HMO Criticized for High Profit From Low-Income Patients

As an emergency room physician in Long Beach, C. David Molina saw immigrant families come in for everything from high fevers to ear infections because they didn’t have regular doctors. To help them, he opened three small clinics in the city.

From those humble beginnings in 1980, Molina Healthcare Inc. mushroomed into one of the nation’s largest -- and most profitable -- health maintenance organizations serving low-income people on Medicaid. With nearly half a million members in California and three other states, Molina’s earnings rose to $30.5 million last year, up from $2.6 million in 1998. Now it’s preparing to go public in a $115-million stock offering.

In regulatory filings, the HMO attributes its financial success to providing medical care efficiently and to its long experience serving culturally diverse communities. Molina Healthcare employs a full-time cultural anthropologist, and its Web site can be viewed in Spanish, Russian, Hmong and Vietnamese.

“They seem to have the formula in place,” said David Menlow, president of IPO Financial .com, a New Jersey data service that tracks initial public offerings.

But according to some health professionals, consumer advocates and independent reviews, Molina profits partly because its members don’t see doctors when they should and may not complain when they are denied care.

Reports from the state and a health-care analyst show, for example, that Molina’s pediatric patients in California and Michigan tend to have immunization rates well below the statewide average. What’s more, Molina and other HMOs that serve Medicaid patients in California can and do readily shift care of acutely ill children to state programs such as California Children Services, thereby reducing their exposure to some of the most expensive cases.

Molina isn’t the only HMO making handsome returns from government contracts with Medicaid, called Medi-Cal in California. But it is among the most profitable in the managed-care industry -- Medicaid or otherwise -- and consumer groups say hefty margins are incongruous at a time regional HMOs have generally struggled, budget-strapped states such as California are slashing funds for health programs, and doctors and other providers are clamoring that they are losing too much money serving Medicaid patients.

The size of Molina’s profits is “shocking,” said Jerry Flanagan, a director with the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based nonprofit group. “HMOs that are serving the lowest-income population on the state’s dime are making huge profits. It’s a great time to be an HMO investor but a bad time to be a patient.”

HMO Has Supporters

Molina executives declined to comment about any matters relating to the business, citing the Securities and Exchange Commission’s so-called quiet period for companies preparing to go public.

“I just can’t; I wish I could,” said Dr. J. Mario Molina, 44, chief executive. He and his brother, John C. Molina, 38, the company’s treasurer, have been running the Long Beach-based business since their father died in 1996.

The HMO has its supporters, among them Julie Olson, a director in the Utah Department of Health. “Molina has done a good job for us,” she said.

Olson was especially impressed, she said, when Molina moved into Utah’s rural Cache County, where some doctors were opposed to managed care.

“I really didn’t think managed care would fly in that county,” she said, but Molina was able to work with doctors and others to successfully sign up new members there. The HMO has more than 40,000 members in Utah.

“They are very good at looking at what is the most cost- effective solution for the patient to get care,” she said. “They will try some innovative things. They excel at that.”

Molina’s mainstay is cater- ing to inner cities, focusing on Latinos, African Americans, Southeast Asians and Russians. Nearly all its $644 million in revenue last year came from Medicaid, which is supported by state and federal funds and covers about 47 million people nationwide, more than half of them children. As an HMO, Molina gets set monthly payments from the government based on its Medicaid enrollment, not on the number of patients seen or services provided.

Wall Street likes such companies because the share of Medicaid members enrolled with HMOs is expected to grow.

“These companies provide a coordinated system of care, and they are willing to take the risk away from the states,” said Thomas Carroll, an analyst at Legg Mason in Baltimore. When Molina makes its stock offering, through underwriter Banc of America Securities, it will join a few major Medicaid HMOs that have gone public in recent years, including Virginia Beach, Va.-based Amerigroup Corp. and Centene Corp. of St. Louis. “We’re in the early stage of what I see as a big growth period for these companies,” Carroll said.

In California, some of the top commercial health insurers are going after the same members. WellPoint Health Networks Inc., the Thousand Oaks parent of Blue Cross of California, said its Medi-Cal membership grew to 1.2 million at the end of 2002, from 830,000 the previous year. Company representatives say this line is slightly less profitable than its overall business.

