News
Healthcare/Hospital Law
Feb. 20, 2002
Health Plans Have No Duty to Pay Physicians Once Risk Is Shifted
Health Care Law Column - By Clare Richardson and Carrie E. Fogliani - Increasingly, physicians are discovering that the laws governing managed-care relationships, originally designed to protect consumers and physicians (see e.g., Health & Safety Code Section 1371), instead may be interpreted to protect health care plans.
Health Care Law
By Clare Richardson and Carrie E. Fogliani
Increasingly, physicians are discovering that the laws governing managed-care relationships, originally designed to protect consumers and physicians (see e.g., Health & Safety Code Section 1371), instead may be interpreted to protect health care plans.
In California Medical Association Inc. v. Aetna U.S. Healthcare of California Inc., 94 Cal.App.4th 151 (2001), the court held that health care plans did not have an obligation to pay treating physicians when the plans entered into risk-shifting agreements with various intermediaries to process claims and make payments to physicians providing care to the plans' enrollees. These intermediaries include large medical groups, independent practice associations and physician practice-management companies.
To provide health care to their enrollees, health plans enter into agreements with intermediaries to arrange for medical services. Under these arrangements, the plans pay intermediaries an agreed-upon rate to manage and arrange medical services for enrollees by signing up primary-care and specialty physicians, processing claims of physicians and making payments to the physicians for providing medical services.
Under these risk-shifting arrangements, according to the California Medical Association court, the "health plans shift the responsibility to pay physicians' claims to the intermediaries." To fulfill their contractual duties with the plans, the intermediaries enter into contracts with several physicians to render care to the plans' enrollees.
Under the contracts with the physicians in California Medical Association, the intermediary, FPA Medical Management Inc., assumed responsibility for paying the physicians for the medical services rendered to Aetna U.S. Healthcare of California Inc.'s enrollees. The physicians agreed to "look solely" to the intermediary for payment for services provided to Aetna's enrollees.
In July 1999, the California Medical Association filed a lawsuit on behalf of several California physicians and medical groups against eight health plans, including Aetna. The suit challenged managed care's impact under California law. This lawsuit emerged from the unexpected bankruptcy of FPA, one of the nation's largest physician practice-management companies.
FPA's decline into bankruptcy left the physicians with between $60 million to $75 million in unpaid medical bills, according to CMA's chief executive officer, Jack Lewin. As a result of FPA's bankruptcy, many physicians were "forced into bankruptcy or have had to sell their assets to keep their practices afloat." Andrews Health Law Litigation Reporter, "CA Physicians Sue Health Plans for Non-Payment of Claims," October 1999.
As in the recent demise of Enron, when FPA collapsed into bankruptcy, physicians searched for deep, solvent pockets to hold accountable for their unpaid claims. The physicians believed that the plans should be responsible for their substantial losses and sought to force the plans to reimburse the physicians for bills left unpaid as a result of FPA's insolvency.
CMA anchored its lawsuit in California's Knox Keene Act, the statute that governs all aspects of regulation of health plans, including financial stability, organization, advertising and capability to provide services. Health & Safety Code Section 1340 et seq.
The legal basis of the physicians' claim for reimbursement was Section 1371(d). The physicians alleged that this provision imposed upon the health plans the obligation to pay for all covered services rendered by physicians to the plans' enrollees even when the plans entered into risk-shifting agreements with intermediaries to delegate the plans' obligation of payment to the intermediaries, within the time frames specified in Section 1371.
Section 1371(d) provides: "The obligation of the plan to comply with this section shall not be deemed waived when the plan requires its medical groups, independent practice associations, or other contracting entities to pay claims for covered services."
The physicians argued that despite the contractual arrangement in which the intermediaries accepted ultimate responsibility to pay physicians' claims for services rendered to Aetna's enrollees, Section 1371(d) precluded Aetna from denying physicians' claims for payment where the intermediary failed to pay the physicians. In addition, the physicians alleged that Section 1371(d) voided the language of the agreements between the intermediaries and the physicians that required the physicians to "look solely" to the intermediaries for payment.
