Exam Questions

How Workers' Compensation Differs from Group Healthcare

Workers' compensation is a state-mandated insurance program that provides benefits for
healthcare costs and lost wages to qualified employees and their dependents. If an
employee suffers a work-related injury or disease, his or her employer will pay the cost of
the related medical expenses through workers' compensation.1

The exclusive remedy doctrine is a rule that states that employees who are injured on
the job are entitled to the benefits provided by workers' compensation but cannot sue their
employers for any additional amounts
Although healthcare in workers' compensation programs and the group healthcare market
both provide medical benefits to injured or ill employees, there are many differences
between the two benefit systems. Some of these differences arise from the fact that
workers' compensation laws were first enacted decades ago- before managed healthcare
became prevalent- and have not been revised to reflect modern ways of providing
healthcare. Some of the differences result from the compromises that were built into the
workers' compensation system when it was first designed

The Move to Managed Care As the cost of providing workers' compensation benefits
increases, employers and states are looking to managed care way to help reduce expenses
while ensuring quality.

The use of managed care not only helps control the cost of workers' compensation medical
benefits, it also helps reduce the cost of indemnity (wage replacement) benefits by coordinating
care to enable injured employees to return to work more quickly.
Until recently, workers' compensation laws often restricted the use of managed care techniques,
such as copayments and deductibles, or prevented employers from limiting employees' choice
of provider.
Now, almost half the states allow managed workers' compensation, and in a few states, the use
of health plans are required.
For example, since January 1, 1997, Florida has required that all workers' compensation
medical benefits be provided using health plans. Many states have encouraged demonstration
projects to establish standards for new approaches to workers' compensation, including the use
of selective networks, utilization review, and case management.
An integrated health and disability plan is a health plan that provides medical
or lost wage benefits to employees for all covered injuries or illnesses, whether they
are work-related or not. One reason for the interest in integrated health and
disability plans is that employers can reduce their administrative expenses if they
administer only one integrated benefit plan instead of several separate plans. In
addition, under integrated plans employers no longer have to devote time and
resources determining whether injuries are work-related as they do under workers'
compensation. Instead, they can focus their attention on promptly providing the
care necessary to return injured employees to work

Common Characteristics of Managed Workers' Compensation.

Use of preferred provider organizations (PPOs) to encourage employees to

choose providers who deliver affordable, quality care
Use of utilization review and case management to ensure the most
appropriate, coordinated care
Reliance on total disability management to control indemnity (wage
replacement) benefits
Focus on occupational health services to return employees to work quickly

Clinical practice guideline

An important and relatively recent development has been the systematic

development of clinical practice guidelines. As we discussed in Workers'
Compensation Programs, a clinical practice guideline is a utilization management
and quality management mechanism designed to aid providers in making decisions
about the most appropriate course of treatment for a specific case.
Clinical practice guidelines are a particularly powerful tool in establishing
accountability for relatively specific behaviors of providers. Indeed, the specificity of
the standards may make it particularly important that providers who are
accountable to those standards feel that the standards have been arrived at by
competent, unbiased parties.
Clinical practice guidelines that are so developed, preferably by or in consultation
with providers themselves, are more likely to be accepted by physicians than those
perceived to be designed and imposed by the health plan.

State Responses to Rising Costs

To help control workers' compensation costs, states commonly use fee schedules that specify
the maximum amount providers may charge for treating workers' compensation patients. One
advantage of fee schedules is that they can regulate increases in medical costs by limiting how
much medical fees may increase from year to year. Fee schedules also help ensure that the
fees paid by employers and health plans for medical treatments are consistent from provider to
provider. Most workers' compensation fee schedules are based on the schedules used in
Medicare and Medicaid.
As an additional way of controlling workers' compensation costs, several states have adopted
clinical practice guidelines, or treatment guidelines, for treating workers' compensation injuries.

Antitrust Concerns and Health Plans

Overview of Laws and Regulations, antitrust laws emerged promote competitive business
practices and to curb efforts to restrain trade. Antitrust laws are laws that address
competition, price fixing, and monopolies in business practices.

The

Sherman

Antitrust

Act

The Sherman Antitrust Act prohibits actions that constitute unreasonable restraints of trade.
Section 1 of the Act provides that "Every contract, combination in the form of trust or otherwise,
or conspiracy, in the restraint of trade or commerce among the several States, or with foreign
nations, is hereby declared to be illegal." Section 2 of the Act prohibits monopolization or
attempts to monopolize and provides that "Every person who shall monopolize, or attempt to
monopolize, or combine or conspire with any other person or persons, to monopolize any part of
the trade or commerce among the several States, or with foreign nations, shall be deemed guilty
of a felony."
The elements of restraint of trade under Section 1 of the Sherman Antitrust Act concern (1) a
concerted action by distinct entities (2) that has an unreasonable anticompetitive effect (3) on
interstate commerce.

The

Clayton

Act

The Clayton Act addresses specific practices of single entities that would tend to lessen
competition or create a monopoly. Section 3 [15 USC 14] prohibits exclusive dealing
arrangements, tying arrangements, and requirement contracts involving the sale of
commodities where the effect may be to substantially lessen competition. Section 7 [15 USC
18] prohibits mergers, joint ventures, consolidations, or acquisitions of stock or assets
where the effect may be to substantially lessen competition or tend to create a monopoly or
to otherwise unreasonably restrain trade.

Hart-Scott-Rodino Act of 1976

, requires that certain proposed mergers and acquisitions involving a specified level of
stock/assets receive approval from the FTC and the Justice Department before consummation

Robinson-Patman Act

Robinson-Patman Act and affects sales of products by nonprofit organizations. The

Robinson-Patman Act prohibits certain practices that result in discriminatory pricing

The Federal Trade Commission Act

The Federal Trade Commission Act (FTC Act) declares that unfair methods of competition
and unfair or deceptive acts or practices are illegal. The FTC Act's broad proscription of

unfair methods of competition was intended to ensure that antitrust enforcement would not
be limited to specific activities prohibited under the Clayton Act. Consequently, the FTC Act
is interpreted quite broadly, and violations of the Sherman and Clayton Acts are also
violations of the FTC Act.
Antitrust activities are measured under two standards. One is the per se rule, which
applies to restraints of trade that are so obvious as to be presumed unreasonable and
therefore illegal. There is no requirement that harm to competition be proven for a per se
violation. Restraints of trade are not permitted regardless of the business justification or
pro-competitive effect. Included as per se illegal are price-fixing agreements among
competitors, horizontal division of markets.
The second standard is less onerous and uses a "rule of reason" analysis to determine if
the purpose or effect of the activity or agreement actually harms competition or if the
arrangement has redeeming economic benefits. A party must show actual and unreasonable
harm to competition under this standard. The existence of market power is an essential
ingredient in the analysis.

Per Se Violations in Antitrust

Price fixing
Price fixing involves the agreement by two or more independent competitors on the prices
or fees that they will charge for services. For example, independent physicians, hospitals, or
other healthcare providers may not agree on the fees they will individually charge health
plan providers.

Horizontal group boycott

A horizontal group boycott occurs when two competitors agree not to do business with
another competitor or purchaser. Horizontal group boycotts are almost always unlawful. For
example, two health plans may not agree to each refuse to do business with a particular
nonprofit hospital until that hospital ceases merger talks with a private hospital corporation.
Nor may a PHO deny membership to a physician solely because that physician has admitting
privileges at a competing hospital. This type of joint pressure reduces the free market
choices or disadvantages a competitor.

Tying arrangement

A tying arrangement exists when a competitor conditions the sale of one of its products or
services, for which it has market power, upon the purchase of a second. This would force
the purchaser to purchase an unwanted product or service to obtain the desired product or
service

Horizontal division of markets

It is unlawful for two or more independent competitors to agree not to compete by dividing
(a) geographic areas in which each will market and sell its products, (b) the products that
each will offer, or (c) the customers that each will service. The preceding sentence describes
a
. For example, two competing PHOs may not split the geographic areas in which they
will market their services to health plans. Nor may two health plans split large employer
subscribers by agreeing that one will market to certain employers and the second will

market to different employers. Horizontal division of markets represents an agreement not

to compete and is thus, by definition, anticompetitive.

NAIC Third Party Administrator Model Statute

The NAIC Third Party Administrator Model Statute (TPA Model Law) is an NAIC
model law designed to regulate operations of third Certificate of Authority According
to the TPA Model Law, a third party administrator subject to the law is any
organization that directly or indirectly solicits or effects coverage of, underwrites,
collects premiums from, or settles claims on residents of the state or on residents
of another state from offices in the state enacting the TPA Model Law. An
organization may not act as a TPA unless it has received from the state insurance
department a certificate of authority designating it a TPA. Thus, a certificate of
authority is required from each state that has enacted such a law and in which a
TPA has an office or whose residents are members of plans administered by the
TPA. Note that some insurers act as TPAs for self-funded employer plans. In those
situations, the licensed insurer does not need to seek additional certification. The
TPA Model Law defines insurer as any person who provides life or health insurance
coverage in the state. Thus, for purposes of the TPA Model Law, an insurer may be
an HMO, an insurance company, or anyone who provides insurance that is subject
to state regulation. party administrators. Many state laws that regulate TPAs are
based on this model. We will base our description of TPA laws on the provisions of
this model law, which we refer to as the TPA Model Law.

Certificate of Authority

According to the TPA Model Law, a third party administrator subject to the law is
any organization that directly or indirectly solicits or effects coverage of,
underwrites, collects premiums from, or settles claims on residents of the state or
on residents of another state from offices in the state enacting the TPA Model Law.
An organization may not act as a TPA unless it has received from the state
insurance department a certificate of authority designating it a TPA.
Thus, a certificate of authority is required from each state that has enacted such a
law and in which a TPA has an office or whose residents are members of plans
administered by the TPA.
Note that some insurers act as TPAs for self-funded employer plans. In those
situations, the licensed insurer does not need to seek additional certification. The
TPA Model Law defines insurer as any person who provides life or health insurance
coverage in the state. Thus, for purposes of the TPA Model Law, an insurer may be
an HMO, an insurance company, or anyone who provides insurance that is subject
to state regulation.

