Provider Relations Department

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American Specialty Health
Laws and Regulations Applicable to Downstream
Risk Entities
Sandy Ward May 19, 2003
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American Specialty Health LAWS AND
REGULATIONSDOWNSTREAM RISK ENTITIES

• HISTORY
• - What is it and why regulate it?
• NAMCR White Paper - June 2001
• NAIC HMO Model Act - December 2002
• State specific laws prior to regulatory models
• New York
• New Jersey
• Colorado

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American Specialty Health LAWS AND
REGULATIONSDOWNSTREAM RISK ENTITIES
HISTORY

• Legislation
• Federal HMO Act of 1973
• California Knox-Keene Act of 1975
• California 1999 Provider Solvency Legislation
  (S.B. 260)
• What is a Downstream Risk Entity?
• A Downstream Risk Entity (DRE) aka as a Risk
  Bearing Entity (RBE) is generally a provider
  group or intermediary management company that
  receives a prepaid monthly amount generally
  negotiated on a per-member per-month basis.
  Under these capitated arrangements, the DRE
  agrees to provide certain services for a certain
  period in exchange for a fixed dollar amount.
• Types of Risk
• Underwriting Risk
• Medical Services Risk
• Administrative Risk

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American Specialty Health LAWS AND
REGULATIONSDOWNSTREAM RISK ENTITIES
HISTORY

• Types of Financial Arrangements
• Capitation
• Capitation with withholds/bonuses
• Cash maintained and administered by health plan
  with periodic reconciliation to DRE
• Percentage of premium
• Why Regulate Downstream Risk
• A solvency of a DRE has a direct result on the
  solvency of an HMO/insurer
• - New Jersey -- HIP Health Plan of New Jersey
  1992 Liquidation
• - California -- FPA Bankruptcy 1999
• Unfair for HMO to pay twice
• Regulation protects members/insureds if DRE
  fails to live up to its promises for covering
  health care services and paying claims bankruptcy
• States that prohibit Downstream Risk without HMO
  licensure
• California
• Texas

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American Specialty Health LAWS AND
REGULATIONSDOWNSTREAM RISK ENTITIES
NAMCR WHITE PAPER National Association of Managed
Care Regulators (NAMCR) - - June 2001 NAMCR
EXECUTIVE SUMMARY Appropriate regulatory
attention to the transfer of various kinds of
risk by managed care organizations and entities
with which they contract is one of the most
complex and serious challenges faced by
regulators at this time. Recently, failures or
insolvencys of entities to which downstream risk
had been delegated have tested regulators
ability to protect members and insureds of
managed care organizations and to ensure that
they received the health care services for which
they had contracted and paid. Option 1 Health
Plan oversees RBE. Regulators oversee Health
Plan. The Health Plan oversees the delegated
functions through its contract with RBE.
Contract should include pre-operational audits
and the right to audit on an ongoing basis. The
Insurer is responsible for all filings and
report to the State or Federal government. The
regulators authority to pre-approve operations
and audit is confined to the licensed. This is
the least effective approach to assure timely,
quality care for the insurer members. Option
2 The Health Plan oversees RBE. Regulators can
audit RBE and take corrective action. The Health
Plan oversees the delegated functions through
its contract with another entity, however, the
State and Federal regulators have the right and
statutory authority to examine, audit and take
corrective action against the RBE. This approach
is more effective than Option 1 since the
regulators can be proactive in correcting a
problem with the RBE. Option 3 RBEs are
licensed/regulated by state. The Health Plan and
the RBE are licensed by the State directly. The
RBE is responsible to the State by statute and
to the Health Plan by contract. This is the only
arrangement where the RBE may set up reserves
(in a vehicle acceptable to the State such as a
trust, etc.) for which the Health Plan can take a
credit on its balance sheet. This is the
strongest level of oversight wherein the State
can assure delivery of quality of care to the
Health Plan members or insureds.
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American Specialty Health LAWS AND
REGULATIONSDOWNSTREAM RISK ENTITIES
NAMCR WHITE PAPER

• NAMCRs additional recommended actions
• Review NAIC Accountability Models
• Delegated functions should be in contract
  subject to State/Federal approval
• Contracts should provide for monitoring by the
  Health Plan
• A pre-approval assessment of the entitys
  ability to assume risk should be made
• Contract must address the flow of information
  between RBE and Health Plan and must be made
  available to the Health Plan to meet is
  monitoring and state/federal reporting
  responsibilities
• All levels of contracts must contain hold
  harmless wording to protect the members/insureds
  from any balance billing for covered services,
  even in the event of an RBEs bankruptcy or
  liquidation

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American Specialty Health LAWS AND
REGULATIONSDOWNSTREAM RISK ENTITIES
NAIC MODEL

• National Association of Insurance Commissioners
  (NAIC)
• HMO Model Act as of December 2002
• Registration required
• Contracting requirements
• Oversight responsibilities of HMO/Insurer
• Continuity of care
• Enforcement against RBEs

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• RBE REGISTRATION REQUIRED
• All RBEs except those currently subject to state
  insurance regulation must register annually with
  the State Commissioner
• Possible exceptions
• RBE contracted with a single HMO, provides
  direct care to covered persons of that HMO,
  and detail of claims payments are available for
  examination from the HMO
• Registration shall include
• A list of all entities with which the RBE has
  contracts and number of covered persons
• A listing of all major categories of health care
  services provided
• An annual audited GAAP financial statement
• A list of all subcontractors (e.g., provider
  contracts)
• Sample contract forms
• A list of all stop loss arrangements
• Any other information requested by the State
  Commissioner

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• RBE REGISTRATION REQUIRED (CONT.)
• RBE shall permit the State Commissioner to
• Inspect RBEs books and records
• Examine under oath any officer of the RBE with
  respect to the use of its funds and compliance
  with terms of its contracts to provide covered
  benefits under the health benefit plan
• RBE must file any material modification to any
  document filed with the State Commissioner

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• CONTRACTING REQUIREMENTS
• HMO/Insurer may not contract with an unregistered
  RBE
• HMO/Insurer shall provide the following, upon
  request, to the RBE
• method of payment and basis of calculation of
  payment
• monthly list of enrollees
• copy of HMO/Insurer most recent NAIC annual
  statement
• quarterly and annual statements
• any other information requested by the State
  Commissioner
• contract with RBE must include requirements for
  annual audited GAAP financials ability to bear
  risk and document management expertise and
  infrastructure
• RBE must provide quarterly status report to
  HMO/Insurer that includes
• GAAP financial statements
• Aging report on claims paid, pended or denied
• Monthly report of estimated reported claims and
  an IBNR report

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• CONTRACTING REQUIREMENTS
• RBE shall provide the HMO notice within 30 days
  of
• changes in ownership structure of RBE
• financial or operational concerns regarding the
  financial viability of the RBE
• loss of DOI registration
• HMO shall provide to the State Commissioner on a
  quarterly basis a list of all RBEs under contract
  and the number of covered persons assigned or
  selected by each RBE, plus any additional
  information the State Commissioner may require
• HMO shall include in its RBE contracts a
  provision that allows the State Commissioner, in
  the event the RBE fails to comply with the act,
  to assign for six months the RBEs contract with
  providers to furnish covered services

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• OVERSIGHT RESPONSIBILITIES OF HMO
• HMO must notify State Commissioner if RBE has
  materially failed to perform its contract
• HMO must provide to the State Commissioner
  systems to review information supplied by the RBE
• Information provided to the State Commissioner is
  confidential, subject to appropriate use by
  state, regardless of form of information
• In the event the HMO is notified that an RBEs
  registration has been terminated, revoked,
  non-renewed, or forfeited for any reason, the HMO
  shall terminate its contract with the RBE, or
  cause the RBE to cease bearing risk unless
  arrangements satisfactory to the State
  Commissioner are made

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• CONTINUITY OF CARE
• The HMO/Insurer cannot divest itself of the
  obligation under its contracts to provide health
  care services pursuant to a health
  benefit plan by contracting with an RBE
• HMO retains responsibility for fulfilling its
  contract obligation on a prospective basis
• HMO must be able to demonstrate that it can
  fulfill its non-transferable obligation in any
  event, including the failure of the RBE

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NAIC MODEL
• ENFORCEMENT AGAINST RBEs
• If an RBE is not complying with the law,
  Commissioner may terminate the RBEs
  registration, institute a corrective action
  (unspecified) or use any other enforcement
  process to force compliance
• Commissioner will notify within 5 days all HMOs
  with which RBE has contracts of any corrective
  action taken or revocation, non-renewal or
  termination of RBEs registration
• Commissioner has the power to assign RBEs
  contract to furnish covered services for up to
  six months
• Commissioner may assess fines on an RBE for each
  day the RBE failed to meet the registration
  requirements

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• STATE SPECIFIC LAWS
• NEW YORK Regulation 164 (11 NYCR 101) - - July
  1999
• Standards for Financial Risk Transfer between
  Insurers and Health Care Providers
• Insurer/HMO Filing Requirements
• HMO files IPA RBE Contracts w/DOH/DOI 90 days
  prior to implementation
• Insurer must seek prior approval of contract
  w/RBE
• Applies to all insurance and HMO products
• HMO includes Prepaid Specialty Plans (PHSP)

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NEW YORK STATE SPECIFIC LAWS (CONT.)
• RBE Financial Security Deposit
• Equivalent to 12.5 of the estimated annual
  in-network capitation revenue to be received from
  Insurer/HMO
• May be securities in trust, Letter of Credit,
  other forms of security approved by DOI
• Contract Requirements with RBE and Insurer/HMO
• Capitation must first be used for medical
  services
• DOI and Insurer/HMO shall have access to RBEs
  books records
• RBE agrees to submit to Insurer DOI audited
  financial statements showing RBEs financial
  condition
• Contract requirements with RBE and its Providers
• Provider will not demand payment from Insurer/HMO
  if RBE defaults payment
• RBE must hold harmless subscribers/insureds
• Assignment to Insurer/HMO if RBE contract
  terminated by DOI
• DOI may examine under oath any officer of RBE
  with respect to its use of funds

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• NEW JERSEY STATE SPECIFIC LAWS
• NEW JERSEY Organized Delivery Systems Licensure
  (N.J.A.C. 1748H, N.J.A.C. 1122) January 2000
• RBE must be licensed by DOBI and submit in its
  application
• Organizational/corporate documents
• Provider agreements
• RBE/Carrier Contracts
• RBE must also provider compliance with Health
  Care Carrier Accountability Act and the Health
  Care Quality Act
• Quality review programs/UM programs subject to
  DOBI and DHSS review and approval
• Minimum Net Worth Requirements
• The greater of
• a.) 6 of annual compensation for all
  contracts but no less than 100,000
• OR
• b.) 8 of annual health care expenditures as
  reported for the most recent four quarters
• ODS must deposit with DOBI cash/securities equal
  to
• 50 of the highest calendar quarterly
  compensation of the most recent four quarters but
  not less than 25,000
• ODS must maintain fidelity bond in an amount not
  less than 100,000

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• COLORADO STATE SPECIFIC LAWS
• COLORADO 3 CCR 702, Reg. 3-1-14, et.al.)
• Insurers may transfer risk to an RBE but shall
  remain ultimately financially responsible unless
  it receives approval from the Commissioner for an
  alternative mechanism to ensure that
  participating providers receive payments
• Insurer must review RBEs
• Business plan including projections
• Monthly financial information including financial
  statements
• Monthly IBNR and Y-T-D cash flow
• Statement of cash flows
• Audited financials
• Experience of senior management
• Composition of board, bylaws and ownership
• Adequacy of transaction processing
• Provider contracts

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American Specialty Health LAWS AND REGULATIONS
DOWNSTREAM RISK ENTITIES

• COLORADO STATE SPECIFIC LAWS (CONT.)
• Reserve requirements
• RBE must maintain cash and cash equivalents at
  least equal to 90 days of claims liability and
• capitation payments and
• Reinsurance equal to Federal Medical Choice
  Programs
• RBE must provide to its providers
• quarterly financial summary including claims
  experience vs. projections
• annual reports
• RBE must obtain from its providers
• statement of understanding annually regarding
  level of risk, services subcontracted
• audited financial statements