Employers, healthcare providers work around insurance companies
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.
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.