Written Agreement

Whenever a TPA enters into an agreement to provide administrative services, the

agreement must be put into written form. In most instances, a TPA enters into an
agreement with an employer to administer a self-funded health benefits plan. The
written agreement entered into between the employer and the TPA must describe:
? The duties that the TPA will perform
? How the TPA will be compensated for its services-compensation may be
based on the amount of premium or charges the TPA collects or on the
number of claims it processes
? The health plan's or insurer's underwriting standards and any other
standards that pertain to the business the TPA will administer

Certain types of provisions may not be included in a TPA agreement. For example,
the TPA Model Law prohibits a TPA from entering into an agreement under which
the amount of the TPA's compensation is contingent upon savings the TPA is able to
realize from claims payments. Such prohibitions are designed to assure that the
TPA is not induced to place its own financial

TPA's Responsibilities
When it acts on behalf of a health plan, a TPA acts in a fiduciary capacity. As a
fiduciary, a TPA must hold all funds it receives on behalf of a health plan in trust,
must promptly remit all such funds to the proper parties, and must periodically
provide the health plan with an accounting of all transactions the TPA has
performed on behalf of the health plan.
The TPA Model Law also requires a TPA to:
? Provide a written notice, which has been approved by the health plan, to all
members identifying the health plan, policyowner, and TPA and describing
the relationship among these parties
? Identify all charges that it collects from covered individuals
? Disclose to the health plan all charges, fees, and commissions the TPA
receives in connection with the services it provides to the health plan
? Promptly deliver to covered individuals any certificates, booklets,
termination notices, or other written communications that it receives from
the health plan
A TPA is required to notify the state insurance department immediately following
any material change in its ownership or control. In addition, a TPA must notify the
insurance department if any material change occurs that might affect its
qualification for a certificate of authority. Each TPA is required to file with the
insurance department an annual report, which includes the names and addresses of
all health plans that the TPA contracted with during the preceding year.

Suspension or Revocation of Certificate of Authority

The TPA Model Law requires the state insurance department to suspend or revoke
a TPA's certificate of authority under certain specified conditions.
The insurance department must suspend or revoke a TPA's certificate of authority if
the TPA
(1) is financially unsound,
(2) is using practices that are harmful to insured persons or the public, or
(3) has failed to pay any judgment rendered against it in the state within 60 days
after that judgment became final.
In addition, the insurance department has discretionary authority to suspend or
revoke a TPA's certificate of authority if, after notice and a hearing, the department
finds such action is warranted.

Corporate Restructuring
All states have enacted some type of holding company act, and most such acts are
based in whole or in part on the National Association of Insurance Commissioners'
(NAIC) Insurance Holding Company System Regulatory Act (Model Holding
Company Act).

State holding company acts typically impose a number of registration and reporting
requirements on companies that are part of an insurance holding company system.
Also, most states have adopted regulations based on the NAIC's Insurance Holding
Company System Model Regulation with Reporting Forms and Instructions (Holding
Company Model Regulation). Such regulations specify requirements designed to
carry out the provisions of the state's holding company act.
4

Factors Contributing to Consolidation and Strategic Alliances in

Healthcare.
Health plan contracting. When health plan patients represented a small portion of the total patient
population, providers were not particularly concerned with the impact of health plan arrangements;
from the providers' perspective, health plan patients brought a slight increase in patient volume, but
were not critical to maintaining a healthcare practice. Today, providers that do not participate in
health plan networks find it increasingly difficult to market their services to an adequate volume of
patients. Consolidation and strategic alliances ease the burden of evaluating and entering into
contractual relationships.
Administrative complexity. Providers are less inclined or able to handle increasingly complicated
administrative functions such as electronic billing and collections from a variety of payors.
Consolidations and strategic alliances offer healthcare providers the opportunity to access expertise
and economies of scale in administrative functions.
Management expertise. Consolidation or strategic alliances enable providers to place the business
side of healthcare management with individuals who are more experienced in these matters.
Information technology. Consolidation or strategic alliances enable providers to obtain access to
information technology, which plays an increasingly important role in health plan arrangements and
in effectively linking with other components of the healthcare delivery system.
Access to capital. Consolidation can provide greater access to capital. For physicians practicing on
their own or in small groups, obtaining operating funds can be difficult. For hospitals, additional
funds can be used for ongoing expenses, construction, and strategic investments in medical and
information technology.
Lifestyle preferences. Many younger physicians prefer a more stable work environment and the
security of working for a large organization.
Increased competition. Changes in the healthcare delivery environment such
as the emergence of ambulatory surgical centers and urgent-care centers have
increased competition, giving

Ombudsman

Programs

As we have seen, the ombudsman program is a method to have complaints against an

health plan investigated by a neutral third party, thereby helping to ensure health plan
accountability to healthcare consumers. Webster defines ombudsman as a public official
appointed to investigate citizens complaints against the government. 54 Common usage and
the practice of governments and nongovernmental organizations have expanded the
definition to include any official appointed to investigate complaints against the officials
organization.
Analysts disagree as to the precise role an ombudsman plays. They have described an
ombudsman in a number of ways:
1. A neutral, third-party fact-finder55

2. A person who helps the aggrieved person gather information in preparation for an
appeal56
3. A person who is not necessarily neutral as he or she helps the aggrieved party
pursue justice57

And that explains the core of the ombudsmans role as its evolving in managed health care, as a
goodfaith mediator between members and health plans, someone who uses his or her judgment to
find the best answers to questions about coverage issues, and who is able to bring knowledge,
experience, and resources to such problems.

A clinical practice guideline

A clinical practice guideline, or treatment guideline, is a utilization management and

quality management mechanism designed to aid providers in making decisions
about the most appropriate course of treatment for a specific case. These guidelines
help providers determine the most cost-effective methods of treating work-related
injuries
Incorrect.

Compliance Program

The Office of Inspector Generals (OIGs) Compliance Program Guidance for

Hospitals defines a corporate compliance program as, Effective internal controls
that promote adherence to applicable federal and state law, and the program
requirements of federal, state and private health plans.
An effective compliance program uses employee education, training, and
oversight to ensure compliance with laws and regulations applicable to the ongoing
operation of an organization. A compliance program can be all-encompassing
covering all lines of business in which an organization is involvedor it can be
limited in scope to one or more specific lines of

Ethics Program

Biomedical ethics, a field with a long and respected history, recently has gained a
specific focusthe ethics of health plans. Rather than the exclusive domain of
academics and consultants, the field has taken up residence in the form of health
plan ethics committees. Ethics committees review health plan policies for
consistency with principles of ethics and recommend changes where needed.
Accepted in hospitals the 1980s, ethics committees are emerging in health plans.

Qui tam action program

Virtually anyone can file a qui tam suit: a disgruntled current or former employee,
competitors, physicians, or patients. People who may potentially bring a qui tam
action are called relators.
A corporate compliance program can heighten employee awareness of fraud and
abuse concerns and thus may expand the pool of potential qui tam relators. This
places an even greater premium on self-policing to avoid improper activities and,
when necessary, to detect improper activities at an early stage and undertake
remedial action as soon as possible

How do I determine my medicare eligibility?

There are certain eligibility requirements for Medicare coverage. Use this page as a
guide to understanding if you qualify for Medicare benefits.

65 and over - Most people qualify for Medicare beginning at age 65.
You should be eligible for Medicare at the age of 65 if:
1. You are a U.S. citizen or legal resident, and
2. You have resided in the United States for a minimum of five years
3. Worked at least 10 years in Medicare-covered employment
If the above applies to you and you have had Social Security deductions taken from
your payroll, chances are that you will automatically receive a Medicare card in the mail
just prior to becoming eligible, showing benefits for both Part A (hospital care) and Part
B (medical care). Part B is optional, can be declined, and requires most people to pay a
monthly premium for participation.

Under 65 - Generally speaking, if you are under age 65, you will qualify
for Medicare if:
1. You have End Stage Renal Disease (ESRD), or
2. You have received Social Security Disability Income (SSDI) payments for 24 months (or in
the first month of disability for ALS ("Lou Gehrig's Disease"))
Medicare Part A and Part B will not cover all of your medical costs. Specific items, such
as prescription drugs, premiums, copayments and many more, are considered out-ofpocket costs, unless you have additional insurance. You have the option to buy
additional coverage from private insurance companies that fill in these "gaps". There are
three different types of plans: Medigap, Medicare Part D prescription drug coverage,
and Medicare Advantage plans.

Health Insurance Portability and Accountability Act of 1996 (HIPAA)

HIPAA affects health plans in many ways. In general, HIPAA contains provisions to ensure
that prospective or current enrollees in a group health plan are not discriminated against
based on health status (e.g., there are rules and limits on the use of pre-existing condition
exclusions). In addition, HIPAA generally requires guaranteed access to health insurance for
small businesses and certain eligible individuals that have lost their group health coverage.
HIPAA also generally requires guaranteed renewal of insurance once a policy is sold to an
individual or group regardless of the health status of the members. 13
Amendments to HIPAA relate to mental health benefits and maternity hospital length of
stays covered by insurers including health plans. We discuss HIPAA in more detail in Federal
Regulation of Health Plans.
The Department of Health and Human Services has delegated its responsibility for
development and oversight of regulations under the Health Insurance Portability and
Accountability Act (HIPAA) to CMS's Center for Medicaid and State Operations. The
provisions in HIPAA allow for a joint federal/state enforcement scheme to ensure compliance
with HIPAA regulations. If a state chooses not to enforce the federal requirements and
standards of HIPAA, that job will fall to the Center for Medicaid and State Operations. Some
states may choose to share the enforcement responsibilities with the Department of Health
and Human Services. In addition, if a state is not adequately enforcing a specific HIPAA
requirement, the Center for Medicaid and State Operations can step in and enforce that
HIPAA regulation

Role of State Regulatory Agencies

There are several approaches to the interagency division of responsibility for MCE
oversight.

