Legislative Program Review and Investigations Committee

Regulation and Oversight of Managed Care
Chapter III - Final Report

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Regulation and Oversight of Managed Care
Chapter III - Regulatory Structure in Connecticut  

Federal role is limited. Health insurance, like other types of insurance enterprise,  is a matter for states, not the federal government, to regulate.  Thus, the controls and oversight over managed care is considered a state activity. (One major exception to state regulation, through the federal ERISA legislation, will be discussed in some detail later in this chapter.)   

While the federal government does not control health insurance or managed care, there are federal influences.  In the early 1970s Congress passed legislation, known as the Federal Health Maintenance Organization Act, to promote HMOs as an alternative to regular health insurance plans through government loans and grants to those HMOs that could meet certain federal standards.  As the federal monies became less available, HMO interest in becoming federally qualified waned.   

Currently, renewed interest by the federal Health Care Financing Administration in contracting with HMOs to cover Medicare clients has spurred HMO interest in those federal standards once again.  However, only those HMOs interested in contracting with the federal government, or in obtaining federal loans or grants, must be federally qualified and meet those federal standards.  Thus, most of the regulation of health care is the responsibility of the states.  

State Responsibility  

In Connecticut, there are several state agencies that have some responsibility in regulating aspects of health care including its financing and its delivery.  The Insurance Department has the largest role, regulating insurers and health maintenance organizations for meeting licensing and financial solvency standards. The Department of Public Health licenses and regulates health professionals, and the Office of Health Care Access is mandated to collect information on all managed care organizations, maintain hospital budget data, as well as approve hospital rate increases above certain statutory parameters. (The Department of Social Services is responsible for overseeing managed care for Medicaid clients, but that is not a part of this study scope Health insurance, like other types of insurance enterprise, is a matter for the states, not the federal government, to regulate.  One major exception to state regulation is the federal Employee Retirement Income Security Act (ERISA) legislation, which significantly limits the state=s role and will be discussed below.

State Agency Responsibilities

There are several state agencies that have some responsibility for regulating aspects of health care in Connecticut, including its financing and its delivery.  The Department of Insurance has the largest role in regulating health insurers and health maintenance organizations to ensure they meet licensing and financial solvency standards.  The Department of Public Health licenses and regulates health professionals, and inspect and licenses any facility that provides health care services. The Office of Health Care Access is mandated to collect information on all managed care organizations, and maintain and report on hospital budget and utilization data.  Until 1992, OHCA had a role in setting some hospital rates, but since that time rates have been set by the market and competition. (The Department of Social Services is responsible for overseeing managed care for Medicaid clients, but Medicaid managed care is not included in the scope of the study.)  

In 1994, the legislature created the Connecticut Health Care Data Institute, which the legislature envisioned would be the principal recipient and generator of_ health care data.  The legislation authorized the institute to maintain a statewide database on all inpatient and ambulatory encounters, track expenditures and health outcomes, and evaluate and distribute information concerning certified health plans and their providers.  

Efforts to have the health data institute become operational have not been successful.  An appropriation of $400,000 was made for the institute in the Office of Health Care Access= budget and a national search for a director was begun in late 1994.  The search was halted because there was a proposal to eliminate the institute in the February 1995 budget.  All but $5,000 of the $400,000 was returned to the Office of Policy and Management.  

A steering committee, made up of relevant executive branch agencies and the governor=s office, was formed in FY 96 to develop a clearer role for the institute, and a memorandum of agreement was developed, but it was never signed by all the parties. In February 1996, the first quarter=s FY 96 appropriation to the institute was returned, and none of the statutory duties outlined for the institute were undertaken.  

Department of Insurance  

Primary regulatory responsibility for health care plans lies with the Department of Insurance. It oversees all insurance companies, including health insurers, to ensure financial solvency. The department also reviews and approves rates and policies, handles complaints, and oversees companies conduct in the marketplace.

