THE SOUL OF AN HMO

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Last year an N.C.Q.A. report card found that 86.7% of Health Net's members rated the plan good to excellent, slightly below the mean for the 21 large plans surveyed. On specific measures that the organization believes reflect a plan's quality, such as how often it provides mammograms, Health Net tended to rank at the mean or just below, but lagged sharply in providing prenatal care for mothers and retinal screens for diabetics--the kind of preventive care at which managed-care companies are supposed to excel. The report card also showed that Health Net spent less on medical care than most of the other plans surveyed and more on marketing, salaries and other administrative expenses. The company is known among California doctors as one of the most aggressively cost conscious in the state, a reputation that stems in part from an earlier attempt to deny a bone-marrow transplant to a subscriber named Nelene Fox, who by coincidence lived just minutes from the deMeurerses. The jury in that case awarded the Fox family $89.1 million, later negotiated down to an undisclosed sum.

Illness of that magnitude, however, was about the last thing the deMeurerses worried about. Like the vast majority of Americans at any one moment, the deMeurerses weren't sick and didn't expect to get sick. Alan signed at 27, Christy at 32; their two children were young and healthy. This was insurance, something for a rainy day. They selected a medical practice--the Rancho Canyon Medical Group in Temecula, California--from a roster of those in Health Net's network. "We just wanted some basic protection," Alan says. "We were all very healthy people."

In late August, less than two months after she had signed with Health Net, Christy discovered a lump in her left breast.

Health Net began life as an experiment that worked too well, much to the delight of Roger Greaves, its chief from 1982 until last year. The company was launched in 1979 by Blue Cross of Southern California, which dispatched Greaves, a vice president, to run the company. In his first year Health Net made $17,000; the next, $17 million. It was so prosperous that Blue Cross in 1984 tried to seize its bank accounts, forcing Greaves to file a lawsuit in which he proved the company was a free-standing satellite.

Health Net is typical of "network-model" HMOs that contract with large medical groups and networks of physicians--called Independent Practice Associations--to provide the actual medical care. New subscribers choose or are assigned to a particular medical group, and in turn choose a "primary care provider" or "gatekeeper" who controls access to other services and outside specialists. Even his or her recommendations often must be approved by the group's own utilization-review managers or by Health Net.

Health Net collects premium dollars from employers and reserves money for its own profit, salaries, bonuses, marketing and administrative costs, as well as for two special reserve pools to pay for AIDS care and all transplants, including bone-marrow transplants. Last year alone it collected over $2 billion in monthly payments from 1.2 million subscribers.