AHM Health Plan Finance and Risk Management: Provider Reimbursement and Plan Risk

Course Goals and Objectives After completing this lesson you should be able to Discuss the three main drivers of complexity in the healthcare regulatory environment Describe the influence of the Department of Health and Human Services, the Department of Labor, the Office of Personnel Management, and the Department of Defense on the healthcare environment Explain the financial effects that mandated benefit laws and regulations have on health plans Our discussion of provider reimbursement and plan risk begins with a review of the overall regulatory environment in which health plans operate. Next, we discuss specific federal and state laws and regulations that affect the healthcare environment. The Regulatory Environment The regulatory requirements that apply to healthcare financing, contracting, and delivery in the United States are numerous and complex. Many general business laws and regulations governing labor, taxes, and contracts apply to health plans much as they apply to other businesses. In addition, healthcare in general, and health plans in particular, are subject to a vast array of industry-specific laws and regulations. Broadly speaking, there are three main drivers of complexity in the healthcare regulatory environment. 1. The number of agencies that are sources of regulations or that have regulatory authority over health plans. Agencies in both the federal and state governments regulate various aspects of healthcare in the United States, and in each level of government, multiple agencies have at least some regulatory authority. State departments of health and departments of insurance typically share responsibility for regulating many aspects of healthcare. The division of this responsibility between the two agencies, however, varies from state to state. Various agencies typically administer federal programs that affect health plans. For instance, the Department of Health and Human Services, through the Centers for Medicare and Medicaid Services (CMS), administers Medicare and Medicaid. A comprehensive list of government agencies that regulate health plans on all levels would be extremely long, because health plans are subject to tax, labor, and other general laws just as any business is. Generally, the larger the number of agencies that have regulatory authority over an industry, the more complex the industrys regulatory environment. The more complex the regulatory environment, the more expensive a businesss compliance operations, all other factors being equal. 2. The relative complexity of both the practice of medicine and the management of health plans. The complexity of modern medicine directly affects the ways in which health plans are regulated. Because health plans are corporations, they cannot practice medicine in most states. Thus, health plans provide health plans that bridge the gap between providers, payors, and members. In doing so, health plans must consider the regulations that affect each of these groups and the goals that these groups have. For instance, the Food and Drug Administration (FDA) has a great deal of

influence on the use of specific drugs and on federal health law. As a result, the FDA influences health plans by determining the medical options available to the health plans providers. In some markets, laws mandate that specific benefits be covered by health plans in those markets. Health plans that are subject to those laws must cover the cost of the mandated benefits, and these mandates must be reflected in provider contracts. Furthermore, health plans operating in more than one state must comply with the regulatory and licensing requirements of each state in which they operate. 3. The importance of healthcare to the public. The public has an interest in healthcare and the contracts that provide it. Legislative and regulatory bodies reflect these public concerns about healthcare. Generally, the greater the public interest in an industry, the more likely it is that legislative bodies will design and pass laws to regulate that industry. The Regulatory Environment Ideally, healthcare laws and regulations serve the public interest by performing two broad functions. First, they provide protection to consumers of healthcare. Individuals seeking healthcare are often not in a strong position to judge the financial stability of a health plan, and sometimes lack the information necessary to compare the various health plans available. Many regulations are designed to protect consumers from these disadvantages. For example, as we saw in Risk Management in Health Plans, solvency regulations are designed to help assure that health plans are sufficiently financed to meet their obligations to plan members. Second, laws and regulations that are both well designed and consistently applied set standards of conduct for the parties involved in the business of healthcare, and these standards foster a competitive, but fair, marketplace environment. From a financial standpoint, however, the laws and regulations that achieve these ideal goals generate costs. For example, licensing requirements for providers and health plans protect consumers and foster public confidence in the healthcare professions. Part of the cost of this protection is that health plans face licensing requirementsand licensing costsin every state in which they enroll plan members. Complex regulatory environments also generate multiple markets, and therefore multiple healthcare delivery systems. For example, in a given geographical area, Medicare, Medicaid, commercial, large group, small group, and individual markets will be influenced, and in some cases created, by government laws and regulations. Changes in laws and regulations in such areas can cause healthcare resources to shift in and out of health plans or shift from less attractive health plan markets to more attractive markets. Beyond generating administrative and compliance costs for health plans, laws and regulations also frequently increase the risk for one party or another in a health plan contract. For example, mandatory coverage of certain illnesses in effect mandates the transfer of the financial risk associated with that illness from the individual plan member to one or more other parties involved in the healthcare contract.