Keeping Costs Down

Like many HMOs, those specializing in Medicaid say their advantage is that they keep costs down by streamlining operations and managing care efficiently. Molina has said its employees work hard to get people to come in for checkups with phone call reminders and by helping provide transportation.

Julie Alvarado, a 38-year-old mother of four in the Long Beach area, said Molina often sends cards to remind her to bring her children in for exams or shots.

“The doctor here is wonderful,” said Alvarado, standing in front of Molina’s clinic in Wilmington, one of 21 the HMO runs in California. “I’ve had other plans, but Molina has been the best.”

Her comments don’t square with California’s annual performance report on Medi-Cal managed-care plans. The report is based on a quality-measuring system known as HEDIS.

The report showed that in some key categories, Molina ranks near the bottom of the 22 Medi-Cal managed-care plans that had contracts with California in 2002. During the year, 48.6% of the children who were enrolled with Molina had received all the required immunizations by age 2. That compared with a statewide average of 59.2% for Medi-Cal managed-care plans, and 79.3% for the best performer in this category, Community Health Group, a San Diego nonprofit.

The study also found that 34.4% of Molina Medi-Cal members who had babies got effective postpartum care. That was just below what the state considered its minimum level, and less than half the highest score achieved by Santa Barbara Health Initiative, at 76.7%.

In response to its substandard results, the state noted, Molina started a “Motherhood Matters” program, giving all pregnant members an infant car seat and improving its data- collection process. The report also said that Molina had “shown substantial improvement” in this area from 2001, when its postpartum care score was 15.3%.

Molina’s performance was stronger in some other categories -- it ranked fourth for well-child visits for members 3 to 6 years of age, with a score of 67.7% -- but the HMO didn’t rank in the top three in any of the HEDIS measures for Medi-Cal enrollees.

Lea Brooks, a spokeswoman for California’s Department of Health Services, said Molina has contracted with the state for more than 20 years. Company reports show that Molina had 253,000 members in California at the end of 2002. Even so, Brooks said, no one at the department could comment on Molina’s HEDIS scores.

“Molina is meeting its contractual obligations and is particularly strong in serving minority populations,” she said.

Allan Baumgarten, an independent managed-care analyst who researches HMOs, said his just-completed study of Medicaid HMOs in Michigan for the year 2000 doesn’t show Molina in the best of light when it comes to childhood immunization rates and preventive tests such as mammograms for middle-aged women. Molina, which also operates in Washington state, has about 33,000 members in Michigan.

Looking at Scores

“Based on these scores, it doesn’t look like they are a strong health-care plan in making sure their members are getting basic services,” Baumgarten said. “The states, by contracting with HMOs, are delegating significant responsibilities, such as encouraging providers to call people and tell them to come in for their six-month checkup.”

Chris Perrone, director of the independent Medi-Cal Policy Institute in Oakland, said it was difficult to speak to critics’ claims about how much Medi-Cal members are using services at Molina and other for-profit managed-care plans. He said, however, that he believed many of these health plans were cutting expenses by encouraging members to see doctors rather than making costly ER visits and by doing a better job managing the length of members’ hospital stays.

Most of the doctors interviewed for this story declined to comment on the record, citing concerns about the effect on their contracts and patients. Some said on the record that their experience with Molina had been mixed.

Ellis Beesley, a pediatrician whose Wilshire Boulevard offices are across the street from Good Samaritan Hospital in Los Angeles, says that at least once or twice a month he is called to visit a new baby at that hospital. But when he bills Molina, Beesley says, it won’t pay if the mother wasn’t pre-approved to deliver at Good Samaritan.

“Sometimes a patient goes into labor and she’s not going to get on a bus to go to the hospital she’s approved for, so she delivers at the wrong hospital,” said Beesley, who is a contract doctor with Molina. “We’re giving services in good faith, and they deny it. I can’t bill the patient, I can’t bill the state. So I get screwed.”

Beesley said Molina makes money by underpaying doctors -- a criticism frequently made about the HMO industry. If Molina gets $40 a month from the state for each member, the pediatrician said, he might get $10 to $12 a month from Molina for each patient that has picked him for a doctor. That fee doesn’t increase, even during the flu season, when a child may come see him several times a month.

“So where does that extra $30 go? They are making money because they don’t pay the physician properly,” he said.

At the same time, Beesley said, Molina has never denied service when he has requested treatments for his patients:

“They’ve always authorized everything I’ve asked for,” he said.