"The cost for regulation of a company adds overhead, and they are going to have to recoup that money somehow, meaning higher prices," Dwyer said.

A 1997 study for the National Center for Policy Analysis examined the cost implications of 12 medical benefits that have been proposed as mandatory. The study concluded that the dozen items could raise the cost of a "standard family policy" (which now costs $3,500 a year) by as much as 30 percent. The health care items examined in the study included drug-abuse treatment, mental health care and vision exams.

Many doctors and consumer advocates counter that those types of services fall under the rubric of "appropriate care," and that the services have been unfairly denied to many policy holders.

Furthermore, doctors like Brian Johnston, medical director of the emergency room at White Memorial Medical Center in Los Angeles, contend that implementing some new services won't necessarily mean price hikes.

"Increased regulation will probably mean increased costs, but they don't have to be passed on to (policy holders)," said Johnston, immediate past president of the Los Angeles Medical Association. "Many of these HMOs have been providing substandard service while making unreasonable profits, taking 20 or 30 percent of their revenues off the top and paying their executives millions of dollars a year."

Johnston suggested that regulation of HMOs is one way to "squeeze out some of the excess" profits. He said this could be done by setting minimum levels for the percentage of HMO revenues that must be spent on furnishing medical care.

Johnston noted that some for-profit HMOs spend a far smaller portion of revenues on providing health care than the percentage spent by non-profit HMOs.

Snyder, of the California Association of HMOs, countered that HMO administrative costs and profits are generally on par with many other industries averaging 15 percent to 20 percent of revenues.

While profits could be affected by regulation, consumer advocates contend that some proposed rules could actually lower HMOs' expenses.

For example, one recommendation from the state task force is that HMOs provide prospective clients more complete information about fees and restrictions of medical care.

Fuller disclosure could prevent complaints and even litigation from customers who believe they have not received the level of care for which they contracted.

"Some of these recommendations have the potential to reduce costs for HMOs by preventing problems before they can become big problems," said Peter Lee, director of the consumer protection programs of the Center for Health Care Rights.

Haines disagreed, saying that "with each new regulation comes new administrative requirements as well as, in many cases, additional benefits that have to be paid for."

While the extent to which new regulations could raise HMOs' costs is debatable, medical industry analyst John M. Curtis said HMOs are already incurring higher costs from government efforts.

"HMOs have had a very costly past couple of years employing lobbyists and attorneys to fight the avalanche of legislation to regulate them," said Curtis, director of the Discobolos Consulting Service in Los Angeles. "They won't admit to something like that because it is not considered legitimate overhead."


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