The last several years have witnessed extraordinary developments in the health care delivery and financing systems, prompted by the continuing movement towards a managed health care environment. These developments have created new opportunities and challenges for those who purchase, underwrite or provide health care services. These developments also have recast dramatically the relationships between and among the consumer, the provider and the payor.

The purpose of this Memorandum is to identify and briefly discuss certain key issues that should be considered by a managed care organization ("MCO") in the development of a legal risk profile and the attendant risk management plan. This Memorandum is organized according to the relationships between the MCO and its various constituencies: members, group customers, providers, state regulators, and federal regulators. As you will note, some of the issues identified below will impact more than one type of relationship.

The following is a list of certain key issues with respect to the MCO’s relationship with its members:

• Access To Care. This concept addresses the MCO’s decisions relative to coverage sought by its members. The relevant activities include utilization review (or medical management), determinations regarding eligibility for coverage, and benefit determinations. The MCO needs to focus on both the process developed to make these determinations and the substantive criteria applied in making such determinations. In addition, the MCO needs to make sure that the contract covering the member: (i) clearly identifies the benefits available to the member, (ii) provides clear direction on how the member accesses coverage, (iii) sets forth the member’s co-payment obligations, and (iv) authorizes the MCO to conduct utilization review/medical management and related functions. The contract also should describe the appeals process available to the member if the MCO denies or limits coverage, as well as the financial consequences to the member if coverage is denied or limited.
• Quality Of Care. This concept addresses the MCO’s activities concerning the nature of the services furnished to its members, the manner in which the services are rendered and the competency of the providers who render the services. Where a member is dissatisfied with the clinical outcome in a given case, the member may attempt to hold the MCO liable for the adverse outcome under a number of evolving theories, including: ostensible agency, negligence in the selection of network providers, negligence in the development and/or application of clinical protocols, breach of contract, etc. The exposure of the MCO in these cases is in a state of flux and will be determined by, among other things, state law governing MCOs and the extent to which the pre-emption doctrine of the Employee Retirement Income Security Act (or "ERISA") is amended by Congress or applied by the courts.
• Product Management. In today’s competitive environment, an MCO may sometimes market a new product before it is prepared operationally to administer the product. This could lead to problems in the following areas: failure to provide members and providers with timely information concerning the new product, inaccurate eligibility determinations, incorrect claims adjudications, disputes with network providers, customer service complaints, complaints to the regulators, and the failure to achieve customer-imposed performance standards.
• Member Privacy. Group customers are requesting more information relative to care rendered to their employees. An MCO needs to consider a number of factors with respect to requests for the release of information to the group customer (or other third parties), including: (i) federal privacy laws, (ii) state privacy laws, (iii) whether the coverage plan in question is an insured program or a self-funded program administered by the MCO on behalf of the group customer, (iv) whether the coverage plan in question advises the employee that information (including patient-identifiable clinical and diagnosis information) may be disclosed to his or her employer, and (v) whether the employee has signed an appropriate document authorizing the release of such information to the employer and other parties.

The following is a list of certain key issues with respect to the MCO’s relationship with its group customers:

