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Legal aspects in the development of health maintenance organizations

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Content LEGAL ASPECTS IN THE DEVELOPMENT OF
HEALTH MAINTENANCE ORGANISATIONS
A Thesis
Presented To
the Faculty of the School of Public Administration
University of Southern California
in Partial Fulfillment
of the Requirements for the Degree
Master of Public Administration
by
James Roy Abernathy II
January 1976
UMI Number: EP64874
All rights reserved
INFORMATION TO ALL USERS
The quality of this reproduction is dependent upon the quality of the copy submitted.
In the unlikely event that the author did not send a complete manuscript
and there are missing pages, these will be noted. Also, if material had to be removed,
a note will indicate the deletion.
Dissertaîton PVbiisbng
UMI EP64874
Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author.
Microform Edition © ProQuest LLC.
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unauthorized copying under Title 17, United States Code
ProQuest LLC.
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This thesisj written by
.......... J.amaa.JRQy..AhenLat±.y.....IL...........
under the direction of the undersigned Guidance
Committee, and approved by all its members, has
been presented to and accepted by the Faculty of
the School of Public Administration in partial ful
fillment of the requirements for the degree of
MASTER OF
PUBLIC ADMINISTRATION
Guidance Committee :
hatrman
Copyright
by
James Roy Abernathy II, 1976
TABLE OF CONTENTS
Chapter Page
I. THE PROBLEM...................................... 1
The Symptoms of a Crisis
Some Roots of the Problem
The HMO: A Suggested Solution
The Approach and Scope of this Study
II. REVIEW OF RELATED LITERATURE ................... 13
The Insurance Law Issue
The Monopoly Issue
The Licensure Issue
The Restrictive Law Issue
The Corporate Practice Issue
Ceneral Considerations
III. TYPE OF " LECAL ENTITY” FOR AN HMO...... 21
Various Alternatives and their Definitions
The American Health Care Plan
IV. EXTERNAL CONTRACTUAL RELATIONSHIPS .............. 40
I
Standard Agreement j
V. MALPRACTICE .......... 80
VI. SUMMARY, RECOMMENDATIONS AND CONCLUSIONS. 84
Summary
Recommendations
Conclusions
APPENDIXES
A. An HMO Dictionary........................ 95
B. Instructions for Officers and Directors with Respect to
Organization and Operation of the American Health
Care Plan ........................................ 107
IX
C. Proposal for Title XIX Contract ................. 120
EXHIBITS
A. Articles of Incorporation of the American Health
Care Plan......................................... 161
B. Exemption Application............................. 169
C. Franchise Tax Board Exemption Letter............. 175
D. Internal Revenue Service Letter ................. 177
E. Letter from Department of Health, Education and
Welfare .......................................... 178
F. Trust Agreement .................................. 179
G. Brochure of American Health Care Plan........... 187
H. Group Coverage of American Health Care Plan ... 189
I. Individual Coverage of American Health Care Plan 193
J. Pricing Structure of American Health Care Plan . . * 195
REFERENCES ................................................ 197
iix
CHAPTER I
THE PROBLEM
Paraphrasing Ralph Waldo Emerson, no idea is stronger than an
idea whose time is come. Today the public is calling for changes in
many areas of human services and one of the loudest calls concern
changes in the system by which health services are delivered. The
passage of the federal Health Maintenance Organization (HMO) Act,
PI 93-222 in 1973 was an attempt by the federal government to respond
to the demand for change in the system of health care delivery.
The problem of this study is that the body of knowledge re
lating to the development of HMOs is very limited. A review of re
lated literature showed a paucity of definitive material which would
assist health field personnel in formally initiating and legally im
plementing HMO programs.
It is the intent of this study to contribute to the organized
body of knowledge relating to HMOs. The approach being utilized is
a case study of a California based HMO and the emphasis is on the
legal aspects of the inception and implementation of such an organi
zation.
The Symptoms of a Crisis
The urgency of America’s current "crisis" in providing medical
care for its people is reflected in the statement: "This nation is
faced with a breakdown in the delivery of health care unless immediate
1
concerted action is taken by government and the private sector."^
Evidence for the extent of the problem is readily compiled.
Comparisons of mortality rates in America with those of other
nations are often cited to demonstrate and to dramatize America’s
health crisis. The United States ranks eighteenth among the world’s
nations in life expectancy for males and eleventh for females.
Fifteen countries have lower death rates for middle-aged males and
2
twelve have lower infant mortality rates.
The significance of these statistics, however, is far from
clear. In part, the United States’ inferior showing may be attributed
3
to its more comprehensive reporting system. In addition, environ
mental, ^genetic, ^ and cultural^ variations make it difficult to draw
firm conclusions.
^Robert Finch and Rodger Egeberg, "Report to the President,"
U. S. News and World Report (Vol. LXVII, No. 3, July 21, 1969) p. 9.
2
Sen. Edward Kennedy, U. S. Congressional Record: 116, August
27, 1970, p. 14, 339.
3
Larry C. Morris, Press Statement: National Association of
Blue Shield Plan (Chicago, 111.) Sept. 1, 1970.
^Differences in pollution level or the prevalence and severity
of poverty may result in differences in mortality and morbidity
experience for which the gorss statistics do not compensate.
^Supra, note 3.
^For example, high mortality rates, especially among middle-
aged males, are attributable to a large degree to the tendency to
over-eat, over-drink, under-exercise and smoke, i.e., as well as to
nervous tension, but it is difficult to compare the significance of
these factors with that of similar proglems in other countries.
However, statistics not affected by the difficulties of com
parison still afford no grounds for optimism. In 1964, The Surgeon
General of the United States estimated that, within the framework of
contemporary medical knowledge, there would be 150,000 needless
deaths and one million needless disabilities that year.^
In addition, despite considerable advances in medical tech
nology and significant increases in both per-unit and total spending
on health services, life expectancy has barely increased in this
Q
country since 1954. The system failure to perform effectively
suggests that the present medical care system is inadequate to meet
the demands made upon it.
In an era of general inflation, the still more rapidly rising
cost of health care and the frequent inability of the poor to afford
needed care have emphasized present inadequacies. In spite of these
facts it is distressing to note that this nation now spends a larger
percentage of its gross national product on health care than does any
other country.^ By 1973, the annual per capita health expenditures
had reached $441.00 and the nation spent some 94.1 billion dollars
^C. Esselstyn, Group Health: A Better Way to Good Health Care,
(1964) p. 5.
^Report of the National Advisory Commission on Health Manpower,
(1967) p. 35. (Hereinafter cited as Commission Report).
^George Meany, The Case for National Health Insurance. See:
AFL-CIO Legislative Department National Health Insurance: 1970 Fact
Sheet No. 1, p. 1.
on health,
To some degree these cost increases may be explained by factors
extrinsic to the delivery system and the financing mechanism. The
general inflation which the nation is experiencing exerts a large
influence on the components of medical care.^^ In good measure, too,
increases in total cost have reflected changes in the nature of the
services performed. As patients demand more and more care and as
procedures which were unknown a decade ago—r-such as heart transplan-r
tat ion or renal dialysis^^-^-are performed, costs are forced upward.
I
Nevertheless, the obvious and distressing fact Is that the rise in
(health care is outpacing the budget increases of too many families.
Some Roots of the Problem
This nation ^s present health delivery system is highly plura-r^
listtc; delivery mechanisms and financing schemes vary widely and
lack coordination, except as the market serves as an allocating
device. Nevertheless, some elements tend to predominate. Physicians
tend to be engaged, though to a lesser extent than previously, in
solo practice or in loose office?-sharing arrangements. Hospitals
^^James E. Smits, Press Release for Kaiser Foundation Health
Plan, Southern California Region, August 27, 1970,
^^Supra, note 10.
12
Renal dialysis is a procedure used when a patient’s kidneys
fail. In such cases, the procedure may be indispensable but costs
approximately $30,000 a year.
are generally independent of each other, independent of other pro
viders of service (except insofar as doctors may be affiliated with
multiple hospital staffs) and free of central control. Within this
system patients frequently serve as their own medical managers and
some assume both initial diagnostic responsibility and responsibility
for referral, at least to a primary provider of medical service.
Once the patient seeks medical assistance, the primary
physician may direct him either to a specialist or to institutional
care. Still, while there is a good deal of pressure on the patient
to yield to the physician’s expertness, the patient generally
determines for himself whether he should purchase additional medical
services.
The financing mechanism also illustrates the atomistic nature
of medical care. The predominant mode is fee-for-service; that is, I
i
each service is valued by the provider and billed separately. Where '
insurance covers specified incidents of care, and a third party there i
replaces the utilizer of medical services as payor. While some kinds
of insurance place limits on the amounts providers can charge, the
prevailing system involves individual agreements between the provider
of services and the recipient as to the services to be received and
the price to be paid.
Because of the prevelance of individual decisions and agreements
many in responsible positions attribute the current medical crisis to
13
the absence of a coherent system. Whether the debate favors the
^^Sen. Abraham Ribicoff, ’ ’ Health Care in America: Hearings",
Part 1, April 14, 1970, p. 2. 5
coordination of the factions in the present pluralistic system or the
creation of a new system, it is generally agreed that the primary
concern should be with determining and fashioning a better delivery
mechanism.
The HMO: A Suggested Solution
One remedy to the present problem being advocated today by
federal and many state officials, consumer groups, labor and others—
excepting some representatives of organized medical groups— to the
improvement of the quality of medical care at the lowest possible
cost is the organization and implementation of hundreds of HMOs
throughout the United States.
The term HMO was first coined only in 1970 and thus for lack
of time there is no case law and little statutory law on the topic.
There has been litigation on HMO related prototype organizations such
as group medical practice and individual practice plans. Prepaid
group practice as a movement had an explosive growth during the
I960’s which has continued into the 1970’s. This has caused a
significant change in the federal posture towards modes of health
care delivery systems and has resulted in the signing on December 29,
1973, of the Health Maintenance Organization Act of 1973 (P.L. 93-
222) .
Many definitions have been given to the HMOs and their proto
types. The semantics differ considerably but the central feature is
14
E. Ginzberg, Men, Money and Medicine, New York, Columbia
University Press, 1969, p. 46.
an organized system for delivering a reasonably comprehensive spec
trum of prepaid health and medical services including at least those
basic physician, hospital and medical maintenance services, generally
available in the HMO service area, at a negotiated cost for voluntar
ily enrolled participants. Members pay a monthly or annual fee for
themselves and/or families and for this they are entitled to as much j
or as little medical care as they need. They are generally cared for j
I
at a group practice clinic which combines the services of general j
i
practitioners and specialists in most medical areas. |
The HMO concept was not conceived and born overnight, but rather
had a long and complicated gestation. The movement can be traced
back to the mid-1920’s when Dr. Michael A. Shadid started the ;
i
Farmers* Union Cooperative Health Association in Elk City, Oklahoma. |
Under his colorful and courageous leadership, one of the first con- i
15 '
sumer cooperatives in prepaid health plans was formed.
Group practice prepayment was first implemented on a large '
scale by the Kaiser Foundation Health Plan on the west coast during
the 1930*s. Initially it was an industrial plan; however, it broad
ened its membership to the community in 1945. It is now probably one ,
of the best known examples of the many successful prepaid group |
16 !
practice plans in the country. I
l^Michael A. Shadid, A Doctor for the People, New York, The
Vanguard Press, 1939.
^^Kaiser Foundation Medical Care Program: Annual Report —
1969, pp. 2-10.
I
7 i
I
I In any discussion of the history of prepaid group practice
I
! plans, groups first formed on the west coast are prominent. These
I include such organizations as the Group Health Cooperative of Puget
I
! 1
; Sound in Seattle, Washington, started in 1946 and the Ross-Loos '
i Medical Group in Los Angeles, California. This latter organization {
: I
has placed primary emphasis on quality preventive medicine. !
Although HMOs still remain in an early state of evolutionary
metamorphosis in most states, the greatest amount of activity in the i
field is centered in California where their 68 HMOs constitute 42% of j
the 160 operational HMOs across the nation. Slightly over one-half j
I
(53%) of California HMOs are located in the Los Angeles area, while ;
j
one-third are located in the three other areas of San Francisco, I
I
Orange County and San Diego. i
The states of Pennsylvania along with Minnesota are in second j
place with seven operational HMOs each. Arizona, Illinois, New York i
and Wisconsin are third with six HMOs each. There are still 20 states
without an operational HMO, while four states have not yet begun '
planning a c t i v i t i e s . '
I
The HMOs of California were in the planning stage at least two |
years before the federal HMO Act of 1973. Liberal state legislation
provided the stimulus for their emergence by the enactment of
statutes titled Prepaid Health Plans under the direction of the
^^R. Wetherille and J. Quale, A Census of HMOs, April, 1974, I
pp. 6-8; Report prepared quarterly by the HMO Empirical and Policy '
Studies Group of Interstudy, Minneapolis, Minnesota. >
State’s Department of Health. These initial plans were set up to
provide health care services to eligible Medi-Cal (Medicaid) bene
ficiaries on a voluntary enrollment basis. An organization or
carrier, in order to be so designated, had to execute a written pre-
I
paid health plan contract with the Department and the carrier was i
reimbursed by the State on a capitation basis to be "at-risk" for I
I
services provided. In order to promote the formation of such organi- [
zations the California legislature in 1971 passed the Health Organi- j
I
zation Maintenance Act which authorized the Department of Health to j
I
make loans and to provide technical assistance to enable persons to j
1 Q !
plan and develop HMOs. j
The Approach and Scope of This Study !
i
The need for this study became apparent during 1972-73 when the !
!
author was involved, as a lawyer and administrator, in the planning, |
inception and implementation of an HMO based in San Francisco, The |
I
American Health Care Plan. Subsequently the many inquiries from '
administrators, lawyers, consumers and individuals around the country '
!
asking how to organize this kind of a plan and about the legal tech- I
nicalities have pointed up the need for this information.
It is felt that this study is timely and important because,
under the Federal IMO Act (P.L. 93-222), the federal government is
authorized to spend up to $325 million over the next five years for
^^California Health and Safety Code, Sec. 1175-1182.
feasibility studies, planning, initial development cost, and initial
; operation. The money could be applied to the expansion of an exist
ing program as well as to starting a program where none currently
1 exists. It is important to note, however, that this money is not for
; subsidizing the costs of providing care; it is basically for studying
I
or setting up the business.
For people concerned with the health care available to the
poor, this law’s impact is not entirely clear. There is a section
specifying that applications for programs which serve rural areas
and/or medically underserved populations will receive priority in the
awarding of grants. However, the service package which the HMO i
would have to provide to be eligible for a grant is so extensive that !
I
the costs of providing such service would be quite high. For people ;
I
who are not wealthy, although not poor enough to be eligible for I
Medicaid (Medi-Cal in California), the costs of such services may be
prohibitive. Also, since rural populations are widely dispersed, the '
costs of transportation may be prohibitively high— regardless of
whether the HMO or the individual pays that cost.
There are some other problems, too. For example, some states
have laws prohibiting the HMO form of medical practice. The U.S. I
Department of Health, Education and Welfare (HEW) has apparently |
made a policy decision not to go to court to preempt these restric- '
tive state laws. I
The scope and delimitations of this study include its focus on j
the case study of the legal formation, implementation and initial j
i
i i
L 10 I
operation of The American Health Care Plan, only. It takes in the
time span from its inception when incorporated on October 17, 1972,
under the general nonprofit corporation laws of the State of
California; through its submission of a proposal to the State Depart
ment of Health for a Title XIX contract to provide comprehensive
health care services to a potential 40,000 Medi-Cal beneficiaries ; to
the finalization of the state contract on April 26, 1973, and the ;
initial operation of this HMO commencing with the actual enrollment Î
of eligible recipients on July 1, 1973. All of the necessary legal
I
agreements are incorporated inclusive of agreements for medical
service, management and fiscal, marketing, outside providers, trust
agreement, application for registration under the Knox-Mills Act, i
applications for state and federal tax exemption. All of the above i
I
are set forth in full with the appropriate reference to the appli- j
I
cable state statute or regulation in a step-by-step process. I
Again, it should be stressed that the materials provided in ■
' ■ ' I
this particular case study via a step-by-step process in the legal I
mechanics of this HMO relies on California experience and law and
, does not and cannot be construed as a basic guidebook for other !
: i
jurisdictions. HMOs forming in other states will therefore have to
rely heavily on their attorneys and administrators to steer them '
through the complexities of prickly statutes which, though not :
drafted with HMOs in mind, appear to affect them. Nevertheless, it !
; i
I is trusted that this case study will be helpful and enlighten others
who are formulating HMO plans after viewing the legal environment as i
it exists in California. |
L U i
The remainder of this study consists of chapters which feature
a review of the available literature on HMOs, references to legal
citations and comments involving prepaid group medical plans prior to
the emergence of the present concept of the HMO, and printed mate-f
rials presented by the Department of Health, Education and Welfare
(HEW), Group Health Association of America and other health
organizations.
These are followed by a detailed analysis of the legal imple
mentation of this case study of The American Health Care Plan.
The findings, summary and conclusions chapters are an analysis
and evaluation of the past two years of active operation of this
California HMO.
The glossary of terms commonly used in reference to HMO or
prepaid group practice plans are extensive and hence are attached
at the end as "An HMO Dictionary" in Appendix "A,"
12j
CHAPTER II
REVIEW OF RELATED LITERATURE
As noted in the introductory chapter of this study, there is
a severe paucity of literature relating to the legal aspects of HMO
formulation and implementation. Also as noted, while many of the
legal problems influencing the establishment of HMOs relates to
specific local jurisdictions and, consequently, cannot be dealt with
here, still there are identifiable areas of legal concern which can
be surveyed. Five such problem areas or issues are:
1. The insurance law issue.
2. The monopoly issue.
3. The licensure issue.
4. The restrictive law issue.
5. The corporate practice issue.
The Insurance Law Issue
Certain state insurance laws, especially those imposing high
financial reserves, present legal difficulties to Health Maintenance
Organizations. The best and most practical argument that Health
Maintenance Organizations should not be governed by these laws is
that an HMO does not assume risks in the traditional sense, but
allocates costs and hazards in a manner which is almost unrelated to
insurance. In Jordan v. Group Health Association (D.C. Cir. 1939)
this argument was recognized and applied to a prepaid group practice.
13
Other states in 1973 and 1974, prior to the enactment of the
federal HMO Act, began to enact HMO enabling legislation. Examples
are Pennsylvania’s State Act No. 2171 whereas profit and nonprofit
HMOs must apply to the Insurance Department for approval and under
this law, ninety percent of the governing boards must be consumer
representatives.
In Iowa the law permitting the establishment and regulation
I
of HMOs gives the Insurance Commissioner the power to issue or deny I
certificates of authority for HMOs, to revoke or suspend certificates j
i
and requires him to examine administration and health care quality |
i
in each HMO every three years. Under the law, premiums received for j
health care, insurance, indemnity and other benefits will not be j
taxed for the first five years of existence of the HMO, but will be i
considered premiums and be taxable thereafter. I
i
The Monopoly Issue |
The monopoly issue is an important one. In most cases local :
I
medical societies wield complete power in the provisions of medical
i
care. This power can be used to frustrate the development of HMOs. j
In at least one case, such activity on the part of a medical society
was found to be in restraint of trade and a violation of the Sherman
Antitrust Act: United States v. American Medical Association, 110 F2di
233 (D.C. An. 1942). j
i
The Licensure Issue
Laws pertaining to the licensure of health professionals also
need to be considered by planners and organizers of HMOs. Licensure
14
is necessary to guarantee that the public be given competent health
care. In some jurisdictions, however, licensure laws are designed
not only to insure the quality of care, but also to restrict the
number of professionals who are allowed to practice. Most licensing
boards are composed of members of the medical profession, and the
standards set by these boards may reflect the interests of the pro
fession but not always those of the state. Many licensure laws heed
to be altered and improved. Until such improvement occurs, HMO
administrators need, at all times, to be acutely aware of the re
quirements and limitations imposed. This type of analysis will help
prevent the HMO from incurring unnecessary liability for improper
utilization of unlicensed personnel (Whittaker v. Superior Court of
Shasta County, 438 P2d 358 (Cal. 1968)) which may raise an inference
of negligence in some jurisdictions (Barber v. Reinking, 411 P2d 861
(Wash. 1966)). A more complete analysis of a number of problems in
this area are discussed in the PHEW REPORT OF LICENSURE AND RELATED
HEALTH PERSONNEL CREDENTIALING, June, 1971.
The Restrictive Law Issue
A major legal problem is restrictive state legislation. Such
legislation imposes qualifications upon groups seeking to establish
HMOs. Such qualifications may hamper HMO expansion by requiring a
particular board composition or by imposing a specific legal form.
Frequently these conditions can be shown to be unfair in that they
prevent certain classes from entering the health care market. Many
such statutes may not survive scrutiny under the U. S. Constitution.
15
In Group Health Insurance of New Jersey v. Howell, 40 N. J. 436, 193
A2d 103 (1963), Aff’d. 43 N. J. 104, 202 A2d 689 (1964), the New
Jersey Supreme Court invalidated a statute which provided that a
corporation was required to obtain the approval of the State Medical
Society before transacting business as a medical service corporation
and held that the statute was unconstitutional and void for a lack of
due process.
The Corporate Practice Issue
In a recent case of October 31, 1974, Garcia v. Texas State
Board of Medical Examiners, U. S. District Court, Western District of j
Texas, it was held that a Texas lay-sponsored HMO may not employ |
I
physicians. The Secretary of State refused to grant a corporate I
charter to a proposed nonprofit corporation known as the San Antonio
Community HMO. The action was brought on behalf of corporations j
similarly situated desiring to hire members of the medical profession {
I
whose directors and incorporators were not members of the medical
profession. The court found that the state was well within the i
reasonable exercise of its police power in requiring that an organi- ;
zation’s board of directors be physician-controlled when the purpose I
of the organization is to deliver health and medical care. The sole
source of relief available to plaintiffs said the court, was the
19
Texas legislature.
^^National Health Lawyers Association, "News Letter," December,
1974, Vol. 2, No. 12, pp. 1-2.
16]
The common law restraint on the corporate practice of medicine
is a decisional rule which holds that if an organized system under
takes to insure medical care, the corporation is practicing medicine
in violation of the licensure law. An early case opposing this
doctrine was State v. Lewin, 128 Mo. A. 149, 106 S. ¥. 581 (1907).
In the Lewin case, the court held that a prepaid group practice I
contracting with a duly licensed physician was not practicing medicinJ
and, therefore, did not violate the corporate practice rule.
The rule is applicable only to "for profit" plans and does not
concern nonprofit organizations. This principle is illustrated in |
People V . Ex. Rel. Exrs. v . Pacific Health Corp., 12 Cal. 2d 156, 82 j
P.2d 429, Annot., 119 A.L.R. 1384 (1938). |
!
The basic argument seems to be that it is against public policy '
to subject the medical profession to a profit motive. At this point, |
I
the corporate practice issue is unsettled and controversial except in |
several states, such as California, where there are specific statures '
allowing the corporate practice of medicine, law and dentistry. This
issue is dealt with at length in 4 A.L.R. 3d 383, "Practice by
Attorney and Physicians as Corporate Entities or Association Under
Professional Service Corporation Statures."
General Considerations I
It is suggested that while person(s) are contemplating the
possibility of developing an HMO, an invaluable guide which is
addressed to potential HMO sponsors, their staff, and consultants
who desire methodological guidance for conducting an HMO feasibility
17 ^
study is available.This is "must" reading before proceeding
further with plans as all of the materials in this manual are directed
towards the final "go" or "no go" feasibility decision which is based
upon both objective data analysis and subjective determination of the
degree of risk which is acceptable to the potential HMO sponsors and
financiers.
Another manual which is helpful to HMO planners with a legal
background but no exposure to this specialty is one published in 1972,
prior to the execution of the federal HMO Act of 1973, is "Lawyers
Manual on Health Maintenance Organizations" which may still be avail
able from HEW, Health Maintenance Organization, Rockville, Maryland.
The most up-to-date compilation and summary of the legal climate
in jurisdictions other than California are the papers published under
the sponsorship of the Health Services Research Center for Inter-
21
disciplinary Studies of Minneapolis, and a state-by-state description
catalog of HMO Enabling Bills is a handy reference through the 1973
22
legislative sessions.
