Staff Reporter

Health maintenance organizations, viewed only five years ago as the saviors of the nation's health care industry, find themselves under fire from all fronts.

"HMOs have become the lightning rods of criticism for everything that people think is wrong with health care," said James Turner, a principal in the San Francisco office of Milliman & Robertson Inc., a national insurance consulting firm based in Seattle.

HMOs face an especially aggressive attack from Sacramento lawmakers, who have repeatedly tried to push through dozens of reform bills. In the wake of a report recommending significant regulatory overhaul, 50 bills are on tap for the year and the deadline for new state legislation is still a month away.

Two HMO reform initiatives are in the works for the November ballot, even though two similar initiatives in 1996 were both defeated.

On the national front, giant hospital chains like Columbia/HCA Corp. have borne the brunt of federal investigations into health care fraud. The resulting uproar resulted in changes in Medicare billing practices that will hit HMOs as well as hospitals.

HMOs are also coming under fire from Wall Street, as they face increasing difficulty in reaching expected profit levels. Several HMO stocks have been pummeled in recent months, including those of New York-based Oxford Health Plans Inc. and Santa Ana-based PacifiCare Corp.

HMOs also face criticism from consumer advocates, who claim that the health plans are profiting by denying needed care.

Doctors, nurses and other health care workers are taking their shots too primarily at the cost-control techniques used by HMOs.

Even Hollywood has gotten into the act, as evidenced by a scene from the current hit comedy "As Good As It Gets," in which the character played by Helen Hunt launches into a tirade against HMOs a scene that repeatedly draws applause from movie audiences.

Myra Snyder, executive director of the California Association of Health Plans, which represents the industry in California, said HMOs have in effect become the "political poster child" for problems with the nation's health care system.

"The politicians, in their zeal to respond to this, may end up unraveling the ability of the health plans to deliver the care that people receive," Snyder said.

Ironically, the public perception of HMOs is mixed. When asked in a recent Field Research Corp. poll whether they are satisfied with their own health plan, 83 percent of 1,200 respondents said they are "very satisfied" or "satisfied." Most multibillion-dollar industries have nowhere near that level of public approval.

Yet in the same poll, 54 percent said the state's health care system needs fundamental change, and 84 percent believe the system needs at least some change.

"What's happened is that many people either have their own horror story about HMOs or know someone who has," said Mike Dwyer, managing director of health care services with the Los Angeles office of accounting firm BDO Seidman. "It feeds into the perception that HMOs are insurance agencies and insurance companies are just not to be trusted."

One public relations disaster involved the policy of sending new mothers home only 24 hours after giving birth. Dubbed "drive-through deliveries" by consumer groups, it fed the perception that HMOs were willing to push patients out the door to cut costs. Many HMOs have dropped the 24-hour restriction.

HMOs took another P.R. beating in the courtroom. In one well-publicized case in 1993, a jury found Health Net Inc. guilty for refusing a bone-marrow treatment for a patient who later died. The jury ordered Health Net to pay $89 million.

HMO officials say such incidents are rare and they repeatedly point to surveys citing high satisfaction ratings.

But fed by the horror stories and widespread public distrust, the drumbeat for reform has become loud and steady.

Last year, state legislators drafted more than 80 bills aimed at tightening up HMO regulations. They took aim at the Department of Corporations, which has been criticized for lax enforcement, along with the HMOs' mandatory arbitration policies.

Most of that legislation was on track to sail through when Gov. Pete Wilson put on the brakes, saying that lawmakers had not waited for results from a panel that was meeting to discuss how best to reform HMOs.

The Managed Health Care Improvement Task Force, composed of 20 gubernatorial appointees and 10 legislative appointees and chaired by the godfather of managed care, Alain Enthoven, released its report this month. Among the more than 100 reform recommendations, a few stood out:

- Creating a new HMO regulatory agency run by a board or an elected or appointed official;

- Requiring HMOs to publish lists of approved drugs and allow patients to continue receiving drugs they are already taking even if they are not on approved lists;

- Requiring HMOs to release detailed information on patient complaints and requiring them to set up standardized procedures for dealing with those complaints;

- Requiring HMOs to publish standardized descriptions of their services that allow consumers to comparison-shop.