• Contract Management. The MCO needs to make sure that it: (i) obtains signed contracts from its customers, (ii) updates the contracts (as necessary), and (iii) administers the program in accordance with the contract. An MCO sometimes faces problems due, in part, to its failure to have on file a signed, updated contract with its customer. MCOs also face problems when they fail to administer plans in accordance with the contract (especially where contracts are customized through negotiation) with group customers. Thus, a thoughtful policy covering the administration, management and retention of customer contracts is essential.
• ERISA Issues. With respect to self-funded plans administered by the MCO on behalf of its group customers, the MCO should be sensitive to potential liabilities arising as a result of the arrangement. For example, based on the MCO’s role in a given arrangement, will the MCO be deemed to be a fiduciary under ERISA? Also, to what extent will the MCO be shielded from state law claims relating to the MCO’s activities in this respect?
• Indemnification. Although all contractual issues should be considered carefully, the MCO should pay particular attention to provisions that require the MCO to indemnify the customer for errors or omissions attributable to the MCO in the administration of the plan. This may be especially important where the customer is requesting indemnification in cases where the customer is sued by the member for poor outcomes. (See "Quality Of Care" under Section II, above.)
• Performance Standards. More group customers are including performance standards in their contracts with MCOs. These performance standards (which may impose time frames for (i) processing claims, (ii) issuing identification cards, and (iii) resolving member inquiries) may have both financial and legal implications for the MCO. Thus, the inclusion of performance standards in a contract should be carefully considered, and the standards should be accurately reflected in the contract.
• Bankruptcy. The MCO should identify those customers who are experiencing financial problems and who have fallen behind in the payment of premiums or service charges. There may be a tendency for MCOs to give latitude to key customers with respect to the payment of delinquent premiums. If a delinquent customer files for protection under the bankruptcy laws, the MCO may not be able to recover pre-bankruptcy premiums and will be required to continue providing coverage for some time following the filing of the bankruptcy petition. In addition, the MCO may be required to return premium payments received within 90 days prior to the filing of the bankruptcy petition if such payments are deemed to constitute preferential transfers under the bankruptcy laws.

The following is a list of certain key issues with respect to the MCO’s relationship with health care providers:

• Provider Selection. The process by which the MCO selects providers for participation in the network is a major source of potential liability for the MCO. The following are the key areas for consideration:

• Credentialing Process. Excluded providers may challenge the manner in which the MCO selects (and de-selects) providers for network participation. The MCO needs to focus on both the process developed to make these determinations and the substantive criteria underlying such determinations. The MCO also needs to make sure that it follows the established procedures in credentialing (or de-credentialing) providers. The MCO also should recognize the potential liability associated with statements made in connection with the credentialing process. For example: will a provider, whose credentialing application has been denied, allege that he or she has been defamed by the MCO (especially if the application was denied based on quality concerns)?

• Antitrust. Excluded providers may challenge the MCO’s decision under the antitrust laws. Although such challenges generally have been unsuccessful, we expect that excluded providers will continue to pursue these types of actions.

• "Any Willing Provider" Laws. Some states have enacted laws that require MCOs to include in their networks any providers who are willing to participate under the same terms and conditions that apply to providers affirmatively selected by the MCO. Some states have enacted these laws to apply to a limited class of provider (e.g., pharmacies). Each such law needs to be examined to determine its applicability. In addition, the applicability of the law may depend on whether the provider network supports an insured product (such as an HMO program) or a self-funded plan that is administered by the MCO.

• Contractual Issues. Due in part to the enactment of laws at the state level, a number of provider contracting issues have moved recently to the forefront. These issues include: (i) prompt payment of claims to the providers, with interest assessed for late payments, (ii) mandated utilization review appeals process (in some cases, culminating in either binding or non-binding external review by an independent entity), (iii) indemnification, and (iv) prohibitions on so-called "gag clauses." Evolving state and federal law has an increasing impact on the contractual relationships between MCOs and health care providers.

• Financial Risk-Sharing. The sharing of financial risks by MCOs and providers (or provider organizations) has proliferated in some areas. The MCOs should be sensitive to certain issues in this regard:

• State And Federal Regulatory Issues. To what extent does the provider organization need to be licensed separately as an insurance or financial risk-bearing entity? Does the provider group constitute an appropriate unit under the antitrust laws to negotiate pricing terms with the MCO?

• Contractual Issues. It is critical to spell out the responsibilities of each affected party (the MCO, the provider organization and the individual providers) in these relationships. For example, to the extent that individual providers may be financially responsible to satisfy a deficit or shortfall under the arrangement: (i) this obligation needs to be communicated to the individual providers, (ii) the individual providers need to commit contractually to this obligation and demonstrate their ability to comply with this obligation, and (iii) the MCO should assess and monitor the providers’ continuing ability to satisfy this obligation.

• Bankruptcy. If the provider organization becomes insolvent, most likely the MCO will be deemed to be ultimately responsible to fund the provision of coverage to its members. Accordingly, the MCO must manage both the relationship with the provider organization and the attendant financial (and legal) exposure.

• Representation Organizations. Recently, physicians have attempted to organize into collective bargaining units for the purposes of negotiating participating provider contracts with MCOs. This development merits close attention by the MCOs.

