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NEWS RELEASE
Jun 17, 2005


CONTACT: Jerry Flanagan, (310) 392-0522 ext. 319

Outsourcing HMO Audits "A Violation of the Public Trust" According to Consumer Group

Santa Monica, CA -- A consumer group called on the Schwarzenegger Administration's lead HMO regulator today to drop a proposal to outsource HMO audits to a private company founded and funded by HMOs themselves. The proposal, first raised by Governor Schwarzenegger's California Performance Review, is supported by HMOs including WellPoint and the industry's lead state lobbying association.

In a letter sent today, the Foundation for Taxpayer and Consumer Rights (FTCR) noted several recent state audits that detected fraudulent and harmful HMO activities that would have likely not been possible if audits were to be outsourced to ally of the HMO industry, the National Committee for Quality Assurance (NCQA). Those state investigations led state regulators to take over financially unstable HMOs and put an end to Kaiser's practice of giving telephone clerks the authority to override physician decisions.

In the letter sent today to Department of Managed Health Care (DMHC) director Cindy Ehnes, FTCR wrote:

"Outsourcing the DMHC's audit role to the NCQA is like a police department asking the defendant's law firm to conduct the investigation... The millions of Californians enrolled in health plans regulated by the DMHC rely on you to ensure the quality of plans, detect problems early, respond promptly, and require immediate resolution. Once the responsibility of lead auditor is passed to another, you can no longer personally guarantee the quality of the oversight that your department is charged to provide."

Under the DMHC's proposal, HMOs and other health plans that are voluntarily accredited by the NCQA would be allowed to largely avoid regular audits and surveys conducted by the DMHC. According to tax returns, in 2003 NCQA received $14.8 million, or 60% of its total income, in fees collected in exchange for accreditations and accreditaton-related services. NCQA also receives significant financial support from drug companies, including Pfizer. Recently NCQA and Pfizer, a leading manufacturer of cardiovascular drugs, announced awards to be provided to HMOs for the treatment plans they provide for cardiovascular disease.

In the letter sent today FTCR wrote:

"Independent oversight by state regulators is intended to provide a review free of economic pressures and financial incentives that will skew results in the favor of the reviewee or any other payer. Such independent oversight is not possible with NCQA."

FTCR encouraged members of the public and health care providers to send emails to the DMHC opposing the plan: PublicComments@dmhc.ca.gov

FTCR's letter:

Cindy Ehnes
Director
Department of Managed Health Care
980 Ninth Street, Suite 500
Sacramento, CA 95814

RE: Oppose NCQA Role as HMO Auditor

Dear Cindy Ehnes,

We are deeply troubled that the Department of Managed Health Care (DMHC) is considering outsourcing the role of lead auditor to a private company founded and largely funded by the managed care industry, a move that was lobbied for by health insurers.

Under your proposal, health plans that are voluntarily accredited by the National Committee for Quality Assurance (NCQA) would be allowed to largely avoid regular audits and surveys conducted by the DMHC. Though the proposal appears to provide the DMHC some follow-up investigatory role, it is the upfront survey authority that has been essential to identifying and quickly solving problems with health plans in the past. The proposed change would create incentives for NCQA to provide reviews that are less stringent than those that the DMHC has the authority to require, as a means of attracting new HMO business.

Outsourcing the DMHC's audit role to the NCQA is like a police department asking the defendant's law firm to conduct the investigation. In the past, it was the state's responsibility as lead auditor that led investigators to:

* uncover that Kaiser Permanente had given telephone clerks the "authority to overrule physician decisions." This finding led the state auditors to conclude that medical decisions at Kaiser could not be "independent of fiscal and administrative considerations," and require the company to justify care denials;

* take control of the 272,000 member Maxicare Health Plans Inc. to prevent it from going into bankruptcy. Other reasons for the take over included low quality preventive health-care services to members and untimely handling of patient grievances;

* take control of Watts Health Foundation in 2001 because of severe debts that far outweighed company assets. The DMHC found that the company, which covers 96,000 patients, was consistently late paying claims;

* take control of Tower Health, which had approximately 111,000 members. State auditors said that the company was holding $5 million in claim checks owed to doctors and hospitals but did not have adequate funds to cover the checks. Auditors also found that the financial stability of the company was strained by a questionable decision to forgive $19.5 million in loans to shareholders and affiliated companies;

* levy a fine against PacifiCare of California for violating state law requiring HMOs to pay medical claims to doctors and hospitals within 45 days. Late payments are a threat to quality of care because they distract doctors and disrupt the financial stability of the health-care system.

NCQA Oversight

Governor Schwarzenegger's California Performance Review report claims that the NCQA "standards are generally more demanding that either state or federal" requirements. The footnote for this statement references a report written by NCQA for the California Healthcare Foundation, an interview with the HMO industry association, and NCQA's own annual "Health Plan Report." Accepting NCQA and HMO assurances as statement of fact is a metaphor for DMHC's current debate over whether or not to outsource the department's audit and survey functions.

According to the California Performance Review (CPR):

* "…health plans participate because accreditation helps them market themselves to consumers, the accreditation is supported by federal law, based on best practices, and accepted nationwide." Again, for proof, the CPR cites NCQA and various California health plans.

* "Conducting a separate review sometimes makes sense when the state has requirements that are not addressed by the accrediting organization." Then CPR largely dismisses the need for the DMHC to conduct follow-up audits citing a NCQA report finding that "…63 percent of survey/audit requirements used by DHS and DMHC were 'highly consistent' with NCQA accreditation standards."