HMO lobbyists say the report's recommendations, if implemented, would result in micromanagement of health care delivery and simply increase health care costs.

Some consumer groups, on the other hand, contend the recommendations do not go far enough. In response, those groups are drafting even more sweeping reforms. They have also drafted two initiatives that would remove existing liability caps on HMOs, among other things.

"Without the pressure from these initiatives, the Legislature and the governor will proceed with their business-as-usual attitude," said Jamie Court, executive director of Consumers for Quality Care, an L.A.-based consumer group.

With this much activity, "HMOs will not come out of this legislative session unscathed," said Dwyer. "They will not be able to ward off the legislation. There is just too much attention on HMOs right now."

Even the HMOs admit they are fighting a largely defensive battle.

"We anticipate an onslaught of legislation, on everything from utilization review to requiring coverage for mastectomy," said Snyder of the HMO trade group. "We are very concerned about the volume of legislation this year."

But HMO advocates say they, too, are scouring the task force recommendations. The aim, they say, is to forestall legislation that would be even more onerous and expensive than the task force recommendations.

Meanwhile in Washington, President Clinton's "Health Care Bill of Rights" has put patient care back in the spotlight.

Among its provisions: requiring health plans to give direct access to specialists; banning so-called "gag clauses" in which providers are forbidden from disclosing certain non-covered treatment options; and allowing patients to appeal treatment denials to independent medical boards.

Many of the provisions including a ban on "gag clauses" are already in effect in California. Other provisions, such as increasing access to specialists, are also being proposed in state reforms.

However, consumer advocates say that even though many of these provisions are already on the books, many cannot be enforced against employer-sponsored plans. Those plans, which include major companies (typically with at least 10,000 employees) that self-insure for health care, fall under the federal Employee Retirement and Income Security Act (ERISA), which pre-empts state laws.

Consumer advocates in California, including Consumers for Quality Care, are pushing for ERISA reform in Congress. Employer groups, insurers and HMOs oppose efforts to change ERISA and have mounted their own lobbying campaigns.

This legislative pressure comes at a time when HMOs are facing severe pressure from Wall Street.

First came the troubles at Columbia/HCA, which had grown to be the largest hospital chain in the country by buying up hospitals and introducing cost-control measures only to be investigated by federal officials on a variety of fraud charges.

Then came the late-October collapse of Oxford Health Plans' stock as the company warned of a third-quarter loss. It turned out that Oxford had to take a $200 million charge because the fast-growing HMO underestimated its costs. Worse yet, Oxford had extensive problems tracking its costs as it grew in size.

Locally, PacifiCare late last year warned of lower fourth-quarter earnings, sending its shares plummeting. Much of the trouble has been attributed to its problems integrating recently purchased FHP International Inc.

"It's becoming clear that, as these HMOs consolidated, they have not been able to realize the economies of scale that had been expected," Dwyer said. "HMOs have been so busy pursuing growth opportunities and gaining what we term in the trade 'covered bodies' that they have neglected to keep their operational costs in line."

HMOs have responded to these financial pressures by raising premiums. For much of the mid-1990s, health care costs had been relatively flat, rising on average between 1 percent and 3 percent. In California, they actually dropped in 1994 and 1995.

But costs began to creep up in 1996 and early 1997, rising on average by 2 percent to 3 percent in each of those years, Dwyer said.

In recent months, though, policy renewals have been averaging 5 percent higher, with some even reaching 10 percent.

As employees are asked to pay more, they are also asking what they are getting for the extra bucks.

"With health care, there is the perception that the service received by the customer never matches the value of what they pay for," Dwyer said.

As consumers increasingly feel they are being shortchanged, the pressure builds for more reform, and a vicious circle begins.

"The system can take only so many add-ons before its ability to function is impaired," said HMO industry representative Snyder.

For reprint and licensing requests for this article, CLICK HERE.