1 Capitation refers to an arrangement by which a fixed amount of money is prepaid to health care organizations for delivering health care services to plan enrollees. See Painter, William S., Provider-Sponsored Managed Care Organizations: A Compendium of Key Legal Issues, in Qualified Plans, Professional Organizations, Health Care, and Welfare Benefits 1997, at 1069Google Scholar (ALI-ABA Course of Study Materials No. 2, 1997). This payment system is customarily based on a fee “per member, per month" (PMPM) that does not vary with the amount of monthly care each member should require. See id. at 1076. In exchange for the PMPM fee, the organizations provide either all or a defined portion of the care needed by each member during the coverage period, thus creating the profit incentive in economizing. See Overbay, Allison & Hall, Mark, Insurance Regulation of Providers That Bear Risk, 22 Am. J.L. & Med. 361, 363 (1996).Google ScholarPubMed

2 See Findlay, Steven, Can Capitation Save the World?, Bus. & Healt, June 1996, at 45, 45.Google Scholar

3 See Taylor, Roger & Lessin, Leeba, Restructuring the Health Care Delivery System in the United States, J. Health Care Fin., June 1, 1996,Google ScholarPubMed available in 1996 WL 10931984.

4 This may even be understating the importance of the capitated dollar amounts. “Whoever controls the capitated revenue stream will be poised to dominate the emerging health care delivery system—and to reap an enormous windfall that could total hundreds of billions of dollars.” Overbay & Hall, supra note 1, at 361 n.l.

5 See Jaffe, Greg, Start-Ups in Health Care are Booming: Change in Nation’s Medical Care Provides Openings, Wall St. J., May 23, 1997, at A9AGoogle Scholar (noating the entrepreneurs rushing to fill gaps in the health care industry and the increasing number of doctors assuming more risk through capitation).

6 29 U.S.C. §§ 1001-1461 (1994).

7 See 29 U.S.C. §§ 1144(a), 1144(b)(2)(A)-(B).

8 See Risk-Bearing Entities Working Group, Nat'l Ass'n of Ins. Comm'rs, The Regulation of Health Risk-Bearing Entities (1996) [hereinafter NAIC White Paper].

9 See id. at 8.

10 Health maintenance organizations (HMOs) are health care delivery systems that offer comprehensive health coverage for hospital and physician services for a capitated fee. See Patricia Younger Et Al., Legal Answer Book for Managed Carea 2 (1995). HMOs exist in various forms; the five basic types are the staff model, the group model, the network model, the direct contract model and the individual practice association. See id. at 3.

11 See Johannes, Laura, Doctor Networks Campaign to Offer Health Insurance, Wall St. J., Jan. 8, 1996, at Bl.Google Scholara

12 See id.; Unland, James J., The Emergence of Providers as Health Insurers, J. Health Care Fin., Fall 1996, at 57, 60.Google ScholarPubMed

13 See Johannes, supra note 11 at B1.

14 Provider-sponsored organizations (PSOs) deliver “a range of services including hospital, physician, and ancillary care.” Two Bills in Congress Would Create Opportunities for PSOs: Provider Groups Support Legislation; State Regulators, HMOs Oppose It, Physician Prac. Options, May 1997, at 1, 1.Google Scholar PSOs may contract with HMOs, Blue Cross and Blue Shield plans, traditional indemnity insurers, employers or employer groups. See id. This Article uses the term PSOs to encompass both provider-sponsored organizations and provider-sponsored networks, although some may distinguish between the two based on whether risk is accepted. See id. Additionally, the term PSOs will be used to refer to the most commonly discussed forms of PSOs including physician- hospital organizations (PHOs), individual or independent practice associations and group practices. See NAIC White Paper, supra note 8, at 11.

15 See id.

16 See Painter, supra note 1, at 1070.

17 See Overbay & Hall, supra note 1, at 361-62.

18 See Memorandum from Professor J.D. Epstein to the Seminar in Health Care Law and Policy at the University of Houston Law Center 17 (Fall 1996) [hereinafter Epstein] (on file with author). The text points out that although PHOs vary greatly in structure, they typically provide: (1) a unified entity through which hospitals and physicians may negotiate contracts with third-party payors; (2) a joint structure for marketing provider services; (3) utilization and quality control; (4) incentives for controlling costs; and (5) assistance in increasing operational efficiency. See id. at 17-18.

19 See NAIC White Paper, supra note 8, at 11.

20 See Painter, supra note 1, at 1070.

21 See Epstein, supra note 18, at 16; Painter, supra note 1, at 1070.

22 See Epstein, supra note 18, at 17.

23 See id.

24 See NAIC White Paper, supra note 8, at 11.

25 See Younger Et Al., supra note 10, at 10; Painter, supra note 1, at 1070.

26 Recent estimates suggest that approximately 15% of existing HMOs are PSOs. See Hudson, Terese, The Great Debate: Resolved, PSOs are Going to be Regulated. The Question Is, Will They Get What They Want?, Med. & Health J., Jan. 20, 1996,Google ScholarPubMed available in LEXIS, Health Library, Rxmega File.

27 See Iowa Code § 513C.10 (1995).

28 See Ernst & Young, Navigating Through the Changing Currents (visited Nov. 7, 1997) <http://www.businessmonitor.co.Uk/docs/proc/203/l04CURR.html> (PSO survey).