^^Arthur Young and Co., "Report: Requirements for Conducting
an HMO Feasibility Study Under Various Organizational Settings"
(Prepared for U. S. Dept, of Health, Education and Welfare) February,
1974, pp. 7-69.
^^R. Holley and R. Carlson, "The Legal Context for the Develop
ment of HMOs," Health Services Research Center of the Institute for
Interdisciplinary Studies, Minneapolis, Minn., December, 1971, pp. 3-
14.
^^R. Holley and R. Walker, "Catalog of 1973 State HMO Enabling
Bills," (Report prepared by Interstudy, Minneapolis, Minn, for U. S.
Dept, of Health, Education and Welfare) February, 1974, pp. 18-117.
18
In addition to these publications, two health organizations
situtated in Washington, D. C., Group Health Association of America
j and The National Association of Neighborhood Health Centers, looked
I over the horizon and foresaw the possibility of the federal act on
' HMOs and National Health Insurance and sponsored seminars throughout
the country from 1971 to the present to acquaint administrators and
t
health lawyers with this new concept. They published, for their
' O g
; members, excellent manuals on fiscal management and legal
I problems^^ that confront HMOs.
This summary of HMO literature indicates that only small
' segments of the entire HMO concept have been considered. These
1 include case law dealing with specific legal issues, research and
health organizations addressing certain fragments such as the legal
context, feasibility studies and fiscal management.
It should be understood that the above legal citations are
not offered as a complete compilation of existing state and federal
cases on this subject. They are meant to be only a starting point
for major substantive laws affecting HMO development. However,
lawyers for prospective HMO development projects may employ these
citations to shepherd these cases in their particular jurisdictions.
23university of Chicago, Center for Continuing Education,
"Fiscal Management and Legal Problems in the Development of HMOs"
(Seminar) December 5-8, 1971.
Lawyers Conference on Health Maintenance Organizations,
Dallas, Texas, August 20-21, 1971.
19
The aforementioned five major legal problems in some states
have generally been resolved in California and references to the
applicable state statutes and regulations which will be hereafter
presented in this HMO case study are primarily the Corporations Code,
Health and Safety Codes, Welfare and Institutions Codes, Revenue and
Taxation Codes, and Business and Professions Codes. The current
California legal complication concerns the licensure of "Physicans
25
Assistants" which became law in 1970 but the implementation of the
training of qualified assistants has been delayed by the California
Medical Association to whom the legislature entrusted the task of |
I
establishing the appropriate guidelines and regulations. |
Again, it cannot be stressed too strongly that, after reading !
all of the suggested literature, there still remains no panacea to I
solve the legal requirements for starting an HMO. Each plan has to \
I
deal specifically with the problems it faces in its own jurisdiction ,
I
I
and this involves hard work, legal research, communiques and meeting J
with state and local officials, and inquiries directed to persons I
presently or previously connected with prepaid group health plans. |
^^Business and Professions Code of California, Sections 2510-
2522.
20
CHAPTER III
TYPE OF "LEGAL ENTITY" FOR AN HMO
The Federal and State laws discussed in this study state that
an HMO is either a private or public legal entity providing basic and
supplemental health services to its members on a fixed periodic rate
(plus reimbursement for emergency services) without regard to date,
frequency, extent or kind of basic medical services.
The question of the types of legal entity leads to the
question: who may own a qualified HMO? HMOs may be community-
sponsored or sponsored by various types of medical groups or associ- |
I
ations of physicians in individual practice. These may be foundations!
1
set up by county or state medical societies or by insurance companies |
such as the Blue Cross-Blue Shield plans. There appears to be nothing
in the law which would prevent a large employer or group of employers
from establishing its own HMO as long as coverage was available to all'
members of the community, irrespective of place of employment.
This study deals specifically with the organization of the
I
American Health Care Plan, a San Francisco based HMO, which was |
organized as a California nonprofit corporation by a group of physi
cians already engaged in group practices. It discusses why and how I
; ^^EBPR Research Reports, (Published by Charles D. Spenser and
! Associates, Inc., Chicago, 111.) January, 1974, p. 1.
!
1
L ___________________________: ________________________________________________ 21.
I this model was chosen as a legal entity.
However, before describing the choices made by the American
Health Care Plan group, a brief discussion is presented of the
principal alternatives from among which their choices were made. The
following definitions of possible legal entity arrangements are taken
from the Lawyers^ Manual of HMOs, United States Department of Health,
Education and Welfare.
Various Alternatives and Their Definitions
Proprietorship. A proprietorship is a one-man ownership of an
unincorporated business. For example. Doctor Jones employs one or
more young physicians on salary, plus a nurse and receptionist. He
is a sole proprietor legally because he alone owns the practice,
although he is not a solo practitioner, since he has fellow medical
doctors working with him. |
Partnership. A partnership is an agreement between two or more 1
i
persons to share their profits and losses in an unincorporated |
business. It has the important legal feature known as "agency," that I
I
is, each partner is an agent of the other and can legally bind him by |
I
his acts, including negligence and each is bound by the other’s acts |
just as if they were performed by himself. For example. Doctors
Smith and Brown own a clinic together and rent out part of it to
other professionals. They pool their capital and their labor,
including seeing the same patients. They agree to split the income
and expenses of the practice between them, not necessarily equally
22
but according to a predetermined ratio. They are partners.
"Subchapter S" Corporation. Subchapter S is a corporation taxed
like a partnership. It will be discussed later in connection with
taxes.
Corporation. A corporation is a body set up as a new entity
I
for a specific purpose, a "thing" able to function in the business j
I
world distinct from its several members. For example, Doctors Allen, j
Burns, and Charles each own one-third of the stock in the ABC Clinic, j
a medical service corporation. They are also employed by the corpo
ration on a salaried basis. The corporation owns their clinical i
i
equipment and supplies. After payment of all salaries, fringe , |
benefits, and other expenses, the corporation pays its taxes and i
distributes the remaining profits to the three physicians as dividendsj
of the corporation. |
I
I
Professional Corporation i
The idea of a corporation was unknown in Roman law and was used |
i
only by religious orders and universities in the Middle Ages. The '
Industrial Revolution virtually dictated it in its economic circum- |
I
stances. Large amounts of risk capital were required to finance j
heavy industry, such as factories and railroads, and no one person j
was usually willing to risk his entire fortune to finance them. So I
I he pooled his investment with others, being careful to condition his
I investment on a new concept which was adopted by the law and known as
! "limited liability,” This concept means that a shareholder in a
corporation is only liable for the corporation’s debts up to the
23
amount he has invested in the organization, that is, the value of his
stock. He cannot be sued personally, as a partner or sole proprietor
can, for the firm’s obligations. The individual’s personal assets
are not part of the assets at risk of the business and subject to
creditors’ claims.
Ironically, it was this very feature of limited liability that |
made the corporation desirable for the business community and yet i
i
unethical for the professions. It was argued that a doctor or lawyer j
enjoys a special trust or confidence in his dealings with his fellow-|
i
man, which precludes his limiting his liability to his monetary ;
investment. |
The professional corporation advocates answered this by a pro- ^
vision in the law retaining the unlimited liability of the physician
for his own acts towards patients just as it exists in the non- j
corporate form.
The professional corporation law typically adopts the provision
that a shareholder’s vicarious liability for the corporation’s debts ,
is limited to the value of his shares. Regardless of his form of
doing business, a physician is liable for his own acts without limit,i
but his liability for the acts of his fellow employees in the corpo
ration is limited to his stock interest in the corporation that |
employs them.
The other traditional characteristics of a corporation are |
I
centralized management, continuity of life, and free transferabilityj
of interest. Frequently the most important factor in the decision
to incorporate is the federal income tax impact.
24 ;
The corporation, as noted earlier, is a separate entity from
its members. As such, it is a taxpaper in its own right for federal
income tax purposes and is subject to a flat income tax of 22 percent
on the first $25,000 of taxable income plus 48 percent of the excess
and surtax, ir any. For example, if the XYZ Clinic earns $500,000
in 1969 and pays salaries and other expenses of $400,000, it has a
taxable income of $100,000 and a tax of $41,500 plus surtax, leaving
a profit of roughly $55,000. This is distributed as dividends to its
shareholders, who in turn are subject to individual income tax on
these dividends in addition to any salary they receive as employees
of the corporation. This double tax at the corporation level and
again at the shareholder level means that the profits earned by a
corporation will be taxed twice before the owners receive them.
Obviously this can constitute a drawback in practicing as a corpo
ration unless some means can be found to keep corporate taxable income
at a minimum or to otherwise remedy the problem.
Normally, a small corporation can partially accomplish this by
paying all or most of its earnings to shareholders— employees as
salaries. The corporation then deducts the salary as an expense and
catch here is that the Internal Revenue Code requires the salaries
to be reasonable and the 1RS might argue it is unreasonable for a
corporation to pay so much salary expense that it has no profit for
itself. They would then disallow the deduction for the corporation but
still consider it taxable income to the employee.
25
One solution to this dilemma is the qualified pension or
profit sharing plan. The advantages of being covered by such a
plan makes this device an increasingly impelling motive to incorpo
rate. The corporate employer gets an immediate tax deduction for
contributions to its employees retirement plan that may go as high as
25 percent of the employee’s annual income, while the employee pays no
immediate tax on the contribution even though he obtains a vested
right to future receipt of the amounts.
All of the tax advantages— current deduction plus tax free
accumulation until retirement, and exclusion from federal estate tax
on death— makes the corporate pension and profit sharing arrangement
"hands-down" more desirable than the private investment plan of the
solo or partner.
This assumes the physician has excess income that he is pre
pared to put into his tax shelter until his retirement. To make in
corporation worth the cost, he should be in the $40-50,000 income
bracket or higher, and be able to channel $10,000 or $12,000 or more a
year into deferred compensation without feeling pinched on spendable
income.
In addition to the direct income tax savings available to a
corporate employee and not to a solo physician or partner, there are
several indirect features or fringe benefits of a corporation that
are not as dramatic but that can be equally important as the pension
plan. Group life insurance can be purchased by the employer corpo
ration, which can write off the premium while no tax is paid by the
26
employee although he names the beneficiary. Sick pay of an incorpo
rated physician is exempt from income tax up to $75 or $100 a week
(after a waiting period) but not for a solo physician or partner.
Health and accident insurance and medical expense reimbursement can
be provided tax free to the corporate employee. And finally, the
employer can deduct up to $5,000 paid as a death benefit to a
deceased employee’s widow or estate and the payment is tax free to
the recipient.
Summarizing, we have pension and profit sharing, tax free life
I
insurance, exempt sick pay, group health and accident insurance,
deductible medical expenses, and $5,000 death benefit, all by adopting
the special tax advantages Congress has given to corporations and j
their employees that are not available to other taxpayers. ;
I
Obviously, certain tax factors will be more important than j
I
others in an individual case. A one-physician corporation with ten j
i
employees may be less attracted to group life and health insurance |
than a five-physician corporation with two or three employees. As in
other areas, these questions should be "costed put" in terms of
i
benefit versus price tag before an intelligent decision can be made.
Subchapter S Corporations
A second solution to the double taxation 'dilemma of the corpo
ration is found in the Internal Revenue Code under Subchapter S. A
corporation taxed under Subchapter S combines some of the advantages
of the corporation with the tax treatment of a partnership. In other
words, while a regular corporation is taxed on its income and losses |
__________________
as a separate entity distinct from its shareholders, a Subchapter S
corporation passes its income and losses through to its stockholders
to be reported directly by them. Its employee pension and profit
sharing plan, however, is limited by the Tax Reform Act of 1969 to
the Keogh ceiling of $7,500 or 10 percent of earned income, whichever
is less.
To elect Subchapter S status, which is limited to corporations
of ten shareholders or less, one would first incorporate under state
law as a professional corporation, then elect, by filing 1RS form
2553, not to be taxed as a corporation but rather to pass the corpo
ration’s income directly through to its physician owners. The
corporation’s net income is computed just as a regular corporation
as far as accounting for revenue and expenditure, but the net income ;
is then picked up and reported directly on the personal returns of |
I
the physician owners. They must pay their personal taxes on this i
i
income whether or not the corporation actually distributes any money 1
to them, just as in a partnership.
Retained Earnings ;
i
A third possible solution to the double taxation dilemma is to !
I
leave the corporation’s income in the corporation and not pay it out |
either in salary or dividends. This is called retained earnings. j
The idea is to accumulate income at 48 percent corporation rates j
instead of paying it out at the presumably higher individual rates. !
If one could do this indefinitely, he could ultimately take it out |
when he liquidates the corporation or sells his stock, paying only j
I
I
28 I
the maximum 25 percent capital gains rate instead of the 50, 60 or
70 percent individual rate, depending on his bracket.
Once retained earnings have reached $100,000 the law imposes a
penalty tax unless the corporation has a legitimate business purpose
for the accumulation, other than avoiding taxes, such as creating
working capital for expansion of the business. The tax, which is in
I
addition to regular corporation income tax, ranges from 27.5 percent ;
I
- to 38.5 percent depending on the amount of income retained. j
1
Some lawyers advise accumulating up to the maximum of $100,000 |
and then electing Subchapter S, which is not subject to accumulated
earnings tax since its income is taxed directly to the owners. '
Personal Holding Company Tax I
' Another problem facing professional medical corporations, j
especially the one-man corporations, is the personal holding company ‘
I
tax. This is a penalty tax of 70 percent on certain income retained ;
by a corporation that fits the definition of a personal holding ^
' company. This is defined as a corporation in which more than half
i the stock is owned by five or fewer persons. Thus any medical j
: I
; corporation with less then ten physicians automatically meets the j
■ ■ i
[ test of ownership.' The confiscatory 70 percent tax applies to income j
i from personal service contracts, such as those entered into by !
! i
; entertainers, ball players, and other unique individuals, in which j
I the individual rather than the corporation is rendering the service,
i
I and in which the person buying the service has the right to insist
on or designate one particular person to perform the service. Thus
!
29
where the patient routinely and consistently has the right to des
ignate which physician in a group practice is "his doctor" rather
than taking whomever is on duty at the time, there is a possibility
the 1RS will assert that the arrangement is a personal holding
company. There have been no reported cases in the tax decisions
applying this to physicians but this may be because medical corpo
rations are still so new. This tax has been successfully imposed on
other small corporations where one or two specialists rendered
personal services in which the customer, rather than the corporation,
had the right to designate who was to perform the service.
An alternative to this, if Subchapter S is not available, is to
distribute all income currently so there is no retained corporate
income to which the penalty tax could apply. This may be costly,
however, by producing the ultimate double taxation referred to
earlier.
Advantages and Disadvantages
i
There are alternatives to the alternatives, each with advan
tages and disadvantages. The corporation gets favorable pension |
benefits but pays double tax. To avoid this it accumulates income j
1
but then faces penalties for accumulated earnings or personal j
holding companies. It thinks it has found a panacea in Subchapter S,|
only to learn that the Tax Reform Act limits their pension plan
benefits thus removing one of their prime attractions for the tax
payer in incorporating as Subchapter S. |
I
30
The sole proprietor and partner cannot have corporation pension
plans but do have Keogh and also pay no penalty tax on dividends,
accumulations, or personal service contracts. Furthermore, the same
Tax Reform Act mentioned above contains another provision that might
make incorporating not so desirable. This is the 50 percent rate
ceiling on earned income. A physician cannot be taxed more than 50
percent on earned income from his practice beginning in 1972. (It
does not affect unearned income such as rents, dividends, interests,
and capital gains.) At present rates for a married taxpayer, this
means that a physician with a taxable income of $40,000 will have
reached the maximum tax bracket on additional earnings, even without
incorporating. Thus the professional corporation could lose some of
its appeal as a tax shelter.
The many variables, not only in the tax area but elsewhere, make
it imperative that there be a great deal of thought and study before
incorporating. These variables entail complex legal and accounting
considerations that have been alluded to only superficially. In an
particular case the decision would involve a tailor-made approach in
cluding such factors as the group’s size, age, location, specialization
of practice, income, monetary heeds, and even temperament of the mem
bers.
The American Health Care Plan
The American Health Care Plan (hereafter referred to as the
^^Keogh Plan: Self-Employed Individuals Tax Retirement Act of
1962 (HR-10) Revision Reform Act of 1974.
31
Plan) was organized as a California nonprofit corporation^^ on
October 17, 1972 when the Articles of Incorporation were filed and
endorsed in the office of the Secretary of State. Prior to filing
said Articles an Exemption Application (FTB 300(1-72)) was submitted
to the Franchise Tax Board which granted an exemption from state
franchise or income as a social welfare organization.^^ The above
documents are attached hereto as Exhibits "A ^" "B" and "C" respec
tively.
The Plan did not "rise as the phoenix" but as an offshoot of a
neighborhood health center, the Hunters Point-Bayview Community
Health Service (CHS) which had been in operation for five years j
I
under a five million dollar HEW federal grant. After it became clear |
and definite that the grant which expired on July 31, 1973, would not ;
be renewed, informal discussions and conferences commenced and con- |
tinned into the latter half of 1972. These meetings included the |
director of CHS who was also the director of a private medical j
practice group. Associates Clinical Group and the heads of three ;
private medical groups in San Francisco: Visitation Valley Medical |
Group, Franklin Medical Group, and Gateway Medical Group. These |
1
representatives contemplated the formation of an HMO in response to a [
social need and concern rather than in terms of an additional profit
motive. They were aware that 10,000 of the population previously
^^Corporations Code of California, Part 1 of Division 2 of
Title 1.
29
California Revenue and Taxation Code, Sec. 237Olf. |
......................... 32J
served by CHS during its tenure were medically indigent and/or on
welfare and would be without health care services except from the
San Francisco General Hospital when the HEW grant had expired.
It was finally resolved that an HMO would be formed after a
formal decision was reached with the regional administrator of the
Department of HEW that $100,000 of the Public Health grant to CHS
would be retained from the budget for the final fiscal year in order
to implement this HMO which would be organized to take advantage of
the Waxman-Duffy Prepaid Health Plan Act^® which allows a prepaid
health plan to contract with the California Department of Health to
furnish direct or indirect health services to Medi-Cal beneficiaries
on a predetermined periodic rate basis.
The four incorporators of the Plan are all physicians and are
the majority of the board of directors which subsequently was ex
panded to seven to include a welfare rights representative, a member
of the local medical society, and administrator of the management
group. The nonprofit model was chosen primarily because the Plan
would control only the policy and professional responsibility. All
direct health services to the enrollees of the Plan would be and
were contracted out to the Consolidated Medical Group, a professional
medical corporation, which in turn subcontracted with other entities
for medical service, management and fiscal, hospital, marketing,
outside providers, etc.
Each of these entities would receive an agreed upon payment
^OWelfare and Institutions Code of California, Sections 14200-
14300 et al.
33
for its services as per executed contract. For example, each medical
group would receive as compensation 42 percent of each capitation
dollar received from the State of California for Medi-Cal benefi
ciaries enrolled with said medical gtoup. The medical services
provided by the group included physician and staff services, equip
ment and supplies, referrals and consultants, drugs, laboratory,
physicial therapy. X-ray services and ancilliary services. However,
the medical group was not required to furnish hospital, convalescent
and nursing home services which were contracted for separately and
directly with the Plan.
For other services they contracted with the San Francisco
Community Health Services, a corporation formed to administer the Plan
which received 15 percent of the monthly payments received from the
state of administrative, fiscal and legal costs.
Articles of Incorporation
Section 9300 of the California Corporations Code requires
certain provisions in the articles of incorporation as follows:
(a) The name of the corporation.
(b) The specific and primary purposes for which it is formed.
This requirement shall not be deemed to preclude a statement of
general purposes or powers or to restrict the right of the corpo
ration to engage in any other lawful activity.
(c) That the corporation is organized pursuant to the General
Nonprofit Corporation Law or pursuant to Part 1 of Division 2 of
Title 1 of the Corporations Code.
___________________ 3-4.
(d) The county in this state where the principal office for
the transaction of the business of the corporation is located.
(e) The names and addresses of three or more persons who are
to act in the capacity of directors until the selection of their
successors...
Nevertheless, in order to claim an exemption under section
2370 of the state Revenue and Taxation Code which itemizes eleven
different types of organizations for which an exemption is granted
from state franchise or income tax, the Secretary of State has set
forth suggested clauses to be inserted in the Articles of Incorpo
ration in order to qualify which are as follows :
(a) The corporation shall not have the power to, and shall not
participate in or intervene in (including the publishing or distri
buting of statements), any political campaign on behalf of or in
opposition to, any candidate for public office...
(b) No part of the profit or net income of the corporation
shall ever directly inure to the benefit of any director, office or
member thereof, or to the benefit of any private shareholder or
individual...
(c) In the event of the liquidation or dissolution of the
corporation, none of its assets shall inure to any individual but
shall be distributed to another organization(s), formed for and
operating for purposes similar to the purposes for which this corpo
ration is formed...
All of the above provisions are included in the articles as per
Exhibit "A, "
_____________________________________________ 35 J
Another step was the obtaining of a federal exemption from
income taxes inasmuch as the state exemption (Exhibit "C") was
issued on the condition that a federal exemption would be applied
for and the state Franchise Tax Board would be notified of the final
determination.
An application for federal tax exemption was so made to the
regional office of the Internal Revenue Service seeking same under
Section 501(c)(3) of the Internal Revenue Code which would allow
individuals’ and organizations’ contributions to the Plan also to
be tax deductible. However, after extensive negotiations between
the Plan and the Internal Revenue Service, the Washington, D. C.
office recognized exemption from federal income tax under Section
501(c)(4) of the Internal Revenue Code which section does not allow
tax deductions for others who make contributions to the Plan. See
ruling of 1RS marked as Exhibit "D,"
Other minor legal tasks which were executed after establishment
of the Plan as a nonprofit corporation were: an application for an '
employers identification number by the Internal Revenue Service which ;
is employed in filing the quarterly employees withholding taxes; and '
a certified copy of the Articles of Incorporation was filed and
recorded in the office of the County Recorder of San Francisco as
required by the Corporations Code whenever the principal office for
the transaction of business of the corporation is located.
At this point and before the first meeting of the board of
directors, the attorney for the Plan prepared and distributed a
memorandum: "Instructions for Officers and Directors With Respect to
36
Organization and Operation of the American Health Care Plan" which
is attached as Appendix "B."
Qualification Under thé Knox-Mills Health Plan Act
In California every health care service plan shall initially
and annually register with the attorney general and be subject to the
maintenance by the attorney general in compliance with the speci-
31
fications set forth in the Knox-Mills Health Plan Act.
This was the final legal obstacle before the Plan could begin
operation by enrolling Medi-Cal recipients. The pertinent provi
sions of the Act which must be submitted with the application for
permission to operate were:
(a) A form of each standard membership contract which the
Plan proposes to issue including standard forms in use on the date of
submission.
(b) Copies of all advertising which the plan proposes to use.
(c) Such other pertinent and relevant information as the
Attorney General may resonably require for the proper administration
of this article...
The initial minimum registration fee was $100 which, in 1974,
was increased to $500. All of the conditions of the Act were met
except Section 12539 of the Government Code which states:
No health care service plan subject to the provisions of this