Any organization that acts like an insurance company by taking and spreading risks must be regulated by the insurance department. The department=s oversight includes health maintenance organization (referred to in Connecticut statutes as health care centers) because they accept the risk of providing health care to their subscribers in return for premiums or per-person fees.  Preferred provider organizations, individual practice associations, and third-party claims administrators, on the other hand, are not required to be licensed because they do not accept and spread risk.  Instead, they contract with insurers, health maintenance organizations, or self-funded employers. Table III-1outlines the regulatory components on various health care organizations.  

The program review committee finds the current regulatory structure and agency responsibility is appropriate, and makes no recommendation for any realignment of regulatory responsibility, nor an expansion of licensure to other entities that are not insurance companies or HMOs. 

HMOs are like insurance companies. They establish plans of coverage, market health plans, ensure that services are included as a covered benefit before approving the service or payment, and pay providers according to contract. Therefore, they are appropriately regulated by the insurance department.  Except for Kaiser Health Plan, which has on-site health services, health maintenance organizations do not see patients directly and are not the direct providers of health care.  They contract with doctors, hospitals and other providers to do that.  The direct provision of those services, and the facilities where they are performed, are monitored and licensed through the Department of Public Health.     

Extent of HMO Regulation  

Health maintenance organizations are regulated for financial solvency in all states, and in the vast majority of states, that function is performed by each state=s insurance department.  In Connecticut, the statutory responsibility and financial expertise for regulating health maintenance organizations, including solvency and rates, already exists at the insurance department, and the program review committee believes that function should remain there.  

Policy review. Connecticut statutes require that, prior to licensure, health maintenance organizations submit to the insurance department: sample provider and group contracts; evidence of coverage forms with included and excluded benefits; and the plan=s internal grievance procedures. Any policies, forms, or documents must also be submitted and approved by the insurance department before a plan may be marketed in Connecticut.  

The division also examines the HMO=s complaint handling procedure, as well as the material on coverage given to the subscriber or enrollee to ensure that they do Anot contain provisions or statements that are unfair, inequitable, misleading, deceptive, or which encourage misrepresentation@.  Policies are also examined to ensure they meet the statutorily mandated benefits.  (A more detailed listing of statutory benefits and coverages is contained in Appendix XXXX).  It is important to note that the department reviews for statutory mandate compliance, but makes no further judgment on the coverage of benefits, nor on the adequacy of the network or types of providers.  

The program review committee believes that the documents currently submitted are related to insurance coverage, and are best reviewed by the Department of Insurance.  Further, the committee finds the Department of Insurance is diligent in its oversight role in examining policies and documents before being approved for use.  The program  review committee reviewed all HMO policies on file at DOI and found there is frequently correspondence between the department and the HMO before a policy, or a new product, is approved.  Typically, the DOI staff will advise a change to clarify confusing language, or inform the insurer or health plan that a mandated benefit must be included in plan before it can be offered.

Absent a mandate for a single payor system, for universal coverage, or for a standardized package of health benefits, health plans are developing and marketing insurance products that respond best to employer and consumer needs for adequate benefits at an affordable price, and the insurance department is the best agency to regulate those products.  The committee recommends in a later chapter that the Department of Insurance compile a report card on quality and utilization issues so that purchasers are better informed. 

The program review committee believes the purchasers of the health plans are the best judges of the levels of quality and access standards they wish, and does not recommend that a state agency establish those for them. Legislating those standards is unwarranted and premature in a health system that is changing rapidly.  Additional requirements may constrict health plans= abilities to develop new products, to recognize new technologies and assess their impact on health care, and form new networks.  Such changes may also stifle innovation, artificially raise the costs, and restrict availability of health insurance coverage.  

In approximately 35 states, the health agency also has a regulatory responsibility, typically for monitoring a plan=s utilization patterns, accessibility to physicians, and other quality of care issues. However, without pre-established criteria on what quality measures should be, health agency involvement would be duplicative, and would add no real value to the regulatory process for approving health plans. In fact, Texas has recently gone from two-agency jurisdiction to one because of regulatory confusion.  

