff devoted to performing these functions. n 14 15 CHAPTER 1 The Current Assessment Model Does Not Reflect the Workload Attributable to Specialized and Full-Service HMOs CHAPTER SUMMARY The percentage of the total assessment that is charged to specialized and full-service health maintenance organizations (HMOs) by the Department of Managed Health Care (department) does not match the level of effort the department devotes to these two classes of HMO. Although assessments for specialized HMOs amount to 48 percent of total assessments, only 22 percent of the department’s work that is identifiable by HMO class is attributable to them. In charging these assessments, the department is simply implementing the rate structure established by the Legislature in August 1997. We have found no documented rationale for this rate structure, but it appears to have been designed to reflect the relative costs of protecting the enrollees of specialized and full-service HMOs. Our review of the financial impact of the assessment on HMOs, as represented by the percentage of their premiums that the HMOs are charged for assessments, found a wide disparity between the different classes of HMO. Specifically, the assessments the department billed to full-service HMOs amounted to about 0.04 percent of their premiums on average, while those for specialized HMOs amounted to about 0.37 percent on average, or about nine times more per premium dollar. Differences in the financial impact on specialized and full-service plans can be quite large. For example, a 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. Given the gap between actual workload and assessment levels, along with the difference in financial impact, it appears that another assessment structure would be more equitable. We present two alternatives, one based on departmental workload and a second alternative based on 14 15 a combination of workload and HMO premiums, that we believe would better match HMO assessments to workload and more evenly spread the cost of regulation. In assessing the fairness of the current and various alternative assessment methods, we considered three factors: how closely the assessment reflects the identifiable workload split, how disparate the financial impacts on full-service and specialized HMOs are in terms of percent of premiums, and how easy it would be to administer the assessment. After discussing the current and proposed assessments with department administrators, we sought to confirm or clarify the department’s perspective on whether the current method equitably allocates costs to HMOs. In particular, we asked department administrators how the current assessment method factors in the extent of services the department provides to specialized and full-service HMOs or why that consideration is unneeded; whether the department considers the disparate financial impacts we identified to be harmful to specialized HMOs; what overhead costs support if not core operations; and why the number of enrollees, rather than identifiable workload or HMO premiums, is the appropriate basis for allocating departmental overhead. The department did not respond to our specific questions. It did, however, assert that the current assessment does not create a financial burden for any HMO. The department also said that the department’s “infrastructure” is built on the premise of serving all enrollees equally regardless of class of HMO. This response, however, begs the question of how the effort the department actually devotes to specialized and full-service plans corresponds to the amounts it asks them to pay. The department also said it has no position on the formula to be used to calculate assessments and its only concern is that the approach chosen provide a proper and timely mechanism to obtain 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 method that would yield approximately the same result as the current assessment method. 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 16 17 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 NUMBER OF ENROLLEES DRIVES AN HMO’s ASSESSMENT UNDER THE CURRENT ASSESSMENT STRUCTURE Assessments paid by HMOs licensed in the State are the primary support for the department’s operations. The department calculates each HMO’s annual assessment based on statutory provisions established in August 1997 that call for each HMO to We considered three pay a nominal flat fee plus an additional amount per enrollee. factors crucial to The flat fee and rate per enrollee are slightly lower for specialized equitable assessments: HMOs than they are for full-service HMOs. Although we P Fees charged to each have not found a documented rationale for this statutory rate class of HMO should structure, it appears that it was intended to reflect the relative reflect the proportion costs of protecting enrollees. of workload devoted to each. In determining the fairness of the current fees and of alternative P Fees should be fee structures, we identified three factors that we consider crucial distributed so to equitable assessments. First, we believe that the fees charged that the financial to each class of HMO—the specialized HMOs and the full-service burden does not fall HMOs—should approximate the proportion of the department’s disproportionately workload devoted to each; in other words, the assessments among the HMOs. should generally reflect the relative costs of protecting the P The assessment plan enrollees for each class. In addition, we believe that the fees should be distributed so that the financial burden does not fall should be cost-effective. disproportionately among the HMOs. Finally, we believe that the assessment plan used should be cost-effective, not requiring an excessive amount of administrative effort to calculate and bill for assessments. SPECIALIZED HMOs PAY A MUCH LARGER PROPORTION OF ASSESSMENTS THAN WORKLOAD FIGURES APPEAR TO WARRANT The current assessment structure does not reflect the relative level of effort that the department devotes to the two classes of HMO. Consequently, specialized HMOs pay a larger share of department costs than appears warranted by our analysis of the department’s workload. Although workload information is not available for all units, for certain units we were able to 16 17 use department records to identify the workload split. It is not surprising that the level of assessments and the amount of work performed are so divergent, since 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. We asked the department to provide its perspective on how the current assessment method factors in the extent of services the department provides to specialized and full-service HMOs. The department did not directly answer our question, only stating that the operations of the department, supported by the depart- ment’s “infrastructure,” are built on the premise of serving all enrollees equally regardless of the class of HMO. This response begs the question of how the effort the department actually devotes to specialized and full-service plans corresponds to the amount it asks them to pay. Using workload figures for those divisions in the department for which data is available by HMO class, we calculated how much of the workload is attributable to full-service HMOs and how much to specialized HMOs. The divisions we used in our calculations accounted for about 64 percent of the department’s budgeted expenditures in fiscal year 2001–02 and include three of the department’s four primary operating divisions. The remaining divisions do work of a general nature and did not keep records that would allow us to assess the split in workload. After weighting the identifiable Although only 22 percent workload data for the relative size of the divisions, we found of its identifiable that these divisions devote approximately 22 percent of their workload relates to efforts overall to regulating specialized HMOs and 78 percent specialized HMOs, the to regulating full-service HMOs. department charges them 48 percent of total These proportions are far different from the relative assessments assessments. billed to the HMOs: 48 percent of the department’s assessments were billed to specialized HMOs and 52 percent were billed to full- service HMOs. Table 1 details the workload splits and the related divisional costs attributable to specialized and full-service HMOs, as well as the weighted proportion of the total costs. Some units also work on other functions that are not differentiated by class of HMO. For example, the Office of Enforcement (Enforcement) spends a substantial amount of its time defending the department against lawsuits brought by HMOs. Table 1 does not show workload splits or divisional costs attributable to these other functions. 18 19 Because we believe it is reasonable to assume that divisional costs relate closely to the specific functions the division per- forms, we applied the workload percentages for specialized and full-service HMOs to each division’s total costs for the first half of fiscal year 2001–02 to arrive at the estimated amount that each class of HMO cost that division. In all of the units shown in Table 1, specialized HMOs account for far less of the work- load than full-service HMOs, and in no case does their share approach 48 percent of the workload. On an annualized basis, which doubles the amounts for the six months presented in Table 1, the divisional costs attributable to specialized HMOs amount to about $3.4 million, and those for full-service HMOs total about $12 million. Together, these divisional costs of $15.4 million make up approximately 50 percent of the department’s assessment for fiscal year 2001–02. TABLE 1 Split of Workload Costs Identified by HMO Type Specialized and Full-Service HMOs July Through December 2001 Workload Split * Divisional Cost* (Percentage) (In Thousands) Departmental Unit Specialized Full-Service Specialized Full Service Help Center: Independent Medical Review 1% 99% $ 7 $ 706 Standard Complaints and Initial Review 11 89 202 1,632 Call Center 10 46 85 391 Enforcement 6 56 53 499 Legal Services 17 60 172 608 Plan Oversight 33 62 1,157 2,173 Total divisional cost $1,676 $6,009 Proportion of cost identifiable by type of HMO 22% 78% Sources: Department accounting and payroll records, and timekeeping and call volume databases. State Controller’s Office payroll information. Bureau of State Audits survey of Help Center’s Division of Preventive Health Intervention and Division of Legal Case Review staff. *Workload splits do not total 100 percent where part of a unit’s efforts was devoted to other functions that are not differentiated by class of HMO. Divisional cost figures reflect only the portion of costs attributable to specialized and full-service HMOs; costs attributable to other functions are not presented. 