Generally, the distribution of risk among the health plan, the plan sponsor, and the providers is one of the central processes of risk management in health plans. The method that a health plan uses to reimburse its providers is a key factor in determining the amount of financial risk that a provider assumes and the amount by which the health plan reduces its underwriting risk. In this sense, provider contracting is closely tied to risk and to risk management tools, such as those we discussed in previous lessons. The concept of the risk-return trade-off causes health plans financial risk managers to seek an appropriate balance between achieving returns that meet its owners (or stockholders) expectations and maintaining appropriate levels of solvency. Healthcare providers and health plans both face financial risk in the course of conducting business. As businesses, health plans invest financial capital with the expectation of achieving a return. Similarly, providers invest their labor, and often some capital of their own in the course of providing care, and in return expect to be financially rewarded. The various types of provider reimbursement methods therefore indicate not only how the provider will be paid for providing services, but also who will bear the risk that providing these services will be more expensive than anticipated, and who will benefit if expenses are lower than anticipated. There are almost as many provider reimbursement methods as there are provider contracts, but reimbursement methods do fall into general categories. We discuss these categories in this assignment and a future lesson. Keep in mind that what often distinguishes these provider reimbursement methods from each other is how risk is divided among the parties to the health plan contract. Regulations addressing the delivery of healthcare services mandate many of the elements that must be included in contracts between health plans and providers and, in doing so, often serve to assign the risks associated with providing these services. In the following sections, we present an overview of the sources of health plan regulation and some of the mandates imposed by regulations. Sources of Laws and Regulations1 Laws and regulations applying to health plans come from both the federal government and state governments. At both the federal and the state level, legislatures enact statutes, governmental agencies develop regulations, and courts interpret laws and establish case law, all of which affect health plans. Federal Government At least four federal agencies establish rules and requirements that affect health plans: 1. 2. 3. 4. the Department of Health and Human Services, the Department of Labor, the Office of Personnel Management, and the Department of Defense.

The Department of Health and Human Services (HHS) Acting primarily through the Centers for Medicare & Medicaid Services (CMS), HHS serves as a purchaser and regulator of healthcare. In addition, CMS is responsible for administering the

Medicare program and the federal governments role in the Medicaid program. We discuss Medicare and Medicaid in more detail in future lessons. The Department of Health and Human Services is also responsible for issuing regulations pertaining to the Health Insurance Portability and Accountability Act (HIPAA) of 1996. These regulations directly affect health plans that offer insured products to employer group health plans and individuals. Recall from Healthcare Management: An Introduction that HIPAA standardizes an approach to the continuation of healthcare benefits for individuals and members of small group health plans and establishes parity between the benefits extended to these individuals and those benefits offered to employees in large group plans. This act also contains provisions designed to ensure that prospective or current enrollees in a group health plan are not discriminated against on the basis of health status. The Department of Labor (DOL) The DOL is the federal agency with primary responsibility for administering the Employee Retirement Income Security Act (ERISA) of 1974, including recent amendments made by HIPAA. Although ERISA set the standards for the health benefit plans that many employers and some unions establish for their employees or members, ERISA does not directly regulate health plans. Because employer group plans often contract with health plans to provide health benefits to the plans enrollees, health plans that sell to this market must design health plan benefits that meet ERISA requirements. Under ERISA, various documentation, appeals, reporting, and disclosure requirements are imposed on employer group health plans. For example, every employer group health benefit plan that is subject to ERISA must have a written plan document that describes in detail the benefits covered by the plan as well as the rules governing eligibility and the procedures by which the plan may be modified. In addition, ERISA requires plans to furnish every participant with a summary plan description (SPD), which outlines the most important parts of the lengthier plan document. Plan descriptions are often at the heart of disputes over whether a health plan is obligated to cover a particular service or course of treatment. For this reason, the plan documents of a health plan may have important legal and financial consequences for the plan. The Office of Personnel Management (OPM) The OPM administers the Federal Employees Health Benefits Program (FEHBP), which provides voluntary health insurance coverage to federal employees, retirees, and dependents. The FEHBP is the largest employer-sponsored health plan in the United States. The OPM sets threshold standards that plans must meet in order to participate in the FEHBP. In addition, ERISA requires plans to furnish every participant with a summary plan description (SPD), which outlines the most important parts of the lengthier plan document. Plan descriptions are often at the heart of disputes over whether a health plan is obligated to cover a particular service or course of treatment. For this reason, the plan documents of a health plan may have important legal and financial consequences for the plan.