Licensure and Rate Setting  

Examination for HMO license.  The Financial Examination Section within the Department of Insurance (DOI) is responsible for reviewing all applications for HMO licensure.  Currently, a principal examiner in the department who is a certified financial examiner conducts the financial reviews of HMOs both for initial licensure and annual review for solvency.  

HMOs are required to be Connecticut-domiciled companies (required to be incorporated in Connecticut and keep all their financial documentation in Connecticut).  This helps regulators keep track of HMOs= business in Connecticut, and ensures that their financial records are accessible.  In addition,  the Financial Examinations Section reviews the HMO=s proposed business and financial plan to ensure that the business partners have some expertise in the running of an HMO. The business plan must document that it has a claims-payment system, as well as how it will handle complaints.  

The Financial Examination Division also requires three-year enrollment, revenue, and expenditure projections.  The application must also include information on how the HMO will contract with physicians, hospitals, and other providers, and what the credentialing procedure (selection process) is for providers.  

Financial requirements.  To obtain and keep a license, HMOs must show that they have enough capital to start and maintain operations, so that they do not become insolvent and leave subscribers without health care coverage. The Connecticut Department of Insurance reviews each HMO=s financial condition to ensure that they meet the statutory capital and net surplus requirements.  

Once an HMO becomes licensed, it does not have to be relicensed, but it must file quarterly and annual financial statements so that the Insurance Department can monitor its financial condition.  In other areas of insurance -- property/casualty and regular life and health insurance -- the National Association of Insurance Commissioners tracks the financial condition of companies, and places financially troubled companies on its Awatch@ list.  The organization does not yet collect data on the financial conditions of HMOs, although it is planned.  Thus, the ongoing financial surveillance of HMOs is at the state level.  

The initial criteria an applicant for an HMO license must meet are the capital requirements.  The minimum capital required by statute is $1.5 million, (raised from $1 million in 1990 via Public Act 90-68).  Second, the HMO must maintain a minimum net worth of either: 1) $1 million; or  2) 2 percent of the first $150 million of premiums plus 1 percent of premium revenues over $150 million, whichever is greater.  

The program review committee compared Connecticut=s financial requirements with other states= through the National Association of Insurance Commissioners (NAIC) data.  Of the 39 states for which NAIC has data, Connecticut=s requirements are similar to 12 other states.  Twenty-two states have less stringent financial requirements than Connecticut or leave the determination of financial adequacy up to the insurance commissioner.  Three other states have somewhat higher capital requirements. New Hampshire=s are substantially higher, requiring HMOs to have and maintain net worth requirements of $6 million.  

In Connecticut, health insurers that are not HMOs must maintain a $2 million surplus, even though they are also assessed for a guarantee fund which is tapped in the event that an insurer becomes insolvent.  HMOs do not contribute to a similar guaranty fund, although Connecticut statutes require a plan for remaining Connecticut HMOs to take over the business of an insolvent HMO.  The committee believes that despite the statutory plan to protect consumers whose HMO collapses financially, subscribers need greater protection.  Especially given that HMOs do not contribute to a guaranty fund, and that NAIC does not yet have a financial Awarning@ system for them, HMOs must maintain greater ongoing capital reserves to protect subscribers.  

Thus, to ensure HMO consumers greater protection, and to equalize the surplus requirements between HMOs and regular insurers, the Legislative Program Review and Investigations Committee recommends that HMOs be required to maintain a net worth of at least $2 million, the same as indemnity health plans.  

Rate-setting.  All HMO rates must be filed with and approved by the insurance department before the health maintenance organization can apply them to subscribers. Regular health insurers only file rates for individual and Medicare supplement policies, not group health policies,  which make up most of their business.  The department may deny any approval of rates, if the amounts are excessive or inadequate for the coverage, or if they are unfairly discriminatory.   

Except for very large employers, HMOs are prohibited from experience rating, where a group=s health claims experience is considered in establishing the rate. Instead, HMOs must provide community rating, although it may differentiate based on the demographics of the group including  age, sex, and geographic location. The community rating requirement for HMOs was initiated as part of the federal Health Maintenance Organization Act for those HMOs who wished to become federally qualified.  Connecticut laws governing HMOs, which in large part adopt the federal standards,  also include this requirement.