article shall establish, maintain or operate a health care service
plan unless such plan shall have and at all times maintain a tangible
^^California Governmet Code, Sections 12530-12539.4.
37
net equity equal to the following minimum amounts in relation to the
number of individuals and family units entitled to health care ser
vices under contracts issued by such health plan:
Number of individual Amount of tangible
family units net equity
2.500 or less.................................... $10,000
2, 501 to 3,500 ........................................... 15,000
3.501 to 4,500 ................................... 20,000
4.501 to 5,500 ................................... 25,000
5.501 and above.......................................... 30,000
This condition presented some difficulty inasmuch as the Plan was
"naked" being recently born and without accumulated assets. However,
after several meetings with the Regional Director of DHEW, it was
agreed that the government owned furniture and equipment previously
used by the Neighborhood Health Center, Hunters Point-Bayview Community
Health Service, would be transferred for the "sole purpose" of advan
cing the activities of the Plan. (See DHEW letter in Exhibit "E.")
After the transfer the controller prepared a balance sheet which
was submitted to the state attorney general which showed that the
appraised value of the transferred furniture and equipment was worth
$50,000, hence the requirement of having a tangible net equity by a
health care plan of $10,000 to $30,000 was overcome.
The attorney general also set up the structure for monitoring
other plan activities under the Act which included : requiring the
health service plan to maintain its books of account on an accrual
basis, making books and records available for inspection, not per-
38
mitting the use of untrue or misleading advertising or solicitation or
deceptive membership contracts and not allowing expenditure of an ex
cessive amount for administrative costs.
The attorney general was also granted by the Act the right of
enforcement for any violations which might be a cease and desist order
of the ultimate of injunctive relief, in receivership, or seeking other
appropriate relief in the superior court in and for the county in which
the violation occurs.
Finally, registration was complete and The American Health Care
Plan was notified by the attorney general’s office that it was en
titled to operate as a health care service plan (HMO) as so provided
by the Knox-Mills Health Plan Act. (See letter from the Attorney
General, labeled Exhibit ’ ’ F.’ ’ )
39
Chapter IV
EXTERNAL CONTRACTUAL RELATIONSHIPS
The preceding chapter has presented the initial intent of this
HMO Plan’s organizers to provide recipients of public assistance,
medically indigent aged and other such persons with the opportunity
to enroll in a prepaid health plan under the Waxman-Duffy Prepaid
Qo 33
Health Plan Act. ^ This Act specifically called for:
(a) Encouraging the development of more efficient delivery
of health care to Medi-Cal recipients.
(b) Reducing the inflationary costs of health care.
(c) Improving the quality of medical services rendered to
those elibible enrollees as defined in this chapter and Chapter 7
(commencing with Section 14000) of this part.
(d) Reducing administrative costs of operating the Medi-Cal
Act by allowing prepaid health plans to assume substantial costs of
administration and utilization controls that are now assumed by the
Department of Health Care Services.
32
Welfare and Institutions Code, Section 14200 et al.
3^Welfare and Institutions Code, Section 14201.
^^Note: the Department of Health Care Services was reor- |
ganized and the name changed to Department of Health effective July
1, 1973, so the names are used synonymously.
40
Therefore, the policy of the State of California which was
enacted into legislation^^ specifies that to the maximum extent
feasible, health care services to eligible Medi-Cal beneficiaries
shall be provided through a system of prepaid health plans which
shall include the full range of Medi-Cal Program benefits. When it
was determined that this intent was also the intent of the Plan,
negotiations began withtthe Department of Health and the submission
of the proposal attached as Appendix "C" culminated in the Title XIX
contract set forth in full in the following section. This contract
was executed on April 26, 1973, but final approval by the Department
of General Services was not given until May 30, 1973. The American
Health Care Plan became operational July 1, 1973, after approval of
its marketing staff and plans by the Department of Health.
q c
j California Administrative Code, Title 22, Division 3,
: Chapter 3, Article 8.
II
STANDARD AGREEMENT
THIS AGREEMENT, made and entered into this 26 day of April
1973 , in the State of California, through its duly elected or
appointed, certified and acting.
TITLE OF OFFICER ACTING AGENCY NUMBER
FOR STATE
Department of Health
Acting Director Care Services AGR-2034
hereafter called the State,
and
The American Health Care Plan
hereafter called the Contractor.
WITNESSETH: That the Contractor for and in consideration of the
covenants, conditions, agreements, and stipulations of the State
hereinafter expressed, does hereby agree to furnish to the State
services and materials, as follows:
Set forth services to be rendered by Contractor, amount to be paid
Contractor, time for performance or completion, and attach plans
and specifications if any.
ARTICLE I— PREAMBLE
1. This contract is entered into under the provisions of Section
14000 (a) and Section 14000 (e) of the Welfare and Institutuions
Code and California Administrative Code, Title 22, Division 3,
Chapter 3, Article 8.
2, It is in the public interest that medical assistance be provided
in the most economical manner, consistent with high quality
medical standards.
3. The purpose of this contract is to enter into an agreement with j
the contractor for the provision of health care services, as .
herein described, to be eligible beneficiaries who elect to j
enroll. In due consideration of services provided, the State i
agrees to pay capitation payments as stated and provided in this
contract.
4, Pursuant to Section 14057 of the Welfare and Institutions Code,
Contractor qualifies as a Knox-Mills carrier.
42
The provisions on the reverse side hereof constitute a part of this
agreement.
STATE OF CALIFOmiA
AGENCY
Department of Health Care
Services__________________
BY (AUTHORIZED SIGNATURE)
TITLE
Acting Director
(Continued on sheets, each
bearing name of contractor)
CONTRACTOR
The American Health Care Plan____
BY (AUTHORIZED SIGNATURE)
TITLE
President__________________________
ADDRESS
5815 Third St., San Francisco, Ca
Do Not Write in Space AMOUNT OF THIS ESTIMATE
$11,394,515
FUND
APPROPRIATION
f
Sec.14157,W&I Codé
UNENCUMBERED BALANCE
ITEM CHAPTER STATUTES FISCAL YEAR
ADJ. INCREASING
ENCUMBRANCE
$
FUNCTION
ADJ. DECREASING
ENCUMBRANCE
$
LINE ITEM ALLOTMENT
I hereby certify upon my own personal
knowledge that budgeted funds are avail
able for the period and purpose of the
expenditure stated above.
T.B.A. B.R.
SIGNATURE OF ACCOUNTING OFFICER DATE
II
STANDARD AGREEMENT
(CONTINUED)
I hereby certify that all conditions for
exemptions set forth in State Adminis
trative Manual Section have been compiled
with and this document X is exempt is not
exempt from the Department of Finance
SIGNATURE OF OFFICER SIGNING
ON BEHALF OF THE AGENCY
DATE
44
1. The Contractor agrees to indemnify, defend and save harm
less the State, its officers, agents and employees from any and all
claims and losses accruing or resulting to any and all contractors,
subcontractors, materialmen, laborers and any other person, firm or
corporation furnishing or supplying work, services, materials or
supplies in connection with the performance of this contract, and
from any and all claims and losses accruing or resulting to any
person, firm or corporation who may be injured or damaged by the
Contractor in the performance of this contract.
2. The Contractor, and the agents and employees of Con-
!
tractor, in the performance of this agreement, shall act in an '
I
independent capacity and not as officers or employees or agents of ^
i
the State of California. i
i
3. The State may terminate this agreement and be relieved |
I
of the payment of any consideration to Contractor should Contractor |
fail to perform the covenants herein contained at the time and in |
I
the manner herein provided. In the event of such termination the
State may proceed with the work in any manner deemed proper by the j
State, The cost to the State shall be deducted from any sum due the ,
Contractor under this agreement, and the balance, if any, shall be |
paid the Contractor upon demand. j
4. Without the written consent of the State, this agreement '
is not assignable by Contractor either in whole or in part. j
5. Time is the essence of this agreement.
6. No alteration or variation of the terms of this contract
shall be valid unless made in writing and signed by the parties
45
hereto, and no oral understanding or agreement not'incorporated here
in, shall be binding on any of the parties hereto.
7. The consideration to be paid Contractor, as provided
herein, shall be in compensation for all of Contractor's expenses
incurred in the performance hereof, including travel and per diem,
unless otherwise expressly so provided.
The American Health Care Plan
Article II— Definitions
As used in this contract, unless otherwise expressly provided or
the context otherwise requires, the following definitions of terms
shall govern the construction of this contract.
A. "Beneficiary" shall mean any person receiving or eligible to re
ceive a public assistance grant.
B. "Department" shall mean the State Department of Health Care
Services.
C. "Director" shall mean the Director of the Department of Health
Care Services.
D. "Prepaid Health Plan (PHP)" shall mean any form of organization
or any arrangement provided by the Contractor for the purpose of
providing, arranging, paying for, or reimbursing the cost of
health care services as set forth in Article 4.4 (commencing with
Section 14140) of Chapter 7, Part 3, Division 9 of the Welfare
and Institutions Code.
E. "Covered Services" shall mean those services as set forth in
Article 4.5 and 10 of Chapter 3 of Subdivision 1 of Division 3
of Title 22 of the California Administrative Code irrespective
of benefit limitations. Notwithstanding this provision, the
Contractor is not required to pay for Short-Doyle services
provided by a Short-Doyle provider. Services for chronic
47
hemodialysis, major organ transplants, or long-term care in any
I Federal, State, or county governmental hospital for treatment of
I
I mental illness, tuberculosis, narcotism, or alcoholism are not
i
I included.
; F. "Catastrophic Coverage Limitation" shall mean the extent determined
I -
by the Director beyond which the Contractor is not at risk to
provide care for illness or injury which results from or is con
tributed to by a major catastrophe or disaster and which occurs
! .
subsequent to enrollment in the PHP.
G. "Emergency Services" shall mean those services required for alle
viation of severe pain, or immediate diagnosis and treatment of
unforeseen medical conditions which, if not immediately diagnosed
I
and treated, would lead to disability or death.
IH. "Enrollment" shall mean the Medi-Cal beneficiary's voluntary
signing of an enrollment application and the Department's veri
fication of the eligibility of the beneficiary.
: I. "Enrollee" shall mean any Medi-Cal beneficiary who elects in j
writing to enroll in the PHP and whose eligibility has been veri- 1
fied by the Department. |
IJ. "Disenrollment" shall mean the deletion of any enrollee from the j
I
approved list of enrollees furnished by the Department to the PHP, j
I
;K. "Capitation Payment" shall mean the periodic amount paid by the ;
Department per enrollee to the .Contractor ■for, administration and j
i i
' )
the provision of health care services provided under the PHP.
:L. "Marketing Organization" shall mean a subcontractor who agrees to
, provide enrollment and marketing services for the PHP.
1 48
I M. "Marketing Representative" shall mean a person who is engaged in
j marketing activities or who contacts Medi-Cal beneficiaries in
i
! regard to enrollment in the PHP.
[ N. "Service Area" shall mean the Department authorized geographic
I area in which health care services shall be provided and in which
i Medi-Cal eligibles may be enrolled by the PHP under the terms of
this contract. It shall comprise that part of San Francisco
County defined by the following boundaries: (1) on the north—
San Francisco Bay; (2) on the east-^San Francisco Bay; (3) on the
south— San Francisco/San Mateo County Line; (4) on the west—
north on Junipero Serra to Holloway; east on Holloway to Ashton;
north on Ashton to Ocean; east on Ocean to San Jose; northeast
on San Jose to Bosworth; northwest on Bosworth to O’Shaughnessy;
northwest on O'Shaughnessy to Twin Peaks Boulevard; north on Twin
Peaks Boulevard to Stanyan; north on Stanyan to Fulton; west on
Fulton to Arguello; north on Arguello to Pacific; east on Pacific
to Lyon; and north on Lyon to the San Francisco Bay.
It shall comprise that part of San Mateo County defined by the
following boundaries: (1) on the north--San Francisco/San Mateo
County Line; (2) on the east— south on the Bay Shore Freeway to
Guadalupe Canyon Parkway; (3) on the south— Guadalupe Canyon
I
‘ Parkway west to Market Street; west on Market Street to the 280
Freeway; north on the 280 Freeway to Alemany Boulevard; southwest
I on Alemany Boulevard to Skyline Boulevard ; (4) on the west— north
j
1 on Skyline Boulevard to the San Francisco/San Mateo County Line.
49
0. "Primary Physician" shall mean a general practitioner, internist
pediatrician, or obstetrician/gynecologist.
P. "Subcontract," for the purpose of this contract, shall mean any
written agreement between the Contractor and any of the following:
1. A provider of services, a defined in Title 22, Division 3,
Chapter 3, Article 2, who provides services to Medi-Cal bene
ficiaries in order to fulfill the obligations of the Contrac
tor under the PHP.
2. A marketing organization that provides enrollment and marketing
services for the PHP.
3. Any other organization or person which is necessary for the
performance of management or other support functions under
this contract.
Q. "Subscriber" shall mean any person, either a Medi-Cal beneficiary
enrolled in the PHP or other person who is enrolled in another
health care plan operated by the Contractor, which plan shares all
or part of the facilities and staff serving PHP enrollees.
R. "Medi-Screen Services" shall mean the full range of screening ser
vices as defined in Article 10 of Chapter 3 of Division 3 of Title
22 of the California Administrative Code.
Article III— General Provisions
A. Standard Form 3, Fair Employment Practices, is attached hereto and
incorporated in this contract as Attachment II.
B. This contract shall be governed and construed in accordance with
the laws of the State of California. Any provision of this contract
50
which is in conflict with Federal or State statutes is hereby
amended to conform to the requirements of such statute(s).
C. No covenant, condition, duty, obligation, or undertaking continued
or made a part of this contract shall be waived except by written
agreement of the parties hereto, and forbearance of indulgence in
any other form or manner by either party in any'regard whatsoever
shall not constitute a waiver of the covenant, condition, duty,
obligation, or undertaking to be kept, performed, or discharged by
the party to which the same may apply; and, until complete per
formance or satisfaction of all covenants, conditions, duties,
obligations, and undertakings, the other party shall have the
right to invoke any remedy available under this contract, or under
law, notwithstanding any such forbearance or indulgence.
D. Should either party during the life of this contract desire a
change in this contract, such change shall be proposed in writing
to the other party. The other party shall have thirty days after
receipt of such proposal to review and consider the proposal, to
consult and negotiate with the proposing party, and to accept or
reject the proposal. Acceptance or rejection may be made orally
within said thirty day period, and confirmed in writing within
five days thereafter. The party proposing any such change shall
have the right to withdraw the proposal any time prior to accep
tance by the other party. Any such proposal shall set forth a
detailed explanation of the reason and basis for the proposed
change, and the text of the desired amendment to this contract
which would provide for the change. If the proposal is accepted,
51
this contract shall be amended to provide for the change mutually-
agreed to by the parties and approved by the State Department of
General Services. If the proposal is rejected, this contract may
be terminated by either party pursuant to Section B or C of Article
IV.
E. Providers of services to enrollees must acquire and maintain a
reasonable private patient to Medi-Cal enrollee ratio. Such
providers shall not treat Medi-Cal enrollees exclusively.
F. Unless otherwise expressly provided, the provisions of Title 22,
Division 3, Chapter 3, Article 8, shall govern the performance of
this contract. All reference within this contract to various
sections shall refer to sections of Title 22, Division 3, of the
California Administrative Code.
Article IV— Term and Termination
A. This contract shall become effective on May 1, 1973 and shall
continue in full force and effect through April 30, 1974.
B. The Director may terminate this contract for cause at any time by
giving written notice to the Contractor to that effect. Such
notification shall be given at least thirty days prior to the
effective date of termination. The notice shall state the effec
tive date of, and the reason for, the termination.
C. The Contractor may terminate this contract for cause at any time by
giving written notice to the Director to that effect. The termi
nation shall become effective on the last day of second calendar
month following the month in which notice of termination was
i_________________________________________________________________________ 52
I given.
j D. All covered services under this contract shall automatically
' terminate on termination of this contract pursuant to Section B
and C of this Article or upon expiration of the term of this
contract. The Contractor shall remain liable for the processing
and payment of invoices and statements for services provided under
this contract to enrollees prior to such expiration or termination
date.
E. At least fifteen days prior to the termination or expiration of
, this contract, the Contractor shall make available to the Depart
ment copies of medical records, patient files, and^any other
pertinent information, as determined by the Director, necessary
for efficient case management of enrollees receiving services in
any institutional setting. However, the Contractor shall be
responsible for providing services to said enrollees until the
termination or expiration of the contract. The Contractor shall
assist the State in the orderly transfer of medical care upon
termination of the contract.
F. This contract may be renewed, by consent of both parties, prior to
the termination date set forth in paragraph A of this Article.
Article V— Duties of the Parties
j
I A. Contractor's Duties
The Contractor shall:
1. Providers and Facilities— Adequacy
Insure that there are adequate providers and facilities to |
L ______________________________________________________________________________________________________ _5?J
provide all covered services as set forth in Article VIII,
Benefits and Standards, of this contract and provide such
covered services.
Providers of such services are set forth in Attachment I
which is attached hereto and incorporated in this contract.
Said Attachment I is subject to change and modification with
out requiring amendment of this contract. Contractor shall
notify the Department in writing prior to any changes to
Attachment I.
2. Providers and Facilities— Standards
Insure that the providers and facilities which provide covered
services meet the standards as set forth in Article VIII of
this contract.
3. Reporting Requirements
Furnish to the Director or his designee, information, reports |
I
and assistance as required, including such timely information j
and reports as are attached hereto and incorporated in this
contract as Attachment III.’
4. Approval of Printed Material
Obtain written approval from the State prior to implementing
the following:
a. The methods of enrollment and enrollment forms to be used
to enroll Medi-Cal beneficiaries.
b. The form and content of informational and instructional
materials to be distributed to eligible beneficiaries out
lining the nature and scope of covered services provided
________ 54_
by the PHP.
c. The form and content of informational and instructional
materials to be distributed to inform enrollees of changes
in program scope of administration.
d. Provide claim forms and instructions for their use where
such claim forms are unique to this contract.
Promotional Material !
I
Provide to the Department, for approval prior to use, the form ,
i
and content of all public information releases pertaining to
PHP s .
Approval of Subcontracts
Submit for written approval by the State, copies of all subcon
tracts prior to the Contractor entering into any such subcon
tract. Copies of all signed contracts shall be submitted to
the Department.
Enrollee Identification
Provide a means of identification for each enrollee to assure
him access to covered services. Such identification shall
specify that emergency services rendered on behalf of, or
rendered.to, the enrollee are reimbursable by the Contractor.
Enrollee Grievance Procedure
Establish and maintain enrollee grievance procedures by which
an aggrieved enrollee may submit his complaint or grievance
for review and hearing and submit such procedure to the State
for prior written approval.
Enrollee Fair Hearing
55
Insure that each enrollee shall have the right to a fair
hearing as set forth in Section 50151 of Title 22, Division
3, Chapter 3. The PHP shall be required to present its
position at such a fair hearing and to implement the fair
hearing decision adopted by the Director. Implementation of
such fair hearing decision shall not be the basis for dis
enrollment of the enrollee by the Contractor.
10. Instruction of Marketing Representatives
Insure that all marketing representatives have received in
struction from the Department on acceptable enrollment
practices.
11. Approval of Marketing Activities
Obtain prior written approval for all marketing activities.
12. Responsibility for Marketing Activity
Accept responsibility for all marketing activity conducted on
behalf of the PHP.
13 Recovery from Other Sources or Providers
Make reasonable efforts to recover from any other carriers
the value of services rendered to enrollees whenever said
enrollees are covered for the same services, either fully
or partially, under any other State or Federal medical care
program or under other contractual or legal entitlement,
including but not limited to a private group or indemnifi
cation program. Such recoveries are retained by the
Contractor.
14. Organizational and Administrative Capability
L
56
Have the organizational and administrative capabilities to
carry out its duties and responsibilities under the contract.
This shall include as a minimum the following:
a. A full-time administrator to administer the day-to-day
business activities of the PHP.
b. Enrollee and enrollment reporting systems which meet the
Department * s requirements.
c. Data reporting capabilities sufficient to provide neces
sary and timely reports to the Department.
d. Financial records and books of account maintained in
accordance with generally accepted accounting principles,
which are sufficient to fully disclose the disposition of
all Medi-Cal program funds received.
15. Financial Resources
Have the financial resources sufficient to carry out the PHP's
obligations under this contract. Such resources shall be in
addition to any requirements pertaining to non-Medi-Cal
activities.
16. Financial Security
Provide to the State satisfactory evidence that Contractor
has secured a surety bond or other financial security in an
I
amount and manner specified by the Director. Such security !
I
shall remain in effect for at least 60 days following termi- |
I
nation of this contract or until, in the judgment of the |
I
State, the obligations set forth in this contract are ful- i
j
filled, whichever occurs first. The method to be used in |
______________________________________________________________________37.]
this contract is a trust agreement.
17. Administrative Organization
Advise the State of the PHP's administrative organization and
changes thereto. This includes the functions and responsi
bilities of each principal, an organization chart, and a list
of all key personnel, physicians, and other providers used by j
I
the PHP. For each principal and each provider, hot previously 1
reported, include the following information: |
a. Full name. j
b. Business address.
c. Date and place of birth. ;
1
d. Social Security number.
e. 1RS employer number. 1
t
f. Professional license number (when applicable). !
g. Medical specialty (when applicable). j
18. Availability of Service j
Continuously demonstrate the availability and accessibility of
adequate numbers of institutional facilities and professional,
allied and supportive paramedical personnel to perform the
covered services.
19. Crippled Children Services
Insure that enrollees are referred to Crippled Children
Services (CCS) when appropriate. The PHP is financially
responsible for all covered services performed by CCS.
20. Rehabilitation Services
Insure that enrollees are referred to the State Department of
58
Rehabilitation when appropriate. The PHP is financially
responsible for all covered services performed by the Depart
ment of Rehabilitation.
21. Quality of Care— Peer Review System
Submit to the State for approval, and implement, a system of
peer review to assure that acceptable medical practice is
being followed. Such peer review system shall at least be
equivalent to comparable levels of peer review available in
the community. Each month the number of cases reviewed and
the actions taken by the peer review system shall be reported
to the Department.
22. Utilization Control
Furnish the State the details of all utilization control
mechanisms.
23:. Financial Basis for Providing Service
Provide the covered services on the basis of the periodic
capitation payment for each enrollee with the exception of the |
Screening Evaluation of Health Status (SEHS) under the Medi- I
Screen regulations as specified in Attachment IV which is |
attached hereto and incorporated in this contract. The SEHS
shall be provided on the basis of a fixed reimbursement rate
for each enrollee screened and billed directly to the Depart-
of Health.
Although billing and reimbursement is required only for the
SEHS, all Medi-Screen services appropraite for each age
group, according to the schedule in Attachment IV, must be
59
provided or must be recorded on the enrollee's medical record
as having been previously provided, before reimbursement will
be made. The claim form shall serve as documentation that
this requirement has been met, subject to review by the
Department.
All other required Medi-Screen services (excluding SEHS), as
specified in Attachment IV, which have not been previously
provided and recorded in the enrollee's medical record, shall
be provided within the capitation payment for each enrollee
under age 21. The Contractor shall also provide, within the
capitation payment, all diagnostic and treatment services
necessary as a result of conditions discovered during screening
under the Medi-Screen regulations.
24. Newborn Child Coverage
Bear responsibility for the medical care of the newborn child
as long as the child remains continuously hospitalized from
the day of birth to a maximum of thirty days and a capitation
payment is paid the Contractor for the mother; or, until the
county issues a temporary Medi-Cal ID card for the newborn or
the newborn is determined to be ineligible, whichever occurs
first. Such care shall be provided in consideration of the
capitation payment paid the Contractor for the mother and such
care shall not result in further payment by the State. A
child born to an enrollee at home or in transit to a hospital
shall be considered as a newborn child covered under provi
sions of this paragraph.
60
25. Termination or Amendment of Subcontracts
Notify the Department in writing when a subcontract is termi
nated, and secure departmental approval before a subcontract
is added or amended.
26. Payment for Emergency Services
Pay for emergency services defined in Section G or Article II
received by an enrollee whether or not the Contractor's own
facilities or services are available at the place where the
