Pressure On To Merge State Agencies — Two Offices Oversee Health Insurance

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Debate is heating up over whether California should continue to be the only state with two agencies regulating health insurance.

The Department of Managed Health Care oversees health plans – mostly HMOs – that cover 21.6 million Californians. The Department of Insurance regulates most preferred provider and traditional indemnity plans, which cover 2.4 million state residents.

Talk about combining the two has spiked several times since the managed-care department began in 2000, but the issue has gained momentum as the state scrambles to save money and federal health care reform begins to change the insurance market.

No legislation has been drafted, but the politically charged issue is looming. Options under debate include shifting all health insurance regulation to one department or the other.

The two departments should collaborate better – and possibly merge, Insurance Commissioner Dave Jones said during his fall campaign for the job. It's no secret that Jones would like to add HMOs to his fiefdom, although he was unavailable this week to talk about it.

The dual structure is "confusing to consumers, inefficient and duplicative and can definitely lead to regulatory inconsistency," said his press secretary, Ioannis Kazanis.

Cindy Ehnes, who stepped down as DMHC director Monday, bristles at the notion of turning over all regulation to Jones. She points to the far higher number of people in plans regulated by her agency and the focus in federal reform toward regulating quality and continuity of care, not just insurance. The law that dictates operations at DMHC does this far more than the state insurance code, she said.

Consumer and industry groups are similarly divided.

Doug Heller, Consumer Watchdog executive director, points to a history of rate regulation at the insurance department and suggests that makes it "the reasonable choice" to oversee the entire market.

But Charles Bacchi, executive vice president at the California Association of Health Plans, cautions that efforts to change the regulatory structure in the middle of federal health care reform "is a complicating factor that doesn't make a great deal of sense."

"Health reform raises the stakes. It is really about empowering consumers. Having two regulators is cumbersome and confusing," said Deborah Kelch, president of Kelch Associates and a consultant hired by the California Health Care Foundation to analyze the issue. Her report is due by summer.

No action on the fate of the two agencies is expected soon, but it may be coming.

Former DMHC deputy director Edward Heidig has been named interim chief, but no appointment is in sight while Gov. Brown focuses on the state budget. Vacancies exist across the new administration because all attention has been diverted to budget negotiations, new Health and Human Services Secretary Diana Dooley said.

"We've kept many directors in place because it's very important to know what the future of the department will be before a decision is made," she said.

The insurance department, led by an elected insurance commissioner, is responsible for regulating the business of insurance in California.

By law, the agency is the primary regulator for all entities engaged in the business of health insurance except those under jurisdiction of another agency – like HMOs.

Historically, DOI regulated fee-for-service indemnity insurance that offered unfettered access to providers. That changed in the 1980s with growth of "preferred provider organization" plans that offer favorable rates if members pick providers in a limited network.

The state Insurance Code, which dictates operations at the department, was amended in stages to add PPOs and "exclusive provider organization" plans in which members are required to seek services within the network, with no option to go outside.

Questions continue about whether insurance regulation should be an elected post because it's often considered a step toward higher office and commissioners may come and go every four years.

On the HMO side, prepaid health plans like Kaiser Permanente began to gain strength in the 1940s.

In 1946, the California Supreme Court ruled prepaid plans were not in the business of insurance and not subject to regulation by the Department of Insurance or the Insurance Code.

A state law in 1965 required prepaid health plans to register with the state attorney general, but established little regulatory authority.

Continued growth of the industry – and scandals around early Medi-Cal prepaid plans – prompted Gov. Jerry Brown during his first stint in office to sign the 1975 Knox-Keene Act. It transferred regulatory authority from the attorney general to the Department of Corporations and set rules for mandatory basic benefits, financial stability, access to doctors and consumer disclosure and grievance procedures.

By the late 1990s, HMOs covered millions of Californians, but complaints were rampant. A sweeping package of some 20 reforms enacted in 1999 included creation of a new regulatory body focused exclusively on the industry. DMHC opened its doors in July 2000.

Debate over roles at the dual agencies started almost immediately.

Two reports issued in 2001 explored the issues. One was a report to the Legislature on the possibility of consolidating health insurance regulated by DOI into DMHC. It was written by Clark Kelso, who did a brief stint as insurance commissioner that year after scandal sidelined elected commissioner Chuck Quackenbush.

A law professor, Kelso now serves as receiver for health care services within the state prison system. He declined to comment on the report because he currently works for the state.

Consultant Kelch and Debra Roth, an attorney, health care policy consultant and former legislative staffer, prepared a report for the California Health Care Foundation in 2001 to contribute to the discussion generated by the Kelso report.

The two departments have different strengths, Kelso concludes in his study.

DMHC has an exclusive focus on health care service plans, consumer grievance programs, quality-of-care monitoring and consumer health education. DOI's strength is financial surveillance, ability to respond to consumer insurance complaints and national connections to regulators in other states, according to the study.

"There seems to be general agreement that consumers and others are often confused about the identity of the appropriate regulator under current law," Kelso wrote in the report.

"The fact that jurisdiction has been divided from virtually the inception of health care service plans in California may suggest that there is really no pressing need for regulatory consolidation at this moment (in 2001)."

As long as there are two different departments regulating health coverage, and two distinct statutory frameworks, there will be important differences in how carriers are regulated, Kelch and Roth conclude in their report.

Dual regulation invites carriers to design plans to fit within the regulatory structure that best works for their business needs, they add. This encourages flexibility, but allows plans to skirt oversight they don't like.

Among big questions posed by the report:

If all health insurance is moved to DMHC and made subject to the Knox-Keene Act, would that reduce or eliminate affordable options for some consumers?

Would consolidation of consumer complaints in one agency mean they are handled by folks with lower levels of expertise who may not understand specific differences and licensing requirements?

"California created DMHC as part of managed care reform in the late 1990s. It makes sense to look at where we are as we gear up for federal reform," Kelch said this week.

Fifty-seven percent of California voters polled in a 2008 survey on health insurance issues said they favored consolidation of the two agencies into one, said Jerry Flanagan, health care policy director at Consumer Watchdog.

"Obviously, we've been looking at this for some time," he said. "Money can be saved from duplication, and it's a fact that confusion over who the regulator is plays into insurance company hands."

Watchdog's Heller goes further.

"Nobody (seeks) to crown Jones king but there's a history of rate regulation at DOI and lack of it at DMHC," Heller said.

Other consumer advocates care about enforcement overall.

"Our focus is less on the structure than making sure there are good standards and processes in place," said Anthony Wright, executive director at Health Access.

Francisco Silva, general counsel at the California Medical Association, agrees.

"We're in favor of a united regulator for health insurance and health plans, but whether it's DOI, DMHC or someone else really depends on the details," Silva said. "However, we would ask it be given appropriate resources to do the job."

The presence of two agencies is more confusing than duplicative, Dooley said.

"The functions are very clear and separated but companies that write both insurance and managed care plans have two different regulatory sources," she added.

"Federal health care reform addresses some of that, with changes in the individual market to make it more like Knox-Keene, with more comprehensive regulation – but it's way too early (for) a crystal ball."

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