The Department of Defense (DOD) The DOD administers the Military Health Services System (MHSS), which provides medical care to active-duty military personnel, their families, and retirees not yet eligible for Medicare. Although its budget is substantial, the MHSS is not yet a major force in the regulation of HMOs and PPOs because of the structure of its health plan contracting initiatives and the limited number of contractors involved in its programs. State Governments As we mentioned earlier, health plans are often regulated by more than one agency in a given state. Typically, a department of insurance oversees the financial aspects of health plan operations for those health plans that do not fall under the ERISA preemption. In some states, the state department of health regulates the healthcare delivery system, including oversight of access to and quality of care. Other state agencies also may be involved in setting standards for some health plans, because states are also purchasers of healthcare for their own employees and for lowincome state residents through Medicaid contracts. The National Association of Insurance Commissioners (NAIC) is a non-governmental organization that consists of the commissioners or superintendents of the various state insurance departments.2 The NAIC assists states in their attempts to achieve some uniformity of laws and regulations applying to health plans and health insurance. The NAIC does this through the development of model acts. The model acts themselves do not carry the force of law, but state legislatures often pattern their own laws or regulations after the NAIC model laws. States may, however, alter any portion of a model law or regulation before it is adopted. Consequently, details of licensure and other requirements frequently vary from state to state, and health plans operating in more than one state must design their plans and provider contracts to comply with applicable laws in each jurisdiction in which the health plans operate. Provider Contracting Laws and Regulations The federal and state agencies and regulators discussed earlier in this lesson set the regulatory environment in which providers and health plans must negotiate contracts. In this regard, healthcare laws and regulations that require health plans to pay certain benefits or cover certain conditions or treatments have an impact on the health plan-provider contracts. The costs of complying with such laws and regulations affect provider contracts at least indirectly in a competitive market, because resources used to meet compliance costs are no longer available as potential surplus for either providers or health plans. In addition, many laws more directly affect provider contracts by mandating elements within those contracts. The large number of legislatures and agencies involved in passing and enforcing these laws make a full discussion of them beyond the scope of this text. However, the following sections briefly discuss some of the types of laws affecting provider contracts. Credentialing Standards An important feature of many health plans is that health plans either limit plan members choice of provider or give incentives for plan members to select from panels of preferred providers. Because plan members may be injured if a health plan selects providers who are incompetent or

