Battle lines are drawn over California deal with Kaiser Permanente

California counties, health insurance plans, community clinics, and a major national health care labor union are lining up against a controversial deal to grant HMO giant Kaiser Permanente a no-bid statewide Medicaid contract as the bill heads for its first legislative hearing Tuesday.

The deal, hammered out earlier this year in closed-door talks between Kaiser Permanente and Gov. Gavin Newsom's office and first reported by KHN, would allow KP to operate Medi-Cal plans in at least 32 counties without having to bid for the contracts. Medi-Cal's other eight commercial health plans must compete for their contracts.

Medi-Cal is California's version of Medicaid, the federal-state program that provides health coverage to low-income people.

Opponents of the KP proposal say they were blindsided by it after having spent months planning for big changes happening in Medi-Cal, which serves more than 14 million Californians. They say the deal would largely allow KP to continue picking the enrollees it wants, and they fear that would give it a healthier and less expensive patient population than other health plans.

Currently, the state allows KP to limit its Medi-Cal membership by accepting only those who have been its members in the recent past, primarily in employer-based or Affordable Care Act plans, and their immediate family members.

"A closed system that excludes vulnerable populations is inequitable," the heads of 10 county boards said in a letter to Assembly member Jim Wood (D-Santa Rosa), who chairs the Assembly Health Committee, which will consider the proposal. They questioned whether Kaiser Permanente would be assigned patients with "more complex physical, behavioral, and socio-economic needs versus giving the existing safety net system and local plans, who do not exclude populations, a disproportionate share of complex and costly patients."

Kaiser Permanente said in an emailed statement that, under the terms of the deal, it would take more Medi-Cal patients with high needs and would collaborate with counties and other health plans on patient care.

Michelle Baass, director of the Department of Health Care Services, which runs Medi-Cal, told KHN in early February that the deal would "ensure that more low-income patients have access to Kaiser's high quality services" and "lead to better health care for more Medi-Cal enrollees."

The deal must win state legislative and federal approval. Opposition to the bill that would codify it, AB 2724, is being spearheaded by Local Health Plans of California, which represents the 16 local, publicly governed Medi-Cal plans that cover most of the 12 million Medi-Cal beneficiaries in managed care. The proposal would make many of them direct competitors of Kaiser Permanente, and they could lose hundreds of thousands of enrollees and millions of dollars in Medi-Cal revenue.

Among them are some of the state's largest Medi-Cal health plans, including L.A. Care, by far the biggest, with 2.4 million members; and the Inland Empire Health Plan, with about 1.5 million members in San Bernardino and Riverside counties.

In addition, the boards of supervisors of 16 counties had registered their opposition as of April 15, as had the California State Association of Counties, at least two community clinic groups, and the National Union of Healthcare Workers, which represents thousands of KP clinicians.

The other commercial Medi-Cal plans are lying low as they bid for the state's Medi-Cal business. The two largest, Health Net and Anthem Blue Cross, declined to comment.

The public health plans and many of the counties said the proposal was sprung on them after they spent months preparing for major Medi-Cal shifts — for example, a more demanding contract with the state, scheduled to take effect in 2024, and an ambitious $6 billion project to provide enrollees with nontraditional services, such as food assistance, home modifications, and help with housing.

Some medical providers are also critical of the proposal.

Leslie Conner, CEO of Santa Cruz Community Health, which operates three clinics in Santa Cruz County, said her group is building a $19 million primary care clinic based on estimates — available at the time the plan was drawn up — of the number of uninsured residents and Medi-Cal members who don't have a doctor.

"It's just not helpful to have to recalculate when Kaiser comes in taking more primary care lives," Conner said. "We didn't get a chance to talk through that with the state or with Kaiser."

Conner said that KP, which currently doesn't have Medi-Cal members in Santa Cruz County, has generously collaborated with Santa Cruz Community Health in the past and that she expects that to continue.

"I'm more disturbed by the state doing this negotiation with a private company," she said. "That's just wrong."

Kaiser Permanente said in its emailed statement that the Department of Health Care Services approached it with the proposal and that it agreed to collaborate "because we recognize, fundamentally, the benefits to the enrollees." The proposal, it said, "meets the fundamental objectives the state has for Medi-Cal: to improve quality, reduce complexity and improve patient outcomes."

KP, which covers 9.4 million Californians, the vast majority in its commercial plans, has 912,000 Medi-Cal enrollees. Most of them are through subcontracts with other Medi-Cal health plans in 17 counties, and the rest are in the five counties where KP already contracts directly with the state.

Kaiser Permanente calls its current enrollment-limiting arrangement continuity of care, but critics say it leaves other health plans at a disadvantage — and they worry about it becoming enshrined in state law. In addition to leaving them with a disproportionate share of sicker, costlier patients, they say, it could saddle them with lower quality ratings from the state.

But KP said its mix of sick and healthy Medi-Cal patients is "comparable to other Medi-Cal managed care plans." It added that the proposal calls on it to increase the number of its Medi-Cal enrollees, including those from "more vulnerable populations."

Under the proposal, KP has committed to increasing its Medi-Cal membership 25% over the five years of the contract. It would accomplish this partly by taking previous KP enrollees in counties where it currently doesn't have Medi-Cal members, according to an 11-page document released in March by the Department of Health Care Services. KP would also take, for the first time, a limited number of the enrollees who don't choose a plan when they sign up for Medi-Cal. And it would enroll children in foster care and the typically complex, expensive patients who are eligible for both Medi-Cal and Medicare.

As of April 15, many details were not yet in the bill language, which will be fleshed out and debated over the next several months.

For instance, the bill makes no mention of the 25% enrollment growth target. And although the Department of Health Care Services document says KP's direct contract would cover 32 counties, the bill leaves that number open.

"The state clearly has to disclose a lot more information and detail about how this will work," said Edwin Park, a California-based research professor with Georgetown University's Center for Children and Families.

Felicia Matlosz, a spokesperson for the bill's author, Assembly member Joaquin Arambula (D-Fresno), said his office is "working to reconcile the language" with the state's proposal.

Arguably, the health plans that would be most affected by this proposal are those that are the sole Medi-Cal plan in their counties, known as county organized health systems, or COHS.

They were created by the boards of their counties and operate in partnership with the counties, their safety-net health facilities, and private-sector medical providers. In the 40 years since they were established in California, they have been the only state-contracted Medi-Cal plan in their counties.

"It's the end of the model," said Stephanie Sonnenshine, CEO of the Central California Alliance for Health, a county organized health system for Santa Cruz, Monterey, and Merced counties. "It's a significant policy change that hasn't been vetted as a policy change."

KHN correspondent Rachel Bluth contributed to this report.

This story was produced by KHN, which publishes California Healthline, an editorially independent service of the California Health Care Foundation.