The California Department of Managed Health Care’s (DMHC) passed a new regulation, effective July 1, 2019 that expands the types of healthcare companies that must be licensed. The regulation is a response to failures of companies that contract with Knox-Keene licensees who provide health care services through subscription plans. The licenses, typically HMOs, provided service to subscribers through:
The new licensee agreement will give the DMCH oversight over the financial stability of these healthcare companies (often called restricted licensees or risk bearing organization).
The History of Knox-Keene Act
The Knox-Keene Health Care Services Plan Act of 1975 (Knox-Keene) was passed to help protect consumers who enrolled in medical health care service plans. These plans, according to the Knox-Keene Act define these plans as
“any person who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees.”
The main targets of the Knox-Keene Act were and are health maintenance organizations, more commonly called HMOs and other organizations that provide or arrange for health care services – in return for payment on a capitated basis.
Generally, the health care service plan company is required, under Knox-Keene, to obtain a license from the California Department of Managed Health Care (DHMC).
The reason Knox-Keene was enacted was to help protect against the possibility members of the HMO or other plans would be left without access to care if the health plan became insolvent and couldn’t cover the cost of future healthcare services.
Capitation agreements
Capitation payments are agreed payment arrangements (contracts) between a health insurance company and a medical care provider. The payments are paid to physicians, medical practices, clinics, and hospitals – generally on a per-patient or per capita basis. The payments are normally fixed, monthly payments calculated 12 months in advance – regardless of how many times the patient needs medical services. Payments usually reflect the subscriber’s age and /or types of ailments. Rates can vary from one part of the country to another. Capitation plans generally identify which services must be proved to patients. There is a balance of risk between the insurance company and the medical provider. Typical medical services include:
In simpler terms, a capitation plan is a per-member, per-month payment. The payments are made in advance, not after the services have been provided.
If you’re a medical doctor, dentist, acupuncturist, chiropractor, or other licensed healthcare provider, and you offer your patients “9 sessions, get 1 free,” have you violated kickback laws?
Licensing requirements under Knox-Keene
“It is unlawful for any person to engage in business as a plan in this state or to receive advance or periodic consideration in connection with a plan from or on behalf of persons in this state unless such person has first secured from the director a license, then in effect, as a plan or unless such person is exempted by the provisions of Section 1343 or a rule adopted thereunder. A person licensed pursuant to this chapter need not be licensed pursuant to the Insurance Code to operate a health care service plan or specialized health care service plan unless the plan is operated by an insurer, in which case the insurer shall also be licensed by the Insurance Commissioner.”
Generally, there are two types of plans that seek licenses under Knox-Keene:
Some licenses who provide just one basic health service such as mental health may obtain a specialized Knox-Keene license instead of a full license.
The 2005 DMHC regulation which expanded Knox-Keene licensing requirements
Historically, some independent physician associations (IPAs) and hospitals took part in restricted plans and/or global capitation agreements. The risk was passed from the insurance plan to the IPAs and hospitals who took part in these global capitation agreements. The health plan would create the arrangements to pay the providers a fixed monthly sum and assign a set of patients to the providers. If the patient group remained healthy – meaning they didn’t seek much use of the provider’s medical services – the providers could make a nice profit. On the other hand, if the patient group used a lot of medical services, the providers could lose a lot of money and time treating the patients in this group.
This technique didn’t work too well because it was hard for the hospitals and IPAs to analyze the risk factors. So, in 2005, the DMHC created regulations that required “Risk Bearing Organizations (RBOs)” that contracted with the licensed insurers to provide financial metrics to the DMHC – so the DHMC could determine the financial health of the RBOS – and in turn, help the hospitals and IPAs better assess their risks. The law did not require that the RBO obtain their own license. Without the requirement to obtain their own license, the DHMC could only direct the licensed health insurance plan – not the RBO.
The new DMHC regulation
A new regulation approved by the DHMHC expands the types of organizations that must obtain a Knox-Keene license. In essence, the new regulations will require that the RBOs and restricted plans will now need to obtain a license. The current requirement to obtain a full-service Knox-Keene license or a specialized Knox-Keene license is expanded to include many types of health companies including the RBOs, the IPAs, hospitals, and other health plans that engage in global risk.
The regulation becomes effective on July 1, 2019. Any health care organization that bears the financial risk of providing medical services to subscribers will need to review the new licensing requirements with an experienced California healthcare lawyer.