18 19 The workload splits for the HMO Help Center (Help Center) units, particularly the Standard Complaints and Initial Review unit and the Independent Medical Review unit, diverge the most from the split of assessments between specialized and full-service HMOs. To carry out its responsibilities, the Help Center responds to written complaints, telephone inquiries, and requests for independent medical reviews (IMRs) from enrollees. The Call Center’s data on call volume identified roughly 10 percent of telephone calls as being related to specialized HMOs and 46 percent as being related to full-service HMOs. Much of the remaining call volume was not identifiable by HMO class because the center’s tracking system specifically identified calls related to only nine large HMOs. It did not track the remaining 44 percent of calls by individual HMO or by HMO class. Enforcement’s workload for specialized HMOs, at 6 percent, Workload is heavily was also small, especially when compared to the 56 percent weighted toward full- related to full-service HMOs. As we mentioned earlier, this service HMOs in each division spent much of its time, 38 percent, on “other” work of the divisions where that was not specific to any HMO class. About 95 percent of work is identifiable by these other efforts related to defending the department against class of HMO. lawsuits filed by HMOs. The workload figures for the Office of Legal Services (Legal Services) also show that the bulk of the workload, 60 percent, was related to full-service HMOs and that specialized HMOs generated only 17 percent of the workload. Like Enforcement, Legal Services spent a significant, though smaller, portion of its time on general departmental work. This general work, accounting for 23 percent of the office’s time, included analyzing legislation and supporting the department’s Advisory Committee on Managed Care. Finally, although the Office of Health Plan Oversight (Plan Oversight) presented the most even workload split between full- service and specialized HMOs that we were able to review, the split still diverged significantly from the split for assessments. The workload ratio appears to be closer because the division must regularly carry out financial examinations and medical surveys of all HMOs in order to assure their financial viability and adequacy of care. Nevertheless, even though this office oversees more specialized HMOs than full-service HMOs, the workload related to full-service HMOs was almost twice that for specialized HMOs. 20 21 The workload split in Table 1 on page 19 presents our calculation of the costs directly attributable to specialized and full-service HMOs for the first six months of fiscal year 2001–02. When we presented this information to the department as a potential basis for revising the assessment structure, the department raised concerns that its operations are evolving and that it is impossible to say how factors such as future legal requirements and enrollee expectations will impact the workload split. We recognize that changes in programs may result in a change in the workload split between HMO classes, and we therefore think it is important for the department to reassess its workload periodically to determine whether the split has changed significantly. However, only a radical change in the department’s basic operations would be likely to alter the current split in workload significantly. For example, a 100 percent increase in the proportion of written complaints for specialized HMOs, from 11 percent to 22 percent, would increase the overall workload percentage for specialized HMOs by only 2 percent, from 22 percent to 24 percent. THE EXISTING ASSESSMENT STRUCTURE HAS A DISPROPORTIONATE FINANCIAL EFFECT ON SPECIALIZED HMOs Besides poorly mirroring the workload split, the current assessment structure has a disproportionate financial effect on specialized HMOs. The department asserts that the current structure does not create a financial burden on any particular HMO. However, we found that the average assessments for specialized HMOs represent a much larger portion of their premium, Medicare, and Medicaid receipts (premiums), than they do for full-service HMOs. We analyzed the effect on premiums rather than on total revenues because premiums represent the amounts HMOs receive in exchange for providing their services. Total revenues also include other funds, such as interest income, that are independent of services provided. On average, the current structure requires specialized HMOs to pay 0.37 percent of their premiums to the department, as The percent of premiums opposed to 0.04 percent of premiums paid by full-service HMOs. for specialized HMOs is This amounts to about nine times more per premium dollar for about nine times higher specialized HMOs. As Table 2 on the following page illustrates, the per premium dollar than effect is magnified for HMOs that provide vision, psychological, it is for full-service HMOs. and certain other services. These HMOs pay more than 0.50 percent of their premiums to the department on average. 20 21 TABLE 2 HMO Assessments as a Percentage of HMO Premiums Premiums Assessment Assessment as Average HMO Type (In Millions) (In Millions) Percentage of Premiums Full-service $40,922 $16.1 0.04% Specialized: Dental 3,167 5.9 0.19 Vision 549 3.7 0.67 Psychological 242 3.6 1.49 Other $ 104 $ 1.7 1.63% Sources: Assessment amounts are from department records for the fiscal year 2001–02 assessment period. Premium amounts are from HMO annual statements for their fiscal periods ending during calendar year 2000. When brought down to the individual HMO level, the difference can be quite striking. For example, a 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. The specialized HMO has about 4.2 million enrollees with average annual premiums per enrollee of about $19; the full-service HMO has about 35,000 enrollees with average annual premiums per enrollee of about $2,345. We shared this example with the department and asked for its viewpoint on why such a disparate impact would not be harmful to specialized HMOs. The department did not address our example, but asserted that only one HMO has indicated it considers the current assessment formula unfair or in need of change. Also the department said that the current assessment, which averages approximately $.50 per enrollee per year, does not cause a financial burden for any HMO. An average of the cost per enrollee for all HMOs, however, hides important differences in financial impact among them. Such disparities make us seriously question the department’s assertion that the current structure does not harm individual HMOs. OTHER METHODS WOULD BETTER REFLECT THE WORKLOAD AND REDUCE FINANCIAL DISPARITIES Assessment models that more directly reflect the split in work- load between specialized and full-service HMOs and that include rates based on HMO premiums, which act as a surrogate for the number of enrollees and the breadth of care provided, appear 22 23 to offer a more equitable way to pay for the department’s costs than the current method. Although we also considered other methods that do not explicitly take workload into account, we found that they did not provide a good enough match to the workload split by HMO class, had disproportionate financial effects, or both. Table 3 presents the financial impacts of the four funding alternatives we considered. Calculations in the table reflect the department’s fiscal year 2001–02 funding need from assessments of approximately $31 million and result in varying financial impacts and assessments for each HMO class. TABLE 3 Comparison of Current and Alternative Assessment Methods Current Alternative Method Assessment Methods B C Total Cost Cost Allocated D A Allocated by by Divisional Flat Fee Flat Fee Divisional Workload Per Premium Per Enrollee Workload* and Premium* Dollar Total assessment by HMO class (in millions) Full-service $16.1 $11.5 $24.2 $26.4 $28.2 Specialized 14.9 19.5 6.8 4.6 2.8 Percentage of total assessments by HMO class Full-service 52% 37% 78% 85% 91% Specialized 48 63 22 15 9 Average assessment per enrollee (in dollars) Full-service $ 0.71 $ 0.50 $ 1.07 $ 1.16 $ 1.24 Specialized 0.38 0.50 0.18 0.12 0.07 Average percentage of assessment per premium dollar Full-service 0.04% 0.03% 0.06% 0.06% 0.07% Specialized 0.37 0.48 0.17 0.12 0.07 Sources: The current assessment amounts are based on the department’s fiscal year 2001–02 assessment records. Amounts for alternative methods are based on department records of HMO enrollees and premiums, and workload figures developed by the Bureau of State Audits. *Assessment methods preferred by the Bureau of State Audits. Alternatives A and D offer simplified methods for calculating assessments but do not meet our criterion of approximating the split in workload between specialized and full-service HMOs. Alternative A would assess a per capita charge per enrollee irrespective of HMO type. The focus on the number of enrollees would make this alternative similar to the current model. Unlike the current model, however, which charges specialized and full-service HMOs different rates per enrollee, it would 22 23 lack any recognition that different classes of HMOs generate different levels of work for the department. As the table shows, this scheme would move the proportion of assessments paid by specialized HMOs to 63 percent, even further away from their estimated workload of 22 percent. Additionally, this alternative would create even more divergence in the financial impact on HMO classes, requiring specialized HMOs to pay, on average, 16 times more than full-service HMOs per premium dollar. In contrast, Alternative D, which charges all HMOs the same rate per dollar of premiums, would eliminate any difference in financial impact between classes. However, the proportion of assessments for specialized HMOs, at about 9 percent, would move too far in the other direction, poorly mirroring the 22 percent level of workload associated with the class. Alternative B would closely align the proportion of assessments Alternative B would to the workload by apportioning the $31 million in assessments closely match the between specialized and