Senator Feinstein Introduces Bill to Cap HMO Spending on Administrative Costs
July 28, 2000

Washington, DC – U.S. Senator Dianne Feinstein (D-Calif.) introduced legislation last night that would require managed care plans to limit their spending on administrative costs to 15 percent of their premium revenues.

“HMOs currently spend as much as 38 percent of their revenues on administrative costs,” Senator Feinstein said. “In some cases, this spending has gone for luxuries such as sales trips, parties and sporting events.

“When our hard-earned premium dollars are frittered away on purchases like these, we have to ask whether HMOs are really providing the best care possible,” Feinstein continued. “This bill limits spending on administrative costs to ensure that money is spent where it is needed--on health care benefits or services, and not on overhead.”

A January 18, 2000 study conducted by the Department of Health and Human Services’ Inspector General found that in 1999, the average amount allocated for administration by medicare managed care plans ranged from a high of 32 percent to a low of three percent. The study also found that if a 15 percent ceiling had been in place in 1998 and additional $1 billion could have passed on to Medicare beneficiaries in the form additional benefits or reductions in deductibles and copayments.

The report cited multiple examples of lavish spending and waste including:

• $249,283 for food, gifts and alcoholic beverages for meetings by one plan;
• $190,417 for a sales award meeting in Puerto Rico for one plan;
• $157,688 for a party by one plan;
• $25,057 for a luxury box at a sports arena by one plan;
• $106,490 for sporting events and/or theater tickets at four plans;
• $69,700 for holiday parties at three plans;
• $37,303 for wine gift baskets, flowers, gifts and gift certificates at one plan.

A similar study of private HMOs found that spending on administrative costs by private, for-profit HMOs in California ranged from 3.6 percent to 38 percent.
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Senator Feinstein, HMO Adminstrative Costs, Page 2

California, the state which pioneered managed care, already limits commercial HMO plans’ administrative expenses to 15 percent. An estimated 88 percent of all insured Californians are covered by some form of managed care. Of the 3.7 million Californians who are covered by Medicare, 40 percent (1.4 million) are in managed care–the highest rate in the nation. Furthermore, 50 percent (2.5 million people ) of Medicaid beneficiaries are covered by managed care.