29 See Ga. comp. R. & Regs. r. 33-20-1 (1996); Ericka L. Rutenberg, Note, Managed Care and the Business of Insurance: When is a Provider Group Considered to be at Risk?, 1 Depaul J. Health Care L. 267, 302 (1996).Google Scholar

30 See Mich. Comp. Laws Ann. §§ 331.1303, 333.21042 (West 1997).

31 See Minn. Stat. Ann. § 331.1303 (West 1992).

32 See Ernst & Young, supra note 28.

33 See id.

34 Just 30% of the surveyed PSOs reported a profit in 1995. See id.

35 See id. PSOs “are taking on many of the characteristics that will allow them to compete with existing managed care companies.” Id.

36 See Jaklevic, Mary Chris, Doc-Owned Health Plans Struggle to Go It Alone, Mod. Healthcare, May 12, 1997, at 3, 14.Google ScholarPubMed Significantly, access to capital, including reserve amounts needed to acquire an HMO license, is cited as a major impediment that prevents PSOs from competing with sizable HMOs. See id.

37 See Shortell, Stephen M.et al., The New World of Managed Care: Creating Organized Delivery Systems, 13 Health Aff. 46, 52-53 (1994).Google ScholarPubMed

38 See Center for Health Policy Research, Am. Med. Ass'n, Health System Conversion to Managed Care: Workforce Implications Policy Research Perspectives 1 (1994).

39 See generally infra Part V.C (discussing various forms of regulation applicable to PSOs).

40 See Unland, supra note 12, at 57.

41 See id. Generally, three factors are motivating providers to offer services more akin to insurance: (1) desire to reduce the 20-30% of health insurance proceeds that the insurance industry takes for overhead and profit; (2) resentment of insurers’ intrusion into the practice of medicine and the physician-patient relationship; and (3) strong negative public perception surrounding HMOs, managed care and poor health care treatment. See id. at 58.

42 See id. The importance of distinguishing between insurers and providers will become more apparent as this Article proceeds. See infra notes 142-57 and accompanying text.

43 See NAIC White Paper, supra note 8, at 13-14.

44 See id. at 14; infra Part II.B.2-3.

45 See Kathrin E. Kudner, Study presented at the National Health Lawyers Association Conference 1 (Dec. 11-13, 1996) (on file with author).

46 See id.

47 See NAIC White Paper, supra note 8, at 11.

48 See id. at 14.

49 See id. Global fee arrangements involve the payment of a flat fee for services rendered throughout the entire course of an enrollee’s treatment for a certain type of medical condition or procedure. See id. at 15. To utilize “withholds" and “risk pools,” designed to place providers at partial risk for the costs of an individual’s care, managed care entities add to a fund for referrals to specialists. See id. The pooled funds may be either lost to the providers or distributed back to them, depending on whether the cost of delivered services exceeds the managed care entity’s budget. See id.

50 See id.

51 See id.

52 Group Health Association of America, PHOs and the Assumption of Insurance Risk: A 50- State Survey of Regulator’s Attitudes Toward PHO Licensure, in Health Care M&A: Com Mercialization of the Medical Industry 1996Google Scholar (Commercial Law and Practice Course Handbook Series No. A-741, 1996) [hereinafter GHAA Survey]. GHAA, now known as the American Association of Health Plans, is an HMO trade group that generally advocates greater state PHO oversight. See infra Part IV.A.l.

53 Because PHOs represent a type of PSO, examining PHO payment methods is applicable in the PSO context. See generally infra Part III.A.l (examining risk-sharing arrangements applicable to PHOs).

54 See GHAA Survey, supra note 52, at 825. The surveyors acknowledged that although the four categories developed in their study represent several ways PHOs may contract to provide health care services, they do not encompass all of the arrangements that can exist. See id.

55 See id.

56 See id.

57 See id.

58 See id.

59 See id.

60 See id.

61 See id.

62 See NAIC White Paper, supra note 8, at 27; Unland, supra note 12, at 57.

63 See NAIC White Paper, supra note 8, at 27.

64 See Taylor & Lessin, supra note 3.

65 See generally infra Part V.C (addressing the problem of determining which regulations are best applicable to PSOs). Although the regulatory issues related to state insurance licensure requirements are the focus of this Article, PSO capital requirements depend on several additional factors. See Unland, supra note 12, at 63. Other considerations include: (1) start-up organization expenses; (2) start-up management and infrastructure expenses; (3) capital reserves based on actuarial data, including premiums for reinsurance and stop-loss coverage; (4) amounts that vary according to the scope of coverage of self-insured employers; (5) working capital; and (6) capital for marketing and promotion. See id.

66 See GHAA Survey, supra note 52, at 825; infra Part IV.A.2.

67 See NAIC White Paper, supra note 8, at 18.

68 See Painter, supra note 1, at 1077. An example of a no risk arrangement is one in which payment is made to a PSO on a discount fee-for-service basis (FFS), such that the amount paid rep resents a discount from regular charges and payment is only made for services actually delivered. See id. Full risk arrangements are typically those in which capitated payments are made. See id. A "risk corridor" is a mechanism by which a PSO would assume risk and simultaneously purchase stop-loss insurance to cover costs that are greater than planned. See NAIC White Paper, supra note 8, at 15.