Rate review. The Life and Health Division also examines the HMO=s  proposed rates to ensure they are not Aexcessive, inadequate or unfairly discriminatory.@  The current director of the Life and Health Division, an actuary, conducts the rate reviews.  No rates are disapproved outright, according to the director, but there may be negotiation between the department and the HMO before the proposed rates are approved.  Rate filing guidelines issued by DOI state that HMOs with approved rates already on file may change the rates, pending approval from the department as long as the premium quote forms explicitly state they are still subject to DOI approval.  If the rates are not approved exactly as submitted, the HMO would have to make payment adjustments to the enrollees.  The DOI guidelines also require that HMOs provide pricing differentials for small employer groups.  

HMO rates are filed in per month per member (or per family) format, and the same rate is charged for each member, or family in that plan.  However, there are a wide variety of actual rates charged because HMOs, like other health insurers, offer multiple plans.  The plans= rates can vary depending on:  

C                  the co-pay to the enrollee for office visits, outpatient services, and the like;  

C                  the level of benefits covered;  

C                  the size of the group purchasing the plan, and sex and age of enrollees; and  

C                  the geographic area of the state.   

The program review committee believes that approval of HMO rates is an appropriate function for the insurance department, given some version of community rating is required for HMOs, and therefore makes no recommendation in this area.  

ERISA and Its Limits on State Regulation  

A major constraint on expanding state regulation over health care plans is ERISA.  The federal legislation creating ERISA was designed to regulate private sector pension and employee benefit plans.  Specifically, ERISA was enacted to establish equitable standards of plan administration, minimum standards of plan design, and fiscal responsibility.  Congress= rationale was that ERISA=s uniform standards would enable large interstate corporations to predict the legality of proposed actions without the confusion of varying state laws.  A key provision in ERISA is a clause which reserves to the federal government, to the exclusion of the states, the right to regulate employee benefit plans. [3]

As a result, ERISA provides employers broad preemption from state regulation. The preemption states the act Ashall supersede any and all state laws insofar as they may now or hereafter relates (sic) to any employee benefit plan.@  This clause essentially exempts all such employee benefits plans, including their health insurance coverage, from state regulation. However, state laws regulating insurance, banking, and securities are spared from the preemption through ERISA=s Asavings@ clause.  Under this clause, states may regulate conventionally insured employee benefit plans but may not regulate plans that self fund or bear the primary insurance risk.  

One significant policy effect of this, as noted by the U.S. Supreme Court, is that it creates two classes of employee health plans. Plans funding coverage through insurance are, in effect, subject to state regulation, while those that self fund are completely beyond state jurisdiction.  For example, states cannot require employers to provide health care coverage, but they can require that all health insurance policies sold in the state include specific benefits. The regulatory framework differs depending on whether the employer purchases its health care coverage from an insurer or if it self funds its health plan. Employers who obtain their health care coverage from an insurer must purchase health plans as dictated by legislative mandate. However, employers who self fund their benefits may design their own health plan coverage.    

Since 1974, hundreds of court cases have been filed by various parties attempting to clarify the meaning of ERISA.  The U.S. Supreme Court once remarked that ERISA Awas not a model of legislative drafting.@ [4]   As a result, courts have struggled to interpret ERISA, and depending on the issue involved the results have been inconsistent conclusions. (A fuller explanation of ERISA and judicial interpretations are contained in Appendix XXX).   Other judgments have been more clear-cut. Table III-2 lists some of the state activities that have been addressed and significantly limited by the courts.  As the table shows, courts have determined that states are prohibited: from mandating employers offer or pay for health insurances, from requiring self-funded plans meet statutory mandates, requiring those health plans be taxed; or that data on health care use, quality, or costs be submitted.  

