HMO Wins Medi-Cal Pact Despite Critical Audits : Health: Sen. Watson was listed as board member when contract was awarded. Officials deny receiving favors.

State health officials recently awarded a no-bid contract potentially worth more than $400 million to a Long Beach-based HMO that serves the poor, even though state audits repeatedly have found significant deficiencies in the health plan’s quality of care.

The contract with Molina Medical Centers to treat Medi-Cal mothers and their children throughout the state was awarded in May, one month after the newly licensed health maintenance organization put state Sen. Diane Watson (D-Los Angeles) on its board of directors.

Watson, who as chairwoman of the Senate Health Committee oversees health programs, said she had helped guide Molina in securing its HMO license from the state.

Although she said she did nothing to influence the contract, Watson pointed out that the company probably got it because she was listed as a board member.

“It’s really great if you can snag the chair of the committee,” she said in an interview. “Somebody who can really help you.”

However, Watson said that Molina officials used her name without permission and that she resigned from the board as soon as she found out.

State officials said Molina got no special treatment, and company officials denied that they misused Watson’s name. Licensing officials said they have a signed document from Watson indicating that she was willing to serve as a board member.

The Molina contract was awarded as the California Department of Health Services is preparing to channel billions of dollars into a program that will make sweeping changes in services for the poor by moving about half the 5.4 million Medi-Cal enrollees into managed care by mid-1996.

The decision to select Molina as a prime contractor has prompted health care advocates to question whether the state in its rush to expand the managed-care program has adequately screened providers and whether political intervention has influenced the process.

The criticism drew an angry response from the company’s owner, Dr. C. David Molina, who said state auditors have misjudged his clinics’ medical care. Molina, who opened his first clinic to serve Medi-Cal patients in 1980, said no legislator has done him any favors, and he attributed his rapidly growing company’s success to hard work.

His son Dr. Joseph M. Molina, vice president of quality assurance, said the company has thrived by providing readily accessible medical care with a multilingual staff to “a patient population that many have shied away from” treating.

The Medi-Cal managed-care program--a cornerstone of Gov. Pete Wilson’s cost-saving proposals--has set off a scramble among HMOs for the multimillion-dollar contracts that health officials are awarding without competitive bidding.

At the same time, health care advocates are demanding closer scrutiny of private providers. “Californians pay for the medical care provided the poor through state and federal taxes,” said Geraldine Dallek, executive director of the Center for Health Care Rights. “The state needs to be much more vigilant that our taxes are spent only on providers giving high-quality care.”

Dallek, whose organization analyzed the annual audits of Molina and six other Medi-Cal managed-care providers under a grant from the Irvine Foundation, is scheduled to release a report this week on the findings.

For four years in a row, state audits have found a “significant deficiency” in Molina’s quality of care, records show. In 1992, the health officials uncovered such a potential threat to patient care at one facility that they considered halting Molina’s enrollment of new patients, but decided against it because the problems were not systemwide.

The next year, health officials temporarily suspended Molina from signing up patients in the Hmong community as a sanction for marketing violations involving that Southeast Asian group in Sacramento.

This September, six months after the Department of Corporations licensed Molina as an HMO, auditors from that agency cited the company for violating licensing requirements in six categories, including quality assurance, accessibility of care and handling of patient grievances, according to a confidential audit obtained by The Times.

Auditors Visit Clinics

Responding to complaints, auditors visited three clinics in the Sacramento area and examined the treatment of 40 patients. Records show they concluded that Molina Medical was systematically denying patients necessary care to boost the company’s profits. They cited more than a dozen cases, including the following:

* Molina’s medical director canceled emergency surgery for a 12-year-old girl whose appendix then ruptured.

* A 5-year-old boy with a shattered shinbone waited 18 hours to have his leg set in a cast while his pain medication ran out and an orthopedic surgeon tried in vain to get authorization from Molina Medical to treat the boy.

* A 5-year-old boy who displayed the speech patterns of an infant was not provided speech therapy.

* A 10-year-old boy suffered a ruptured eardrum while he waited two years for “definitive treatment” of ear infections.

“Medical decisions are being influenced by financial considerations or, if not, by medical misjudgment,” the auditors reported. “There is far more concern with the expense of the care than the quality.”

