State Regulatory Experience with Provider-Sponsored Organizations

06/27/1997

STATE REGULATORY EXPERIENCE WITH PROVIDER-SPONSORED ORGANIZATIONS

FINAL REPORT

Prepared under HHS Contract No. 100-93-0012 for:

The US Department of Health and Human Services

Office of the Assistant Secretary for Planning and Evaluation

Project Officer: Lisa Rovin

Prepared by:

The Lewin Group, Inc.

June 27, 1997


Table of Contents

EXECUTIVE SUMMARY

INTRODUCTION

Purpose of the Project

Primary Issues Surrounding PSO Regulation

Licensure of PSOs Assuming Direct Risk

Regulation of PSOs Assuming Downstream Risk and Other Management Functions

State Regulatory Jurisdiction over PSOs Assuming Direct Risk from Employer Health Plans

Organization of the Report

METHODOLOGY

Literature Review

In-Depth Examination of Nine States

State Selection

Research Protocol

Presentation of Findings

SUMMARY OF FINDINGS

State Laws and Policy Towards PSOs

State Standards for PSOs Assuming Direct Risk

Special Licensing Standards

Differences in Standards for PSOs and HMOs

Standards Governing Downstream Risk

State Positions on Regulatory Authority Over Direct Contracting with Employers

Perceptions of Market Participants and State Regulators

Why PSOs Are an Issue for States

Factors Raising PSO Issues

Positions of Regulators and Others on PSO Risk Assumption

Impact of State PSO Activities and Positions on the Marketplace

Future Market Developments and How State Regulation Needs to Change in Response

Issues Raised by Medicare Contracting with PSOs

CONCLUSION

Review

Lessons for Federal Policymakers

ATTACHMENT A: INTERVIEW PROTOCOL

ATTACHMENT B: LIST OF ORGANIZATIONS INTERVIEWED

ATTACHMENT C: STATE PROFILES

California

Colorado

Illinois

Iowa

Minnesota

Ohio

Pennsylvania

Texas

Washington


EXECUTIVE SUMMARY

This report describes the experience of selected state governments in regulating provider-owned health care delivery systems that accept insurance risk for the provision or arrangement of health care services. We refer to these entities as Provider-Sponsored Organizations (PSOs). The primary sources of the information used for this report were interviews with regulators, hospital and physician association representatives, and managed care industry representatives in nine selected states. The states included in the study are: California, Colorado, Illinois, Iowa, Minnesota, Ohio, Pennsylvania, Texas and Washington.

MAJOR FINDINGS

States are just beginning to consider questions involved in provider assumption of insurance risk in evolving compensation systems (Exhibit A). Many states currently lack legislation specific to this issue, with official policy being dictated by regulatory addenda or the issuance of bulletins or letters from state regulators. Furthermore, in those states where relevant regulation or legislation exists, the policies reflected in these measures continue to be in flux and debated by regulators and market participants.

Direct Contracting PSOs

While nearly all the states investigated are making some attempt to regulate the activities of PSOs contracting directly with purchasers of health care (e.g., employers), the mechanism used to regulate these relationships vary. The two main models for regulating direct risk contracting PSOs were uniform licensing, where state officials sought to regulate the assumption of risk in the same way regardless of whether the entity agreeing to assume risk was provider owned or not, and the creation of a separate licensing category for risk-assuming PSOs. Regulators in the states using the former model claimed that their job was to regulate the activity of risk assumption and, in some cases, simply applied regulation pertaining to non-provider managed care entities to all organizations seeking to provide or arrange for health care delivery. Other states are considering adopting legislation which would explicitly grant the state authority to regulate the transactions involving insurance risk for health care, provider owned or not. Among the states where insurance risk-bearing PSOs are licensed separately from other managed care organizations, differences in the standards required for PSOs varied. There was little consistency among states with separate licensing categories as to the rationale for separate categories.


Exhibit A: PSO Regulatory Features of the Nine States Reviewed


Downstream Risk Assumption

The states also vary substantially in their regulation of PSOs that assume risk from self-funded, ERISA exempt employer plans. Most states considered a PSO that enters into a risk-sharing arrangement with a self-funded plan is engaging in the business of insurance, and therefore, the relationship is subject to regulation by the state, even with ERISA. Other states consider such an arrangement off limits as long as the risk is 'ultimately' borne by the self-funded employer. Similarly, states differ widely in their position on regulating PSOs accepting risk downstream from licensed insurance carriers or MCOs, with some states leaving these relationships unregulated, others requiring special licensing for PSOs assuming downstream risk under certain arrangements (e.g., global capitation), and yet others impose lengthy lists of requirements governing risk transfer agreements between traditional insurers/MCOs and PSOs.

Other Findings

Common issues described by market participants and regulators in each of the nine study states include:

  • Regulatory authority within the state: In many states the regulatory prerogative with regard to PSOs, and other managed care organizations, was a subject of contention. In several states, regulatory authority had recently been passed between the Departments of Insurance and Health. In others, both departments were concurrently involved in regulating PSOs and MCOs. Many interviewees suggested a need for unification of regulatory authority. One common theme in this regard was a general lack of confidence in the ability of Health Departments to regulate issues of financial solvency.
  • Limited risk assumption: Many states apply standards regulating risk-bearing PSOs only to providers that accept risk for services they arrange, rather than provide themselves. In some states, regulatory standards governing risk assumption apply only when PSOs accept global capitation.
  • Medicare/PSO risk contracts: Questions regarding Medicare risk contracting elicited interesting responses from various market participants. Representatives from licensed managed care organizations voiced opposition to allowing PSOs to risk contract with Medicare without being held to the same regulatory requirements as other Medicare risk contracting entities. Some PSO interviewees indicated mixed feelings about the possibility of directly contracting with Medicare under separate regulatory jurisdiction. Many PSOs serve Medicare risk enrollees downstream from licensed managed care organizations, and are therefore wary of legislation that could negatively affect current Medicare risk contractors.

IMPLICATIONS OF THE FINDINGS

Because state policy towards PSOs is still in the early stages of development, the lessons to be drawn by federal policymakers are limited. There is wide variation in state approaches toward PSOs, but the laws and policies are still new and there is not sufficient experience with them to understand their impacts. Despite this limitation, we can draw some implications for federal policymakers considering policies affecting health insurance markets and health plan regulation:

  • Many interviewees indicated a need for consumer protections when PSOs assume substantial direct risk. States that have developed separate licensing for PSOs have applied HMO-type standards, showing concern in the areas of financial solvency, network adequacy and access, quality assurance, and utilization review. States in some cases have applied lower capital standards for PSOs.
  • Many interviewees stressed the need for more emphasis on the quality of care provided by managed care plans and for more information to be made available to regulators and consumers about all types of managed care plans. The role that accrediting organizations (NCQA, JAHCO, URAC) and national data efforts (HEDIS) can play in these areas was acknowledged in a number of interviews.
  • The uncertainty about how ERISA might affect a state's jurisdiction over PSOs directly contracting with employer health plans is affecting the development of policy towards PSOs at the state level. Until more clarity is provided, either by Congress or through the courts, it will be difficult for states and market participants to understand the parameters of potential state regulatory activities relating to PSOs.
  • Regulators and market participants in several states raised concerns about differences in consumer protection standards applied to different types of managed care plans. In particular, they have concerns that PPOs offered by indemnity insurance carriers are not subject to the same regulation for quality, utilization review, and network adequacy as HMOs (and PSOs in states with licensing laws). It is possible that NAIC efforts to develop more uniform laws for managed care plans may reduce this variation over time, but federal policymakers should consider this variation when developing policy that relies on, or otherwise affects, state regulation of managed care plans.

I. INTRODUCTION

A. Purpose of the Project

Under a contract from the Assistant Secretary for Planning and Evaluation (ASPE) at the Department of Health and Human Services, the Lewin Group has undertaken a project to explore the approaches taken by states to regulate provider-sponsored health care delivery systems related to their assumption of financial risk. We examine the regulatory regimes in selected states and the perceptions of state regulators and market participants about the need for new standards or approaches. We also explore the views of state regulators and market participants about the regulatory issues associated with Medicare entering into direct risk contracts with integrated networks of providers.

We focus on regulatory regimes directed at provider-sponsored systems of care, and do not consider all state standards for managed care arrangements. States have adopted a variety of names for these entities, such as integrated delivery systems (IDSs), community integrated service networks (CISNs), and organized delivery systems (ODSs). All provider owned and operated organizations accepting insurance risk for the delivery of medical services are hereinafter referred to as Provider-Sponsored Organizations (PSOs). We have intentionally used a very broad definition so as not to exclude any entities that states might consider a PSO, and to accommodate the range of definitions used by states that have defined PSOs for regulatory purposes.

Primary Issues Surrounding PSO Regulation

Integration and consolidation have become bywords in the health care marketplace. Providers of care are increasingly coming together to develop more integrated systems of care delivery, driven by marketplace demands for lower costs and greater efficiency, and by the desire of providers to increase their bargaining leverage with large managed care plans and employer coalitions. Recently, the American Association of Health Plans (AAHP) testified before the House Ways and Means Committee, Subcommittee on Health that there are currently more than 300 PSOs operating in 43 states. Many of these PSOs assume financial risk, just like HMOs. According to an AAHP survey of state insurance departments during April and May 1997, 169 out of 815 licensed HMOs nationwide (21 percent) are provider-owned. This survey also suggests that the number of PSOs assuming risk appears to be growing, with provider-owned HMOs accounting for nearly 38 percent of all HMOs licensed over the past two years.

A 1996 Ernst & Young survey of integrated delivery and financing systems (IDFS) similarly found that 45 of the 202 IDFSs surveyed (22 percent) had HMO licenses. Like the AAHP study, the Ernst & Young survey identified IDFSs as a young and rapidly growing segment of the health care system with 26 percent of the IDFSs surveyed having been in existence for one year or less. The survey also found that 27 percent of IDFSs accepted premiums from employers, 52 percent accepted percent-of-premium arrangements, and 72 percent accepted capitation. Of the IDFSs surveyed, 95 percent accepted fee-for-service payments. Many IDFSs placed their providers at risk, with 53 percent putting primary care physicians at risk and 29 percent putting specialists at risk. The IDFSs included in the survey covered 10 million lives in 40 states.

As these systems of care grow and gain experience with managed care, they are increasing their roles in the managed care arrangements in which they participate, including: accepting a greater portion of the insurance risk involved in providing care; accepting insurance risk from HMOs on a global basis, with subcapitation and other risk-sharing arrangements with individual providers and facilities developed at the system level; and undertaking responsibility for utilization review, provider credentialing and quality assurance functions.

As these provider groups begin to assume a greater role in the delivery of managed health care, questions have arisen about whether our current regulatory models adequately account for the roles and potential roles these organizations may have in the financing and delivery of health care. The questions revolve around three primary issues:

  • Licensure of PSOs assuming direct risk;
  • Regulation of PSOs assuming downstream risk and other management functions; and
  • State regulatory jurisdiction over PSOs assuming direct risk from employer health plans.

This project focuses on these three issue areas and on how states have addressed some of the questions surrounding these issues. We further discuss the issues below.

1. Licensure of PSOs Assuming Direct Risk

The first set of questions revolves around whether the current standards applied by state regulators and federal programs to HMOs are overly stringent when applied to PSOs that want to assume risk directly from purchasers. Although these PSO arrangements could seek licensure as HMOs under existing state laws, many do not, and critics of the existing standards claim that they act as a barrier to the development of PSOs as independent risk-assuming arrangements. Stated another way, the issue is whether PSOs are sufficiently different from other types of integrated health plans assuming risk that the regulatory standards applied to PSOs should be different than those currently applied to HMOs and other arrangements.

Advocates of applying different standards point primarily to the advantages that provider-owned and operated systems have in assuming risk. Their argument is that, unlike other types of managed care plans that must increase their payouts to providers when utilization is higher than expected, the provider-owners of a PSO can absorb the increased utilization by increasing the amount of service that they provide. This ability to directly absorb unexpected utilization is suggested as a justification for applying less stringent minimum capital and other solvency standards to PSOs. They also suggest that PSOs can operate more efficiently, because they reduce a layer of expenses and profit from health care delivery. In addition, PSO advocates have claimed that PSOs put health care providers in control of patient care, in contrast to the utilization management schemes developed by HMOs and other insurance carriers. Alternatively, advocates of applying HMO-like regulatory standards to PSOs point out that, when assuming insurance risk, providers are at risk not only for the service they provide, but also for non-labor costs (e.g., equipment and overhead). Furthermore, they argue it is unclear how providers can be forced to work harder to absorb unexpected utilization, and there is no evidence suggesting this is what actually occurs.

2. Regulation of PSOs Assuming Downstream Risk and Other Management Functions

A second set of questions relates to how the transfer of risk and the delegation of management functions to PSOs by HMOs may affect the ability of regulators to protect consumers. States regulate HMOs and other managed care plans to protect consumers from potential harms that may result from such things as insolvency, limiting provider choice, or the financial incentives placed on providers to reduce care. States have established standards for, and exercise active oversight of, HMOs in a number of areas, including finances, utilization review systems, quality assurance systems, provider selection and contracts, and enrollee grievance systems.

As HMOs delegate to PSOs more of the financial risk (often called downstream risk) and more of the functions of managing care, the application of these standards and the ability of regulators to identify and address problems in a timely manner is drawn into question. Although providers have been accepting risk from HMOs for years, the advent of global capitation arrangements, in which PSOs accept a fixed payment (or a fixed percentage of premium) for managing all of the care for HMO enrollees, have raised regulatory concerns in some states. Under these arrangements, PSOs not only accept full risk for all services, but also may be responsible for a substantial portion of care management, including: credentialing and developing the provider network; developing payment and risk sharing arrangements with participating providers (often the owners of the PSO); management of risk pools and incentive payments; utilization review; and quality assurance. Regulators are concerned about their ability to oversee HMO practices if a substantial component of the risk and care management has been transferred to an entity that is not licensed, and therefore, potentially less accountable to the State. The issue is whether states need more direct oversight of PSOs contracting with HMOs or whether sufficient oversight can be applied through the State's regulation of the HMO and its contracts.

3. State Regulatory Jurisdiction over PSOs Assuming Direct Risk from Employer Health Plans.

A third set of questions relates to how a state's ability to regulate arrangements in which PSOs assume risk directly from employer health plans may be affected by the Employee Retirement Income Security Act (ERISA). ERISA generally preempts state laws that relate to an employee benefit plan established by an employer, including a plan of health benefits. However, the preemption provisions contain a clause, known as the "savings" clause, that excludes state regulation of the "business of insurance" from ERISA preemption. This generally means (subject to a number of qualifications beyond the scope of this paper) that states are able to regulate health insurance provided through insured arrangements (e.g., when an employer pays a premium to an insurer or an HMO to cover its employees) but are not able to regulate self-funded health plans (e.g., where an employer pays directly for the health care it provides to its employees).

As the health care market drifts more and more toward managed care, however, an issue arises as to whether an employer health plan can shift risk to a provider of health care and continue to claim to be self-funded for the purposes of the ERISA exemption. The question is whether a provider network that accepts risk directly from an employer has engaged in the "business of insurance" and has thus brought the arrangement under the regulatory purview of the State, or whether there are methods of structuring risk-sharing arrangements between employer health plans and providers (such as PSOs) that do not constitute the business of insurance, and therefore, are outside of a state's regulatory reach. Because the McCarran-Ferguson Act grants states primary jurisdiction over the regulation of insurance, ambiguities concerning the exact activities which constitute the "business of insurance" must be resolved by state regulatory authorities.

