Regulation of Health Plan Companies and Provider Sponsored Networks:
Practical and Public Policy Considerations
©1995 American Hospital Association
This paper was prepared by the American Hospital Association, Office of the General Counsel and Policy Development Group. We would like to thank James S. Matthews of Lindquist & Vennum, Minneapolis, Minnesota, for his assistance. Comments or questions should be directed to Ms. Maureen Mudron, (312) 422-2790 or Ms. Ellen Pryga, (202) 626-2267.
April 25, 1995
Regulation of Health Plan Companies and Provider Sponsored Networks:
Practical and Public Policy Considerations
Health care delivery and finance are evolving in response to marketplace and legislative pressures. At one end of the spectrum, insurance carriers, health maintenance organizations, Blue Cross organizations, and others are increasingly adopting the concepts of "managed care," limited provider networks, and innovative benefit plans. At the other end of the spectrum, many health care providers, such as hospitals, physicians, and allied practitioners, are experimenting with the creation of small and large scale organizations to deliver care more efficiently and with greater accountability. These organizations are sometimes called integrated delivery systems, or can more easily be called "Provider Sponsored Networks."
This rapid evolution and turbulent development of the marketplace has created regulatory uncertainty. For example, at one time there was a fairly clear understanding in the marketplace and among state regulators of how an HMO might differ in structure, licensure and operation from a commercial indemnity carrier. With the growth of insurer created provider networks (such as Preferred Provider Organizations) and with great creativity in the methodology of provider compensation and plan design, it is increasingly difficult to discern any operational difference between the two types of companies. This obviously creates a certain degree of regulatory confusion and consternation.
At the same time, there has been a significant change in the way many health care providers have organized to deliver care, fueled in part by marketplace and legislative demands that providers work hard to eliminate costs and duplications of effort, reduce unnecessary utilization, create more "patient-friendly" systems of care, and demonstrate greater accountability for patient satisfaction. While these are laudable goals, they, in turn, have also created regulatory uncertainties. When, for example, is a Provider Sponsored Network a PPO (preferred provider organization)? Similarly, if a Provider Sponsored Network is paid by a health plan on a basis which reflects an incentive to manage health care service delivery within a budgeted amount, such as capitation, is the PSN itself acting as a separate insurer or HMO? If the PSN is not a traditional kind of regulated entity, is some alternative form of regulation appropriate from a public policy perspective?
Given these uncertainties, the AHA suggests that there are two essential regulatory responses to the changing environment. First, regulators and legislators must continue to protect public interests and expectations by assuring the solvency and fair operation of insurers or other types of health plan companies. In that respect, the AHA suggests that the best and primary locus for traditional insurance regulation should be at the health plan company level rather than at the PSN level. Health plan company regulation is the only logical point at which regulators can efficiently and effectively evaluate the totality of benefit packages offered to enrollees, the solvency of the entity providing those benefits, the adequacy of the overall provider network offered, and the fairness of the administrative and claim adjudication procedures employed. Second, regulators and legislators should support the evolution of health care delivery organizations, such as Provider Sponsored Networks, to foster continued access of the public to quality, low cost health care. Of course, where the operations of a PSN have expanded to such a point that they encompass all of the functions traditionally undertaken by carriers, the AHA concurs that traditional insurance regulation and licensure may be appropriate.
Consistent Regulation of Health Plan Companies.
To ensure enrollee protection, the AHA believes there should be consistent regulation across the spectrum of health plan companies. In this regard, the AHA:
_ Supports the concept of consistent regulation of health plan companies, regardless of their organizational structure, (e.g., insurer, HMO, etc.) and believes that the National Association of Insurance Commissioners' (NAIC's) current efforts to develop a model uniform licensing act holds promise in that regard.
_ Supports the concept of strong solvency regulation of health plan companies, and believes that the risk based capital proposal now under consideration by the NAIC may provide a model for appropriate future regulatory action, so long as the standard is appropriately structured to support application to integrated delivery and finance systems and does not generate required capital levels significantly beyond those currently required unless clearly needed.
_ Supports state regulation of health plan companies, within the context of national guidelines to ensure consistency and reciprocity among states.
_ Supports federal standards for ERISA-exempt employer plans comparable to state licensed health plan companies with delegated state enforcement of single state plans.