Concurrent model,
various state agencies exert authority over similar aspects of MCE operations among the same
group of MCEs. For example, a state Medicaid agency and a state health department may both
be responsible for ensuring quality improvement programs are in place to meet each agencys
rules and regulations for such programs. In this approach, there is considerable overlap of the
functions performed by the various agencies. States using this approach include New Jersey,
Rhode Island, and Vermont.
Parallel model
each agency regulates both financial and quality aspects of MCE operations for
distinctly different MCE types. For example, one agency might focus on HMOs, the
second on PCCMs, and the third on PHPs

Shared model

A third approach is the shared model, in which each agency focuses on its
particular area of expertise in regulating managed care. The health department
focuses on quality assurance; the insurance department focuses on financial
operation; the Medicaid agency focuses on those aspects of financial operation and
quality assurance that are beyond the expertise of the insurance or health
department. Alternatively, the Medicaid agency may focus more exclusively on
program administration, including contracting, rate-setting, and contract

compliance. While this approach is still in development, the states of Florida,

Illinois, and Tennessee each have implemented a version of the shared model

Certificate of Creditable Coverage

A written certificate issued by a group health plan or health insurance issuer (including
an HMO) that shows your prior health coverage (creditable coverage). A certificate
must be issued automatically and free of charge when you lose coverage under a
plan, when you are entitled to elect COBRA continuation coverage or when you lose
COBRA continuation coverage. A certificate must also be provided free of charge
upon request while you have health coverage or within 24 months after your
coverage ends.
The Department has developed a model certificate that can be used by a group health
plan or a health insurance issuer. Correct use of the model will generally assure
compliance with the regulatory requirements.

Pre-existing condition exclusion

A group health plan may only impose a pre-existing condition exclusion on new enrollees for
conditions for which medical advice, diagnosis, care, or treatment was received or
recommended within the 6-month period before their enrollment date (called the 6-month lookback period

Individual Directors' Roles and Responsibilities

Corporate directors are bound by several specific legal duties and obligations as defined in the
state corporate codes, the corporation's articles of incorporation, bylaws, and in other governing
rules.
As a threshold matter, corporate directors are required to act within the scope of the
corporation's and their own authority. They must act only within the particular power and
authority of their positions as directors. Corporate management is the responsibility of the entire
board; individual directors generally do not have independent legal authority to govern the
corporation. Rather, the board's combined judgment is to be relied upon to protect the
corporation from unwise decisions.
Directors, as a group, can be held liable for the decisions of the board. In unusual
circumstances, directors can be held individually liable for board decisions; however, most state
laws and corporate charters limit directors' individual liability. To minimize the risk of such
liability, individual directors must exercise good faith business judgment. To meet this
requirement of exercising good faith business judgment, directors must demonstrate their
compliance with three duties in all their decisions: the duty of care, the duty of loyalty, and the
duty to supervise.

The Duty of Care

Both for-profit and not-for-profit corporate law in most states requires that
directors exercise their duties in good faith and with the same degree of diligence,
care, and skill that an ordinary, reasonable person would be expected to display in

the same situation. This is known as the duty of care. Figure 10A-4 describes
some key criteria that are used by regulators to evaluate meeting the duty of care.
11

Figure 10A-4.

Key Criteria to Evaluate

Meeting the Duty of Care.
The director's exercise of independent business judgment (e.g., did the director critically evaluate
the recommendations of the corporation's officers and employees and make an independent decision,
or did he or she simply follow the recommendations of another without independent thought?)
-making based on knowledge of the facts and circumstances related to the
issue under consideration (e.g., was the director's decision based upon a consideration of the facts
relevant to a particular issue, or was it based upon other factors?)
meetings and activities that were required for an informed decision (e.g., did the director attend
meetings at which relevant information was presented and discussions held, or was he or she
chronically absent?)

The Duty of Loyalty

Because directors hold positions of special trust and confidence (i.e., they act as fiduciaries),
they have certain special obligations to the company. Fiduciaries must carry out their duties by
acting in the best interests of the organization. That is, a director must put the interests of the
organization before his or her personal interests. In this way, a director meets the duty of
loyalty. For example, directors may not use their roles as directors to further their personal
business interests to the detriment of the organization. In addition, directors may not try to win
business away from the organization to further their personal business or interests. These types
of situations are generally referred to as conflicts of interest.
To uphold their duty of loyalty, directors must notify the organization of potential conflicts of
interest that arise and may have to abstain from participation in board decisions on such
matters. Many boards develop policies that address conflicts of interest. In addition, some state
laws allow boards to excuse themselves from obligations made by a director who had a conflict
of interest and did not disclose that conflict to the board, unless the action is shown to be fair
despite the conflict of interest.
12

The Duty to Supervise

A board of directors cannot undertake every action to manage and operate the
organization's business and affairs, but must necessarily rely on the actions of
others. Accordingly, directors also have a duty to supervise. If the board is
notified that its officers or outside advisers (e.g., accountants, attorneys, or others)
may not be adequately performing their duties, then the board must use reasonable
care to investigate and correct such conduct. The board must exercise its duty of
care to supervise the corporation's officers and others who act on the corporation's
behalf.

Medicare Prescription Drug, Improvement, and Modernization Act[1]

also called the Medicare Modernization Act or MMA) is a federal law of the United States, enacted
in 2003.[2] It produced the largest overhaul of Medicare in the public health program's 38-year history.
The benefit is funded in a complex way, reflecting diverse priorities of lobbyists and constituencies.

It provides a subsidy for large employers to discourage them from eliminating private
prescription coverage to retired workers (a key AARP goal);

It prohibits the federal government from negotiating discounts with drug companies;

It prevents the government from establishing a formulary, but does not prevent private providers
such as HMOs from doing so.

Basic prescription drug coverage[edit]

Beginning in 2006, a prescription drug benefit called Medicare Part D was made available. Coverage
is available only through insurance companies and HMOs, and is voluntary.
Enrollees paid the following initial costs for the initial benefits: a minimum monthly premium of
$24.80 (premiums may vary), a $180 to $265 annual deductible, 25% (or approximate flat copay) of
full drug costs up to $2,400. After the initial coverage limit is met, a period commonly referred to as
the "Donut Hole" begins when an enrollee may be responsible for the insurance company's
negotiated price of the drug, less than the retail price without insurance. The Affordable Care Act,
also commonly known as "Obamacare", modified this measure.

Medicare Advantage plans

With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries were given the option
to receive their Medicare benefits through private health insurance plans, instead of through the
Original Medicare plan (Parts A and B). These programs were known as "Medicare+Choice" or "Part
C" plans.
Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the
compensation and business practices for insurers that offer these plans changed, and
"Medicare+Choice" plans became known as "Medicare Advantage" (MA) plans. In addition to
offering comparable coverage to Part A and Part B, Medicare Advantage plans may also offer Part D
coverage.

Different types of Medicare Advantage Plans

Health Maintenance Organization (HMO) Plans
Preferred Provider Organization (PPO) Plans
Private Fee-for-Service (PFFS) Plans
Special Needs Plans (SNPs)

There are other less common types of Medicare Advantage Plans that may be available:
HMO Point of Service (HMOPOS) Plans: An HMO Plan that may allow you to get some
services out-of-network for a higher cost.
Medical Savings Account (MSA) Plans: A plan that combines a highdeductible health plan
with a bank account. Medicare deposits money into the account (usually less than the
deductible). You can use the money to pay for your health care services during the year.

The Ethics in Patient Referrals Act ("Stark laws") The Ethics in

Patient Referrals Act of 1989
and its amendments, commonly called the Stark laws or Stark I and Stark II, prohibit a physician
from referring Medicare or Medicaid patients for certain designated services or supplies provided by
entities in which the physician or the physician's family member has a direct or indirect financial
interest.
These designated services and supplies include but are not limited to laboratory services, radiology,
diagnostic services, physical therapy, home health services, prescription drugs, occupational
therapy, and durable medical equipment.
Under the Stark laws, there are two ways that a physician may have a financial interest in a
healthcare facility.
First, a financial interest can arise if the physician has an ownership or investment interest in a
facility that provides services.
A financial interest can also result because there is some kind of compensation arrangement
between the physician and the healthcare facility. The definition of compensation arrangement is
very broad, and almost any kind of payment between the physician and the facility could be
considered to create a financial interest. For example, a physician might have a financial interest in a
clinic simply because the clinic leases office space or equipment from the physician.
If a physician makes a referral that is prohibited by the Stark laws, the healthcare facility receiving
the referral may not present a bill to Medicare or Medicaid for the services that were provided. In
addition, a physician who violates the Stark laws may be required to pay a penalty of up to $15,000
and be excluded from participating in the Medicare and Medicaid programs.
The Stark laws were enacted to avoid the conflict of interest that might result when a physician
refers patients to healthcare facilities in which the physician has a financial interest. The laws can
also apply to a physician who belongs to a health plan network and has a financial relationship with
the health plan arising from the health plan's compensation of the physician.
There are numerous exceptions to the Stark laws, however, including an exception that applies to
prepaid health plans. This exception states that health services provided to plan members by some
prepaid healthcare plans, including federally qualified HMOs and plans with Medicare contracts, are

not subject to the ownership and compensation prohibitions. Another important exception exempts
certain physician incentive arrangements complying with the Medicare/Medicaid physician incentive
requirements. This exception is important because it may protect health plan payment arrangements
for Medicare enrollees not covered under the Medicare Advantage program. Provider compensation
arrangements for services provided under the Medicare Advantage program are exempt under the
prepaid health plan exception.
These exceptions recognize that some referrals to services or laboratories in which the referring
physician has a financial interest are not necessarily fraudulent or abusive.
The Stark laws also impose reporting requirements on each entity that provides Medicare or
Medicaid services. The entities must provide the Department of Health and Human Services with
detailed information about the identity of all the physicians who have an ownership interest in the
entity or who have a compensation arrangement with it. An entity that fails to comply with these
requirements can be fined up to $10,000 per day.

Balanced Budget Act of 1997 (BBA)

The Balanced Budget Act of 1997 (BBA) has made significant changes to
Medicare and Medicaid health plan programs by making enrolling Medicare and
Medicaid beneficiaries in health plans easier. The BBA changes allow Medicare
beneficiaries more health plan options under the Medicare+Choice program.
Beneficiaries can now enroll in PPOs, POS options, medical savings account plans,
provider-sponsored plans, private fee-for-service plans as well as in HMOs.
Payment reform provisions in the BBA may encourage health plans to enter
traditionally low-payment Medicare markets. Funds for expanding health insurance
for children whose parents cannot afford health insurance were also allocated as
part of the BBA. The Medicare Modernization Act of 2003 further encouraged health
plans to re-enter the Medicare market, though the creation of the more inclusive
Medicare Advantage program (replacing M+C plans) a competitive bidding processs
and more favorable risk selection.
14

15

16

Federal Qualification: Then and Now While federal qualification is entirely

voluntary, HMOs that elected to meet federal qualification requirements historically
gained two basic advantages.
First, HMOs were eligible to participate in Medicare as risk or cost contractors
without submitting additional documentation to qualify as Medicare contractors.
Second, certain employers used federal qualification status to determine which
HMOs to offer to their employees, viewing federal qualification as a "stamp of
approval" from the federal government.
The Balanced Budget Act of 1997 (BBA) made changes to the Medicare law that, in
effect, eliminate the first advantage cited above. As for the second advantage,
employers are increasingly looking to private accreditation status, rather than
federal qualification, as an indicator of a high quality health plan.
7

The BBA added Section 1932 to the Social Security Act (SSA). Section 1932 of the SSA
addresses virtually every area of Medicaid health plan contracts, including
definitions of Medicaid health plan entities, eligibility for benefits, states ability to
mandate health plans, regulation of MCE performance, marketing by Medicaid
MCEs, and protection of Medicaid enrollees rights. We will discuss some of these
changes in the following lessons.

Options for raising operating funds

A health plan that qualifies as a 501(c)(3) charitable organization can raise
operating funds through the sale of tax-exempt bonds and can accept taxdeductible donations.
A health plan can potentially obtain private sector operating funds from any number
of sources. For the purpose of this discussion, we will divide these sources into four
general categories:
(1) internal sources, such as operating and investing activities;
(2) debt markets;
(3) equity markets; and
(4) donations. In other words, a health plan can:
Generate funds by using its own resources, that is, its business operations
and investments (internal sources)
Borrow from creditors (debt markets)
Sell shares of ownership to owner-investors (equity markets)
Solicit or receive funds (donations)
All health plans have the potential to generate funds via internal sources of income. For the
purpose of this discussion, we have divided internal sources of income into operating
activities and investing activities.
1. Operating activities
2. Investing activities

Operating activities

are those activities associated with a health plan's major lines of business and
involve transactions that directly determine the company's profits, including
selling, administering, delivering, and designing managed healthcare products.
Generally, a health plan prefers to generate funds via operating activities.
The health plan invests in itself to improve its operations, which results in a
healthier organization in terms of funds on-hand, as well as future earnings
potential.
When it invests in operating activities, a health plan does not have to take
outside investment risk, pay interest on debt, or pay the cost of issuing stock,
as it might when seeking other sources of funds.
At the same time, it strengthens its ability to provide products and services. Of
course, such activities are not risk-free. There are no guarantees that a venture
will succeed. Also, with increased competition in healthcare, profits are slimmer,
and many operating activities require substantial capital investments. These
challenges make it increasingly difficult for health plans to generate sufficient
income via operations. In addition, health plans must adhere to all regulations
governing investment in operating activities. For instance, a not-for-profit
health plan that seeks to enter a strategic alliance with a for-profit health plan
must comply with the requirements that apply to such transactions, and faces
extensive and protracted regulatory scrutiny
13

Investing activities

a health plan's other internal source of income, are transactions that involve the
purchase or sale of assets and the lending of funds to another entity. A health
plan's investing activities include
(1)
purchasing and selling bonds, mortgage loans, stocks, real estate,
equipment, certificates of deposit, and other assets, and
2) making loans and collecting the principal and interest on those loans.
14

A company can also raise funds through the debt markets, which are sources of funds loaned
in exchange for the receipt of interest income and the promised repayment of the loan at a given
future date. Debt instruments, also known as bond issues, represent debts that the issuing
corporation owes to the bondholders.
The debt markets are available to all health plans, although mutual companies do not usually
issue conventional bonds. As we have seen, 501(c)(3) charitable organizations have access to
tax-exempt bond offerings and tax-free loans; for tax purposes, they can deduct both the cost of
generating a bond offering and the interest paid. Other types of health plans can deduct only the
interest payments.
Debt is the most expensive method of obtaining operating funds. Companies must pay interest
on debt, whether or not the company is making money. Typically, debt is utilized by health plans
that operate medical facilities, such as staff model HMOs, and is used in connection with
building or renovating facilities.
for-profit company can also raise funds in the equity markets. The equity markets are sources of
funds obtained by issuing financial instruments that represent an ownership interest (equity) in
the issuing corporation. Shareholders invest in and own shares in the issuing corporation.

Health Maintenance Organization Act of 1973

It provided grants and loans to provide, start, or expand a Health Maintenance
Organization (HMO); removed certain state restrictions for federally qualified HMOs;
and required employers with 25 or more employees to offer federally certified HMO
options IF they offered traditional health insurance to employees. It did not require
employers to offer health insurance. The Act solidified the term HMO and gave
HMOs greater access to the employer-based market. The Dual Choice provision
expired in 1995.
Qualifications of a Federally qualified HMO[edit]
To become a certified as a federal qualified HMO, the HMO must meet the following requirements:

Deliver a more comprehensive package of benefits;[6]

Be made available to more broadly representative population;

Be offered on a more equitable basis;

More participation of consumers;

All at the same or lower price than traditional forms of insurance coverage

The HMO Model Act,

originally drafted in 1972 and modified subsequently as necessary, contains
provisions regulating major aspects affecting formation and operation of HMOs.

There are provisions in the HMO Model Act concerning licensing, solvency
requirements, quality assurance, enrollee information, grievance procedures,
enrollment periods, confidentiality of medical information, and reporting
requirements. Most states have some form of HMO law that closely mirrors the
HMO Model Act.
In 1972, the NAIC adopted the Health Maintenance Organization Model Act
(HMO Model Act), a model law designed to regulate the licensure and operations
of HMOs. In the HMO Model Act, a health maintenance organization is defined as
"any person that undertakes to provide or arrange for the delivery of basic
healthcare services to enrollees on a prepaid basis, except for enrollee
responsibility for copayments and/or deductibles." Basic healthcare services are
defined under the Model Act as "the following medically necessary services:
preventive care, emergency care, inpatient and outpatient hospital and physician
care, diagnostic laboratory services, and diagnostic and therapeutic radiological
services. It does not include mental health services or services for alcohol or drug
abuse, dental or vision services, or long-term rehabilitation treatment."
3

Once it has been determined that an entity meets the definition of an HMO, the
entity must comply with the licensing requirements and all other applicable
requirements of the particular state's HMO statute.
The main purpose of the HMO Model Act is to provide consumer protection in two
critical areas: financial responsibility and healthcare delivery. In the rest of this
section, we discuss how the HMO Model Act regulates the licensure of HMOs, then
we describe how the HMO Model Act regulates financial responsibility, healthcare
delivery, and several other important operational issues with regard to HMOs.

Health Plans

HMO. A health maintenance organization (HMO)

is a system designed to deliver healthcare to a voluntarily enrolled population in a

particular geographic area, usually in exchange for a fixed, prepaid fee. An HMO
brings together the delivery, financing, and administration of healthcare into a
single integrated system.

PPO. A preferred provider organization (PPO)

is an organization that offers a healthcare benefit arrangement designed to
supply services at a discounted cost by providing incentives for members to use
network providers, while also providing more limited coverage for services
rendered by providers who are not part of the PPO network. Sometimes the
product is called a preferred provider arrangement (PPA) to differentiate it from
the organization that offers it.

EPO. An exclusive provider organization (EPO),

as its name suggests, only covers healthcare rendered by participating

providers, and does not cover most healthcare rendered by nonparticipating
providers. Typically, an EPO, as opposed to an HMO, is regulated by state
insurance laws and is subject to fewer licensing requirements.

Specialty health plans.

A specialty health plan is an organization that uses an HMO or PPO model to
provide healthcare services to a subset or single specialty of medical care. Many
states require a licensed HMO to provide a comprehensive set of services and
supplies. Some states regulate the establishment of single-service HMOs, such
as dental HMOs. Other states do not permit single-service HMOs, although
organizers do have other options for offering health plan specialty services, such
as dental PPOs and dental POS plans.

Utilization Review Organization.

A utilization review organization (URO) is an organization that conducts

utilization review activities for health plans and purchasers. A URO may offer
medical cost management services in any number of areas, such as inpatient
review, outpatient review, and case management of high-risk conditions. Some
UROs have expanded their services to include additional functions, such as
claims administration, provider contracting, provider credentialing, medical
outcomes measurement, member satisfaction surveys, and plan design
consulting.

Third party administrator.

A third party administrator (TPA) contracts with insurers, health plans, or

employers to provide services to help administer healthcare benefits. Because
TPAs often perform insurance-like functions, such as claims administration, they
are regulated by the insurance department in many states.

At-risk provider organization.

