The Office of General Counsel issued the following opinion on August 25, 2004, representing the position of the New York State Insurance Department.
Re: Independent Practice Association, Transfer of Risk
Must a Health Maintenance Organization that no longer transfers risk to an Independent Practice Association (IPA) maintain a reserve for anticipated claims?
If risk is not transferred to an IPA, then the HMO must maintain the appropriate reserve.
An HMO with a Certificate of Authority from the Commissioner of Health pursuant to New York Public Health Law § 4403 (McKinney 2002) that had, prior to August 22, 2001, entered into an arrangement with an IPA. The agreement between the HMO and IPA is in compliance with N.Y. Comp. Codes R. & Regs. tit. 10, § 98-1.5(b)(6)(iv) (2001). Under the agreement, the HMO pays the IPA a stipulated capitation amount. The IPA, which is not at risk for any amount in excess of the capitation amount, in turn, compensates the health care providers with which it has contracted to provide services to the HMOs subscribers on a fee for service basis, less a 10% withhold. If the claims expenses exceed the capitation amount, the withhold is utilized. After the withhold has been exhausted, the HMO is again liable for the remaining claims.
The Insurance Department has previously informed the HMO that the above arrangements constitute a transfer of risk within the meaning of N.Y. Comp. Codes R. & Regs. tit. 11, Part 101 (Regulation 164). Since neither the HMO nor the IPA desire to comply with the requirements of Regulation 164, the HMO and IPA intend to restructure their relationship in such a fashion that there is no transfer of risk within the meaning of Regulation 164.
New York Public Health Law § 4403(1)(c) requires, as a condition precedent to an HMO receiving a Certificate of Authority, that:
it is financially responsible and may be expected to meet its obligations to its enrolled members. For the purpose of this paragraph, financially responsible means that the applicant shall assume full financial risk on a prospective basis for the provision of comprehensive health services, including hospital care and emergency medical services within the area served by the plan, except that it may require providers to share financial risk under the terms of their contract, it may have financial incentive arrangements with providers or it may obtain insurance or make other arrangements for the cost of providing comprehensive health services to enrollees; any insurance or other arrangement required by this paragraph shall be approved as to adequacy by the superintendent as a prerequisite to the issuance of any certificate of authority by the commissioner;
Based upon the above language in New York Public Health Law § 4403(1)(c), the Insurance Department had taken the position that an HMO could compensate health care providers, either directly or through an IPA, on a capitated basis without the health care provider or IPA being considered to be doing an insurance business within the meaning of New York Insurance Law § 1101(a) (McKinney 2000 and 2004 Supplement). This position was regularized by 1998 N.Y. Laws 586, which, among other statutory changes, enacted New York Insurance Law § 4325(f) (McKinney 2000):
No contract entered into between an insurer and a health care provider shall be enforceable if it includes terms which transfer financial risk to providers, in a manner inconsistent with the provisions of paragraph (c) of subdivision one of section forty-four hundred three of the public health law, or penalize providers for unfavorable case mix so as to jeopardize the quality of or insureds' appropriate access to medically necessary services; provided, however, that payment at less than prevailing fee for service rates or capitation shall not be deemed or presumed prima facie to jeopardize quality or access.
After consultation with the Commissioner of Health, the Superintendent promulgated Regulation 164, which became effective on August 22, 2001. N.Y. Comp. Codes R. & Regs. tit. 11, § 101.3(a) (2002) defines capitation:
The term capitation . . . shall mean contractually based prepayments . . . made to a health care provider, on a per member per month or a percentage of premium basis, in exchange for one or more covered health care services to be rendered, referred or otherwise arranged by such provider and by its participating providers . . . .
Financial risk transfer is defined in N.Y. Comp. Codes R. & Regs. tit. 11, § 101.3(c):
The term financial risk transfer shall mean the contractual assumption of liability by the health care provider by means of a capitation arrangement for the delivery of specified health care services to subscribers of the insurer
Health care provider is defined in N.Y. Comp. Codes R. & Regs. tit. 11, § 101.3(g) & (i):
(g) The term health care provider shall mean . . . a health care professional licensed, registered or certified pursuant to Title 8 of the Education Law (including a group of such health care professionals) . . . . A health care provider shall also include . . . an intermediary entity as defined in this section.
(i) The term intermediary entity shall mean a person or entity which enters into a financial risk transfer agreement with one or more insurers and who contracts with
one or more participating providers to perform the services which are set forth in the financial risk transfer agreement. When the insurer is an entity certified
pursuant to article 44 of the Public Health Law, the term shall also mean an Independent Practice Association.
The requirements that a health care provider demonstrate financial responsibility and the specification of how such financial responsibility is to be demonstrated are set forth in N.Y. Comp. Codes R. & Regs. tit. 11, § 101.5 (2002). An additional administrative requirement is set forth in N.Y. Comp. Codes R. & Regs. tit. 11, § 101.4(c) (2002):
An insurer who uses a capitation arrangement to transfer all or part of its financial risk to a health care provider must do so by means of a contract approved by the superintendent. Before granting such approval the insurer shall have demonstrated to the satisfaction of the superintendent the financial responsibility of the health care provider to render the services covered by the in-network capitation and compliance with the provisions of this Part. If so demonstrated, the insurer is relieved of the reporting requirements for carrying a liability on its own balance sheet for underlying unpaid claims and expenses related to in-network capitated payments made pursuant to the financial risk transfer agreement. . . . (emphasis added)
The general requirement that risk transfer arrangements comply with Regulation 164 has been modified by N.Y. Comp. Codes R. & Regs. tit. 11, § 101.4(g):
Financial risk transfer arrangements which are in effect on the effective date of this Part and which receive all necessary Department of Health approvals, may continue in effect without having to meet the requirements of this Part . . . until the contract renewal date; however, for agreements which are either automatically renewed or whose renewal date is more than thirty-six months after the effective date of this Part, the exemption from meeting all of the other requirements of this Part, including obtaining the superintendent's approval, shall not extend beyond thirty-six months.
Since the arrangement between the HMO and the IPA meets the Regulation 164 definition of financial risk transfer, if the arrangement had not predated August 22, 2001, the IPA would have had to meet the requirements of N.Y. Comp. Codes R. & Regs. tit. 11, Part 101 since the effective date of Regulation 164. If the arrangement between the HMO and the IPA is restructured so that there is no longer a risk transfer within the meaning of Regulation 164, the HMO would no longer be relieved of the reporting requirements for carrying a liability on its own balance sheet for underlying unpaid claims. Accordingly, it would have to establish the applicable reserves.
In order that the HMO and IPA would not have to be in compliance with Regulation 164, the arrangement between them should have been restructured by August 23, 2004. Confirmation of the restructuring and a description of the new arrangements, so the Insurance Department may confirm that Regulation 164 is not applicable, should be submitted, by September 2, 2004 to:
Ms. Yvonne Rowser
Associate Insurance Examiner
New York State Insurance Department
25 Beaver Street
New York. NY. 10004
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.