_ Supports the establishment of a clear standard of accountability for health plans in meeting quality and other consumer protections in the performance of plan functions, whether performed directly or under contracts with other organizations, and supports the obligation of health care providers, PSNs, and other contractors to cooperate with health plan companies in assuring that those standards are fully met.
What is a Plan? What is a Health Plan Company?
The nomenclature of insurance regulation is often confusing. With that in mind, a glossary is attached to this paper to facilitate common understanding of terms. It is important at the outset, however, to differentiate between a "Plan" and a "Health Plan Company." In this paper the term "Plan" means a written promise of coverage given directly to an individual, family or group of covered individuals, pursuant to which a beneficiary is entitled to receive a defined set of health care benefits in exchange for a defined consideration, such as a premium. The amount of consideration is set in advance and does not directly fluctuate according to the volume of services utilized. Plans are sometimes expressed in the forms of group insurance policies, subscriber agreements, enrollee booklets, or summary plan descriptions, depending upon the entity offering the Plan. A Plan is typically offered by a third party which holds itself out to the public as an insurance company, HMO or Blue Cross type organization. An entity which offers a Plan to the public is termed a "Health Plan Company" for purposes of this presentation. These entities are sometimes called "carriers." In this paper the term "Health Plan Company" also includes employers which "self-insure" their employee health plans, since they too make a commitment to provide health benefits to employees (often accepting payroll deduction contributions toward the cost of the benefits). Similarly, self-insured employers also perform many of the same tasks and maintain the same degree of control over plan design, funding and operation as is the case with traditional carriers.
As noted, the specific benefits which are provided to covered individuals are generally set forth in a written Plan designed and prepared by the Health Plan Company. It is the Health Plan Company that selects the benefits to be covered, the conditions for receiving coverage, and often the very providers to be used. The Health Plan Company also is the entity responsible for making actuarial projections for the benefits it wishes to provide under the Plan (i.e., for determining the expected morbidity, utilization, cost, trend factors of a given set of benefits for a defined group and for setting the resulting premium and reserve levels).
While it may seem definitional, it is important to keep in mind that an entity which contracts with a Health Plan Company to provide services in connection with a Plan is not itself a Health Plan Company merely because it provides those services. A consulting actuary, for example, does not become a Health Plan Company merely because she contracts with such a company to review premium levels (even if she is paid a flat fee), and a company which reviews claims for appropriateness on behalf of a Health Plan Company is not itself a Health Plan Company merely on account of that contract (although it may be subject to separate licensure as a utilization review company or third party administrator). Similarly, a group of health care providers which contracts with a Health Plan Company to provide health care services to covered individuals is not a Health Plan Company merely on account of that contract.
What is a Provider Sponsored Network or PSN?
Broadly speaking, Provider Sponsored Networks or PSNs are formal affiliations of providers, organized and operated to provide an integrated network of health care providers with which third parties, such as insurance companies, HMOs or other Health Plan Companies, may contract for the provision of health care services to covered individuals.
PSNs take a wide variety of organizational forms, depending upon local market and regulatory factors and continued evolution in this regard is highly likely to occur. The numerous structures are often driven by complex state, federal, and local laws relating to the delivery of health care.
For example, some PSNs are organized as "Physician-Hospital Organizations" under which physicians (often themselves organized as a group) will create a joint venture with a hospital. The joint venture will often then contract on behalf of its member providers with Health Plan Companies to deliver a variety of health care services. For example, the hospital and its physicians may offer "package pricing" for given services, under which a health plan company may pay a set price inclusive of both facility and professional charges for a given procedure, such as a transplant. The PHO may also contract with health plan companies for broader ranges of services.
Other PSNs may be more "integrated" (i.e., there may be greater economic or corporate ties among the participants). For example, in many states such as Minnesota, hospitals may directly acquire physician practices and employ the practitioners. In other states, such as California, hospitals and physicians have created "foundations" under which they join as closely as they may without violating state law prohibitions against the corporate practice of medicine.
Other PSNs may involve a less formal "merger" but still are organized to allow providers to jointly contract with Health Plan Companies on an accountable basis. These PSNs may take the form of traditional "Independent Practice Associations" (IPAs) or even as Health Provider Cooperatives.
Finally, still other PSNs may involve only one type of provider (such as physicians combined in a multi-specialty arrangement), or even specialist groups of physicians (such as cardiologists) spread through a number of geographic regions, while others are more inclusive as to provider type, size, and geographical dispersion.