Gauging the impact of court decisions on ERISA is difficult, and so too is determining the extent to which Connecticut employers and employees are subject to its jurisdiction, and thus beyond state regulatory reach.  A recent study conducted for the U.S. Department of Labor estimates that nationwide 40 percent of all employees receive their health benefits through a self-insured plan.  However, two other surveys of private sector employers indicate that the percentage of employees covered by self-funded plans in Connecticut may be less than the national average. [5]  

Thus, it is uncertain exactly how many private sector employees in Connecticut are covered by self-funded health plans, but it is most likely at least one-quarter, and probably higher.  However, that does not necessarily mean they are getting sub-standard coverage.  The U.S. Department of Labor also found that, despite the differences in regulatory oversight, substantial similarities exist between self-insured and fully insured plans in their demographics, benefits, and premium costs.             

The legitimate escape offered to employers through ERISA should signal some caution to policy makers that stringent regulation of insured health care plans may only trigger more employers to self-insure, thereby avoiding any costs incurred through increased mandates or reporting requirements.  When this happens the state not only loses the ability to oversee those plans, but the ability to garner the revenues from premium taxes as well.  

Accreditation  

In addition to government regulation, a recent movement toward self-monitoring in managed care has begun.  In response to demands for quality services provided by health maintenance and utilization review companies, organizations designed to accredit these companies have developed. The leading accreditation organization for utilization review is the Utilization Review Accreditation Commission (URAC). The National Committee for Quality Assurance (NCQA) accredits prepaid managed care organizations and all structural forms of HMOs.  

Accreditation of utilization review.  URAC was established in December 1990 by the American Managed Care and Review Association which is a trade association for utilization review firms, PPOs, and HMOs. The URAC accreditation process was developed to bring uniformity into the utilization process and provide an alternative to state regulation. The URAC accreditation process begins with a desktop review of a detailed application. If URAC staff are unable to verify or interpret the information given, they will conduct an on site inspection for which the applicant organization will pay expenses.  

The URAC standards apply to prospective and concurrent utilization review for inpatient admissions to hospitals and other inpatient facilities as well as to outpatient admissions to surgical facilities. URAC standards specify that the utilization review organizations shall collect and use only the information necessary to certify the admission, procedure or treatment, and length of stay. Medical records may be requested retrospectively for purposes such as auditing, quality assurance, and evaluation of compliance with the terms of the health benefit plan or utilization review provisions.  

URAC standards. In most respects, the accreditation standards are similar to Connecticut=s utilization review statutory requirements.  In fact, Connecticut statutes allow the insurance commissioner to accept the accreditation as having met the statutory criteria for utilization review companies. The accreditaion standards require accessible hours and specific certification, appeals procedure, and qualified personnel. The URAC standards require that reviews be conducted in a timely manner. For most cases, certification determinations are to be made within two working days of receipt of the necessary information. Utilization review organizations may conduct ongoing reviews of inpatient stays but may not conduct daily review of such stays. The organization must have in place procedures for providing notification of its determinations. The utilization review organization is also required to have procedures to address the failure of a health care provider, patient, or their representative to provide the necessary information for review.  

Accreditation standards require that utilization review staff be properly trained, qualified, and supervised. Written clinical criteria and procedures are to be established with appropriate involvement from physicians and periodically evaluated and updated. Standards require that all decisions not to certify be reviewed by available specialists who are board certified or board eligible. There must be written documentation of an active quality assessment program.  

If the organization meets the minimum criteria for accreditation, the reviewer=s recommendation is forwarded to an accreditation committee, comprised of representatives from various national medical associations and societies, which reviews the information with all organizational identifiers deleted. If  the accreditation committee decides to recommend accreditation, the application is sent to the board of directors for final approval. Accreditation is granted for two year period. As noted previously, there are 129 utilization review companies licensed by the state of Connecticut. Of those, approximately 39 have URAC accreditation.  

National Committee for Quality Assurance.   Established in 1979, NCQA was originally governed by the HMO industry. In late 1989, the Robert Wood Johnson Foundation awarded NCQA a grant to develop as an independent entity.  NCQA is a nationally recognized evaluation that purchasers, regulators, and consumers can use to assess managed care plans. Eligible organizations must: 1) provide comprehensive health care services to enrolled members through a defined benefit package in both ambulatory and inpatient settings, 2) have been in operation and actively caring for members for at least 18 months, and 3) have access to essential clinical information about their patients. To meet NCQA standards, an organization must have a well-organized, comprehensive quality assurance program accountable to its highest organizational levels.  