Arrangements between employer health plans and PSOs might be structured in a number of ways that could be considered to be the transfer of risk. Capitation arrangements, where the employer health plan pays a set amount to the PSO for each covered person, are the clearest example of arrangements that at least some states would define as the business of insurance. Arrangements where an employer health plan contracts with a PSO on a discounted fee-for-service basis usually would not be considered the transfer of risk, but could evolve into such if the payment amount is made subject to a withhold requirement or if the PSO and employer share losses or gains around a target amount of expenses. In such cases, the desire of a state to exercise regulatory jurisdiction over the arrangement may depend on whether they believe that there has been a transfer of risk and on the amount of risk that the PSO has assumed.

C. Organization of the Report

The remainder of the report is organized as follows: In Section II, we describe the research methodology and activities undertaken for this report. In Section III, we first describe state laws and positions regarding the three primary issues discussed above: licensing standards for PSOs assuming direct risk; regulation of PSOs assuming downstream risk; and authority over PSO direct contracting with employer health plans. We then report on how regulators and market participants perceive state activities to date and their views about future issues, including the regulatory issues that arise under potential federal legislation authorizing Medicare to enter into risk contracts directly with PSOs. We conclude in Section IV with a summary of state activities, and suggest implications for federal policymakers as they consider reforms for the health care market.

II. METHODOLOGY

We conducted two primary activities to examine state experience with PSO regulation: review of existing state regulations and literature related to the issue of PSOs; and structured interviews with state regulators and market participants in nine states. We further describe these activities below.

A. Literature Review

The research process for the project began with a review of the existing literature regarding regulatory and legal issues involved in provider-based risk assumption. Materials gathered and reviewed included reports, surveys, and other information obtained from the National Association of Insurance Commissioners, National Academy for State Health Policy, American Association of Health Plans, and the American Hospital Association. These materials were used to gain a better understanding of the different policy issues involved with provider-based risk assumption and with the regulatory activity to date.

B. In-Depth Examination of Nine States

1. State Selection

We selected nine states for which we reviewed state laws and regulations, and for which we conducted interviews with health care market participants and persons involved in the regulatory process. The states selected for in-depth study were chosen based on the existence of regulatory mechanisms already in place relating to provider-sponsored networks, or sophistication in the processes whereby new regulatory standards were being considered. Additionally, states were chosen with the hope of being able to analyze a variety of different approaches to the issue of how states are regulating provider-sponsored risk bearers. The states chosen for in-depth review were California, Colorado, Illinois, Iowa, Minnesota, Ohio, Pennsylvania, Texas, and Washington.

2. Research Protocol

Following the selection of the nine states, the process of identifying and contacting appropriate sources for interviews began. We selected interviewees primarily from four categories: representatives from state offices responsible for regulating entities entering risk-based contracts for the delivery of health care; policy experts from hospital and physician associations; representatives from the insurance organizations; and representatives from integrated provider organizations that have, or might form, PSOs. In several states, we also interviewed representatives from multi-employer purchasing organizations involved with or contemplating direct contracting arrangements with PSOs.

Interviews were conducted in person or by telephone. We conducted personal interviews in four states: Iowa, Minnesota, Ohio, and Pennsylvania. All of the interviews in the remaining states were conducted by telephone.

The interviews were structured through a research protocol (Attachment A). The protocol contains questions in four areas: state regulatory requirements for traditional managed care arrangements; state activities directed at PSOs; impacts of state activities on PSO development; and the interviewee's view of the market and regulatory requirements in the future. The questions were intended to elicit information about what states had done, what they were intending to do, and the views and concerns of interviewees about these actions and about PSO issues in general. The protocol was used in each interview, but served more as a guide than a script: different respondents were sometimes asked different questions depending on their position, their responses, and the length of time available for the interview. The interviews were conducted on a confidential basis, We therefore do not attribute specific opinions, views, or remarks to particular interviewees. A list of the organizations to which the persons interviewed were affiliated is presented in Attachment B.

C. Presentation of Findings

We present the findings of this project in two ways. In the following sections, we summarize our findings with respect to the three primary issue areas discussed above and with respect to interviewee perceptions of the current regulatory environment and their opinions on the changes needed to address future market development.

In addition, we have attached to this report the detailed profiles of the nine states for which we conducted in-depth research and interviews (Attachment C). The information contained in the state profiles is organized in the following manner:

Section I: Standards Related To Integrated Delivery Systems Assuming Risk. This section discusses the standards and positions that states have adopted for PSOs that assume risk. The section is divided into the following subsections:

A. General Approach. This subsection outlines the state's general approach to PSOs assuming risk.

B. Regulation of PSOs Assuming Direct Risk. This subsection describes any special laws or regulations that the state has adopted for PSOs assuming risk.

C. Differences in Treatment of PSOs and HMOs. For states that have adopted special PSO provisions, this subsection discusses the major differences between the regulatory provisions applied to PSOs and those applied to HMOs.

D. Proposals for Change. This subsection describes significant activities in a states that would affect the state's treatment of PSOs assuming risk. We have limited our descriptions to official proposals, including the reports or task forces or work groups established by state legislative or executive action or proposals developed by state regulatory agencies.

E. State Position on Effect of ERISA. This subsection describes the position that state regulators take with respect to their jurisdiction to regulate PSOs that contract directly with employers on a risk assuming basis. We explore at what point a state determines that an arrangement constitutes the business of insurance and whether states believe that their ability to exercise jurisdiction is affected by ERISA.

F. Regulation of Downstream Risk. This subsection describes standards and provisions that states have adopted that affect the ability of PSOs to accept risk from licensed HMOs or PPOs. We have attempted here to focus on requirements and proposed requirements that are aimed at establishing a structure for the regulation of integrated PSO networks and which attempt to regulate them, directly or indirectly, as entities. We do not discuss all of the traditional requirements in state HMO laws that might affect participating providers (e.g., requirements that HMO contracts have hold-harmless clauses).

Section II: Opinions about Impacts on the Market of Current Rules Related to PSOs. This section summarizes the views of interviewees about how state rules and positions relating to PSOs assuming risk are affecting the marketplace.

Section III: Opinions about Regulatory Changes Needed to Accommodate Market Change. This section summarizes the views of interviewees about how state laws and the roles played by state regulators may need to change in response to anticipated changes in the health care market and the development of new types of health plans.

Section IV: Other Issues Raised by Interviewees. This section summarizes other issues relating to PSOs assuming risk that were raised by the people we interviewed. Opinions about such issues as the adequacy of regulatory resources, the need for additional expertise, and issues related to the directing contracting with state Medicaid issues are addressed here.

III. SUMMARY OF FINDINGS

A. State Laws and Policy Towards PSOs

The issue of appropriate state regulatory standards for PSOs assuming financial risk has been considered in some depth in a number of states, and by the National Association of Insurance Commissioners (NAIC), which has produced a draft white paper on the issue of PSO regulation. Provider groups and insurers have participated in state and NAIC processes, and have developed a number of documents setting forth detailed legal and policy arguments on the issue of PSO regulation. Proposals in Congress that would provide for direct contracting with PSOs by Medicare have also generated substantial discussion and analysis of the potential roles of PSOs in the health care system.

Our review of the literature, state regulations and pronouncements, and interviews with regulators and market participants found that state policy toward PSOs is still very much in the formative stage. States have adopted different approaches in each of the three issue areas discussed above, and even states that have enacted legislation specifically addressing PSOs are in the process of considering modifications to the policies they have adopted. We found significant differences across states in their positions on the effect of ERISA preemption on their jurisdiction over direct contracts between PSOs and employer health plans. Below, we discuss our findings with respect to state standards for PSOs assuming direct risk, standards governing PSOs assuming downstream risk and other functions, and state positions on regulatory authority over PSO direct contracting with employers. We summarize our findings regarding the regulatory features of the nine states reviewed for this project in Exhibit 1 at the end of this section.

1. State Standards for PSOs Assuming Direct Risk

a. Special Licensing Standards

Only a small minority of states have enacted special licensing laws for PSOs directly assuming risk from purchasers, but the number is growing. According to the December, 1996 draft white paper developed by an NAIC working group, eight states, Colorado, Georgia, Iowa, Kentucky, Minnesota, New York, Oklahoma and Texas, have adopted by law or rule special licensing provisions for risk-assuming PSOs that provide coverage directly to purchasers. Four of these states, Georgia, Kentucky, New York and Oklahoma, adopted provisions in 1995 or 1996.

In most of the remaining states, PSOs seeking to enter into risk-sharing arrangements directly with purchasers must become licensed as an HMO. As discussed below, a few states have taken the position that PSOs can directly contract with certain employer health plans without being licensed in the state. A few additional states have laws that permit insurance departments to license limited or alternative managed care plans. For example, the Michigan HMO law has a provision that authorizes the Department of Health and the Insurance Bureau to license alternative financing and delivery arrangements. The provision permits the Department and Bureau to waive or modify provisions in the HMO law where appropriate.

b. Differences in Standards for PSOs and HMOs

Where states have adopted specific PSO licensing provisions, the standards applied to PSOs are similar to those imposed for HMOs, although in several cases the minimum capital requirements for PSOs are lower than comparable HMO requirements. For example, regulations in Georgia create a new licensure category for "provider-sponsored health care corporations" (PSHCCs). PSHCCs must meet most of the same regulatory requirements as HMOs, but are subject to an initial net worth requirements of $1 million compared to a minimum net worth requirement of $1.5 million for HMOs.

A similar situation applies in Kentucky, where "provider-sponsored integrated health delivery networks" are required to have minimum initial net worth of $1.5 million and ongoing net worth of $1 million, compared to HMOs that must have initial minimum capital of $2 million, and ongoing minimum capital of $1 million and $250,000 in additional surplus.

Four of the states identified by NAIC as having specific licensure for PSOs were among the nine states profiled for this project. They are Colorado, Iowa, Minnesota, and Texas. We highlight the main findings from these states below.

Colorado: In Colorado, recently adopted regulation creates a separate licensure category, called "limited service licensed provider networks" (LSLPNs), for networks providing a limited range of services directly to purchasers on an at-risk basis. Entities licensed as LSLPNs are permitted to offer only a limited range of services. The regulations restrict LSLPNs to offering: (1) a narrowly defined specialty (e.g., substance abuse or radiology); (2) services narrowly defined to a single type of licensed health facility; or (3) home health services. PSOs wanting to offer a broader range of services must be licensed as HMOs. The types of regulations applicable to LSLPNs and the minimum net worth requirements are described in the profile in Attachment C.

Iowa: Iowa adopted legislation in 1993 providing for the licensing of "organized delivery systems," or ODSs. The law creates a comprehensive licensure scheme for ODSs under the authority of the state Department of Health. The laws for ODSs and HMOs are similar, but not identical. ODSs are regulated primarily by the Department of Health (although the Insurance Division oversees ODS finances), while HMOs are regulated by the Insurance Division. In addition, ODSs are required to file outcomes information with the Department of Public Health, while HMO quality is monitored through a biannual peer review process. There are is no difference between the regulations for HMOs and ODSs relating to the minimum capital required for licensure; both are required to have minimum capital of $1 million or 3 months premium.

Minnesota: Minnesota adopted provisions for the licensure of "community integrated service networks" (CISNs) in 1994. CISNs are defined in statute as 'small, community-based integrated health plans that provide prepaid health care services to 50,000 or fewer enrollees.' CISNs are subject to many of the same standards as HMOs (Attachment C), with a few exceptions. The initial minimum capital requirements for CISNs are lower than those for HMOs: HMOs must have initial capital of $1.5 million and capital cannot fall below $1 million, while CISNs must have initial capital of $500,000 and build to at least $1 million after three years. The minimum capital requirements for both CISNs and HMOs increase in a similar manner as premium or expected premium grows. CISNs are also not subject to several other provisions applicable to HMOs, including requirements for filing provider agreements for approval, for conducting focused quality of care studies, for keeping certain statistics, for submitting a quality assurance plan, and for preparing a marketing plan.

Texas: Texas adopted legislation in 1995 permitting "authorized nonprofit health corporations" (ANHCs) to be licensed under the state's HMO provisions. ANHCs must meet all of the provisions applicable to HMOs and must be accredited by the National Committee on Quality Assurance, the Joint Commission on Accreditation of Healthcare Organizations, or other organizations approved by the Commissioner.

It should be noted that direct risk assumption by PSOs is still a new issue to states, and even states with specific licensure arrangements for PSOs may revisit the issue. In fact, task forces in both Iowa and Minnesota, the two states that have had PSO-specific statutes for the longest period, recently issued reports addressing the issue. The Iowa report proposed changes in the regulatory standards for both ODSs and HMOs to make the regulatory provisions more similar (see attached profile). The Minnesota report discussed the potential advantages and disadvantages of direct contracting by PSOs and suggested that PSOs assuming a significant level of risk (left undefined in the report) should be regulated under provisions similar to those applicable to CISNs and HMOs (see attached profile).

2. Standards Governing Downstream Risk

Another issue for which there are significant differences across the states relates to the perceived need to regulate PSOs assuming downstream risk. Downstream risk is insurance risk for the delivery of services transferred from a licensed insurance carrier (usually an HMO, but sometimes indemnity insurance plans and PPOs) to a provider or group of providers, including PSOs. Regulatory concerns have grown as HMO risk arrangements have evolved from direct risk-sharing contracts with specific providers (or provider groups) toward global capitation arrangements where PSOs accept a fixed payment (or a fixed percentage of premium) for managing all of the care for HMO enrollees. Similarly, a PSO can provide a ready-made preferred network for a PPO, and the arrangement may include some shifting of insurance risk.

We examined state regulatory requirements imposed on PSOs accepting risk, through capitation or otherwise, from licensed insurance carriers. This is somewhat complicated by the fact that nearly all state HMO laws have standards that apply to the contracts between HMOs and participating providers. For example, states commonly require that HMO participating providers agree not to directly bill HMO enrollees for covered services in any event, including the insolvency of the HMO (usually referred to as a hold harmless clause). We have attempted here to focus on requirements and proposed requirements that are aimed at establishing a structure of regulation for integrated PSO networks and which attempt to regulate them, directly or indirectly, as entities.

The NAIC draft white paper identified six states, California, Maine, New Jersey, North Dakota, Pennsylvania, and Texas, that had adopted or were proposing regulation of PSOs assuming downstream risk from HMOs or other licensed insurance carriers. The paper notes that there are also other states that impose standards on downstream risk arrangements with PSOs. In most cases, the states are regulating or attempting to apply standards to PSOs assuming downstream risk by requiring that certain provisions be in the contracts between PSOs and the licensed insurance carrier. In some states, regulators seemed likely to develop standards requiring HMOs to monitor PSOs, rather than developing PSO-specific licensing, to avoid having to expand resources in order to deal with a potentially large number of PSOs that would seek licensure. In California, however, regulators have required that PSOs meet standards and obtain a limited license in order to enter into certain types of arrangements with HMOs.

Three of the states profiled for this project had or were considering significant oversight of PSOs assuming downstream risk: California, Pennsylvania, and Texas. We discuss the main findings for these states below.