In short, the actual evolution of any PSN is uniformly the result of local market conditions and regulatory constraints. Because the regulation of health care systems is rapidly changing, and because local market conditions are so varied, very little can be said at this time about the inherent validity, prevalence, or usefulness of any individual corporate or organization model for PSN development.
Nevertheless, PSNs do have several things in common. In general, they are initiated, financed, and governed by health care providers. They generally are formed for the purpose of delivering health care services through contracts with Health Plan Companies. The PSN often will arrange to contract on an accountable basis, using techniques such as capitation or "hold-backs," and they generally will subject themselves to internal quality assurance, utilization review, and credentialing standards.
Provider Sponsored Networks play an important and positive role in health care delivery, particularly in the delivery of managed health care. Health Plan Companies find that the expansion of programs of managed care is facilitated by PSNs, as they:
_ Provide an established network of providers.
_ Promote provider accountability for quality by providing a vehicle through which administrative simplification and clinical quality management programs can be implemented.
_ Reduce the Health Plan Company's administrative expense of contracting by providing a single party through which to negotiate contract terms.
Traditional Health Plan Company Type Regulation of PSNs is Redundant and Does Not Serve a Useful Public Purpose.
PSNs differ in significant respects from Health Plan Companies. For example, PSNs:
_ Do not contract directly with Covered Persons.
_ Are not the locus of plan design, premium or rate setting, or benefit administration.
_ Are primarily in the business of providing health care services directly or through their affiliates rather than in the business of insurance.
These differences are highly significant. A group of hospitals and physicians, for example, does not dictate to a Health Plan Company the type and extent of benefits to be offered to employers and employees. Similarly, while providers obviously negotiate the charges for their services with a Health Plan Company, the providers have no direct say in establishing the premium the Health Plan Company would, in turn, charge to employers. Moreover, a group of hospitals and physicians in City A would have no say over which providers would be a part of the Health Plan Company's network in City B (nor would the City A providers have any ability to oversee the quality of care in City B). Each of those differences reflect the fact that the business of PSNs (delivering health care services) is not the same as the business of a Health Plan Company (extending commitments of health care coverage).
Nevertheless, because Health Plan Companies sometimes pay PSNs on a capitated basis or in some similar way which reflects an incentive to manage health care service delivery within a budgeted amount, some have argued that PSNs should be subject to Health Plan Company-type regulation, particularly solvency regulation. This argument is often premised on the notion that a capitated or similar performance-based payment is the economic equivalent of a premium. Reasoning backwards, proponents of this line of thought conclude that since the PSN is receiving a "premium," it must be a Health Plan Company, and if it is a Health Plan Company, it should be subject to the same solvency, filing, and reporting requirements applicable to Health Plan Companies in general. This argument is often advanced under the guise of "creating a level playing field," thereby ignoring the fact that PSNs and Health Plan Companies are fundamentally different in operation, in purpose, and in the eyes of consumers and purchasers, regardless of how one might characterize payment methodologies.
Historically, insurance regulation has sought to promote four public policy goals: solvency of the insurer (to protect consumers' expectations that coverage is there when they need it); fairness in claim payment (to protect consumers from corporate overreaching); adequacy of the benefit package (to protect consumers from misleading sales claims or "junk" coverage); and overall honesty and competency of company management and operations (to serve as a buffer and a bulwark for all of the foregoing). AHA agrees that these continue to be important considerations in Health Plan Company regulation.
There are several reasons why traditional Health Plan Company type regulation is not relevant to PSN operations, primarily because many of the historic public policy goals of insurance regulation are obviously inapplicable to PSNs.
_ Assurance of adequate benefit design, while an important and necessary goal, is not achieved through PSN regulation since the PSN has very little if anything to do with designing a plan of benefits. PSNs provide health care services, not health plan benefits. It is the insurer, HMO or employer which generally selects the benefits to be provided and then in turn contracts with groups of providers to deliver covered services.
_ Similarly, assurance of fair benefit payment is quite important to health care providers, since they are often the ultimate economic beneficiaries of those payments. What provider of service is not interested in receiving payment for the services which a health insurance policy is intended to cover? However, it would be inherently circular to impose insurance type regulation on PSNs simply to assure that the PSN pays itself and its members in a fair and consistent way.