illness or injury occurs. Such payments to nonparticipating
facilities or providers shall be at not less than current
Medi-Cal reimbursement rates.
27. Wage and Price Controls
Comply with Presidential Executive Order No. 11627, dated
October 15, 1971, and all guidelines, rules, and regulations
of the Cost of Living Council, Pay Board, and Price Commission,:
I
or as subsequently modified. ,
The Contractor warrants that no wages, prices, or salaries to
be paid under the performance of this contract will be in i
excess of the maximum legally allowable pursuant to the I
foregoing order, rules, and regulations. |
28. Return of Prorated Capitation Payment I
Return a prorated amount of the capitation payment following
the Director's determination invoking the catastrophic
coverage limitation.
29. Care of Other Than PHP Enrollees
__ 6li
Demonstrate that the PHP is not providing care for Medi-Cal
enrollees exclusively.
30. Notification of Enrollees— Benefits and Services
Prior to the effective date of enrollment and at least annually
' thereafter, apprise enrollees in writing concerning the type,
I scope, and duration of benefits and services to which such
eligible beneficiaries are entitled. Such apprisal shall
I include :
i a. Notification of his effective date of enrollment,
j b. Information about all services and benefits he may receive.
I
I c. An explanation of the procedure for obtaining benefits
I including the address and telephone number of providers
of services and where and how twenty-four hour emergency
care is available.
d. An explanation of out-of-area emergency coverage.
e. Information regarding continued enrollment in the PHP
including the reasons a person might lose eligibility
for the PHP and what should be done if this occurs.
f. Procedures for resolving complaints.
g. Disenrollment procedures and reasons.
h. Other information essential to the enrollees proper and
best use of the PHP.
31. Notification of Enrollees— Change in Benefits or'Services
I Notify all enrollees in writing of any change in the scope of
; benefits being provided by the PHP at least ten days prior to
I the effective date of such changes. 1
L _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 62]
32. Sale of PHP
Notify the Department, for its approval or disapproval, of a
proposed sale of the PHP, or a major portion thereof. Such
notification shall be given at least thirty days prior to the
proposed date of sale.
33. Medi-Screen Patient Records
Maintain and furnish upon request to the Director or his
designee a medical record file of all Medi-Screen services
provided and the date of such services for each enrollee
screened under the Medi-Screen regulations.
B. State's Duties
The State shall:
1. Enrollment
Review applications for enrollment submitted by the Contractor.
The State will verify the eilgibility of the beneficiary
making the application and the Contractor will be provided a
listing of such enrollees.
I
2. Program Information J
Provide the Contractor with complete and current information j
with respect to pertinent statutes, regulations, policies, j
1
procedures, and guidelines affecting the operation of this |
contract. j
3. Payments
For all required Medi-Cal and Medi-Screen services, excluding
the SEHS, pay the capitation payments as set forth in Article
IX to the Contractor for all enrollees in this PHP. Such
63
payments are to be made once each month for the duration of
this contract.
Pay a fixed reimbursement rate for the SEHS for each enrollee
screened under the Medi-Screen regulations. Attachment IV,
upon submission of claims by the Contractor to the Department
of Health. Such claims for the SEHS shall serve as documen
tation that all Medi-Screen services appropriate for each
age group have been provided and recorded on the enrollee’s
medical record, subject to review by the Department.
4. Risk Limitation
Terminate the Contractor’s liabilities to provide care to an
enrollee on a risk basis in those situations where the enrollee
has received covered services from the PHP in an amount in ex
cess of ten thousand dollars ($10,000) based upon Medi-Cal
schedules of reimbursement within any twelve consecutive
months during which the enrollee was in the PHP. Such termi
nation shall follow submission to the Director of sufficient
evidence to determine the dollar value of covered services
rendered to the enrollee.
5. Non-Risk Services
Designate as excluded from risk, treatment provided to indi
viduals for chronic hemodialysis or Medi-Cal program covered
major organ transplant. Such individuals may remain enrolled
in the PHP. Treatment for the above conditions shall be paid
for at Medi-Cal program reimbursement rates and shall be sub
ject to all program requirements.
64
6. Marketing Brochures and Procedures
a. Review and approve, when appropriate:
(1) Contents o£ all marketing brochures and printed
material to be given to prospective enrollees.
(2) All marketing procedures in writing prior to their
implementation.
(3) All mass media marketing presentations in writing
prior to their release or transmission.
b. Notify the county welfare department of the Contractor's
intent to distribute brochures.
7. Enrollment and Marketing Procedures
Monitor the Contractor's enrollment and marketing procedures.
Such monitoring will include as a minimum:
a. Instruction of all of the Contractor's marketing repre
sentatives by a Department representative prior to
commencement of enrollment of beneficiaries by such
marketing representatives.
b. On-site visits to Contractor's enrollment centers by
Department representatives.
c. Surveys of enrollees to insure that the Contractor is
following allowable and appropriate enrollment procedures.
8. Termination of Contract
Notify enrollees of their health care benefits and options
available upon termination of the contract.
9. Approval of Subcontracts
Notify the Contractor, in writing, of the Department's approval
65
of a subcontract or any changes thereto
Article VI— Administrative Sanctions
A. The following penalties may be applied, at the discretion of the
Director, for improper enrollment or marketing techniques or
contract violations as determined by the Director:
1. Contractor will be warned that further improper enrollment,
disenrollment, or marketing techniques or contract violations
will result in forfeiture of some or all enrollment and
marketing privileges.
2. Contractor will be required to terminate one or more of the
enrollment and marketing methods.
3. The department will refuse to accept further enrollment appli
cations from the PHP.
4. The Department will withhold all or part of the capitation
payment.
5. The Director will terminate the contract for cause.
B. The Director will notify the Contractor in writing of the effective
date of, and the reasons for, any administrative sanctions.
i
I Article VII— Eligibility and Enrollment
A. Eligibility
Each Medi-Cal cash grant, AFDC, AID, AB, and OAS beneficiary
residing within the service area of this PHP, shall be eligible
to enroll voluntarily in the PHP established by this contract
without regard to physical or mental condition, age, sex, race.
66
religion, creed, color, national origin, or ancestry.
B. Enrollment
1. Each beneficiary who is eligible to enroll and does enroll in
the PHP established by this contract, shall be covered here
under. Coverage shall begin at 12:01 a.m. on the first day
of the calendar month following the month in which the enroll
ment is received, in magnetic tape format, by the Department
of Health Care Services, 714 P>Street, Sacramento, California
95814, when such receipt is on or before noon of the 17th day
of the month. The Director may authorize submission of an
enrollment by use of the original enrollment form, signed by
the beneficiary, for a PHP with an actual enrollment of less
than 5,000. In the event the signed enrollment form is
received by the Department after noon of the 15th day of the
month (or the 17th for tape submission) or if the influx of
enrollments by the Contractor exceeds the ability of the State
to process, the beneficiary's enrollment and coverage shall
not begin until 12:01 a.m. on the first day of the second
calendar month following receipt of the signed enrollment form.
2. Total enrollment under this contract shall not exceed the
following number of enrollees by aid category for the months
listed ;
67
Contract Month
Aid Category Codes 3 _6 9
12
Aid to Families with
Dependent Children (AFDC)
30,32,33
35,40,42
7,100 14,200 21,300 28,400*
Aid to the Blind (AB) 20,50 100 200 300 400*
Old Age Security (OAS) 10 1,500 3,000 4,500 6,000*
Aid to the Disabled (ATD) 60 1,300 2,600 3,900 5.200*
Total 10,000 20,000 30,000 40,000*
^Maximum Enrollment
Minimum Number of Primary
Physicians Required 9 17 25 34
D
The enrollment rate is regulated to allow for the securing of
adequate facilities, physicians, dentists, ancillary services,
and other medical personnel. Initial enrollment will be
limited to 20,000 until additional facilities and primary
physicians staffing is approved by the Department of Health
Care Services.
Period of Enrollment
Each beneficiary enrolled in the PHP established by this contract
shall be required to enroll for not less than one year unless this
contract is terminated in less thanoone year, or the enrollee is
disenrolled under Section D of this Article.
Disenrollment
1. Disenrollment of an enrollee from the PHP is mandatory when:
a. The enrollee becomes ineligible as a Medi-Cal beneficiary.
68
h. The enrollee elects to terminate his enrollment subsequent
to completion of the required period of enrollment spec
ified in Section C of this Article.
2. Notwithstanding paragraph 1 of this Section disenrollment of an
enrollee from the PHP may be approved by the Director when
there is reasonable cause as determined by the Director.
Reasonable cause includes but is not limited to:
a. The medical need of the enrollee for chronic hemodialysis,
major organ transplant, or long-term care in any Federal,
State or County governmental hospital for treatment of
mental illness, tuberculosis, narcotism, or alcoholism.
b. The transportation difficulty encountered by the enrollee
in gaining access to health care services under the PHP.
c. The receipt, by the enrollee, of medical services from the
PHP in an amount in excess of ten thousand dollars
($10,000) based upon Medi-Cal schedules of reimbursement
within twelve consecutive months during which the enrollee
was in the PHP.
1. d. The presence of a preexisting medical condition under a
specific treatment plan by a provider not participating
in this PHP.
e. A change in the legal residence of the enrollee, such new
residence being outside the service area.
f. Unauthorized solicitation or enrollment misrepresentation
in violation of Section 51850 of Title 22, Chapter 3,
Division 3, Article 8, by the Contractor or his marketing
69
representative.
3. The Contractor shall have the right to recommend to the
Director the disenrollment of any enrollee in the event
of a breakdown in the "doctor-patient relationship" which
would make it impossible for the Contractor's providers to
render services adequately to an enrollee or in the event
any enrollee has abrogated his enrollment agreement by
habitually seeking and. receiving covered services, other
than emergency care, from a provider other than the Contractor
or his subcontractors. The decision to allow disenrollment
of any enrollee shall be solely that of the Director.
E. Termination of Enrollment and Coverage
The enrollment and coverage established by this contract shall
cease at midnight on the last day of the calendar month in which
disenrollment occurs. On the first day of the month following the
disenrollment of the enrollee, the Contractor is relieved of all
obligations to provide medical services under the terms of this
contract. The Contractor agrees to return to the State any capi
tation payment forwarded to the Contractor for persons not enrolled
in this PHP.
Article VIII— Benefits and Standards
A. Providers
Each provider of services participating in the PHP, either as a
member of the PHP or through a subcontract or other agreement with
the PHP, shall meet the requirement for participation in the Medi-
70
Cal program as set forth in Articles 2, 3, and 6 of Chapter 3 of
Subdivision 1 or Division 3 of Title 22 of the California Admini
strative Code.
B. Facilities
1. Each facility used by the PHP for providing covered services
shall meet the standards for licensing by the appropriate
licensing agency and shall meet all applicable local. State,
and Federal standards, including those for fire and safety,
and must be appropriately licensed. A PHP facility meeting
the standards for participation in the Medi-Cal program will
be deemed as having met the standards for participation in
the Prepaid Health Plan program.
2. Each facility shall be located so as to provide reasonable
accessibility to enrollees.
3. Each facility shall be clean, sanitary, and in good repair at
all times.
4. Each facility providing surgical services shall maintain
emergency lighting andnpower facilities not less than is
currently the general practice in the service area of the PHP
and at least equal to the requirements set forth by the
Department of Public Health for facilities providing such
surgical services.
5. Each facility shall have waiting area with sufficient floor
space to seat the maximum number of persons who are expected
to be accommodated at any one time.
6. Each examination and treatment room shall have not less space
71
than is currently the general practice in the service area of
the PHP and at least equal to the requirements set forth by
the Department of Public Health for examination and treatment
rooms in similar health facilities.
C. Availability of Services
1. The Contractor shall demonstrate to the satisfaction of the
Director that it has available to enrollees the services of an
adequate number of institutional facilities and professional,
allied, and supportive paramedical personnel to perform the
agreed upon services. The PHP shall have as a minimum the
following:
a. On equivalent full-time primary physician per 1,200 sub
scribers or such other primary care physician-physician's
assistant or other paramedical personnel, as determined by
the Director as comparable.
b. One hospital bed per 500 subscribers.
c. Other providers in such numbers as the Director may
determine to be necessary for adequate availability by
subscribers.
2. In addition, the PHP shall demonstrate to the satisfaction of
the Department that it has available to enrollees the services
of the following medical specialties : general surgeons,
orthopedists, urologists, dermatologist, otolaryngologists,
opthalmologists, physical therapist, neurosurgeons, radio
logists, pathologists, psychiatrists, other medical special
ties as determined by the Director.
72
D. Pharmaceutical Services
The PHP shall provide pharmaceutical services through licensed
pharmacies.
E. Scope of Benefits
The PHP shall provide the covered services as defined in Article II
of this contract.
Article IX— Capitation Payment and
Reimbursement for Medi-Screen Services
A. The maximum amount payable under this contract shall not exceed
$17,643,120.
B. For all services required by this contract, excluding the SEHS, the
State shall remit to the Contractor on behalf of each covered
person the following capitation amount for each month of enrollment
as verified by the State:
San Francisco County
GAS - $ 36.41 AB - $ 63.82
ATD - 111.45 AFDC - 22.77
San Mateo County
GAS - $ 31.36 AB - $ 63.91
For the SEHS, the State shall reimburse, for each enrollee
screened, the fixed reimbursement rate specified in Attachment IV
upon submission of claims by the Contractor to the Department of
Health.
C. The Contractor shall administer the benefits provided for illness
or injury resulting from or contributed to by a major catastrophe
73
or disaster. Catastrophic coverage limitation as defined in
Section F of Article II shall become effective when the Director
determines that a major catastrophe or disaster has occurred.
When such a determination is made by the Director, and with the
concurrence of the Contractor, theiprovisions of this contract
shall terminate. Any proration of the monthly capitation payment
due to this provision shall be based upon the number of days in
the month for which the payment is made.
Article X— Subcontracts
A. Each subcontract with any person, persons, company, group, or
organization to perform health care services, management or
support systems services, or marketing services which the Con
tractor is responsible for shall first be submitted to the Depart
ment for review and approval prior to the Contractor entering into
any such subcontract. Such subcontracts shall insure the legal
sufficiency of the subcontractor's commitment and ability to
provide the services described therein.
B, The State shall consider the obligation or service the Contractor
proposes to subcontract, the financial aspects of any such pro
posed subcontract, and such other aspects of the proposed sub
contract that the State may deem relevant to the performance of
duties by the Contractor pursuant to the provisions of this
contract.
Article XI— Confidentiality of Data
74
A. Names of persons receiving public social services are confidential
as provided in Section 10850 of the California Welfare and
Institutions Code and are to be protected from unauthorized dis
closure. Release of any information pertaining to PHP enrollees
must be made in accordance with the provisions of Title 22,
Division 3, Section 51009.
B. For the purposes of this contract, all information, records, data,
and data elements collected and maintained for the operation of
this PHP and pertaining to providers, enrollees, and facilities
shall be protected by the Contractor from unauthorized disclosure.
Release of any information pertaining to PHP enrollees must be
made in accordance with the provisions of Title 22, Division 3,
Section 51009. 'Access to such information, records, data, and
data elements shall be limited to the State, to such personnel
of Contractor who require the information to perform their duties,
and to such others as may be authorized by the State.
Article XII-Rights in Data
A. The Contractor shall maintain for a minimum of three years and
make readily available to authorized personnel of the Department
for review and evaluation such records as the Director deems
necessary. Such records shall include, but are not limited to,
all physical records originated or prepared pursuant to the
performance under the contract including working papers, reports,
financial records, charts, all medical records, medical charts,
prescription files, and other documentation pertaining to medical
r-________________________ 75
and nonmedical services for enrollees.
B. Upon request, at any time during the performance of the contract or
within thirty days of completion of termination of the contract,
the Contractor shall furnish any such record, or copy thereof, to
the State.
Article XIII-Notices
All notices to be given under this contract shall be in writing and
shall be deemed to have been given when mailed, postage prepaid, to
the State or the Contractor at the following addresses:
Department of Health Care Services The American Health Care Plan
714 P Street 5815 Third Street
Sacramento, CA 95814 San Francisco, CA 94124
Discussion of Provisions
An explanation of some of the terms of the contract appears to be
in order in terms of the provisions as originally set forth in the
Proposal (Appendix "B") and the actçal wording of the final contract.
1. Financial Security
The Knox-Mills Health Plan Act in addition to requiring a health
care service plan (HMO) to have a minimum tangible net equity also
required each Plan to maintain cash or equivalents reserve which is
stated as follows:
"Every health care service plan which reimburses providers of
health care service that do not contract in writing with the health
plan to provide health care services for a specified consideration, or
76
which reimburses its members for expenditures incurred in having
received health care service from providers that do not contract with
the health plan, in an amount which exceeds 10 percent of its total
expenditures for health care services, shall maintain cash or equi
valents at least equal to the aggregate sum of the last three months of
such payments which were made and accrued to such providers of service
and its members, provided however, that the Attorney General may, in
his discretion, reduce this requirement to such amount as he deems
sufficient to protect subscribers to such plan.
This HMO was unable to meet the above requirements being without
cash or liquid assets which would constitute the equivalent, therefore,
in order to satisfy the state eventually a meeting of the minds
occurred between the negotiators for the Plan and the Department of
Health whereas clause No. 16 whereas a trust agreement was the method
employed. Trustee was the Wells Fargo Bank of San Francisco and the
State of California, Department of Health as primary beneficiary where
as all monthly payments received from the State under the contract
with this HMO would go to the trustee and 10 percent of the amount
received by the Bank from the State shall be transferred and maintained
in a separate reserve account until the amount of the latter equals 50
percent of the amount received by Bank from State as capitation pay
ments for the latest month, etc. (See paragraph 4, p. 2 of Trust
Agreement, Exhibit "F.")
^^California Government Code, Section 12539.1.
77
Trustee bank makes additional payments to carrier (HMO) and other
providers as enumerated on pp. 4 and 5 of Exhibit "F."
2. Eligibility and Enrollment r
The provision that any person on Medi-Cal which includes AFDC (Aid
Families Dependent Children), ATD (Aid/Totally Disabled), AB (Aid
Blind), and OAS (Old Age Supplements) beneficiary residing in the ser
vice area, shall be eligible to enroll voluntarily in the HMO plan but
the initial enrollment, was limited to 20,000 (instead of 40,000 pro
posed in Appendix "B") until additional facilities and primary physi
cian staffing is approved by the Department of Health.
Each beneficiary enrolled in the Plan shall be required to enroll
for not less than one year unless the Title XIX contract is terminated
in less than one year or the enrollee is disenrolled under Section D of
said contract,
3. Capitation Payment and Reimbursement
The amount that the HMO Plan receives monthly from the State is
dependent upon type of Medi-Cal enrollee which is verified monthly by
the Department of Health which ranges from $22.77 for AFDC to $111.45
for ATD. Article IX .sets forth in detail the maximum annual amount
payable under the contract and each capitation amount.
4. Benefits
All health and medical services are provided to enrollees under
this contract except when (a) the medical need of the enrollee calls
for chronic hemodialysis, major organ transplant, or long-term care in
any federal, state or county governmental hospital for treatment of
mental illness, tuberculosis, narcotism or alcoholism, and (b) the
78
enrollee shall be disenrolled when he/she receives medical services
from the Plan in an amount in excess of $10,000 within twelve consec
utive months during which the enrollee was in the Plan.
After approval of the promotional material and enrollment forms
and instruction from the Department of Health of all marketing repre
sentatives of the Plan as so mandated by this Title XIX contract. The
American Health Care Plan became operational with the distribution by
mail through the Department of Health to all potential enrollees in
the service area a brochure describing the "What? Who? Why? How?
and Where?" of the Plan's benefits.
A sample copy of such brochure is attached as Exhibit "G".
79
I CHAPTER V
I
MALPRACTICE
I
No report that concerns the organization of a group to deliver
health care services to the public would be complete without some
discussion of the absolute necessity of malpractice insurance to cover
I the providers in the area of professional liability. Recent newspaper
articles have pointed out the sharply rising cost of medical mal-
: practice insurance. Examples are:
I Dozens of insurance companies used to write doctor's
I insurance. Today there are five.
I i£ifj:i.Two thousand Los Angeles doctors were left without
I insurance the first of 1975 when their insurance companies
I unexpectedly pulled out of the malpractice field. Fifty
Los Angeles and two hundred San Diego physicians are
I still without coverage, though they continue to practice,
i In the profession, this is considered suicidal.
Argonaut Insurance Company, based in Menlo Park,
California, is asking almost 200 percent more to Insure
27,000 of New York's 35,000 doctors and new premiums
by Argonaut covering 4,000 doctors in Northern Cali
fornia, including the Bay Area, and all of Nevada have to
be set by May 1, 1975, and the insurance carrier is obliged
to make its new rate proposal known to the doctors by
February 1st. The company has yet to have a single meeting
with the doctors as it has in the past years.
The carriers say that the problem is that court judg
ments— some running into the millions of dollars— have
simply overwhelmed their resources, and their only course
is to raise premiums sky high.
There is some validity that court judgments are in
creasing and a million dollars or more in malpractice
cases are published more frequently than in the past but
these are miniscule in comparison to the total number of
malpractice cases filed in the courts in any given year
and it must be kept in mind that inflation has caused a
sharp rise in everything including doctor's and hospital's
80
costs and fees.
A recent local malpractice case received extensive
media coverage when a San Francisco court in 1973 awarded
$2,420,629 actual damages and $1,604,371 general damages
against a hospital based upon its improper treatment of
a boy who had been treated by it following his school play
ground accident (actually $4 million against the hospital
and $25,000 against the school-— a total of $4,025,000)
The American Health Care Plan fortunately was designed so that
it was not delivering direct personal health services to its sub
scribers therefore the malpractice insurance crisis has not been an
issue at any stage of its development and implementation. The Plan
contracted for the necessary health care services for its recipients
from the four original medical groups, hospitals, ambulances, outside
providers, and nursing and convalescent homes and key provisions in
all contracts for services are:
1. It is expressly agreed between the parties that (name of
provider) is being employed in the capacity of an independent con
tractor and is not an employee, partner, associate or agent of AHCP.
2. (Name of provider) shall require its members to provide,
keep and maintain throughout the entire term of this agreement, in
surance coverage for professional liability, negligence, errors and
omissions, and public liability. (Name of provider) expressly agrees
to indemnify and hold AHCP free and harmless from and against any and
all liability, loss, damage, claim or cause(s) of action (whether or
not well-founded) which may result, directly or indirectly, from the
O -1
San Francisco Examiner, January 22, 1975
^^Niles V . City of San Rafael, 42 CA 3rd 230.
81
provisions for medical services under this agreement (including
reasonable attorney's fees) not otherwise paid or provided by any
insurance company insuring AHCP.
I There are certain fundamental principles which are applicable
'whether a lawsuit is against an HMO or against anyone else and that is
I that the individual physician is held personally liable for his own
iconduct or misconduct. That is clear. If he happens to have his own
malpractice policy so much better for him. If he is a member of a
I
: group, a partnership, all of the partners are held liable. If there
|is an organizational structure with an employer-employee relationship,
I
Ithen undoubtedly the organization is held liable under the doctrine of
vicarious liability.
The positive side of HMOs which could do something beneficial
to diminish the occurrence of malpractice claims, thereby lowering
'premium rates, is the prompt correction of errors. In the private
t
sector, when a physician makes an error in treatment which can lead to
a later claim, he has many ways of reacting, based upon his own
experience. He may be gun shy; he may not want to discuss it with the
patient at all; he may not want to mention it to his malpractice in
surance company because he has had previous trouble; he may opt for
doing nothing, hoping that he can muddle his way through the situation
by having his patient go to another doctor who may be blamed for what
ihe himself had done.
On the other hand, in a group practice such as an HMO this is
jless likely to occur. When an error is made, immedicate consultation
is usually available. There is team effort. This HMO team approach
82
can lessen the chances of an HMO being involved in litigation which [
in the long run should help diminish the costs of insurance coverage. |