California: In California, the Department of Corporations recently began issuing licenses which allow PSOs to accept global risk downstream from managed care organizations (MCOs) fully licensed under California's managed care legislation (The Knox-Keene Act). The Department of Corporations refers to these special licenses as "restricted" health service plan licenses (also called a restricted Knox-Keene license). These special licenses differ from regular Knox-Keene licenses (held by HMOs) by granting specific waivers including exemption from compliance with requirements for service area, accessibility, marketing, and public policy participation. Not exempted under the special licensing provision are initial and ongoing capital requirements. The Department of Corporations requires downstream global risk contracts between fully-licensed MCOs and restricted Knox-Keene licensees to include provisions recognizing that ultimate responsibility for compliance with statutory requirements lies with the fully licensed entity. Furthermore, the fully licensed entity must be allowed to terminate any contract with a globally capitated provider if the services being provided are of inadequate quality, or if the provider is not in compliance with statutory requirements.

Pennsylvania: In Pennsylvania, the Insurance Department and the Department of Health have issued statements of policy that outline when a PSO can accept capitation from an HMO. Prior to the issuance of the statements of policy, HMOs were not permitted to enter into risk-sharing arrangements with PSOs or other types of integrated provider networks. The introduction to the statement of policy issued by the Department of Health includes a discussion on the need for state regulators to consider PSO risk assumption downstream from insurance entities other than HMOs (e.g., PPOs, traditional insurers, self-funded employer health plans, and Blue Cross/Blue Shield plans) but leaves the issue unresolved stating the intention to work with the Department of Insurance in the future to develop standards for health plan-PSO contracting. State regulators considered establishing a separate licensing mechanism for PSOs, but determined instead to address their concerns through their authority to approve HMO contracts with health care providers. By establishing standards for these contracts, the Departments were able to obligate HMOs to monitor the performance of contracting PSOs both financially and with respect to delivery of care, while continuing to hold the HMOs ultimately responsible for meeting their legal and contractual obligations to enrollees.

The Pennsylvania Insurance Department's statement of policy indicates that it will review agreements with PSOs to ensure that HMO enrollees cannot be directly billed by PSO participating providers and that the HMO has the ability to assure itself of the financial status of the PSO, including the ability to institute a plan of financial monitoring if appropriate. The Pennsylvania Department of Health's statement of policy indicates that it will review agreements with PSOs to ensure that when HMOs delegate important functions to PSOs, such as provider credentialing, quality assurance and utilization review, state standards for such functions continue to apply and that the HMOs will retain the ultimate responsibility for assuring that the standards are met. A more detailed description is included in the attached profile.

Texas: Texas recently adopted legislation that permits PSOs to accept risk from an HMO without being licensed. Under the provisions, authorized nonprofit health corporations (ANHCs) and 'provider HMOs' (HMOs that contract with other HMOs to provide services) are permitted to enter into risk contracts with what are called 'Primary HMOs' to provide services as part of the Primary HMO's provider network. The Primary HMO must file a monitoring program with the Department of Insurance setting forth how the Primary HMO will ensure that functions delegated to the ANHCs and provider HMOs are carried out, and must file copies of the agreements demonstrating that they meet certain standards. These include: that the Primary HMO can take such actions as are deemed necessary (by the HMO or by state regulators) to ensure that the delegated functions are performed in compliance with state laws; and that the ANHC or provider HMO will provide specified information at least monthly. The Primary HMO also must conduct an on-site audit of the ANHC or provider HMO at least annually to verify that they are in compliance with state law.

In most of the remaining states reviewed for this study, regulators expressed little interest in regulating the structure or extent of downstream transfers of risk. The one exception mentioned by several regulators were potential situations where the licensee had transferred so much of its obligations that its financial health could be threatened. Even in such cases, the regulator's ability to review and approve the provider contracts of HMOs was generally viewed as a sufficient safeguard.

Most states we reviewed lacked regulation or legislation specifying when and how traditional indemnity insurers could transfer risk to providers. State regulators seemed to have developed ad-hoc policies on the issue. In some states (e.g., Iowa and Minnesota) state officials leave these arrangements unregulated, others (e.g., California) seem to require that indemnity insurers compensate providers strictly through fee-for-service arrangements. Other states place the same requirements on risk-sharing arrangements between indemnity insurers and providers as they do on risk-sharing arrangements between HMOs and providers. Overall, it seems that risk-sharing arrangements between indemnity insurers and providers are far less common in practice and have demanded less attention from regulators as risk-sharing arrangements between HMOs and providers.

3. State Positions on Regulatory Authority Over Direct Contracting with Employers

We found significant differences across the states in their views concerning regulatory authority over PSOs contracting directly with employer health plans. As described above, states can generally regulate the business of insurance, but cannot regulate arrangements in which employers self-fund their employees' health benefits. The question here is whether a PSO that has assumed risk directly from an employer has engaged in the business of insurance and has brought the arrangement under the regulatory purview of the state, or whether there are methods of structuring risk-sharing arrangements between employer health plans and providers (such as PSOs) that do not constitute the business of insurance, and therefore, are outside of a state's regulatory reach.

An important aspect of this issue is that there is no forum, other than the courts, for determining whether a state can regulate a particular arrangement. Further, the structure of ERISA essentially allows employer health plans to develop arrangements under a claim of ERISA preemption of states laws without any direct oversight by federal regulators. This means that states may be unaware of the existence of direct risk-sharing arrangements between employers and PSOs unless they receive inquiries or complaints or they are informed of the arrangement by other market participants. These questions about regulatory jurisdiction have the potential to impede the development of policy at the state and federal levels because both regulators and market participants are uncertain of the rules applicable to different arrangements.

The NAIC draft white paper identified three states, Illinois, Idaho and South Carolina, that have indicated that they would not or did not believe that they could exercise jurisdiction over risk arrangements between PSOs and employer health plans. A study of physician-hospital organizations by Ernst and Young suggests that Kansas also would not regulate such arrangements. In our state interviews, we identified one additional state, Ohio, that also has taken this position.

In Illinois and Ohio, documents from state regulators indicate that these states would not exercise jurisdiction over arrangements between "self-insured employers" and PSOs as long as the ultimate responsibility for providing services is retained by the employer health plan. This means that the employer health plan must retain the responsibility of paying or arranging for care in the case that the PSO becomes insolvent or otherwise fails to provide services. In each case, the state position made an analogy to the transfer of risk from a licensed insurance carrier to a PSO, noting that the insurance carrier would retain payment responsibility if the provider failed to perform. In essence, the states are treating the risk transferred to PSOs by "self-insured employers" as downstream risk. We should note, however, that neither state appeared to have a systematic method for determining whether the employer health plan retained the ultimate payment responsibility.

In each of the other states that we reviewed, regulators generally take the position that PSOs contracting directly with employer health plans and assuming a significant level of risk are engaging in the business of insurance and must be licensed as an HMO (or other type of insurance carrier). State regulators, however, were not always able to define precise lines identifying when certain arrangements would be considered sufficient transfers of risk to warrant state licensure. All of the states that indicated that they would exercise jurisdiction over direct arrangements between PSOs and employers stated that capitation arrangements between PSOs and employer health plans would be considered to be the business of insurance, requiring that the PSO be licensed. Regulators indicated that they would review other types of risk sharing arrangements on a case by case basis. Interviewees from provider organizations in several states expressed concern over this lack of clarity. Colorado has attempted to reduce the ambiguity in determining risk transfer which is sufficient to require state regulation by using the terms "chance of loss" to describe this threshold.

An example from Minnesota demonstrates the potential uncertainty that can exist for market participants. A group of large Minnesota employers, the Buyers Health Care Action Group (BHCAG) developed an arrangement under which groups of providers, called "care systems," contract to provide services to the health benefit plans formed by BHCAG employers. The providers are reimbursed pursuant to negotiated fee schedules, but the fee levels for each care system are recalculated each quarter, based on changes in utilization across all employers for that system. A letter from the Department of Commerce to the executive director of BHCAG determined that while substantial risk was being transferred to care systems, the state did not believe that the "rationale for regulation was being violated." The letter relied on two factors in its determination that the imposition of regulation was unnecessary. The first factor was that the BHCAG arrangement contained a risk adjustment mechanism that limited the risk assumed by care systems. The second, and more important reason according to the letter, was that the employers in the BHCAG arrangement, due to their large size and financial resources, would be able to meet their commitment to their employees through other means in the event that a care system became insolvent. The letter noted that it would not have the same confidence with every employer that seeks to develop a similar system, and suggested that the Department would seek to develop minimal regulations for such arrangements "...with enough flexibility to encompass change but with adequate protection for the public."

B. Perceptions of Market Participants and State Regulators

In this section, we describe the views and perceptions of state regulators and market participants concerning several issues related to the development of PSOs. The issues we consider are:

  • Why PSOs are an issue for states;
  • Impact of state PSO activities and positions on the marketplace;
  • Issues raised by Medicare contracting with PSOs; and
  • Future market developments and how state regulation needs to change in response to those developments.

In the discussion below, we synthesize the views obtained from the interviews conducted for this project. We interviewed a large number of people with sometimes very divergent positions on issues. Not all of the opinions and views of each interviewee are included in the report. Rather, we highlight the common themes or positions that were expressed by a number of different interviewees.


Exhibit 1: PSO Regulatory Features of the Nine States Reviewed


1. Why PSOs Are an Issue for States

An important purpose of this project is to gain a better understanding of the reasoning underlying the actions and positions of state regulators regarding PSOs. This involves understanding the factors that are causing PSO issues to arise in the states and the positions that state officials and others have taken with respect to risk assumption by PSOs.

a. Factors Raising PSO Issues

Interviewees pointed to a number of factors that are raising the visibility of PSOs on state policy agendas. A factor raised by interviewees in several states was the need to modify state regulatory policy to respond to changes in the market. As discussed above, consolidation and integration in the marketplace are pushing providers to develop more integrated health care systems. As these systems emerge and develop more capabilities, they naturally hope to assume a larger role in health care financing and delivery. In some states, however, the ability of PSOs to perform certain roles (e.g., accept global capitation, take responsibility for utilization review functions) is unclear. In these cases, provider organizations appear to have taken the lead in pushing for clarification and modification of state laws. This factor appears to be most important in the case of states where there are laws and regulations that affect the ability of HMOs to shift risk downstream, although the general desire of providers to increase their role in health care delivery (and to strengthen their position with respect to managed care plans) appears to be a significant element in the advocacy of state-level provider organizations that we interviewed.

The rapid movement of state Medicaid programs to managed care has created a new market for managed care plans and, in some cases, a distinct regulatory environment. Provider interest in forming their own plans to serve Medicaid enrollees was mentioned by interviewees in several states as an important driver of PSO policy development. In several states, the issue of whether organizations contracting with Medicaid programs to provide "carved-out" services (e.g., mental health) need to be licensed as health plans has contributed to the debate over appropriate licensure standards for PSOs.

The growing interest in direct contracting with PSOs by large employers and employer coalitions was also a factor in PSO considerations in several states. For regulators, the emergence of arrangements that appear to be transfers of risk have caused regulators to respond by asserting jurisdiction over arrangements, or by issuing clarifying statements. The uncertainty over where regulators will draw lines about risk transfers was mentioned by several provider representatives as an important factor in their advocacy on PSOs. Insurers are responding to these arrangements by raising the call in states for a level playing field between existing managed care plans and PSOs. We should note, however, that some providers and employers appear reticent to draw too much attention to direct contracting issues. Several interviewees suggested that they would much rather be regulated under ERISA than under state law, and that they were not interested in states developing special standards for PSOs assuming risk. They indicated that their preferred route would be to assert ERISA preemption if and when a state challenges the arrangements that they have developed.

Although primarily federal issues, the growth in Medicare managed care and the potential that Medicare will begin contracting with PSOs were cited as extremely important factors in the PSO debate. Medicare is the largest payer for many health care providers, and being in a position to accept Medicare capitation as Medicare managed care grows was reported by a number of interviewees to be of paramount importance to providers and to integrated systems. National provider organizations, including the American Hospital Association and the American Medical Association, have made the inclusion of PSOs in the Medicare risk contracting program a very high priority. From our interviews, it is clear that this priority and the interest in PSOs has been taken up by state provider organizations that are raising PSO issues at the state level.

In several states, local factors were mentioned as prominent in explaining PSO activities. For example, interviewees in one state suggested that concerns raised by rural health providers were the primary cause for the state's adoption of a special PSO licensing law. The state, through its reform efforts, was moving toward providing more and more care through integrated health plans. Rural providers in the state were concerned about coming under the domination of larger urban providers and health systems, and wanted the ability to form their own plans. In another state, interest in creating an alternative to the insurance-sponsored managed care plans was suggested as the primary motivation for the state's PSO licensing law.

It is apparent that there is a confluence of factors shaping the current debate on PSOs in the states. A number of interviewees suggested that, while local issues and politics were important, much of the focus was on how Medicare will treat PSO contracting, because what Medicare does could drive the marketplace.

b. Positions of Regulators and Others on PSO Risk Assumption

Overwhelming, state regulators that we interviewed indicated that their concerns about PSO risk assumption related to consumer protection. Generally, they suggested that PSOs posed the same issues as HMOs: potential for loss of coverage or disruption of care if insolvency occurs, and potential for reduced access to care or poor quality of care resulting from incentives placed on providers to control costs. Regulators generally believed that the type of standards now applied to HMOs were appropriate for PSOs assuming capitation or substantial risk directly from employers. Many regulators suggested that the issue of appropriate solvency standards for all types of managed care plans would be addressed when NAIC completes work on a model risk-based capital regulation. Recent testimony suggests that the NAIC is changing its position on risk-based capital requirements for insurance risk assuming PSOs. The new policy seems to allow 20 percent of their real value of property assets to be counted towards solvency requirements. This change is significant in the light of the opinions of some hospital association representatives who regarding the need to consider the facility assets when determining solvency requirements for hospital based organizations assuming insurance risk.

In the case of downstream risk, regulators' concerns tended to focus on their ability to enforce financial and quality of care standards when risk and management functions were delegated to PSOs. Most regulators were confident in their ability to adequately regulate managed care arrangements under their current authority, at least with respect to HMOs. A few regulators expressed concern about the fact that managed care arrangements offered by indemnity insurance carriers and Blue Cross and Blue Shield Plans (e.g., PPO arrangements) are not always subject to the same consumer protection standards applied to HMOs, particularly relating to review of network adequacy, quality assurance, utilization review, and grievance procedures.

Most interviewees from provider organizations and integrated provider systems expressed a strong interest in expanding the role of PSOs in the health care system, although their particular interests varied to some extent in response to state issues and local markets. Many of these interviewees expressed the belief that PSOs are fundamentally different than HMOs or insurance carriers because of their ability to directly provide services, and that any state licensure laws should reflect these differences through reduced financial standards. Many suggested, however, that PSOs assuming direct risk should be subject to the same consumer protection standards as other managed care arrangements.

In several states, interviewees from provider organizations expressed a strong interest in permitting PSOs to contract with the state Medicaid program. There was nearly universal interest in permitting PSOs to contract with Medicare and with having the primary regulations for Medicare contracting determined at the federal level. A number of interviewees also took the position that ERISA preempted the ability of states to regulate direct contracts between PSOs and employer health plans, even in the case of capitation.