_ Third, the goals of competent and honest administration have equal applicability to health care providers and Health Plan Companies, but those goals have been historically well advanced at the provider level through existing state licensure requirements and oversight directed at physicians, hospitals, and other professional care givers. One might well argue that the jurisdiction and disciplinary authority of any state professional licensing board over health care professionals and of state health departments over institutional providers exceeds to a significant degree the type of control exercised by state insurance regulators over health plan managers, officers or directors.
_ Fourth, there is little opportunity to mislead the public. Consumers will look first to the entity which has given them a direct promise of coverage, rather than health care providers, to resolve issues regarding their health coverage.
The position that broad-based health plan company level accountability requirements are best placed at the health plan company level is not to suggest that health care providers should be able to avoid participating in safeguarding the public. While appropriate health plan company regulation should reflect the health plan company's ultimate compliance responsibilities, those regulations should also reflect the contractual obligations of health care providers to cooperate in meeting those obligations, particularly in the areas of quality assurance, utilization review, data privacy, and consumer complaint procedures. Provider-based enrollee hold harmless and continuation of care requirements may also be appropriate. Providers and PSNs should also remain accountable to the public for the quality of care delivered through state professional and institutional licensure bodies, such as boards of medical examiners and state health departments. Other areas of provider accountability may similarly be open for further evaluation.
The Issue of Solvency
Given the historic concerns of insurance regulation (i.e. fairness, adequacy, competency), the remaining issue relative to the imposition of insurance type regulation on health care providers is solvency. The AHA is firmly committed to Health Plan Company solvency. As previously noted, the AHA also concurs that traditional Health Plan Company regulation, including solvency regulation, may be appropriate when the operations of a PSN have expanded to such a point that they encompass all of the functions traditionally undertaken by those carriers. At the present time, however, this is not the case. Therefore, the AHA believes that traditional approaches to Health Plan Company solvency are inappropriate and unrelated to ordinary PSN operations and activities.
The primary public policy goal supported by Health Plan Company solvency requirements is to assure the premium paying public that the health care insurance they purchase is there when they need it. To that end, insurance regulation has traditionally utilized such tools as statutory accounting and financial reporting (to assure a conservative and consistent basis for state regulation); capital, surplus, and net worth requirements (to assure a sufficient cushion against the inherent underwriting, investment, interest rate and general business risks faced by even a well managed Plan); deposit requirements (to provide a funding base for regulatory intervention); independent certification of loss reserves (to ensure the integrity of financial statements); limitations on permitted investments (to limit the risks of insufficient asset diversification and poor credit selection); limits on risk retention and standards for reinsurance entities (to promote industry wide spreading of risk); limitations on the degree of premium growth relative to existing surplus (to limit the risks associated with growth and potential underpricing); and numerous other mechanisms.
Each of these tools is focused on some element of risk faced by any insurer. While every business, including PSNs, faces risks, the tools of insurance regulation are distinctly focused on the unique risks of insurance companies and other health plan companies. Consequently, the purpose of solvency and other requirements is primarily to assure due consideration, management and regulation of "insurance risk."
In order to understand insurance risk, one must consider two different viewpoints: the viewpoint of the consumer and the viewpoint of the insurer. First, consumers face the risk of unexpected loss. In the context of health care, an individual consumer does not know in advance whether he will become sick or suffer accidental injury in a given year. The consumer does know that, if such misfortune did come his way, he would face potentially large hospital or medical bills, which he might not be able to afford.
Second, insurance companies, on the other hand, know something about the "law of large numbers." That is, the insurer knows (through the application of actuarial principles) that it is extremely difficult to predict the likely incidence of disease or accident (called "morbidity") for one person but that, if you put together a large enough population of people, you can make some statistically reasonable projections about overall health related morbidity, utilization and costs. The voluntary "lumping together" of a group of individuals, each of whom faces a similar risk of unexpected loss, is called the pooling and spreading of risk, and is the essence of insurance.
When a legal entity is publicly engaged in the pooling and spreading of risks among unrelated parties (usually through the acceptance of fixed premiums from those parties), it is typically considered to be conducting the "business of insurance." In most states, this would require a license as an insurance company; in the case of health-related risks the company may be a commercial insurer, HMO, Blue Cross type prepaid plan, or limited service plan. Moreover, in order to secure such a license the Health Plan Company must uniformly demonstrate that it has adequate resources to assure that its risk distributing activities will not cause it to become insolvent. Obviously, an insolvent insurer is not able to pay a particular insured's claims, leaving the consumer with large, unpaid medical bills and thus defeating the insured's original purpose in buying the insurance. Avoidance of this result has therefore appropriately led to the establishment of Health Plan Company solvency and other related requirements.
