An intense political flap has left one of the year’s most important pieces of legislation stalled on the Senate floor and the removal of a consumer advocacy group’s disputed TV spot targeting the chair of the Senate Health Committee.

The Democrat-on-Democrat fight between Senate moderates and the rest of the caucus also raised eyebrows in the Capitol about Consumer Watchdog, a highly visible advocacy group that goes after insurers and other deep-pocket interests on behalf of consumers.

The debate is over AB 52 by Assemblyman Mike Feuer, D-West Hollywood, which would give the state insurance commissioner and the state’s HMO regulator the authority to approve insurers’ rates to make sure they are not unfair, excessive or discriminatory. It is the latest in a series of attempts to expand the power of the commissioner to regulate health care rates.

At stake is regulatory authority over a multibillion-dollar marketplace and the potential political clout that stems from it. Nearly 500 companies provide health, life, long-term care and disability insurance in  California, according to an industry estimate and nearly 25 million Californians are covered under managed care programs regulated by the state.

Moderate and business friendly Democrats, critical of key provisions of the bill, blocked it in the Senate, although Feuer notes that negotiations are continuing.

“There continues to be extremely compelling reasons to support the bill,” he said, noting double-digit rate increases by HMOs and a witness at a recent hearing who testified that his mother was forced to give up health care coverage in order to keep her house. “That is the essence of why we need AB 52,” he said.

But Consumer Watchdog’s Jaime Court said the proposal is “dead as a doornail.” He said his group planned to officially submit a ballot initiative before lawmakers return in January that would place all health care-related rate regulation in the Department of Insurance. The measure would appear on the November 2012 ballot.

Court, whose Santa Monica-based group supported AB 52, said the proposed ballot initiative would be patterned after Proposition 103, which voters approved in 1988 to cut rates and bar discriminatory pricing. Proposition 103 did not cover health insurance.

The planned initiative is far more sweeping than AB 52.

Consumer Watchdog targeted Sen. Ed Hernandez, a Los Angeles Democrat and chair of the Senate Health Committee, because he questioned key provisions in AB 52 and appeared to be leading the moderates in opposition, Court said.

Hernandez also was attacked because a company he owns derived income from $5,700 a month in office-space rent paid by Kaiser Permanente in Baldwin Park. Hernandez’s company got a total of $387,000.

Hernandez rejected allegations of conflict, says he did not advocate for or against AB 52, and noted that he gave it a courtesy vote to put it on the Senate floor. The bill remains mired there. It requires a simple majority vote of 21 in the Democrat-controlled, 40-member house, but it is shy about nine votes.  

He said the bill could hurt the newly formed health exchange board’s ability to negotiate contracts. He said the insurance commissioner’s rulings should be backstopped by an independent, three-member board as a way of taking politics out of the decision-making.

Hernandez also said the interveners – attorneys – who represent consumers before the state should disclose their donors.

“It was a very small concern, it was minor in comparison to the other stuff we were asking,” Hernandez said. “But I’m into transparency, and it was the intervener fees that triggered that response. They tried to beat the crap out of me. They sent a letter to (Senate Leader Darrell) Steinberg demanding my resignation and they started to run that ad.”

“I never heard of Consumer Watchdog until they started attacking me,” he added. “They had gone after me with a vengeance, and it (Hernandez’ proposed amendments) was going after their bread and butter.”

Intervener fees have been a touchy subject for years for Court’s group, in part because Proposition 103 had provisions for unlimited intervener fees written into the law – a law that the founder of Consumer Watchdog drafted. The group has received some $7.5 million in fees in the past few years, according to the Department of Insurance.  The fees ultimately come from insurers targeted by Consumer Watchdog in legal actions.

Backers of the fees say the money ensures that solid legal talent will protect consumers before the state. Feuer noted earlier that compared with the magnitude of the dollars involved in insurance regulation, the fees are relatively small.

Thornier than the fees is the disclosure of individual donors who fund Consumer Watchdog, It is  widely believed – and some within Consumer Watchdog have confirmed it over the years – that much of its money comes from the trial bar. The group receives individual donations from the public, money from foundations, money from settlements that go into affiliated foundations for education and outreach that provide money to the main group and money from labor and other groups.

But individually, just who gives what is not available, Court said, “the donors can get harassed by politicians because people like us run ads about their (the politicians’) conflict of interest,” he said. He said nondisclosure as a civil rights tool, much as nondisclosure was important to the NAACP to protect its donors.

But critics of Consumer Watchdog are not convinced, saying the group is hypocritical for not disclosing donors while demanding full disclosure from those it attacks.

Veteran Democratic consultant Steve Maviglio, who has become a fierce critic of Consumer Watchdog, says the group is not a real consumer group in the mold of Consumers Union, which has dues-paying members and transparency, or the members of the California Consumer Federation. 

Instead, Maviglio said, Consumer Watchdog is funded by interests with political axes to grind. He noted a $50,000 payment in 2006 from the California Nurses Association, reported on the federal Department of Labor’s website.

Maviglio served as a top strategist to Assembly Speaker Fabian Nunez, who along with former Gov. Arnold Schwarzenegger authored health care legislation opposed by Consumer Watchdog but supported by an array of other groups. 

But it was the Hernandez attack ad that got the most attention in the Capitol.

The ad depicted a witness – the same noted by Feuer in his earlier comment — at a June 29 hearing of the Senate Health Committee testifying about his mother’s decision to give up health care coverage to have enough to pay her mortgage.

He mentions that he lives in Hernandez’ 24th Senate District, and Hernandez jokes that with the redrawn political boundaries, he won’t be living in that District for long. Hernandez smiles, and the witness laughs, as do a number of people in the hearing chamber.

In the ad, Hernandez is seen laughing, although the witness is not. Text on the ad urges viewers to “tell Senator Hernandez a family’s health is no laughing matter.”

The ad angered some Democrats in the Capitol. Feuer and Jones both appeared to disavow the ad, and issued unusual press releases about their position.

“While he and I currently have significant disagreements about key provisions of AB 52, I believe he has acted in good faith in his interactions with me on the bill.  I remain hopeful he and I can find the common ground necessary to pass strong legislation that protects consumers from unreasonable health insurance rates,” Feuer said.

As for Consumer Watchdog, it pulled the ad off TV after it was up for a week and ran nearly 300 times in Hernandez’s district. Court said the ad was yanked because the witness felt it had brought him and his family undue attention.

The ad is likely to be viewed, however, during the campaign over the November ballot initiative.