Most interviewees from insurance organizations expressed concern about the potential for uneven regulation of PSOs. Insurance interviewees generally expressed the view that PSOs assuming direct risk from purchasers were operating as insurers and that they should be subject to the same standards as other licensed insurance entities.

2. Impact of State PSO Activities and Positions on the Marketplace

We were unable to obtain a clear picture of how state laws and positions on PSOs are affecting the type of health care arrangements forming in the marketplace. To some extent, the responses were divided between states where managed care is fairly mature and states where managed care is still relatively uncommon. In the less advanced markets, interviewees tended to ascribe relatively little importance to the effects of state regulatory positions because there tended to be few integrated provider arrangements capable of assuming a large amount of risk. In more mature markets, the responses were mixed. Many interviewees suggested that the market was having a much larger impact on the formation of PSO arrangements than state laws, and that in most cases, market participants were finding ways to form the types of arrangements that they wished. Other interviewees stated their belief that the amount of direct contracting between PSOs and employer health plans on a risk basis would be greater if regulators in some states altered their position that such arrangements were the business of insurance. One interviewee thought that allowing PSO direct contracting wouldn't increase the amount of direct contracting arrangements, but would encourage more good faith negotiation on the part of licensed health plans entering into contracts where they shift risk downward to providers. A few interviewees, however, suggested that a large number of PSOs would seek licensure if states reduced the appropriate regulatory requirements for PSOs (i.e., applied lower capital standards).

3. Future Market Developments and How State Regulation Needs to Change in Response

We asked interviewees how they believed the health care market would develop over the next few years, and how the regulatory system might need to change to respond to developments in the market. We received a wide variety of responses, particularly on the issue of regulatory change.

In general, interviewees foresaw a continuation of consolidation and integration in the health care market, with managed care becoming even more dominant in the future. Some interviewees suggested that provider-based systems would continue to develop and become more important in local and regional markets. Others suggested that larger regional and national health plans would continue to grow and become more dominant.

Interviewees had a number of different opinions about how the roles of regulators and the regulatory system would need to change in the future, ranging from those who believed that little change would be necessary, to those who believed that we should move more toward a self-regulatory system that relies on the availability of information and industry monitoring to protect consumers (several interviewees used securities regulation as an analogy). A number of interviewees suggested that oversight of the industry needed to be more performance based, and that information about the quality and efficiency of integrated systems needed to be more available to regulators and to consumers. The concern about getting more and better information from health plans and PSOs regarding quality and outcomes of care was a priority mentioned by many interviewees. In several states, initiatives were underway formally or informally to collect HEDIS-type information from health plans. A number of regulators and market participants also suggested that accreditation by one of the national organizations reviewing health plans (NCQA, JAHCO, URAC) provided an important contribution to the oversight of managed care plans. There are laws or initiatives in several states to incorporate accreditation into the regulatory process. Some interviewees stressed, however, that many of the traditional areas of regulation (solvency, consumer complaints) would continue to be needed.

We also found differences of opinions among interviewees about whether regulators had sufficient resources and expertise to regulate PSOs, if it were required. Opinions differed both within and across states. In several states, regulators and other interviewees indicated concerns about resources if a large number of PSOs sought licensure. There was no common opinion about whether regulators had sufficient expertise to oversee PSOs, although there appeared to be a fair degree of comfort in a number of states.

Some interviewees in states that have dual regulatory structures for regulating HMOs or PSOs (i.e., regulation is shared by two agencies, usually the Departments of Insurance and Health) distinguished between the two departments in their opinions about the need for additional expertise. These interviewees were often more comfortable with the abilities of one of the two departments with regulatory jurisdiction. Whether insurance or health regulators were considered more able differed across the states. Experience in one state with dual regulation for PSOs is informative. In that state, the issue of consolidating regulation of PSOs into one agency is under consideration, but the views of interviewees on this were mixed. Some believed that one of the agencies had a greater understanding of the market, and that it would be less burdensome to deal with a single regulator. One interviewee, acknowledging the efficiency of a single agency, stressed that the expertise of both agencies would be needed to effectively regulate the financial and quality aspects of managed care plans.

4. Issues Raised by Medicare Contracting with PSOs

We asked interviewees how they viewed the prospect of Medicare including PSOs in the risk contracting program and how the regulatory structure should be changed under such a scenario. We also asked what type of standards should be applied to PSOs contracting with Medicare.

As discussed above, the expected market impact of Medicare directly contracting with PSOs was perceived to be large. Interviewees from provider groups suggested that the expectation of Medicare business was a major driver in provider interest in establishing separate recognition of PSOs. The vast majority of interviewees indicated that it would be appropriate for Medicare to directly contract with PSOs. There were differences of opinion over the regulatory structure that should apply to such arrangements.

In most cases, state regulators expressed a belief that states should be able to establish standards for PSOs accepting risk under the Medicare program, similar to their authority to establish standards for HMOs and insurers that currently act as Medicare risk contractors. Regulators were generally skeptical about the ability of the US Department of Health and Human Services to handle consumer complaints and adequately monitor the performance of local delivery systems. A number of regulators indicated that states should have the discretion to require PSOs to be licensed as HMOs (i.e., not establish a separate licensing statute for PSOs) before they directly accept risk under Medicare. On the other hand, a few state regulators suggested that preemption of state laws for PSOs accepting risk might be acceptable to them if it were limited to Medicare business.

Interviewees from provider groups were much more supportive of a strong federal role in regulating PSOs contracting with Medicare, and were generally supportive of federal preemption of state laws that would impose requirements on PSOs that were more stringent than federal requirements. Many suggested that the Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)) provides substantial oversight of current risk contracting health plans and would be capable of providing similar oversight of PSOs.

Interviewees from insurance organizations expressed views similar to state regulators. They tended to believe that PSOs contracting with Medicare should be regulated by the states in the same way as other health plans that contract with Medicare. In general, they wanted a level playing field so that all health plans contracting with Medicare would be subject to the same standards.

Virtually all of the interviewees suggested that the type of standards applied to HMOs contracting with Medicare should also apply to contracting PSOs. These include requirements related to solvency, utilization review, quality assurance, and consumer information and protection. Several interviewees stressed the need for Medicare to provide better information to beneficiaries about all of the types of plans available to them, including PSOs. Interviewees from states where AAPCC rates are perceived to be low thought that separate regulatory standards for PSOs could reduce beneficiary options by forcing current Medicare risk contractors out of the market. Some interviewees, primarily from provider organizations and delivery systems, suggested that the solvency standards applied to PSOs should be less stringent than those applied to HMOs because the PSO structure allows these organizations to better manage risk.

IV. CONCLUSION

A. Review

Our review of state regulatory experience with PSOs found that state policy toward PSOs is still very much in the formative stage. States have adopted different approaches to the issues of PSO licensing, regulation of PSOs accepting downstream risk, and the ability of PSOs to contract directly with employer health plans. Even states that have enacted legislation specifically addressing PSOs are in the process of considering modifications to what they have adopted.

The impact of state activities on the health care market is uncertain to this point. Interviewees in a number of states indicated that state activities are not yet having a substantial effect on the market because there only are a limited number of PSOs taking substantial risk. Interviewees also suggested that there would be more risk contracts between PSOs and employer health plans if regulators did not consider such arrangements to be the business of insurance. In states with special PSO licensing laws, few PSOs have sought licensure. For example, only five health plans in Minnesota are licensed as CISNs and of these most have enrollment figures significantly below the 50,000 enrollee minimum. A large number of interviewees suggested that a decision at the federal level to permit Medicare to directly contract with PSOs could have a substantial impact on market development.

B. Lessons for Federal Policymakers

Given that state policy towards PSOs is still in the early stages of development, the lessons to be drawn by federal policymakers are limited. There is wide variation in state approaches toward PSOs, but the laws and policies are still new and there is not sufficient experience with them to understand their impacts. Despite this limitation, we can draw some implications for federal policymakers considering policies affecting health insurance markets and health plan regulation:

  • Many of the people that we interviewed indicated a need for consumer protections when PSOs assume substantial direct risk. States that have developed separate licensing for PSOs have applied HMO-type standards, showing concern in the areas of financial solvency, network adequacy and access, quality assurance, and utilization review. States in some cases have applied lower capital standards for PSOs.
  • Many interviewees stressed the need for more emphasis on the quality of care provided by managed care plans and for more information to be made available to regulators and consumers about all types of managed care plans. The role that accrediting organizations (NCQA, JAHCO, URAC) and national data efforts (HEDIS) can play in these areas was acknowledged in a number of interviews.
  • The uncertainty about how ERISA might affect a state's jurisdiction over PSOs directly contracting with employer health plans is affecting the development of policy towards PSOs at the state level. Until more clarity is provided, either by Congress or through the courts, it will be difficult for states and market participants to understand the parameters of potential state regulatory activities relating to PSOs.
  • Regulators and market participants in several states raised concerns about differences in consumer protection standards applied to different types of managed care plans. In particular, they have concerns that PPOs offered by indemnity insurance carriers are not subject to the same regulation for quality, utilization review, and network adequacy as HMOs (and PSOs in states with licensing laws). It is possible that NAIC efforts to develop more uniform laws for managed care plans may reduce this variation over time, but federal policymakers should consider this variation when developing policy that relies on, or otherwise affects, state regulation of managed care plans

ATTACHMENT A:

INTERVIEW PROTOCOL FOR ASPE PROJECT ON STATE REGULATION OF INTEGRATED DELIVERY SYSTEMS


STANDARDS FOR TRADITIONAL INSURERS

1. Does the state have regulations that apply to the financial relationships between insurance companies and PPO networks?

a. Can PPOs accept risk through capitation, or does this make the entity subject to the HMO laws?

b. Is there a limit on the percentage of the total insurance risk that can be transferred to PPO providers?

2. Can an insurer establish a closed network health plan, or would an HMO license be necessary to offer such an arrangement?

a. Can HMOs offer POS plans, or must the non-network risk be underwritten by an insurer?

b. Are there special rules or standards that apply to HMOs offering POS plans?

3. What are the minimum capital standards that are applied to HMOs?

a. Do you think the standards are sufficient?

b. Are they too stringent?

c. Are there changes being contemplated?

d. Does the state apply risk-based capital standards to integrated health plans?

4. Does the insurance department regulate Medicaid managed care plans? Should it?

5. How do the requirements for the different types of risk bearing entities differ?

a. What purpose is served for the different categories?

b. How did the different categories come about?

c. What are the major differences in the regulation among the categories?

6. What types of concerns or issues do regulators have with current HMO and PPO standards?

STANDARDS FOCUSED ON DELIVERY SYSTEMS

1. What is the state's general regulatory approach to regulating IDSs?

a. What concerns do regulators have about different types of delivery arrangements?

b. What specific regulations apply to IDSs?

c. What specific actions has the state taken to regulate IDSs?

What types of actions are under consideration?

What is your opinion about the outcome, short and long term?

What is the position of insurance regulators in the state on any proposals?

d. Have there been regulatory or legal challenges to state actions?

2. At what point are IDSs considered to be engaged in the business of insurance?

a. Are there particular factors, relationships or types of arrangements that would cause regulators to find that an arrangement is insurance?

b. Is this a bright line or must each case be analyzed separately?

3. Are there instances when the state would want to regulate IDSs that are contracting with licensed insurers?

a. What are those instances?

b. Are the concerns primarily related to finances? to service?

4. Are there limits on the level or type of risk that an IDS can accept from a licensed insurer or HMO?

a. Does the state have limits on the ability of providers to accept risk for services that they cannot deliver?

b. Are there limits on the amount of risk that can be transferred to participating providers?

5. How does the state view instances in which IDSs accept financial risk directly from a customer, such as a large employer?

a. How does ERISA affect the state's jurisdiction over the relationship? (Probe to gain the perception, position or posture of the informants on the ERISA issue)

6. How is the state responding to new types of arrangements being developed in the market?

a. Are new laws or regulations needed to address changes in the market? What are the specific type of changes that need to be accommodated?

b. What types of regulatory changes are necessary or desirable? Why?

c. Are current regulatory standards flexible enough to accommodate the types of changes occurring the market?

7. Should Medicare establish arrangements with IDS?

a. Should Medicare contact with IDS even if they are not regulated by the state in which they operate?

If yes, what types of regulatory standards should Medicare apply to the IDSs?

Should the state have any oversight role?

What should the relative roles of federal and state regulators be for IDSs contracting with Medicare?

Are there activities that the federal government could do to assist state regulatory activities?

Should the state have the right to prohibit such an arrangement from operating without getting an insurance or HMO license?

8. Do state regulators have sufficient resources to oversee new integrated arrangements?

a. What steps are being taken to expand resources?

b. Is additional expertise required?

9. What type of information do regulators get from risk-bearing entities?

a. In your opinion, do regulators get enough information to understand the operations of integrated health plans?

b. What additional information do regulators need to better understand how plans are operating in the market?

c. Are there any proposals to increase the information provided to regulators?

d. How would an insurance regulator know if an IDS in the state were accepting insurance risk?

e. Is there a role for the federal government or the NAIC in data collection and analysis of information about IDSs?

10. What types of risks exist for consumers under the new integrated arrangements that are forming in the market? Are changes to regulations needed to address these risks?

IMPACT OF PLAN FORMATION

1. What new types of plans or delivery mechanisms are forming in the state?

b. How are these arrangements governed and financed?

a. What do you believe is driving the formation of these new arrangements?

2. How do current regulatory standards or approaches affect the ways that IDSs are forming in the state?

a. Are there regulatory barriers to the formation of IDSs?

b. How do state regulations affect the organizational form, governance, or financing of IDSs?

3. Has the state modified its position or approach (or proposed such a modification) with respect to IDSs overtime?

a. What were the factors leading to the modification?

b. Have changes in the market compelled regulators to modify their approaches?

c. Did you support or oppose the changes? Why?

4. Would the types of new integrated arrangements forming in the state be different if the regulatory environment was different?

5. What types of regulatory changes are necessary to accommodate new integrated arrangements? (Push to describe why arrangement is important and why regulation needs to be changed)

VIEW OF MARKET IN THE FUTURE

1. How do you think the market will change over the next five to ten years?

2. What types of changes in the regulatory environment will be necessary to accommodate those changes?

a. How do you think the role of insurance regulators will change over the period?


