Guest Article

Most* Medical Provider Network Entities that Contract Directly with Employers are Currently Illegal

by Frederick D. Hunt, Jr.
President, Society of Professional Benefit Administrators

Question: How many of the "provider network" "integrated", "PHO", "managed care" and other new providers of health coverage contracting directly with employers for coverage are illegal?

Answer: Most are illegal*.

Question: How many know they are illegal or even which laws they should be obeying?

Answer: Very few*.

Question: Are they and the individuals running them headed for trouble?

Answer: Yes, big trouble, from several directions*.

* Don't dispair--there's a happy ending, with a way to minimize legal problems.

Everybody's doing it, and most of medicine is wooing it...but who has stopped to figure out if the burgeoning group of doctors, hospitals and other medical providers who are now starting to contract directly with employers to provide health services for their employees are obeying the laws (not to mention which laws are applicable)?!? The sad truth is that few of these medical direct-contracting entities is knowledgeable or following the laws. What happens in the coming crackdown & breakdowns?

It seems so simple and logical on the surface! Doctors & hospitals contract with employers to provide medical coverage & care for the employers' workers. It's the direct way that medical services have been handled with individual patients for years.

However, things are not so simple. There are literally thousands of laws...mostly for consumer protection...from federal and state authorities that take effect when the health coverage or care is employer-related! The minute there is any employer involvement...even if there is no money involved from the employer...you're in a whole new business. You're in the employee benefits business! Today's situation has arisen because the rhetoric and vacuum emerging from the recent years of health reform ideas...but the laws never changed.

Most of today's "provider network", "integrated", "PHO", "direct", "managed care", "capitated" and other names for types of medical entities who are arranging directly with employers to provide care do not know the laws, and are very seriously breaking them. IRS, the Department of Labor, other Federal agencies, State Insurance Commissioners, and Congress are increasingly alarmed and planning crackdowns. This article is aimed at the entities who do not realize they are now in the employee benefits business and/or have not acquired employee benefits administrative expertise, such as contracting with an independent Third Party Administration (TPA) firm.

The main legal question is what are these plans? Where do they fit in the legal structure, and thus what laws apply? (This article only examines major employee benefit laws, not anti-trust, Medicare, etc.) This was fuzzy and the subject of many court cases as high as the U.S. Supreme Court, even in the old days when lines were pretty clear-cut. (In employee benefits, the word "plan" is used both broadly to refer to any benefit arrangement an employer has for his workers...and it also has a specific legal definition in the actual benefits contracts.)

Let's examine the possibilities of legal status these plans might have:

Are medical entities that provide direct-contract health plans "insurance companies"? Most are accepting the "risk" via a capitated fee or pre-determined premium paid for the coverage. By accepting the risk, the medical provider entities become insurance companies. However, few, if any, have filed as insurers with the Insurance Commissioners in the states where they are selling their "product", nor are they providing the huge reserve funds, premium taxes, liability fund, and range of mandated benefits & conditions for each state. Are the direct medical entities HMOs? The capitated ones look on the surface like HMOs, but few are meeting the Federal & state HMO requirements.

In the case of insurance company or HMO status, sometimes the integrated medical entity product was spawned by a parent insurance company or HMO. However, few, if any, of the actual direct provider/employer plans are being reported, meeting the legal requirements or paying the fees under the parent insurer or HMO status, so the direct plans remain in legal limbo.

The National Association of Insurance Commissioners (NAIC) is working on a model state law called "Consolidated Licensure of Entities Accepting Risk" (CLEAR). The state law would cover HMOs, PPOs, point-of-service plans, commercial plans, and all other entities that finance and deliver health care services on a risk-sharing/risk-assuming basis. NAIC's "CLEAR" stakes out state claim to more plans than would stand up in court, but it shows the level of frustration over unregulated risk-bearing plans that lack the consumer safeguards which insurers, HMOs and self-funded ERISA plans must provide.

