The Department of Managed Health Care (DMHC) is the primary government watchdog overseeing managed health care in California. It exists within the state's Business, Transportation and Housing Agency. The DMHC is charged with being an advocate for consumer rights and enforcing access to treatment. The state has long been a leader in HMO participation, and when the department was created in 2000 it was the nation’s first state entity devoted solely to managed care issues. The department licenses health service plans, enforces the state laws and regulations that govern these plans, and educates the public.

The department was created in 2000 amid a firestorm of consumer anger over Health Maintenance Organization Plans, known as HMOs. The growth of these plans was spurred by the passage of federal legislation in 1973, during Richard Nixon’s presidency. It is generally regarded as the first major attempt to move health care away from not-for-profit business principles toward a for-profit model driven by the insurance industry.

Managed care plans were widely embraced across the country and are credited with taming the medical cost inflation in the 1980s by reducing hospitalization and treatment, and forcing providers to discount their rates. By 1975, 6 million people were enrolled in HMOs. That number doubled in seven years and reached 29.3 million by 1987. California led the way. In 1982, the state had the largest number of HMOs and the highest proportion of enrollees, 41.6%, in the country.

Overall HMO enrollment peaked in 2001. As of 2009, 42.6% of Californians were enrolled in HMOs. Nationally, the figure is 21.7%. One-quarter of the nation’s HMO enrollees live in California.

HMOs in California were originally regulated by the Department of Corporations. In 1975, the state enacted the Knox-Keene Health Care Service Plan Act, which authorized state regulation of health care plans. But growing dissatisfaction with patient care and rising costs led to creation of the Managed Health Care department, armed with a new mandate and a bigger budget.

Nineteen months later, the department was fighting for its life. Kaiser Foundation Health Plan, slapped with a $1 million fine over the death of a patient, challenged the department’s power to regulate it. Kaiser, which currently controls about 40% of the California market, maintained that the department was usurping the authority of the federal government and other state agencies. After unfavorable rulings in court, Kaiser paid the fine. Kaiser was more successful in its court bid six months earlier to avoid having to provide coverage for prescription drugs like Viagra.

In September 2002, the state beefed up the Knox-Keene Act by passing the Health Care Providers Bill of Rights. It shifted some power from insurers to doctors by outlawing what many in the medical profession thought were unfair contract terms between them.

The Department of Managed Health Care shares oversight of the medical industry with other state agencies, most notably the Department of Insurance and the Department of Health Care Services.

The department enforces the Knox-Keene Act. The act is a plethora of regulations regarding consumer protections, access to care, specific service coverage, prescription drugs, grievances, licensing of plans and reporting by health plans. 

Essentially, it monitors and regulates HMOs, provides information to consumers and enforces state regulations when they are violated.

The DMHC is organized into eight functional offices: Administrative Services; Enforcement; Help Center, Health Plan Oversight; Legal Services; Patient Advocate;  Provider Oversight; and Technology and Innovation. Each office is led by an assistant deputy director who reports to the Director’s Office.

The department monitors and regulates HMOs through licensing, financial examinations and regular medical surveys of each health plan. It informs the public via an annual HMO report card, public education and awareness efforts, and its HMO Help Center.

The department takes enforcement actions as a result of a financial examination, a complaint from the HMO Help Center or a referral from its licensing division.

DMHC releases departmental reports each year, special plan surveys and other announcements on issues affecting the HMO industry. Residents can also ask for information by submitting a Public Records Act request.

A Consumer Participation Program enables the public to suggest ideas to the department. This legislative-authorized program allows the department director to award fees to groups and private citizens who suggest new and innovative ideas that positively impact the HMO system. Citizens can also sign-up for e-mail alerts about public meetings, proposed regulations and other news items.

DMHC has an extensive online presence, including Twitter, Facebook, YouTube and Myspace, that offers a clearinghouse of information and links to outside assistance.

The Department operates a Financial Solvency Standards Board made up of experts in the medical, financial and health-plan industries. The board advises the department director on ways to keep the managed care industry financially healthy and accessible to the more than 21 million Californians who are enrolled in HMOs.

