The Health Law Resource

NAIC Health Plan Accountability Working Group

Memorandum & Model Bulletin to Insurance Commissioners

Contents and Overview

|Memo of Work Group | Model Bulletin | Examples of Risk-Assuming Relationships |

Many state insurance commissioners have debated whether or how to regulate provider groups which assume financial risk in the arrangement and provision of health care services to consumers and employer groups. Typical arrangements are where Integrated Delivery Systems (IDSs), Physician-Hospital Organizations (PHOs) and Independent Practice Associations (IPAs) contract, for a capitation or other risk-assuming payment arrangement, to arrange for and/or provide all or certain health care services to HMO subscribers or employees.

In 1995, the National Association of Insurance Commissioners ("NAIC") studied these relationships and concluded that many of the arrangements were assuming insurance risk and should therefore be regulated either as insurers, HMOs or as some hybrid entity. What follows is the memorandum to the state insurance commissioners from the NAIC Work Group, a "model" bulletin which the insurance commissioners could use to inform arrangements in their respective states how the insurance department would regulate such ventures and examples of various risk-assuming arrangements.

Note: As of April, 1996, the Pennsylvania Department of Health and the Pennsylvania Insurance Department have adopted statements of policy on the treatment of IDSs which assume risk and perform other functions for licensed HMOs. Look here soon for copies of these policies.

M E M O R A N D U M

TO: All Commissioners, Directors and Superintendents

FROM: Kenney Shipley (Florida), Chair Health Plan Accountability Working Group

Date: August 10, 1995

RE: Suggested Bulletin Regarding Certain Types of Compensation and Reimbursement Arrangements Between Health Care Providers and Individuals, Employers and Other Groups

The Health Plan Accountability Working Group of the Regulatory Framework Task Force (HPAWG) was charged in 1995 with consideration of the development of a single model health care licensing act for all "health carriers" (referred to as the Consolidated Licensure of Entities Accepting Risk Model Act --CLEAR) that would cover HMOs, PPOs, point-of-service plans, fee-for-service plans, Blue Cross/Blue Shield plans, commercial plans, and all other entities that finance and deliver health care services on a risk-sharing/risk-assuming basis. In developing a recommendation, the working group was asked to consider jurisdictional issues raised by such a project and to identify those areas that appropriately rest with state insurance departments and other regulatory agencies. The HPAWG made its recommendation concerning CLEAR to its parent at the Summer National Meeting in June. In order to formulate the recommendation, the HPAWG held a series of public meetings to determine, in part, the types of entities operating in the marketplace in order to better define what types of risk-bearing arrangements are engaged in the business of insurance.

The public hearings made the HPAWG aware that groups of health care providers may be entering into certain types of compensation, reimbursement, and risk-sharing arrangements that rise to the level of being the business of insurance without first obtaining a license or certificate of authority from state insurance regulators, in violation of state laws. These groups of health care providers are commonly referred to by a variety of names, such as "integrated provider organizations--IPOs," "integrated provider arrangements--IPAs," "physician hospital organizations--PHOs," and "provider sponsored networks--PSNs." It was the overwhelming opinion of the members of the HPAWG that if these entities are accepting risk on a prepaid basis (e.g., capitation, etc.), they are in the business of insurance and need to be concerned about existing insurance licensure laws.

The only exception to this opinion is where the entity is accepting "downstream risk" from a duly licensed health carrier (e.g., HMO), on that carrier's policyholders, certificate-holders or enrollees.

In order to bring this serious problem to your attention, the HPAWG has drafted a suggested Bulletin for your consideration in order to alert the marketplace to your state's laws and regulations. The Bulletin focuses only on risk-sharing arrangements where a provider agrees to assume all or part of the risk for health care expenses or service delivery from an individual, employer or other group. Examples of the types of insurance arrangements that may be occurring in your state are provided in the sample Bulletin.

Several states have already found it necessary to address this ever-increasing problem. Copies of a letter used in Ohio and a Bulletin released in Minnesota are enclosed as background for your review. However, prior to using the Bulletin we urge your staff to undertake a thorough review of your statutory and case law and to modify the Bulletin to conform to your state's legal requirements. To assist you in this review, we have enclosed copies of a Maryland Attorney General Opinion, No. 90-030, and one from Georgia, No. 82-71, that pertain to this subject, together with some other thoughts and analysis developed from our many hours of deliberations and discussions.

We hope you find this information helpful. If you would like to obtain any further information on this subject or on our deliberations, please feel free to contact either me or Greg Stites (NAIC/SSO) at 816/842-3600, extension 460.

Draft Bulletin

This bulletin sets out the position of the Commissioner of Insurance [insert Director or Superintendent, as appropriate] regarding certain types of compensation and reimbursement arrangements between health care providers (e.g., doctors, hospitals, networks and others) and individuals, employers and other groups. It is the Commissioner's goal to see that consumers have the solvency and consumer protections afforded by the insurance laws.