The recent emergence of many HMOs will present some interesting >
problems in the casualty-malpractice insurance area. The HMO may have '
\a variety of entities associated with it. Some of them may be insured
j
;by one insurance company under one set of rates and others may be
jrepresented by other companies. The inter-company warfare could be-
Icome fierce. One could even have five or six companies involved in
t
I
I one litigation, each of them trying to claim against the other one.
j On the other hand this presents an apparent opportunity for an
HMO, properly managed, conceivably to design its own insurance needs
1
.system, put it out on a bid basis and obtain a much better premium
i
Irate. Or a conglomerate, a system of HMOs could put out bids on a
i
competitive basis for their insurance needs.
The HMO concept, carried to its logical conclusion, can bring
about some interesting and worthwhile changes in the malpractice in-
1
suranee field. The key to success in this area will be quality control.
Some experiments in this area, perhaps with government funding, could
come up with some interesting results and, hopefully, these findings
would be fed back profitably to the general health care system.
83
GHAfTBR VI
SUMMARY, RECOMMENDATIONS AND CONCLUSIONS
Summary
The following is a synopsis of the number of Title XIX en
rôlées (Medi-Cal) and financial breakdown of revenue received and
the expenditures of The American Health Care Plan during its operating
period from July, 1973, through February, 1975. It should be stressed
that the Plan's total annual revenue for the entire period was derived
from its state contract for the health care of Medi-Cal recipients
which agreement may or may not be renewed each year; therefore, this
HMO's financial base may be described as uncertain and lacking sta
bility for a long-term operation particularly in view of the present
economic and political instability— which will be discussed later.
1. Breakdown of Title XIX Enrollees
Year Total AFDC OAS AB ATD
First 7,611 6,998 199 15 399
Second 8,031 7,394 226 10 401
2. Capitation Rates :
Year AFDC OAS AB ATD
First $22.77 $36.41 $63.82 $111.45
^^AFDC = Aid to Families Dependent Children; OAS = Old Age
Security; AB = Aid Blind ; ATD = Aid Totally Disabled.
84
2. Capitation Rates: (continued)
Year AFDC OAS AB
$58.05 $36.94 Second $22.06
3. Revenue :
Year Total
1973 (6 mos.) $ 349,426
1974 $2,128,190
AFDC
ATD
$97.35
OAS AB ATD
270,098 12,052 1,021 66,256
1,659,229 85,907 7,286 375,769
Expenditures : 1973 (6 mos.) 1974
Medical Service $122,299 691,905
Laboratory ,& X-ray
6,989 39,537
Pharmacy 13,977 79,075
Hospitals & E.C.F. 65,844 452,061
Dental 9,994 85,217
Emergency & Transportation 16,333 72,933
Administration 45,629 391,399
Optometry & Supplies 3,494 19,769
Out-of-Area Service 1,119 9,884
Innovative Programs 13,708 103,320
Totals $299,386 $1,945,100
During the first two years of its existence, the Plan has
established itself as a smoothly operating organization. However, its
continued success will probably depend upon the manner in which it is
affected by the areas of uncertainty surrounding the annual renewal of
the state contracts and the pending federal legislation for national
health insurance.
85
As the above financial statement suggests, the Plan is fiscally
sound with its enrollment of 8,000 members at an estimated income of
$240,000. Strong emphasis was placed on fiscal and utilization
controls for hospital and dental costs. These two areas, if not
watched constantly, can bankrupt a prepaid health plan in a very short
time.
Administration of this health care plan was handled with
efficiency with less than thirty staff persons since direct medical
services were provided by contractors at their own risk.
The\first six months operation of the Plan resulted in a sur
plus of $28,766, which was held as a reserve for catastrophic illnesses
At the end of the next twelve months period of operation, an additional
surplus was realized and the reserve was increased to $46,910.
Under the 42 percent capitation arrangement which the Plan has
with the four medical groups who provide the medical services, x—rays,
drugs, laboratory work, and optometry, there was some profit realized
by these groups. They evidently controlled utilization by providing
quality care and thereby reduced the need for services.
Generally, with good administration and sound fiscal manage
ment, this health care plan remains in a financially solvent position.
However, several external factors may affect its immediate future.
Recently elected. Governor Edmund G. Brown, Jr., of California,
told a news conference that he endorsed "the concept" underlying the
state’s controversial prepaid health plan (PHP) program, but announced
a four and one^half month moratorium in the issuance of new contracts,
until June 30th, which would give his administration time to put the
86
PHP procedures "ia order." This means that not only no new contracts '
will he issued but that existing contracts that expire be;Çore that date]
(about 30) will not be immediately renewed for the usual one or two j
I year period. Rather they will be temporarily extended until June..
! "We will expand the program if we can make it worh., .whether we can or
1 not is an open question," the Governor said,
i Former California Governor, Ronald Reagan, launched the PHP
I program in 1971 as part of his reform of Medi-Cal, the oyerall program '
I
I
j that finances health care for the poor. Under PHP, the state contracts
I with private corporations which agree to provide care for poor persons
in a specific geographic area.^^ Currently, February, 1975, there are
53 contracts in effect covering 269 persons of about 2 million on the
IMedi-Cal rolls. To provide the PHP care, contractors receive about 8
million per month.However, the program is in political trouble.
According to a variety of testimony, including investigators
for the State Department of Health, the Reagan administration began
issuing contracts to financial opportunists and the entire program was
soon mired in charges involving deceit, conflicts of interest and
shoddy medical practice. This has resulted in the filing of at
least one Superior Court suit and other reports are under investigation.
Thus, it appears that the AHCP is at least in "limbo" until
!after June 30th when the state completes its investigation. Also,
'^^Los Angeles Times, February 12, 1975
^llbid.
'^^Ibid.
^^Ibid.
87
although Its contract may continue past the moratorium with more
stringent regulations, it is also apparent that AHCP cannot continue
indefinitely to rely upon the contract with the State Department of
Health as its sole financial source if the HMO Plan is to be assured
long-range planning and survival in the highly competitive health care
field.
Recommendations
It is imperative that AHCP locate another financial source or
base in order to perpetuate itself in long-range planning. The most
obvious avenue open is expansion from the public into the private
sector by offering health care services to groups and individuals at a
competitive rate with the established HMOs in the San Francisco area
which, in this case, is primarily the Kaiser Plan.
The directors of AHCP have recognized this fact and have retained
an insurance consultant to prepare for this eventuality. Planning has
proceeded to the extent that a benefit package has been prepared for
groups and individuals and a pricing structure has been established.
I
!(See Exhibits "H," "I" and "J,")
An impasse has occurred in implementing this expansion because
of the marketing costs of competing with other existing plans*
Although AHCP is solvent with a small reserve, it does not have the
necessary funds to enter the highly competitive public marketplace.
Nevertheless, a method which minimizes marketing costs may be
found in the long awaited federal regulations governing "dual choice"
as provided by the Health Maintenance Organization Act which were
88
44
published in preliminary form on February 12, 1975.
Under dual choice employers are required to offer "in accord
ance with regulations which the Secretary shall prescribe" the option
of membership in qualified health maintenance organizations (UMOs) in
any health benefits plan offered to their employees. However,
neither the current law nor regulations require the employer to seek
out or develop HMO options. Regulations, as currently proposed, would
not require employer to offer an HMO option until a qualified HMO seeks
him out with a proposal for coverage.
The key word in these preliminary regulations is "qualified^”
a state yet to be achieved by most existing HMOs. Preliminary regu
lations define "qualified" health maintenance organizations as "an
entity which has been found by the Secretary (HEW) to meet the require
ments of Title XIII of the Act and the applicable regulation of this
part,'". To qualify, an HMO must offer full physician services, in
patient and outpatient hospital services, emergency health services,
alcohol and drug treatment referral services, laboratory and radio
logical services, at-home care, broad preventive dental and eye care
for children and mental health services.
44
- Health Services Administration, U.S. Department of Health,
Education and Welfare, 5600 Fishers Lane, Rockville, Md.
'^^National Health Lawyers Association, "Hews Letter", March,
1975, Vol. 3, No. 3, p. 2.
^^Ibid., pp. 2-3.
^^Ibid., p. 2.
89
The American Health Care Plan benefit package to the public
offers all of the above services (Exhibits "H" and "I") with the ex
ception of alcohol and drug treatment referral services which could be
included in the benefits package with minimal cost thereby qualifying
AHCP as an HMO under these federal regulations.
The proposed HMO regulations are preliminary and comments
looking toward alterations must have been received by the Admini
strator, Health Services Administration, not later than March 31, 1975.
If they are adopted in their present form, then AHCP will have an
opening to the private section as employers may be required to offer
AHCP’s health benefits package as an option to their employees.
Therefore, if AHCP’s benefit package is competitive and
attractive to employees in terms of health services and price, indi
viduals or groups may opt to join AHCP which will provide a further
financial base for expansion and continuance.
Conclusions
A question may be posed as to how this HMO described herein i
compares with other models or an ideal in accomplishing the objective
of quality health care services to the public at minimal cost. It
would be impractical and misleading to attempt to fit AHCP within the
framework of what most health professionals consider the ideal, that is,j
Kaiser Health Plan, as Kaiser is over thirty years of age, hospital
based, monolithic and adequately financed by thousands of subscribers.
Likewise, it is unfair to attempt any comparison of AHCP with other
California HMOs since they are also in an early evolutionary stage with
many deficiencies and other problems.
90
Nevertheless, this type of health delivery mechanism in order
to effectively serve its enrollees and survive must possess the follow
ing criteria; QL) availability, (2) accessibility, (.3) acceptability,
C4) efficiency, C5) comprehensiveness, (6) continuity, and (7)
coordination.
This writer’s objective appraisal of AHCP concludes that it is
functional and meets the above criteria on five levels which is affirmed
by the evaluation of the coordinator from the state’s Department of
Health, who ranks the Plan in the upper one fourth with all health care
plans contracting with the state. The Plan is deficient in the area of
continuity because of external factors, as previously mentioned, which
may be remedied in the near future by entry into the private prepaid
health market and continuance of the state contract for health services
to Medi-Cal recipients. The most serious deficiency in this Plan and
other models is the lack of coordination or linkage between the health
practitioners in the system with other services outside of this orbit.
Enrollees in AHCP have a choice of four medical groups at
strategic locations throughout San Francisco for comprehensive health
pare services. Each medical group has access to hospitals and other
specialists outside of the organization which makes the Plan accessible
and available to the enrollees. Hence, no undue problems are presented
when a member receives good quality medical care from his or her primary
physician or other support health benefits as recommended by the primary
doctor. However, the problem commences when an emergency requires a
member to seek medical services outside of the system. For example,
when a member of the Plan is involved in a serious automobile accident
91
and is injured in the late P.M. in Sacramento and is transferred to
the emergency room of the nearest hospital. The patient's medical
history and records are stored in the facility of the primary physician
in San Francisco, the attending physician at the emergency room may be
aware that this particular patient is a member of AJîCP, however, the
emergency room physician does not have access to the patient's past
history and treatment and must begin at point zero instead of higher
up on the scale if the information was available through a telephone
call.
The above illustration magnified the loss of time, efficiency
and additional costs imposed upon this type of Plan because of its
lack of coordination. The lack of coordination and linkage is a
general criticism directed at the entire medical industry as well as
AHCP.
In this decade of increasing technological changes, the
computer at present is the only feasible method to combat and alleviate
this defect in the delivery system. Assuming that AHCP would purchase,
rent or lease computer time and an operator from a central location,
it would have the capability of programming the patient's initial and
subsequent examination and treatment by the primary physician into the
computer. Then any inquiries from providers outside of AHCP would have
access to this data through the computer operator, therefore, elimi
nating the roots of the problem,
Costwise it would be more efficient for the Plan to rent or
lease computer time and maintain an operator only during the evening
hours and weekends. The enrollee's identification card issued by AHCP
92
would have the telephone number to be used by outside providers.
The management of AHCP is aware of this problem and is ex
ploring feasible solutions. Whenever a later evaluation of this Plan
is instituted, hopefully, the solution will have been implemented and
AHCP may be deemed an ideal model of an HMO.
93
APPENDIXES
94
AN HMO DICTIONARY
A Glossary of Group Health Terms
Here, for your information, is a glossary of terms commonly
used in reference to health maintenance organizations (HMO) or prepaid
group medical practice plans.
The following terms are widely used in describing prepaid
group medical practice plans--almost since their inception. They make
up a lexicon commonly understood by plan administrators and others in
describing these plans. For most of these terms, however, there is
no single definition that has been accepted and uniformly applied
throughout the group health field.
This glossary is, therefore, one of "common usage" rather
than of standard terminology. Its purpose is to present the defini
tions that would seem to be most widely understood. Users of the
glossary should recognize, however, that the definitions do not en
compass the entire range of meanings of terms where usage differs
widely from plan to plan.
95
ADVERSE SELECTION
BENEFICIARY.
BENEFIT PACKAGE
BENEFITS
BLUE CROSS
BLUE SHIELD
CAPITATION
CARRIER
CLINIC
COMMUNITY CORPORATION
Some population parameter such as age (e.g.,
a much greater number of ôS-^year-olds or
older to young population) that increases
the potential for higher utilization than
budgeted and increases costs above those
covered by the capitation rate.
CAlso eligible individual; enrollee; member;
participant); Any person eligible as either
a subscriber or a dependent for service in
accordance with a contract.
A listing of specific services provided or
assured by the HMO to enrollees,.
Benefits are specific areas of plan coverages
i.e., outpatient visits, hospitalization and
so forth, that make up the range of medical
services that an HMO markets to its sub
scribers .
A hospital insurance plan which provides
benefits covering specified hospital related
services and pays member hospitals directly
for services rendered.
A medical service insurance plan which pro
vides benefits covering specified physician
rendered services and pays either the
physician or patient.
(Also per capita; capitation payment); The
amount of money required per person to
provide covered services to a person for a
specific time.
An insurer; an underwriter of risk.
(Also health center); A facility for pro
vision of preventive, diagnostic, and treat
ment services to ambulatory patients, in
which patient care is under the professional
supervision of persons licensed to practice
medicine in the political jurisdiction where
the facility is located.
Those organizations which have been developed
by community interest groups or which pro
vide for meaningful community input through
Board participation or input to the Board.
96
COMMUNITY-RATED PREMIUM
COMMUNITY RATING
COMPREHENSIVE CARE
The practice by some prepayment plans whereby
net rates or premiums for plan subscribers
are reasonably uniform and not dependent on
individual claim experience or the experience
of any one group. (For contrast, see
"Experience-rated Premium.")
The rating system by which a plan or an in
demnity carrier takes the total experience
of the subscribers and uses this to deter
mine a capitation rate that is common for all
groups regardless of size or utilization.
Provision of a broad spectrum of health
services, including physicians* services and
hospitalization, required to prevent, diag
nose and treat physical and mental illnesses
and to maintain health.
COMPREHENSIVE MEDICAL
CARE PLANS Plans providing a wide range of care, in
cluding physicians* services in the home, in
the office or clinic, and in the hospital.
The benefits typically include hospitaliza
tion.
COMMUNITY-WIDE PLANS Those in which the membership is open to
qualified groups or individuals in the com
munity, rather than limited to members of
specified unions or employees of specified
industries.
COMPOSITE RATING
CONTRACT GROUP
CONVERSION PRIVILEGE
A method of developing a rate structure in
which the capitation rates for single and
single and spouse member units include some
of the medical care costs developed for a
family unit. Composite rating also allows
for developing rates for families of more
than 4 people.
(Also enrolled group); A specific group of
persons who are to be provided a particular
program of benefits (e.g.. Local 59; Co-op
group ; Federal employees ; etc.)
The provision that allows a member enrolled
through a group to convert, regardless of age
or physical condition, to a direct pay pro
gram at the time of retirement or other sepa
ration from the group.
97
COST CENTERS
COVERAGE
DEPENDENT
Functional areas that generate the basic
costs incurred to provide the Plan*s range
of benefits.
In general, services, or benefits provided,
arranged, or paid for through a health in-r
surance plan, or the people eligible for
care under such a plan. More specifically,
a package of specified benefits (Federal
program - high option; premium plan; etc,).
Person other than the subscriber eligible to
receive care because of a subscriber ^ s
contract,
DIRECT payment
SUBSCRIBERS
DIRECT SERVICE
BENEFITS
DUAL CHOICE
ECF (EXTENDED CARE.
FACILITYl
ELIGIBLE INDIVIDUAL
EMERGENCY CARE
BENEFITS
Persons, enrolled in a prepayment plan who
make individual premium payments directly
to the plan rather than through a group.
Rates of payment are generally higher, and
benefits may not be as extensive as for the
subscriber enrolled and paying as a member
of a group.
See "Service Benefits."
(Also multiple choice!; An option offered
individuals; in a group to choose between
two or more different arrangements for
prepaying medical care; i.e., indemnity
insurance and a group health plan.
A nursing or convalescent home offering
skilled nursing care and rehabilitation
services.
See "Beneficiary,"
Indemnity benefits for care received from
non-^plan doctors and non-r^plan facilities in
the event of accident or emergency illness,
whether in or out of the plants service
area.
98
FEE SCHEDULE
FIXED COSTS'
With respect to the physician or other
supplier of service, this refers to payment
in specific amounts for specific services
rendered'— as opposed to retainer, salary
or other contract arrangements. In relation
to the patient, it refers to payment in
specific amounts for specific services
received, in contrast to the advance payment
of an insurance premium or membership fee
for coverage, through which the services or
payment to the supplier are provided,
A listing of accepted fees or established
allowances for specified medical procedures.
As used in medical care plans, it usually
represents the maximum amounts the program
will pay for the specified procedures.
Costs which do not change with fluctuations
in enrollment or in utilization of
services,
! FOUNDATIONS
GROUP HEALTH PLAN
GROUP PRACTICE
An association of physicians that organizes
and develops a management and fiscal
structure that develops a fee schedule for
individual physicians who join the foun--
dations. Foundations usually market the
plan to subscribers, do peer review, claims
payments, and set rates for subscribers,
(Also direct service plan; group practice
prepayment plan; prepaid care plan): A
plan which provides health services to
persons covered by a prepayment program
through, a group of physicians usually
working in a group clinic or center,
A group of persons licensed to practice
medicine in the State, who, as their prin-r
cipal professional activity, and as a group
responsibility, engage or undertake to
engage in the coordinated practice of their
profession primarily in one or more group
practice facilities, and who (if and to the
extent such expenses are paid by members of
the group), medical and other records, and
substantial portions of the equipment and
the professional, technical, and adminis
trative staffs.
99
(Also contract groups): Persons with the
same employer or with membership in common
in an organization, who are enrolled in a |
health plan. Usually, there are stipulations
regarding the minimum percent of the group
which must enroll before the coverage is
available.
ENROLLEE (Also beneficiary; eligible individual;
member; participant): Any person eligible
as either a subscriber or a dependent for
service in accordance with a contract.
ENROLLMENT
EXPANSION
The process by which an individual becomes
a subscriber for himself and/or his
dependents for coverage in a health plan.
May be done either through an actual "sign
ing up" of the individual, or by virtue of
his collective bargaining agreement of his
employer’s conditions of employment. The
result therefrom is that the health plan
is aware of its entire population of
beneficiary eligibles. As a usual practice,
it is incumbent on the individual to notify
the health plan of any changes in family
status that affect enrollment of dependents.
Some HMOs compute Plan expansion as part of
the capitation rate in order to provide the
necessary capital for growth.
EXPERIENCEtRATED
PREMIUM
EXPERIENCE RATING
A premium which is based upon the antici
pated claims experience of, or utilization
of service by, a contract group according
to its age, sex constitution, and any other
attributes expected to affect its health
services utilization, and which is subject
to periodic adjustment in line with actual
claims or utilization experience.
The rating system by which the Plan de
termines the capitation rate by the experi
ence of the individual group enrolled,
Each group will have a different capitation
rate based on utilization. This system
tends to penalize small groups with high
utilization.
100
kHEALT^MD
I WELFARE- FUND See "Welfare Fund."
(Health Maintenance Organization); The term
health maintenance organization is speci
fically defined in the Health Maintenance
Act of 1973 (Public Law 93—222) as a legal
entity or organized system of health care
that provides directly or arranges for a
comprehensive range of basic and supplemen
tal health care services to a voluntarily
enrolled population in a geographic area on
a primarily prepaid and fixed periodic basis.
,3$0SPiTAE-AFFi;hlATT0N The hospital or hospitals from which the Plan
contracts to provide the hospital benefits
of the Plan,
"iSfNDEmUTY-CARRIER
* "I " s . L '
Usually an insurance company or insurance
group that provides marketing, management,
claims payment and review, and agrees to
assume risk for its subscribers at some pre
determined level.
Clndemnity health insurance); A plan which
reimburses physicians for services performed,
or beneficiaries for medical expenses in
curred. Such plans are contrasted with group
health plans, which provide service benefits
through group medical practice.
Cz^ENPATLENE'^GARE Care given a registered bed patient in a
hospital, nursing home or other medical or
psychiatric institution.
.^MEDIC AE-. GRpJJR A group of physicians organized to provide
medical services to members of a group health
plan under a specified contract. Medical
Group in prepaid group practice
a. includes, a broad range of medical
specialties, with capability for
meeting most needs for medical
diagnosis and treatment, including
both primary care and specialty
care (with, the ability to purchase
service beyond its capabilities on
a fee—for—service basis);
101
MEMBER
MULTIPLE CHOICE
b. operates under common employment
or with a common financial interest,
under a capitation arrangement or
some system for payment other than
fee-for—service;
c. has available group offices and
facilities, equipment, and the
services of paramedical personnel
and non-medical assistance;
d. has responsibility for the care of a
defined group of enrolled participants
See "Beneficiary,"
See "Dual Choice,"
NONCONTRIBUTORY
ARRANGEMENT
NONPROFIT PLAN
OFFICE VISIT
OPEN ENROLLMENT
OUT-rOF- ARE A-BENEFIT S
An arrangement under which the employer,
union or other third party pays the full
premium.
A term applied to a prepaid health plan
under which no part of the net earnings
inures, or may lawfully inure, to the
benefit of any private shareholder or
individual,
A formal face—to—face contact between the
physician and the patient in a health center,
office or hospital out-patient department,
A period during which subscribers in a dual
choice (see definition) health benefit
program have an opportunity to select the
alternate health plan being offered to them.
Most frequently, open enrollment periods
are negotiated and held for one month during
every one to two years.
Those benefits that the Plan supplies to its
subscribers when outside the geographical
limits of the HMO, These benefits usually
include emergency care benefits, plus low
indemnity payments for non—emergency bene
fits, Most plans stipulate that within the
area services for emergency care will be
102
OUTPATIENT CARE
PARTICIPANT
I PHYSICIAN'S SERVICES
! PLAN
! PLAN ADMINISTRATION
PLAN SPONSORSHIP
POLICYHOLDER
provided until the subscriher can be re
turned to the Plan for medical management of
the case.
Care given a person who is not bedridden.
See "Beneficiary."
Services involving a face-to-face contact
with a physician.
See "Group Health Plan."
The management unit with responsibility to
run and control the HMO Plan — includes
accounting, billing, personnel, marketing,
legal, purchasing, possibly underwriting,
management information, facility mainte
nance, servicing of accountants. This
group normally contracts for medical
services and hospital care.
The group that organizes the plan and/or
finances its facilities and/or makes up its
governing board,
(1) Under a group purchase plan, the policy
holder is the employer, labor union, or
trustee to whom a group contract is issued;
(2) in a plan contracting directly with the
individual or family, the policyholder is the
individual to whom the contract is issued.
PRE-EXISTING
CONDITION
PREMIUM
A physical condition of an insured person
which existed prior to the issuance of his
policy or his enrollment in a plan, and
which may result in a limitation in the
contract on coverage or benefits,
A prospectiyely determined rate that a sub-
sctiber pays for specific health services.
Generally a comprehensive prepaid health
plan will havG a premium rate for single
subscribers and a separate premium rate or
rates for subscribers with dependents. In
addition, separate premium rates may be
established for optional health care coverage.
103
PREPAID CARE PLAN
PREPAID GROUP PRACTICE
I PREPAYMENT
PRIMARY CARE
PROVIDER
RESERVES
RECIPROCITY
RISK LOAD
SELF-ADMINISTERED PLAN
See "Group Health Plan."
Prepaid Group Practice Plans involve multi
specialty associations of physicians and
other health professionals, who contract to
provide a wide range of preventive, diag
nostic and treatment services on a continu