Not every contract which involves the "transfer" of risk from one party to another also involves the "distribution" (i.e., pooling and spreading) of risks as well. Historically, only those contracts involving both the transfer and the distribution of risk have been treated as "insurance," thus bringing into play insurance (and solvency) regulation. Unfortunately, the task of applying the somewhat esoteric concepts of risk transfer and distribution to determine whether a particular entity or particular contract is engaged in the business of insurance has proven difficult to courts, legislators and regulators alike.
Oftentimes, courts and others have made a distinction between "service risk" and "insurance risk" to reflect the difference between a contract which merely transfers risk to one which involves both the transfer and the distribution of risk. For example, in several states the question of whether a warranty company requires licensure as an insurer has been examined. Often, the final answer has turned upon whether the warranty company could itself provide the needed repairs or whether it was a mere financial intermediary which relied on its ability to arrange contracts with other, unrelated repair shops to actually perform the work. Where the warranty company could perform the promised repairs itself, the courts have usually concluded that the contract involved some transfer of risk, but no distribution of risk. That is, the warranty company, in accepting a fixed fee, might have to work harder if a large number of repairs came in, but was not serving as an intermediary between other repair shops and the consumer. The courts generally concluded that the risks involved were only "service" risks and that no insurance license was required. Where the warranty company did not deliver services directly, but instead had to contract with unrelated repair shops, the courts generally found the company to be engaging in the business of insurance (i.e. was accepting "insurance" risk) and insurance licensure was required.
In the context of health insurance, the insurer, or HMO, or Blue Cross company is engaged in accepting insurance risk because it accepts premiums from similarly situated individuals facing similar risk of loss, thus transferring the risk from the insured to the company and distributing that risk among a large pool. When the Health Plan Company in turn contracts with a PSN, perhaps on a capitated basis, it may transfer a portion of the risk to the PSN, but there is not an additional distribution of risk (i.e. pooling and spreading) at the provider level.
In short, most PSNs are engaged in accepting service risks, not insurance risks. The primary goal of a PSN is to deliver health care services, and a PSN is typically organized to do just that. It may include hospitals, physicians, and other allied care-givers. It may include acute care, outpatient, and home health care services. It may provide laboratory, radiological and pharmaceutical services. Its purpose is to deliver health care services. Even if the PSN is organized as a separate legal entity, it is generally formed to operate as the "alter ego" of the providers involved, who capitalize, govern, and operate the PSN entity and continue the primary goal of delivering health care. In sum, the purpose of a PSN is to deliver the services that one might buy insurance in order to be able to afford when one needs those services. In that sense, the PSN does not sell insurance; the PSN sells the object of the insurance, which is health care services.
It would be absurd to argue that PSNs do not face risk, because they are businesses and businesses face risk. There is always the possibility that a PSN's expenses and costs may exceed its revenues. There is always the possibility that a PSN might become insolvent and close its doors. These are the same as the "service risks" described previously. They are not the same as insurance risks. Most importantly, those risks exist regardless of how the PSN is paid. Any business which enters a contract, particularly a fixed price contract, faces these same risks. Whether a PSN is paid on a fee-for-service basis, or on a budgeted or incentive basis, or a capitated basis, there is still a risk associated with its activities, just as there is a risk for any business. The essential point is that the business of a PSN is health care. A PSN does not hold itself out to the public as a mechanism for the voluntary pooling and spreading of the risk of unexpected loss. Instead, the PSN acts as an entity organized to deliver health care services. As a result, the PSN is simply not engaged in the business of insurance, nor is it acting as an HMO, merely because of the methodology of payment. Because a PSN merely accepts service risk, and not insurance risk, it should not be treated as an insurer and should therefore not be subject to separate licensure or solvency requirements.
Practical Regulatory Considerations
The conclusion that a PSN is not acting as an insurer or as an HMO does not undermine public confidence or safety. The public's expectations that they will receive the health coverage they have paid for can be met--as they always have been--through appropriate solvency regulation of Health Plan Companies.
At the same time, regulation of insurance related concerns, however expressed, is achieved most practically and efficiently by placing that regulation at the Health Plan Company level rather than at the provider level, for a variety of reasons.