69 See infra Part III.C.2. Because no risk arrangements do not raise the specter of unauthorized insurance risk assumption, these agreements are not of much concern to insurance regulators and, likewise, are not of much concern in this Article.

70 See Unland, supra note 12, at 57-58.

71 See id. at 58.

72 See Kertesz, Louise & Wojcik, Joanne, Risky PHO’s Winning Bet, Mod. Healthcare, July 25, 1994, at 44, 44.Google Scholar

73 See McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015 (1994). The Act provides in relevant part that:

1. (a)

   (a) The business of insurance and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

2. (b)

   (b) No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, . . . unless such Act specifically relates to the business of insurance.. . .

Id. § 1012.

74 See NAIC White Paper, supra note 8, at 1.

75 See id.

76 See generally infra Parts III.A-B, IV.C (discussing the complexity of health insurance sys tems and the difficulties in instituting regulations).

77 See 15 U.S.C. §§ 1011-1015. The McCarran-Ferguson Act, among other things, provides an exemption from federal antitrust laws for the business of insurance. See id. at §§ 1012-1013.

78 Market regulations include, most prominently, rates and policy form regulation and market practice regulation. See Robert W. Klein, Structural Change and Regulatory Response in the Insurance Industry (visited Sept. 17, 1997) <http://www.naic.org/geninfo/about/regutra3.htm> . The rationales for these regulations reflect concern for “destructive competition" and market implosion, high consumer search costs, imperfect information and unequal bargaining power. See id. (Joskow, citing Paul L., Cartels, Competition and Regulation in the Property-Liability Insurance Industry, 4 Bell J. of Econ. 375 (1973)).CrossRefGoogle Scholar See generally Harrington, Scott E., Rate Suppression, 59 J. Risk & Ins. 185 (1992)CrossRefGoogle Scholar (providing background on trends in rate regulation).

79 See Klein, supra note 78.

80 See id.

81 See id. Solvency regulation is designed “to limit the degree of insolvency risk in accordance with society’s preference for safety.” Id. Solvency regulation covers insurers with regard to: "(1) capitalization; (2) pricing and products; (3) investments; (4) reinsurance; (5) reserves; (6) asset- liability matching; (7) transactions with affiliates; and (8) management.” Id. Over the last decade or so, states have been involved in a significant effort to “rebuild the framework for insurance regulation,” and much of this effort has focused upon “strengthening solvency regulation by establishing more stringent capital standards, expanding financial reporting, improving monitoring tools, and certifying insurance departments.” Id.

82 See id. These standards aim to create a cushion against an insurer’s unexpected losses by requiring insurers to set aside funds that may be used to help protect policyholders and claimants in the event of subsequent insolvency. See id.

83 The National Association of Insurance Commisioners (NAIC) states these elements as follows: "1. All entities which assume health insurance risk must be subject to solvency and other appropriate consumer protection standards, irrespective of the name and form of the entity,” and “2. Any regulatory framework should foster a level playing field among risk-bearing entities which engage in similar insurance arrangements as opposed to a regulatory framework that favors the development or maintenance of any particular organizational form assuming insurance risk.” NAIC White Paper, supra note 8, at 2. These concerns, of course, must be considered in light of factors that affect insurance regulation more generally, including: industry structure, conduct and performance; public opinion; interdependence among states; state fiscal pressures; and state/federal tensions. See Klein, supra note 78.

84 See NAIC White Paper, supra note 8, at 2.

85 Regulations that hinder entrepreneurial PSOs by requiring excessive capital requirements, for instance, end up restricting market movements that have the potential to create lower overall health insurance costs, thereby benefiting consumers. See Klein, supra note 78. Between competitors, furthermore, creating a level playing field necessarily involves taking away from a group or organization some degree of competitive advantage, albeit perhaps originating from a prior regulatory framework. See NAIC White Paper, supra note 8, at 19. Achieving regulatory objectives requires coordination between solvency and market regulations. See Klein, supra note 78. However, evaluation of these objectives relative to PSO regulation depends on the interests of whichever group—insurers, providers or employers—one believes to be foremost. See generally Overbay & Hall, supra note 1, at 362-68 (observing that regulation needs to focus on protecting consumers and fostering market reform instead of preserving insurers and providers).

86 See Kudner, supra note 45, at 6. A more in-depth look at state health insurance provisions follows later in this Article. See infra Parts IV.A.2, IV.B. 1-3.

87 For a related discussion, see infra notes 95-123 and accompanying text.

88 See Random House Webster’s College Dictionary 1162 (2d ed. 1992).

89 The scenario described herein is based on material contained in the NAIC White Paper, which provides a thorough background description of insurance risk. Despite discussion, the author acknowledges that distinguishing insurance risk from business risk or service risk remains difficult particularly in the health care context. See Ed Hirshfeld & Frank Kolb, Am. Med. Ass'n, Legal Issues in Forming Regional Physician Networks 21 (National Managed Health Care Congress Executive Briefing Series No. 21, 1997).

