April 13, 2006

Adopted Rules for IPAs/PHOs

On March 17, 2006, the Division of Insurance (DOI) of the Department of Financial and Professional Regulation published adopted amendments with respect to the Health Maintenance Organization (HMO) Act and those entities that contract with HMOs, herein referred to as managed care organizations (MCOs). MCO’s are generally physician hospital organizations (PHOs) and independent practice associations (IPAs). The Illinois Hospital Association (IHA) commented on the proposed rules in April, 2005.

In the adopted amendments, IHA concerns regarding bond/letter of credit were addressed as the requirements were withdrawn.  Most importantly, the amendments acknowledge that in the event of an MCO insolvency, THE HMO is secondarily liable as the ultimate risk bearer for unpaid health care services.  IHA concerns regarding lack of statutory authority to enforce a hold harmless on all providers were not fully addressed and will impact capitated MCOs and physicians.

You may access the final rule beginning on page 4732 via: http://ilsos.net/departments/index/register/register_volume30_issue11.pdf (Note - takes time to download).

Recall, in March, 2005, DOI published a proposed rule requiring any MCO that took capitated risk and contracted with an HMO to establish specified surety bond(s) or irrevocable/unconditional letter(s) of credit. The bond/letter of credit was to be held by DOI for the benefit of unpaid physicians, hospital facilities or other persons licensed to furnish care pursuant to the agreement. Under the proposed rule, DOI was allowed to exercise the bond or draw on the letter of credit for payment to providers at his discretion. The proposed rule stemmed from IPA financial insolvencies several years back, in particular Meyer Medical. In addition, the proposed rule required all contracts to have a provider hold harmless clause (currently by law only hospitals are required to have such a hold harmless) to ensure enrollees are not held liable in the event of an insolvency or breach of contract. IHA sent in written comment to the proposed rule and was successful in having one of two concerns addressed.

The final rule omits references to the proposed bond/letter of credit and requires provider agreements between HMOs and MCOs whereby:

• The MCO agrees to fully cooperate and disclose information to the HMO’s actuaries;

• The HMO acknowledges that in the event of the MCO’s insolvency, the HMO is secondarily liable as the ultimate risk bearer for unpaid health care services rendered to its enrollees.

As stated earlier, for the first time we do have a rule that establishes that the HMO is in fact liable when an IPA/PHO becomes insolvent and there are outstanding claims.

However, the final rule remains intact as proposed with some clarification requiring that beginning January 1, 2007, all new capitated provider agreements [clarified that it is those provider agreements between the HMO and its capitated providers] contain a hold-harmless clause that the MCO agrees to hold the enrollee harmless for unpaid provider services. To the extent that any capitated provider contract renewed or extended after December 31, 2007, fails to incorporate the hold harmless clause, it is deemed incorporated as operation of law as of the date of renewal.

It should be noted that the Joint Committee on Administrative Rules (JCAR) opposed DOIs hold harmless changes at the behest of the Illinois State Medical Society (ISMS) as it was argued that there is lack of statutory authority to enforce HMO hold harmless requirements on physicians. DOI has refused to meet the objections of JCAR and as such the final rule stands unless JCAR submits legislation to clarify the law, which appears unlikely at this time.

Please forward this memorandum to your managed care personnel.

Staff Contact: Elena Butkus: (630) 276-5526