Em­ploy­ers, health­care providers work around in­sur­ance com­pa­nies

The Oklahoman (Sunday) - - BUSINESS -

In the face of ris­ing health care costs and un­cer­tainty cre­ated by stunted at­tempts at health care re­form, em­ploy­ers and med­i­cal providers are tak­ing mat­ters into their own hands. They are col­lab­o­rat­ing di­rectly for the pro­vi­sion and pay­ment of health care.

This trend pur­ports to elim­i­nate the mid­dle man — the in­sur­ance com­pany. Rather than pay pre­mi­ums to an in­surer, em­ploy­ers con­tract di­rectly with providers, or more of­ten a group of providers form­ing a provider spon­sored or­ga­ni­za­tion (PSO), to ful­fill em­ployee health care needs.

The PSO model in­volves a di­rect con­tract be­tween the

PSO and self-funded em­ploy­ers, wherein the PSO agrees to pro­vide ser­vices at pre­ferred pric­ing. Typ­i­cally, the PSO as­sumes the fi­nan­cial risk that ser­vices will be uti­lized above an­tic­i­pated lev­els. A pre­de­ter­mined “pre­mium” is paid for the provider ser­vices.

Un­til re­cently, large em­ploy­ers oc­cu­pied the field of di­rect con­tract­ing. An in­sur­ance prod­uct known as a stop loss group cap­tive now makes di­rect con­tract­ing at­trac­tive to small em­ploy­ers by al­low­ing them to self-fund, with­out the volatil­ity that his­tor­i­cally dis­cour­aged them from do­ing so, and cover cost in ex­cess of pre­mium.


Di­rect con­tract­ing has promis­ing fea­tures. It pur­ports to give em­ploy­ers more con­trol over the way in which they spend health care dol­lars, im­prove ac­cess to high qual­ity care at af­ford­able and more trans­par­ent cost, in­crease provider ac­count­abil­ity, and en­cour­age com­pe­ti­tion and choice in the health care mar­ket.


Di­rect con­tract­ing also has po­ten­tial draw­backs. Providers may un­der­es­ti­mate the risk in­volved in earn­ing an ac­cept­able re­turn, given the mar­gin dis­counts em­ploy­ers of­ten re­quire and the com­plex­ity in­volved in set­ting up an ef­fi­cient care man­age­ment sys­tem. Em­ploy­ers, in turn, may over­es­ti­mate the po­ten­tial for sav­ings. In par­tic­u­lar, ad­min­is­tra­tive costs may be sub­stan­tially in­creased rather than re­duced, as the role that the ex­cised mid­dle­man in­surer played was sig­nif­i­cant. More­over, there is risk to en­rollees if coverage ter­mi­nates due to provider in­sol­vency.

Le­gal Is­sues

Em­ploy­ers and providers en­ter­ing a di­rect con­tract­ing re­la­tion­ship should be mind­ful of var­i­ous le­gal is­sues. The field of em­ployee ben­e­fits, which is a large-dol­lar piece of the econ­omy, is heav­ily reg­u­lated to en­sure con­sumer pro­tec­tion.

Even jet­ti­son­ing the tra­di­tional mid­dle­man in­surer, the typ­i­cal PSO in a di­rect con­tract­ing ar­range­ment ar­guably is en­gaged in the busi­ness of in­sur­ance be­cause it ac­cepts fi­nan­cial risk. Most states, in­clud­ing Ok­la­homa, re­quire an in­surer to reg­is­ter, make avail­able large re­serve funds, pay pre­mium taxes, and pro­vide an ar­ray of man­dated ben­e­fits. And ab­sent ERISA pre-emp­tion, an in­surer is ex­posed to con­tract and tort li­a­bil­ity for im­proper claims han­dling.

The di­rect con­tract­ing ar­range­ment also may con­sti­tute an em­ployee ben­e­fit plan sub­ject to ERISA (Em­ployee Re­tire­ment In­come Se­cu­rity Act). Un­der ERISA, plan fidu­cia­ries must op­er­ate a plan for the ex­clu­sive ben­e­fit of par­tic­i­pants, re­frain from con­flicts of in­ter­est and pro­hib­ited trans­ac­tions, fund ben­e­fits con­sis­tently with the law and the plan, and re­port and dis­close in­for­ma­tion re­gard­ing the op­er­a­tions and fi­nan­cial con­di­tion of the plan to the gov­ern­ment and plan par­tic­i­pants. Fail­ure to sat­isfy ERISA’s re­quire­ments can lead to sig­nif­i­cant civil and crim­i­nal penalty.

Things are com­pli­cated by the fact a di­rect con­tract­ing ar­range­ment of­ten in­volves mul­ti­ple em­ploy­ers un­re­lated by com­mon own­er­ship, cre­at­ing a MEWA (mul­ti­ple em­ployer wel­fare ar­range­ment). MEWAs are sub­ject to par­tic­u­larly strict fidu­ciary and re­port­ing re­quire­ments un­der ERISA and are heav­ily reg­u­lated by state law. In Ok­la­homa, a self­funded MEWA must be li­censed as an in­sur­ance com­pany; main­tained by an en­tity ex­ist­ing for at least five years; have a Board of Trustees with com­plete fis­cal con­trol; main­tain cer­tain re­serve, sur­plus, and stop loss coverage; and file an an­nual au­dited fi­nan­cial state­ment.

Em­ploy­ers and providers will­ing to take the risk in di­rect con­tract­ing are tread­ing on fer­tile but rocky ground.

Ali­son M. Howard is an at­tor­ney with Crowe & Dun­levy and chair of the firm’s Em­ployee Ben­e­fits & ERISA Prac­tice Group.

Ali­son M. Howard Le­gal Coun­sel


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