_ Health Plan Company regulation is the only logical point at which regulators can efficiently and effectively evaluate the totality of benefit packages offered, the solvency of the entity providing those benefits, the adequacy of the overall provider network offered, and the fairness of the administrative and claim adjudication procedures employed.
_ Consumers routinely deal with insurers and look to them to assure that benefits are provided. Consumers understand the difference between an insurance company and a health care provider.
_ Health Plan Companies provide a consistent platform for regulation. First, insurers typically offer an existing organizational capacity to respond to regulation, with administrative and operational staff familiar with historic regulatory requirements and issues. Second, regulation of Health Plan Companies builds upon the existing base of historic state regulation.
The ERISA Dilemma
At the present time, state regulators have a reduced ability to regulate the benefit plan design, solvency, and claim payment process of self-insured employee welfare benefit plans governed by federal law. This gap in state regulatory powers has prompted some to suggest that state regulation over those plans be obtained indirectly by regulating the providers with whom the self-insured plan contracts. The AHA does not agree. Instead, and for all of the reasons previously described, the AHA supports revisions of federal law to establish standards for self-insured plans comparable to those imposed on state licensed plans and to enable the U.S. Department of Labor to delegate appropriate enforcement powers to state Health Plan Company regulators over employer based self-insured plans operating substantially in one state. We believe that comparable regulation of all Health Plan Companies provides a rational and economical (not to mention less litigious) approach to the protection of public interests.
During the pendency of any such federal reform, it should be noted that self-insured employers with little or no federal or state solvency regulation are rendered in fact somewhat less risky if they are permitted to contract with PSNs on a capitated or similar risk sharing basis. As reflected in the current NAIC risk based capital study, the statistical volatility and risk of failure of a Health Plan Company is reduced when the company can gain more predictability over its health care costs through provider contracting, particularly through capitation. If contracting of this sort by self-insured employers is discouraged by requiring health care providers to first get an insurance license, a self-insured employer may not be able to implement these risk reducing contracts simply because there may not be anyone to contract with on that basis. As a result, the self-insured employer Plan may actually face a greater, rather than lesser, risk of insolvency. This would, in turn, place enrollees at greater risk.
While comparable standards for self-insured employers is preferred because it is best suited to protect the public, the likelihood of near-term federal reform is uncertain. Therefore, alternative forms of regulation for PSNs which wish to contract with self-insured employers using capitated or other forms of accountable contracting, including financial capability, should be considered. These alternatives should particularly reflect the underlying nature of PSN activities (i.e. delivery of health care services). Alternatives for further discussion might include:
_ The imposition of plan participant "hold harmless" requirements upon PSN providers to protect plan participants in the event a self-insured employer becomes bankrupt. (A hold harmless provision prohibits the provider from seeking payment from an enrollee for services rendered prior to the date of a self-insured employer's insolvency, except for co-payments, deductibles, and similar non-covered services or amounts, even if the provider is not paid by the employer.)
_ The imposition in certain situations of a "continuation of care requirement" to give some protection to the most vulnerable plan participants in the event of a self-insured employer's insolvency. (A continuation of care requirement requires the provider to continue to provide care for a limited period following the insolvency of a self-insured employer; for example, a hospital might be required to continue to treat a hospitalized enrollee until discharged.)
_ The imposition of some financial capability requirements upon the PSN which contracts with self-insured employers on a capitated or risk sharing basis in the interest of promoting overall consumer and public protection until such time as federal law imposes solvency or reserve standards on self-insured plans. Traditional insurance, HMO or similar solvency requirements, including the proposed health organization risk based capital standards, are inapposite and inappropriate to service delivery entities. Provider Sponsored Networks are not insurance companies and should not be subject to the same capital requirements as insurers. The specific PSN solvency standards to be developed would need to take into account the actual operational and organizational characteristics of the employer/PSN relationship.
For example, if a PSN contracts only for pre-paid services which can be provided directly by the PSN or by its affiliated members (except for nominal payments to a limited number of providers necessary to assure that the network has adequate geographic, provider type, and emergency coverage), it may be reasonable to create a regulatory scheme under which the PSN agrees to file with appropriate state regulatory authorities an actuarial certification that the PSN has a net worth equal to the direct costs of providing the contracted services to the plan participants for a specified period of time following the insolvency of the self-insured employer, without regard to whether the PSN receives any payment for those services from the employer. The PSN should be allowed a variety of means to demonstrate compliance with this standard, including unrestricted surplus, reinsurance, guarantees from a financially strong party, letters of credit, or other methods acceptable to local regulatory authorities.