ing basis for enrolled participants.
A method of providing in advance for the cost
of predetermined benefits for a population
group, through regular periodic payments in
the form of premiums, dues, or contributions,
including those contributions which are made
to a Health and Welfare Fund by employers on
behalf of their employees.
Professional and related services adminis
tered by an internist, family practitioner,
obstetrician-gynecologist or pediatrician
in an ambulatory setting, with referral to
secondary care specialists.
A person or organization providing health
care services.
A fiscal method of withholding a certain
percentage of premium to provide a fund
for committed but undelivered health care
and such uncertainties as; longer hospital
utilization levels than expected, over
utilization of referrals, accidental cata-
strophies and the like.
The right of a member of a group health plan
temporarily away from home, to receive
necessary medical care from a group health
plan in the area where he is a visitor.
A factor that is multiplied into the rate to
offset some adverse parameter in the group.
A plan administered by the employer or
welfare fund without recourse to an inter
mediate insurance carrier. Some benefits
may be insured or subcontracted while others
are self-insured.
104
SERVICE AREA
SERVICE BENEFITS
SERVICE CHARGES
i STRAIGHT RATING
The geographic area covered by the plan,
within which it provides direct service
benefits.
(Also direct service benefits) :
provided by the plan itself.
Benefits
Any extra charges specified in the contract
in relation to certain services not fully
covered through prepayment.
A single rate multiplied by the total number
of people in a family to give the family
rate.
STOP LOSS
SUBSCRIBER
THIRD PARTY PAYMENT
TOKEN PAYMENT
TRANSFERABILITY
UNDERWRITING
(Or risk control insurance; often incorrect
ly referred to as "reinsurance"); Insuring
with a third party against a risk which the
plan cannot financially and totally manage.
For example, a comprehensive prepaid health
plan can self-insure hospitalization costs
or it can insure hospitalization costs with
one or more insurance carriers.
(Also policyholder; certificate holder):
The person in whose name an individual or
family contract is issued.
The payment for health care when the bene
ficiary is not making payment, in whole or
in part, in his own behalf.
A partial payment made for a service or
supply item. For example, some comprehen
sive prepaid health plans charge $1 for each
office visit. Sometimes also known as
"nominal" or "hesitation" payments.
The right of a member of a group health plan
who changes his place of residency, to re
ceive medical services in a group health plan
in his new place of residency, with benefits
and obligations as defined under prior agree
ment between the plans.
Cl) The entire process of issuing new
securities; (2) the insurance function bear
ing the risk of adverse price fluctuations
105
during the period in which a new issue of
bonds is being distributed.
UNION-SPONSORED
PLAN
. UTILIZATION
A Program of health benefits developed by a
union. The union may operate the program
directly, or may contract for the benefits.
Funds to finance the benefits are usually
paid out of a welfare fund which receives
its income from (1) employer contributions ;
(.2) employer and union member contributions;
or (3) union members alone.
The extent to which a given group uses
specified services in a specific period of
time. Usually expressed as the number of
services used per year per 100 or per 1,000
persons eligible for the services, but
utilization rates may be expressed in other
types of ratios; i.e.
covered.
per eligible person
WELFARE FUND
WORKING CAPITAL
VOLUNTARILY
ENROLLED GROUP
(Also health and welfare funds): When em
ployer and/or employee contributions for
health are placed in a fund which is adminis^.
tered by a board, usually with equal repre
sentation from labor and management, the
fund is known as a welfare fund. When the
welfare fund provides health benefits,
these are either paid directly, insurance
is purchased, or service; benefits are
provided.
Refers to an institution’s investment in
short-term assets-— cash, short-term secu
rities, accounts receivable and inventories.
Gross working capital is defined as an
institution's total current assets. Net
working capital is defined as current
assets minus current liabilities. If the
term "working capital" is used without
further qualification, it generally refers
to net working capital.
An enrolled group of persons of which each
individual has exercised an option to join
the program.
106
APPENDIX B
INSTRUCTIONS FOR OFFICERS AND DIRECTORS WITH RESPECT TO
ORGANIZATION AND OPERATION OF THE AMERICAN HEALTH CARE PLAN
The Articles of Incorporation for your Corporation has been
I issued by the Office of the Secretary of State, Sacramento, California,
I A copy of the Articles of Incorporation is submitted herewith,
, showing the effective date of the incorporation. The original
I
I Articles of Incorporation will be filed in the Corporation's "Minute
Book," which will be given to you at the initial organizational
! meeting (discussed below). Your accountants will be working with you
i
and with us to effect the transfer of the assets to the Corporation.
The transition may seem to be complex. To make it easier and more
; understandable for you, your employees, and your advisers, we have
prepared this memorandum.
I
1. Initial Organization Meeting
The California Corporation Code requires that the directors,
who are named in your Articles of Incorporation, meet and transact
' certain business. This will include the election of a President,
Vice President, Treasurer and Secretary, and the following reso-
'lutions:
(a) That the seal of the Corporation be adopted. The seal,
107
which is a metal device which will leave an imprint on
paper hearing the name of the Corporation, has been
ordered and will be available at the initial organiza
tional meeting.
That a bank be designated as the official depository bank
of the Corporation and that the officers and directors of
the Corporation be authorized to execute the necessary
corporate resolution forms required. In connection with
this, it would be helpful if you would decide on a bank
to use and procure from that bank the resolution forms
and signature cards, which they will require. You can
telephone the bank and they will inform you of their
requirements and send you.the necessary documents by mail.
In regard to such bank, it will not have to be the same
bank which might be the Trustee of your profit-sharing or
pension plan. It may be more convenient to utilize an
accessible bank where you will make your daily deposits.
(cl That the Corporation will have authority to begin business
under its Corporate name.
That the Corporation name its fiscal or calendar tax year.
Largely^ this is a matter in which your accountant would
like to participate in, since the ending of the taxable year
has a direct bearing upon certain activities which he must
perform in connection with the accounting servicing
requirements for your nonprofit Corporation. A copy of
108
this memorandum is being sent to your accountant, so he
i will be informed as to the matters contained herein.
I
I (e) That the Treasurer be authorized to pay all fees and
expenses incident to the organization of the Corporation.
(f) That certificates of membership or shares be issued for
certain cash and/or property which must be paid into the
Corporation. All assets transferred by you to the Corpo
ration will become property of the Corporation and will be
appropriately entered upon the books of the Corporation by
your accountant. As to what assets will be transferred,
and the timing thereof, is a complex question which must be
resolved by your attorney, your accountant and you.
Questions of tax elections, transfers or nontransfers of
accounts receivable and accounts payable, among other
questions, must be thoroughly analyzed in light of your
particular circumstances.
Upon completion of the initial or organizational meeting, we will
prepare minutes of such meeting to be filed in your "Minute Book."
2. Post Organization-Accounting
It is the responsibility of the officers and directors of the
Corporation to make certain that accounting practices and auditing
procedures customarily followed by similar businesses are observed in
proper and timely fashion by the Corporation. Accordingly, your
accountant, whom we have fully advised regarding the initial steps
109
to form your Corporation, should be kept currently 'and consistently
I informed by you regarding all of your Corporation’s business
activities. Insofar as preliminary matters are concerned, it will be
necessary for us or your accountant to file an Application for
I
! Federal Employer’s Identification Number for your Corporation, and
I you may have received from the Internal Revenue Service withholding
!
! tax forms which, should be delivered promptly to your accountant. In
' addition, the State Franchise Tax Office, in Sacramento, will send
! to you a packet dealing with that office's reporting requirements on
, franchise taxes, which should also be turned over to your accountant.
' Your accountant will, moreover, complete applications for employer
I
' identification numbers with the California Employment Tax Office. He
; is familiar with the State, Federal, and local tax requirements, re
specting the reporting of all transactions by your Corporation, He
will, moreover, assist you to meet all record-keeping requirements
: imposed upon your practice by reason of its incorporation. It will be
necessary, for example, for him to set up a new set of books.
3, Insurance
In all likelihood, you will personally be covered by Workmen's
Compensation Insurance for the first time. Accordingly, it will be
desirable if an analysis of your insurance be made by your accountant
and your insurance agent. Thereafter, it can be coordinated to trans—
I
fer or purchase such insurance upon the commencement of practice by
your Corporation, It should be emphasized, at this point, that eyen
110
though your Corporation is now in existence, it will not be doing I
business until such time as you desire. Accordingly, a date fixing ,
the transfer of assets to the Corporation and issuance of membership '
I
I shares to you can be made at a time most desirable for you, according
I to your own circumstances. The transfer of such insurance can be
!
i made toward such "target date,"
4, Preliminary Steps to be Taken Toward the "Target Date"
I With our assistance and that of your accountant, the following
initial steps, immediately prior to, or at the time of your commencing
' practice in the Corporation form, should be taken,
' (a) Your letterhead, billheads, etc, should be modified to
i
reflect the full name of the Corporation. If you wish
to use your old stationery, you should block out the
i old name and stamp in the name of the Corporation. This
can he done by a rubber stamp.
(hi All of your professional cards should be similarly
changed to reflect the Corporation name,
(cl Your bank checking account should reflect your Corporation
name, As mentioned earlier, you may haye already procured
bank, resolution forms and signature cards. If the bank has
these on file, your account will go into effect when you
make your first deposit funding in the Corporation account.
Banks generally will hold the signature card and resolution
forms, as a matter of convenience, until such funding
occurs.
Ill
(d) Your telephone listing and your listing in all professional |
directories should be changed to reflect the Corporation
name, as opportunity arises.
(e) All leases, contracts and other arrangements which you have
regarding your present equipment, office premises or furni
ture and any other contracts or arrangements which you have
previously entered into in connection with your professional
practice should be modified, assigned, or rewritten in
order to reflect the fact that the Corporation has replaced
you entirely as the contracting party to each such lease,
contract, or obligation.
(f) The name on the door of your office and on the directory,
or any other signs which you presently exhibit, should be
I
changed to reflect your new Corporation name.
(g) New Workmen's Compensation Insurance, as above noted, on
all of the principals, including yourselves, as well as all
of your other employees, should be acquired in the Corpora
tion name. All insurance policies, with respect to public
liability, except personal policies on your life and health,
should be transferred to the Corporation.
5. Corporation Formalities
It is difficult to overestimate the importance of maintaining
the formal integrity of your new Corporation, which is a separate per
son from yourself. All important transactions in your practice should
be reflected in minutes of meetings of your Board of Directors or mem
bers. All contracts, including employment contracts, profit-sharing
112'
plans, pension plans, trust agreements, loans, leases, and purchase '
contracts, should be made in the name and on behalf of the Corporation
and memorialized by appropriate minutes in the Corporation minute book.
; When signed, such documents should be kept in the minute book. With- ;
I
out limiting the significance of the foregoing general admonition, it
i
jis mostly important to realize that you are going to be required for-
“mally to consider, review and act upon the following:
* (a) Use of Corporation Seal
i
I We have provided you with a corporation seal. Although
I
there is no legal requirement that a corporation seal be
used on any documents under California law, many financial
; institutions require that you use this in connection with
[ resolutions, loan documents, notes, and the like. You will
I observe that there is a place for the corporation seal, for
: example, on your membership certificates. If required, do
not hesitate to use the corporation seal.
6. Corporation Disagreements
Most difficulties regarding the corporation formalities can be
resolved by appropriate reference to your bylaws, employment contracts,
and other documents which are to be found in the minute book, or which
are in course of preparation by us''and to be delivered to you in the
near future.
7. Outline of Directors' and Officers' Responsibilities !
Principal officers and directors of every corporation, including
your nonprofit corporation, should be mindful of the following specific
and important duties and responsibilities:
113
(a) Payment of Salaries to Employees
Officers responsible for the payment of salaries must see
that those salaries are paid by the Corporation.
(b) Payroll Taxes
All payroll taxes must be paid by the Corporation.
Nonpayment may result in personal liability.
(c) Distinction between Directors and Officers
Directors control the policy of the Corporation, and
officers put that policy in effect. This difference must
be understood. A director may not delegate his authority.
An officer, except in respect to professional responsibili
ty, as limited by the Corporation, its enabling statutes,
and its agency's rules, may delegate his responsibility
and authority. A director may not give his proxy to vote
at a meeting of the Board of Directors, for example. The
officers of the Corporation serve at the pleasure of the
Board of Directors. Even though an officer may have an
employment contract which provides him with rights to com
pensation, he may be removed from office at any time by the
Board of Directors. A director, on the other hand, may be
removed only by the action of the directors and/or members,
under specific and special procedures. A director or offi
cer may resign at any time. Acceptance of the resignation
is not necessary. A resignation is effective upon the
delivery of the resignation to the Corporation. It need
not wait acceptance by the Board of Directors or by any
114
officer. The remaining directors may appoint a new direc- ]
tor to fill a vacancy which has not previously been filled
by the Board of Directors.
(d) Membership Shares
Directors establish salaries, not the members. Issuance
of membership shares is also with the exclusive province of
the Board of Directors. Before issuing shares, however,
it is wise to consult with both the accountants and with us
since there are complex statutory inhibitions upon the
issuance of membership shares which must be observed in non
profit corporations.
(e) Duties to Corporation and Members
A director may not compete with his own Corporation or
take business opportunities of the Corporation for his own
benefit. In any event, all such transactions will probably
have to be disclosed, as a general matter, to the members
of the Corporation in any large nonprofit corporation where
there is any difference between the officers and directors,
on the one hand, and the members on the other. A director
is ordinarily not entitled to compensation for his services
as a director unless the compensation is provided for by
contract by an appropriate Bylaw, or by a Corporation reso
lution. Remember that the directors have the additional
power to fix the salary of each and all of the officers.
Elaborate compensation plans such as profit-sharing plans.
115
pension plans, vacation plans, and the like must be sub
mitted to the members as well as to the directors for their
approval and ratification in most instances. This corpora
tion formality should be followed by the nonprofit corpora
tion even where the directors and members are the same
person or persons.
(f) Other Responsibilities
The director of a nonprofit corporation must be concerned
with compliance by the corporation with each and all of its
obligations under the statutes and rules applicable to it
as a nonprofit corporation. Each director should make cer
tain that the Corporation is in good standing with the
taxing authorities and the Secretary of State of the State
of California; that each of its officers, directors, mem
bers, and employees who will render professional service
is a licensed person, as defined in the California laws;
that the affairs of the Corporation continue to be conducted
in compliance with law. Finally, the Corporation should
obtain and continue to provide and maintain security by
insurance or otherwise for claims arising out of the render
ing of professional services by the Corporation. Mainte
nance of appropriate malpractice insurance may be prudent.
Of course, your attorney and accountant, who are familiar
with corporate, tax, and agency law, are available to assist
you in every way possible.
116
8. Pension, Deferred Compensation Plan '
You may be concerned that no decision as to type or extent of
jpension plan has been made. Generally, this can be viewed as a sepa-
I rate phase from the organization and initial implementation of your
Corporation. There is adequate time to properly consult and reflect
i
ion all considerations, regarding the best plan for you. This is true
since the Internal Revenue Code of 1954, as amended, and implementing
jRegulations thereto, permit you to adopt a plan and make a contribution
jthereto, after the formation of the Corporation, but before the end of
jone year following such formation. The contribution will be retro
actively effective to the effective date of the Corporation's existence.
These are matters which can be discussed at an early time, when you and
your advisers can meet.
i9. Termination and Dissolution of Corporation
i Neither the Corporation nor its employee benefit plans should be
'terminated or dissolved without further consultation with the accoun
tant for the Corporation and with us, or any successor counsel whom
the Corporation may retain. The Corporation is not dissolved by
reason of the death or disqualification of the sole remaining member-
director. Dissolution is accomplished only as provided by the general
corporation laws of the State of California. No pension or other com-
'pensation arrangement should be terminated or altered without careful
review and study by the advisers of the Corporation.
We hope that the foregoing will prove helpful. The intent of
; this information is to give you some insight as to the preliminary
117
matters which are involved in the organization of the nonprofit Corpo
ration and some of the Corporation formalities which should be observed
during the course of operation of the Corporation. The matters con-
!tained herein, of course, are general, and your attorney and accountant
I
! are always available to assist you as specific problems arise. If you ,
I have additional questions, these can be covered at a future meeting.
Very truly yours.
I
I C C :
James R. Abernathy, II
By;
118
APPENDIX C
P R O P O S A L
To The
Department of Health Care Services
State of California
Prepaid Health Plan Development Bureau
for a
TITLE XIX CONTRACT
Submitted by;
American Health Care Plan
5815 Third Street
San Francisco, California 94124
November 16, 1972
„119.
TABLE OF CONTENTS
Page
PURPOSE ........................................
SECTION
I. INTRODUCTION ............................... ,
Philosophy ...............................
Organization of the Prepaid Health Plan
American Health Care P l a n ..............
Organization of Delivery System . . . .
Consolidated Medical Group (CMC) ....
Provider Profile ...................... .
Map of Service Area and Provider Location
Community Health Service (CHS) .........
Clients .................. ......
II. LEGAL COMPLIANCE ..........................
Benefit Package ........................
III. SERVICE AREAS .............................
IV. ENROLLMENT ..............................
Marketing ...............................
Schedule ...............................
Plan..................................
120
PURPOSE
The purpose of the proposed program is to demonstrate to the
Department of Health Care Services, Prepaid Health Plan Development
Bureau, that the American Health Care Plan has the capability and
expertise to deliver comprehensive health care services to the
categorical-aid recipients of a selected area of San Francisco at a
I
i level and in a manner that, heretofore, has not been available. We
j believe that the unique organization of the AHCP, which brings together
i
physician, patient, and outreach worker, will ensure the delivery of
I quality health care. The Consolidated Medical Group (CMG), an
amalgamation of physician group practices, brings together into a
■ professional network a wide array of primary care providers and
; in-depth back up services under a capitation payment system. AHCP has
, incorporated the latest innovations in health care delivery which have
i been accepted as musts in the design of systems which are tailored to
the needs of low-income individuals and communities. The AHCP, with
its dispersed offices, flexible time schedules, and patient/profession-
al ratios, will be readily available to its clients. The AHCP will
be accountable to its clients, its staff, and the State through its
' system of performance monitoring. The AHCP will be beneficial in
three broad areas. First, it will benefit its clients by affording
them comprehensive health services not presently available. Second,
121
1 the providers will benefit by practicing in a well-designed delivery
system. Third, the State of California will save valuable resources
by securing improved medical care which produces healthier citizens
at a reduced cost. Furthermore, because the AHCP has embodied the
I practice of preventative care, it is believed that, after a period of
, time, its clients will become more accustomed to seeking health care
! services on a preventative basis, rather than a crisis one.
122
I. INTRODUCTION
j Philosophy
The American Health Care Plan (AHCP) was designed with the funda-
I
mental premise that the most important factor in the delivery of
I quality health care services is the relationship that exists between
I
I the patient and his physician. The traditional forms of social
I insurance. Medicare and MediCal, have tended to erode and obscure
I
this relationship because of the built-in fee-for-service incentives.
I Under the prevailing fee-for-service reimbursement mechanism, the
I
I physician or other provider receives a fee for each service rendered.
In marginal cases, even the most scrupulous of providers have an
incentive to undertake a procedure, in order to receive a fee. Some
providers may decide to perform services in cases which they would
normally refer to others more qualified, were there no financial
element involved. The incentives probably do not operate consciously
or in all cases, but their effect has been felt throughout the entire
medical care delivery system.
A further detriment to the patient-physician relationship is the
severe fragmentation of the delivery system. Doctors are not respon-
' sible for patients for long periods of time and are, therefore, more
concerned with episodic care than with the maintenance of the patient's
' i
: health. The patient is often greatly frustrated in his attempts to
123
I manage his own medical treatment. As a result, the patient may either '
fail to receive the care he needs or seek care from an inappropriate
provider.
To the degree that the prevailing system of health care delivery
is still predominantly composed of solo practitioners and small,
single-specialty groups, the difficulties inherent in the fee-for-
service incentives are exacerbated. Due to the fact that there is no
coordination between providers, each doctor consulted may have little
; knowledge of what has been done to the patient. Moreover, because
medical records are scattered, a physician may undertake a treatment
I with undesirable consequences, merely because he had little or no
I
I prior knowledge of the patient's condition.
The Prepaid Health Plan of the Department of Health Care Services
(PHP) is a functioning model of an organized delivery system that
operates in conjunction with comprehensive prepayment. The American
Health Care Plan has designed a system in conjunction with the concepts
■ embodied in AB 949 which, it is felt, will ameliorate the effects of
the now operative incentives and will reduce the fragmentation now
characteristic of the system. Therefore, an application is now being
■ submitted to the State of California for a contract covering 40,000
, Title XIX recipients in the San Francisco County.
! The decision to apply for a Prepaid Health contract with the
State is based on the following premises:
(1) The Hunters Point-Bayview Community Health Service (CHS)
has worked with low-income clients in need of medical care
124
for the past four and one-half years* Working with the
disjointed system of providers, patients, and payment
mechanisms has proved to us that comprehensive health care
cannot be obtained under such organizational constraints.
Our expert opinion on community health care indicates that
the Prepaid Health Plan offers the best opportunity now
available to deliver quality comprehensive health care.
(2) By using the latest 1970 Census and San Francisco Depart
ment of Social Services reports, it was found that over
80,000 categorical aid recipients live within the bounda
ries of our proposed service area. These boundaries, as
constructed, fall within a 2.5 mile radius of each of our
provider groups and, furthermore, are serviced by public
transit on major transportation corridors. Both of these
factors ensure ready access to health facilities for
prospective clients. Two other mechanisms which function
under the umbrella of Model Cities and CHS are the
Transportation and Mothers' Helpers programs, both of which
will be used to increase access to the facilities of the
AHCP. The Transportation Program has four (4) 1972 Dodge,
12-passenger vans, one dispatcher, and four (4) drivers
who are able to transport MediCal residents of the Model
Cities area to our health facilities. The Mothers' Helpers
Program has two full-time and eleven part-time workers who
125
are able to supply babysitting services while patients are ^
receiving medical care in AHCP facilities. Details of
these plans can be obtained from the San Francisco Model
Cities Agency, 2690 Jennings Street, San Francisco, CA
94124.
(3) Through a series of formal meetings and informal contacts
with primary care providers, specialists, super specialists,
hospital, and ECF representatives, as well as representa
tives of other ancillary services, enough interest was
found to warrant the formal development of a contract
application to DHCS,
(4) An examination of the four and one-half years of patient
data of Hunters Point-Bayview Community Health Service,
as detailed in the Annual Reports distributed to HEW,
indicated that it would be economically feasible to con
duct a prepaid program of health care with the State.
The AHCP believes that it can provide a full range of
comprehensive health care to its clients and, with appro
priate utilization, will remain a profitable and viable
entity.
(5) Having completed a survey on existing Prepaid Health Plans,
it was determined that a very vital component to delivery
of health care services was missing— outreach. During the
126
past four and one-half years. Hunters Point-Bayview