Money for the department is appropriated from the general fund. Most of the department’s projected $56.3 million budget is earmarked for personnel costs. The rest pays for operating expenses and equipment. The DMHC was structured to direct about half of its expenditures toward health plan oversight and the HMO Help Center.  The rest is divided among the six other functional offices.

Oversight of Managed-Care Plans

More than 7.5 million Californians are Medi-Cal beneficiaries, and 4.9 million receive their care through managed care. The Department of Health Care Services makes sure the managed-care plans follow laws governing managed care and the Department of Managed Health Care keeps tabs on their finances.

But the State Auditor says both are falling down on the job.

The Department of Managed Health Care was “chronically late,” sometimes by 200 days, doing financial reviews of local initiatives deemed critical to Medi-Cal’s success, and made significant errors categorizing administrative expenses as medical ones. In one case, the department failed to note that Kern Health Systems had incorrectly categorized $5.3 million as medical expenses when it was actually for claims processing.

“Managed Health Care's failure to identify these errors in its financial reviews is troubling and suggests that it may be overlooking other errors as well,” a December 2011 auditor’s report said.

The report also said that once the department had identified local problems, it didn’t have a good system for determining if the problems were addressed. 

Audit Faults State Health Officials on Medi-Cal Oversight (by Anna Gorman, Los Angeles Times)

Medi-Cal Managed-Care Program (State Auditor) (pdf)

Autism

In July 2009, the Department of Managed Health Care was sued in Los Angeles Superior Court over the way its grievance system handled denial of treatment claims concerning autism. In March, following a lobbying campaign by the insurance industry, the department changed the way it handled claims about a treatment called Applied Behavioral Analysis (ABA). The insurers argued that the treatment was an “educational” program not covered by insurance. Until then, ABA denials of payment were referred to a group of physicians called the Independent Medical Review (IMR), operated by DMHC but independent of it. Appeals to the IMR generally resulted in payment for treatment. The change channeled ABA appeals to an internal DMHC grievance system. In a December 2010 ruling, the court sided with the department, ruling that it had the authority to oversee coverage disputes related to autism therapies.

WellPoint-Anthem Merger

In November 2004, the department approved the merger of California-based WellPoint Health Networks and Indiana-based Anthem, creating the nation’s largest health insurer. Blue Cross of California was a subsidiary of WellPoint. Consumer advocates criticized the merger, arguing that Blue Cross of California enjoyed a unique and unfair loophole that allowed it to pay lower taxes than rival health plans. The group said the tax loophole cost the state about $48 million in taxes in 2003 and urged state regulators and lawmakers to remove the exemption. Blue Cross was established in the late 1930s as a nonprofit, public-benefit institution and was exempted from paying taxes on health premiums that the state imposes on other insurers. Blue Cross was sold in the 1980s to WellPoint, a for-profit corporation, but its tax status did not change.

The 2004 deal was criticized at the time because it required an estimated $3.4 billion in debt and because it bestowed payouts to WellPoint executives in California of as much as $600 million.

Within three years of acquisition, the state received more than 1,600 complaints from consumers, physicians and hospitals about Blue Cross of California. State officials said they considered the level of complaints troubling, but lacked comparable data from before the 2004 merger.

In the summer of 2004, Blue Cross raised premiums for consumers and cut payments to physicians. "This is exactly what we said would happen," said Karen Nikos, a spokeswoman for the California Medical Association, the state's largest physician trade group.. "This is what happens when you only have a few insurance companies controlling all insurance. They do it because they can."

In February 2010, Anthem Blue Cross, citing losses in the state, announced rate increases in California of up to 39%. A Los Angeles Times analysis of the company's regulatory filings showed that $525 million in Anthem's earnings in 2009 was shipped to its corporate parent, WellPoint Inc. Anthem did not dispute the findings. Anthem Blue Cross was so profitable after WellPoint acquired it in 2004 that it contributed more than $4.2 billion to the parent company's bottom line during the next six years.

The Department of Managed Care will have a significant role in implementing federal health care reform legislation passed in 2010. Many of the key elements of that reform plan don’t take effect until 2014, and others dovetail with efforts already underway in California.