_ The imposition of cash flow limitations in contracts between PSNs and self-insured employers to help protect the public against the upstream domino effects of a downstream provider insolvency. It may be reasonable under some circumstances to limit the amount of prepayment a self-insured employer may make at any one time to a Provider Sponsored Network. For example, by limiting prepayments to no more than one month of capitation, a self-insured employer would be in a greatly improved position should the PSN become insolvent.
Public Policy Support for PSN development.
As noted, neither the historic rationale for insurance regulation nor the methodology of payment suggest that PSNs should be subject to regulation as Health Plan Companies. There are also several important policy reasons related to the important public interest in expanding access to quality, low cost health care which mitigate against the imposition of insurance type regulation to PSNs.
First, redundant capital and surplus standards take limited money away from the delivery of health care services. The public is adequately protected by solvency "safety nets" at the Health Plan Company level and creating an additional "safety net" at the PSN level will tie up capital idly in reserves which might be used to maintain and modernize facilities or to expand access to health care services or reduce costs.
Second, redundant regulatory structures impose additional burdens on state regulatory agencies, with potentially little additional benefit to the public. At the same time, the additional burden of regulating more entities as insurers could make it more difficult for state regulators to focus resources on troubled plans.
Third, treating capitated payments to health care providers by a Health Plan Company as insurance or reinsurance, and therefore imposing insurance type regulation on the providers, would discourage providers from accepting that form of payment, lest they become subject to substantial, additional capital and surplus requirements. This in turn would remove a significant economic tool to control health care costs from the marketplace, with the unintended result that the health plans which do remain are placed in a less stable and potentially more risky environment.
On the other hand, PSNs contribute to the improvement of the quality of health care services and reduction of health care costs by:
_ providing an established network of health care providers organized to integrate formerly disorganized delivery of care;
_ providing a vehicle for provider accountability for the quality of health care services delivered;
_ reducing the costs of contracting and administration for Health Plan Companies.
Health Plan Companies differ in purpose, operations, and consumer expectations from Provider Sponsored Networks. Health Plan Companies are primarily involved in the business of insurance while PSNs are primarily involved in the business of delivering health care services. The methodology by which PSNs are paid does not alter these differences.
These differences suggest that the primary locus of insurance type regulation is best placed on insurance type entities, and in that regard the AHA continues to support strong and consistent regulation of all Health Plan Companies, including self-insured employer plans.
Provider Sponsored Networks, on the other hand, should not be subject in most circumstances to insurance type regulation and, in fact, should be encouraged to develop as an essential component in an evolving marketplace for health care delivery and finance. During the pendency of federal reform imposing comparable standards for ERISA-exempt employers, however, alternative forms of consumer protection regulation for PSNs contracting with self-insured plans on a capitated or similar risk sharing basis should be considered.
Capitation. In general terms, a fixed amount paid periodically, usually monthly, by a Health Plan Company to a health care provider to cover the cost of designated health care services for an individual for a defined period of time. Capitated payments are sometimes expressed in terms of a "per member/per month" payment. The capitated provider is generally responsible for delivering or arranging for the delivery of all of the contracted health services required by the covered person under the conditions of the contract.
Commercial Insurer. A for profit insurance company licensed to sell accident and health insurance, generally regulated by state departments of insurance or commerce. Traditionally, commercial insurers sold basic and major medical insurance to individuals, families, or groups (including employers).
Continuation of Care Requirement. A statutory or contractual provision requiring providers to deliver care to an enrollee for some period following the date of a Health Plan Company's insolvency.
ERISA. The Employee Retirement Income Security Act of 1974. This federal law imposes fiduciary responsibility and reporting and disclosure requirements upon the sponsors and managers of employer sponsored health plans. These provisions apply to both insured and self-insured plans. ERISA generally preempts the application of any state law which "relates to" an employee welfare benefit plan, except for laws regulating the business of insurance.
ERISA-exempt Employer. An employer which self-insures its health benefit plan. As a result of the preemption provision of ERISA, self-insured plans are generally not subject to state insurance or HMO laws, such as mandated benefit, any willing provider, or solvency requirements. ERISA-exempt employer plans have some degree of regulation from the U.S. Department of Labor.