Community Health Services has developed an outstanding
outreach program. Experts in the field of health readily
admit that outreach is one of the more effective methods
of delivering health care services, especially in the area
of preventative medicine and client advocacy. Having estab
lished a track record in the area of outreach, this agency
has developed means of reducing problems associated with
categorical aid recipients.
For these reasons, it is believed that the AHCP is eminently
suited to initiate a Prepaid Health Plan. We believe that the AHCP
will be the initial step in the development of a full-fledged Health
Maintenance Organization (HMO) that will service not only the categor
ical aid recipients of San Francisco, but the at-large population as
well.
Organization of the Prepaid Health Plan
The Prepaid Health Plan can best be described in terms of its five
component entities: the American Health Care Plan, Incorporated,
which serves as the insurance carrier; the Consolidated Medical Group,
which is the professional corporation; the individual Provider Groups,
which make up the professional corporation; the clients of the plan,
who are the MediCal recipients of selected San Francisco Census Tracts;
and. Hunters Point-Bayview Community Health Service, which will supply
127
administrative and marketing staff to the AHCP. In the following sec- <
I
tions, each of these components will be described and their inter- |
actions and relationships to the other components will be specified. |
I An organizational chart of the delivery system is given on the follow-
I
1 ing page.
I
! American Health Care Plan
j American Health Care Plan (AHCP) is a nonprofit corporation whose
I
I
j purpose is to establish and maintain medical, hospital, and other
health care service plans which will spread the risk of paying for the
cost of illness, disability, and prevention of illness over a large
i
!
group of people. AHCP is empowered to enter into contracts and agree-
Iments with physicians, dentists, hospitals, clinics, and government
' agencies for the provision of health care services. The AHCP is
qualified as an insurance carrier under Knox-Mills.
The AHCP will carry out the administrative, fiscal, marketing, and
evaluation functions required by the MediCal Prepaid Health Plan. The
Board of AHCP is made up of nine representatives from the provider
i groups, the Consumer Advisory Council, and members of the community-
at-large. The general policies of the organization will be specified
: by the Board of Directors. The responsibility for carrying out these
i
policies will rest with the administrator of AHCP.
I ,
! The AHCP will operate on the principle of capitation. Under this
J compensation scheme, each individual medical provider group will be
’ given an amount of money equal to a fixed per capita sum for each
128
(Client, multiplied by the number of clients enrolled with that group's
1
! providers. The provider groups will be free to establish partnership
I shares from their funds, salaries for associates, and fee-for-service
I arrangements with specialties. In this manner, each provider group
!will be free to vary its reimbursement mechanisms from the simple
! expediency of straight salaried providers, to incentive payments for
: retaining clients, bonuses for meritorious service, shares in net
earnings at the end of the year, and any number of more complex
; profit-sharing mechanisms.
Consolidated Medical Group (CMG)
I The Consolidated Medical Group is a professional corporation with
the legal capability of contracting with the AHCP for the delivery of
comprehensive medical care. CMG will not be involved in the direct
^ delivery of care, but has an employment contract with each of the
individual provider groups.
Provider Profile
The AHCP is singular in that it has four completely self-contained
private practice groups strategically located in five offices (see
I
ifollowing map) within the service area. No client within the area
will be farther than 2.5 miles away from the office of a provider.
'The names and addresses of the participating groups are:
129
1. Associates' Clinican Medical Group
Legal Entity: Nonprofit Corporation
Location: 6301 Third Street, San Francisco
Lab: Yes, same building
X-ray: Yes, same building
Pharmacy: Yes, same building
2. Close and Staff
Legal Entity: Partnership
Location: 728 20th Street, San Francisco
Lab : Yes, same building
X-ray: Yes, same building
Pharmacy: Next door, adjacent to Medical Building
3. Visitacion Valley Medical Group
Legal Entity : Professional Corporation
Location: 141 Leland Avenue, San Francisco
Lab: Yes, same building
X-ray: Yes, same building
Pharmacy: 58 Leland Avenue, one (1) city block from
Medical Building
4. Franklin Medical Group
Legal Entity : Professional Corporation
Location: 45 Castro Street, San Francisco
Lab: Yes, same building
X-ray: Yes, same building
Pharmacy : Yes, same building
5. Franklin Medical Group (Satellite Office)
Legal Entity: Professional Corporation
Lab : Yes, same building
X-ray : Yes, same building
Pharmacy : Yes, same building
Each of these groups has committed itself to providing comprehen
sive primary care to those clients who choose a member of a group as
their primary physician. In addition, each group has agreed to provide
specialty care, as well as pharmacy. X-ray, and laboratory services on
a capitation basis.
130
The AHCP will pay to each participating provider group a capita I
I rate equal to the sum of the total number of patients who have selected
j members of that group as their primary care providers, A proportion
I of that amount will be held by the AHCP to pay for hospital and other
I ancillary fee-for-service agreements that have been credited to each
I participating provider. An additional amount will be withheld from
the state's capitation sum, which will cover the overhead costs of
' administering the Plan, A detailed breakdown of the capitation
I
; dollar by category is given in Section V,
Community Health Service
j Hunters Point-Bayview Community Health Service is a comprehensive
!
I Medical Outreach Program which has been operating in the southeast
section of San Francisco for the past four and one-half years. CHS
I
is a special demonstration project, funded under the Partnership for
I
; Health Plan (PL 89-749), whose purpose is to obtain comprehensive
health care for the poor and near-poor residents of its target area.
CHS has gained valuable experience in the managing of a large,
community-based health care delivery system and will provide valuable
expertise to the AHCP during the phasing-in operations. CHS will
furnish expertise in two basic areas; management and outreach.
Initially, CHS will supply the top administrative personnel to
AHCP. Once the AHCP becomes fully operational, the staff will be
either absorbed into the permanent structure of AHCP or will return
to manage other categorical programs anticipated to be developed by
131
' CHS.
i
; In addition, CHS will allow AHCP to utilize the services of the
1
I trained community health workers, the Social Health Technicians
I
t (SHT's). CHS has an extensive Education and Training Division which
I
: has over the years developed a highly competent trained staff of
I community health workers. In both formal classroom activity and
I through on-the-job training, a cadre of twenty-four (24) SHT's has
t
; been developed, which has an ongoing program of community service to
! the southeast section of San Francisco. CHS has a current enrollment
I
of 16,000 individuals on its active rolls. Of this number, it is
estimated that about 5,000 are on MediCal. In the initial marketing
! phase, the SHT’s will use the enrollment list to contact potential
' clients of AHCP. The Department of Health, Education, and Welfare
has already given verbal approval for CHS to use SHT's in any area
of the city to aid in the development of AHCP.
i
I The use of both the administrative staff and the SHT's represents
an expenditure of close to $200,000 for the development and implemen
tation of AHCP.
Clients
Each MediCal recipient residing within the service area of AHCP
1
is eligible to enroll in the Prepaid Health Plan. Upon enrollment,
I
the client will be assigned a unique I.D. number, a membership card
which will entitle him to comprehensive health care benefits for the
' month. The client will be assisted by the Enrollment Counselors and
132
Social Health Technicians in selecting a primary care physician who
will be responsible for his comprehensive health care.
In addition to medical care, each client will be free to choose a
identist from a roster made available by the AHCP. Each client will be
.able to receive dental benefits under a fee-for-service plan.
I
; Each MediCal recipient, upon joining the plan, becomes eligible
i to vote for representatives who will serve on the Consumer Advisory
I
Council, This Council will have periodic general meetings to elect
i
: officers, hold educational sessions, and make grievances known to the
Board of Directors of AHCP. The officers of the Consumer Advisory
I Council will elect a representative to sit on the Board of Directors
i
and will be responsible for hiring the ombudsman, who will be the
; staff person charged with consumer affairs.
133
II. LEGAL COMPLIANCE
'A. The American Health Care Plan is a nonprofit corporation, organized
j
I under the General Non-profit Corporation Laws of the State of
!
California to establish and maintain health care services for per
sons residing in the San Francisco area. Tax exempt status was
granted on October 17, 1972, under Section 23701f of the Revenue
and Taxation Code of California. Federal tax exemption will be
sought under Section 501c (3) of the Internal Revenue Code.
Articles of Incorporation are attached as Appendix A.
B. Registration as an insurance carrier under provisions of the Knox-
Mills Act is in progress. The Acting Attorney for AHCP is the
Staff Attorney of CHS, Mr. James A. Abernathy, J.D., 5815 Third
Street, San Francisco, CA 94124, telephone number: (415) 822-3130.
C. A sample provider's contract is attached as Appendix B. The con
tract will be modified to suit the facilities and providers, with
their appropriate fee schedules, where applicable..
134
jBenefit Package
I The Consolidated Medical Group (CMG), a professional corporation
I of well-equipped, multi-specialty groups of providers, will provide
(
,comprehensive health care benefits to all eligible covered persons who
I
tare members of the AHCP. AHCP will ensure the health care services are
.readily accessible to covered persons, that 24 hour emergency services
'will be assured, whether provided by the CMG or at facilities available
at the place where the illness or injury occurred. In addition, the
I
I CMG will provide:
(1) outpatient services, including physician, hospital out
patient, optometric, occupational therapy, speech therapy,
' physical therapy, podiatry, and audiology;
(2) prescription drugs;
(3) outpatient laboratory and X-ray services;
(4) home health care services;
(5) eyeglasses, prosthetic eyes, and other eye appliances; and
will arrange for the following services on a fee-for-service basis:
(1) specialized outpatient services, including physician,
hospital outpatient, chiropractic, and psychological ser
vices ;
; (2) hospital in-patient care;
(3) nursing home care;
: (4) blood and blood derivatives;
(5) emergency and essential diagnostic and restorative dental
care;
(6) medical transportation;
135
(7) prosthetic or orthotic devices;
0) hearing aids;
I
! (9) durable medical supplies and equipment ; and
(10) dental care.
I
Exceptions, exclusions and limitations are as follows:
(1) Tuberculosis, alcoholism, drug abuse, and aggravative
mental diseases;
Q.) Illnesses or injuries that results in an annual cost over
$10, 000;
(3) Hemodialysis (chronic);
(4) Cosmetic surgery not resulting from birth defects or
accident;
0) Major organ transplants.
I
The plan is liable for all coverages alluded to whether provided out-
I side or within the plan.
136
III. SERVICE AREAS
Geographical Territory
The catchment area to be considered is a defined geographic area
in the City and County of San Francisco. The boundaries are:
North- San Francisco Bay
East- San Francisco Bay
South- San Francisco County Line
West- North on Junipero Serra to Holloway. East on Holloway
to Ashton. North on Ashton to Ocean. East on Ocean
to San Jose. Northeast on San Jose to Bosworth.
Northwest on Bosworth to 0'Shaugnessy. Northwest on
0'Shaugnessy to Twin Peaks Blvd. North on Twin Peaks
Blvd. to Stanyan. North on Arguello to Pacific. East
on Pacific to Lyon. North on Lyon to San Francisco
Bay.
137
I IV. ENROLLMENT
I
I
; The enrollment of the Prepaid Health Plan will be open to all
Icategorical-aid recipients who reside within the boundaries of San
Francisco which are specified in detail in Section III. The Prepaid
I
iHealth Plan will be one of the options available to the clients under
I
I a multiple-choice arrangement. Clients can choose to use the tradi-
jtional procedures of MediCal, or they may voluntarily enroll in the
; Prepaid Health Plan. Periodic renewal of choice will be required at
yearly intervals. This dual choice provision will preserve the clients'
freedom of choice for physician services.
The clients of the system will have an important voice in the
! operation of the health plan. Membferssof the client group will be
urged to participate in the decision-making functions of the AHCP, by
engaging in the activities of numerous task forces and aH hoc commit
tees that will be formed to deal with the special problems of the
,clients.
If the contract is completed by February 1, 1973, the enrollment
^goals will be as follows :
I Enrollment Total
February, 1973 3,700 3,700
March, 1973 3,300 7,000
138
Enrollment Total
April, 1973 3,300 10,000
May, 1973 3,300 13,600
June, 1973 3,300 16,900
July, 1973 3,300 20,200
August, 1973 3,300 23,500
September, 1973 3 ,300 26,800
October, 1973 3,300 30,100
November, 1973 3,300 33,400
December, 1973 3,300 36,700
January, 1974 3,300 40,000
Marketing
A. Schedule
It is the goal of the American Health Plan to enroll 40, 000
individuals during the first year of operation. There are approxi
mately 85,000 MediCal recipients in the City and County of San Fran
cisco, of whom over ninety percent (90%) reside in the target area.
Thus, AHCP will seek to enroll approximately fifty percent (50%) of
these individuals.
Twenty-two staff members will be actively involved in the recruit
ment and enrollment of subscribers. During the first month of opera
tion, the enrollment goal is 3,700; thereafter, 3,300 enrollees per
I
1month should be maintained. This results in approximately 170 en-
irollees per staff member the first month and 150 enrollees each
successive month.
139
B. Marketing Plan i
The marketing effort will be implemented in three primary phases: I
I
1. Enrollment stations will be established at the AHCP central ;
office and at the five primary care facilities. Announcements
and subsequent phone calls will be initiated to the present
eligible patient base, informing them of this plan. These
efforts will be concentrated in the first two months of
operation.
2. Public forums will be presented, providing an opportunity for
potential subscribers to become familiar with AHCP benefits.
Immediate enrollment opportunities will be available for
eligible subscribers during the course of the forums. These
forums will be presented regularly during the first year of
operation.
3. Door-to-door solicitations will be organized and conducted,
and will be an on-going effort.
Most of the MediCal patients who are presently being seen by AHCP
providers are within the AHCP service area. Based on the latest in
formation from the Department of Health Care Services, the medical pop
ulation for San Francisco is as follows:
AFDC OAS ATP AB
71% 15% 13% 1%
The Plan will concentrate on enrolling those recipients already j
carried on the rolls of the participating groups. However, we will
enroll in a non-discriminatory first-come, first-served basis. Assu
140
ming that we will eventually enroll our maximum allowable clients, the
numbers reflecting the above percentages are as follows:
AFDC OAS ATD AB
28,400 6,000 5,200 400
141
V. PREMIUMS AND BUDGET EXPLANATION
I Premiums
j
Premiums will be on a contractual capitation basis with the State
I of California. The category breakdown is as follows;
I AFDC OAS ATD AB
23.08 36.43 115.43 63.91
The percentage breakdown of the capitation dollar, is unique in
that it is administered at three stages in order to assure a certain
level of autonomy. All monies are received by the Plan and disbursed
according to their level of applicability.
% AFDC ATD OAS AB
AMERICAN HEALTH CARE PLAN:
Out of Area 1 $ .23 $ 1.15 $ .36 $ .64
Administration 10 2.31 11.54 3.64 6.39
Reinsurance 1 .23 1.15 .36 .64
Catastrophical 111 (In House) 5 1.16 5.77 1.82 3.20
Innovative Programs 5 1.15 5.77 1.82 3.20
Hospital 23 5.31 26.55 8.38 14.70
Dental 6 1.39 6.93 2.19 3.83
Other (Transportation,
ECF, Hospital Out-patient)
5 1.16 5.77 1.82 3.20
142
AB % AFDC ATD OAS
CONSOLIDATED MEDICAL GROUP:
Administration 1 .23 1.16 .37 .63
Reserve 1 .23 1.16 .37 .63
MEDICAL GROUPS:
Drugs 4 .92 4.62 1.46 2.56
Equipment and Supplies 1 .23 1.15 .36 .64
Lab, X-Ray 2 .46 2.31 .73 1.28
Physical Services
(including Staff)
30 6.92 34.63 10.93 19.17
Referrals (Consultants) 5 1.15 5.77 1.82 3.20
GRAND TOTAL 100% $23.08 $115.43 $36.43 $63.91
The preceding totals broken down by categories are as folows:*
AFDC ATD OAS
(71%)
28,400
X 23.08
(13%)
5,200
X 115.43
(15%)
6,000
X 36.43
AB
(1%)
400
X 63.91
$654,904 $600,236 $218,580 $25,564
X 12 months x 12 months x 12 months x 12 months
$7,858,484 $7,202,832 $2,622,690 $306,768
Monthly Total: $1,499,284
Annual Total: $20, 614,368
*The premium figures are based upon expected cash reserves at peak
operation of the Plan.
143
AMERICAN HEALTH CARE PLAN
Budget Explanation*
Administrator $28,000
Assistant To Administrator 18,000
Secretary To Administrator 8,400
Ombudsman 16,000
Public Information Director 15,000
Market & Plan
Director 24
Assistant (Planner) 14
Secretary 7
Enrollment Counselors (4) 7
Information Systems Director 19
Economist/Statistician 18
Info Research Specialist 12
Records Technicians (2) 8
Secretary 7
Legal Counselor 22
Legal Secretary 8
Health Care Administrator 18
Registered Nurses (4) 12
Licensed Vocational Nurses (4) 7
Nutritionist 10
Secretary 7
Coordinator 10
Social Health Technicians (20) 6
Clerk Typists (2) 6
Medical Social Worker 12
Comptroller 19
Senior Finance and Accountant 14
Personnel Manager/Purchasing 14
Junior Accountant 8
Personnel/Accountant Clerk 7
Secretary 7
Janitor 7
$28,000
18,000
8,400
16,000
15,000
000
000
200
800
500
500
000
500 each
200
000
400
000
000 each
200 each
000
200
000
300 each
000 each
000
500
000
000
400
200
200
800
24
14
7
7
19
18
12
17
7
22
8
18
48
28
10
7
10
126
12
12
19
14
14
8
7
7
7
000
000
200
800
500
500
000
000
200
000
400
000
000
800
000
200
000
000
000
000
500
000
000
400
200
200
800
144
PBX/OPR/Receptionlst (2) 6,000 each 12,000
Mail Clerk 6,000 6,000
Business Mach OPR 7,200 7,200
TOTAL 641,700
FRINGE BENEFITS @ 15% 96,255
TOTAL $737,955
Marketing
a. Printing Forms Brochures
b. Postage
c. Open Forums
d. Advertising
30,000
Miscellaneous
Building: Rental, Utilities, Upkeep 53,000
Data Processing and Consulting 50,000
Payroll Related 25,000
Supplies (To Include Company Car) 60,000
Travel 6,000
Miscellaneous 3,000
Telephone 13,000
TOTAL $240,000
GRAND TOTAL $977,955
*The rationale for these bids takes into consideration
ing:
the follow-
(1) overall coverage cost of care per patient during the
period June through December, 1970. This period was chosen because it
represents minimal restrictions placed on providers and, apparently,
maximal utilization;
(2) 10% reduction below the average per patient cost during
this two-quarter period. This further reduction of costs represents
a minimum guaranteed savings to the state;
(3) our plan will eliminate duplication of care mainly affect
ing hospitalization which represents approximately 80% of the total
145
cost of care.
(4) supplemental setting-up funds will be obtained by AHCP
through the use of federal funds (314e) and the services of HPBVCHS
staff.
Payments made in one month will be subject to adjustment in the
next month for any enrollees either added to or deleted from the eligi
bility list. Furthermore, notification of these changes during a
month must be made by the Department of Social Services without undue
delay.
AHCP will maintain an out-of-area reserve fund to be used in cases
where a patient's condition necessitates emergency services, intensive
care, or highly specialized services.
AHCP will maintain and present to the Department of Health Care
Services all of the records which both parties agree are necessary to
satisfy the cost-recording and audit requirements of the DECS and for
evaluation of the Plan by the DHCS.
AHCP will administer the Plan with sound management and fiscal
principles, providing all necessary personnel and equipment.
In order that the records of AHCP be complete, the DHCS will give
AHCP information about the amount of services received outside of the
Plan by enrollees in the Plan. AHCP will make available all infor
mation pertaining to the operation and effectiveness of the Plan to
both state and federal authorities.
146
IV- HEALTH DELIVERY CAPABILITIES
Medical Program Implementation
I
j
' Upon approval of the AHCP Prepaid Health Plan proposal by the
Division of Health Care Services, the organization will embark upon an
I
iinitial twelve—month phase-in program. The phase-in period will be a
I time of transition in which AHCP will concentrate on gearing the pro
gram up to full operational capability. The initial marketing program
I '
will be instituted. The registration procedure and eligibility pro
gram developed, a comprehensive health appraisal service begun, and
'the first restorative and preventative medical services delivered.
A. Marketing, Registration, Eligibility
The initial marketing for AHCP will be handled in coopera
tion with the San Francisco Department of Social Services which
will inform clients of the existence of a Prepaid Health Plan in
their area. Individual i;contracts will be made with eligible
MediCal recipients in the offices and facilities of the parti
cipating providers. An a'ctive outreach marketing program will
employ the trained Social Health Technicians of the CHS staff.
The name, age, sex, and other identifying characteristics of the
I I
i client will be prepared for keypunching, using the state aid ;
I number as the patient identifier. Registration and eligibility
147
lists will be constantly updated and modified by comparison with
the master MedlGal lists prepared by the County and checked by
the Department of Health Care Services. (See Section IV for
Marketing Plan details.)
B. Comprehensive Health Appraisal Service
Upon enrollment in the plan and assignment to a physician,
a comprehensive health appraisal appointment will be scheduled
for the client within a reasonable time period. Whereupon, the
health status of the client will be ascertained using a variety
of clinical and psychological testing mechanisms in conjunction
with an examination by his primary care physician. A uniform
health record will be created, which will be periodically
scanned by our outreach workers and data processing equipment.
C. Preventative and Restorative Medical Services
All patients will be classified by the health appraisal
service for the type of medical care they feel is needed for the
immediate future. These classifications will be changed when new
information becomes available, or in periodic réévaluations. For
those patients who are in good health, a program of preventative
care will be instituted. Preventative care will include:
1. health education;
2. physical fitness;
3. immunization schedules;
4. counseling; and
5. health workshops.
148
The chronically-ill patient will be placed on a regimen of '
preventive maintenance, in the form of special regimens set up ,
specifically to treat the following types of conditions: i
1. allergies;
2. metabolic diseases;
3. cardiovascular diseases;
4. dermatoses;
5. degenerative diseases; and
6. psychoneuroses.
The acutely-ill patient will, of course, undergo a program
of immediate, therapeutic management of his condition, whether
his illness be medical or surgical. Each type of general ill
ness, then, will be evaluated to determine the optimum course
of treatment, with the following alternatives available:
1. intensive care— hospital;
2. acute care— clinic infirmary and/or hospital; and
3. extended care— home and/or convalescent hospital.
Finally, all information concerning the current status of
the patient and any new information about him, regardless of the
type of care he is receiving, will be transmitted back to the
data processing center. Such a system will ensure that the cen
ter remains viable and accurate at all times.
D. Membership Management
AHCP will maintain and provide the Department of Health
Care Services a list of all those covered persons enrolled in
149
the Prepaid Health Plan on a monthly basis, including those who
are new to the medical groups and those who are continuing
patients. An identification card will be issued to each covered
on a monthly basis; it will:
1. be distinct from the current MediCal card;
2. indicate that preventative and routine care will be
covered only when supplied by providers participating
in the Consolidated Medical Group;
3. indicate that only emergency care and first-aid will be
covered, unless proper documentation is available at AHCP
to indicate coverage for that particular month;
4. Provide a toll-free telephone number which will be
printed on the card for the purpose of authorizing any
non-participating provider to offer emergency care; and
5. identify the bearer by name, address, date of birth,
social security number. State MediCal number, federal
Medicare number, and the period for which the card is
valid.
Provider Ratios
Because of its flexibility, the Consolidated Medical Group will be
able to maintain the following ratios:
Physician/Patient 1:1300
Physician/Staff 1:10
Hospital Bed/Client 1:500
Physician Ratio
AHCP operates in the city that enjoys the best physician/patient
150
ratio in the nation. This provides the AHCP with a readily accessible
pool from which to recruit staff as the need arises. At no time will
a client of AHCP suffer because of a paucity of professional providers.
Physician/Staff Ratio
The Medical Director of each group is convinced that new methodo
logies for delivering health care services must be developed and con
stantly updated. In addition, these directors believe that an effec
tive outreach program is the most innovative method of serving cate
gorical aid recipients as well as society-at-large. Other Prepaid
Health Plans are learning this after the fact. We intend to avoid
such a disastrous setback by having this facet of health care service
at the outset. The outreach staff is a complementary arm to the al
ready existing office support staff.
Client/Hospital Bed Ratio j
We will maintain a level well within acceptable limits. AHCP pro--
viders will be admitting to four large general hospitals, St. Luke's 1
Mt. Zion, St. Francis, and Franklin. Also, we are augmenting this !
with a home health care staff, as well as extended care facilities. \
The hospitals in the City and County of San Francisco are presently
operating at an occupancy rate of slightly below 70%. AHCP forecasts
that ample beds will be available for our clients.
151
VII. ASSETS AND LIABILITIES
AHCP is presently in the process of meeting the Rnow-Mills
financial requirements as a carrier. When completed, AHCP will have
assets of $10,000 and no liabilities, as we are a newly-formed organi
zation.
The Board of Directors of AHCP has experienced great difficulty
in acquiring a letter of credit or bonding at a reasonable rate be
cause of our new status. Therefore, AHCP is applying to the Depart
ment of Health Care Services (DHCS) for a post-payment mechanism. It
is possible for the AHCP to begin operations in this manner, because
original PHP start-up costs have been absorbed by the Hunters Point-
Bayview Community Health Services. It is anticipated that, within
six months of beginning operation, the plan will have sufficient funds
I
and experience to cover any bonding liabilities as required by the !
!
State of California. '
152
VIII. PROJECTED CASH FLOW
The proposed enrollment schedule will generate the cash flow de
picted on the following page. For the initial year, the total income
(eleven million dollars) was computed through the use of an average,
forty-two dollar monthly premium. During the second year of operation,
a maximum enrollment of 40,000 per month will be maintained. This will
result in the twenty million dollar annual income proposed in Section
V, Premium and Budget Explanations.
IX. ROSTER OF PERSONNEL
The key personnel positions of the American Health Plan will be
filled by the following:
Administrator :
Fiscal Officer:
Medical Directors:
Mr. Joseph L. Pierce
Deputy Director
Hunters Point-Bayview Community Health
Service
5815 Third Street, San Francisco, CA 94124