NCQA standards. NCQA measures health plan performance primarily through two methods - accreditation reviews and report cards. At the time of application, an organization fills out a preliminary information form which contains detailed description of the plan=s delivery system including information about quality assurance, utilization management, and credentialing activity. NCQA uses this information to determine the size and composition of the review team and the duration of the on site review. The accreditation review is based on 50 standards in six main categories: 1) quality management; 2) physician credentialing; 3) members= rights and responsibilities; 4) preventative health services; 5) utilization management; and 6) medical records.  

The NCQA review team typically consists of an administrative reviewer and two or more physician reviewers. The first and most intensive area of NCQA review targets an organization=s own internal quality control systems. NCQA establishes compliance with its standards by a thorough review of an organization=s quality assurance program description and related policies, procedures, studies, projects, and monitoring activities.  In addition, NCQA reviews quality assurance committee and/or governing body meeting minutes, interviews key staff, and tracks issues uncovered by the quality assurance system to ensure resolution and documented evidence of quality improvement.  

The accreditation process also includes a through review of an organization=s credentialing system. NCQA also requires a periodic performance appraisal of its providers to include information from quality assurance activity, risk and utilization management, member complaints, and member satisfaction surveys.  

Among the NCQA standards for utilization management are requirements that:  

C                  the review decisions are made by qualified medical professionals;  

C                  the organization has written utilization management protocols based on scientific evidence;

C                  there are adequate appeal mechanisms for physicians and for patients;  

C                  decisions and appeals are processed in a timely manner; and  

C                  the utilization management system monitors for under- and over-utilization.   

Compliance with these standards is confirmed through a review of utilization reports, committee minutes, individual files, as well as interviews with relevant staff .  

Another NCQA requirement is that  an organization have a system for resolving members complaints and grievances. This system must aggregate and analyze complaint and grievance data and use the information for quality improvement.  

Once the review team determines compliance with each of the NCQA standards, it prepares a summary report of its findings. The report is reviewed by NCQA staff and an oversight committee of physicians. The oversight committee makes compliance determinations for each of the NCQA standards as well as for the overall accreditation decision.  

Accreditation period. Plans can achieve three levels of accreditation: full, one year, or provisional. Plans that meet all the NCQA standards receive full accreditation which lasts three years.  One year accreditation status is awarded when in NCQA=s judgement the organization is in substantial compliance with most of the standards but still has significant areas of non-compliance. If a plan is one year accredited, NCQA provides the plan with a specific list of recommendations and reviews the plan again within one year to determine if the organization improved enough to move up to full accreditation. Plans with partial compliance but without deficiencies that pose significant risk to quality of care are awarded provisional accreditation. These plans are resurveyed within one year and given the opportunity to upgrade to either one year or full accreditation. Accreditation lapses for provisionally accredited plans that fail to correct the areas of deficiency.  Plans that fail to meet the NCQA standards are denied accreditation.  

Eight states currently use NCQA accreditation as part of their quality oversight requirements: Pennsylvania, Rhode Island, Florida, Nevada, Vermont, South Carolina, Oklahoma, and Kansas. The NCQA accreditation status among Connecticut health plans is provided in Table III-3.  

As of June 1996, five Connecticut health plans had NCQA accreditation status. Three others either have site reviews pending or scheduled. As mentioned earlier, NCQA accreditation is a strictly voluntary process. Health plans choose whether or not they would like to be reviewed by NCQA.  Some health plans believe there are limitations and/or potential problems with NCQA accreditation. For example, changes in accreditation standards over time may make it difficult to compare the accreditation statuses across plans. There is also significant time and effort spent by the health plan to prepare for NCQA review which is intensified by long waiting lists and delays for site visits. Finally, there is concern that less is expected from newer plans while larger older plans may be examined more critically.  NCQA itself has recognized the limitations of its accreditation process.  While NCQA accreditation is the most thorough examination of health plan quality currently existing, it simply determines whether basic protective mechanisms are in place for the plan=s members.  It does not measure performance or examine results or outcomes.  