unqualified to provide quality care, courts have held that health plans have a duty to use reasonable care in credentialing providers. Recall from Healthcare Management: An Introduction that credentialing is a review process conducted to determine the current clinical competence of providers and to ensure that providers meet the organizations criteria. Various organizations, including the National Committee for Quality Assurance (NCQA), URAC and the American Association of Preferred Provider Organizations (AAPPO), have adopted standards for conducting provider credentialing. These standards are not mandatory for health plans, but courts sometimes find that health plans have satisfied their duty to use reasonable care in their credentialing activities if they comply with these standards. The NCQA standards list the kinds of information health plans should obtain about providers during the initial credentialing process and suggest that health plans recredential all providers every two years. The NCQA has also established standards for health plans that contract with third parties to credential or verify the credentials of providers. In addition, some states have enacted laws that specify the criteria health plans should consider in making credentialing decisions. Compliance with these laws may help an health plan show that it has satisfied its standard of care. Fair Procedure Laws Fair procedure laws, also called due process laws, are laws that require health plans to disclose the criteria they use in 1. selecting or deselecting the providers with which they contract, and 2. explaining to rejected or deselected providers why they were not selected, and the process by which a provider can challenge the health plans decision. Direct Access Laws Several states have passed direct access laws, which are laws that allow health plan members to see certain specialists without first being referred to those specialists by a primary care provider. Direct access laws specify which type of specialist plan members must be allowed to see without referral. As of 1997, 14 states had direct access laws, and 9 of those states specified obstetricians/gynecologists. Other direct access laws allow visits to dermatologists (Florida and Georgia) and chiropractors (New York). 4 Even in jurisdictions where there are no direct access laws, some plans allow enrollees to see certain specialists without referral. However, in the absence of direct access laws, plans can require such referrals. In such cases, primary care provider contracts can require the primary care provider to manage some portion of the plan members utilization of such specialists. Direct access laws reduce the primary care providers ability to manage utilization of these specialists. Because both the specialists and the primary care providers have different roles under these laws than they might otherwise have, direct access laws can influence the content of contracts between the health plan and providers.

Any Willing Provider Laws About half of the states have passed any willing provider (AWP) laws, which require that health plans allow any provider to supply services to plan members, so long as the provider is willing to meet the same terms and conditions that apply to the providers that are in the health plans network. In other words, AWP laws mandate that an health plan allow providers to become part of its network or reimburse those providers at the health plans negotiated-contract rate, so long as the non-contract provider is willing to perform the services at the contract rate. Any willing provider laws vary by state. Some state AWP laws allow plan members to choose any provider, whether the provider is in the health plans network or not. Several AWP laws require that a health plan send contract proposals to all providers in the health plans service area. Other AWP laws confine themselves to relatively narrow categories of providerspharmacies, for example or they include a much wider range of providers. Provider groups tend to be in favor of AWP laws. They maintain that health plans that control a high percentage of the healthcare market in local areas may put providers who do not contract with them at a competitive disadvantage, and may further reduce competition by reducing the number of providers in the market. In contrast, health plans are opposed to AWP laws because such laws tend to remove any motivation a provider may have to contract with the health plan. A health plan can significantly reduce healthcare costs in a health plans population by contracting with providers who agree to provide services to the health plans plan members at reduced rates. In exchange, the health plan effectively makes available to the provider a larger volume of patients than the provider would otherwise have. Fair Procedure Laws Particularly in the case of hospitals, which have high fixed costs, and in the case of physicians who are in individual practice and may not have marketing expertise, a dependably large volume of patients can be a valuable benefit. The greater the perceived benefit of patient volume, the more motivated providers will be to agree to reduce their fees, and the greater the cost reductions the health plan will be able to achieve for its plan members, all other factors being equal. Further, health plans seek to enter into contracts with providers who share the health plans utilization management philosophy and who provide excellent care. By allowing all providers access to the health plans patient base, AWP laws remove providers incentive to contract with the health plan at reduced rates and make more difficult the health plans attempt to build a provider panel that includes only the top-quality providers in a given market. As a result, health plans have challenged AWP laws in court. Usually the legal basis for these challenges is that an applicable federal law, such as ERISA or the HMO Act, pre-empts state statutes. Insight 3A-1 highlights the recent finding of the US Supreme Court regarding the applicability of ERISA to AWP challenges. Insight 3A-1 In Kentucky Association of Health Plans v. Miller, the issue the Supreme Court decided is whether Kentuckys broad law violates the Employee Retirement Income Security Act (ERISA) or whether the state law is a valid regulation of the business of insurance. In the January 14, 2003