Broadly speaking, an at-risk provider organization, also called a provider

sponsored organization (PSO), also called a physician-owned organization or
provider-owned organization, is a health plan entered into or established by
providers to arrange for the delivery, financing, and administration of
healthcare. PSOs are often formed as a result of a state authorizing an
alternative to securing an HMO license. Typically, PSOs are subject to less
rigorous solvency and licensing requirements than HMOs, although regulators
are considering changing these requirements. The Medicare PSO, a specific type
of PSO, is an entity entered into or established by providers who deliver a
substantial proportion of services under a Medicare+Choice contract; these
providers share substantial financial risk and have at least a majority financial
interest in the entity.

Independent practice association.

An independent practice association (IPA) is an association of individual
physicians (or physicians in small group practices) that contracts with a health
plan to provide healthcare services.

Intensive growth strategies

are those available to a company that has not yet exhausted the sales or market
potential in its current products or current markets. Intensive growth strategies
focus on market penetration, market development, and product development.
These strategies require significant financial capital.

Market penetration
focuses on increasing sales of current products to current purchasers. A company
using a market penetration strategy usually increases its sales by increasing its
promotion efforts significantly. For example, as a market penetration strategy, a
health plan can simultaneously increase its advertising in business periodicals,
increase the size of its sales force, and offer additional incentives to its sales
associates.

Market development

focuses on increasing sales of current products by introducing them in new

markets. This type of strategy often involves expansion into new geographic areas.
In recent years, several health plans that established themselves in one region of
the country have sought new markets by setting up operations in other regions.

Product development

focuses on increasing sales by modifying current products or developing new, but

related, products for current markets or segments within current markets. When a
health plan develops a new type of health plan product and then markets that
product to its current customers, the company is following a product development
strategy. For example, a health plan that decides to offer an open access plan or a
managed dental plan is following a product development strategy.

Physician-hospital organization

. A physician-hospital organization (PHO) is structurally much the same as an

IPA, except that it includes a hospital. The primary purpose of a PHO is to contract
with other health plans, payors, and purchasers on behalf of its participating
hospitals and medical practices.

Management service organization.

A management service organization (MSO) is a legal entity that provides a

variety of management and administrative services for participating physicians'
practices. These services may include centralized purchasing, administrative
support, marketing, and practice management. With regard to these primary
functions, an MSO is similar to a physician practice management company (see
next item). Some MSOs have begun negotiating contracts with payors. For the
most part, however, the MSO focuses on the "back office" (i.e., the administrative
functions) to free the physicians to focus on the clinical aspects of healthcare.

Physician practice management company.

A physician practice management (PPM) company is a legal entity that

provides a variety of management and administrative services for participating
physicians' practices. Typically, a PPM accomplishes this by purchasing the assets of

the practices and entering into long-term contracts with those physicians, often
supplying capital for improving and expanding existing assets. The services they
provide may include centralized purchasing, administrative support, marketing,
practice management, and contract negotiations. Some PPMs perform payer and
utilization review/quality management functions; others have acquired HMOs.

Integrated delivery system.

An integrated delivery system (IDS) is a combination of two or more legally
affiliated health plans, group practices, clinics, or hospitals that combine their
assets, efforts, risks, and rewards to deliver comprehensive healthcare and, in
certain instances, to arrange for the financing and administration of that care.

Medical foundation.

A medical foundation is an entity that owns and manages all purchased assets of
physicians' practices. However, unlike an MSO or PPM, a medical foundation is
organized as a not-for-profit entity, rather than a partnership, professional
corporation, or other for-profit entity. A similar entity, the medical foundation
IDS, integrates a hospital and a tax-exempt physician practice, thereby producing
tax-exempt status for this organization as well. Typically, a medical foundation IDS
consists of a holding company and two not-for-profit subsidiaries: a hospital, and a
medical foundation. The medical foundation (not the holding company or hospital)
enters into contracts with payors and receives the negotiated fees.

Academic medical center.

An academic medical center (AMC), also known as an academic health center
(AHC) is an institution that trains healthcare professionals and performs basic and
clinical research. In addition, because AMCs receive government funding, they are
required to provide medical care for the poor.

Federal Programs Established by Law that Incorporate Health Plans

As we discussed earlier in this lesson, both Medicaid and Medicare allow health
insurance plans to offer health plan products to eligible members of those
populations. In addition, two other federal programs established by law have
significantly incorporated health plans into their product offerings.
The Federal Employees Health Benefits Act of 1959 (FEHB Act of 1959)
established a voluntary program to provide health insurance to federal employees,
retirees, and their dependents and survivors. The program established by the FEHB
Act of 1959 is called the Federal Employees Health Benefits Program
(FEHBP). FEHBP offers a choice of fee-for-service and health plans to more than
nine million beneficiaries. Many health plans participate in FEHBP and must comply
with rules and requirements for this program set forth by the Office of Personnel
Management (OPM).
17

18

Amendments to the Dependents Medical Care Act created the Civilian Health and
Medical Program of the Uniformed Services (CHAMPUS) in 1967. CHAMPUS
19

authorized a program of medical benefits for families of active-duty military

members, certain military retirees and their families, and certain former spouses of
members of the military.
To incorporate health plans into CHAMPUS, the Department of Defense created
TRICARE. TRICARE is a health benefits program that has three options for eligible
members: an HMO-type option, a PPO option, or the traditional fee-for-service
option. Most of the care provided by TRICARE is through military facilities. The
Department of Defense administers the TRICARE program and health plans bid to
provide TRICARE services in regions established by the DOD.

The Federal Employees Health Benefits Program (FEHBP)

As we discussed in Perspective and Overview of State and Federal Laws, the
Federal Employees Health Benefits Program (FEHBP) was created by the Federal
Employees Health Benefits Act of 1959 (FEHB Act) and is administered by the Office
of Personnel Management (OPM), the human resources agency of the U.S.
government. Through the FEHBP, the U.S. government provides health benefits to
federal employees, retirees, and their family members. FEHBP is the largest
employer-sponsored health benefits program in the United States.
Federal employees enjoy the widest selection of health plans in the country. The
choices that FEHBP offers include managed fee-for-service (FFS) plans, plans
offering point-of-service (POS) options, and health maintenance organizations
(HMOs). Eighty percent of the FFS plans in FEHBP offer participants a preferred
provider organization (PPO) option. Figure 8A-1 describes some features of FEHBP for
beneficiaries.

Features of FEHBP

Voluntary, annual enrollment

No pre-existing conditions, physical exam, or age requirements
Choice of HMOs, POS options, and fee-for-service plans
Self-only or self-and-family coverage is available, and coverage begins
immediately upon enrollment
Payroll deduction for premium contributions

All prepaid plans offered by FEHBP have health plan features such as preadmission
certification, the use of primary care providers as gatekeepers to coordinate
medical care, and a network of physicians and other providers.
The minimum benefits that FEHBP plans provide include hospital benefits, surgical
benefits, physician services benefits, ambulatory patient benefits, supplemental
benefits, and obstetrical benefits.

Measures of Customer Satisfaction

Ability to see the same doctor on most visits

Access to medical care (arranging for and getting care)
Access to medical care in an emergency (POS and HMO only)
Choice of doctors available through the plan (plan members' ability to find
doctors they are satisfied with)
Costs that beneficiaries personally have to pay (FFS only)
Coverage (range of services covered)
Explanation of care (what is wrong, what is being done, and what to expect)
Getting appointments when sick
How quickly claims are processed (FFS only)
Quality of care (from doctors and other medical professionals)
Results of care

Governance is the vehicle health plans use to make decisions about the overall
direction or purpose of a company.
In this course, we will define governance as the efforts by the health plan's
board of directors or other governing body, in conjunction with senior
management, to develop corporate policy, to create a corporate mission
statement and vision, and to develop strategies in order to achieve the
organization's goals and mission. We will discuss corporate vision and mission
statements later in this lesson.

Licensing

The licensing requirements imposed on sales representatives allow the states to oversee the
activities of the individuals who engage in the sale of insurance and health plan products. As
with other regulatory requirements, specific licensing requirements vary from state to state but
are similar in many respects.
We'll use the NAIC Agents and Brokers Licensing Model Act to illustrate state licensing
requirements. Although most states enacted their licensing laws before the NAIC adopted this
Model Act, the model illustrates features that are common to licensing laws.
Who Must Be Licensed? Sales representatives must be licensed in each state in
which they do business. Although not all states define exactly what they mean by
"doing business" in the state, sales representatives are generally required to obtain
a license in each state in which they solicit or negotiate sales, deliver contracts,
collect premiums, or have an office that transacts insurance business.
State laws typically list a number of individuals who are not required to be licensed
sales representatives.
The Agents and Brokers Licensing Model Act exempts certain individuals from the
licensing requirements, such as:
A health plan's or insurer's employees who do not negotiate or solicit
business
Persons who assist in administering group health coverage and who do not
receive commissions for their services
Employers that provide employee benefit plans, trustees of employee trusts,
and employees who administer such plans and who are not compensated by
the health plan or insurers that issued such plans
Agent and Broker Licenses According to the Agents and Brokers Licensing Model
Act, an insurance agent is an individual, partnership, or corporation appointed by
a company to solicit applications for policies or to negotiate policies on the
company's behalf. The Model Act defines an insurance broker as a partnership,
corporation, or individual who is compensated for helping others to obtain insurance
from a company that has not appointed that individual as an agent. Note the
distinction the Model Act makes between an insurance agent and an insurance
broker. An agent represents and acts on behalf of the health plan, whereas a broker
acts on behalf of the purchaser. Agents may place business with a health plan only
if they have been appointed as an agent with that company. By contrast, brokers
may place business with health plans they have not been appointed to represent.
Most states issue both agent's licenses and broker's licenses. States that do not
issue broker's licenses typically require individuals who act as brokers to obtain an
agent's license.
In most states, partnerships and corporations are eligible to be licensed agents and
brokers. Laws in these states usually require licensed partnerships to register with
the insurance department every partnership member and employee who personally
engages in the sale of insurance; licensed corporations must register every officer,
director, and employee who personally engages in the sale of insurance. In
addition, these individuals who are registered by a partnership or corporation must
also be licensed as agents or brokers.
Resident and Nonresident Licenses Sales representatives typically conduct their
business in the state in which they reside. From the state's perspective, these

individuals who reside and work in the state are known as resident agents and
brokers, and the type of license they are required to hold is known as a resident
license.
Individuals who do not live in the state or whose principal place of business is
located outside the state are known as nonresident agents and nonresident
brokers, and must obtain a nonresident license before conducting business in
the state. State laws typically require applicants for a nonresident license to hold a
similar license from another state or country. In other words, sales representatives
usually must hold a resident's license from their home jurisdiction before being
eligible to receive a nonresident license from another jurisdiction.
Licensing Requirements Individuals must comply with statutory requirements in
order to be eligible to receive a license. Figure 6A-1 lists the requirements from the
Agents and Brokers Licensing Model Act
Once the insurance department receives a completed application and all applicable
fees, the department may conduct whatever investigation it deems necessary
before acting on that application. In most cases, the department approves the
application and notifies applicants of the dates and times on which they may take
any required examination. If the applicant passes the examination, then the
department issues a license to the applicant. If the department disapproves an
application, it notifies the applicant of its disapproval and gives the reasons for its
decision.
Requirements for a nonresident license are generally the same as the requirements
for a resident license. Some states that issue nonresident licenses impose a
countersignature requirement under which applications solicited by nonresident
sales representatives must also be signed by an individual who holds a resident
license.

Medical Savings Account (MSA)

Option to Use Medical Savings Accounts (MSAs) The BBA also created the
Medical Savings Account (MSA) national demonstration project.
The Medicare MSA demonstration project is limited to 390,000 beneficiaries, with
no new enrollment accepted after January 1, 2003.
9

Medical Savings Accounts (MSAs) are "health insurance arrangements that give
consumers a financial incentive to control their own healthcare costs by combining
a high-deductible health insurance policy with an individual savings account."
10

A Medicare+Choice Medical Savings Account is a tax-preferred account set up

for individual Medicare beneficiaries and to which CMS makes contributions on
behalf of the beneficiary.
Individuals who choose to establish Medicare+Choice MSAs purchase a catastrophic
MSA health policy with high deductibles and out-of-pocket expenses of not more
than $6,000 in 1999. After the deductible and out-of-pocket expenses are met,
Medicare covered services are paid at 100%.
Beneficiaries are not allowed to deposit their own funds in their MSA account.
Instead, Medicare+Choice MSAs may only receive funds from CMS. Deposits and
earnings are not taxable. Likewise, withdrawals are free from federal income tax if
used for qualified medical expenses, as defined by the Internal Revenue Code, for
the beneficiary.

Withdrawals can be used to pay medical expenses that are not covered under the
high-deductible health insurance policy.
MSA plans are the high-deductible plans that beneficiaries must obtain in
conjunction with the establishment of an MSA. In general, MSA plans are subject to
the same requirements as other Medicare+Choice plans.
MSA plans are required to cover at least 100% of the cost of Medicare-covered
items and services or 100% of the amounts that would have been paid under
Medicare, but only after the enrollee incurs accountable expenses equal to the
amount of the annual deductible. If the Medicare+Choice payment exceeds the MSA
plan premium, the difference is deposited in the beneficiary's MSA.\

Market Conduct Examination

To carry out a market conduct examination, representatives of a state insurance
department, called examiners, visit the insurer or health plan's home or regional
office and examine the business records of the company.
An on-site market conduct examination may be either a comprehensive
examination of all market conduct operations or a target examination of one or only
a few facets of a health plan's conduct operations.
or example, a target examination might focus on one line of a health plan's
business or on specific functions such as underwriting or claims. We describe the
scope of a comprehensive market conduct examination later in this lesson.
Many state insurance departments conduct a follow-up examination, known as a
reexamination, some time after the completion of a comprehensive or target
examination. An insurance department's focus in a reexamination is to determine
whether an insurer or health plan has complied with recommendations or directives
contained in a previous examination.
In addition to on-site examinations, state insurance departments sometimes
conduct desk examinations in which they review some of a health plan's business
records in the offices of the insurance department. A health plan that is the subject
of a desk examination is required to provide all necessary materials to the
insurance department.
A desk examination is generally limited in scope as compared to an on-site
examination.
For example, an insurance department might request that a health plan send a list
of all contract forms and evidence of coverage forms used within a specified time
period to determine if the health plan is in compliance with state filing
requirements. Or an insurance department may receive a series of consumer
complaints about a specific aspect of a health plan's operations. The insurance
department then might require the health plan to provide the department with its
files and correspondence relating to those complaints. The department would use
those records to conduct a desk examination as part of its investigation of the
consumer complaints.

Not for Profit Health Plan

The distinguishing characteristic of a not-for-profit health plan is that it has no
owners or owner-investors, as does a for-profit health plan, and therefore cannot
distribute profits for the benefit of individuals.
Not-for-profit health plans typically use the term surplus to refer to the excess of
income over expenses. Depending on the stated purpose of the health plan, surplus
can be used for the benefit of the organization, the community, or a charity, but
not private individuals
If a portion of the net earnings of a not-for-profit organization go to the benefit of
private individuals, this is called private inurement. Salary and benefits paid to
employees of a not-for-profit health plan are part of the organization's operating
expenses and are not considered private inurement.
However, a not-for-profit company must be cautious in designing its compensation
plan because if regulatory authorities determine that the plan is not reasonable, the
excess could be deemed unlawful private inurement of profit.
Although one might think that not-for-profit health plans would be less "profitable"
than for-profit health plans, this has not been demonstrated. According to one
study, the rates of return on assets are not appreciably different between for-profit
and not-for-profit HMOs.

Condumer Interests
There are basically two types of organizations that seek to represent consumer
interests: unaffiliated consumer groups and consumer advocacy organizations.
Unaffiliated consumer groups consist of consumer advocacy organizations, such
as the Consumers Union (CU), the Consumer Federation of America (CFA),

Community Catalyst, and Public Citizen, that have a long history across a broad
array of issues.
These groups are less likely to represent a single special interest than consumer
advocacy organizations.
Consumer advocacy organizations are consumer organizations created by special
interests with a more direct stake in the outcome of particular policy issues.
For example, the American Association of Retired Persons (AARP) seeks to
represent the consumer interests of retired persons. In addition, patient advocacy
groups, discussed in Environmental Forces, can have an impact on healthcare public
policy by advocating for the passage of laws to protect their members interests.

Health Care Quality Improvement Act (HCQIA),

exempts some health plans from liability arising from the credentialing and peer
review process. To receive the benefits of this exemption, however, health plans
must adhere to certain due process standards. For example, a health plan that
declines to retain a physician in its provider networkbecause of the physicians
professional misconduct or incompetence, which could adversely affect patient
healthmust provide the physician with timely notice of its decision so the
physician can prepare a response.

An Overview of Contract and Tort Law

Many of the legal issues that health plans encounter in administering health plans arise from
contracts. A contract is a binding promise or an agreement enforceable at law. For example,
the terms and provisions of a healthcare plan are considered to form a contract that creates
obligations on the part of the health plan that are enforceable by plan members. Health plans
also enter into contracts with healthcare providers and others, such as pharmacists, who
provide services to plan members. A health plan may be required to pay money damages if it
commits a breach of any of these contracts.
A breach of contract is the failure of a party to perform a contract according to its terms without
a legal excuse.
In addition to liabilities arising from breach of contract, health plans may be liable for damages if
they commit a tort.
A tort is a violation of a duty to another person imposed by law, rather than contract, causing
harm to the other person and for which the law provides a remedy. One type of tort is known as
negligence.
Negligence is the failure to exercise the amount of care that a reasonably prudent and careful
person would exercise under similar circumstances.
The duty to exercise reasonable care applies both to individuals and corporations, such as
health plans, and both individuals and corporations are liable for damages when their
negligence harms someone.
One type of negligence most of us are familiar with in the field of healthcare is medical
malpractice.
Medical malpractice is a type of negligence that occurs when a patient is harmed because a
healthcare provider failed to exercise reasonable care in providing medical treatment.

We mentioned that health plans may be required to pay damages if they commit a breach of
contract or a tort.

Damages are the sum of money that the law awards as compensation for a legal wrong. In
most contract and tort cases, damages are the amount of money that will compensate the
injured party for his or her injuries. In some tort cases, however, courts may also award the
injured party a kind of damages known as punitive damages.
Punitive damages are damages awarded to punish and make an example of the wrongdoer
and not to compensate the injured party for an injury. They are usually permitted only when a
tort is outrageous or intentional. Because punitive damages are intended as punishment and not
as compensation, they are typically awarded in very large amountssometimes in the millions
of dollars.

When the language in a health plan contract is unclear or ambiguous, a court will
interpret the language against the party that selected the language and wrote the
contract in this case, the health plan.
As we noted in Pharmacy Laws and Legal Issues, health plans must pay careful
attention to drafting their contracts to ensure that they clearly and unambiguously
specify what types of treatments are excluded, because ambiguities will be
interpreted in favor of plan members. Some health plans define coverage for drugs
based on whether treatment has been approved by the Food and Drug
Administration, for example, because determining whether a treatment is FDAapproved is an objective decision and leaves little room for ambiguity. Some plans
also voluntarily seek third party review of these claims to assure plan members that
the decisions are objective

Direct Access Laws

Direct access laws allow subscribers to have direct access to certain specialists in
the health plan's network without a referral from a primary care provider (PCP). As
of mid-1998, thirty-four states require direct access to some type of provider. The
vast
majority
of
these
direct
access
laws
relate
to
access
to
obstetricians/gynecologists. Interestingly, most health plans already provide direct
access to in-network obstetrician-gynecologists for routine gynecological and
maternity care. Florida and Georgia both have direct access laws that allow
enrollees to visit a dermatologist without referral from a PCP.