Mr. Harry Yee, Director of Finance
Hunters Point-Bayview Community Health
Service
5815 Third Street, San Francisco, CA 94124
Dr. Frank M. Close
728-20th Street, San Francisco, CA 94107
Dr. Lawrence Neblett
6301-3rd Street, San Francisco, CA 94124
153
Medical Directors: Dr. Anthony Constantini
(cont.) Castro & Duboce Avenues, San Francisco,
CA 94114
Dr. Donald Lastreto
141 Leland Avenue, San Francisco, CA 94134
Resumes for each person are contained in Appendix C.
154
PROJECTED CASH FLCW*
(12 Months)
1 2 3 4 5 6 7 8 ■ >9 , 10 11 12 ■ Total
INCCHE
MediCal (Dollars) 155,400 294,000 432,600 571.200 709,800 848,400 987,000 1,125,600■ 1.264.200 1,402,300 1.541,400 1.680.000 .11,012,400
MediCal (Patients) 3,700 7,000 10,300 13,600 16,900 20,200 23,500 ■ 26,800 30,100 33,400 36,700 40,000 40.COO
EXPENDITURES
Administration 15,540 29,400 43,260 57,120 70,980 84,340 98,700 112,560 ■ 126,420 140,280 154,140 168,000 1,101,240
Piiy s Ic ians 46, 620 88,200 129,780 171.360 212,940 254,520 296,100 337.680 339,260 420,840 462,420 504,000 3,303,720
Pharmacy 6,216 11,760 17,304 22,848 28,392 33,936 39.480 45,024 .30,568 56,112 61,656 67,200 440,4 96
Lab/X-Ray 3. 108 3,830 8.652 11,424 14.196 16,968 19,740 22;512 _ â5,284 28,05 6 30.828 33,600 220,243
Hospital 35,742 67,620 99.498 131,376 163,254 195,132 227.010 253,888 290.766 322.644 354,522 336.400 2.532,852
Dental 9,324 17,640 25,956 34,272 42.588 50,904 59,220 67,536 75.852 84.168 92.784 100.800 660,744
Referral
(Consultants)
7,770 14,700 21.630 28,560 35,490 42,420 49.350 56,280 63.'2 10 70.140 70,070 84,000 550,620
Equipment & Supplies 1,554 2.940 4,326 5,712 7,098 8,484 9,870 11,256 12,642 14,02 8 15,414 16,800 .110,124
Other** 26,418 49,980 73,542 97,104 120,666 144.228 167,790 191.352 214,914 238,476 262.038 235,600 1.872,108
TOTAL 152.292 288,120 42 3.948 559,776 695,604 831,432 967,260 1.103,088 l;2'38,916 1 ,374,744 1.510,572 1 .646.400 10.792,152
RESERVE . 3,108 5,830 8,652 11,424 14,196 16,963 .19,740 22.512 25.284 - 28 ,056 30,823 33.600 220,248
*Ba3ed on $42,00 per month average capitation premium.
■^♦Includes out-of-area coverage, reinsurance, innovative programs,
care « and transportation.
extended care facilities, catastrophic illness, hospital out-patient
L55I
X. EVALUATION SYSTEMS
Quality of Care, Consumer Evaluation, Utilization Review
Since the assessment of a program's operation is subject to the
usual sorts of error and bias, the viability of the data can be im
proved by examining the system from a variety of perspectives that are
not subject to the same bias and error. Therefore, assessment of Plan
will be conducted primarily from three points of view: (1) a pro
fessional approach embodied in a peer review system; (2) a client
/
approach operationalized in a Consumer's Council; and, (3) an admini- |
strative review embodied in a utilization review procedure. Each of |
these approaches will be discussed in further detail below: j
(1) Peer Review— a peer review panel of physicians, dentists, ‘
!
and Other providers will be formed by the Professional j
Activities Committee of the Consolidated Medical Group. The j
t
peer review panel will meet at regular intervals to conduct [
reviews of patient cases and their treatment, professional
activity monitoring, and to institute programs of continuing
education for the providers.
(2) Consumer Evaluation— a Consumers Council will be sponsored
by the Plan and the representatives elected at-large will
advise the Board of Directors of any recommendations from
J36.
the Plan members. It will be the purpose of this council to
hire a staff person who will act as ombudsman for the clients
of the Plan.
(3) Utilization Review Committee— a periodic review of utilize-,
tion data, including information from the outreach components
will be conducted by both a representative sample of provi
ders and the key administrative personnel of the central
staff which will further the efficient and economical use of
the Plan's facilities and services. The Committee will
ensure that all patient service delivered is necessary and
could not be provided more effectively in the home, office,
hospital, out-patient department or other more appropriate
and available facilities. The Utilization Review Committee
will function as a fact-finding and educational instrument
of the provider and administrative staff. It will operate
to strengthen the responsibility and authority of the pro
vider staff and administrative structure by making practical
recommendations to the appropriate body for consideration
and action. It will devote particular attention to the
following areas which generally account for ineffective
utilization :
a. Unnecessary hospital admissions
b. Excessive length of in-patient stay
c. Delay in use or over-use of X-Ray, laboratory, and
other diagnostic and therapeutic services
157
d. Delay in consultation and referral
e. Inappropriate use of outreach services
f. Monitoring of the preventative medicine programs
g. Cost effectiveness and efficiency of medical proce
dures
Information for the use of these review committees will be devel
oped from a variety of sources. These sources will include the patient
records themselves, special questionnaires that deal with client satis
faction, use of the ombudsman's reports, and from the Plan's actuarial
data base. The data base will be built up in abstract form by Shefco
Systems, Inc., of Menlo Park, California. Shefco has satisfactorily
handled the data processing requirements of Community Health Service.
They will capture information about the patients' treatments in RVS
codes, the value of the treatment in fee-for-service dollars using
the San Francisco Conversion Factor. Additional fiscal information
will be drawn, including utilization data of all services, drugs, and
facilities.
By evaluating the data obtained from these sources, the Board of
Directors and administrative staff will have adequate information to
make the Plan responsive to the needs of the clients, professional,
and administrative staff.
158
EVALUATION SYSTEM SPIN-OFFS
Cost Information
Membership
Information
Health Services
Information
Consumer
Evaluation
Peer
Review
Research and
D^elopment
Utilization
Review
Long and Short Range
Planning
Enrollment
Information
The above diagraphically represents the spin-offs anticipated from the
Evaluation System.
159
EXHIBITS
160
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161]
COPY
ARTICLES OF INCORPORATION
OF
THE AMERICAN HEALTH CARE. PLAN
ARTICLE I
The name of this corporation is THE AMERICAN HEALTH CARE
PLAN.
ARTICLE II
A. The purpose for which this corporation is formed, the speci
fic and primary purpose for which it is formed being set forth in sub-
paragraph 1 of this paragraph'^A of Article II, are as follows:
1. To establish and maintain non-profit medical, hospital and
other health care service plans so as to spread the cost of illness
and disability and prevention thereof, over a large group of people;
and in this connection to enter into contracts and agreements with
physicians, hospitals, clinics, government entities and other groups
and organizations engaged in and relating to health care for providing
health care services; and to build, construct, establish and maintain
hospitals and clinics, and employ the services of physicians, surgeons
and other health care attendants and administrative personnel.
2: To promote, encourage, aid, assist or engage in, financially
or otherwise, the advancement and improvement of, and the public in
terest in, health care services for the public at reasonable cost, and
in this connection to cooperate with, or become a member of, or pro-
162
vide funds for, any organization or institution, whether incorporated
or not, engaged primarily in scientific medical research, or in the
education, training and instruction of suitable persons in the techni
que of treating, attending upon or administering to sick, afflicted,
infirm, aged or injured persons.
3. To solicit, collect, receive, acquire, hold and invest money
and property, both real and personal, received by gift, contribution,
grant, bequest, devise, or otherwise; to sell and convert property,
both real and personal, into cash; and to use the funds of this corpo
ration and the proceeds, income, rents, issues and profits derived
from any property of this corporation for any of thé purposes for
which this corporation is formed.
4. To purchase or otherwise acquire, own, hold, sell, convey,
lease, or otherwise dispose of, and mortgage, or otherwise hypothecate
or encumber, all kinds of property, real and personal, and while the
owner or holder thereof, to exercise all rights, powers and privileges
of ownership.
5. To borrow money, incur indebtedness, and to secure the re
payment of the same by mortgage, pledge, deed of trust, or otherwise.
6. Generally to do all things incidental or appropriate to the
achievement of any of the foregoing purposes, and to exercise all of
the powers and privileges which are given to any nonprofit corpora
tion under the General Nonprofit Corporation Law of the State of
California.
B. Notwithstanding any of the above statements of purposes and
163.
powers, this corporation shall not have the power to, and shall not,
participate in, or intervene in Cinelading the publishing or distri
buting of statements), any political campaign on behalf of, or in
opposition to, any candidate for public office, nor shall it engage
in activities which in themselves are not in furtherance of social
welfare, religious, charitable, scientific, literary or educational
purposes, or for the prevention of cruelty to children or animals, and
nothing contained in the foregoing statement shall be construed to
authorize this corporation to aid any organization other than those
organizations qualified for exemption from Federal income tax under
the Internal Revenue Code of 1954, as now in effect or as subsequently
amended, which are organized and operated exclusively for social wel
fare, religious, charitable, scientific, literary, or educational
purposes, or for the prevention of cruelty to children or animals, no
part of the net earnings of which inures to the benefit of any private
shareholder or individual, and which do not participate in, or inter
vene in (including the publishing or distributing of statements), any
political campaign on behalf of or in opposition to, any candidate for
public office.
ARTICLE 111
The number, qualifications and classes of members, the pro
perty, voting and other rights and privileges of each class of mem
bership, and the liability of each and all classes as to dues or
assessments and method of collection thereof shall be set forth in the
By-laws of this corporation.
164!
ARTICLE IV
This corporation is organized pursuant to the General
Nonprofit Corporation Law of the State of California. This corpora
tion is not organized, nor shall it be operated, for pecuniary gain or
profit, and it does not contemplate the distribution of gain, profits
or dividends to the members thereof or to any private shareholder or
individual. The property, assets, profits and net income of this
corporation are irrevocably dedicated to social welfare, charitable,
scientific, literary, educational and religious pruposes, and no part
of the profit or net income of this corporation shall ever directly |
inure to the benefit of any director, officer or member thereof, or to !
the benefit of any private shareholder or individual, except that the I
corporation shall be authorized and empowered to pay reasonable com
pensation for services rendered and to make payments and distribution
I
in furtherance of the purposes set forth in Article 11 hereof. |
ARTICLE V j
In the event of the liquidation or dissolution of this cor- |
poration, after paying or adequately providing for the debts and obli-j
!
gâtions of the corporation, none of its assets shall inure to any I
I
individual, but shall be distributed to another organization or organic
zations, formed for and operating for purposes similar to the purposes
for which this corporation is formed, and which have qualified for
exemption under Internal Revenue Code Section 501(c)(3) or 501(c)(4)
of the Internal Revenue and Taxation Code Section 23701d or 23701f or
such other legislation of similar import as shall be in effect at the
165
time of such, dissolution. If this corporation holds any assets in
trust, such assets shall be disposed of in accordance with a Decree of
the Superior Court of the County in which the principal office of this
corporation is located, upon petition therefor by the Attorney General
or any person concerned in liquidation proceedings in which the Attor
ney General is a party.
ARTICLE IV
The county in the State of California where the principal
office for the transaction of the business of this corporation is to
be located is San Francisco.
ARTICLE VII
The powers of this corporation shall be exercised, its
properties controlled, and its affairs conducted by a Board of Direc
tors. The number of directors of this corporation shall be four (4),
and authority is hereby granted to change the number of directors by
a By-law duly adopted by the members of this corporation. The names
and addresses of the persons who are appointed to act in the capacity
of directors from the period from the date of the incorporation until
the election and qualification of their successors are as follows:
A. V. Constantini, M.D
Arthur H. Coleman, M.D
Don Lastreto, M.D.
Robert L. Morris, M.D
45 Castro Street
San Francisco 94117_________
6301 Third Street
San Francisco 94124________
141 Leland Avenue
Sari Francisco 94134_________
560 Battery
San Fraricisco 94111 ________
166
IN WITNESS WHEREOF, for the purpose of forming this non
profit corporation under the laws of the State of California, we, the
undersigned, constituting the incorporators of this corporation and
including all of the persons named herein as the first directors,
have executed these Articles of Incorporation this day of October,
1972.
167
STATE OF CALIFORNIA )
)SS.
CITY AND COUNTY OF SAN FRANCISCO)
On this jday of October, 1972, before me.
, a Notary Public in and for said County and State,
personally appeared Dr. A. V. Constantini, Dr. Arthur H. Coleman,
Dr. Don Lastreto, and Dr. Robert L. Morris, known to me to be the
persons whose names are subscribed to the foregoing Articles of Incor
poration as incorporators and who are also named therein as Directors
and each acknowledged to me that they executed the same.
Notary Public
State of California
My Commission Expires:
168
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COPY
EXEMPTION APPLICATION (con’t)
7(d) Proposal is being prepared to be submitted to California’s
Department of Health Services contracting for state pre-paid categori
cal aid recepients for medical services. All medical providers sub
contracting with the American Service Health Plan will be paid on a
pre-capitation basis. The aforementioned will also apply whenever
funds are available for Health Maintenance Organizations under Health,
Education & Welfare.
15. As outlined above, employees will be engaged to handle all
administrative and nonmedical of health plans (pre-paid) and paid
accordingly, for said services. No income or expenses at present.
No advertising.
9a. Attached.
9b. Attached
9c. None
9d. None
9e. None at present
9f. To enter and maintain non-profit compreshensive health care plans
for a large group of people primarily in the south-east region of San
Francisco, California.
9g. None
9h. Our proposed activities are as set forth above in 8(d).
9i. None.
9j. Only administrative and non-medical costs whenever funds are
available for the purposes as set forth in 8(d) and 15 above.
17.1
9k. Nona.
91. As in the Articles of Incorporation attached hereto.
Dated: October 16, 1972 ■ ' ' ' ■ ' • ' ■ ' ■ ' - ■ ' ' ' ' ' ■ _____Director
Arthur H, Coleman, MD.
174
EXHIBIT C (Copy)
State Qt California ; ■ : ^ : ■ ' : : :
FRANCHISE TAX BOARD October 17, 1972
Sacramento, California 95857
In reply refer to:
EO:JCS:r
The American Health Care Plan
5815 Third St.
San Francisco, CA 94124 Purpose: Social Welfare
Code Section: 23701f
Form of Organization: Corporation
Accounting Period Ending : December 31
Organization Number :
Gentlemen:
Based on your stated purposes and the understanding that you present
operations will continue or will be as proposed In you application,
you are exempt from state franchise or income tax under the provisions
of the Revenue and Taxation Code section indicated above. Any changes
in operation, character or purposes must be reported to this office
immediately for consideration of their effect upon your exempt status.
You also must report any change in name or address.
You are required to file Form 199 (Exempt Organization Annual Informa
tion Return) or Form 199B (Exempt Organization Annual Information
Statement) on or before the 15th day of the 5th month (4-1/2 months)
after the close of your accounting period. See annual instructions
with forms for requirements.
You are not required to file state franchise or income tax returns
unless you have income subject to the unrelated business income tax
under Section 23731 of the Code. In this event, you are required to
file Form 109 (Exempt Organization Business Income Tax Return) by the
15th day of the 3rd month (2-1/2 months) after the close of your
annual accounting period.
If the organization is incorporating or is a foreign corporation
qualifying to do business in California, this approval will expire
unless incorporation or qualification is completed within 30 days.
175
Exemption, from federal income or other taxes and other state taxes
requires separate applications.
Very truly yours.
James C. Stewart
Counsel
cc: Secretary of State (Corp)
cc: Registrar of Charitable Trusts
"This exemption is issued on the
condition that a federal exemption
will be applied for and a copy of
the final determination letter is
furnished to this office."
FTB 4207 Cl-72)
176
EXHIBIT D
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E X H IB IT I
s.vIsü W ;
EXC LU S IO N S •;
S ervices c o v e re d b y W o rk m e n s C o m p e n s a tio n
S e rv ice c o n n e c te d d is a b ilitie s ,
E le c tiv e c o s m e tic surgery
S ervices p ro v id e d th ro u g h g o v e rn m e n ta l a gencies o r
in s titu tio n s .
H o s p ita liz a tio n c p m rn e n c e d p rio r to m e m b e rs h ip
A tte m p ts a t s u ic id e , s e lf-in flic te d o r s e lf-p ro c u re d
in ju ry or illness
A lc o h o lis m o r d r u g a d d ic tio n
E x ten s iv e n e u ro m u s c u la r re h a b ilita tio n
C o n d itio n s c au s ed b y a m a jo r d is a s te r o r e p id e m ic
S ervices o f a d e n tis t or o ra l surgeon
O rg a n tra n s p la n ts ' .
R en al d ialys is ■ 2-,
In te rru p tio n o f s e rv ic e d u e to la b o r d isp u te s.
A b o rtio n s , tu b a l lig a tio n & v a s e c to m y ' . :
■ P ro s th e tic & o rth o tic d e v ic e s and d u ra b le m e d ic a l
; e q u ip m e n t v'‘ ‘
L IM IT A T IO N S
C a lifo r n ia Ü C D . p a y m e n ts m u s t .b e assigned to
■ A H C P • ' ' ' - ■ - Ï
R a d ia tio n th e ra p y a n d n u c le a r m e d ic in e a re c o v e re d
to a m a x im u m o f $500p e r y ea r; • > '
C a re fo r c o n ta g io u s diseases is lim ite d to $5000
P h ysical e x a m in a tio ris lim ite d to o n e p e r y e a r;
M e d ic a l C a re services c o v e re d to a m a x im u m o f
$ 2 0 ,0 0 0 p e r illness.
A fte r hours ■ e m e rg e n c y c a re can be o b ta in e d by
c o n ta c tin g y o u r p h ys ic ia n o r by c a llin g th e 24 hour.
E m e rg e n c y S e rv ice N u rh b e r (8 2 2 -5 4 5 4 ). T h e e m e rg e n c y
n u m b e r is also lis te d on y o u r I D . c a rd , - _ <1^;
T E R M IN A T IO N O F BENEFITS . v
T h e H e a lth P lari m a y te rm in a te th e a g re e m e n t as to
a n y in d iv id u a l m e m b e r u p o n th irty (3 0 ) days n o tic e
. t o th e s u b ,c r,b e ,_ ' ve ^
Y O U C A N JOIN
BY C O N T A C T IN G
AMERICAN HEALTH CARE PLAN
5815 T h ird St.
San F rancisco, C a lif. 9 4 12 4
(415) 46 5-4 825
This is not a contract. This brochure contains a brief descrip
tion of the Plan. The exact provisions governing this Program
are contained in the master policy issued to each member.;-' t
p&oph u/luD e c M axjoût yOLu
oMol youA fijeaftft
IN D IV ID U A L COVERAGE
PLAN IV
^ A M ER IC A N HEALTH CARE PLAN
B A N O N -P R O F IT C O R P O R A T IO N
193
EXHIBIT I (Continued)
"M
A M E R IC A N HEA LTH CARE PLAN p e o p le
w h o c a re a b o u t y o u a n d y o u r h e a lth . . .N O W
O F FE R S Y O U A C H O IC E in s ele ctin g c o m p re h e n s iv e
h e a lth c a re s ec u rity fo r y o u a n d y o u r f a m ily .
A p la n th a t n o t o n ly ta k e s c a re o f y o u w h e n y o u 're
sick or in ju re d . . b u t has a g o al o f m a in ta in in g y o u r
h e a lth . J .
Y O U ARE ELIGIBLE. . . . .
if yo u liv e o r w o rk in th e a re a served by th e P la n .
Y o u m a y e n ro ll as a sing le o r fa m ily m e m b e r. Y o u r
spouse a n d u n m a rrie d c h ild re n are e lig ib le fro m b irth
to age 19. If y o u r c h ild re n a re u n m a rrie d fu ll tim e
s tu d e n ts , p r im a rily d e p e n d e n t up o n you fo r s u p p o rt,
th e y a re e lig ib le to age 23.
A ny u n m a rrie d c h ild re n in c a p a b le o f self s u p p o rt are
e lig ib le reg ardless o f age.
If e n ro llm e n t in this P lan is on a fa m ily basis, a p p lic a
tio n s m u s t be s u b m itte d fo r each e lig ib le m e m b e r o f
y o u r fa m ily . . 7 ■ '
A ll e lig ib le m e m b e rs o f y o u r fa m ily m u st m e e t th e
re q u ire m e n ts o f th e M e d ic a l R ev ie w B o a rd in o rd e r
to be a c c e p te d fo r m e m b e rs h ip .
PERSO NAL M E D IC A L CARE...........
m ean s y o u s e le c t y o u r o w n perso nal p h ys ic ia n fro m
o u r s ta ff o f p h ys ic ia n s. H e w ill g ive y o u th e in d iv i
d u a l a tte n tio n o f p riv a te c a re . . a n d as y o u r p rim a ry
p h y s ic ia n , he w ill d ire c t y o u r to ta l c a re . A te a m o f
m e d ic a l sp e c ia lis ts stands by .to assist him w h en
re q u ire d . . • ■
P e d ia tric ia n s a re a v a ila b le fo r y o u r c h ild re n an d
g y n e c o lo g is ts a re a v a ila b le fo r fe m a le P lan
m e m b e rs . ' ■ -.'.v > . ' , ’ ;-
M E D IC A L BENEFITS ARE A V A ILA B LE . . . .
o n ly th ro u g h th e p a rtic ip a tin g P lan fa c ilitie s , e x c e p t
in th e case o f an e rn érg e n cy . ’
1
■M
m j v i j m p / i B v t c L e c l
C ost to YOU
THE D O C T O R 'S OFFICE
• d iag nosis and tre a tm e n t n o charge
• la b o ra to ry a n d x -ra y n o charge
e x a m in a tio n s
• p e d ia tric ch e c ku p s fo r n o charg e
c h ild re n
• fo llo w up care n o charge
• eye e x a m in a tio n s n o charge
• a lle rg y tests and n o chargé
im m u n iz a tio n s
• h e a rin g e v a lu a tio n s n o charge
• in je ctio n s no charg e
• casts an d dressings n o charg e
• p h y s ic a l th e ra p y n o charge
IN THE H O S P ITA L
• 365 days in s e m i-p riv a te
ro o m (as o rd e red b y the
P lan P h ysician fo r a n y on e
illness o r in ju ry no charge
• services and su pp lies n o charge
• su rg ical an d m e d ic a l c are n o charge
• in ten sive care s ervice n o charge
• p riv a te ro o m and s p e c ia l
.d u ty n u rsin g, if o rd e re d by
a P lan ph ysician n o charg e
• x -ra y , la b o ra to ry tests a n d
ph ysical th e ra p y no charge
• b lo o d tran sfu sio n s , if rep la c ed
w ith in 6 0 days no cftarge
M A T E R N IT Y CARE
V . • o b s te tric a l, p re n a ta l a n d
■ Ï
’ p o st n a ta l care , h o s p ita l and
d e liv e ry services, in c lu d in g
c ae s a re a n sections
' $ 4 0 0
■ • in te rru p te d 'p re g n a n c y
. (m is c a rria g e )
' $200
■ ■ . • to b e c o v e re d , d e liv e ry m ust ta k e ;
■'7^, 5 p la c e a fte r 10 m o n th s o f c o n tin u o u s '
c o v e ra g e ' . ’ ■
'•X
A M B U L A N C E SERVICES
I
' w h e n o rd e re d by y o u r P lan
p h ys ic ia n n o charg e
C ost to you
EXTENDED CARE SERVICES
3 6 5 days less th a n th e n u m b e r o f a c u te g e n e ra l
h o s p ita l days fo r a n y o n e illness or in ju ry in sem i-
p riv a te ro o m , b o a rd and g e n e ra l nursing c a re in
P lan a p p ro v e d fa c ilitie s , if o rd e re d by y o u r P lan
P h ysician n o charg e
D O C T O R 'S H O U S E CALLS
• d o c to r's v is it if A H C P
d e e m s necessary $5 each visit
• e a c h a d d itio n a l person
seen $3
H O M E N U R S IN G CARE
. # nursing services as o rd e re d by y o u r
' . P la n p h y s ic ia n n o charge
M E N T A L H E A LTH CARE
• h o s p ita l care - up to 30 days
e a c h c a le n d a r y e a r
• o u tp a tie n t p s y c h ia tric c a re by
P la n s ta ff - u p to a m a x im u m
o f 20 visits in a c a le n d a r y e a r
no charg e
n o charg e
EM ERG ENCY BENEFIT
if y o u re q u ire e m e rg e n c y m e d ic a l c are w h ile a w a y
frorri th e a re a served by th e P lan. . . you w ill be
c o v e re d to a m a x im u m o f $ 3 0 0 0 .
.T h e A m e ric a n H e a lth C a re P lan m u st be n o tifie d
w ith in 48 hours a fte r in itia l tre a tm e n t. A rra n g e m e n ts
m a y be m a d e to tra n s fe r y o u to a H e a lth P lan
fa c ility unless y o u r .c o n d itio n c o n tra d ic ts such
■ a c tio n . ' ...- ► v ' ' . - . .. ... 7
If a m e m b e r is p a id fo r an in ju ry by a p a rty res p o n
s ib le fo r th e in ju r y ,'t h e m e m b e r w ill be c h a rg e d
p riv a te p a tie n t rates fo r h o s p ita l, a n d m e d ic a l
services up to th e a m o u n t c o lle c te d fo r such in ju ry
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REFERENCES
19.6^
REFERENCES
Books
Ginzberg, Eli. Men» Money and Medicine. New York: Columbia
University Press, 1969.
Young, Arthur. HMO Feasibility Study Guide. Prepared under contract
with Department of Health, Education and Welfare. Washington,
D. C., 1974.
Holley, Richard and Carlson, Robert. The Legal Context for the
Development of HMOs. Minneapolis, Minnesota: Health Services
Research Center of the Institute for Interdisciplinary
Studies, 1971.
Holley, Richard and Walker, Richard. Catalog of 1973 State HMO
Enabling Bills. Minneapolis, Minnesota : Interstudy, 1974.
Shadid, Michael A. A Doctor for the People. New York: The Vanguard
Press, 1939.
Wetherille, Robert and Quale, John. A Census of HMOs. Minneapolis,
Minnesota: Interstudy, 1974.
Federal Reports and Releases
Department of Health, Education and Welfare, "Report of the National
Advisory Commission on Health Manpower." Washington, D.C.:
U. S. Government Printing Office, 1967.
Finch, Robert and Egebert, Roger. "Report to the President," U. S.
News and World Report LXVIII, No. 3 (July 21, 1969) : 9.
Kennedy, Edward Senator. U. S. Congressional Record, (August 27, 1970)
116.
Ribicoff, Abraham Senator. "Health Care In America Hearings,"
United States Senate, Part I (April 14, 1970) : 2,
Federal and State Statutes
California Business and Professions Code, Sections 2510-2522.
California Health and Safety Code, Sections 1175-1182.
19j\
Keogh-Smathers Act (Taxation Self-Employed Retirement), U. S. Code
1964, Title 26, Sections 37, 62, 72, 101, 104, 105, 172, 401
et. seg.
News Reports, Releases and Other Publications
EBPR Research Reports. Chicago, Illinois: Charles D. Spenser and
Associates, Inc., January, 1974: 1.
Esselstyn, C. A Better Way to Good Health. Group Health, 1964: 5.
Fiscal Management and Legal Problems in the Development of HMOs.
Edited speeches presented at Seminar sponsored by The National
Association of Neighborhood Health Centers, Coordinated by
Group Health Association of America (December 5-8, 1971)
University of Chicago, Chicago, Illinois.
Kaiser Foundation Medical Care Program: Annual Report, 1969: 2-10.
Lawyers Conference on Health Maintenance Organizations. Presentations
at Seminar sponsored by Group Health Association of America,
Inc., (August 20-21, 1971) Chicago,Illinois.
Meany, George. The Case for National Health Insurance. AFL-CIO
Legislative Department, National Health Insurance: 1970
Fact Sheet No. 1: 1.
National Health Lawyers Association. News Letter 2:12 (December 1974)
1.
National Health Lawyers Association. News Report 3:3 (March 1975): 2.
Smits, James E. Press Release for Kaiser Foundation Health Plan
(August 27, 1970) Los Angeles, California.
198

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Asset Metadata

Creator Abernathy, James Roy, II (author)

Core Title Legal aspects in the development of health maintenance organizations

School School of Public Administration

Degree Master of Public Administration

Degree Program Public Administration

Degree Conferral Date 1976-01

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag health and environmental sciences,OAI-PMH Harvest

Format application/pdf (imt)

Language English

Contributor Digitized by ProQuest (provenance)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c39-144836

Unique identifier UC11312160

Identifier EP64874.pdf (filename),usctheses-c39-144836 (legacy record id)

Legacy Identifier EP64874.pdf

Dmrecord 144836

Document Type Thesis

Format application/pdf (imt)

Rights Abernathy, James Roy

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA