State insurance regulation of value-based care: What to watch

Perhaps the hottest buzz words in the managed care industry are “value-based care.” In some ways lead by the Centers for Medicare and Medicaid Studies (CMS), the industrywide push toward value-based care (VBC) refers to a range of efforts to align the financial incentives of health care providers (including hospitals, physician groups and ancillary service providers) and payors (including commercial insurers, self-funded employer benefit plans, managed Medicaid and Medicare Advantage plans).

The core concept of VBC is to have health care payors pay providers more for successful (and hence ultimately less costly) patient outcomes, and less for unsuccessful outcomes. The goal of most VBC arrangements is to transfer some financial risk for the cost of health care from the plan sponsor to the health care provider.

While incentivizing health care providers to achieve good patient outcomes may sound like plain good business strategy, to a lawyer’s ear, the first question must be whether such arrangements engage the provider in the business of insurance. Health insurers and other managed care organizations (MCOs) are tightly regulated by state insurance departments to strict financial solvency standards. Providers, by their nature, are not subject to risk-based capital and surplus requirements, conservative limitations on investment portfolios and hands-on financial regulation. Therefore, when a provider organization agrees to take on significant financial risk for the cost of care for their own patients, state insurance regulators can and do take a keen interest in scrutinizing such arrangements under widely varying and state-specific regulatory schemes.

As a starting point, any attorney representing either a payor or provider must understand that bearing risk for the cost of care constitutes the business of insurance, and the entity accepting risk must either be a licensed insurer (or MCO), or otherwise subject to a specific exception from the state law requirement to be licensed.

While no state requires a provider to be a licensed insurer to enter any VBC arrangement, state laws vary tremendously regarding the scope of exceptions available for risk that can be transferred; what, if any, regulatory status the provider organization must have; and whether prior approvals are needed from regulators to implement such arrangements. Thus, upon encountering a proposed VBC arrangement or other risk transfer to a health care provider, the parties are best served engaging specialized counsel with local insurance regulatory expertise in this area.

Types of financial risk transfer arrangements

Not all types of VBC arrangements constitute transfer of risk. For example, a common VBC arrangement involves a network participating provider agreeing to accept increased or decreased future payment rates for common services based on the health outcomes of attributed patients in preceding years. Generally, this arrangement, and others where the provider organization merely adjusts their own compensation and is not subsequently liable for paying for a patient’s care outside the organization, does not constitute a transfer of insurance risk. However, other common arrangements can and often do trigger insurance regulatory scrutiny, including:

Traditional capitation. An intermediary organization such as an independent practice association (IPA) contracts to be paid a fixed amount per plan member that uses the organization’s services. The plan pays a fixed per member per month (PMPM) fee to the intermediary organization to provide all necessary care within the organization’s scope of services to the member. If the intermediary organization ultimately pays participating individual providers on a fee for service (FFS) basis, while accepting a capitation payment from the health plan, many states will consider this an inherent assumption of financial risk.

Global capitation. Unlike a traditional capitation arrangement where an organization accepts payment for provision of a defined but limited scope of services, a global capitation arrangement pays an organization to bear responsibility for all health care required by the patient, with potential limited exceptions for emergency care or medically necessary rare specialties. This means the provider organization is fully responsible for managing (and paying for) an individual’s healthcare, even if the intermediary has no relationship with certain categories of necessary providers who provide that care. These arrangements are nearly always considered a transfer of insurance risk, and are closely scrutinized.

“Shared savings” programs are often either an incentive payment or a downside risk payment (penalty) based upon a provider organization’s achievement or failure to achieve a medical loss ratio (MLR) or total medical spend on an attributed population. While upside reward payments are generally not considered risk shifting, the current market trend is to include downside risk element as well for failure to achieve targets.

Bundled/episodic care programs. Large specialty provider groups often seek contracts with health plans to accept bundled payments for significant episodes of care within their control. A typical example would be a large orthopedic practice that will accept a large bundled payment for a surgery, in consideration of bearing liability for all follow-up care, any corrective surgical procedures, hospitalization, anesthesia, post-operative care and rehabilitation. The financial risk to the provider organization is that certain patients may ultimately consume significant additional care without additional compensation, including care provided by providers who are paid FFS by the organization.