ATTACHMENT B: LIST OF ORGANIZATIONS INTERVIEWED


CALIFORNIA

  • California Department of Corporations

Sacramento, CA

  • California Association of HMOs Sacramento, CA
  • California Healthcare Association Sacramento, CA
  • Adventist Health System Roseville, CA
  • Pioneer Provider Network, Inc. Lakewood, CA
  • California Medical Association Sacramento, CA
  • Health Net Woodland Hills, CA

COLORADO

  • Colorado Department of Insurance Denver, CO
  • Colorado Hospital Association Denver, CO
  • Blue Cross Blue Shield of Colorado Denver, CO
  • CIGNA Corporation Kansas City, MO
  • Centura Healthcare Englewood, CO
  • Quorom Health Resources Boulder, CO

ILLINOIS

  • Illinois Department of Insurance Springfield, IL
  • Blue Cross Blue Shield of Illinois Chicago, IL
  • Illinois Department of Public Health Springfield, IL
  • Advocate Health Partners Oak Brook, IL
  • Rush Systems for Health Oak Brook, IL
  • Illinois Medical Society Springfield, IL
  • Illinois Hospital and Health Systems Naperville, IL

IOWA

  • Iowa Division of Insurance Des Moines, IA
  • Iowa Department of Public Health Des Moines, IA
  • Iowa State Medical Society Des Moines, IA
  • Hospital Association of Greater Des Moines Des Moines, IA
  • Principal Mutual Insurance
  • SecureCare of Iowa Des Moines, IA
  • Health Policy Corporation of Iowa Des Moines, IA
  • Heritage Health Plan Moline, IL

MINNESOTA

  • State of Minnesota Department of Commerce St. Paul, MN
  • Minnesota Department of Health St. Paul, MN
  • Preferred One Minneapolis, MN
  • Alina General HMO Minneapolis, MN
  • Minnesota Hospital and Healthcare Partnership Minneapolis, MN
  • Blue Cross Blue Shield of Minnesota St. Paul, MN
  • Minnesota Council of Health Plans St. Paul, MN
  • Buyers Health Care Action Group Bloomington, MN
  • Central Minnesota Group Health Plan St. Cloud, MN

OHIO

  • Ohio Department of Insurance Columbus, OH
  • Ohio State Medical Society Columbus, OH
  • Ohio Hospital Association Columbus, OH
  • CIGNA Corporation of Ohio

Westerville, OH

  • Akron City Health Systems & SummaCare Akron, OH
  • Metro Health Cleveland, OH
  • Ohio Health Plan Association Columbus, OH

PENNSYLVANIA

  • Pennsylvania Department of Insurance Harrisburg, PA
  • Pennsylvania Department of Public Health Harrisburg, PA
  • Pennsylvania Medical Society Harrisburg, PA

PENNSYLVANIA (continued)

  • The Hospital Association of Pennsylvania Harrisburg, PA
  • Pinnacle Health Systems Harrisburg, PA
  • Health Education Research Foundation Cheltenham, PA
  • Geisinger Health Plan Danville, PA
  • Wyoming Valley PHO Kingston, PA

TEXAS

  • Texas Department of Insurance Austin, TX
  • Texas HMO Association Austin, TX
  • Scott & Wyatt Health Systems Temple, TX
  • Texas State Medical Society Austin, TX
  • Texas State Hospital Association Austin, TX
  • PCA Health Plans of Texas, Inc. Austin, TX
  • Harris Methodist Health System Fort Worth, TX

WASHINGTON

  • Washington State, Office of the Insurance Commissioner Olympia, WA
  • Washington State Medical Society Olympia, WA
  • Washington State, Office of the Insurance Commissioner Olympia, WA
  • King County Blue Shield Seattle, WA
  • Wentache Valley Clinic Wenatchee, WA
  • Group Health of Puget Sound Seattle, WA
  • Everett Clinic Everett, WA

ATTACHMENT C: STATE PROFILES


CALIFORNIA


I. Standards Related to PSOs Assuming Risk

A. General Approach

In the State of California the Knox-Keene Act requires the Department of Corporations to regulate "health care service plans" (Blue Cross/Blue Shield Plans, HMOs). The Department's approach has been to regulate risk assumption by provider groups similarly to the way they regulate health care service plans under Knox-Keene. They did, however, create a special licensing category that allows provider groups to accept full risk capitation downstream from licensed health care service plans without fulfilling all the requirements of direct contracting health care service plans. The Department of Corporations does not have specific information reporting requirements for health care service plans.

B. Regulation of PSOs Assuming Direct Risk

PSOs assuming risk for the provision of institutional and non-institutional care directly from purchasers are required to obtain full Department of Corporations licensing as a health care service plan under the Knox-Keene Act.

C. Differences in Treatment of PSOs and HMOs

None identified.

D. Proposals for Change

None identified.

E. State Position on Effect of ERISA

The Department of Corporations lacks an official position concerning how ERISA is applied to PSOs contracting directly with self-funded employer health plans. While indicating that they would probably interpret such an arrangement as the business of insurance and therefore susceptible to state regulation, a representative from the Department of Corporations informed us that, to her knowledge, there have been no situations to date where the Department has had to make such a determination.

F. Regulation of Downstream Risk

The Department of Corporations allows providers to accept unregulated downstream risk from Knox-Keene licensed plans only if the contract involves a limited subset of services; i.e. physicians are allowed to enter unregulated risk arrangements if the services being covered are non institutional, while hospitals are allowed to enter unregulated risk contracts for institutional services.

Provider networks seeking to accept global risk (i.e. for institutional and non-institutional care) downstream from a Knox-Keene licensed entity must obtain a "restricted" health service plan license (also called a restricted Knox-Keene license). These special licenses differ from regular Knox-Keene licenses by granting specific waivers for downstream risk contractors including exemption from compliance with requirements for service area, accessibility, marketing, and public policy participation, which are considered the responsibility of the insurer The full Knox-Keene tangible net equity requirements, currently amounting to $300,000, are applied. The Department of Corporations also requires downstream global risk contracts between fully licensed health care service plans and restricted Knox-Keene licensees to include provisions recognizing that ultimate responsibility for compliance with statutory requirements lies with the fully licensed entity. Furthermore, the fully licensed Knox-Keene entity must be allowed to terminate any contract with a globally capitated provider if the services being provided are of inadequate quality or if the provider is not complying with statutory requirements.

A Department of Corporations representative claimed that indemnity insurers in the state were required to compensate providers on a fee for service basis. PPOs are allowed to use discounted fee for service arrangements.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

Most interviewees agreed that the regulation is not currently having a restrictive effect on the market of PSO risk assumption in California. One large provider group seeking to accept full risk seemed comfortable with their ability to do so downstream to full Knox-Keene licensed entities under the current regulatory scheme. Interviewees didn't think a lessening of regulation would lead to a rush into direct contracts between purchasers and providers. One interviewee did, however, say that he thought the limited Knox-Keene requirement for the assumption of global downstream risk was too restrictive; the same interviewee thought that direct risk assumption would not take place on a large scale in California absent federal regulations governing PSO direct contracting arrangements with Medicare, Medicaid and ERISA exempt employers.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

No changes were suggested by interviewees.

IV.

Other Issues Raised By Interviewees

None identified.


COLORADO


I. Standards Related to PSOs Assuming Risk

A. General Approach

The State of Colorado does not have special statutory or regulatory provisions for the separate licensure of PSOs. Colorado recently adopted standards for limited service licensed provider networks, which address the direct provision of a limited range of services (e.g., pediatrics, radiology) by providers to purchasers on an at-risk basis.

The State requires provider networks assuming risk from licensed health carriers to certify to the Department of Insurance that they are not engaged in the business of insurance.

The Department of Insurance is responsible for regulating health insurers, the Blue Cross and Blue Shield Plan, and for the financial regulation of HMOs. The Department of Health oversees the network adequacy and quality of care of HMOs.

B. Regulation of PSOs Assuming Direct Risk

In 1994, Colorado adopted legislation that authorized the Commissioner of Insurance to issue regulations providing standards for licensed provider networks. The legislation also provided for creation of a process by which provider networks could enter risk-sharing arrangements with licensed insurance carriers. A financial standards advisory committee composed of networks, providers, carriers, consumers, state regulators, and technical advisors was appointed to make recommendations related to the regulations.

The regulations issued by the Department of Insurance generally provide that PSOs assuming risk directly from purchasers (including employers, individuals, and government payers) for a comprehensive array of services must be licensed as an HMO, health insurer, or a nonprofit hospital, medical-surgical and health service corporation as appropriate. Under the Colorado regulations, risk assumption or risk sharing is defined as

". . . a transaction whereby the chance of loss, including the expenses for the delivery of service, with respect to the health care of a person is transferred to or shared with another entity . . . in return for consideration."

Full or partial capitation, withholds, risk corridors, and indemnity agreements are listed in the regulation as examples of risk assumption or risk sharing agreements. Fee-for-service arrangements, per diem payments, diagnostic-related group payments, and employee assistance programs are not considered risk assumption or risk sharing agreements.

The regulations also create a separate licensure category, a limited service licensed provider network (LSLPN), for networks providing a limited range of services directly to purchasers on an at-risk basis. The regulation provides that the services offered by a LSLPN must be " . . . significantly less than the basic health services offered by a health maintenance organization or under a comprehensive or major medical policy" and must the restricted to

  • A narrowly defined specialty (e.g., substance abuse, radiology, mental health);
  • Services narrowly defined to a single type of licensed health facility (e.g., inpatient hospital, long term care facility); or
  • Home Health Services delivered in the enrollee's home.

The regulation establishes standards for LSLPNs, including standards for initial licensure (relating to demonstrating qualifications, administrative capacity, and minimum net worth); the bonding of LSLPN officers, directors, and employees with access to enrollee funds; financial reporting and annual relicensing; requirements for health coverage plans (including a requirement for hold harmless language) and evidence of coverage; a complaint system; filing of policy forms, rates and charges; suspension and revocation of an LSLPN license); and the application to LSLPNs of the regulatory standards applicable to other licensed carriers.

The minimum net worth of an LSLPN must be the greatest of:

  • $100,000;
  • One month's premiums (or capitation); or
  • An amount determined by the Commissioner commensurate with the risk assumed by the LSLPN.

LSLPNs also are required to include a disclosure in all written agreements, plans or polices stating that it is not subject to all of the insurance laws of the State and that the State guaranty fund will not provide coverage if the LSLPN becomes insolvent.

C. Differences in Treatment of PSOs and HMOs

There are no provisions for PSOs providing comprehensive services similar to an HMO. LSLPNs are subject to less stringent regulations in several areas, including minimum net worth requirements, investment limitations, and reporting requirements.

D. Proposals for Change

None identified.

E. State Position on Effect of ERISA

State regulators view the assumption of financial risk by a PSO directly from an employer or other unlicensed entity to be engaging in the business of insurance requiring the PSO to be a licensed insurance carrier. Entities engaged in the assumption of risk or in risk sharing (as defined in Section B above) with an unlicensed entity would be considered to be engaged in the business of insurance.

The responsibility of pursuing unlicensed risk assumption is performed by the Insurance Division.

F. Regulation of Downstream Risk

The State requires PSOs assuming risk from licensed insurance carriers, including HMOs, to certify to the Division of Insurance that they are not engaged in the business of insurance. Through this process, the State requires the provider network to certify, among other things, that it has not engaged in direct contracting. The State also restricts the provider network from entering into risk sharing arrangements for services outside of its scope of licensure or expertise.

Under state regulation, a provider network assuming risk from a licensed insurance carrier must certify that:

  • The provider network is entering into capitated or risk-sharing agreements only with licensed insurance carriers and/or is subcontracting on a capitated or risk-sharing basis only with provider networks that have submitted a certification. The provider network must certify that it is not entering into capitation or risk-sharing contracts directly with customers (including individuals, groups or employers).
  • The provider network has entered into capitated or risk-sharing arrangements only under health care coverage policies, plans or certificates offered by licensed insurance carriers.
  • The provider network is entering into capitated or other risk-sharing agreements only for services that it has the capacity, ability and legal authority to provide.
  • The provider network is not (except in the case of professional liability) indemnifying or reimbursing the licensed insurance carrier for services covered in the risk sharing agreement.
  • The provider network has notified the carrier of all subcontracts for health care services and that the carrier has the right to review and approve or disapprove the subcontracts.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

Interviewees disagreed about whether the current state rules were having a significant impact on the market. One interviewee suggested that there would be substantially more direct contracting in Colorado if there were fewer requirements. Another, however, pointed out that there was still a limited amount of capitation occurring in Colorado, making it unclear how many direct contracting arrangements would exist under different regulations. This interviewee suggested that there would be more capitation in the future as managed care reduced excess capacity.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

Several interviewees suggested that the State's role will continue to focus on consumer protection. One interviewee indicated that new methods of protecting the consumer will be needed, potentially, methods that do not involve licensure of risk-bearing entities. Another interviewee stated that PPO arrangements offered by indemnity insurance carriers posed bigger consumer protection issues than HMOs or LSLPNs, and that additional consumer protection regulation might be necessary in that area.

IV.

Other Issues Raised By Interviewees

Several interviewees suggested that the Departments of Insurance and Health would need more resources if a number of risk assuming PSOs emerged and were required to be licensed. There was some disagreement about whether the Departments had sufficient expertise.


ILLINOIS


I. Standards Related to PSOs Assuming Risk

A. General Approach

The State of Illinois does not have any special licensure status for risk bearing PSOs.

The State generally does not regulate provider organizations that assume risk from HMOs.

The Department of Insurance is responsible for regulating health insurers and has most of the responsibility for regulating HMOs. PPOs also register with the Department. The Department of Public Health oversees HMO provider contracting and the adequacy of HMO provider networks.

The Department of Insurance has issued a bulletin stating that it will not regulate arrangements in which provider organizations accept risk directly from self-funded employers if the employer retains the risk of providing services to employees should the provider fail to perform.

B. Regulation of PSOs Assuming Direct Risk

No provisions.

C. Differences in Treatment of PSOs and HMOs

No provisions.

D. Proposals for Change

None identified.

E. State Position on Effect of ERISA

The Department of Insurance issued a bulletin in April, 1996 setting forth its opinion about when provider-based market systems should be regulated. The bulletin was the result of a year-long review conducted by the Department.

The bulletin focused on four types of arrangements which it determined are not required to be licensed or regulated by the Department. They were:

  • No-risk arrangements, in which a group of health care providers contract directly with an employer and is reimbursed on a fee-for-service basis and in which the employer retains the risk for health care costs for its employees.
  • Full-risk arrangements, in which (1) a group of providers contracts directly with an employer and is reimbursed on a capitated basis for all medical services and (2) the employer remains at risk for its employees' health care costs if the provider group fails to perform.
  • Partial-risk arrangements, in which a group of providers contracts directly with an employer and establishes a budget for health care services. The provider group assumes or shares risk above the budgeted amount and shares in savings below the amount. The employer remains at risk for its employees health care costs if the provider group fails to perform.
  • Downstream-risk arrangements, in which a group of health care providers contracts with a HMO to provide medical coverage to covered employers, and is paid on a capitated or fee-for-service basis. The licensed entity retains the risk for the health care costs of the plan enrollees.

The Department determined that these arrangements would not require regulation of the provider group because the provider groups would have no direct contractual obligations to the employees. In each case, the self-insured employer, insurer, or HMO would have full and direct responsibility to the individual and would be at risk to provide or pay for health care services for individual employees if the provider group failed to perform.

The Bulletin notes that the Department has jurisdiction any time that the provider group becomes the "ultimate risk bearer and is directly obligated to individuals to provide, arrange, or pay for medical services." In the bulletin, "ultimate risk bearer" refers to situations where there is no intermediary between the patient and the risk bearing provider (i.e., situations where provider groups risk contract directly with patients in the absence of an employer, health plan, or insurance company). Provider groups in such situations would be required to be licensed as insurers or HMOs.

F. Regulation of Downstream Risk

As pointed out in the bulletin discussed in the previous section, the State does not regulate provider organizations that assume risk from HMOs or employers. Traditional indemnity insurers are not, however, allowed to compensate providers through mechanisms other than fee for service.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

None of the people we interviewed voiced a strong opinion about how the current rules were affecting the market. Direct contracting arrangements are not very common in the State. One interviewee believed that the Department's acceptance of direct contracting between risk bearing PSOs and employers was opening new market opportunities.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

Several interviewees suggested the need for more flexible regulations in the future; one suggested that it was inappropriate to develop new standards until the market has evolved and we see the types of organizations and problems that emerge. Several interviewees also suggested that a greater emphasis on quality and providing information to consumers was necessary. One interviewee voiced the concern that consumer protection regulation at the state level could push more arrangements toward self-funding, reducing the ability of the State to influence health policy. The privatization of Medicare and Medicaid further reduced state policy tools.

