California's HMO Battle: Cost vs. Care

Managed care, once touted as the panacea for the ills of the US health-care system, is facing a growing backlash.

Critics charge that in their pursuit of reducing medical costs, health-maintenance organizations (HMOs) and other managed-care plans are reducing the quality of care as well.

Doctors say they are being pressured by HMOs to deny expensive treatment to their patients. Already some 16 state legislatures have sided with doctors by passing laws this year rolling back so-called gag rules. The gag rules are used by HMOs to limit what doctors can tell their patients.

Providers vs. workers

But by far the most extensive effort to curb the power of HMOs is taking place in California, the state that pioneered managed care and with the highest percentage of patients covered by those plans. Health-care worker unions, patients' organizations, and consumer advocates have placed two proposed laws on the ballot this fall that would give doctors more freedom to make medical decisions, restrict the ability of HMOs to deny treatment, and set standards for staffing levels in hospitals, clinics, and other health facilities.

"If this wins, this will change the nature of the debate across the country," says John Roark, head of the California Physicians Alliance, a doctors' group backing one of the initiatives. "Then it becomes politically credible and easy for legislatures across the country to say this is what the public wants."

The ballot initiatives have sent a scare through the HMO and insurance industry and supporters among the businesses that buy their services. They are mounting a multimillion-dollar campaign, covering California's airwaves with slick advertisements designed by the makers of the "Harry and Louise" campaign partly credited with sinking the Clinton-proposed health-care reform in 1993.

"We believe these two initiatives would increase health-care costs between 10 to 15 percent a year," says Allan Zaremberg, executive vice president of the California Chamber of Commerce, who is staunchly against the initiatives. The measures would require excessive staff levels and make it difficult to control unnecessary medical procedures, he says.

Supporters of the HMO reforms contend the estimated costs are overstated, based on an industry-sponsored study. But other analysts share the view that these measures would undercut the gains made in lowering health-care costs in this country by HMOs, which provide health services through their own doctors and hospitals or by contracts with them.

Managed-care plans reduced inefficiency and waste that were characteristic of the traditional fee for service system that used to predominate, says Allain Enthoven of Stanford University, one of the country's leading experts on and proponents of managed competition in health care. The impetus for these ballot measures comes less from consumer unhappiness than from the impact of cost-cutting on doctors, nurses, and other health-care workers, he argues.

California's experiment

California has been a laboratory for managed care since the early 1980s - today out of 21 million Californians covered by health insurance, some 13 million belong to an HMO. According to a 1994 RAND Corp. study, this led to a rate of growth of health-care expenditures that is half the national rate.

But a wide array of critics, among them patients organizations and consumer activists, such as Ralph Nader, paint a picture of an industry out of control. "We've seen a steady erosion of care and unsafe practices that is the direct result of a shift from pursuit of care to pursuit of profit," says Charles Idelson, spokesman for the California Nurses Association.

Such attacks have been fueled by reports of huge profits by California's major health plans - nearly half a billion dollars last year - paired with a declining percentage of money spent on actual medical care.

Proposition 216 would tax annual compensation for HMO executives above $2.5 million, as well as mergers, acquisitions, and sales of assets. Their plan would use the funds to finance creation of a consumer watchdog agency and treatment for the uninsured poor.

Propositions favor doctors

The two California propositions prohibit gag orders, bar financial incentives to deny or delay care, as well as preventing denials without a second opinion. Proposition 214 also bars HMOs from firing doctors or nurses without demonstrating "just cause," such as proven malpractice.

The proposed measures aim at "shifting the decisionmaking balance back to the licensed health-care provider and the patient and away from HMO bureaucrats," says Dr. Roark, whose organization backs Proposition 214, sponsored mainly by the Service Employees International Union, a major health-care worker organization.

"We have to get rid of the waste," responds Maureen O'Haren, chief lobbyist for the California Association of HMOs. "We have to have denials of care, and we can't assume denials are bad."

State and federal legislation has focused on two aspects of this debate - gag rules and requirements that mothers leave maternity hospitals within 24 hours of a normal birth. Recent studies have suggested the rapid departure of newborns led to an increase of more serious health complications, leading some 28 states and the federal government to pass laws mandating at least a 48-hour stay.

The California legislature also passed three laws this year that prohibit gag rules and protect doctors from retaliatory action by health organizations. But the initiative backers say those laws are weak and loophole-ridden, passed with the support of the industry for the purpose of heading off their more sweeping proposals.