full-service HMOs according to portion of assessments workload estimates and then dividing this amount within the for each HMO class to class by the amount of premiums each HMO collects, to arrive the split in identifiable at an assessment amount for each HMO. In this example, workload and would $6.8 million, or 22 percent of the $31 million the department reduce disparities in needs, would be allocated to assessments of specialized HMOs, financial impact. and individual specialized HMOs would pay an assessment at the rate of 0.17 percent of premiums. The result of Alternative B is an assessment that closely matches the identified workload and reduces disparities in financial impact. Specialized HMOs would pay approximately three times the rate per premium dollar that full-service HMOs pay, rather than the nine times they pay currently. Additionally, no specialized HMOs would pay more than 0.17 percent, eliminating the large disparities that HMOs providing vision, psychological, and certain other services experience. This method allocates the departmental overhead costs according to the identifiable split in workload and is similar to the department’s own method for allocating overhead costs in its accounting system. The department’s system distributes costs for the Director’s Office, Office of Administration, and Office of Information Technology to its other divisions based on their proportion of budgeted personnel positions. See Appendix B for the steps we used to calculate assessments under Alternative B. 24 25 Finally, Alternative C offers a different method for taking workload into account, one that reduces even further the differences in financial impact. This method apportions between the HMO classes the divisional workload costs of $15.4 million that can be identified by class and then divides the remaining overhead costs of $15.6 million across all HMOs according to Alternative C would their premiums. This method of allocating the $15.6 million of reduce differences in overhead would have a common financial impact by assessing financial impacts by each premium dollar at the rate of 0.03 percent, and we charging the same therefore believe that this method, like Alternative B, offers a rate per premium sound structure for assessments. See Appendix B for the steps we dollar to all HMOs for used to calculate assessments under Alternative C. departmental overhead. We shared the alternatives above with the department, indicating those we prefer. In responding to us, the department stated that it has no position on the formula issue or preference as to the methodology used to assess HMOs. 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 method that would yield approximately the same results as the current assessment method. Similar to Alternative C, it would divide divisional costs according to workload, with 24 percent of these costs assessed to specialized HMOs. It would, however, allocate the remaining overhead costs at the same rate per enrollee regardless of the class of HMO, assessing specialized HMOs 63 percent of these costs. We asked the department to provide its perspective on what its overhead supports, if not its core operations, and why the number of enrollees, rather than identifiable workload or HMO premiums, provides a better alternative for allocating overhead. The department did not directly answer our question, stating only that the operations of the department, supported by the department’s “infrastructure,” are built on the premise of serving all enrollees equally regardless of the class of HMO. We do not consider the department’s additional alternative to be equitable because the split between the 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 the HMOs. 24 25 The alternatives detailed here do not include a flat fee per HMO or a sliding rate scale similar to that included in the current assessment structure. Such refinements would assure that small HMOs pay a minimal amount to cover their share of the department’s costs, even if their enrollment or premiums are low. For example, a full-service HMO with 1,805 enrollees was assessed about $14,200 for fiscal year 2001–02. Of this amount, $12,500, or 88 percent, related to the flat fee that the department charges to all full-service HMOs. Although we believe that a flat fee and/or sliding scale is necessary no matter what basic assessment method is used, we did not include such modifications in our study of the various alternatives because it would not significantly change the proportion of assessments or the financial impact on the HMO classes as a whole. ADDITIONAL USER FEES ASSESSED DIRECTLY TO HMOs WOULD NOT BE BENEFICIAL All of the alternatives detailed in the previous section would be relatively inexpensive for the department to implement because they use sources of data that are readily available and would not require a complicated billing system. In addition to these alternative assessment structures, we considered a direct billing process that would charge specific regulatory costs back to individual HMOs. Such a process would be similar to billing systems for regulatory functions at the Department of Insurance, which funds some of its activities through charges for examinations and reviews. HMO regulators in Illinois that we interviewed also indicated that they charge fees for the examinations they perform. Currently, the department bills HMOs directly for the cost of performing only additional or nonroutine financial examinations and medical surveys. Thus, there is a precedent for the practice of direct billing to recover the costs of regulatory activity. However, we are not recommending that the department Direct billing for expand its direct billings to cover the costs of other activities, financial exams and primarily because we do not believe it would be beneficial to medical surveys would do so. If the department were to undertake such billings, we not be beneficial believe that the most administratively feasible areas to expand because it would into would be routine financial examinations and medical introduce fluctuations in surveys because the department already has a direct billing charges to HMOs. process established for nonroutine activity in these areas. Even in these areas, however, we do not believe that direct 26 27 billing would be beneficial because the related services are performed on three- and five-year cycles, and billing for them would introduce fluctuations in the charges to HMOs as well as potential fluctuations in the department’s resources. Further, direct billing for the cost of operations for other units would be administratively difficult given that the department performs many tasks of short duration, such as responding to enrollee telephone calls or complaints. For example, the department’s Help Center staff answered an average of 915 calls each week in 2001, and tracking the time spent assisting enrollees for each of the 107 HMOs would be cumbersome. RECOMMENDATIONS To ensure more equitable assessments of HMOs to support the department’s activities, similar to the results from Alternatives B and C presented in this chapter, we recommend that the Legislature: • Consider changing the department’s assessment structure to reflect the proportion of the documented workload that the department devotes to specialized and full-service HMOs and to reduce disparities in the financial effect on HMOs, and • Require the department to report to the Legislature triennially on the proportion of assessments charged to each class of HMO and the proportion of the documented workload related to each class of HMO. n 26 27 Blank page inserted for reproduction purposes only. 28 29 CHAPTER 2 The Department Is Generally Effective in Meeting Deadlines, But It Must Improve the Timeliness of Financial Examinations and Its Responses to Requested Plan Changes CHAPTER SUMMARY The Department of Managed Health Care (department) has increased the output for some of its core functions, has introduced several new services for health maintenance organization (HMO) enrollees, and, in certain instances, is generally better at meeting statutory deadlines when compared to the same functions previously carried out by the Department of Corporations (Corporations). 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 40 backlogged surveys at the end of calendar year 1998. On the other hand, the department’s Division of Financial Oversight (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. Financial Oversight has recently implemented recommendations made by a consultant that may help it reduce its backlog through better planning and the elimination of review procedures unlikely to reveal financial risk. This unit also plans to fill staff vacancies and hire a contractor to keep up with its workload. Similarly, the Division of Licensing (Licensing) has often failed to promptly notify HMOs of its decisions regarding the HMOs’ requests to make significant changes, known as material modifications, to health plans. It was late in sending written notifications for 42 of the 122 material modification filings it received in 2001. Licensing is implementing a new electronic filing system intended to improve the monitoring 28 29 of its workflow. However, given the newness of the system it is too early to tell whether it will help Licensing resolve the problem of late notifications. Based on our review of the department’s work related to six core functions, the department appears to have adequate resources to meet its needs. Production is up, backlogs are generally down, and new services have been made available to HMO enrollees. The two functions, Financial Oversight and Licensing, which still need to improve the timeliness of their work, have resources available to them that should help them improve their performance. FOUR CORE OPERATIONS ARE GENERALLY We reviewed the following units: MEETING DEADLINES OR HAVE GREATLY • Standard Complaints and Initial Review unit EXPANDED SERVICES • Call Center The department has significantly increased the • Independent Medical Review unit resources devoted to HMO regulation compared to those spent by Corporations on similar functions in • Division of Plan Surveys fiscal year 1998–99, increasing output and generally • Division of Financial Oversight meeting statutory requirements. For four of the six • Division of Licensing units we reviewed—the Standard Complaints and Initial Review unit (Complaints unit), the Call Center, the Independent Medical Review unit, and Medical Surveys—the department is meeting deadlines and/ or has greatly expanded the services it provides to HMO enrollees. Improvements in the timeliness of complaint resolutions and medical surveys are particularly dramatic. THE DEPARTMENT RESOLVES MOST WRITTEN COMPLAINTS ON TIME The department’s Complaints unit has greatly reduced the backlog of written complaints. As shown in Table 4, under Corporations there were 305 backlogged complaints at the end of calendar year 1998; by the end of calendar year 2001, the Complaints unit had a backlog of only 9 complaints. This turnaround came despite the fact that the department now faces a tighter 30-day deadline for the resolution of written complaints, as opposed to the 60-day deadline in effect in 1998. Moreover, 84 percent of the Complaints unit’s closed cases in 2001 were resolved within the 30-day time frame, and less than 1 percent took longer than 60 days to resolve. 