CA Governor Davis Signs HMO Liability Law, Other HMO Reforms; Consumer Group Says End To Mandatory Binding Arbitration Now Needed

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California Governor Gray Davis today signed into law HMO liability legislation, sponsored by the Foundation for Taxpayer and Consumer Rights (FTCR), which allows patients who are seriously harmed to collect damages from HMOs that deny them medically necessary treatment. Until the reform takes effect, 14 million Californians who receive health coverage through private sector employers can recover no damages when harmed, only the cost of the benefit denied, due to a federal employee benefits law.

SB 21 (Figueroa) was amended at the governor’s request, from the original language drafted by FTCR, so that it would not take effect until January 2001, when an external review system is implemented. In addition, the legislation was changed to be silent on the issue of whether HMOs can force patients into private arbitration rather than court. FTCR heralded the bill as an important step for Californians, after its three year campaign for the enactment of the liability law, but said it would seek legislative relief before the January 2001 implementation date to prevent patients from being forced into binding arbitration as a condition of health coverage.

“California patients and their doctors will now have more leverage when requesting medically necessary treatment because HMOs will have to fear the threat of significant damages for their wrong-doing,” said Jamie Court, FTCR’s advocacy director. “This historic reform package will be a bellwether for the nation because it evens the gravest imbalances of power between HMOs and their patients in the state where HMOs were born and over ninety percent of the population is in managed care. But California patients should be able to take HMO abuses before juries and the public scrutiny of an open court, not be forced before private judges who can receive repeat business from an HMO and have a pecuniary interest in not ruling against the company in a significant way. Patients should not be forced to give up their right to see a jury as a condition of joining an HMO and ending pre-dispute binding arbitration at HMOs will be our next task. All HMOs should have to face the eyes of juries for their abuses.”

To date, only Texas has a similar HMO liability law to SB 21. Georgia enacted a liability law this year also, but it does not allow for punitive damages. Missouri patients also have a limited remedy to sue their HMOs for malpractice.

Texas Model Produces No Cost Increases, Few Lawsuits, Much Deterrence

Despite HMO industry claims, a Texas HMO liability law in effect since September 1997 has not increased health care costs and has resulted in only six lawsuits. Doctors report, however, that they are receiving more deference from HMOs when requesting medically necessary treatment from their HMOs, according to the Texas Medical Association.

“The HMO boogey man of increased costs due to HMO liability did not materialize in Texas and it will not in California,” said Court. “The two year old Texas experiment shows that liability forces HMOs to behave responsibly, but does not result in litigiousness or increased costs.”

Rate Regulation For HMO Industry Is Needed Reform

FTCR also announced today that it will seek to establish legislatively a state regulatory system for HMO premiums and for the rates paid by HMOs to doctors, similar to the “prior-approval” system established by insurance reform Proposition 103 for property/casualty insurers (which was authored by FTCR president Harvey Rosenfield). Under Prop 103, property/casualty insurers must submit rate increase or decrease requests to the state for approval before they take effect, and the public can intervene to stop unnecessary rate hikes through public hearings. The proposed HMO “prior approval” system would cover both the rates charged by HMOs to customers and the amount HMOs pay doctors to care for patients, which are often inadequate to patients’ needs. Both rates would have to be sound. In the case of doctors, the rate would have to be enough to actually care for patients. While HMO premiums have been increasing significantly, the amount paid to doctors and hospitals has declined.

“HMOs should have to justify their rates to the state before they take effect just like property/casualty insurers do,” said Court. “Today’s bill signing cermony is just the beginning of HMO reform, not the end. We have a beach head in the fight for patients’ rights to reasonably-priced, high quality health care but the battle is not over.”


Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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