Health Plan Employer Data and Information Set (HEDIS).  Larger employers were also looking for more outcome-based measures than could be provided through NCQA accreditation process alone.  These employers, with the cooperation of NCQA, in 1993 developed a system of health plans indicators known as the Health Plan Employer Data and Information Set (HEDIS).  While still not a pure report of outcomes, HEDIS provides a set of uniform standardized performance measures designed to document the quality and value of health plans and, in time, allow for outcome comparisons among competing plans.  

Because of employer demands, more than 300 health plans nationwide are currently using HEDIS to report on their performance.  This standardized measurement underlies most report cards now being issued to consumers by employers and plans. To date, NCQA has released HEDIS 2.0 in 1993 and HEDIS 2.5 in 1995. It plans to make a draft of HEDIS 3.0 available in the fall of 1996. HEDIS 2.5 contains a collection of more than 60 performance measures in the areas of quality of care, enrollee access and satisfaction, membership and utilization, finance, and descriptive information on health plan management. Table III-4 lists some key HEDIS measures for examining these categories. HEDIS 3.0 is expected to address the needs of a broader population (including Medicaid and Medicare) and have more outcome measures related to acute and chronic care and incorporate a standard member satisfaction survey.  

Managed Care Regulation in Other States  

This chapter focuses on regulation of managed care entities in other states. Although there is a certain level of uniformity in the regulations from state to state, wide variability also exists. The most common and heavily regulated entity is the health maintenance organization (HMO).  The following is an attempt to identify basic regulatory requirements but specific criteria varies from state to state and is described in more detail below.  

The states selected for this profile were chosen for one or more of the following reasons: a long standing history of regulating HMOs; mentioned by health care literature as being forerunners in regulation; and/or their proximity or other similarity to Connecticut. Based on these criteria the following states were selected: California, Minnesota, Texas, Florida, Maryland, New York, Massachusetts, and New Jersey. The information was compiled using statutes, regulations, comprehensive reference materials, interviews, and surveys. Table III-5 lists the various regulatory measures in effect in the selected states.   

Overview  

This discussion is a limited overview of other state regulation. In addition to enabling statutes and regulations, other sources of authority are used to govern HMO operations. From time to time, regulators will supplement their regulations with written policy statements or internal office polices that are developed to deal with specific issues.  

HMOs are regulated on the state level often by more than one state agency. Typically, regulatory supervision is shared by departments of insurance and health.  In a few instances, other state subdivisions may be charged with some supervisory duties. Insurance regulators assume principal responsibility for the financial and consumer aspects of HMO operations. Health regulators focus on quality of care issues, utilization patterns, and the ability of participating providers to provide adequate care.  

Licensure is required and typically obtained by applying for a certificate of authority or license and payment of licensing fees. Applications are usually processed by the insurance department and among other items include the following documents: sample provider and group contract forms; evidence of coverage forms; financial statements and feasibility plan; description of service areas; internal grievance procedures; and the proposed quality assurance program. Some regulators require enrollee participation in determining HMO policy .  

In addition to licensing requirements, managed care entities are also required to adhere to various statutory and regulatory mandates. All states prohibit misleading, confusing, and unjust advertising and marketing practices. Regulators tend to require policy, forms, and documents be filed with and approved by the regulatory body prior to use.  Many times plans must provide details on how services can be obtained through the HMO network and a telephone number at the plan to answer additional questions. A few states require HMOs to maintain a sufficient ratio of physicians to enrollees.  However, most do not indicate what constitutes an adequate ratio. Accessibility standards for distance and waiting times are referenced in a limited number of HMO regulations. In addition, a few states require a system for reviewing the credentials of physicians or impose some minimum requirements on their staff and contracting providers.  