90 See NAIC White Paper, supra note 8, at 4.

91 See id.

92 See id.

93 See id. at 4 n.4.

94 See id. at 4. Unfortunately, this definition of insurance risk does not sufficiently distinguish this type of risk from other risks, such as financial risk or service risk. These distinctions prove to be critical in regulating capitation arrangements because PSOs involved in such arrangements often assume a combination of risk elements that do not neatly lend themselves to classification. At least one author has noted that a key factor used in identifying whether a risk is appropriately classified as “service" or “insurance" is which party makes capitation payments. See Rutenberg, supra note 29, at 280. Because regulators rely so heavily on categorizations based on insurance risk and the business of insurance, regulators would like to define these terms as broadly as possible; PSOs bearing risk are critical of such liberal interpretations. See Letter from G. Lawrence Atkins, Project Coordinator, Employer Health Care Innovation Project, to Stephanie Lewis, National Association of Insurance Commissioners 2-3 (Oct. 31, 1996) [hereinafter EHCIP Letter] (questioning the NAIC definition of insurance risk). For further discussion of the arguments surrounding the interpretation of regulatory terminology, see infra Part V.B.

95 See Kudner, supra note 45, at 7.

96 See id.

97 See NAIC White Paper, supra note 8, at 5.

98 440 U.S. 205(1979).

99 458 U.S. 119(1982).

100 See generally 440 U.S. 205 (1979) (analyzing the language in the McCarran-Ferguson Act).

101 See id. at 209.

102 See id. at 214.

103 Id. at 221.

104 The Court commented that the insurer’s arrangements with the pharmacies “may well be sound business practice, and may well inure ultimately to the benefit of policyholders in the form of lower premiums, but they are not the ‘business of insurance.’” Id. at 214.

105 See id. at 215.

106 Id. at 215-16 (quoting SEC v. National Sec., Inc., 393 U.S. 453, 460 (1969)). The Court stated that these concerns were the core of the business of insurance. See id. at 216 (quoting National Sec., Inc., 393 U.S. at 460).

107 The Court rejected a contrary interpretation of the relationship as “plainly contrary to the statutory language, which exempts the ‘business of insurance’ and not the ‘business of insurance companies.’” Id. at 217. It is quite plausible to read the opinion as placing great emphasis on the relationship’s effect on the policyholder. See Overbay & Hall, supra note 1, at 374. Overbay and Hall comment that:

108 See Royal Drug, 440 U.S. at 224. The Court made this point in the context of reviewing the legislative history of the McCarran-Ferguson Act. See id.

109 458 U.S. 119(1982).

110 See id. at 122. The peer review committee consisted of ten practicing chiropractors, who served on a voluntary basis, and was designed primarily to assist insurers in evaluating chiropractic claims. See id. at 123.

111 See id. at 126-29. None of the three criteria is determinative in deciding whether a particular practice is part of the business of insurance. See id. at 129. The risk-spreading component, in particular, gives rise to inherent public policy concerns in many insurance risk arrangements. See NAIC White Paper, supra note 8, at 6. Nevertheless, distinguishing insurance risk from other types of risk remains difficult. See supra notes 87-94 and accompanying text.

112 See Pireno, 458 U.S. at 134.

113 See id. at 130. The Court reasoned that the

Id.

114 See id. at 131.

115 See id. at 132. The weight the Court gives to this third factor is somewhat unclear. Al though the Court used language indicating the factor is perhaps not dispositive, it refused to depreciate the fact that the provider market potentially affected by the arrangement—the chiropractic services market—was not an insurance market. See id. at 132-33.

116 See 471 U.S. 724, 744 (1985). With certain exceptions, the Employee Retirement and In come Security Act of 1974 (ERISA) preempts state laws that relate to employee benefit plans. See 29 U.S.C. §§ 1001-1461 (1994); infra Part III.B.

117 471 U.S. at 743. For an ERISA case where the Court applied these same criteria but con cluded that a state law did not regulate the business of insurance, see Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41,50-51 (1987).

118 See 471 U.S. at 746.

119 107 F.2d 239 (D.C. Cir. 1939). One source compares the Jordan arrangement to the discount purchase agreement in Royal Drug. See Painter, supra note 1, at 1074. Other commentators view the activities in Jordan to be “identical to the modern-day HMO.” Overbay & Hall, supra note 1, at 370.

120 See Jordan, 107 F.2d at 242.

121 See id. at 243.

122 See id. at 247 n.26. The court was not concerned with “whether risk is involved or assumed, but. . . whether that or something else to which it is related in the particular plan is its principal object and purpose.” Id. at 248.

123 See id. The court’s distinctions relating to the types of risk involved in the activities in Jordan do not comport with more recent state insurance commission analyses. See NAIC White Paper, supra note 8, at 7 nn.17-18 and accompanying text; Painter, supra note 1, at 1075. For an additional discussion of state insurance commission reports, see infra Part V.A.

124 See 29 U.S.C. §§ 1001(a)-(c), 1144(a), (b)(1)-(2) (1994). The ERISA provisions indicate that an “employee benefit plan" includes an “employee welfare benefit plan.” Id. § 1002(3). “Employee welfare benefit plan,” in turn, includes “any plan, fund, or program which was . . . established or maintained by an employer or by an employee organization, or by both ... for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise . . . medical, surgical, or hospital care or benefits.” Id. § 1002(1). In this context, state law includes all laws, decisions, rules, regulations, or other state action having the effect of law, of any state. See id. § 1144(c)(1). Furthermore, the term “state" includes a state, any political subdivisions thereof, or any agency or instrumentality of either, which purports to regulate, directly or indirectly, the terms and conditions of employee benefit plans covered by ERISA. See id. § 1144(c)(2).