The medical director declined comment, but Dr. Martha Molina--David’s daughter and associate medical director--said emphatically: “Financial decisions do not drive medical decisions.”

David Molina declined to comment on the audit because it is a confidential document. But he defended the quality of the health care that his 40 clinics provide to the poor in seven counties, including Los Angeles, Orange, Riverside and San Bernardino.

“I think we do a pretty damn good job frankly, contrary to what some of these audits look like,” he said. The audits are based on “one-tenth of 1%” of the company’s 62,000 patient files, producing an inaccurate picture, he said.

His son John C. Molina, chief financial officer, produced state statistics showing that in 1993 Molina Medical did an equal or better job of screening children for preventive health problems than nine other licensed HMOs, even though prior state audits had faulted Molina in this area.

Company officials also pointed to their patient surveys that give them high marks for service, including trust in the doctors.

Health officials said Molina, like other managed care providers, has had problems, but nothing severe enough to keep them from getting additional contracts.

Joseph Kelly, chief of the Medi-Cal Managed Care Division, said Molina’s audits do not show “the kind of situation where . . . people are dying in the street because of poor care.”

He acknowledged that it is unusual for a provider to be cited year after year for “significant deficiencies” in its quality of care. But he said Molina Medical deserves credit for promptly filing plans to correct problems. “We don’t want a Band-Aid put on,” he said. “They have always made . . . a systemic fix.”

On Blue Shield Board

Watson, whose South-Central Los Angeles district has a high percentage of Medi-Cal beneficiaries, has been closely associated with the health care industry and health issues for many years.

She served nine years on the board of directors of Blue Shield of California and reported receiving $5,700 during her last year of service in 1986.

In 1988, the state Fair Political Practices Commission fined Watson $2,000 for failing to publicly disclose a $5,000 personal loan given to her by a health care lobbyist.

During the last several years, Watson’s committee has passed legislation that has helped mold the state’s Medi-Cal managed-care program.

Last summer she carried a bill that creates a commission in Los Angeles to award a contract worth about $450 million to serve Medi-Cal patients in this county. Molina officials said they intend to compete for it.

Fueled by government contracts and aggressive door-to-door marketing of its services, Molina has mushroomed from three clinics treating 5,000 patients in 1989 into a statewide chain that has received more than $63 million from the state during the last 2 1/2 years.

In its latest contract, awarded May 1, Molina officials were authorized to enroll up to 148,000 patients; the state has set a cap of $423 million on payments to Molina to treat these patients through 1997.

What opened the door to this major contract award, and other contracts too, was an HMO license granted to Molina by the Department of Corporations.

For Molina, the license enlarged the company’s scope of services and made it eligible for more money and higher reimbursement rates from the state.

But there were many hurdles. Watson said Molina officials came to her office early this year asking for help in guiding them through the bureaucratic maze. “I told them how to work the system,” Watson said.

Time Was of Essence

The senator said she called the Department of Corporations to advise them that Molina’s application was on its way. “Don’t put it over on the shelf and let it sit there all year,” she said she told them.

Time was of the essence for Molina officials, who say they were in a rush to get licensed by the April 1 starting date of a new contract to serve 20,000 people in the Sacramento area. The license was approved in mid-March, the same month that the company distributed $15,500 in political contributions to 23 state legislators, according to LegiTech computerized campaign records. None went to Watson, but her campaign had received $500 from Molina several months earlier.

Although a number of other HMOs make substantial contributions, it was an unprecedented outpouring of largess for Molina. “We thought it was a wise thing to do at that time,” said David Molina.

Department of Corporations officials said the contributions did not have any impact on their decision to grant the license, and neither did their receipt of a disclosure statement listing Watson as a member of Molina’s board.

Department senior counsel Anita Ostroff said Molina met all licensing requirements. She said she reviewed all “relevant information” regarding Molina but had not seen copies of the health department’s audits.

Ostroff said she relied on verbal assurances by Kelly of the health department that the Molina clinics “were in compliance, with no outstanding deficiencies.”

Kelly said he had not read the audits either but relied on staff summaries when he briefed Ostroff.