Regarding the regulation of Medicare direct contracts, interviewees in Illinois expressed differing views. Some thought that state regulation should supersede federal policies, and expressed reservations about HCFA(now known as CMS)'s expertise in the area of regulating insurance risk arrangements. One interviewee thought that because some PSOs would most likely provide services to enrollees across state lines, federal regulations would be most appropriate. Yet another thought that HCFA(now known as CMS) should push states to adopt uniform rules concerning the regulation of risk bearing PSOs, and should then abide by those regulations in their potential contracts.

IV.

Other Issues Raised By Interviewees

None identified.


IOWA


I. Standards Related to PSOs Assuming Risk

A. General Approach

In 1993, the State of Iowa became the first state to create a separate licensure category for provider-based delivery systems assuming risk. Under the 1993 statute, provider-owned delivery systems which assume insurance risk by accepting capitated payment directly from purchasers for the delivery of health care must be licensed as organized delivery systems (ODSs). Provider ownership is the distinction between an ODS and an HMO.

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers, including HMOs.

B. Regulation of PSOs Assuming Direct Risk

Iowa's ODS legislation requires PSOs assuming risk directly from purchasers to be licensed by the State Department of Public Health. The legislation does not define the specific activities that constitute the assumption of risk. The Insurance Division is responsible for overseeing solvency.

The Department of Public Health is responsible for:

  • General licensure and oversight;
  • Review of provider contracts;
  • Review of policies and other materials;
  • Approval of utilization review and quality assurance systems;
  • Approval of grievance procedures;
  • Approval of service area; and
  • Review of health care data.

The Insurance Division is responsible for:

  • Financial Oversight and Solvency monitoring; and
  • Review of financial statements.

The initial capital requirement for an ODS is the greater of $1 million or 3 months of uncovered services. ODS provider contracts are required to have hold harmless language to protect enrollees from financial liability to network providers in case of the financial insolvency of the ODS.

ODSs are required to file data related to outcome measures annually to the Department of Health.

C. Differences in Treatment of PSOs and HMOs

ODSs are treated similarly, but not identically, to HMOs. ODS capital requirements are the same as those imposed on HMOs. ODSs, however, are primarily regulated by the Department of Public Health, while HMOs are regulated by the Insurance Division. In addition, ODSs are provided with a limited exemption from state antitrust laws and are required to include rural populations in their service areas. Finally, ODS are required to file outcomes information with the Department of Public Health while HMO quality is monitored through a biannual peer review process.

D. Proposals for Change

Recent recommendations issued by the Health Systems and Plans Committee of the Health Regulation Task Force ("Task Force") suggest that Iowa should move toward uniformity in regulating the different types of managed care organizations in the State. The committee recommends that legislators develop a single definition of managed care and maintain the same regulations for all entities falling under this definition. With respect to quality, the recommendations suggest that all managed care entities be required to submit outcomes measurements to the Department of Public Health, and that the Department conduct audits of all managed care entities at least once every five years. With regard to financial solvency, the task force recommended that HMO solvency requirements be changed so that they are similar to those that apply to ODSs, that similar investment limitations be applied to both types of organizations, and that the State consider the application of risk-based capital standards to HMOs and ODSs when the NAIC finishes work on its proposed model standards.

Other recommendations to the legislature include assuring a 'level playing field' for managed care systems, creating uniform requirements for disseminating information to consumers, making ODSs subject to agent licensing and unfair trade practices requirements applicable to other insurance entities, and expressing concern to the federal government about the State's inability to regulate ERISA exempt employer health plans. Finally, the committee suggested that the State legislature create an authorization process for limited service managed care organizations.

E. State Position on Effect of ERISA

State regulators generally view the assumption of substantial financial risk by a PSO directly from an employer or other unlicensed entity to be engaging in the business of insurance requiring the PSO to be licensed as a risk-bearing entity. Regulators indicated that there is not a bright line test and that arrangements need to be reviewed on a case-by-case basis to determine if a PSO is engaging in the business of insurance. Accepting capitation from an employer for the delivery of services would be considered by regulators as engaging in the business of insurance.

The responsibility of pursuing unlicensed risk assumption is performed by the Insurance Division.

F. Regulation of Downstream Risk

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers, including HMOs.

The Task Force recommended that the State focus its regulation of managed care organizations only on the ultimate risk takers.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

The people we interviewed generally did not believe that the ODS law had had a significant impact on the market as of yet. Iowa was not considered to be well developed in terms of managed care, and it was reported that there are only a limited number of systems capable of forming an integrated system that could bear substantial risk. One interviewee suggested that employers may be reluctant to contract with licensed ODSs out of fear of losing their ERISA exemption. To date, only one entity has been licensed as an ODS.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

Many interviewees believed that there was a need for more information about health plans that should be available to both consumers and regulators. It was the view of these interviewees that all types of managed care plans should provide outcome information to help regulators and consumers assess quality and access.

In this area, the Task Force recommended that the State focus on nationally recognized systems for the collection of quality measures. It agreed that all managed care entities should be required to report a core set of indicators contained in the HEDIS 3.0 system. The Task Force also recommended that additional information about health plans be made available to consumers; the report contains an appended list of potentially useful information related plan structure, quality of care and consumer satisfaction. The report suggested that State efforts should be aimed at directing consumers to private sources of information and did not suggest mandating the types of information that should be available or the manner in which it should be provided.

IV. Other Issues Raised By Interviewees

Several interviewees suggested that the Task Force may not have gone far enough in recommending elimination of the differences between regulations applied to different types of managed care entities. Several interviewees raised the concern about the lack of application of quality monitoring to PPO plans operated by indemnity insurers. The Task Force recommended that a definition of risk-bearing PPO be developed and that such entities be subject to the same quality reporting as ODSs and HMOs. Another interviewee pointed out that, even if the Task Force recommendations were implemented, indemnity insurers would have a greater premium tax burden than HMOs or ODSs due to existing differences in the way the state taxes HMOs and insurance companies.

There were conflicting concerns raised in the interviews about moving toward a single regulator for managed care plans. While a number of interviewees mentioned the issue and suggested that moving to one regulator might be more efficient, many interviewees also suggested that both health-related and financial expertise would be needed in the future, suggesting a continued need for involvement of both the Department of Public Health and the Insurance Division.

The issue of limited service organizations also was raised several times by interviewees. Under Iowa law, there is no provision for licensing managed care organizations that want to assume risk for a limited scope of medical services (e.g., prepaid vision or dental plans; mental health or prescription carve-out plans). The issue became more visible when the State's Medicaid program began providing mental health services through a private entity that is not regulated by the State. The Task Force suggests that the State create authority for limited service managed care plans.


MINNESOTA


I. Standards Related to PSOs Assuming Risk

A. General Approach

The State of Minnesota has developed several separate categories under which provider-based delivery systems can assume risk.

The most prominent option is called Community Integrated Service Networks (CISNs), which are defined as 'small, community-based integrated health plans that provide prepaid health care services to 50,000 or fewer enrollees.' CISNs can enter into direct contracts with purchasers for the delivery of prepaid services.

A second option, authorized by specific amendments to the 1995 MinnesotaCare Act, permits specific provider networks, selected by the legislature, to form cooperatives and enter into direct contracts with qualified employers or self-funded employer plans on a three-year demonstration basis. Among the few formal requirements for these cooperatives is to notify the Department of Health of direct contracts entered into with employers, and the Department must make a report to the State legislature in 1999. The intent of these amendments was to allow providers and patients in rural communities to continue to retain control over their health care delivery apparatus under a managed care system. Three provider networks have been authorized by the legislature to operate as cooperative, but to date, these plans haven't entered into contracts where they assume risk directly from employers.

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers. However, provider networks contracting with licensed insurance carriers have the option of being licensed as a health provider cooperative. Health provider cooperatives are organized by licensed health care providers and are empowered to enter into administrative and service agreements with certain health care purchasers, including health care network cooperatives (i.e., a cooperative of health care purchasers recognized under Minnesota law), HMOs, insurers, nonprofit health service plans (i.e., those satisfying the statute under which Blue Cross and Blue Shield of Minnesota is organized), CISNs and government plans.. The Departments of Health and Commerce have issued a joint bulletin stating their position that cooperatives may not contract directly with employers on a risk-assuming basis.

B. Regulation of PSOs Assuming Direct Risk

This section describes the requirements applied to CISNs. The requirements applicable to Health Care Provider Cooperatives are reviewed below in the section on downstream risk.

CISNs are licensed by the State Department of Health. The Department of Health also regulates HMOs in Minnesota, while the Department of Commerce regulates insurers and nonprofit health service plans.

The CISN legislation makes CISNs subject to a number of regulatory provisions (many of which are also applied to HMOs). These include requirements for:

  • A written quality assurance work plan;
  • An ongoing quality evaluation;
  • The compilation and reporting of statistics related to utilization and enrollment;
  • An internal system for enrollee complaints;
  • Biannual quality assurance audits by the Department of Health;
  • Availability of services (e.g., services available in a timely manner within a reasonable geographic distance);
  • Basic services that must be provided;
  • Filing and approval of certificates of coverage;
  • Filing and review or approval of premiums; and
  • A written plan for providing continuity of services if provider contracts are terminated.

The provisions of provider contracts (which are not filed for approval, but which are subject to audit by the Department of Health), include the requirement that providers hold enrollees harmless from liability (except for coinsurance or uncovered services).

CISNs must have minimum capital of $500,000 when first licensed, and must increase the amount to $1 million by year three of operation. The minimum levels increase as the level of premiums increase. Capital levels are monitored by the Department of Health.

The Minnesota statutes contain an exception that permits large, self-funded employers to contract on a capitated basis with CISNs without becoming subject to the State's general insurance requirements. The exception for CISNs is limited to arrangements with larger employers (at least 750 employees) in which: (1) the CISN's risk does not exceed 110 percent of the self-funded program's expected losses; (2) the self-funded employer does not carry stop-loss or similar coverage with an attachment point below 120 percent of the program's expected losses; (3) the CISN and the self-funded employer comply with requirements related to data submission and administrative simplification; (4) the CISN complies with requirements related to a pass through of provider taxes; (5) the CISN's minimum net worth reflects the risk borne under the arrangement; and (6) the employer meets nondiscrimination requirements. The arrangement is also subject to certain assessments: the MinnesotaCare provider tax, a one percent premium tax, and assessments by the Minnesota comprehensive health care association (the State's high risk pool for uninsurable individuals).

C. Differences in Treatment of CISNs and HMOs

CISNs are treated similarly, but not identically, to HMOs. The capital requirements for CISNs are lower than those for HMOs; HMOs must have initial capital of $1.5 million and cannot fall below $1 million, while CISNs must have initial capital of $500,000, and build to at least $1 million after three years. CISNs are also not subject to several requirements applicable to HMOs, including requirements to:

  • File their provider agreements for approval;
  • Conduct focused studies each year related to quality of care;
  • Keep certain statistics;
  • Submit a quality assurance plan; and
  • Prepare and file a marketing plan.

D. Proposals for Change

A recent draft report from the Departments of Health and Commerce, entitled "Direct Contracting for Health Care Services: Final Report to the Legislature" (Draft Report), contains recommendations and options for state oversight of direct contracting between risk-bearing integrated delivery systems (IDSs) (called PSOs in the report) and employers. The Draft Report was released for public comment and a final report has not yet been issued.

In its discussion of direct contracting, the Draft Report discussed possible advantages and disadvantages of direct contracting. The possible advantages of direct contracting cited were:

  • May encourage increased competition.
  • May result in increased choice and more information about available options for consumers.
  • May increase provider accountability and improve incentives to provide cost-effective, high quality care.
  • Depending on state regulation, some or all payments to PSOs may not be subject to Minnesota comprehensive health care association assessments, premium taxes, mandated benefit requirements, guaranteed renewal, or other state insurance laws.

The possible disadvantages cited by the report were:

  • Increased risk to enrollees if coverage is terminated due to provider insolvency.
  • Less ability to assure that enrollees have access to an adequate level of services.
  • Lack of protection for enrollees in the areas of quality control, utilization review, marketing and disclosure, and appeal rights.
  • Administrative costs may be duplicated, rather than reduced.
  • The employer in a direct contracting arrangement could lose its ERISA preemption.
  • Under a direct contracting agreement, there would not be a contractual relationship between the enrollee and the PSO.

A number of general conclusions about general contracting were included in the Draft Report:

  • That direct contracting between employers and risk bearing IDSs is feasible.
  • That the assumption of direct risk by an IDS is the business of insurance. The report explicitly did not resolve the issue of what level of risk assumption should trigger state regulation.
  • That the regulation of risk bearing IDSs should be similar to current regulation of CISNs and HMOs.
  • That solvency for risk bearing IDSs should be addressed through either: (1) A lower initial capital threshold of $500,000, accompanied by more stringent oversight, increasing to a higher minimum threshold of $1 million, accompanied by less stringent oversight. (This is similar to standards for CISNs); or (2) A level minimum capital threshold of $1 million.
  • That risk bearing IDSs would be subject to HMO quality standards. They would not be required to file reports demonstrating compliance with the standards, but would be required to file certification of compliance.
  • That risk bearing IDSs would be subject to nondiscrimination provisions relating to employers and individual enrollees.
  • That risk bearing IDSs would be required to maintain 24-hour access to service, to report complaints to the State, and to submit to impartial arbitration in the event an enrollee complaint cannot be resolved.
  • That subcontracts by risk bearing IDSs would be limited to 10 percent of capitation fees and that state regulators would be notified of and have the right to review all subcontracts.

E. State Position on Effect of ERISA

State regulators generally view the assumption of financial risk by an IDS directly from an employer or other unlicensed entity to be engaging in the business of insurance. The Report states that IDSs involved in such arrangements are required to become licensed as risk-bearing entities for the protection of the public. The Draft Report also states that the question as to what level of risk assumption should cause the State to regulate an arrangement has yet to be resolved.

An example of how the State has approached the issue is its response to a new contracting arrangement by the Buyer's Health Care Action Group (BHCAG), a group of large Minnesota employers. Under the arrangement, groups of providers, called "care systems," contract to provide services to the health benefit plans formed by BHCAG employers. The providers are reimbursed pursuant to negotiated fee schedules, but the fee levels for each care system are recalculated each quarter, based on changes in utilization across all employers for that system. A letter from the Department of Commerce to the executive director of BHCAG determined that, while substantial risk was being transferred to care systems, the State did not believe that the "rationale for regulation was being violated."

The letter relied on two factors in its determination that the imposition of regulation was unnecessary. The first factor was that the BHCAG arrangement contained a risk adjustment mechanism that limits the risk assumed by care systems. The second, and more important reason according to the letter, was that the employers in the BHCAG arrangement, due to their large size and financial resources, would be able to meet their commitment to their employees through other means if a care system became insolvent. The letter noted that it would not have the same confidence with every employer that seeks to develop a similar system, and suggested that the Department would seek to develop minimal regulations for such arrangements "...with enough flexibility to encompass change but with adequate protection for the public."