The governor's budget for 2011-2012 proposes 13 positions and $1.8 million for the department to ensure health care plans implement the earliest requirements of the federal Patient Protection and Affordable Care Act (PPACA). These include requirements that health care plans abide by minimum medical loss ratios and offer dependent care coverage until age 26. Beginning in 2011-2012 the PPACA also will prohibit health plans from imposing lifetime benefits limits, imposing cost-sharing for preventive services, and failing to provide coverage to dependents under age 19 due to pre-existing conditions.

The budget also includes two positions and $1 million for the DMHC to ensure health care plans abide by PPACA requirements governing the imposition of unreasonable rate increases.

Should CDI be Merged with Department of Managed Health Care?

Regulation of the health industry in California is essentially divided between two agencies: the Department of Managed Health Care and the California Department of Insurance (CDI). The former deals primarily with HMOs and has a strong mandate to protect consumers while the latter is often characterized as regulating the “business of insurance” and deals with all types of insurance, medical and otherwise, except HMOs.

It is not unusual for there to be a certain amount of overlap between the departments and some confusion about their jurisdiction. But a debate which has simmered since the DMHC was created in 2000 is beginning to bubble up to the surface. And it is loaded with irony.

Some critics argue that Californians would be better served by a single health care regulatory agency because one of the two current dominant health care agencies, the DMHC, is too good. Managed care plans, somewhat at the behest of the DMHC, have pioneered innovations such as timely access to care, mandatory basic services, and disclosure and grievance requirements. A report from the New America Foundation maintains that the dual regulatory system produces strong incentives “for insurers to offer lower-value products with fewer regulations (under the CDI framework) rather than higher-value products with strong consumer regulations (under the DMHC framework).” The report concludes, “The best plan would be for California to transfer the CDI’s regulatory authority of health insurance to the Department of Managed Healthcare.(sic)”

A study from the Berkeley Center on Health, Economic & Family Security, agreed,  claiming that Californians had a difficult time assessing the individual health care products and, “The division of regulatory authority between CDI and DMHC has led to inequities in minimum benefits packages.”

Brent Barnhart, 2011-2013

Lucinda “Cindy” Ehnes, 2004-2011. Ehnes, a registered Democrat, was appointed director by Governor Arnold Schwarzenegger in March 2004.

A native of Ohio, Ehnes is a graduate of George Washington University and the Catholic University Law School. She is licensed to practice law in Colorado and California.

Ehnes lost her left hand in a meat grinder accident while working her way through college at a fast-food restaurant. She suspended her education for a few years to become the first disabled representative for the Bonnie Bell exhibition ski team.

She is a former member of the U.S. Disabled Ski Team and won seven gold medals in international skiing competitions.

From 1978 to 1984 and again from 1988 to 1996, she was a lawyer in private practice.

Before coming to California in 2002, Ehnes served as legislative affairs director for the Commission on Family Medicine in Colorado for two years and from 1997 to 2000 as the director of enforcement for the Colorado Division of Insurance.

Ehnes has authored two books on the rights of those with disabilities.

Her husband is Jack Ehnes, chief executive officer of the California State Teachers’ Retirement System since 2002. They have two daughters, Lacey and Amy.

Daniel Zingale, 2000–2003. Zingale, a Democrat and the department’s first director, attended California State University, Sacramento, and earned his B.A. in political science from the University of California, Berkeley, with high honors. He also graduated from the John F. Kennedy School of Government at Harvard University,  where he earned his M.P.A.

Zingale was the managing director of government relations for the American Psychological Association from 1991 to 1993 and deputy controller and chief of staff in the office of the California State Controller from 1987 to 1991.

Zingale spent three years as public policy director of the Human Rights Campaign, the nation's largest gay and lesbian civil and human rights organization.

From 1997 to 1999, the Sacramento native served as executive director of the Washington, D.C.-based national patient advocate organization AIDS Action.

He was appointed DMHC director by Governor Gray Davis shortly after its creation in 2000. He served until 2003, when he became a cabinet secretary and Davis’ deputy chief of staff.

Zingale spent more than three years as chief of staff to California First Lady Maria Shriver and as a senior adviser to her husband, Governor Schwarzenegger, working on health reform issues.

He is currently senior vice president of Healthy California at The California Endowment.