The California Department of Managed Health Care (the "DMHC"), which regulates Health Care Service Plans, recently adopted a regulation regarding general licensure requirements for health care providers ("Entities") that accept global risk, as defined by the Knox-Keene Health Care Service Plan Act of 1975 ("Knox-Keene Act"). Taking effect this week (July 1, 2019), the regulation is codified in California Code of Regulations, title 28, section 1300.49.

The new law will require most Entities to file their health plan contracts and request an exemption any time they enter into or renew a health plan contract during the next 12 months, and will eventually require a significant minority of the approximately 300 Entities in California to obtain licensure as a Knox-Keene Plan. Below, we take a closer look at these requirements and how they will impact the Entities.

Background

On June 14, 2019 the Department of Managed Health Care (the "Department") issued an All Plan Letter 19-014 ("APL") containing its formal guidance regarding implementation of the General Licensure Requirements regulation ( the "Rule"). The APL clarifies certain license or exemption applications/filings, as well as other issues associated with the Rule, and provides a one-year "phase-in" period for the Rule's implementation for contracts executed, renewed, or amended from July 1, 2019 through June 30, 2020. During that period, any Entity that submits its global risk contracts along with a request for expedited exemption to the Department within thirty days after executing or renewing the contracts will be granted an automatic exemption from the Rule. The exemption period will be for the term of the contract if a licensed health plan is a party to the contract; otherwise, the exemption will be granted for the earlier of two years from the exemption date or the contract renewal or amendment date.

The APL defines the "Entity" that is subject to the Rule, as a person or organization that (1) is not licensed under the Knox-Keene Health Care Service Plan Act of 1975 ("Knox-Keene Act") or as an insurer by the California Department of Insurance, and (2) "assumes any amount of global risk on a pre-paid or periodic basic, including by providing a payment at the end of a contract or term." Under the definition of "global risk," an Entity takes on the financial responsibility related to the costs of professional services AND institutional care (i.e., hospital or long-term care facility care) is subject to the Rule. Financial responsibility for institutional care will result from any downside institutional risk such as participation in a hospital risk sharing pool or sharing in any hospital cost-savings program that would result in the Entity's disqualification for hospital cost-savings bonuses OR would require the entity to make out-of-pocket payments due to risk pool losses.

Global Risk Licensure Requirement

Under the Rule, a person who accepts global risk "shall" obtain a license to operate a health care service plan. However, a person accepting global risk can apply for an exemption, which the DMHC will grant after finding that the exemption is "in the public interest and not detrimental to protection of subscribers, enrollees or persons regulated under the Knox-Keene Act." Entities accepting global risk may apply for a full-service Knox-Keene license, or alternatively apply for a restricted Knox-Keene license ("Restricted License"). The Restricted License permits an Entity to enter into global risk arrangements with fully licensed health plans on a contract-by-contract basis, and the Entity prohibited from marketing its own products.

Restricted License Exemptions

Alternatively, an Entity that accepts global risk may apply for an exemption to the restricted licensing process, an applicant must file certain financial exhibits and information showing: (1) the total percentage of annualized income of institutional risk the person will assume and how it will be assumed; (2) the contract for the assumption of global risk; (3) the estimated number of subscribers and enrollees for whom the person will provide health care services; (4) the geographic service area under the global risk arrangement in which the person intends to operation; and (5) any other information the person believes is appropriate or relevant for the Director to consider when reviewing the exemption request.

The DMHC will then review the submitted information and consider factors[i] related to the applicant's financial capacities, the amount of global risk compared to its overall business, and the effects on enrollees and the marketplace should the applicant fail to maintain financial solvency and public interest considerations. The DMHC has thirty (30) days after receiving the exemption request to issue its decision.

Global Risk Arrangements that Do Not Require Licensure or Exemption

The Department has excluded the following global risk financial arrangements from licensure filing requirements "at this time:" (1) Bundled payments; (2) Case rates; (3) DRG payments; (4) Professional services contracts for hospital emergency department services; (5) Per diem payments where the assumption of financial responsibility is for episodes of care, including hospital and professional services and other medical services associated with the episode sharing, such as risk pools or global budgets, the Entity assuming global risk must apply for an exemption; (6) Agreements between a licensed health plan and a provider for professional capitation only where the provider assumes financial responsibility for professional services that may be provided in a hospital facility under the parties' Division of Financial Responsibility; (7) CMS Accountable Care Organizations that are not Knox-Keene Act licensed health plans such as medical groups and hospitals; and (8) The assumption of global risk where all consumers impacted by the global risk arrangements are covered by a California Department of Insurance licensed insurer.

Phase-in Period for Automatic Exemptions.

The DMHC has established a "phase-in" period for all contracts that include global risk, which the Entity executes or renews[ii] between July 1, 2019 and June 30, 2020. Under the phase-in period, any Entity that assumes global risk, or a party acting on the Entity's behalf, must file its contracts along with a Request for Expedited Exemption to the DMHC thirty days after executing or renewing the contract within the phase-in period. The DMHC will automatically grant an exemption to those contracts for the term of the contract if a licensed health plan is a party to the contract; otherwise, the exemption will be granted for the earlier of two years from the exemption date or the contract renewal or amendment date.

Conclusion

The phase-in period provides Entities with at least one year in which to evaluate whether or not their global risk sharing arrangements are impacted by the new general licensure requirement, and to determine whether the application and ongoing maintenance costs of Restricted Knox-Keene licensure outweigh the inability to accept global risk without such licensure or exemption.

Members of Hinshaw's & Culbertson LLP's Health Care Practice Group have significant experience advising health care providers regarding compliance with Knox-Keene Health Care Service Plans and other managed care plan laws and regulations. Reach out to your legal counsel or speak with a Hinshaw attorney to learn more about how we can help.

[i] The DMHC factors of consideration include: (a) The person's portion of contracted global risk when compared to the person's overall business; (b) The portion of market share the person assumes for global risk in the geographical region compared to the market share assumed by other persons within the region, and whether disruption will occur in the marketplace if the person fails to maintain financial solvency; (c) The financial capacity to assume a portion of global risk without jeopardizing enrollee access to basic health care services in the geographical region; (d) If an arrangement/contract involves a combination of (i) bundled payments, case rates, DRG payments and/or per diems, plus (ii) other types of global risk; (e) The potential impact on the health care marketplace in the geographical region in which the person operates, including the impact on contracted institutional and professional providers, if the person is unable to maintain financial solvency; and (f) The issuance of an exemption will not negatively impact public interest or protection of the public, subscribers, enrollees, or persons subject to the Knox-Keene Act, if the entity assumes global risk.

[ii] An automatic or "evergreen" renewal is considered a renewal under the APL and the renewed contract must be submitted within thirty days of the contract renewal date.