• Fraud And Abuse. Due to certain federal and state initiatives, MCOs have been given more responsibility for investigating and reporting fraud and abuse perpetrated by providers, customers and members. In addition, MCOs need to be sensitive to the implications of certain state and federal fraud and abuse laws (in particular, patient referral restrictions imposed on physicians) on the various contractual arrangements between and among the MCO and its network providers.

The following is a list of certain key issues with respect to the MCO’s relationship with state regulators:

• Regulatory Compliance. A flurry of recent state legislation focuses on protecting patients’ rights and holding MCOs accountable for coverage determinations. In addition, states are moving to enforce the requirements imposed on insurers (including health maintenance organizations and other forms of MCOs) by the Health Insurance Portability and Accountability Act. Increased scrutiny of the managed care industry by the regulators underscores the importance of complying with these laws.(FN1)

• ERISA Preemption. The status of the ERISA preemption doctrine continues to be a centerpiece issue for MCOs. The direction ultimately taken in this regard will impact MCOs in at least two significant areas: (i) potential increased liability for medical outcomes, and (ii) potential increased state regulation of the MCO’s administrative-services-only (or "ASO") business.

• "Any Willing Provider" Laws. As discussed above, some states have enacted "any willing provider" laws. An MCO’s ability to manage coverage and the attendant financial risk depends, in part, on its ability to construct a provider network of its choosing. "Any willing provider" laws impact this ability.

• Financial Risk-Sharing Arrangements. As financial risk-sharing with providers gains prominence, the MCO needs to consider the various laws and state policies in this regard. These laws and policies will impact the MCO’s relationship with its members, the network providers and group customers.

• Medicaid Managed Care. More states are transitioning their respective Medicaid programs to a managed care environment. This process has been facilitated with the passage of the Balanced Budget Act of 1997. Certain issues arise in the Medicaid managed care context that do not arise in the commercial environment. (FN2) The MCOs need to understand the legal and financial implications associated with participation in Medicaid managed care programs, as well as the special needs of the Medicaid population in this managed care context. These implications will vary from state to state.

• Fraud And Abuse. As noted above, greater responsibilities are being imposed on MCOs in the area of fraud and abuse detection. In addition, the MCOs are coming under greater scrutiny for potential fraud and abuse violations (e.g., under-treatment, denial of care, reimbursement arrangements with providers, etc.).

The following is a list of certain key issues with respect to the MCO’s relationship with the federal regulators:

• Federal Legislative Initiatives. It is uncertain at this stage the extent to which the enactment of federal managed care reform legislation will impact the MCOs. A key issue in the ongoing debate is whether liability will be expanded at the federal level for MCOs with respect to coverage determinations and the acts and omissions of network providers. In addition, it is expected that the new legislation will likely include other patient protection measures which will need to be assessed to determine the impact on both the potential liability of MCOs and the costs associated with the implementation of such measures.
• Medicare Managed Care. Through the Balanced Budget Act of 1997, Congress expanded the coverage options available under the Medicare program. These options may be intended, in part, to facilitate the transition of the Medicare program to a managed care environment. Certain issues arise in the Medicare managed care context that do not arise in the commercial environment (including the manner in which programs can be marketed to potential enrollees). The MCOs need to understand the legal and financial implications associated with participation in Medicare managed care programs.
• Fraud And Abuse. For the past several years, the federal government has focused significant attention on the investigation and prosecution of fraud and abuse in the health care industry. Although the initial efforts have been directed primarily at health care providers, the focus is shifting to MCOs. The government is concentrating on denial of coverage determinations, financial incentives to under-treat patients, and financial relationships between MCOs and their network providers. In this regard, the importance of corporate compliance programs as a legal risk management tool has emerged.

As noted above, this Memorandum represents a general overview of certain key issues facing MCOs in today’s environment. We hope that these observations are helpful. Please do not hesitate to contact David A. Bongiovanni at (609) 520-6023 or any other member of the Reed Smith health care group with whom you work if you have any questions concerning this Memorandum.

The contents of this Memorandum are for informational purposes only, and do not constitute legal advice.