125 See id. § 1144(b)(2)(A). This clause is qualified, however, by the “deemer clause.” See id. § 1144(b)(2)(B). As such, these provisions must be read in tandem, but to do so is not so easy. See infra Part III.B.2.

126 The purpose of ERISA’s preemptive clauses is to give large employers whose retirement and welfare benefit plans would be subject to federal regulation “some assurance that they would face uniform requirements.” Clark C. Havighurst, Health Care Law and Policy 1197 (1990).Google Scholar The entanglement of the statute’s provisions, however, prohibits a smooth transition from succinct objective to facile translation and application of the language employed. See Bobinski, Mary Anne, Unhealthy Federalism: Barriers to Increasing Health Care Access for the Uninsured, 24 U.C. Davis L. Rev. 255, 274-78 (1990)Google Scholar (observing that nebulous interrelation of ERISA’s provisions leads to extensive litigation).

127 463 U.S. 85 (1983).

128 See id. at 96-99.

129 Id. at 96-97.

130 The Court commented that “some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan.” Id. at 100 n.21. For an example of other Supreme Court cases reading ERISA’s scope expansively, see FMC Corp. v. Holliday, 498 U.S. 50 (1990); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987). The Court finally limited the effect of the relate to clause in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995).

131 514 U.S. 645(1995).

132 See id. at 649. The law was constructed to promote the coverage of Medicaid recipients. See id. at 658.

133 See id. at 651-52.

134 See id. at 668.

135 See id. at 659, 668. The Court reasoned that laws with only “indirect economic influence" fail, with respect to employee benefits, to either “bind plan administrators to [a] particular choice and thus function as a regulation of an ERISA plan itself . . . [or] preclude uniform administrative practice or the provision of a uniform interstate benefit package.” Id. at 659-60.

136 See id. at 668.

137 See Dorros, Torin A. & Stone, T. Howard, Implications of Negligent Selection and Retention of Physicians in the Age of ERISA, 22 Am. J.L. & Med. 383, 406 (1995).Google Scholarxs

138 29 U.S.C. § 1144(b)(2)(A) (1994). The provision “saves" insurance acts to minimize federal encroachment on the state’s traditional role as insurance regulator. See Overbay & Hall, supra note 1, at 379-80.

139 See 29 U.S.C. § 1144(b)(2)(B). Thus, the deemer clause effectively overrides the insurance saving clause and reinstates ERISA preemption for employers who self-insure their own employee benefits. See Overbay & Hall, supra note 1, at 380.

140 See supra note 87 and accompanying text. Notably, courts have ruled differently on the issue of whether HMO laws regulate the “business of insurance" and are subject to preemption. Com pare, for example, Travelers Insurance Co. v. Cuomo, 14 F.3d 708 (2d Cir. 1993) (holding that ERISA preempted a New York statute imposing surcharges on hospital rate assessments made against certain HMOs) with Physician’s Health Plan, Inc. v. Citizens Insurance Co. of America, 673 F. Supp. 903 (W.D. Mich. 1987) (finding that the Health Maintenance Organization Act did not preempt a section of Michigan’s insurance code).

141 471 U.S. 724 (1985). See supra notes 116-19 (discussing the definition of the “business of insurance”).

142 481 U.S. 41 (1987).

143 See supra Part III.A.2.

144 See infra Part III.C.2.

145 See NAIC White Paper, supra note 8, at 27; Painter, supra note 1, at 1080.

146 See Painter, supra note 1, at 1080. An illustration may help describe how downstream arrangements operate. Suppose an employer pays an HMO on a capitated basis (i.e., fixed amount, per member, per month) in exchange for that HMO’s obligation to provide health care services as the covered employees may require. The HMO, in turn, can contract downstream with a PSO, for example, and pay the PSO a smaller capitated amount for assuming responsibility for providing health care as the employees require. In this manner, the HMO transfers a portion of its risk to the PSO and, in doing so, it raises significant regulatory issues. For a more detailed illustration, see Overbay & Hall, supra note 1, at 371-72.

147 See Overbay & Hall, supra note 1, at 372.

148 NAIC White Paper, supra note 8, at 28.

149 See Hirshfeld & Kolb, supra note 89, at 18.

150 See id. The NAIC White Paper echoes these concerns, observing that “states recognize that if the licensed entity does not monitor effectively the contracting provider group or the provider group takes on too much risk, the insolvency of the provider group may considerably harm the solvency of the HMO and the ability of plan enrollees to receive health care services.” NAIC White Paper, supra note 8, at 28.

151 See NAIC White Paper, supra note 8, at 28. Some of the state initiatives in this area are discussed at infra Part IV.A-B. The comments of Overbay and Hall reflect, however, the view that regulation of PSOs which contract for risk downstream “provides little additional protection of the consumer and may in fact harm the consumer by hampering this innovation in health care delivery.” Overbay & Hall, supra note 1, at 373.

152 See Painter, supra note 1, at 1077. Although these arrangements may in some situations in volve no risk (e.g., FFS), this Article deals only with the more controversial realm of risk contracting.

153 See Unland, supra note 12, at 60. There are a number of related reasons for PSOs’ heightened interest in bearing risk. These include the following: increased interest by HMOs and purchasers to share risk with providers; providers’ increased desire to control medical management decisions; "excess supply of beds and physicians; declining premiums; opportunities for Medicaid and Medicare risk contracting; and the emergence of for-profit hospitals.” NAIC White Paper, supra note 8, at 18-19.