Are the direct-contracting medical entities self-funded ERISA plans, in which state laws are preempted by federal law? If so, are they meeting the very strict ERISA reporting, disclosure and fiduciary "prudent man" requirements? Being both provider/biller as well as payor is prima facie evidence of failure to meet the ERISA independence & fiduciary requirements. Failure to meet the fiduciary requirements can bring both civil and criminal (jail time) penalties...which go beyond the corporate veil and go after the personal assets of any individual deemed to "know or should have known" about the operations of the plan. Is form 5500 being filed for the plans? ERISA is the Employee Retirement Income Security Act of 1974, which is the basis of most employee benefit plans, with regulation mostly from the U.S. Department of Labor.

Are they ERISA single-employer plans? Most providers contract with many employers, and unless the funding for each employer is completely segregated in separate trust funds and reported on separate Form 5500 each year, it is not a single-employer plan.

Are they ERISA Taft-Hartley multi-employer union-management jointly-administered plans? Unless they are based on a true collective bargaining agreement, they aren't multi-employer plans (and there is a whole separate enforcement crackdown on plans trying to form "phoney" union plans.)

Are they Multiple Employer Welfare Arrangements (MEWAs, pronounced "mee-waas")? In almost all cases, yes, the integrated direct provider employee benefit plan would be considered in the broad category of MEWA. Unfortunately, for jealousy reasons, both federal & state policy has long tried to cripple & abort MEWAs. They are subject to both tough ERISA fiduciary requirements and reporting as well as fairly extensive state-by-state regulation. About 30 states directly or indirectly prohibit self-funded MEWAs from even existing for their residents. Thus, even though we can identify the legal category of most of the new provider-organized, direct-contract, PHO, managed care arrangements as being MEWAs, most are not meeting the compliance requirements of being a MEWA and in most states the arrangements would be considered illegal as self-funded (as-opposed to fully-insured via an insurance company policy) MEWAs...or be gobbled up by states under the CLEAR legislation.

That's only the start of the illegality! Every year, there are about 1,000 new laws, regulations, opinions, directives, notices, and major court cases employee benefit plans must obey. They are issued by about 300 different government entities. Only about 1/3 are adequately announced & explained, even in the technical trade press & legal journals. That is, in large part, because only 1% (yes, only one percent) of the requirements ever get final official comprehensive guidance how to comply.

This has also proved to be a handicap for attorneys, CPAs and others who are trained to rely on written precedents, decisions, and other documents. With 99% of compliance based on unwritten and undecided factors, that vacuum of information is a big handicap for attorneys etc.. Even when there is documentation, it often leads to incorrect conclusions because there are so many conflicting factors from so many uncoordinated sources. Thus, "Our attorney assures us..." is often useless and has no effect with enforcers. That's not a slap at attorneys...merely recognizing that they can't really render a useful opinion in most cases because 99% of the issues are unsettled.

Most of these requirements apply to all types of employee benefit plans. Unfortunately, the penalties for even innocent non-compliance (including the 99% of situations in which there are no or conflicting rules for obeying) are designed to be crippling. For example, an employer was recently hit with a $100 million fine, and it cost another small employer $500,000 under COBRA continuation of coverage...which has no official guidance how to obey, despite being law for over 9 years.

Though most of these rules require action or tracking by the medical provider or plan, many are legally aimed at the employer. Thus, if you goof on something you never knew existed or did your best to obey, but government retroactively decided otherwise, you will not only have several federal agencies and maybe a state or two prosecuting you...but also your client employer suing you because your action got him into trouble! Adding insult to injury, most liability insurance policies do not cover or have severe limits for ERISA & benefits transgressions.

As you can imagine, the dozen or so federal agencies in charge of employee benefits plus state insurance officials are watching the emergence of unregulated direct provider/employer benefit plans. Why do they care? The primary reason is consumer protection. Most of the employee benefits regulation is to assure fair treatment & protection of the covered individual workers and assure adequacy and safety of the funding to provide those services & coverage. Employee benefits is one of the biggest chunk of dollars in the economy! Thus, to be against the regulations (as stifling as they are) is to say that you oppose an amazingly safe network of safeguards for individuals.