All states require the establishment of a grievance procedure to assist in the resolution of the enrollee complaints. Some states often specify how these grievances should be handled. Enrollees must be informed of their right to a hearing when they join the HMO. Typically, regulators require that each HMO form a grievance committee that hears complaints. Decisions by the committee may be appealed within the HMO and, if necessary, the state may step in to hear the complaint.  

All states have solvency protections in place.  Some establish specific capital, reserve, and deposit requirements for HMOs to protect consumers and other interested parties against insolvency. Before a certificate of authority will be issued, an initial net worth requirement may be set.  After issuance, a minimum net worth must be maintained usually as a percentage of annual premiums. A deposit may be required to protect the interests of HMO enrollees or to cover the administrative costs if the HMO goes into receivership or liquidation.  Only one state (Minnesota) restricts the formation of HMOs to nonprofit entities.  

In most states, HMOs are required to include Ahold harmless@ clauses like the one required in Connecticut.  States often require HMOs to establish contingency plans for insolvency that allow for the continuation of benefits to enrollees during the contract period for which premiums have been paid. If necessary, insurance departments will call for HMO to take further precautions to safeguard enrolled benefits. This may include the purchasing of additional insurance entering into contracts where providers promise to continue to provide services in the event the HMO ceases operation, setting aside additional insolvency reserves, or securing letters of credit.  

State regulators employ a number of methods to make sure the HMO stays in compliance with the law after it is licensed. Regulators may conduct specialized inquiries which often examine HMO finances, marketing activities, and quality assurance programs. These are also conducted to determine HMO financial solvency and statutory compliance.   

Another common compliance check is to impose data collection and/or reporting requirements. Typically, annual reports must be filed with the regulating agency.  These may include audited financial statements, a summary of enrollee grievances, or schedule of premium rates. Regulators in some states also require quality assurance programs that evaluate among other things, preventive care activities, program administration, provider credential review, utilization review procedures, risk management, provider payment mechanisms, accessibility of services, medical records, claims processing procedures, and management information services.  Finally, some states require an HMO to obtain an independent external review of its quality assurance program from approved review agencies such as the National Committee for Quality Assurance.  

National Association of Insurance Commissioners  

Often states rely on national organizations to create prototypes or models of regulations that can be adapted or modified to meet the needs of particular jurisdictions.  Probably the best-known organization involved in developing regulations is the National Association of Insurance Commissioners (NAIC).  It first developed model regulations for overseeing HMOs in the early 1970s, and by the early 1980s 27 states had adopted the model or portions of it.  In 1994, the NAIC drafted additional HMO model regulations in five areas: credential review; utilization review; quality assurance; grievance procedures; and provider contracting.  Two of these models -- credential review and quality assessment (the name was modified since 1994) were adopted at the annual meeting of NAIC in June 1996, while the remaining model acts are still being revised.  

Table III-5. Comparison of Other State Managed Care Regulation
	CA	FL	MN	TX	CT	NY	MA	MD	NJ
Primary  Reg. Agencies	Corporation	Insurance/Health	Health	Insurance/Health	Insurance	Insurance/Health	Insurance	Insurance/Health	Insurance/Health
Certificate of Authority/ License term	Until  Revoked	Until Revoked	One  Year	Until Revoked	Until Revoked	Until Revoked	Until Revoked	One  Year	Until Revoked
Regular Mandated Examinations	3yr	3yr	3yr	3yr	5yr	3yr	2yr	3yr	3yr
Regulation of:
Marketing Practices	T	T	T	T	T	T	T	T	T
Physician/Enrollee Ratio	T+	T	T	T			T	T	T
Distance/Time to Care	T+	T+	T+	T+				T	T+
Quality Assurance Plan	T+	T+	T+	T+		T+	T+	T+	T+
Grievance Process	T+	T+	T+	T+	T	T+	T+	T+	T
Data Collection	T	T	T	T		T	T	T	T
Enrollee Representation	T		T		T	T		T
Physician Credentialing		T	T	T				T+
Insolvency Protection	T	T	T	T	T	T	T	T	T
Nonprofit Status Required			T
Accreditation		T
T+ Specific regulations Source of data: LPR&IC 1996