154 See supra note 65 and accompanying text.

155 See Bowen, Kate, The “Other" Risk in Provider Contracting (visited Nov. 7, 1997)Google Scholara <http://www.jenkens.com/hf96_3.htm> .

156 See Regulation of Risk-Bearing Networks Described as “All Over the Board”, 4 Health Care Pol. Rep. (BNA) No. 9 (Feb. 26, 1996),Google Scholar available in 1997 WL BNA-HCP [hereinafter Regulation of Risk-Bearing Networks].

157 See id.

158 See Hirshfeld & Kolb, supra note 89, at 18-19. The high cost of licensure is a result of solvency standards, reporting requirements and other regulatory requirements. See id. at 18. The flexibility that would be lost by self-insured employers includes the ability to save money by de signing their own health benefits plans rather than purchasing these plans from insurers who them selves must comply with licensing requirements. See id. at 19.

159 See id.

160 See NAIC White Paper, supra note 8, at 19. The consumer protection and level playing field credos serve as buzzwords littering insurance industry-speak. See Mjoseth, Jeannine, NAIC Creates Body of Regulation to Address Managed Care Entities, 3 Health Care Pol. Rep. (BNA) No. 40, 1665 (Oct. 9, 1995)Google Scholar; NAIC Gives States Guidance for Regulating IDSs, PHOs, 5 Managed Care Wk. No. 30 (Aug. 21, 1995)Google Scholar, available in 1995 WL 2409108; NAIC Urges State Oversight of Non- Regulated Providers, 3 Wash. Health Wk. (Atl. Info. Serv.) No. 18 (Aug. 21, 1995)Google Scholar, available in 1995 WL 7731224.

161 See State Regulation of PHOs Depends on How Provider At-Risk Contracts are Structured, 5 Managed Care Wk. (Atl. Info. Serv.) No. 19 (May 22, 1995)Google Scholar, available in 1995 WL 2408963 (noting that “state oversight of PHOs and other provider linkages is haphazard”). To sum up the confounding regulatory environment, one can simply say, “It’s just kind of a mess.” Id. (quoting Doug Chaet, President of New York City’s Lenox Hill PHO and Chairman of the American Association of PHOs); see also GHAA Survey, supra note 52, at 822 (observing that regulatory oversight of PHOs is erratic). Alternatively, one could describe the state regulation of risk-bearing PSOs as “all over the board.” See Regulation of Risk-Bearing Networks, supra note 156.

162 See generally GHAA Survey, supra note 52 (discussing the states’ regulation of risk transfer to PHOs).

163 See id. at 824. The survey results provide insight into how states regulate one particular type of PSO (namely, the PHO); thus, the regulators’ opinions are relevant not only in terms of regulating PHOs specifically, but also PSOs generally. See supra Part II.B.2.

164 See GHAA Survey, supra note 52, at 824.

165 One of these four options describes an arrangement where no risk is transferred to the PHO, which is of little consequence here beyond confirming that, as could have been expected, 40 states and the District of Columbia reported that they had no licensure requirements for PHOs in these situations. See id. at 827.

166 Id. at 823. Introductory materials to the survey results recognize the goal of state licensure requirements as “ensuring] that consumers receive the medical coverage they have been promised.” Id. The materials continue to list a number of typical solvency requirements states impose on risk- bearing health plans, as well as quality of care regulations that may be imposed. See id. The mate rials also make reference to regulators’ concern with “maintaining a level regulatory playing field,” as well as to the observation of the “NAIC and others" that PHOs “frequently operate in states as unauthorized insurers or health plans . . . [assuming] insurance risk without applying for state licensure.” Id. Additionally, conclusory remarks express concern the “adequacy of consumer protections and the fairness of the competitive environment" and with fostering “a more level regulatory playing field.” Id. at 831.

167 See id. at 822.

168 The survey denoted direct contracting arrangements as “Full Risk" and “Partial Risk,” distinguishing based on the level of risk transferred to the PHO through the payment mechanism. See id. at 825. Full Risk options were defined as those in which “the PHO is paid on a prepaid, capitated basis for all medical services.” Id. Partial Risk contracts were described as those where the PHO and the employer establish a budget within which the PHO must stay, providing that the PHO will be liable for expenses beyond the budgeted amount and any savings below the budget will be split between the PHO and the employer. See id. The downstream contracting option was aptly titled “Downstream Risk,” wherein a PHO contracts with a licensed health plan on a prepaid, capitated basis for providing medical services. See id. See supra Part II.B.2 for additional discussion of the options presented to state regulators.

169 See supra Part II.B.3.

170 See GHAA Survey, supra note 52, at 829.

171 See id. Most of the states indicating that they would not regulate downstream PHOs also conveyed that significant transfers of risk could raise the possibility that such organizations would be subject to regulation. See id.

172 See id. at 825.

173 See id. at 827.

174 See id.

175 Id. Interestingly, regulators representing different agencies within the same state even expressed disparate views regarding arrangements that would trigger oversight. This may be attributed to the fact that “[t]ypically, state insurance departments focus on solvency issues, while state health departments focus on the delivery system.” Id. at 828. While locating a plausible cause of confusion is fascinating enough, it cannot be particularly reassuring for those PHOs needing guidance as to state regulatory requirements.