30 31 The improvement in the unit’s on-time performance has come at a cost, however. The costs for staff devoted to resolving written complaints have more than doubled since 1998, but the volume of complaints closed has increased by only 36 percent. TABLE 4 Performance Indicators for the Resolution of Standard Complaints Against HMOs Department of Department of Corporations Managed Health Care July Through December July Through December Percent 1998 2001 Change Backlog at end of period 305 9 -97% Complaints closed 1,430 1,942 36% Cost of Complaints unit staff $132,320 $304,945 130% 111%* Sources: Bureau of State Audits report 97118.2, issued April 1999, for 1998 closed complaints and backlog information. Help Center organization chart and reports on 2001 open and closed complaints. State Controller’s Office payroll records. *Adjusted for inflation. The Department Has Significantly Reduced Its Backlog of Medical Surveys The department’s Medical Surveys unit has also greatly reduced its backlog. As shown in Table 5 on the following page, backlogged medical surveys fell from 40 at the end of calendar year 1998 to 4 at the end of calendar year 2001. The law requires the department to complete a medical survey for each HMO at least every 3 years. Thus, we consider surveys to be backlogged when Medical Surveys does not publish a new survey report for a given HMO within 3 years of its last published survey report. In addition, Medical Surveys has done a better job of publishing survey reports within 180 days of the end of the survey, which is the statutory deadline unless the director decides that more time is necessary to complete a full, fair report. During the 3 years ending December 31, 1998, the related unit at Corporations issued 44 late reports that missed the 180-day deadline by an average of 6 months. In contrast, for reports initially due during the first 18 months of the department’s operations, ending 30 31 December 31, 2001, Medical Surveys issued 14 late reports that missed the deadline by 77 days on average. Only 2 of these late reports related to output during fiscal year 2001–02. Table 5 shows that Medical Surveys increased its output of surveys during the first 6 months of fiscal year 2001–02 over the same period in fiscal year 1998–99. Labor hours devoted to surveys have also increased but at a much slower pace. By reducing backlogs and improving its compliance with the publishing deadline, Medical Surveys has decreased the risk that the HMOs that are the subjects of these surveys will have uncorrected deficiencies that violate laws and regulations, and it has also improved the timeliness of the information available to the public regarding the quality of HMO services. TABLE 5 Performance Indicators for Routine Medical Surveys Department of Department of Corporations Managed Health Care July Through December 1998 July Through December 2001 Backlog at end of period 40 4 Hours spent on medical surveys 1,702 2,774 Public reports issued 7 20 Sources: Bureau of State Audits report 97118.2 issued April 1999, for 1998 data. Department accounting records and Medical Survey tracking logs and files for 2001 data. Note: Because surveys take several months to complete, reports in one year may have been started in another year. The Department Has Significantly Expanded Other Services for Enrollees The department has also devoted more resources to answering enrollee requests for assistance and has established a new program to address enrollee requests for independent medical reviews. As detailed in Table 6, costs have gone up significantly at the department’s Call Center. This unit is, however, responding to many more calls and providing consumers with a broader array of services. In fiscal year 1998–99, staff answered enrollee calls only during normal business hours. In contrast, the Call Center now provides around-the-clock service through an external contractor and also offers “urgent” and “quick- 32 33 resolution” services for resolving complaints. Urgent complaint- resolution services relate to issues of denial or delay of medication, premature release from a hospital, or inappropriate care. According to the chief of the HMO Help Center (Help Center), the Call Center has a goal of resolving these issues within seven days. Quick-resolution complaint services relate to nonurgent issues, such as payment of claims, problems scheduling appointments, and enrollment in an HMO, which Call Center staff believe can be resolved quickly. Currently, nine HMOs have agreed informally to participate in the Call Center’s quick-resolution program. The goal of the program is to resolve complaints in three days. By using these processes, enrollees can bypass the written complaint process and get complaints resolved more quickly. The Call Center has also instituted an interactive voice response (IVR) system that gives phone callers general information, such as telephone numbers for the complaint units of HMOs, which reduces the number of calls that staff or the external contractor must answer. As Table 6 indicates, call volume increased by 62 percent between the first half of fiscal year 1998–99 and the first half of fiscal year 2001–02, while costs increased by 118 percent, after adjustment for inflation. By offering urgent and quick-resolution services, the Call Center probably reduced the workload of the TABLE 6 Performance Indicators for the Call Center Division of Managed Health Care Department of July Through December 2001 Corporations Interactive July Through Voice December 1998 Response Percent By Department Staff By Department Staff System By Contractor Total Change Calls answered 41,479 21,362 24,697 21,197 67,256 62% Quick resolutions handled Not offered 279 Urgent complaints handled Not offered 672 Cost $145,492 $204,808 $6,576 $134,646 $346,030 138% 118%* Sources: Bureau of State Audits report 97118.2, issued April 1999, for 1998 call data. Help Center organization chart and reports on services performed in 2001. State Controller’s Office payroll records. *Adjusted for inflation. 32 33 Complaints unit, but more importantly, it helped consumers resolve issues more quickly by not requiring them to submit written complaints. In addition to these expanded services, the department began processing enrollee requests for independent medical reviews (IMRs) in 2001, as required by law. The Independent Medical Review unit (IMR unit) within the Help Center helps consumers The department answered resolve issues related to medical necessity and experimental 85 percent of requests or investigational therapies. IMR staff collect requests for for Independent Medical IMRs and related paperwork, determine whether the requests Reviews within its 30-day meet minimum criteria for review, and send qualified deadline. requests to independent, contracted health care professionals, who decide whether HMOs have inappropriately denied services. During 2001 the IMR unit closed 513 standard IMR requests. Of this total, the IMR unit answered 438 or 85 percent of the requests within the department’s own 30-day deadline. As of December 31, 2001, only 1 of 38 open IMR cases had been outstanding for more than 30 days. TWO CORE OPERATIONS ARE HAVING DIFFICULTY MEETING DEADLINES While four of the six operating units we reviewed showed marked improvements in effectiveness and/or a significant expansion in services, two others—Financial Oversight and Licensing—are not meeting statutory deadlines. Financial Over- sight has seen a large increase in its routine workload which, combined with staff vacancies and an increase in nonroutine work, has led to a backlog in completing routine examinations. Licensing has sometimes failed to notify HMOs within statutory time frames of the status of its decisions regarding their requests for major plan changes, known as material modifications. When the department does not complete examinations on time, the public is not fully informed of the financial status of HMOs, and when it does not notify HMOs of delays in approving their requests for changes, they are not able to respond to department concerns, resulting in delays in changes that the HMOs believe are necessary and significant. 34 35 The Backlog of Financial Examinations Has Increased Despite an Increase in Examinations Completed Financial Oversight recently increased its output of reports on the results of routine financial examinations, yet its backlog of reports to complete also increased. These examinations assess the financial condition of each HMO every 5 years, as required by law, to ensure that consumers receive adequate protection from financially weak HMOs. As shown in Table 7, this backlog amounted to 13 reports at the end of calendar year 2001, com- pared to 2 at the end of calendar year 1998. Examinations for all of the reports in the current backlog were in progress as of December 31, 2001, but Financial Oversight had not yet issued the public reports. When the department does not publish reports on time, enrollees do not receive up-to-date analysis that could assist them in making appropriate decisions about their HMOs. TABLE 7 Performance Indicators for Routine Financial Examinations Department of Department of Corporations Managed Health Care July Through December 1998 July Through December 2001 Hours spent on routine financial examinations 7,624 10,476 Routine public reports issued 5 13 Backlog at end of period 2 13 Sources: Bureau of State Audits report 97118.2, issued April 1999, for 1998 data. Department accounting records and Financial Oversight tracking logs and files for 2001 data. Note: Because examinations take several months to complete, reports issued in one year may have been started in another year. As shown in Figure 4 on the following page, the number of reports that Financial Oversight needed to complete surged in fiscal year 2001–02. Several factors contributed to this significant increase in workload and Financial Oversight’s inability to keep up with it. First, the large number of HMOs licensed in fiscal year 1996–97 had their first reports come due in fiscal year 2001–02. In addition, the department explained that staff vacan- cies reduced its ability to complete examinations. For example, as of December 7, 2001, department records show that 3 of 34 35 FIGURE 4 Routine Financial Reports Required by Fiscal Year �� �� �� �� �� � � Source: Financial Oversight Aging Report. 36 37 ����������������������� �� �� �� �� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � ���������� Financial Oversight’s 15 budgeted examiner and auditor posi- tions for routine financial examinations were vacant. Accord- ing to the chief of Financial Oversight, these positions have not been filled because of a lack of qualified candidates and a state- wide hiring freeze that began in October 2001. Financial Over- sight has, however, applied for an exemption from the freeze and indicates that it plans to hire additional workers in fiscal year 2002–03. It is also in the process of hiring private audit- ing firms to complete 4 to 6 financial examinations. Accord- ing to the chief of Financial Oversight, it plans to have these firms begin their work in spring 2002. Finally, he explained that Financial Oversight delayed work on routine examinations in order to undertake several large, nonroutine examinations of financially troubled HMOs. During the first half of fiscal year 2001–02, for example, Financial Oversight logged over 1,300 hours for nonroutine examinations, close to the amount of time required for two routine examinations. This compares to 988 hours spent on nonroutine examinations in all of fiscal year 1997–98 and 15 hours spent on them in the first half of fiscal year 1998–99. We also believe that Financial Oversight incorrectly interprets a state law, and this misinterpretation contributes to its problems with publishing financial examination reports on time. The Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act) requires the department to perform financial examinations of each HMO no less frequently than once every five years. The Chief of Financial Oversight said that the division has a long-standing policy of determining compliance with the five-year cycle according to when it sends notification letters to HMOs at the beginning of financial examinations. He said that using this methodology, Financial Oversight currently has only one financial examination that does not meet the five-year requirement. However, we believe that the Knox- Keene Act requires Financial Oversight to complete a financial examination and issue a final report for each HMO at least once every five years. By using the start date of the notification letter rather than the issue date of the final report, Financial Oversight has extended the time between reports for certain health plans to longer than permitted. For example, because the department licensed a particular full-service HMO on March 22, 1996, we expected to find that it had issued a financial examination report on the HMO by March 22, 2001. Financial Oversight, however, sent a notification letter to the HMO on February 5, 2001, and did not issue a public report until March 29, 2002, one year beyond the five-year limit. It will be particularly important for Financial Oversight to adequately address its backlog problem because, with recent increases in funding, it has committed itself to examining all full-service HMOs every three years instead of every five years, and it plans to do the same for specialized HMOs considered to be at risk for financial difficulties. Consequently, the number of reports required each year will continue to be high—between 25 and 30. In addition to its plans to hire more staff and use external contractors to deal with this workload, Financial Oversight is implementing new processes, recommended by a consultant, that may also help improve its output. For example, it is using a risk-based approach for planning examinations and is budgeting and tracking the time it spends on examinations. The effectiveness of these processes and of Financial Oversight’s hiring plans, however, is still to be seen. 36 37 The Licensing Division Often Misses Statutory Deadlines for Material Modifications Licensing is also having problems in meeting its statutory deadline to promptly notify HMOs of its decisions regarding material modifications (modifications) to their plans. The law requires the department to approve, disapprove, suspend, or postpone the implementation of these modifications, such as the expansion of a service area or the sale of an HMO, within 20 business days of receiving notice of them, or within such additional time as the HMOs may specify. The department must notify HMOs in writing in cases where it is The Licensing Division disapproving, suspending, or postponing the implementation was late in notifying of the modifications. The notifications serve to inform HMOs of HMOs of its decisions for the reason for the department’s decision. Licensing was late in 42 of the 122 requests for notifying HMOs of its decisions on 42 of the 122 modifications material modifications it it received in 2001. As of December 31, 2001, these items were received in 2001. late by 41 business days, on average. The delays ranged from 1 to 139 days, with 12 of the items outstanding at year’s end. The department’s slowness in notifying HMOs of its decisions regarding modifications may lead to delays in implementing major changes in health care services when HMOs are not aware of and thus cannot address issues the department has with their modifications. Licensing said that it verbally provided its comments to HMOs at an earlier date for 23 of the 42 late modifications. Verbal notifications do not, however, meet the requirements of the law. In addition, by their very nature, verbal notifications leave the department vulnerable to charges that it has not responded to the HMOs. According to the assistant chief counsel for Licensing, workload issues may be a factor contributing to late notifications. In addition, an August 2001 report studying the feasibility of implementing a new electronic document management system found that limitations in Licensing’s manual processes made it difficult to ensure that statutory turnaround requirements were met. The report also found that Licensing had no reliable, consistent means of tracking the status of its workload. Indeed, we found that the system used to track modifications in 2001 often had incomplete data and did not have a mechanism for highlighting overdue items. To alleviate these problems, Licensing is implementing an electronic filing system intended in part to enhance the department’s ability to satisfy statutory requirements through workflow functions. According to the manager for the project, the department completed the pilot phase of the project in 38 39 October 2001, began the rollout phase in December 2001, and should complete the project by June 30, 2002. Nevertheless, Licensing appears to face continuing problems with meeting deadlines for notifying HMOs regarding modifications. It turned off an automated feature of the new system that indicates when notifications are close to being overdue because the feature created a tremendous workload for the system administrator, who had to redistribute the filings. Given the newness of the system, however, it is too early to tell whether it will eventually help Licensing resolve the problem of late notifications. Based on our review of the department’s work related to six core functions, the department appears to have adequate resources to meet its needs. Production is up, backlogs are generally down, and new services have been made available to HMO enrollees. The two functions, Financial Oversight and Licensing, which still need to improve the timeliness of their work, have resources available to them that should help them improve their performance. RECOMMENDATIONS To ensure that enrollees have up-to-date departmental analysis on the financial status of HMOs, the department should establish deadlines for the publishing of financial examination reports and should closely monitor the success of its efforts to meet deadlines for these reports. To ensure that HMOs are promptly notified of the status of material modifications to their plans, the department should closely monitor the time elapsed between its receipt of requests for these modifications and the notifications it sends to HMOs, and it should make it a priority to send written notifications within the statutory deadline. n 38 39 We conducted this review under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. We limited our review to those areas specified in the audit scope section of this report. Respectfully submitted, ELAINE M. HOWLE State Auditor Date: May 28, 2002 Staff: Lois Benson, CPA, Audit Principal Jim Sandberg-Larsen, CPA Ana Clark Dominic Nadarski Katrina Williams Lan Yan 40 41 APPENDIX A The table on the following page compares the amount bud- geted for support staff to that budgeted for line staff by division and for the Department of Managed Health Care as a whole. Line staff include employees who provide services directly to health maintenance organizations (HMOs) or HMO enrollees, such as consumer services representatives in the HMO Help Center, corporation examiners in the Office of Health Plan Oversight, and their supervisors. Support staff include managers and clerical employees in operating divisions and all employees in support divisions. 40 41 TABLE A.1 Comparison of Budgets for Line Staff vs. Support Staff Fiscal Year 2001–02 Budgeted Personnel Divisions Expenditures Percentage Operating: HMO Help Center Line staff $2,818 90% Support staff 320 10 Office of Enforcement Line staff 1,010 67 Support staff 494 33 Office of Health Plan Oversight Line staff 4,266 79 Support staff 1,144 21 Office of the Patient Advocate Line staff 356 57 Support staff 270 43 Support: Office of Administrative Services Support staff 2,228 100 Office of the Director Support staff 1,384 100 Office of Legal Services Support staff 1,562 100 Office of Technology and Innovation Support staff 924 100 Department Totals Line staff 8,450 50 Support staff 8,326 50 Total $16,776 100% Sources: Governor’s Budget and Wages and Salaries Supplement for fiscal year 2001–02. Note: Percentages rounded to the nearest full percent. 