The Challenge of Regulating Managed Care

12. The Role of State Insurance Regulators

  The Role of State Insurance Regulators Frances Wallace States have been involved in regulating managed-care plans since their inception . Blue Cross Blue Shield Plans, which were arguably the ‹rst PPO plans, became subject to state insurance regulation soon after their creation. In the 1970s, as HMOs became more common, some states required them to be licensed as health facilities or agencies under statutes that also regulated them as insurance-risk-bearing entities. As health insurers began adding managed-care elements to their policies during the 1980s, states added requirements to their insurance laws to address this development. States have regulated insurance to protect their citizens from ‹nancial loss due to insurer insolvencies and from deceptive and unfair underwriting, marketing, and claims payment practices. They have also regulated to improve access to and affordability of health insurance coverage in the small employer and individual health insurance markets. The federal government has also been involved with the health insurance marketplace. In 1973, Congress, through passage of the HMO Act, encouraged the development of HMOs by preempting state law restrictions on the corporate practice of medicine and prepaid group practices and by requiring certain employers to offer HMO coverage as part of their employee bene‹t plans. In 1974, with the passage of ERISA, Congress preempted all state laws that relate to employer-based health plans, except state laws that regulate the business of insurance, banking, or securities. Employers have responded to ERISA by selffunding their health plans to avoid state bene‹t and provider mandates, as well as state unfair claim practice and punitive damage statutes and state premium taxes. ERISA removed state authority to regulate the content of self-funded employer health plans, their ‹nancial solvency, or their contractual relationships with providers and did not replace it with federal laws regulating those same areas. The federal government has also used its role as a purchaser of health care for Medicare, Medicaid, and federal employees to indirectly regulate the behavior of insurers in the private health insurance market. State insurance regulators recognize the increasing federal role in managed -care insurance regulation. Since the enactment of ERISA in 1974, states 167 have been able to regulate health insurance mainly in the individual and small employer markets, which account for somewhere between 15 to 50 percent of private health-care coverage, depending upon the state.1 States recognize that because of ERISA only the federal government can regulate the behavior of self-funded employers in the health-care marketplace. Although the federal role in managed-care regulation has increased, states can still play a role in the health-care marketplace, by concentrating their efforts in areas where they can have the most impact. These areas are likely to be those that focus on the regulation of the ‹nances of managed-care plans, regulation of MCO processes and procedures, regulation of information, regulation of bene‹ts, and regulation of risk relationships between MCOs and contracted providers. States are likely to be less successful in legislating bene‹t and provider access mandates because of ERISA preemption. Because of federal preemption, state bene‹t and provider access mandates do not affect over half of the health insurance market. Additional state mandates will only encourage more employers to choose self-funding to avoid them. State bene‹t or provider access mandates may be more successful when limited to small employer and individual health insurance purchasers, since self-funding is not usually a viable option for most participants in these markets. Areas of Regulation In many states, insurance and health departments jointly regulate managedcare plans that are licensed as HMOs. Typically, insurance departments regulate HMO risk arrangements, ‹nancial reporting, pricing adequacy and equity, claims processing, and coverage documents and coverage determinations. Health departments oversee network adequacy, provider access and credentialing , and the assessment of quality assurance and improvement activities.2 Usually state insurance departments have sole responsibility for regulating managed -care plans that are licensed as insurance companies or health-care service companies. Regulation of Finances Regulation of the solvency of insurance risk bearers is the one traditional state regulatory function that the federal government seems relatively likely to leave with the states. Concern in Congress about the adequacy of state ‹nancial regulation of insurance companies, including managed-care companies, has eased since state insurance departments have strengthened their solvency regulation through adoption of the accreditation program proposed by the National Association of Insurance Commissioners. From 1990 through 1998, forty-nine states have had their ‹nancial regulatory programs...