Health Maintenance Organization (HMO). An entity that provides, offers or arranges for coverage of designated health services needed by plan members for a fixed, prepaid premium. HMOs are traditionally organized as group models, individual practice associations, network models, and staff models. HMOs generally operate in a defined geographic service area. HMOs are regulated by state departments of insurance or commerce, by state health departments, or by other agencies of government. HMOs may pay providers in a number of ways, including discounted fees for services, relative value schedules, DRGs or per diems, or capitation.
Health Plan. A written promise of coverage given to an individual, family or group of covered individuals, pursuant to which a beneficiary is entitled to receive a defined set of health care benefits in exchange for a defined consideration, such as a premium. Plans are sometimes expressed in the form of group insurance policies, subscriber agreements, enrollee booklets, or summary plan descriptions. A self-insured employee welfare benefit plan maintained by an employer can also be a Health Plan.
Health Plan Company. An entity which offers a Health Plan to the public.
Hold-Back. An amount withheld from payments made by a Health Plan Company to a provider as an incentive for appropriate utilization and quality of care. The amount withheld may be returned to the provider in varying levels based on analysis of the provider's performance or productivity compared against peer providers. Sometimes called a "withhold."
Hold-Harmless. A contractual or statutory requirement prohibiting a provider from seeking payment from an enrollee for services rendered prior to the date of a Health Plan Company's insolvency.
Independent Practice Association. A legal entity, usually owned by participating physicians or other health care providers, which contracts on behalf of its participating providers with a Health Plan Company, typically an HMO. The providers will ordinarily continue in their existing individual or group practices and are compensated on a capitated, fee schedule,or discounted fee for service basis.
Managed Care. A system of health care delivery that attempts to influence the utilization, quality and cost of services provided.
Net Worth Requirement. A statutory requirement that Health Plan Companies, such as Health Maintenance Organizations, maintain their net worth at an amount in excess of a specified amount. The goal of a Net Worth Requirement is to help assure the solvency of the Health Plan Company by providing a financial cushion against expected loss or misjudgments. Net Worth is generally measured as a company's admitted assets minus its liabilities, determined on a statutory accounting basis.
Physician Hospital Organization. A legal entity formed and owned by one or more hospitals and physician groups in order to obtain contracts with Health Plan Companies to provide for a variety of services.
Preferred Provider Organization. An arrangement in which contracts are established by Health Plan Companies (typically, commercial insurers, and, in some circumstances, by self-insured employers) with health care providers. The Health Plans involved will often designate these contracted providers as "preferred" and will provide an incentive, usually in the form of lower deductibles or co-payments, for covered individuals to use these providers. Providers under a PPO are often, but not always, paid on a discounted fee for service basis.
Provider Sponsored Network (PSN). Formal affiliations of providers, organized and operated to provide an integrated network of health care providers with which third parties, such as insurance companies, HMOs or other Health Plan Companies, may contract for health care services to covered individuals. Some models of integration include Physician Hospital Organizations, Management Service Organizations, Group Practices Without Walls, Medical Foundations, and Health Provider Cooperatives. PSNs are sometimes called "integrated delivery systems."
Quality Assurance. A formal set of activities to review and affect the quality of services provided. Quality Assurance functions are undertaken both by health care providers and Health Plan Companies.
Self-insurance. A health plan offered by an employer under which the employer agrees to fund covered benefits directly from the employer's general assets, rather than through the purchase of an insurance policy or HMO contract. The employer may hire a Third Party Administrator to process claims or undertake other administrative activities, or may elect to administer the plan itself. The employer may also elect to purchase stop loss or excess risk insurance to limit its financial risks under its plan.
Statutory Accounting. A method of accounting standards and principles used by state regulatory authorities to measure the financial performance of regulated Health Plan Companies and other insurance enterprises. Statutory Accounting is more conservative than the Generally Accepted Accounting Principles used by most businesses. Solvency and other Health Plan Company standards are determined using financial documents prepared in accordance with Statutory Accounting Principles.
Third Party Administrator. An independent person or corporate entity hired to administer group benefits, claims and related matters for a self-insured employer health plan. A TPA does not accept any insurance risk relative to the plan it administers. TPAs are generally subject to special licensure by the states in which they operate.
Utilization Review. A formal assessment of the medical necessity, efficiency, and appropriateness of health care services and treatment plans. This review may be done before, after, or during a course of treatment.