42 43 APPENDIX B The steps listed in this appendix detail the procedures we used to calculate assessments for specialized and full-service health maintenance organizations (HMOs) under alternative assessment methodologies B and C in Chapter 1. Alternative B—Total Cost Allocated by Divisional Workload Steps Action 1 Determine the workload split by HMO class. 2 Multiply the total funding need by the workload split in step 1 to calculate the total to be paid by each HMO class. 3 Divide the amount to be paid by HMO class from step 2 by the revenues from premiums, Medicare, and Medicaid (premiums) for the HMO class to calculate the assessment rate for the class. 4 Apply the assessment rate for the HMO class from step 3 to premiums for individual HMOs to calculate the assessment for each HMO. For example, assuming a department funding need of $31 million, a specialized HMO workload split of 22 percent, and specialized HMO premiums of $4.1 billion, total assessments for specialized HMOs would total $6.8 million and the assessment rate for individual, specialized HMOs would be 0.17 percent of premiums. A specialized plan with $80 million in premiums would be assessed about $136,000. continued on the next page 42 43 Alternative C—Divisional Workload and Premiums Steps Action 1 Determine the workload split by HMO class. 2 Multiply the workload split by the funding need for those divisions with an identifiable workload split to calculate the total to be paid by each HMO class. 3 Divide the amounts in step 2 by the premiums for the HMO class to determine the divisional cost assessment rate. 4 Apply the divisional cost assessment rate for HMO class in step 3 to the premiums for individual HMOs to calculate the assessment for each HMO. 5 Divide the remaining funding need by the total premiums for all HMOs to calculate the departmental overhead assessment rate. 6 Apply the departmental overhead assessment rate from step 5 to the premiums for individual HMO to calculate the assessment for each HMO. 7 Add the amounts from steps 4 and 6 to determine the total assessment for each HMO. For example, assuming a department funding need of $31 million which includes $15.4 million budgeted for divisions with identifiable workload, a specialized workload split of 22 percent, and specialized HMO premiums of $4.1 billion, assessments for specialized HMOs related to divisional costs would total about $3.4 million and the assessment rate for individual, specialized HMOs would be 0.08 percent of premiums. In addition, assuming that total premiums for all HMOs amount to $45 billion, all HMOs would be charged at a rate of about 0.03 percent of premiums to pay for the departmental overhead costs of $15.6 million. A specialized plan with $80 million in premiums would be assessed about $64,000 for divisional costs and about $24,000 for remaining overhead costs for a total assessment of $88,000. 44 45 Agency comments provided as text only. Business, Transportation and Housing Agency 980 9th Street, Suite 2450 Sacramento, CA 95814-2719 May 15, 2002 Elaine M. Howle* State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, CA 95814 Dear Ms. Howle: Attached is the Department of Managed Health Care’s (Department) response to your draft report, The Department of Managed Health Care: Assessments for Specialized and Full-Service HMOs Do Not Reflect Its Workload and Have Disparate Financial Impacts (#2001-126). I appreciate that, in the first chapter of your report, you include the Department’s perspective on the rate structure alternatives that you present for the Legislature’s consideration. As the Department’s more detailed response indicates, there are quite a number of additional factors that the Legislature must consider 1 when analyzing the financial impact that alternative assessment structures will have on Health Main- tenance Organizations (HMO), particularly those HMOs whose financial solvency may be affected through an increased assessment. Additionally, fairness to the HMOs and their subscribers, as well as the ease of administering the assessments, certainly will be factors in the decision the Legislature is being asked to make. In addition to the workload analysis and possible alternative assessment methods presented in the first chapter, the second chapter of your report discusses the Department’s performance. I am pleased that four of the six operating units reviewed have significantly improved existing services, such as complaint resolution, while offering several new services to HMO enrollees. In relation to the issue of the timeliness of its financial examinations, I support the Department’s placing a high priority on actions to protect consumers, and agree that its change to a three-year examination cycle and its hiring of outside firms will address any concerns regarding the timeliness of conducting the examinations. As * California State Auditor’s comments begin on page 55. 44 45 Elaine M. Howle May 15, 2002 Page 2 the Department indicates in its response, to improve licensing operations, it has made programmatic changes to focus on its core responsibilities and ensure timely performance, and is developing a new tracking system for improved caseload management that will be integrated with its system for the electronic filing of amendments and material modifications. I appreciate the opportunity to respond to your audit report. If you need additional information, please do not hesitate to contact me, or Michael Tritz, Chief of the Office of Internal Audits within the Busi- ness, Transportation and Housing Agency, at (916) 324-7517. Sincerely, (Signed by: Maria Contreras-Sweet) MARIA CONTRERAS-SWEET Secretary 46 47 Agency’s comments provided as text only. Department of Managed Health Care 980 9th Street, Suite 500 Sacramento, CA 95814-2725 May 13, 2002 TO: Elaine M. Howle State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, CA 95814 VIA: Maria Contreras-Sweet, Secretary Business, Transportation and Housing Agency FROM: Daniel Zingale, Director Department of Managed Health Care RE: BUREAU OF STATE AUDITS DRAFT REPORT Thank you for giving us this opportunity to respond to the first independent state audit of the Department of Managed Health Care since our July 2000 launch. We appreciate your recognition of the Department’s efforts on behalf of California’s HMO consumers. We have been concerned that previous oversight of HMOs as reported in a 1999 state audit discouraged many frustrated HMO consumers from seeking state help. Thus, we are hopeful that release of this report will help educate more consumers about their new rights and the role the Department can play in protecting and enforcing those rights. In your 1999 report, you suggested that HMO oversight was failing to meet the needs of consumers and needed to be moved to a new department with new leadership to “provide the necessary direction, focus and vision to the staff responsible for regulating health plans.” In the same year, Governor Davis signed into law the most ambitious and comprehensive HMO reforms in the nation, including the establishment of the Department of Managed Health Care, the first and only organization in the nation solely dedicated to protecting HMO consumers. 46 47 Elaine M. Howle, State Auditor May 13, 2002 BSA Draft Response Page 2 In the 1999 report, you suggested that the appointment of new leadership was urgently needed to ensure more responsive and accountable HMO oversight. On the first day of the Department, the Governor filled top positions with patient advocates; he appointed medical professionals to ensure that medical decisions guide our work; and he filled three advisory boards to ensure the input of consumers, health care professionals, employers and other health leaders. In your 1999 report, you cited “indifferent customer service” for Californians who were trying to resolve their HMO problems. We are pleased your report validates the work of our leadership team and everyone at the Department to make customer service a core principle: • “Production is up, backlogs are generally down, and new services have been made available to HMO enrollees.” • “[The Department] 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 [the previous regulator] until June 2000.” • “Improvements in the timeliness of complaint resolutions and medical surveys are particularly dramatic.” • “The department’s Complaints unit has greatly reduced the backlog of written complaints...This turnaround came despite the fact that the department now faces a tighter 30-day deadline for the resolution of written complaints, as opposed to the 60-day deadline in effect in 1998.” HMO MEDICAL SURVEYS In 1999, you wrote that “consumer protection was less than expected because the department had not completed by December 1998 nearly half of all required medical surveys.” In 2002, you report: “The department’s Medical Surveys unit has also greatly reduced its backlog… By reducing backlogs and improving its compliance with the publishing deadline, Medical Surveys has decreased the risk that the HMOs that are the subjects of these surveys will have uncorrected deficiencies that violate laws and regulations, and it has also improved the timeliness of the information available to the public regarding the quality of HMO services.” HMO LICENSING Your report says that the Department has not promptly informed HMOs of our decision to approve, postpone or deny their proposed changes in writing. We have sought to improve communications with health plans by providing more informal forums 2 for sharing information. This more informal approach is similar to the HMO Help Center’s informal complaint resolution process, which has helped to expedite the resolution of thousands of consumer complaints. 