hearing before the court, the attorney for the Kentucky Association of Health Plans argued that health plans need to use limited provider networks to deliver quality health care at a reasonable cost. The state argued that the Kentucky law is a legitimate consumer protection measure that gives consumers access to providers of their choice. On April 2, 2003, the US Supreme Court, in a unanimous decision, affirmed the Sixth Circuit decision that found that Kentuckys any willing provider" laws are saved from ERISA preemption by the ERISA saving clause because the laws regulate insurance. In the decision, the Supreme Court held that for a state law to be deemed a law which regulates insurance, and thus be saved from ERISA preemption, it must satisfy two requirements: 1) it must be specifically directed toward entities engaged in insurance; and 2) it must be substantially affect the risk pooling arrangement between the insurer and the insured. Mandated Benefits Mandated benefit laws are state or federal laws that require health plans to arrange for the financing and delivery of particular benefits, such as coverage for a stay in a hospital for a specific length of time. In some cases, such as laws that require health plans to supply chiropractic services, mandated benefit laws also have the effect of requiring health plans to contract with specific types of providers. In recent years, the number of state laws mandating coverage has increased significantly. The types of illnesses or procedures covered, and the degree to which they are covered, vary from state to state. Even within individual states, mandates vary according to the type of health plan. Figure 3A-1 lists some examples of procedures or services that fall under at least some mandated benefit laws. In addition to state mandates, some mandates arise from federal law. From a financial standpoint, mandated benefits have the potential to influence health plans in the following ways:
They increase the cost of a health plans health plan to the extent that the plan must cover

mandated benefits that would not have been included in the plan in the absence of the law or regulation that mandates the benefits. Health plans must contract with providers, including specialists, to provide the required level of mandated benefits. To the extent the mandated benefits change the benefit structure of the health plans health plan, the health plans may have to contract with providers with which the health plans would not have contracted otherwise. Health plans must be able to track and process data that demonstrates that the health plan is complying with the law. The health plan must also gather and analyze cost data to be able to adequately price the increased benefits. To the extent that this data tracking and analysis represents an increased load on the health plans information and management systems, costs will increase. Mandated benefit laws may have the effect of causing a higher degree of uniformity among the health plans of competing health plans in a given market. Individual health plans that seek to differentiate their products from those of their competitors in competitive markets will have less flexibility in benefit design. Because self-funded plans typically are exempt from state mandates, in some markets, large group employers may be motivated to begin self-funding in order to avoid paying premium increases in other healthcare plans that are subject to state mandates. In other markets, self-funded plans may be pressured to add benefit coverage to match the

mandated benefits of other plans. In either case, mandated benefit laws may at least temporarily influence the structure of the market balance between self-funded and other types of plans. A full discussion of all the mandated benefit laws that states have passed is beyond the scope of this text. The following sections discuss some common and representative mandates. Mental Healthcare Coverage5 Concern that coverage for mental illnesses was not being treated on a par with physical illnesses motivated lawmakers to enact a mental health parity requirement that subsequently was incorporated into HIPAA. The federal mental healthcare coverage requirements bar group health plans from having more restrictive annual and lifetime limits or caps on mental illness coverage than for physical illness coverage if the health plan has annual payment limits or aggregate dollar lifetime caps. The federal mental healthcare coverage law does not mandate coverage for mental illness; it seeks to ensure thatif a health plan covers mental illnessthe caps and limits are comparable to caps and limits for physical coverage. More than 15 states have enacted their own mental healthcare coverage laws. These laws, similar to HIPAA, vary from mandating coverage of treatment for severe disorders or biologically based illnesses such as schizophrenia, manic-depression, or bipolar disorder to mandating parity for coverage of mental illnesses comparable to caps and limits for physical illnesses.6 Some state laws require that all terms and conditions of coverage (i.e., copayments, deductibles, etc.) be the same for both mental and physical illnesses. Some state mental health parity laws exclude substance abuse treatment from their mandates for coverage of mental illnesses. Other state laws provide extensive coverage for mental illnesses. For example, the Vermont mental health parity law, which includes in its definition of mental illness any disorder listed in the International Classification of Diseases Manual (ICDM), requires coverage for the treatment of a wide variety of mental illnesses, including substance abuse. In addition, as in several other state laws, the Vermont law prohibits separate deductibles, copayments, coinsurance, and other similar types of cost-sharing arrangements for mental and physical illnesses. 7 Generally, health plans must ensure that they comply with the mental health parity requirements of the federal law as well as any more stringent requirements imposed by the states in which they operate. Length of Stay Laws8 Some state mental health parity laws exclude substance abuse treatment from their mandates for coverage of mental illnesses. Other state laws provide extensive coverage for mental illnesses. For example, the Vermont mental health parity law, which includes in its definition of mental illness any disorder listed in the International Classification of Diseases Manual (ICDM), requires coverage for the treatment of a wide variety of mental illnesses, including substance abuse. In addition, as in several other state laws, the Vermont law prohibits separate deductibles, copayments, coinsurance, and other similar types of cost-sharing arrangements for mental and physical illnesses. 7 Generally, health plans must ensure that they comply with the mental health parity requirements of the federal law as well as any more stringent requirements imposed by the states in which they operate.