The physicians also asserted that the legislative and enforcement history of the Knox-Keene Act, including Section 1371(d), imposed a duty upon Aetna to guarantee payment for all covered services.
The court rejected the physicians' arguments and concluded that Section 1371(d) did not preclude the plans from delegating, through the agreements with the intermediaries, any alleged payment obligation to the physicians.
In addition, the court found nothing in Section 1371(d) negating the contractual provisions between the physicians and the intermediaries requiring the physicians to "look solely" to the intermediaries. The court interpreted Section 1371(d) to "simply mean that section 1371's time limits and other procedural requirements must be satisfied even when health plans have delegated their payment obligations to contracting entities under risk-shifting agreements consistent with other Knox-Keene Act provisions."
The court recited several examples of the Legislature's approval of these types of risk-shifting arrangements. Under these arrangements, plans pay intermediaries on a fixed, periodic or capitated basis. The intermediary assumes the financial risk for the cost of services provided. 28 C.C.R. Section 1300.75.4(d)(2)(2001).
Capitation payments are payments made based on a fixed per-member-per-month payment or percentage-of-premium payment. The provider assumes the full risk for the cost of contracted services without regard to the type, value or frequency of services provided. 28 C.C.R. Section 1300.76(f).
In the instant case, the health plans made capitated payments to the intermediaries to cover the costs associated with managing and arranging for the provision of services. Therefore, according to the court, the plans fulfilled their obligation to pay for the services provided to their enrollees by making the capitated payment to the intermediary as required pursuant to the agreement.
The court held that the health plans were not responsible for making payments to the physicians in the event that the intermediaries were unable to pay: "[W]here intermediaries, as risk-bearing organizations, have agreed with [the plans] to be solely responsible for paying the physicians as the providers of medical services rendered to health plans' enrollees and, in turn, the physicians have agreed to look solely to the intermediaries for such payments, nothing in section 1371 imposed an independent obligation upon [the plans] to pay the physicians directly if the intermediaries failed to do so after [the plans] had already paid the intermediaries for the physicians' services."
Commentators have noted that these risk-shifting arrangements require the physicians to rely on the health plans to ensure that the intermediaries are financially stable and capable of paying physicians for services rendered to plans' enrollees. According to the court, the Legislature recently imposed stricter regulations on risk-shifting arrangements to monitor the financial solvency of the intermediaries and the plans.
The Legislature added Sections 1375.4, 1375.5 and 1375.6 to establish standards and requirements for capitation and risk-shifting arrangements between plans and their contracting entities. The regulations implementing these statutes, effective as of Aug. 31, 2001, require intermediaries to report specified financial information to the Department of Managed Health Care, the state agency responsible for regulating health plans in California.
In addition, the regulations require health plans to share certain risk-related and actuarial information with their contracted providers. Health plans must also disclose to the Department of Managed Health Care information relating to the financial risk that they have assigned to their provider network. These regulations, however, do not require the intermediaries to disclose financial information to the plans or to the providers with whom the intermediaries contract.
The Legislature also enacted Section 1347.15 to establish the Financial Solvency Standards Board to develop and recommend financial solvency requirements and standards, as well as to monitor and report on the implementation and results of the financial-solvency requirements and standards. Health & Safety Code Section 1347.15(a), (b).
These recent actions of the Legislature may provide physicians with a level of comfort with respect to their decision to contract with intermediaries. However, the Court of Appeal clearly indicated that it will not hold health plans accountable for unpaid claims and that the plans will not be a deep, solvent pocket if the intermediaries become insolvent.
In response to this decision, physicians may scrutinize closely the financial stability of intermediaries before entering into contracts under which the physicians are forced to look solely to the intermediaries for payment.
Clare Richardson is a partner in the Los Angeles office at Foley & Lardner, specializing in health care finance and business law. Carrie E. Fogliani is an associate in the firm's Los Angeles office, specializing in health care law.
??
#337682
Columnist
Daily Journal Staff Writer
For reprint rights or to order a copy of your photo:
Email
Jeremy_Ellis@dailyjournal.com
for prices.
Direct dial: 213-229-5424
Send a letter to the editor:
Email: letters@dailyjournal.com