48 49 Elaine M. Howle, State Auditor May 13, 2002 BSA Draft Response Page 3 3 To improve licensing operations, we have concentrated on establishing a new system for electronic filing of amendments and material modifications. In addition, the Department has begun an aggressive, multi-faceted program of change to focus on our core responsibilities and ensure on- time performance. A new, integrated tracking system is being developed to be used with the e-filing system to enable our staff to manage their caseload effectively and supervisors to review up-to- date caseload information. HMO FINANCIAL EXAMS Finances affect patient care. From the moment our financial exams begin, they inform us of potential problems that could affect patient care. Our approach toward financial exams has already yielded record patient rights enforcement results. In fact, three exams resulted in the seizure of three HMOs where poor financial management was gravely threatening patient care. We recognize that, in some cases, we have prioritized actions to protect consumers, over issuing some final reports to HMOs. Additionally, we are moving towards a three-year financial examination cycle, 4 hired outside contractors, implemented exam efficiency measures and applied automation to improve collecting and reporting information. HMO ASSESSMENTS We recognize your concerns about the HMO assessment fees that are used to fund the work 5 at the Department. A change to the current assessment formulas would require action from the legislature. The Department of Managed Health Care merely complies with existing law in applying the current assessment formulas. CONCLUSION Your report provides us with useful, constructive observations. It also provides an opportunity to inform HMO consumers that they are empowered with some of the strongest patient rights laws in the nation and have a responsive new advocate to assist them in exercising those rights. We put patients first and we will continue to do so. Thank you again for giving us the opportunity to comment on the report. A technical appendix follows, with minor corrections and other areas of concern. If I can be of any assistance, please do not hesitate to call me directly at 322-2012. DZ:KG:bs Attachment – Technical Appendix 48 49 Technical Appendix Below is information relative to specific points raised in the report. HMO Help Center 6 The 1,684 includes both the Department’s Call Center and External Call Center. • Page 12a – Types of Help Center Assistance 7 Written Complaints – The report said HMO enrollees file a “Request for Assistance,” when in fact they file a “formal complaint.” • Page 16 – last bullet and Page 26, first paragraph These are correct statements, for the time period reflected, however, with the installation of the new computer system, we are now able to capture the call volume for all HMOs. The Department of Corporations’ old system relied on agents manually entering data into a Call Center Management Information System via the keypad on the telephone. Because of the volume of information involved in entering data for all health plans, only data for the nine largest plans was captured. • Page 35 – Call Volumes 6 Last sentence – The report says 915 calls each week, when in fact the number should be 1,684. The 1,684 includes both the Department’s Call Center and External Call Center. • Page 39 and 40 – Chart 8 The report shows that there are 9 complaints backlogged, when in fact there were 6. 9 The number of complaints closed from July-December 2001 is 2,664, note 1,942. • Page 43 – first sentence 0 The report says “…such as telephone number and addresses…” – we do not provide addresses via the IVR System. • Page 44 – second paragraph q “During 2001, the IMR Unit closed 513 standard IMR requests. Of this total, the IMR Unit answered 438 or 85 percent of the requests within the Department’s own 30-day deadline. As of December 31, 2001, only 1 of the 38 open IMR cases has been outstanding for more than 30 days.” - 1 - 50 51 Technical Appendix This should be: “During 2001, the IMR Unit closed 561 standard IMR requests. Of this total, the IMR Unit answered 487 or 87 percent of the requests within the Department’s own 30-day deadline. As of December 31, 2001, only 1 of the 38 open IMR cases has been outstanding for more than 30 days.” Licensing Activities The BSA report states that the Department has not promptly informed HMOs of our deci- sion to approve, postpone or deny their proposed changes known as “material modifica- tions.” Under the new Department, we have sought to improve communications with health plans 2 by providing more informal forums for sharing information. Holding pre-filing conferences with plans, review of draft plan filings, and corresponding by phone and email are efforts we are making to facilitate faster review of filings, and ensure that plans have understood and met the requirements of the Knox-Keene Act and regulations. This more informal approach is similar to the HMO Help Center’s informal complaint resolution process, which BSA staff praised in the report. To improve licensing operations, we have concentrated on establishing a new system for electronic filing of amendments and material modifications. Approximately 50 health plans are now filing documents electronically, and we anticipate all plans will be doing so by June, 2002. At the same time that plans are being certified to file electronically, design changes are being made to enhance performance. In addition, the Department has begun an aggressive, multi-faceted program of change to focus on our core responsibilities and ensure on-time performance. A new, integrated tracking system is being developed to be used with the e-filing system to enable staff to manage their caseload effectively and supervisors to review up-to-date caseload information. Financial Examinations The BSA audit report states that the Department is having difficulty completing financial examinations on time, and that a backlog of 13 examinations exists. The Department’s emphasis has always been on the protection of the enrollee. This has w meant that in some cases, the Department has delayed production of a report in favor of more pressing financial issues. This is consistent with the Department’s traditional reading of the statute which we believe requires an examination to begin within five years. - 2 - 50 51 Technical Appendix Beginning with the current year, the Governor and the Legislature provided support in the budget to move to a 3-year examination cycle for full service plans and specialized plans. e Thus, the 5-year issue is moot since those reports will clearly be completed with the 5 years. Regarding the backlogged examinations, the fieldwork on 12 of the 13 examinations has been completed and 9 final reports have been issued. The issuance of the final report in these cases was delayed because staff were diverted to other more pressing workload, pri- marily non-routine examinations. It is our belief that investigating and resolving issues which prompt non-routine exams, primarily financial solvency-related issues, is more important than completing the routine examinations in question. An analysis of the routine exami- nation reports in question would have shown that there are no potential findings that will negatively impact enrollees. The Department provides up-to-date financial information to consumers. In keeping con- sumers informed, the Department has posted 20 financial exam reports on our website since July 1, 2001. Currently, summary financial information is on the website, and as part of the Department’s automated financial statement submission, the financial statements of all licensed health plans will soon be added to the Department’s web page. In addition, the Department is in the process of automating the financial statement review with the purpose of better targeting potential financial problems. This will allow the Department to address financial problems earlier, with the potential of redirecting examiner time to performing examinations. To meet increased examination obligations, the Department has contracted with four out- side firms to assist with performing limited scope examinations. Additionally, the Department engaged the services of an outside consultant to review and recommend changes to the financial examination and financial statement review processes. The Department has or is in the process of implementing several recommendations. This includes implementing more risk assessments when planning examinations, enhancing preplanning for examinations, reducing work paper volume, expanding the use of technology, creating more structure in the financial statement review process, and establishing the outcome-based indicator model to rapidly classify a plan’s financial status. Assessments As we have stated in our numerous discussions, the Department has no position, at r this time, on the formulas used to assess plans. Our concern is only that the approach chosen provides a proper and timely mechanism to obtain the funding necessary for the Department’s operations, and secondarily, that the method be straightforward and simple to administer. - 3 - 52 53 Technical Appendix We believe a change to the current assessment formulas, which were originally established t to fund the HMO licensing and regulatory functions in the Department of Corporations, would be a legislative determination. The Department of Managed Health Care merely complies with existing law in applying the current assessment formulas. y We believe the Legislature should be advised of all different methodologies and their impacts. As we have discussed with BSA audit staff throughout the audit, there are many different formulas which can be used to assess the plans, and a number of ways to evaluate them. At a minimum, this evaluation could take into consideration the different cost structures u associated with various types of plans, as well as the specific impact a revised formula may have on a given plan. We have raised throughout the audit our concern that changing the existing formulas may impact some plans adversely. Increasing assessments to full service plans to the levels recommended by the BSA may raise new concerns with the financial solvency of some of those plans. Finally, to the extent it is determined that the appropriate methodology for plan assessments i is a “cost” driven approach, the method for assigning cost must be fully analyzed. The Department’s operations, supported by the Department’s “infrastructure,” are built on the premise of serving all enrollees equally, regardless of whether an enrollee is in a full service or specialized plan. In fact, based on the BSA’s findings, less than 50% of the Department’s activities can be attributed directly to either full-service or specialized plans. It should be noted that the BSA’s “cost allocated” assessment option is built on the i assumption that the appropriate method of allocating 100% of the Department’s costs should be allocated based on the less than 50% of costs that the BSA could associate with a specific plan type. While this type of “cost accounting” approach for “overhead” allocation is not unreasonable, it certainly does not represent the only possible approach. For example, allocating significant portions of infrastructure/overhead based on plan enrollment would generate a very different result. This option and others are not presented for legislative consideration. - 4 - 52 53 Blank page inserted for reproduction purposes only. 54 55 COMMENTS California State Auditor’s Comments on the Response From the Business, Transportation and Housing Agency and the Department of Managed Health Care To provide clarity and perspective, we are commenting on the responses to our audit from the Business, Transporta- tion and Housing Agency (agency) and the Department of Managed Health Care (department). The numbers correspond to the numbers in the agency’s and department’s responses. 