F. Regulation of Downstream Risk

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers.

State law does provide the opportunity for licensed providers (as well as other entities, including HMOs, CISNs, and nonprofit health service plans) to develop health provider cooperatives, which are permitted to enter into administrative and service agreements with health care purchasers, including health care network cooperatives (i.e., a cooperative of health care purchasers recognized under Minnesota law), HMOs, insurers, nonprofit health service plans, CISNs, government plans, and any other purchasers.

The law does not require licensed providers to develop a cooperative to accept risk from authorized health care purchasers, but the cooperative form can convey certain financial and tax advantages to its members. The law also offers potential protections to cooperatives from provisions of state and federal antitrust laws.

Minnesota law requires that health provider cooperatives provide services on a substantially capitated or similar risk-sharing basis. Contracts between cooperatives and purchasers must be filed with the Department of Health.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

Most interviewees did not believe that the CISN law has had a large effect in encouraging formation of provider networks to assume risk. Five entities have now been licensed as CISNs, with an average enrollment of approximately 6,000 each

. Several interviewees stated that the regulations were not a serious barrier to the formation of risk assuming PSOs, suggesting that the market was dictating how integration was occurring. One interviewee stated that the already significant level of consolidation in the State's markets made developing new systems difficult. Another interviewee disagreed, however, suggesting that the current regulations had too many requirements and were discouraging new entrants into the market. The interviewee suggested that the regulations should be modified to reduce reporting and infrastructure and to be more creative in the area of minimum capital requirements.

Several of the people that we interviewed suggested that the State's ambiguous opinion on when it would permit employers to directly contract on a risk basis with unlicensed IDSs was stifling direct contracting in the State. These interviewees thought that more self-funded employer plans would contract with risk bearing but unlicensed IDSs if they were more certain that the State would not challenge the arrangement.

No interviewees suggested that the health cooperative law was having any effect in the State. No entities had been licensed as cooperatives. The Draft Report noted that none of the three demonstration cooperatives approved by the legislature had entered into direct risk-bearing contracts with employers.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

Many of the people that we interviewed suggested that regulations and regulators would need to be more flexible and creative in adapting to a purchaser driven marketplace, although the difficulty in achieving these attributes in a regulatory system was noted. A need to focus more on outcomes, quality and plan performance was mentioned by most interviewees. Several interviewees noted that the activities of purchasers, both public and private, would have a large effect on how the market evolves.

IV. Other Issues Raised By Interviewees

Several interviewees suggested that the State had been reactive in creating its constellation of laws relating the provider networks and that the result was a mish-mash without sufficient coherence. These interviewees suggested that some of these provisions had been passed assuming a level of reform in the market that had not been achieved. Several interviewees suggested that the general level of regulation in the State was too high, and one interviewee suggested that changes should be considered for all types of health plans.


OHIO


I. Standards Related to PSOs Assuming Risk

A. General Approach

The State of Ohio does not have any special licensure status for risk bearing PSOs. State regulators generally view the assumption of financial risk by a PSO directly from an unlicensed entity to be engaging in the business of insurance, which would require the PSO to be licensed as an HMO or an insurer in most circumstances. However, if a PSO assumes risk directly from an "ERISA-exempt" employer that retains the ultimate risk for providing health care services (i.e., the employer retains liability if the PSO fails to perform its obligations or becomes insolvent), the Ohio Department of Insurance (ODI) has determined that the PSO generally will not be considered to be engaging in the business of insurance and would not need to obtain an HMO or indemnity insurance license.

The ODI has proposed legislation, called the "Managed Care Uniform Licensure Act (MCULA)," that would move toward uniform regulatory treatment of all health insurance entities (called "health insuring corporations" in the proposed law) offering managed care arrangements. The new provisions generally would apply to PSOs assuming insurance risk unless a health insuring corporation or a "self-insured" employer retains the ultimate responsibility to provide the health care services offered by the health benefit contract.

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers.

The Department currently has authority to review the books and records of providers contracting with HMOs. The proposed MCULA would require the contracts between health insuring corporations and provider networks to include provisions requiring the networks to provide access to the Division of Insurance to the network's books, records and financial information and other documents related to the delivery of services to individuals covered by the health insuring corporation.

The ODI generally is responsible for regulating indemnity health insurers and is he lead agency in regulating health maintenance organizations. The State Department of Public Health oversees the health maintenance organizations in the areas of quality assurance, utilization review and network adequacy.

B. Regulation of PSOs Assuming Direct Risk

No provisions.

C. Differences in Treatment of PSOs and HMOs

No provisions.

D. Proposals for Change

The ODI has proposed legislation, called the Managed Care Uniform Licensure Act (MCULA), that would provide for the uniform regulatory treatment of all health insurance entities (called "health insuring corporations" in the proposed law) offering managed care arrangements. The new law would replace existing laws for health insurance carriers offering services through network arrangements.

The proposed MCULA is a comprehensive licensure scheme which establishes standards and requirements in a number of areas, including:

  • Standards and process of obtaining a certificate of authority (i.e., license) as a health insuring corporation.
  • Powers and authority of health insuring corporations.
  • Contents of the evidence of coverage provided to health insuring corporation enrollees.
  • Filing and approval of premium rates.
  • Contents of contracts between health insuring corporations and providers and health care facilities, including standards and requirements related to the inclusion of hold harmless and coverage continuation provisions in provider contracts, nondiscrimination and confidentiality provisions, provider incentives to limit medically necessary care.
  • Annual open enrollment period for individual applicants.
  • Right to conversion or continuation coverage of enrollees who terminate membership in a group covered by a group policy with a health insuring corporation.
  • Limits on the investment of health insuring corporation funds.
  • Renewability and termination of coverage.
  • Minimum net worth and statutory deposit of funds.
  • Filing of financial and other information with the ODI.
  • Examination, revocation of certificate of authority, and rehabilitation and liquidation of health insuring corporations by the ODI.
  • Inclusion of certain benefits or coverage provisions in health insuring corporation coverage contracts.

The proposed legislation defines health insuring corporations as "a public or private, profit or nonprofit corporation, domiciled in Ohio and formed under the laws of Ohio, that, pursuant to a policy, contract, certificate, or agreement, pays for, reimburses, or providers, delivers, arranges for, or otherwise makes available, basic health care services or any one or more supplemental health care services, or both of these types of health care services through a network of providers, in exchange for compensation determined by a contractual periodic prepayment or premium, except for reasonable copayments and deductibles." Under MCULA, provider networks would not be required to become licensed as health insuring corporations if they contract with health insuring corporations or self-insured employers and the health insuring corporations, or self-insured employers retain the ultimate responsibility to provide the health care services offered by the health benefit contract. Provider networks operating in the state that are not required to obtain a license as a health insuring corporation would be required to file an annual certification with the ODI.

The proposed MCULA would establish a variable set of requirements related to the minimum net worth of health insuring corporations:

  • Health insuring corporations providing only basic health services would be required to maintain a minimum net worth of 110 percent of liabilities, but no less than $1 million.
  • Health insuring corporations providing basic and supplemental health services would be required to maintain a minimum net worth of 110 percent of liabilities, but no less than $1.5 million.

Under current law, the minimum net worth requirement for indemnity insurers is $2.5 million and for health maintenance organizations is $1.2 million.

MCULA also would impose additional constraints on health insuring corporations offering PPO-type arrangements. Under MCULA, health insuring corporations would be prohibited from offering "open network plans," (i.e., plans with incentives for enrollees to use participating providers but which also permit enrollees to receive benefits from non- participating providers) unless (1) the health insuring corporation also had a license as an indemnity insurer; or (2) the risk for the out-of-network benefits was borne by an indemnity insurer.

Under the proposed MCULA, the contracts between provider networks and health insuring corporations must contain language requiring the networks to provide the Division of Insurance access to books, records and financial information and other documents of the network related to the delivery of services to individuals covered by the health insuring corporation. Under MCULA, indemnity insurance carriers would be permitted to provide global capitation to provider networks only if the indemnity carriers received a license as a health-insuring corporation.

E. State Position on Effect of ERISA

The ODI has issued two letters that outline its position on when an arrangement between a PSO and an employer or other unlicensed entity constitutes the business of insurance. The earlier of the two letters stated that a capitated arrangement between a PSO and a self-funded employer would be considered the business of insurance and that the PSO would be considered to be acting as an unlicensed entity. The interpretation was based on the fact that all of the risk in the arrangement is transferred from the employer to the PSO. The letter went on to say any amount of risk assumed by a provider in such circumstances would be considered to be the business of insurance.

In a subsequent letter, however, the ODI suggested that as long as a "self-funded ERISA-exempt" employer retains the ultimate responsibility for providing the covered health care services (i.e., the employer will pay for or arrange for services if the PSO becomes insolvent or fails to perform), a PSO can accept capitation without being licensed. This interpretation is consistent with the provision in the proposed MCULA discussed above.

The ODI indicated that in some cases, a PSO contracting directly with employers could be required to be licensed as an HMO if the PSO's product took on the attributes of a commercial insurance product (i.e., the PSO product became identified in the public as a commercial insurance product).

F. Regulation of Downstream Risk

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers.

The State places some limits on the capitation arrangements of indemnity insurance carriers offering PPO plans. Indemnity insurers are permitted to separately capitate hospitals and physicians in PPO arrangements, but are not permitted to give a fixed, global capitation to a PSO as part of a PPO arrangement. Only HMOs are permitted to provide global capitation to a PSO.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

Several interviewees indicated that the market was having a larger impact on the development of PSO arrangements than the current regulatory provisions, and that adoption of the proposed MCULA standards would not have a large impact. One interviewee suggested that the current capital standards for HMOs as well as the proposed capital standards for health insuring corporations under MCULA could be a barrier to the development of risk-taking PSOs by smaller provider groups. The current and proposed standards were not seen as barriers for larger provider groups, and several interviewees suggested that a number of larger provider groups already had received HMO licenses.

Interviewees suggested that there was some ambiguity around the ODI's position on ERISA and its effect on direct risk contracting between PSOs and employers. While many of the interviewees noted that the ODI was willing to accept a broad view of preemption, several interviewees noted that ODI was unwilling to give definitive position letters to proposed arrangements and that this practice may be dissuading some smaller PSOs from undertaking direct contracting. One interviewee suggested that ODI would not challenge arrangements involving large players (e.g., large employers and large PSOs) but might challenge arrangements involving smaller participants. Several interviewees raised fears about the potential for selective enforcement.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

Several of the people we interviewed supported the concept of a more uniform, functional licensure approach (such as the proposed MCULA). One interviewee suggested that regulations needed to better recognize the unique aspects of provider-sponsored network arrangements, which would justify lower capital standards than those applied to more traditional insurance-based arrangements. The interviewee stressed the need for lower initial minimum capital requirements so that smaller PSOs would have an opportunity to enter the market. Other interviewees expressed concern about applying lower standards to PSOs because it would give them an unfair competitive advantage. Another interviewee stressed the need for better communication between federal and state regulators.

IV. Other Issues Raised By Interviewees

Interviewees in Ohio expressed mixed opinions on the issue of regulating potential direct contracting arrangements between Medicare and PSOs. While some thought that this regulation was best handled on the federal level with the understanding that PSO risk assumption was fundamentally different from risk assumption by HMOs, others thought that risk contracts between any entity and HCFA(now known as CMS) should be regulated by the HMO laws of the state in which the entity was operating.


PENNSYLVANIA


I. Standards Related to PSOs Assuming Risk

A. General Approach

The Commonwealth of Pennsylvania does not have special statutory or regulatory provisions for the separate licensure of PSOs. PSOs that assume insurance risk directly from employers or unlicensed entities must be licensed as health insurance carriers.

The Commonwealth Insurance Department and Department of Health recently issued joint guidelines for the contractual arrangements between health maintenance organizations and PSOs. Prior to the issuance of the joint guidelines, PSOs were not allowed to accept global capitation from HMOs.

The Insurance Department is responsible for regulating health insurers, including prepaid hospital and medical service plans, and for the financial regulation of HMOs. The Department of Health regulates provider contracts, network adequacy, and quality of care.

B. Regulation of PSOs Assuming Direct Risk

No provisions.

C. Differences in Treatment of PSOs and HMOs

No provisions.

D. Proposals for Change

None identified.

E. State Position on Effect of ERISA

Commonwealth regulators view the assumption of financial risk by a PSO directly from an employer or other unlicensed entity to be engaging in the business of insurance. The Insurance Department considers whether the arrangement is accepting risk, enrolling covered individuals, and performing other insurance-related administrative functions. PSOs engaging in such arrangements would be required to be licensed as a health insurance carrier. Additionally, networks in which providers act as gatekeepers must be licensed as HMOs.

F. Regulation of Downstream Risk

The Insurance Department and the Department of Health recently issued statements of policy outlining provisions that are required to be included in contracts between HMOs and integrated delivery systems, such as physician-hospital organizations and physician organizations. Prior to the issuance of the statements of policy, HMOs were not permitted to enter into risk-sharing arrangements with PSOs or other types of integrated provider networks.

In the statements of policy, the Departments indicated their interest in promoting the development of new integrated delivery systems while protecting the public from potential harm. The Department of Health stated that its challenge was to "establish guidelines. . . which provide adequate oversight to protect consumers against undertreatment or poor quality care but which do not impose excessive or unreasonable regulatory requirements. . ." The Insurance Department stated that the purpose of its guidelines were to ". . . assist HMOs in implementing prudent business practices and in identifying and addressing issues which might lead to PSO insolvency which could negatively impact the financial integrity of the HMO.

The statement of policy of the Department of Health states that it considered separate licensing for PSOs during the development of the standards for PSOs, but determined instead to address its concerns through its authority to approved HMO contracts with health care providers. One concern that became apparent during the interviews was the potential number of PSOs that might seek licensure under a separate licensing arrangement and the regulatory burden associated with regulating that number of entities. By establishing standards for these contracts, the Departments were able to obligate HMOs to monitor the performance of contracting PSOs both financially and with respect to delivery of care, while continuing to hold the HMOs ultimately responsible for meeting their legal and contractual obligations to enrollees.

HMOs entering into risk arrangements with PSOs must file the contracts with both the Insurance Department and the Department of Health. The Insurance Department's review is aimed at assuring that the arrangement with the PSO will not adversely affect an HMO's finances. The statement of policy of the Insurance Department provides that it will review contracts for the following:

  • Presence of hold-harmless arrangements prohibiting PSOs and their providers from directly billing HMO enrollees for service.
  • Provisions for the HMO to assure itself of the financial status of the PSO, which might include provisions relating to:
    • The maintenance of books and records by a PSO and the HMO's access to them.
    • The PSO providing information about its reserves to the HMO and securing periodic audited and unaudited financial statements that would be reviewed by the HMO.
    • The PSO carrying adequate liability insurance, excess of loss insurance or a surety bond to guaranty its performance.
    • The establishment of a withhold amount that would be held by the HMO.
  • Provisions granting the HMO the right to review and approve the assignment of rights or obligations or the use of a subcontractor by the PSO.
  • Provisions setting forth when the HMO would institute financial monitoring of the PSO.
  • Provisions requiring the PSO to carry appropriate insurance and to notify the HMO of matters that could materially affect the PSOs ability to perform its obligations.