176 See id.

177 See id. at 829; see also Kaufman, Laura & Webster, Susan, GHAA Survey Finds States Erratic in Oversight, Regulation of PHOs, 3 Health Care Pol. Rep. (BNA) No. 29, 1142 (July 17, 1995)Google Scholar (discussing the GHAA survey results and observing the discrepancy between what regulators say and how they act).

178 GHAA Survey, supra note 52, at 829.

179 Id. at 831. In summary,

Id.

180 See Painter, supra note 1, at 1080 (noting that since the GHAA survey, states have revised their approaches or requirements regarding risk-bearing PSOs).

181 See Klein, supra note 78.

182 See NAIC White Paper, supra note 8, at 18.

183 See id. at 17-18. The NAIC White Paper underscores that regulators must target these re solves as they strive to address consumer protection and solvency issues, to create a level playing field, and to allow for development of new delivery and financing systems. See id. at 18. As com mendable as this sounds, one must bear in mind that the White Paper “does not include a recommendation on the specific manner in which states should regulate risk-bearing entities.” Id. at 2.

184 See id. at 17. By way of review, it is worth citing some of the critical considerations facing insurance regulators in the process of shaping policies regarding risk-bearing PSOs. These include: (1) identifying the scope of the business of insurance; (2) distinguishing (to the extent appropriate) provider risk from insurance risk, as well as the significance of drawing distinctions for purposes of licensing requirements; (3) determining the level of oversight befitting downstream risk-contracting arrangements; and (4) what effect ERISA preemption has on state regulatory initiatives. See Unland, supra note 12, at 64-65.

A backdrop to these issues is the ever present concerns of consumer protection from both insolvency and incentives to limit care, as well as for maintaining a level playing field and permitting the development of innovative organizational arrangements. See NAIC White Paper, supra note 8, at 18.

185 See id. at 27.

186 See id. at 21.

187 See id.

188 See id. The White Paper points out that more than half of the states have passed laws based on the NAIC Health Maintenance Organization Model Act (model 430), which governs persons who provide or arrange for the delivery of basic health care services to enrollees on a prepaid basis. See id. The NAIC HMO Model Act contains initial and minimum net worth requirements and, for con tracts between HMOs and providers, requires that a “hold harmless" provision prevent providers from collecting from subscribers or enrollees in case of HMO nonpayment. See id.

189 See generally Kudner, supra note 45 (outlining the current statutes and regulations that may apply to PSOs in risk-sharing arrangements).

190 See id. at 8. Hawaii was the last state to regulate HMOs. See Haw. Rev. Stat. Ann. § 432D (Michie Supp. 1996).

191 See Kudner, supra note 45, at 8.

192 See id.

193 Minn. Stat. Ann. § 62N.01-.40 (West 1996).

194 Incidentally, the capital requirements for the provider networks are not significantly differ ent from the requirements applicable to HMOs licensed in Minnesota. Compare id. § 62N.28 (requiring a provider network to maintain a minimum net worth equal to the greater of: (1) $1 million; (2) 2% of the first $150 million of annual premium revenue plus 1% thereafter; (3) 8% of the annual health service costs, excluding capitated or managed hospital payments, plus 4% of the annual capitation and managed hospital payments costs; or (4) 4 months uncovered health services cost) with § 62D.042 (requiring an HMO to maintain a net worth equal to the greater of: (1) 8-1/3% of the sum of all expenses expected to be incurred; (2) $1.5 million for the first year of operation and the greater of $1 million; or (3) 8-1/3% of the sum of all expenses incurred during the most recent calendar year thereafter).

195 See id. § 62R.03. A health provider cooperative is defined as a “corporation organized un der this chapter and operated on a cooperative plan to market health care services to purchasers of those services.” Id. § 62R.04.4.

196 Id. §62R.01.

197 See id.

198 See id. § 62R.17. The provision sunsets December 31, 1999. See id. § 62R.26.

199 See Joint Bulletin # 94-3 from the State of Minnesota Department of Health 2 (Sept. 26, 1994) [hereinafter Minnesota Joint Bulletin] (on file with the State of Minnesota Department of Health). Insurance is defined as “any agreement whereby one party, for a consideration, undertakes to indemnify another to a specified amount against loss or damage from specified causes, or to do some act of value to the assured in case of such loss or damage.” Minn. Stat. Ann. § 60A.02.3(a).

200 See Minnesota Joint Bulletin, supra note 199, at 2. Recently, Minnesota regulators have recommended that they limit PSOs in their ability to contract directly with employers, noting the potential threat to consumers when PSOs act as insurers. See Scott, Lisa, Providers Overruled: Minnesota Regulators Recommend Treating PSOs as Insurers, Mod. Healthcare, Mar. 10, 1997, at 28, 28.Google Scholar The March final report followed a draft released in January which, as was anticipated, drew concern particularly from providers who object to being held to capital standards approaching those imposed on HMOs. See Minnesota: Urges Regulations for Risk-Bearing Networks, Am. Health Line, Jan. 8, 1997,Google Scholar available in 1997 WL APN-HE7.