NCQA Conflicts of Interest

Independent oversight by state regulators is intended to provide a review free of economic pressures and financial incentives that will skew results in the favor of the reviewee or any other payer. Such independent oversight is not possible with NCQA. In fact, the NCQA was founded and primarily funded in 1979 by two HMO industry associations seeking to avoid federal and state oversight.

According to former U.S. Justice Department anti-trust attorney, Kenneth Anderson, who believes that the NCQA is an example of collusion in the managed care market:

"...NCQA criteria by which performance is measured are initially framed by those entities -- HMOs, managed care companies and employer payers -- who have a strong incentive to define 'appropriate' level of care in narrow economic (e.g. cost) terms... The NCQA effort is, in part, essentially a massive public relations program orchestrated by the managed care industry in hopes of averting the establishment of a truly independent and objective mechanism ... to define what quality health care really is... ."

(Kenneth C. Anderson, "Collusive Behavior In the Managed Health Care Industry," September 10, 1997)

Though the NCQA has attempted to legitimize itself in recent years by diversifying its funding (it is now heavily subsidized by the drug industry), according to the company's 2003 federal tax return NCQA received:

* $9.6 million, or 40% of its $24.3 million budget, in fees paid by managed care companies and physician organizations in exchange for accreditation services;

* $4.1 million from providing licenses and technology services to other companies to provide their own accreditations;

* $1.1 million from selling reports providing instruction for completing NCQA surveys.

In total, fees collected in exchange for accreditations and accreditaton related services accounted for $14.8 million, or 60%, of NCQA's total 2003 income.

HMOs clearly see a benefit in having an old ally as overseer. Certainly, they must realize that NCQA will be less aggressive than state regulators have the authority to be. In fact, Governor Schwarzenegger's California Performance Review report acknowledges that audit out-sourcing was recommended by state HMOs and the industry's lead California lobbying association including: WellPoint, Health Net, Molina and the California Association of Health Plans.

The health plans are likely not the only health care industry that would like to see NCQA play a more prominent role in HMO oversight. Recently, the pharmaceutical powerhouse Pfizer, along with NCQA, announced "awards" for health plans providing the best treatment plans for cardiovascular disease. Pfizer is a major NCQA funder and industry leader in cardiovascular drug treatments like Norvasc. With this partnership, Pfizer can now use the NCQA accreditation and treatment awards as a means to encourage HMOs to include Pfizer's cardiovascular drugs in treatment protocols and prescription drug formularies.

How can the DMHC be sure that a company founded and funded by HMOs will detect financially unstable and fraudulent HMOs and recommend timely state takeovers like past regulators have done?

Severing the Link between Patient and Auditor

Under the current proposal, the link between the public, practitioners, and the DMHC would be severed if NCQA took over front-line audit duty. Over the years, many of the DMHC's audits, investigations, fines and other actions were initiated following telephone complaints made by patients and physicians to the DMHC's toll free HMO Help Center. The DMHC monitored these calls and launched investigations. Under the current proposal, would DMHC forward complaints received by the Help Center to NCQA? How would DMHC confirm that complaints were followed up on?

Financial Incentive for Health Plans

The California Performance Review could not quantify savings that outsourcing such audits and surveys would provide to the state and taxpayers, only savings for the plans themselves. In fact, audits conducted by DMHC are paid for by fees from the health plans themselves.

Though state and taxpayer savings cannot be accounted for, the California Performance Review argues for NCQA to takeover the audit function of the Department of Health Services (DHS) and DMHC because "…it is easier to have just one organization perform a function than to have two organizations coordinate together to do the same job." Patients and advocates would likely be much less incredulous about having one independent state auditor conducting both audits rather than one private company.

The state should not be in the business of removing necessary oversight in order to help an industry boost its profits even higher.

Questions you should ask NCQA

The thoroughness of NCQA audits and surveys have been called into question by several independent physicians. According to these physicians, NCQA does not have the requisite staff necessary to conduct comprehensive reviews and often relies on temporary staff to provide reviews. DMHC should ask NCQA the following questions:

* What percentage of accredited HMOs have you decertified?

* What percentage of HMOs that have applied for accreditation have been denied?

* NCQA accreditation is primarily based upon data voluntarily provided by health plans to NCQA. Does NCQA conduct mandatory reviews to ensure that data reported by health plans is accurate? What percentage of awarded "accreditations" was based upon NCQA first-hand reviews of data?

* How many specialty matched physicians in active clinical practice does NCQA have on staff?

* What data is available for public review demonstrating NCQA's follow-up on doctor and patient complaints against NCQA accredited health plans?

The millions of Californians enrolled in health plans regulated by the DMHC rely on you to ensure the quality of plans, detect problems early, respond promptly, and require immediate resolution. Once the responsibility of lead auditor is passed to another, you can no longer personally guarantee the quality of the oversight that your department is charged to provide.

Not only is outsourcing of audits and surveys to a private company likely illegal under California law, it is a violation of the public trust.

With no measurable state savings, the only reason to make this drastic change is to let HMOs write their own rules. This proposal is particularly troubling given recent Supreme Court limits on the legal rights of patients to sue their health insurer if they have employer provided health care. The DMHC is the last resort for most patients and should not shirk its responsibility.

Sincerely,

Jerry Flanagan
(310) 392-0522 ext. 319

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The Foundation for Taxpayer and Consumer Rights (FTCR) is California's leading nonpartisan consumer advocacy organization.

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