The Insurance Department's statement of policy indicates that it may seek additional information about HMO contracts with PSOs if: 1) a contract results in an HMO transferring more than 50 percent of its annual premium to a single PSO; 2) contracts results in an HMO transferring more than 75 percent of its annual premium to one or more PSOs; 3) an HMO contracts with a PSO that controls the HMO; 4) the HMO transfers claims processing, claims payment, and control of its information system; 5) the HMO employs a PSO employee or the offices and directors of the HMO and the PSO overlap; or 6) the contract potentially interferes with the Department's authority to examine the books, records and financial information of the HMO.

The Department of Health's statement of policy provides for the following:

  • The terms of the HMO contract with a PSO must be incorporated by reference into all contracts between the PSO and providers, including the hold harmless language prohibiting providers from billing HMO enrollees for covered services.
  • HMOs may delegate credentialing, quality assurance and utilization review to the PSO, as the standards for these activities are submitted by the HMO to the Department for approval and the implementation is subject to the review and compliance verification of the HMO, the Department of Health and other external agencies.
  • A PSO may use primary care physicians as gatekeepers if the HMO has an acceptable plan of quality of care oversight and the incentives do not lead to inadequate or poor quality care.
  • The HMO contract with a PSO must require that the PSO's participating providers comply with reporting requirements (including reporting encounter, utilization and reimbursement methodology to the Department). The Department maintains the right to require that actual reimbursement rates be submitted if the information is needed to diagnose and correct quality of care problems related to reimbursement methodology.
  • The PSO must acknowledge in its contract with an HMO that the HMO is required to maintain a health delivery system, a quality assurance program, a system for credentialing providers, a grievance system and other systems meeting standards of the Department of Health, and that the HMO's contract with a PSO can in no way limit the authority or responsibility of the HMO to meet required standards or take corrective action. The PSO must agree that any delegation of functions by the HMO in the areas of credentialing, provider relations, quality assurance and utilization review is subject to the performance evaluation of the HMO and the Department of Health (or an independent evaluation organization approved by the Department).
  • The PSO must agree to provide in its contract with an HMO that the HMO and the Department of Health have access to the medical and other records relating to the provisions of services to HMO enrollees.

The Department of Health's statement of policy also provides that in the case of contracts between HMOs and "super-PHO's" (defined as an organization created by and exercising contracting authority on behalf of two or more physician-hospital organizations), each layer of provider contracts must be submitted to assure compliance with the guidelines.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

The people we interviewed generally thought that the statements of policy provided clarity for market participants and removed a barrier to the creation of capitated arrangements. Most interviewees suggested that there were not a large number of systems in the Commonwealth that could accept significant risk and that the market was not yet ready for a great deal of direct contracting. One interviewee suggested that the lack of clarity about PSOs ability to contract with employers under ERISA might be holding some players back. Another suggested that the Commonwealth's Medicaid program would be more willing to directly contract with PSOs if they had more direct contracting experience in the commercial market.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

There was no common theme to the responses from interviewees. Several interviewees mentioned the need for flexibility as the market developed, with encouragement for alternative models. The need for more information and monitoring on quality of care also was mentioned by several interviewees. Clarification on the effect of ERISA on the ability of PSOs to directly contract with employers was also suggested by several people. Interviewees also suggested that there was the need for more clarity on the ability of PSOs and providers to accept risk form indemnity carriers (e.g., in PPO arrangements). One interviewee indicated the need for more appropriate licensing standards for PSOs accepting risk. Several interviewees suggested a role for the Commonwealth in developing health plan acceptability measures and ensuring solvency.

IV. Other Issues Raised by Interviewees

One interviewee expressed concern that the statements of policy may put too many restrictions on the ability of HMOs to delegate certain functions to PSOs. The person believed that HMOs have been keeping an excessive portion of premiums to perform some of these functions, creating unneeded expenses.

Several interviewees suggested that Commonwealth regulators may need additional staff and expertise. Concerns were raised that regulators are not always using the information they receive to review performance and take corrective actions when necessary.

The issue of permitting PSOs to contract directly with the Commonwealth's Medicaid program also was raised by an interviewee. Currently the Commonwealth is contracting only with licensed HMOs for Medicaid managed care, but a recent report by the Department of Public Welfare suggests that the Commonwealth would consider direct contracts with PSOs and similar organizations as those systems evolve. One interviewee expressed concern that the terms being established for Medicaid managed care plans, particularly the large geographic zones being defined as plan service areas, could make it impossible for provider-developed systems to participate.


TEXAS


I. Standards Related to PSOs Assuming Risk

A. General Approach

The State of Texas generally requires all entities assuming risk directly from purchasers of health care services to be regulated in the same manner. An exception to this is an exemption from Department of Insurance regulation for 'physicians' who receive prepayment for services that they are licensed to render themselves. This exemption has been interpreted to allow physician groups to accept both direct and downstream risk, provided they are licensed to provide the services for which they are contracting and they are not responsible for arranging institutional services for the population for whom they are assuming risk. Approved Nonprofit Health Corporations (ANHCs) are nonprofit health corporations certified under the Medical Practice Act (Texas Civil Statutes, Article 4495b), ยง5.01(a), which arrange for or provide health care plans to enrollees on a prepaid basis. ANHCs are allowed to take global capitation downstream from a licensed HMO, but are required to meet HMO regulatory standards if they wish to accept full risk directly from purchasers.

B. Regulation of PSOs Assuming Direct Risk

In the 1995 legislative session, provider groups in Texas pushed for legislation that would create special licensure for provider entities who accept financial risk. The Approved Nonprofit Health Corporation legislation was originally designed to allow 5.01(a) physician groups to accept global capitation, while not being required to comply with all HMO regulations. Lobbying efforts by health plans, however, ultimately resulted in the legislation requiring ANHCs to abide by all licensure and regulatory requirements applied to HMOs if they accepted global capitation directly from purchasers. ANHCs not meeting HMO standards are allowed to accept global capitation downstream from licensed HMOs. The only requirements for physician groups seeking ANHC status for accepting downstream risk are that they be wholly governed by physicians and recognized as non-profit health care corporations by the Texas State Board of Medical Examiner's office. One interviewee mentioned that since the passage of the ANHC legislation no ANHCs have formally applied for licensing to accept direct global capitation.

C. Differences in Treatment of PSOs and HMOs

Texas statute does not recognize a need to regulate PSOs and HMOs differently with regard to direct risk assumption. The only difference between the regulation of ANHCs authorized to assume direct global capitation and HMOs is an additional requirement that ANHCs be accredited by the NCQA or the JAHCO's network accreditation program.

D. Proposals for Change

Interviewees in Texas mentioned that issues of PSO risk assumption are hot legislative items during the current session. Among the areas where clarification is being sought is the precise scope of 'physician' exemption from HMO regulation concerning prospective payment arrangements.

E. State Position on Effect of ERISA

Regulators in Texas claim authority to regulate entities accepting global capitation from ERISA exempt, self-funded employer plans. All such entities are subject to regulation as HMOs or ANHCs.

F. Regulation of Downstream Risk

In Texas, regulation of the risk sharing between two licensed HMOs ('primary HMO' and 'provider HMO') is identical to regulation of risk sharing between an HMO and an ANHC, regardless of whether the ANHC is licensed to accept direct risk. The regulation of these arrangements includes requiring the downstream risk contract (either the 'provider HMO' or the ANHC) to agree to comply with the primary HMO's standards for quality assurance and provider credentialing. Additionally, downstream risk contractees ('provider HMOs' or ANHCs) are required to disclose information regarding their contracts with providers, evidence of financial solvency, and all data necessary for the primary HMO to comply with State audits. These requirements for downstream risk assumption between providers and HMOs are applied to entities ('provider HMOs' or ANHCs) accepting risk for services that they are not licensed to perform themselves (i.e. ANHCs accepting risk for institutional services).

In the past, Texas has required all indemnity insurers to compensate providers through fee-for-service arrangements. According to one interviewee, however, recent legislation has allowed PPOs to transfer risk to providers. This legislation does not specify the type of risk which may be transferred (i.e., global vs. limited scope of services). One interviewee suggested that PSOs might use this legislation to enter into globally-capitated risk contracts with PPOs.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

Interviewees in Texas revealed a desire on the part of providers to assume financial risk directly from purchasers, and general frustration with regulatory mechanisms that precluded them from doing so legally. One interviewee emphasized the need for regulators to consider plant and equipment expenses incurred by institutions that take on financial risk when determining solvency requirements. Another spoke of the potential for reducing costs by eliminating administrative layers through direct contracting. While interviewees suggested willingness on the provider side to accept direct risk, one interviewee believed that some employers would shy away from individually contracting with providers because of their reliance on agent services provided by HMOs and indemnity insurers. The same interviewee claimed that contracting with providers would most likely occur through purchaser coalitions rather than individual providers. Some interviewees suggested direct contracting with unlicensed providers for full risk existed illegally in the state, and blamed the Department of Insurance for not taking the lead in addressing these arrangements.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

Interviewees in Texas gave mixed opinions regarding the changes they considered necessary in the regulation of financial risk assumption by PSOs. Generally, interviewees espoused one of two legislative options. The first of these options involved creation of special licensing which would allow providers to assume risk under regulations specific to their situation as hospitals or practicing physicians. Interviewees who supported this option favored lesser solvency requirements for PSOs than for HMOs. The second option is some form of uniform licensing provision which would make regulation of risk assumption by all entities consistent regardless of whether the entity is provider-sponsored.

IV. Other Issues Raised By Interviewees

With regard to the regulation of hypothetical direct contracts between Medicare and PSOs, interviewees generally thought that federal standards would be appropriate. Some expressed the opinion that these federal standards should be administered on the state level through HCFA(now known as CMS) regional offices. One interviewee mentioned that he did not think it mattered who the ultimate regulators were as long as PSOs and HMOs were regulated in the same way with regards to Medicare risk contracts.

Interviewees held mixed opinions concerning a recent shift in the regulation of certain HMO functions (e.g., QA, UR, grievance procedures) from the Department of Health to the Department of Insurance. Some interviewees thought the Department of Insurance is doing a more comprehensive job, while others contended that the expertise in these areas still lies with the Department of Health.


WASHINGTON


I. Standards Related to PSOs Assuming Risk

A. General Approach

The State of Washington does not have any special licensure status for risk-bearing PSOs. State regulators view the assumption of financial risk by a PSO directly from an employer or other unlicensed entity to be engaging in the business of insurance requiring the PSO to be licensed as a risk-bearing entity.

The State generally does not regulate provider organizations that assume risk from licensed insurance carriers. The Office of the Insurance Commissioner (OIC) proposed rules in the fall of 1996 which impose indirect oversight on PSOs contracting with managed care plans, including provisions which require managed care plans to monitor the financial capabilities of provider networks and which give the OIC access to the books and records of provider networks. The State has since withdrawn some of the proposed regulatory provisions and delayed implementation of others.

The OIC is responsible for regulating indemnity health insurers, health care service contractors (i.e., the licensure provisions applicable to the State's Blue Cross and Blue Shield Plans and some other prepaid health plans), and health maintenance organizations. The Department of Health has a voluntary program under which managed care plans can submit their quality improvement programs for approval.

B. Regulation of PSOs Assuming Direct Risk

No provisions.

C. Differences in Treatment of PSOs and HMOs

No provisions.

D. Proposals for Change

The Office of the Insurance Commissioner (OIC) proposed regulations in the fall of 1996. The regulations were proposed to (1) consolidate the regulations governing health plans; (2) establish uniform standards for managed care plans for the fair regulatory treatment of health carriers offering these types of plans; and (3) create minimum standards for managed care health plans that ensure consumer access to health care services.

Although the new proposed rules did not provide for the licensure or the direct regulation of PSOs assuming downstream risk, several of the provisions imposed new types of oversight of provider network activities. One provision required managed care plans to monitor certain attributes of the of the providers (including health care facilities) with which they contract, including the provider's financial capability and legal authority to furnish the benefits it has contracted to provide. In addition, the proposed rules required the contracts between managed care plans and intermediaries (defined as persons authorized to contract with managed care plans on behalf of providers) to include language granting OIC access to the intermediary's books, records, financial information and any documentation of services provided to enrollees necessary to determine compliance with the regulations.

After reviewing comments on the proposed rules and conducting a public hearing, the OIC indicated its intent to revise their proposal. The OIC withdrew the portion of the rules relating to provider networks, including the provisions requiring managed care plans to monitor the financial capability, legal authority and other attributes of its participating providers. A new working group is being formed to develop "a comprehensive set of reporting requirements with recommended methods of data transmission." Proposed provisions relating to provider contracts and several other sections are being revised in response to comments and are scheduled to become effective in April, 1997. The OIC indicates that they intend to revise

the provisions granting them access to the books, records and financial information of intermediaries of providers and provider networks.

Several of the comments by interested parties raised concerns about the proposed provisions that would require managed care plans to monitor participating providers and gain access to the books and records of intermediary organizations. One commentator suggested that monitoring the financial capability of providers would be difficult to do and, because providers are prohibited from billing enrollees for services in the case of insolvency, would be unnecessary. Another commentator suggested that the criteria used by managed care plans for monitoring be available to health care providers or be included in the provider contracts. Several commentators questioned the OIC's authority to adopt regulations requiring intermediaries to provide OIC access to their books and records.

A bill recently introduced in the legislature would allow PSOs to assume risk in an unregulated manner from a variety of purchasers including self-funded employer groups.

E. State Position on Effect of ERISA

State regulators view the assumption of financial risk by a PSO directly from an employer or other unlicensed entity to be engaging in the business of insurance. PSOs engaged in such arrangements would be required to be licensed as a risk bearing entity.

F. Regulation of Downstream Risk

The State prohibits providers from entering into risk arrangements for health care services that they legally cannot deliver.

II. Opinions about Impacts on the Market of Current Rules Related to PSOs

Several interviewees suggested that market forces rather than current regulations were directing the development of PSOs in the market, although other interviewees suggested that it was difficult to know if there were any effects of regulations on market behavior. Several interviewees indicated that PSOs were entering into risk arrangements, including capitation, directly with employers.

III. Opinions about Regulatory Changes Needed to Accommodate Changes in the Market

One interviewee stated that insurance regulation should be addressed at the carrier level and not at the provider level. Other interviewees thought that the State should recognize the potential for reduced costs and improved quality of care achievable through direct contracting arrangements and allow providers to assume risk without having to comply with the same financial requirements faced by HMOs and other insurers which, they claimed, would take away from this benefit.

IV.

Other Issues Raised By Interviewees

Several interviewees suggested that the rules proposed by the OIC were an attempt to enter into new areas of regulation. It was suggested that the OIC was attempting to regulate below the group level and regulate providers and provider organizations.

There was a difference of opinions among interviewees about the risk to enrollees in direct contracting situations. Several interviewees saw little risk, but several others suggested a need for some regulation for such things as solvency and continued care. Some interviewees stated that PSOs assuming risk should be regulated in the same manner as other insurance entities. Other interviewees stated that PSOs assuming risk were not insurance arrangements because their risk is their "sweat" (i.e., they can address utilization risk by providing additional services). This differs from insurers, who must pay someone to provide additional services if utilization is different than expected.

One interviewee suggested that providers, particularly physicians, view accepting risk as a way of restoring the physician-patient relationship, because it puts the physician back into position to managed the care.