The state Assembly on Wednesday passed the measure, which now goes to the Senate for review.
The proposal would also give patients the right to have an independent physician review decisions by health plans that put off or refuse treatment recommended by patients' physicians.
Consumers would be allowed to sue only after exhausting all of their rights through the independent review process, and could only seek damages if they were denied "medically necessary" treatment, rather than a broader "medically appropriate" standard sought by some consumer advocates.
"We intend for the independent review process to resolve the vast majority of disputes with only a very, very narrow doorway for litigation," said Democratic Assemblywoman Sheila Kuehl, a co-sponsor of the bill.
Kuehl said the compromise allows suits by patients to recover the cost of needed care they received from other doctors after being wrongfully turned down by their HMO.
While the proposal allows suits against HMOs for delaying or denying treatment, it would not allow medical malpractice suits against HMOs for an attending physician's actions. That would remain a legal issue between the patient and the physician or physician group providing care.
Adding more fuel to the fire of outraged patients, a new study says most elderly Americans living in rural counties don't have the option of joining an HMO because none of the health plans in their area participate in Medicare.
About one-fourth of Medicare's 39 million beneficiaries, or 9.2 million, live in a rural county, according to the study of Medicare and Census Bureau figures released by Families USA, a liberal group that advocates universal health care.
Among them, 6.7 million, or 73 percent, do not have access in their home county to private health plans, known as HMOs, that are paid a flat fee by the government to provide all necessary care for Medicare-covered enrollees.
The study found 13 states where no rural counties currently have a Medicare HMO: Alaska, Idaho, Iowa, Kansas, Kentucky, Mississippi, Nebraska, North Dakota, South Carolina, South Dakota, Utah, Vermont and Wyoming.
Medicare beneficiaries who do not have access to an HMO still get care through the nation's health insurance program for the elderly and disabled. The government simply pays each of their medical bills directly.
However, HMOs are attractive to senior citizens because many offer extra benefits, such as prescription drugs, which are not usually covered by Medicare.
Authors of the report said the lack of participation by HMOs in rural areas raises questions about the viability of lawmakers' Medicare reform proposals that would give private healt plans a bigger role in caring for the nation's elderly.
The report said that sparse populations and the scarcity of health care providers in rural areas make it difficult for HMOs to create the economies of scale that allow them to profit in other parts of the country.
Susan Pisano, spokeswoman for the American Association of Health Plans, said HMOs have had trouble signing up the few doctors and hospitals in rural areas because these health care providers often can do as well or better financially by submitting bills to Medicare on their own.
"It's a problem that we think is likely to get worse," she said.
The Families USA report predicted that HMO closings announced for 2000 will mean an even greater portion of rural Medicare beneficiaries -- 77 percent -- will have no HMO available to them next year.