State approaches to regulation

For anyone involved in crafting a VBC arrangement, it is critical to be mindful of the regulatory scheme in your state, as this can significantly affect the time, burden and cost associated with a proposed VBC deal.  Among local jurisdictions:

New Jersey has one of the most stringent regulatory schemes for controlling the transfer of financial risk from a health plan to an intermediary organization, set forth in the Organized Delivery Systems Act (N.J.S.A. 17B:48H-1 et. seq.) and implementing regulations (N.J.A.C. 11:24B-1 et. seq.). Any organization that contracts with a health plan to accept a delegation of responsibility for providing key healthcare services, which includes a combination or providing a network of providers and/or directly providing care, plus certain management functions, must be either licensed or certified as an organized delivery system (ODS). Licensure (rather than certification) as an ODS is required for the ODS to be able to accept financial risk. Licensure as an ODS subjects the entity to direct regulation by the New Jersey Department of Banking and Insurance, and includes solvency regulation akin to that of being an insurer, and further subjects the ODS and its affiliates to holding company financial and disclosure obligations typically applicable to domestic insurers.

For any provider organization contemplating a VBC deal in New Jersey with an insurer or HMO, the organization must be prepared to undertake a significant licensing process well in advance of the effective date of any arrangement, and be prepared to accept significant ongoing insurance regulatory obligations.

In contrast to New Jersey law, which places an affirmative licensing obligation on the risk-bearing provider organization, New York’s regulatory scheme calls for review and approval of individual risk-transferring contract arrangements. The New York Department of Financial Services’ (DFS) Regulation 164 (11 N.Y.C.R.R. Section 101.1 et. seq.) generally governs risk sharing contracts between providers and health insurers. Separately, the New York State Department of Health (NYSDOH) has principal responsibility for reviewing and approving all risk transfer agreements between managed care organizations (MCOs) organized under Article 44 of the N.Y. Pub. Health Law and risk-bearing intermediaries. NYSDOH regulations require that a provider organization much be organized as an IPA under New York law to accept financial risk and be exempted from regulation as an insurer or MCO. If the degree of financial risk transferred from an MCO to an IPA exceeds certain threshold, the contract is subject to dual review by both NYSDOH and NYDFS.

In New York, parties accepting a transfer of financial risk for healthcare services must be prepared to undergo a significant examination of the provider organization’s “character and competence” and financial strength, as well as a detailed multi-agency compliance review.

Pennsylvania also maintains a complex regulatory scheme governing financial risk transfer arrangements, which, like New York, subjects arrangements with HMOs to different treatment than arrangements with insurers. For arrangements with Pennsylvania HMOs, a provider organization meeting the definition of an integrated delivery system (IDS) may accept a transfer of financial risk without its own license as a risk-bearing organization, provided that the HMO-IDS contract is filed with and approved by the Pennsylvania Department of Health (PADOH) under regulatory standards set forth at 28 Pa. Code Section 9.724, and further, upon approval and effect of such arrangement, the contract is fully disclosed to the Pennsylvania Department of Insurance (PADOI), where it is subject to review for compliance with standards set forth at 31 Pa. Code Section 301.301 et. seq.

For provider organizations considering a risk transfer arrangement with a Pennsylvania health insurer, the risk-bearing organization is likely to require licensure as a “risk-assuming preferred provider organization that is not licensed as an insurance company” (RANLI PPO). A RANLI PPO application requires submission of an extensive business and financial plan, biographical information and solvency protections for joint review by the PADOI and PADOH.

These are only three state approaches to regulation of financial risk transfer arrangements with health care providers. No two states have identical approaches. Moreover, though so much innovation in VBC is in response to federal directives from CMS, on whole managed care is still run through state-regulated insurers and MCOs, and federal regulatory preemption generally does not apply to state regulation of financial solvency. Therefore navigating the state-based regulation of health care risk arrangements is and will remain an important task for health care and insurance lawyers for years to come.

Michael J. Morris is a principal of Bressler, Amery & Ross, P.C. based in Florham Park, NJ and Charlotte, NC, and a member of the firm’s Insurance and Healthcare Regulatory Practice. Michael regularly represents health insurers, managed care organizations and healthcare provider organizations in negotiating, structuring and obtaining regulatory approvals for healthcare arrangements, and in obtaining necessary insurance and managed care licenses for provider organizations in New Jersey, New York and North Carolina.