If a health care provider enters into an arrangement with an individual, employer or other group that results in the provider assuming all or part of the risk for health care expenses or service delivery, the provider is engaged in the business of insurance. Providers wishing to engage in the business of insurance must obtain the appropriate license [certificate of authority] (e.g., health insurer or HMO, etc.) from the Department of Insurance [insert Division, Bureau, etc., as appropriate].

For example, if a group of doctors or a hospital enters into an arrangement with an employer to provide future health care services to its employees for a fixed prepayment (i.e., full or partial capitation) the doctors or hospital are engaged in the business of insurance. Examples of other arrangements that may be the business of insurance include risk corridors, withhold or pooling arrangements. The only arrangement where a provider need not obtain a license from the Department of Insurance is when the provider agrees to assume all or part of the risk for health care expenses or service delivery under a contract with a duly licensed health insurer, for that insurer's policyholders, certificate-holders or enrollees. An example of this is when a group of doctors or a hospital enters into an arrangement with an HMO to provide services to the HMO's enrollees in exchange for a fixed prepayment.

The Department of Insurance invites health care providers who have entered into an arrangement, or who are considering doing so, to ask for clarification if they are uncertain whether the arrangement violates state law. The Department will be pleased to work with providers to bring any arrangements into compliance with state insurance law or other laws applicable to health carriers.

August 10, 1995, Memorandum Addendum

Thoughts and analysis on groups of health care providers engaging in the business of insurance.

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Bulletin Fact Situation:

"For example, if a group of doctors or a hospital enters into an arrangement with an employer to provide future health care services to its employees for a fixed prepayment (i.e., full or partial capitation) the doctors or hospital are engaged in the business of insurance."

Various Definitions for "Insurance":

In Colorado--"means a contract whereby one, for consideration, undertakes to indemnify another or to pay a specified or ascertainable amount or benefit upon determinable risk contingencies, and includes annuities."

In Tennessee--"means an agreement by which one party, for a consideration, promises to pay money or its equivalent, or to do some act of value to the assured, upon the disruption or injury, loss or damage of something in which the other party has an insurable interest..."

In Florida--"is a contract whereby one undertakes to indemnify another or pay or allow a specified amount or a determinable benefit upon determinable contingencies."

Accepted Case Law Definition for an "Insurance Contract":

"...five elements are normally present in an insurance contract, which are:
  1. An insurable interest.
  2. A risk of loss.
  3. An assumption of the risk by the insurer.
  4. A general scheme to distribute the loss among the larger group of persons bearing similar risks.
  5. The payment of a premium for the assumption of risk.
See Professional Lens Plan, Inc. vs. Department of Insurance, 387 So. 2d 548 (Fla. 1980)

Analysis of Fact Situation Applying a Definition of Insurance and Case Law:

For purposes of this scenario, assume Florida's definition of insurance, namely, "a contract whereby one undertakes to indemnify another or pay or allow a specified amount or a determinable benefit upon determinable contingencies." Apply the five elements normally present in an insurance contract as set forth in the Florida case cited above:

  1. An insurable interest. The employer in this example is a consumer and has an insurable interest in the health and welfare of its employees (and importantly their dependents) especially where it has established a health benefit plan that obligates it to pay for or provide health care benefits to its employees.
  2. A risk of loss. The employer has a risk of loss when it establishes a health (employee) benefit plan that obligates it to pay for or provide health care benefits to its employees. The design of most major medical health benefit plans sponsored by an employer puts it at major financial risk. If employees stay healthy, this risk is diminished. However, if numerous employees become catastrophically sick the risk dramatically increases. Please keep in mind that lifetime maximums for total health care expenses per covered life under a health benefit plan are commonly set at $1 million or even $2 million. Multiply that by the number of employees in the company and one gains a better understanding of the potential risk of loss. Traditionally, employers will purchase insurance to cover this risk of loss, or, if they are of sufficient size in terms of the number of employees covered and financial strength, they will self-insure using the general assets of the company.
  3. An assumption of the risk by the insurer. In this scenario, the providers become the insurer because they have accepted the risk of providing a schedule of health care benefits on a fixed prepayment basis (usually a fixed monthly charge or fee per employee). The schedule may be all or just part of the benefits required to be covered under the employer's health benefit plan. Regardless, the risk accepted is that of having to provide health care benefits to employees as needed. Again, just as in the discussion of the employer's risk in Paragraph 2 above, the providers have now assumed all or part of the risk to pay for or provide health care benefits "upon determinable contingencies," that is, that only a certain number of employees get sick enough to require benefits. The providers will make a profit if utilization of their services is at or less than the level priced for when they negotiated their contract with the employer. The providers will lose money, and potentially be forced out of business, if overall utilization for the number of employees they have agreed to treat is higher than the total of the fees they have agreed to accept from the employer.

    As an aside, if this scenario was not an example of the "assumption of risk," departments of insurance around the country would not be receiving policy form filings from duly licensed insurance companies who have been asked by providers to insure this very risk (e.g., the risk of capitation).