1 We address the department’s statements related to assessments at pages 57 through 59, points 14 through 18. 2 The department’s use of more informal methods to share information with health maintenance organizations (HMOs) is laudable. Nevertheless, as discussed at page 38, the department still needs to adhere to the Knox-Keene Act’s requirement that it provide written notification to HMOs within the designated timeframes. We considered notifications by letter or e-mail to be adequate written notification. 3 In our report, we have recognized the department’s efforts to improve its licensing operations and discuss them at pages 38 and 39. 4 In our report, we have recognized the department’s efforts to improve its financial examination operations and discuss them at pages 36 and 37. 5 On pages 15 and 17 of our report, we acknowledged that the Legislature established the current assessment structure and that the department has simply implemented this structure. Our recommendations related to assessments, at pages 4 and 27, are addressed to the Legislature. 54 55 6 Our analysis at page 27 focused on calls answered by the department’s HMO Help Center staff, which averaged 915 calls per week, as we reported. We have added wording to the text to clarify this point. 7 The department used the terminology “Request for Assistance” in internal reports tracking complaints it received through November 14, 2001. Nevertheless, we have changed the text box at page 10 to refer to “formal complaints,” rather than “requests for assistance.” 8 The department is mistaken. There were nine complaints backlogged at December 31, 2001. Six of these relate to complaints tracked by the department’s new database, established November 15, 2001, and three relate to complaints tracked by the department’s old database. 9 The complaints total cited by the department includes written complaints that the department resolved itself, complaints referred to the HMOs or other agencies for resolution, and quick resolution complaints. To provide data comparable to that which we presented in our 1999 audit report on the Department of Corporations, we only presented the number of written complaints resolved by the department in 2001. Similar to 1999, we did not include referred complaints because the department did not actually resolve them. We presented the number of quick resolution complaints in the table on Call Center performance because the Call Center handles this newly established function. Complaints both resolved by the Department of Corporations and referred to the HMOs or to other agencies totaled 2,505 in the first half of fiscal year 1998–99. Had we compared this total to a comparable figure for 2001, Table 4 on page 31 would have indicated a much smaller increase in output. We do not believe that reporting these numbers would have fairly reflected the department’s achievements. 0 We have deleted the words “and addresses” from the text at page 33. q The department’s figures do not match those from detailed department reports on independent medical review (IMR) cases closed in 2001. Because department staff did not raise a concern about these figures in discussions we previously held with 56 57 them, we were unaware of their concern and did not have the opportunity to clarify what their statistics represent. However, it appears that the department’s total includes the 48 IMRs that were withdrawn in 2001. w We have recognized the department’s position at page 37 and disagree with it. We also note that its position appears to contradict the statement on its Internet site, which says, “Pursuant to Section 1382 of the California Health and Safety Code, the Division of Financial Oversight is responsible for conducting routine financial examinations of each health plan and issuing a public report for each plan a minimum of once every five years.” Further, it is not clear to us how delaying a report in favor of more pressing financial issues is consistent with the department’s reading of the statute to require an examination to begin within five years. e The department is incorrect in dismissing our finding related to the lateness of its financial examination reports. We concentrated our analysis on the department’s ability to meet the five-year cycle since that was the relevant timeframe for fiscal year 2001–02. The move to a three-year cycle does not relieve the department of the need to complete, as well as start, financial examinations. Given the fact that the department will receive resources to shorten the examination cycle, we believe it is incumbent on the department to set and adhere to a schedule for issuing financial examination reports every three years. r It is true that we have had numerous discussions about the assessment structure with the department, which indeed reiterated that it has no position on the formula used to assess HMOs as we indicate at page 16. In these meetings, we discussed the need to change the current structure based on the criteria we discuss on page 17. We believe these criteria are not only reasonable, but practical. We also believe our criteria are preferable to the department’s, which do not address the issue of an inequitable distribution of assessments. Because of the department’s vigorous response to our proposed criteria, we solicited its response to numerous questions, as we indicate throughout Chapter 1. The department did not address our specific questions, but instead chose to respond with general observations. t We agree that it is the Legislature, not the department, which will change the current assessment structure, should it conclude the change is necessary. However, we believe the department is 56 57 disingenuous when it describes its role as “merely” complying with the law. Instead, we believe it is reasonable to expect that the department will have some input on any proposed changes to the law. y Although the department states that the Legislature should be advised of “all different” methodologies and their impacts, we believe no value is added by presenting numerous additional methods that do not meet our criteria of reflecting the propor- tion of workload devoted to each class of HMO, distributing the financial burden equitably among the HMOs, and being cost- effective to administer. We have, however, presented an array of methods that are quite different from one another and that yield very different results, as Table 3 at page 23 indicates, and have recommended two that satisfy our criteria. Further, in its general response to our questions, the department offered four alternatives of its own for our consideration. By the department’s own descrip- tion, three of these were “similar” to three that we have presented. In considering the fourth, we found that it resulted in average assessments very similar to current assessments, which we had already concluded were inequitable and therefore unsatisfactory. u The department exaggerates the effect of a change in assessment methodology on full-service HMOs. While it is true that full- service HMOs would pay more in assessments under our preferred alternatives, the financial impact as a percent of premiums would be small. On average the percent of premiums that full-service HMOs would pay to the department would increase from 0.04 percent to 0.06 percent, as indicated in Table 3 at page 23. We are at a loss to understand why the department is concerned that changing the existing formula may impact some plans adversely, but is unable to conclude that the kind of disparities in financial impact resulting from the current assessment structure, where specialized plans pay 0.37 percent of their premiums or nine times more per premium dollar than full-service plans, is burdensome. This is one of our questions the department declined to answer directly. With regard to the effect of alternative assessments on specific HMOs, we offered to share with the department the results of alternative methodologies on individual HMOs. The department did not respond to our offer. We are, however, aware of one full-service HMO, with premiums of about $180 million, about which the department has concerns. When we calculated the increase in assessments under our preferred alternatives, even with the addition of a flat fee of $12,500, we found that this HMO would pay only $10,000 or $19,000 more. 58 59 i The department is inaccurate when it contends that we did not fully analyze the method for assigning overhead costs. In particular, the department implies that we have not considered enrollment as a basis for allocating overhead. However, the four alternative methodologies we present at Table 3 consider various ways of assigning overhead costs, including by enrollment (Alternative A), by workload (Alternative B) and by premium (Alternatives C and D). In analyzing these methods, however, we considered the financial impact of the method on each class of HMO. As we indicated in the report, the enrollment-based methods result in disparate financial impacts. This is true of the current, enrollment-based, assessment structure, as well as the fourth assessment structure the department proposed, more than half of which would be enrollment-based. 58 59 cc: Members of the Legislature Office of the Lieutenant Governor Milton Marks Commission on California State Government Organization and Economy Department of Finance Attorney General State Controller State Treasurer Legislative Analyst Senate Office of Research California Research Bureau Capitol Press 60