The Texas State Liability Law In addition to laws that increase health plans costs by imposing administrative or compliance requirements, some laws expose the health plan to financial liability for its actions or the actions of its providers. Providers and health plans may be liable for damages if they fail to perform duties imposed upon them by these laws. A tort is a violation of a legal duty to another person imposed by law, rather than contract, causing harm to the other person and for which the law provides a remedy. The business of healthcare is sufficiently complex that health plans face a certain level of risk from tort actions. Although it would be impossible to list all laws that could subject a health plan to tort action, one state law recently passed by Texas has the potential to significantly increase financial risks faced by health plans through tort actions, and in doing so, increase health plans costs of doing business in Texas. The Texas state liability law (SB 386) states that any health plan entity is liable for damages for harm to an insured or enrollee proximately caused by the health care treatment decisions made by the health plans employees or agents. In other words, if a physician providing care to a health plans plan member harms the plan member through medical malpractice or other negligence, the health plan, as well as the provider, is liable. Medical malpractice is a type of negligence that occurs when a patient is harmed because a provider failed to exercise reasonable care in providing medical treatment. Traditionally, health plans have not been liable in cases of physician malpractice, particularly when the physician was not a full-time employee of the health plan. The reasoning behind not holding the health plan responsible is that, in the United States, corporations are not allowed to engage in the practice of medicine; only individuals may be licensed to practice medicine. Because only individuals have the authority to practice medicine, malpractice was a tort for which only individual providers were liable. Thus, in provider contracts with health plans, the risk of malpractice was borne by the providers (or the insurance companies supplying the physicians with malpractice insurance), and not the health plans. Under the Texas law, a health plan cannot use the corporate practice of medicine doctrine as a defense. Malpractice costs make up 5% to 6% of the total healthcare costs in the United States. Determining whether or not healthcare providers who contract with health plans are agents of the health plan and whether or not health plans are liable for the actions of these agents are significant financial issues for health plans. Currently the Texas law is being challenged in court, in part on the same basis as any willing provider lawsthat is, that federal laws such as ERISA pre-empt state laws. Endnotes 1. Adapted from American Association of Health Plans, The Regulation of Health Plans: A Report from the American Association of Health Plans, Washington, D.C., February 3, 1998, 12. Used with permission; all rights reserved. 2. Harriett E. Jones and Dani L. Long, Principles of Insurance: Life, Health and Annuities (Atlanta: LOMA, 1996), 58. 3. Adapted from Academy for Healthcare Management, Health Plans: Governance and Regulation (Washington, D.C.: Academy for Healthcare Management, 1999), 12-6. Used with permission; all rights reserved.

4. Adapted from Academy for Healthcare Management, Health Plans: Governance and Regulation (Washington, D.C.: Academy for Healthcare Management, 1999), 5-32533. Used with permission; all rights reserved. 5. Adapted from Academy for HealthcareManagement, Health Plans:Governance and Regulation (Washington, D.C.: Academy for Healthcare Management, 1999), 5-25526. Used with permission; all rights reserved. 6. State Report: A Health Law Score Card, Business & Health (February 1998): 54. 7. States Move on Health Plan Legislation,Employee Benefit Plan Review (September 1997): 49. 8. Adapted from Academy for Healthcare Management, Health Plans:Governance and Regulation (Washington, D.C.: Academy for Healthcare Management, 1999), 5-26527. Used with permission; all rights reserved. 9. State Wrap-Up 1997: Health Plan Targeted for Restrictions, Mandates,Business Insurance (June 30, 1997): 1, 15, 16, 19.