Patient Self-Determination Act

The Patient Self-Determination Act (PSDA) was passed by the United States Congress in 1990
as an amendment to the Omnibus Budget Reconciliation Act of 1990. Effective on December 1,
1991, this legislation required many hospitals, nursing homes, home health agencies, hospice
providers, health maintenance organizations (HMOs), and other health care institutions to
provide information about advance health care directives to adult patients upon their admission
to the healthcare facility.[1][2] This law does not apply to individual physicians.
The requirements of the PSDA are as follows:

Patients are given written notice upon admission to the health care facility of their decisionmaking rights, and policies regarding advance health care directives in their state and in the
institution to which they have been admitted. Patient rights include:

The right to facilitate their own health care decisions

The right to accept or refuse medical treatment
The right to make an advance health care directive

Facilities must inquire as to whether the patient already has an advance health care directive,
and make note of this in their medical records.
Facilities must provide education to their staff and affiliates about advance health care
directives.
Health care providers are not allowed to discriminately admit or treat patients based on whether
or not they have an advance health care directive.

Basic Forms of Legal Organization

Corporations
A corporation, as defined in 1819 by U.S. Supreme Court Chief Justice John Marshall, is "an
artificial being, invisible, intangible, and existing only in contemplation of the law."
The owners, directors, and officers of a corporation, unlike the owners of a sole proprietorship or
a general partnership, are not individually liable for the debts of the organization. Unlike sole
proprietorships and partnerships, many corporations are taxed twice. First, the corporation pays
a corporate tax before it distributes earnings to its owner-investors. Then the owner-investors
pay individual income tax on the distributed earnings. However, not all corporations are subject
to this double-taxation. For example, some smaller businesses can organize as a subchapter S
corporation, which is not subject to corporate taxes. To qualify as a subchapter S corporation,
an entity must file a formal election with the Internal Revenue Service (IRS) and must meet
other criteria, including requirements limiting the number of stockholders.
Professional Corporations and Professional Limited Liability Corporations
For years, practitioners of the "learned" professions, such as law and medicine, were not
permitted to establish corporations. In the early 1960s, however, states began enacting laws to
permit and regulate professional corporations, and in 1969 the IRS granted professional
corporations the same tax status as other types of corporations.
Physicians and, in some states, other healthcare practitioners-such as registered nurses,
physical therapists, chiropractors, dentists, and pharmacists-may now establish professional
corporations.
In some states, medical practitioners may also establish professional limited liability
companies.
Because of the variety of state approaches to regulation, it is difficult to generalize about
professional corporation laws; however, in almost all states professional corporations differ from
business corporations in at least three ways:
1. Ownership. 2. Directors and officers. 3. Liability.
3

Ownership.

A unique feature of professional corporations is that their shares of stock can only
be owned by individuals (and in some states, partnerships or other professional
corporations) licensed to practice that corporation's profession.
Some states allow the owners to be licensed practitioners in different areas of
medicine, such as physicians and dentists.
Any sale or transfer of shares must be to a person or entity meeting this
requirement. Also, if a shareholder dies or is no longer a qualified shareholder, the
stock must be transferred to a qualified shareholder or it must be purchased by the
corporation within a specified period of time.

Directors and officers.

Another unique feature of professional corporations is the requirement in most

states that all directors and officers be licensed to practice the corporation's
profession. In states where nonprofessional directors are permitted, laws typically
prohibit them from exercising authority over professional matters.

Liability.

Under the professional corporation laws in most states, professionals who own
shares of stock in the corporation are individually liable for improper acts they
perform or that are performed their supervision, but only if the act is related to
their profession.
In other words, if a lawsuit arises concerning the corporation's purchase of office
equipment, the physician involved is not personally liable. However, if a lawsuit
arises concerning a medical service, then the physician who performed or
supervised the service can be held individually liable, although the risk can be
insured against or financially limited by the purchase of liability insurance.
In a business corporation, the liability of individual stockholders is limited in
virtually all circumstances.

Models of Accountability
Outside the world of healthcare, organizations typically establish accountability through
selection, training, job design, goal setting, performance development/appraisal, and corporate
climate. However, these challenges are made more complex within the healthcare environment
because accountability has typically been defined by the professional model of accountability.

The professional model of accountability,

designed for individuals and focused on the relationship between a physician and a patient,
relies extensively on personal relationships and trust. This paradigm does not work well with
large institutions, yet most participants in the healthcare system have been raised on that
professional model. These providers often perceive the network of external controls imposed by
health plans, government regulators, private accreditation organizations, hospital or physician
practice risk management policies, and payment and reimbursement decisions as interfering
with professional accountability and eroding the clinical and ethical quality of care.
8

economic model of accountability

As an alternative to the professional model of accountability, health plans and other participants
in health plans are turning to the economic model of accountability and the political model of
accountability. The economic model of accountability suggests that the delivery of healthcare
should be more like a businesspatients are just specialized consumers, shopping for some
optimal combination of price and quality. Under this model, the primary mechanisms for
accountability are the mechanisms of the marketplace; failure to meet standards will result in a
loss of demand for services. In other words, patients are cost-conscious buyers shop[ping] for
the lowest price, and the health plans are the provider community divided into competing
economic units.
10

The political model of accountability, on the other hand, sees the health plan as less of a
business and more a community of stakeholders. In this view, accountability is achieved, not
through exit, as is the case in the economic model, but through voice. In other words, instead of
withdrawing business from a stakeholder who does not meet the standards (exit), the other
participants can complain, protest, and offer an alternative (voice). Note that political does not
necessarily mean governmentalunder this model, stakeholders can express themselves
through a variety of mechanisms, only one of which is governmental. Community boards,
physician committees, and citizen advisory groups are other mechanisms for the expression of
this voice and the exercise of organizational control.
All three of these models of accountability are in operation in the current healthcare
environment; various stakeholders, whether organizations or individuals, have some level of
influence over the models and systems of accountability under which they operate. For
example, health plans can choose a primarily economic model of governance through a
shareholder-dominant board of directors or they can elect a political model of governance
through member and provider participation on the board of directors and advisory committees.
12

13

Self-funded Plans
Employers that offer self-funded plans to their employees have policy interests distinct from
indemnity carriers, and other employers that purchase healthcare coverage from indemnity
carriers and health plans.
As we discussed earlier in this lesson, the most significant policy distinction is that self-funded
plans are not subject to state insurance laws. ERISAs preemption of such state insurance laws
has profound consequences in the area of health plan policy.
For example, if a states oversight of health plans becomes so rigorous that it imposes an
undue burden or cost on health coverage, employers may decide to selffund and thereby
escape the regulatory burden.
Similarly, self-funded employers often have an entirely different reaction to state legislative
proposals affecting health plans (which laws would not apply to them) than the employers that
purchase health coverage from regulated carriers and health plans.
Finally, while a state-regulated health plan could conceivably support some forms of federal
regulation of health plans if the law helped to level the competitive playing field without
damaging its ability to operate profitably, it is less likely that self-funded employers would
support an expanded federal regulatory role that subjects them to additional regulation

General Principles of Preemption When Congress enacted ERISA, it intended to make the
regulation of employee benefit plans an exclusively federal concern. Congress, however, also
did not want to divest the states of their traditional power to regulate insurance. Pursuant to this
scheme, Congress enacted three clauses relating to the preemptive effect of ERISA:
1. The preemption clause-This clause provides that ERISA supersedes any and all state laws
insofar as they may relate to any employee benefit plan subject to ERISA, except to the extent
that such laws may be "saved" from preemption by the savings clause.
2. The savings clause-This clause preserves from preemption any law of any state that
regulates insurance, banking, or securities except as provided in the deemer clause.
3. The deemer clause-This clause provides that an employee benefit plan shall not be deemed
to be an insurance company or other insurer, bank, trust company, or investment company or to
be engaged in the business of insurance or banking for the purposes of any law of any state
purporting to regulate insurance companies, insurance contracts, banks, trust companies, or
investment companies.
61

62

63

The Preemption Clause As noted above, Section 514(a) of ERISA preempts "any and all State
laws insofar as they may now or hereafter relate to any employee benefit plan." A law relates to
an employee benefit if it has "a connection with or reference to such a plan." The preemption
clause is "conspicuous for its breadth," however, preempting not only state laws that are
specifically designed to affect employee benefit plans but also those that may only indirectly
affect such plans. Those state laws that courts have found not to be preempted under Section
514(a) are generally limited to laws of general applicability that only tangentially affect ERISA
plans.
64

65, 66

67

The Savings Clause A state law that relates to an ERISA plan may be saved from preemption
if it falls within Section 514(b)(2)(A), which excepts from preemption those state laws that
regulate the "business of insurance." In Pilot Life Insurance Co. v. Dedeaux, the U.S. Supreme
Court used a two-part analysis to determine whether a state law regulates the business of
insurance. First, the Supreme Court took a common-sense approach, determining that, in
order to regulate insurance, a law must be specifically directed toward the insurance industry.
Second, the Supreme Court applied the three part test for determining whether a practice
constituted the business of insurance formulated for the McCarran Ferguson Act, namely,
whether the practice had the effect of transferring or spreading a policyholder's risk, whether the
practice was an integral part of the policy relationship between the insured and the insurer, and
whether the practice was limited to entities within the insurance industry. Since Pilot Life, courts
have recognized the necessity of a state law meeting both parts of the test to fall within the
protection of the savings clause.
68, 69

70

71

A merger occurs when two or more entities decide to pool their resources to form
a single legal entity. A merger can be transacted in any of a number of ways. For
example, one of the entities can merge into the other, or one of the entities can
merge into a new subsidiary formed by the acquiring entity. Frequently, the
acquiring entity forms a new subsidiary, which it then merges into the entity being
acquired, leaving the acquired entity as the surviving entity in the merger. By
having the acquired company survive as a legal entity, the acquiring company can
sometimes avoid requirements for obtaining new licenses or other government
approvals. When two or more companies merge to form an entirely new company,
and the original companies are dissolved, this type of transaction is called a
consolidation.
17

