Structuring Health Insurance Markets

Assuring Financial Solvency

From Risk-Based Capital Standards to Oversight of Down-Stream Risk

Presenters: Stephanie Lewis, Counsel for Health Policy and Regulation, Institute for Health Policy Solutions, Washington, D.C. Kip May, Deputy Director, Ohio Department of Insurance, Columbus, OH.

This was the first of two sessions examining States' major objectives in regulating managed care organizations and other forms of risk-bearing entities: assuring financial solvency and assuring accountability to consumers. This session examined the methods used to assure financial solvency and the following session examined health plan accountability.

The session began by reviewing the types of risk associated with the business of insurance and the consequences of insurer insolvency. The five types of risk include the following:

• Affiliate Risk. The risk that the financial condition of an affiliate entity causes an adverse change in capital.
• Asset Risk. The risk of adverse fluctuation in the value of assets.
• Underwriting Risk. The risk that premiums will not be sufficient to pay claims.
• Credit Risk. The risk that providers and plan intermediaries paid by capitation will not be able to provide the services contracted as well as the recoverability of amounts due from reinsurers.
• Business Risk. The general risk of conducting business, including the risk that actual expenses will exceed amounts budgeted.

If these risks are not managed appropriately, an insurer may become insolvent. The major consequences of insolvency include disruption of care for enrollees and lack of payments of medical expenses to providers. Unless another insurer can step in to honor the contracts in force, there may be a loss of premiums paid in advance and significant disruptions to the market.

To protect against insolvency, most States employ four key types of regulations/activities, including the following:

• Capital Standards. including minimum net worth requirements, reserves, as well as other asset and investment requirements.
• Insolvency Protections. most commonly these include deposits held by the State to cover administrative costs, hold harmless provisions, continuation of benefits clauses, fidelity bonds and insurance, an uncovered expenditures deposit. Some States also require reinsurance and/or guaranty funds.
• Financial Monitoring and Examination. including financial Statement filings and on site examinations.
• Liquidations. supervision of the liquidation process.

Ms. Lewis explained that States have traditionally used a series of "freestanding" regulatory structures to oversee indemnity insurers, health maintenance organizations (HMOs), and even certain types of risk-bearing provider-sponsored organizations. Over the past few years, however, regulators have found it increasingly difficult to oversee a growing array of new types of risk-bearing organizations, including downstream risk arrangements whereby a licensed insurers pass on significant financial risk to a providers network or other entity. As a result, the National Association of Insurance Commissioners (NAIC) has been leading the field to develop a more "consolidated" approach to regulating health insurers, based on specific functions rather than ownership type.

The overall theory of functional regulation is to treat organizations that perform the same or similar functions in the same or similar manner irrespective of their organizational structures. Examples of this approach include the development of NAIC's Consolidated Licensure for Entities Assuming Risk (CLEAR) initiative, and its risk-based capital formula model act.

In 1997, Ohio became the first State to enact such an approach in law, through its Managed Care Uniform Licensure Act (MCULA). The State now regulates by function, regardless of an entities function, referring to all risk-bearing entities that provide managed care plans as "Health Insuring Corporations."

References

Ohio Department of Insurance. March 12, 1998. Policy Statement on the Managed Care Uniform Licensure Act (S.B. 67) and the Regulation of Risk-Bearing Entities.

National Association of Insurance Commissioners. 1998. The Regulation of Health Risk-Bearing Entities. White Paper. Washington D.C.: National Association of Insurance Commissioners.

Ward SO. October 1997. Provider-Sponsored Networks: State Oversight and Contracting Innovations. Washington D.C.: Alpha Center.

Negotiated Rulemaking Committee on PSO Solvency Standards. March 5, 1998. Committee Statement. U.S. Department of Health and Human Services.

Bibliography on Provider Sponsored Networks. October 1997. Washington D.C.: Alpha Center.

Akula JL. Insolvency Risk In Health Carriers: Innovation, Competition, and Public Protection. Health Affairs 16(1):9-33.

American Hospital Association. Regulation of Health Plan Companies and Provider Sponsored Networks: Practical and Public Policy Considerations. April 25, 1995 (draft).

Barents Group, LLC of KPMG Peat Marwick LLP. Provider Sponsored Organizations and Direct Risk Contracting: When PSOs Become HMOs. Chicago, IL: Blue Cross and Blue Shield Association, January 1997.

Buell CH. State Oversight of Integrated Health Systems. New York: Milbank Memorial Fund, 1977.

Butler PA, Mitchell E. Health Care Provider Networks: Regulatory Issues for State Policy Maker. Portland, ME: National Academy for State Health Policy, February 1996.

Carneal G. State Regulation of Managed Care. The Managed Health Care Handbook, Chapter 53. Aspen Publishers, 1996.

Casey M, Wellever A, Moscovice I. Rural Health Network Development: Public Policy Issues and State Initiatives. Journal of Health Politics, Policy and Law 22(1):23-47.

Group Health Association of America. PHOs and the Assumption of Insurance Risk: A 50-State Survey of Regulators' Attitudes Toward PHO Licensure. Washington, DC: GHAA, July 10, 1995.

Hirshfeld E. Assuring the Solvency of Provider-Sponsored Organizations. Health Affairs 15:(3):28-30.

Iglehart JK. Interview: State Regulation of Managed Care with Josephine Musser. Health Affairs 16(6):36-43.

Jordan RS. Regulation of Provider Risk Sharing and Other Limitations on Risk Bearing Provider Networks. BNA's Health Law & Business Series. Washington, DC: Bureau of National Affairs, Inc., 1966.

Jimenez CS. Provider-Sponsored Organizations and Direct Risk Contracting: Who Protects the Consumer? Chicago, IL: Blue Cross and Blue Shield Association, January 29, 1997.

Kelly MP. State Insurance Regulation of Provider-Sponsored Organizations. Healthcare Financial Management July 1997, p. 44-6.

Milbank Memorial Fund. State Oversight of Integrated Health Systems. New York:1997.

National Association of Insurance Commissioners. The Regulation of Health Risk Bearing Entities, Volume I: Issues Overview (draft). Washington, DC: NAIC, March 1997.

National Association of Insurance Commissioners. The Regulation of Health Risk Bearing Entities, Volume 2: Position Paper (draft). Washington, DC: NAIC, March 1997.

O'Loughlin Ward S. Provider-Sponsored Networks: State Oversight and Contracting Innovations. Washington, DC: Alpha Center, October 1997.

Physician Payment Review Commission. Provider-Sponsored Organizations. Annual Report to Congress, Chapter 10. Washington, DC: PPRC, 1997, p. 201-32.

West Virginia Coalition For Managed Care Options. Provider Sponsored Networks And State Insurance Regulation. Wheeling, WV: February 11, 1997.

Sage, William M. Health Law 2000: The Legal System And The Changing Health Care Market. Health Affairs 15(3):9-27.

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