    As another aside, some providers have argued that since the employer remains primarily obligated (i.e., stays at risk) to pay or provide for the benefits of the health benefit plan even if the provider group goes insolvent that somehow, magically, this fact removes these transactions from being the business of insurance. This is not the case. Here the employer is seeking to remove all or part of its determinable contingent risk arising from its obligations under the health benefit plan it established for its employees. Employers know that they stay ultimately obligated under the plan to their employees.

    However, the employer has an expectation that when it prepays a fixed amount to someone to take over a variable obligation belonging to them, that the person or entity will be there when the time comes to perform. Insurance laws are designed to protect all consumers. Employers are consumers. Employers purchase all types of insurance to help covers risks that they are primarily liable for.
  4. A general scheme to distribute the loss among the larger group of persons bearing similar risks. The scheme to distribute losses among a larger group of persons arises from a theory that having to provide more services to one employee will be balanced out by under-utilization of many other employees. At the end of the month, the provider is seeking to have made a profit by having provided a total amount of services of a value at or less than the total amount of the fixed prepayment from the employer (and in most cases, many employers). It is highly unlikely that a provider will join one of these groups and engage in these activities solely with one employer. Even where they have done so, this analysis would hold true, namely, that the activities would be the business of insurance.
  5. The payment of a premium for the assumption of risk. The payment of a premium for the assumption of risk occurs when the providers have agreed to accept a fixed prepayment in exchange for providing certain health care benefits for a set number of lives (employees and their dependents). Actuaries are commonly hired by providers to assist them in determining the amount of risk they are accepting before they negotiate one of these contracts.

Conclusion: Any group of providers is engaged in the business of insurance whenever it contracts directly with an employer to provide future health care services on a fixed prepaid basis (e.g., capitated basis). However, varying fact situations must be individually reviewed and analyzed in a similar fashion before the same conclusion can be reached.

General Discussion of the Marketplace:

Typically, when an employer chooses to establish a health benefit plan for its employees, it first decides how to fund or fulfill its obligation under the plan. It can choose to self-insure (also referred to as "self-funding") or to purchase insurance. The plan itself is usually designed by the employer in consultation with a health benefits consultant or with a licensed insurer, which ultimately will either "administer the self-insured plan" or "fully insure it." Either way, the plan is an employee benefit plan under ERISA. It is important to keep in mind that few employees pay 100% of the cost of a health benefit plan. Employees are regularly subject to co- payments and deductibles and in many instances are required to contribute monthly "premiums" towards the cost of the plan. Unfortunately, most employees are not privy to whether their plan is self-insured or fully insured. The NAIC's White Paper entitled ERISA: A Call for Reform points out the lack of protections for employees under a self-insured plan.

If the employer chooses to self-insure, the amount of money it must pay each month varies depending on how often its employees receive treatment (i.e., it depends on claims experience). Self-insured employers will often hire an actuary to determine its theoretical monthly financial obligation in order to set a global budget for the amount at risk and the statistical odds of exceeding this budget. The larger the number of covered lives in the group, the more predictable the risk.

An employer afraid of the variable financial risk required by self-insuring may choose to transfer the risk (or a portion thereof) by paying someone else to accept it. Traditionally employers will go out and solicit bids from various types of insurers to "take over the group," meaning to remove them from the risk of being obligated beyond a defined amount each month, referred to as premium.

As medical expenses have risen in recent years and new market systems have moved more lives into some form of managed care, employers have been forced to find non-traditional ways to try and reduce their costs and obligations. At the same time, providers have become increasingly frustrated with their standing in traditional managed care arrangements. It appears that provider groups have recently begun joining together in ever-increasing business combinations to sell and provide their services directly to employers with self- insured health benefit plans on a fixed prepayment basis (and other risk-assuming arrangements). Remember that these two groups have been doing business with one another for years and years, only on a "fee-for-service," "discounted fee," "cost-plus" basis, "DRG" basis, etc. All of these more traditional types of contracts paid the providers for actual services incurred only when someone got sick and needed them. The trigger mechanism for payment was someone getting sick. None of these contracts paid providers for when people did not get sick. Under the capitated payment mechanisms, the providers are counting on the vast majority of people they are under contract to serve not getting sick, yet these agreements expose them to the risk that everyone will.

As stated earlier, an employer is a consumer that deserves the protection of the insurance laws. The employer has made a fixed payment (a premium) to the providers to provide future (randomly used) health care services to its employees. If the providers become insolvent, the employer has lost its premium, yet it is still obligated to continue to pay for or provide for all the health care benefits under the health benefit plan. This scenario is further made grievous where the employees have contributed toward the fixed prepayment by paying a "premium" to their employer for the health benefit plan. Now both parties have paid for something they won't get except by paying someone else for the services.

This scenario also places the employees at risk since most providers will look to them for full payment for the services they have individually received in a situation where the employer falls on hard times and becomes in arrears for payment of the fixed prepayment.

Since no privity of contract exists between the providers and the employees, the providers can look for payment from the person who personally received the treatment. It has been reported that few of these risk-sharing agreements have hold-harmless provisions to protect the employees if the employer were to become insolvent.

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