Length of Stay Laws

Two types of length of stay (LOS) laws enacted by many states are maternity length of stay and
mastectomy length of stay.
A federal maternity length of stay mandate was enacted by passage of the Newborns' and
Mothers' Health Protection Act of 1996 (NMHPA).
The NMHPA was subsequently incorporated into HIPAA.
The NMHPA requires that health plans provide coverage for hospital stays for childbirth-at least
48 hours for normal deliveries and 96 hours for cesarean births.
Prior to enactment of the NMHPA, more than half of the states had enacted maternity length of
stay mandates. At a minimum, a health plan must comply with the federal NMHPA law. If the
health plan operates in a state with a similar mandate that has more stringent requirements, it
must also comply with those additional requirements.
In addition, most states have considered and a number have enacted mastectomy length of stay
mandates. Some state mastectomy length of stay laws mandate a specific hospital stay. For
example, in New Jersey, health plans and insurers must cover hospital stays for 72 hours for a
radical mastectomy and 48 hours for a simple mastectomy. In other states, such as Florida,
health plans and insurers must cover the length of the hospital stay as determined by the
physician.
5

Mental Health Parity Act

Amendments to HIPAA created the Mental Health Parity Act of 1996 and the Newborns' and
Mothers' Health Protection Act of 1996. Through these acts, HIPAA is the first law that sets
federal benefit mandates for group healthcare.
In general, the Mental Health Parity Act of 1996 (MHPA) prohibits certain group health plans
that provide both medical benefits and mental health benefits from imposing lower annual or
lifetime dollar limits or caps for mental illness than for physical illness, if the health plan has
established an annual payment limit or aggregate dollar lifetime cap for mental health benefits.
Until September 30, 2001, the MHPA applies to both fully funded and self-funded group health
plans, but does not apply to group health plans for small employers (defined as those with at
least two but no more than 50 employees).
15

The law also does not apply to substance abuse, often subject to stricter limits on annual and
lifetime caps than mental health.
Under the law, group health plans cannot, for example, set a cap of $1 million for a group
member's lifetime medical health benefits while limiting the member's lifetime mental health
benefits to $50,000.
16

Rather, plans must either

(1) set one lifetime limit that applies to both medical and mental health benefits or
(2) set separate but equal lifetime limits each for medical health benefits and mental health
benefits or
(3) set higher limits for mental health benefits than for medical health benefits. These same
requirements for lifetime limits apply to annual limits for group medical and mental health
benefits.
Note that the MHPA does not require group health plans to offer mental health
benefits; it imposes requirements on those plans that do offer mental health
benefits. In addition, the MHPA
18

Does not prevent group health plans from imposing annual limits on the
number of outpatient visits and inpatient hospital stays for mental health
services. For instance, many group health plans limit group members to 20
outpatient visits and 30 days of inpatient hospital stays for mental health
services per year. The Act allows such limitations.
19

Permits health plans to charge different copayments and deductibles for

mental health benefits than for medical/surgical benefits. "Different" may
mean higher copays and deductibles.
Allows an exemption from compliance for employers who can prove (after six
months) that providing parity would result in an increase in costs under the
plan of at least 1 percent. As we mentioned earlier, there is also an
exemption for employers with at least two but no more than 50 employees.
Does not ban limits on the number of days or visits for mental health
treatment, or place restrictions on medical necessity determinations.
Does not preempt more stringent state mental health parity laws.
Will sunset (i.e., the Act will no longer be effective) on September 30, 2001.*
20

21

The mutual holding company

is a corporate structure under which the mutual insurer can sell as much as 49% of its
ownership to public shareholders.
The company gains access to capital markets, yet remains a mutual insurer because
policyowners retain majority ownership.
A number of jurisdictions have passed new mutual holding company laws or are considering
new laws to allow mutual holding companies.
Proponents of the mutual holding company structure contend that it is a valuable option for
mutual insurers that need access to capital and strategic alliances to compete with stock
companies, but want to preserve the mutual relationship with their policyowners. On the other
hand, some stock companies argue that this type of arrangement gives mutuals an unfair
advantage in that they can access capital markets and initiate strategic alliances yet remain
immune to takeover. In addition, some consumer advocates argue that policyowners as a group
suffer because they lose the full ownership available to them under the traditional mutual
insurance company structure.

Self-Funded and Self-Administered Plans

As we discussed in Healthcare Management: An Introduction, self-funding (also called selfinsuring) is a method employers use to provide healthcare benefits to their employees by
funding the cost of the healthcare themselves, rather than through a payor, such as an insurer
or health plan.
The employer, rather than the health plan, assumes the financial risk. Figure 3B-4 shows the
percentage of employers who provide healthcare benefits to their employees through selffunded plans. Most employers that decide to self-fund do so to improve finances and gain more
control of benefit design.
Employers that decide not to self-fund typically do so because of (1) the financial risk of having
to pay for catastrophic healthcare costs and (2) the investment in time, effort, and financial
resources needed to establish a self-funded arrangement.
Also, smaller employers that cannot perform the necessary administrative functions on their own
sometimes find that the cost of contracting for these services eliminates many of the financial
advantages described above.
In a self-funded arrangement, employers use one of two funding vehicles. They either obtain the
funds from their general assets (this is called a nontrusteed plan), or they use a trust to hold
plan reserves.
Employers that are concerned about claim fluctuation or large-amount claims often minimize
their financial risk by purchasing stop-loss insurance. Stop-loss insurance places a dollar limit
on the employer's liability for paying claims. However, some states have maintained that in
certain situations a self-funded plan with stop-loss insurance constitutes healthcare insurance,
subject to state regulation (see ERISA and Health Plans for more on this subject).

Self-funding eliminates or minimizes the employer's need to pay an insurer or

health plan to assume financial risk. However, the employer must still have a way
to administer the healthcare benefit plan: determine eligibility, enroll members,
review and pay claims, and perform all the other administrative functions typically
performed by a health plan. Often, an employer handles this by hiring an insurer, a
health plan, or a third party administrator (TPA) to provide administrative services
under the plan, while financial responsibility for funding benefit payments remains
with the employer. The contract that describes this arrangement is called an
administrative services only (ASO) contract.
15

Some employers choose to self-administer. A self-administered plan is a selffunded plan that is also administered by the employer. Often a large employer can
devote staff to perform these administrative activities. An employer that self-funds
or both self-funds and self-administers a healthcare benefit plan is performing some
or all of the major functions of an insurer; however, it is not required to be licensed
as an insurer or health plan as long as it performs these functions only for its
employees.
16

Trivia

The NMHPA requires that health plans provide coverage for hospital stays for
childbirth-at least 48 hours for normal deliveries and 96 hours for cesarean births.
Prior

In the end, health plans generally cannot guarantee anonymity even to those
who report misconduct through an apparently anonymous procedure. At
some point, the company may need to reveal the identity of the person who
initiated the complaint, or that identity may become obvious. Typically,
health plans strive to assure discretion, but also endeavor not to mislead
individuals with promises of absolute anonymity.

An organization can obtain mitigation credit, in addition to the credit available for
maintaining a corporate compliance program, if it voluntarily reports a criminal
offense to the government and subsequently reveals the results of the internal
investigation.

What Is Public Policy?

For purposes of this discussion, we define public policy as any law, regulation, principle, or
plan established by an agency, arm, or branch of government. It can apply at the federal, state,
or local level. Most often, public policy involves action and is shaped by many players, including
privatesector entities, interested in its outcome. However, the choice not to act is also an
element of public policy, as absence of action is not the absence of policy.
Governments have six types of tools they can exercise in the domain of public policy:
legislation, regulation, taxation, funding of public programs, purchase of services, and collection
and provision of information. Historically, they have used these tools within the realm of two
broad categories of public policyallocative policies and regulatory policies.
2

Types of Public Policy In the context of public policy, allocative policies are those that
determine the allocation of public funding. Regulatory policies include all other policies that
affect the delivery and financing of healthcare in both the public and private sectors.

On December 8, 2003, President George W. Bush signed into law the Medicare Modernization
Act of 2003 (MMA), taking steps to expand private sector health care choices for current and
future generations of Medicare beneficiaries prescription drug benefit that will be made available
to all Medicare beneficiaries in 2006.
The centerpiece of the legislation is the new voluntary prescription drug benefit that
will be made available to all Medicare beneficiaries in 2006. Additional changes to
the Medicare+Choice (M+C) program include

On January 16, 2004 CMS announced new county base payment rates for the MA program.
Beginning March 1, 2004, all county MA base rates received an increase which plans are
required to use for enhanced benefits. Plans may use the extra money in one of four ways:

Board Duties and Responsibilities

The board exercises control over the company by approving or not approving actions
performed or proposed by the executive officers. Most health plan boards, whether for-profit or
not-for-profit, perform the following functions:
the overall corporate strategic plan
morale, and quality performance goals)
fer
between not-for-profit and for-profit companies)
Authorize major transactions, such as mergers and acquisitions

Appoint and evaluate the performance of the executive officers (including the chief executive)
who actually operate the company
re external auditors
10

Records and Privacy In the course of doing business, health plans gather a large amount of
personal information about individuals. General laws and court cases relating to confidentiality
of medical information apply to health plans and insurers. In addition, many states have enacted
laws designed to protect the privacy of individuals by establishing guidelines for how health
plans must treat such personal information. State privacy laws regulate the ways in which
companies collect, use, and disclose personal information. Many of these laws are based on
NAIC model acts.
For example, the NAIC HMO Model Act requires HMOs to protect the confidentiality of
information that would reveal the health status or treatment of members.
10

11

HMOs may disclose such information only in the following situations:

carry out the purposes of the HMO Act
With the express consent of the individual
Pursuant to a statute or court order requiring the production of evidence