Attorneys at the National Health Law Program who have critiqued Molina’s licensing application blasted Ostroff’s failure to use “common sense” and review critical audits that point to a “track record” of problems with access and quality of care.

Records do show that Ostroff had many reservations about Molina’s licensing proposal, but her fundamental concern was a potential conflict of interest within the family-run company that could result in medical decisions being dictated by financial concerns in violation of state regulations.

She questioned whether the company’s top executives--Molina’s children--would be sufficiently independent of their father to make the proper medical decisions without regard for his pocketbook. Three of David Molina’s children serve in key posts; the company also employs two other children and his wife.

This question was resolved, Ostroff said, when the company revealed that it was expanding its board beyond the family by adding four financially disinterested outsiders, including Watson, to serve without compensation.

“We are not blind,” Molina wrote the Corporations Department, “to the possible perception that a conflict exists when numerous family members hold key positions in a health care service plan.”

Watson said she thought the reason Molina officials put her on the board was because they were “really pleased that I helped them” with their licensing.

The senator said she believes the chief advantage of this for Molina would be her political clout with the bureaucracy.

“They thought, ‘Oh, what better person to have on the board than the chair of the Senate Health and Human Services Committee,’ ” Watson said. “They wanted me to sit on the board so I could help them.”

Watson noted that Molina’s offer was “not an unusual request. I could be on 1,000 boards right now if I wanted,” she said.

She agreed to consider Molina’s offer but never formally accepted a board post, she said, because it would have posed a conflict with her legislative oversight responsibilities.

“For God’s sake, get me off that board,” she remembered telling her chief of staff after a television reporter inquired last spring about her membership on the panel.

However, her resignation letter was not sent for four months--and during that period, Molina was awarded the state contract potentially worth $423 million.

Molina officials said Watson was the company’s first choice as an outside board member because “she was very knowledgeable about what was happening in health care.”

John Molina expressed shock that Watson now says she had not agreed to serve on the board. He said all board members filled out and signed forms giving identifying information to the Department of Corporations as part of the company’s licensing application.

But when asked about this, Watson said she never signed any forms: “Oh, no. No, no, no, no, no.”

Ostroff, the Corporations Department attorney, refused to release the confidential forms but confirmed that all board members signed the documents under penalty of perjury. She said Molina’s license would not have been granted without the documents and added that Watson has not complained that her name was used without her knowledge.

As of last week, Ostroff said, the department had not received notification that Watson had left the board.

In her Aug. 24 letter of resignation to Molina, Watson did not mention that she had been placed on the board without her knowledge. She resigned “with sincere regret,” citing scheduling conflicts that had prevented her from attending the board’s only meeting.

Watson said she believes that the health care group “probably” got its contract because she was listed as a board member.

“They (health officials) look and they see who the board is and they’re willing to give it,” she said.

Kelly of the health department said Molina never notified his department that Watson was on the board.

On April 25, when David Molina sent health officials a letter, he advised them he was sending a copy to Watson. The letter, addressed to health department chief Kimberly Belshe, thanked department officials for speeding up his new contract award, among other things.

Molina said in an interview that he sent copies to Watson and two other legislators in hopes that his letter would get more attention.

Belshe, who met with Molina at least twice this year, said the department did nothing for Molina that it would not do for any other contractor.

Officials said that at Molina’s request, the agency did some “technical things” to accelerate the contract award, including drafting the language in advance of the HMO license approval and streamlining the application process.

Once Molina had secured the license, the contract was virtually assured because health department procedures require the department to contract with any willing, qualified HMO that accepts the department’s non-negotiable reimbursement rate.

Kelly said Molina joins 14 other HMOs that provide managed health care to the poor--the largest is Cigna Healthplans of California, with 114,000 enrollees.

For Molina to reach its enrollment goal of 148,000 patients, Kelly said, the company will have to prove it has the resources and personnel to treat them.

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Watson Resignation Letters

In this letter, Sen. Diane Watson (D-Los Angeles) resigns from the board of directors of Molina Medical Centers, a managed health care group that received its HMO license this spring and then got a contract potentially worth $400 million to serve Medi-Cal patients throughout the state. Watson has said that the HMO put her on the board without permission, which company officials deny.