If the rules seem silly, here are some of the kinds of situations especially the fiduciary rules are designed to avert: Assume you are a wonderful group of people providing quality care and contract with employers at a fair price for coverage. What protections, disclosure & warning do the employer and especially individuals have against your entity going bankrupt or simply deciding to pull out of the business all of a sudden? What protections are there against the human nature inclination to let the profit margin affect the medical decisions or make "sweetheart" side deals? What protections are there against abusive over-billing and other shenanigans when biller and payor are the same entity? What disclosures are publicly made to the employers about each business interrelationship and financial transaction? (Are any "self-dealing" or self-referral?) How will the plan provide the required "same" coverage to previously-unknown people federal law says the plan must suddenly cover in some distant geographical region (such as COBRA continuation of coverage, Qualified Medical Child Support Orders, etc.)? Employee benefits regulation has a law or requirement to disclose and protect against virtually every unfortunate circumstance. The consumer protections are far more extensive than in normal business relations. Can the new provider-sponsored direct plans document that they meet each of those requirements?

Thus, doctors & hospitals who have decided to launch into the employee benefits business have stepped into quicksand, unless they are careful. Saying "We've been providing quality medical service for X years!" is very nice...but totally unrelated to consumer protection requirements in the new business of employee benefits.

What are the options to make provider-organized plans legal?

1. Most of the rules and new business described above all relate to plans that have any role (even non-financial) of the employer or group. Thus, the rules could be avoided if you only deal with individuals. The bad side of that is that it is infinitely more expensive to deal with hundreds or thousands of individuals (collecting money, contracts, paperwork, etc.) rather than a handful of employers, and such insurance arrangements withindividuals clearly fall under state insurance regulation. Also, employee benefits (in part because of the consumer protections) are tax-free to the patient and tax-deductible to the employer. Thus, the cost of individual fully-taxed payments for health care & coverage would seem much more expensive. Also, even individual contracts would usually leave the medical entity in the legal status of being an "insurance company" subject to the extensive state requirements, taxes and huge reserves.
2. The direct-contracting medical entities could get legal. Just as they would hire a CPA for their taxes and attorney for their court cases, more and more medical entities are contracting with independent Third Party Administration (TPA) firms. It is a TPA's profession to guide plans & employers through the regulatory jungle. Over half of all employee benefit plans used some form of TPA even before this new trend of direct medical plans started, and the growth has been phenomenal. Some warnings when considering a TPA:
   • Be sure they know what they are doing. There is no certification or even uniform definition of "TPA", so question closely especially how & where they get their government compliance insights. For instance, just being an insurance company means they would know their states' insurance law...but are usually fuzzy on federal requirements.
   • Though most of the medical entities seem to want to own their TPA/administration function, it is legally much "cleaner" to contract with an outside independent TPA (just as you hire an independent CPA). Having an outside independent TPA eases a lot of the ERISA fiduciary concerns. Warning: Some integrated direct-contract managed care entities have bought or started a TPA-like administrative function in-house. That opens another whole set of laws to obey. About 36 states require any entity doing TPA functions to register or be licensed as a TPA in the state, and that often also requires licensing as an insurance agent and fairly stiff bonding.
   • The independent TPA firm will often tell you what you don't want to hear...such as consumer protection requirements that seem to defy common sense or which pinch your profits. Don't blame the messenger! It's no different than when a doctor has to give a patient a dire diagnosis or prescribe a bitter pill.

The good news is that though employee benefits is unquestionably a regulatory jungle with lots of deadly hidden traps, with proper experience and processes these new direct-contracting medical entities can achieve their goals...and stay on the right side of the law.

This article was provided by:

Society of Professional Benefit Administrators
Two Wisconsin Circle, Suite 670
Chevy Chase MD 20815
Phone (301) 718-SPBA
Fax (301) 718-9440

SPBA is the national association of Third Party Administration (TPA) firms who contract with clients to administer employee benefit plans (much as employers often hire an outside CPA firm for book-keeping & tax computation services on an ongoing basis). About 40% of all U.S. covered workers are in benefit plans administered by SPBA member firms. These client plans represent every size & format of employment (union, non-union, big & small business, plans-sponsored by associations, state & local governments as employers, and religious groups who are in every industry and state.) Understandably, legal compliance is a major focus of the work of TPAs.

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