201 Minn. Stat. Ann. § 62R.06.1. The Health Care Cooperative Act does not define substantially capitated or similar risk-sharing basis, thus, whether an arrangement satisfies this requirement depends on the totality of the circumstances. See Minnesota Joint Bulletin, supra note 199, at 3.

202 See Jaklevic, Mary Chris, Ohio Weighs Rules for Risk Bearers, Mod. Healthcare, Apr. 15, 1996, at 26, 26Google ScholarPubMed; Mcllrath, Sharon, Who Will Regulate Provider-Run Plans?: States Jockey to Limit Federal Oversight Role, Am. Med. News, Apr. 1, 1996, at 3, 23Google Scholar; Ohio: Bill Would Standardize Managed Care Regulation, Am. Health Line, Feb. 28, 1996,Google Scholar available in 1997 WL APN-HE11 [hereinafter Ohio Bill].

203 Solvency requirements, based on the types of services provided, range from $1.2-1.7 million. See Ohio S.B. 67, 122d Gen. Ass. (1997) (enacted); see also Jaklevic, supra note 202, at 26; PHOs Regulated Under Ohio Law, Mod. Healthcare, June 30, 1997, at 78, 78Google Scholar; West, Diane, Ohio’s Uniform Licensure Act Moves, Nat'l Underwriter Life & Health/Fin. Services, Mar. 31, 1997,Google Scholar available in 1997 WL 9319046.

204 See Jaklevic, supra note 202, at 26.

205 PSOs not assuming risks, such as certain preferred provider organizations (PPOs), would nonetheless have to register with the state even though they are not subject to other HIC standards. See Ohio Bill, supra note 202.

206 See Ohio Rev. Code Ann. §§ 1736.01-.28,1742.01-.41 (Anderson 1992).

207 See Letter from David J. Randall, Deputy Director, State of Ohio Department of Insurance, to John E. Callender, Senior Vice President, Ohio Hospital Association (July 28, 1994) [hereinafter Ohio Department of Insurance Letter] (on file with the State of Ohio Department of Insurance).

208 See id. at 1-4. In clarifying the difference between an insurance risk and a business risk, the Ohio Department of Insurance (DOI) indicates that the former involves a risk transference (spreading), while the latter does not. See id. By example, the letter illustrates that a capitated payment arrangement consists of insurance risk, while a discounted FFS represents mere business risk. See id. The distinction made here is difficult to decipher and adds little more than providing a somewhat rhetorical attempt to differentiate among risk types based on accepted state attitudes toward insurance regulation.

209 See id. at 3.

210 See id. The reference to a possible de minimis exception was made in the context of a capitated arrangement that was limited to services only provided by a particular provider, or alternatively, if the contract was reinsured via stop-loss coverage. See id.

211 See 215 Ill. Comp. Stat. 110/1-/47; 125/1-1 to 6-15; 130/1001-/4008 (West 1993). A limited health service organization is defined as “any organization formed under the laws of this or another state to provide or arrange for one or more limited health care plans under a system which causes any part of the risk of limited health care delivery to be borne by the organization or its pro viders.” Id. 130/1002. “Limited health care plan[s]" provide, arrange and pay for the cost of any limited health services given on a capitated basis. Id. (listing ambulance, clinical laboratory, dental, pharmaceutical, podiatric and vision care services as limited health services).

212 See Grant, David, Provider Based Market Systems When to Regulate, St. of 111. Dep't of Ins. Newsl., Feb. 1996Google Scholar (St. of 111. Dep't of Ins., Springfield, 111.) [hereinafter 111. Dep't of Ins. Newsl.].

213 Id.

214 Id.

215 See id.

216 Id.

217 See NAIC White Paper, supra note 8, at 26. In Idaho, the DOI has apparently indicated it would not require licensure of a PSO contracting either downstream or directly such that responsibility to the covered individuals remains with the licensed entity or the self-insured employer. See id. Furthermore, in South Carolina, the DOI notes that its attempts to regulate provider networks contracting only with self-insured, single-employer health plans might be subject to ERISA preemption. See id.

218 In contrast to Ohio’s approach that it would not tolerate any degree of PSO risk assumption, for instance, the Illinois DOI focuses on whether a contracting employer or upstream entity “remains on risk for health care costs . . . should the provider group fail to perform.” 111. Dep't of Ins. Newsl., supra note 212. Arguably, this approach more nearly achieves goals of ensuring a level of consumer protection and promoting innovation in the health care marketplace.

219 See generally supra Part III.C.1-2 (discussing the recent risk involvement of PSOs).

220 To this point, only a small fraction of states have indicated clear policies regarding their tack on these issues, a reality largely attributable to the relative dearth of past PSO involvement in bearing risk. This is not to say that other states are not making headlines as they grope for common ground and endeavor to locate the proper place for PSOs within existing regulatory frameworks. See Virginia, Georgia, Clamp Down on IDSs Taking Financial Risk, 5 Managed Care Wk. (Atl. Info. Serv.) No. 25 (July 10, 1995)Google Scholar, available in 1995 WL 2409040; NAIC Committee Sees Delay in PSO Rules as Members Await Congressional Action, 4 Health Care Pol. Rep. (BNA) No. 14 (Apr. 1, 1996)Google Scholar, available in 1997 WL BNA-HCP (discussing the various stages of state regulation of risk- assuming PSOs); N.C. Insurance Department, Attorney General Clash on PSNs, 6 Managed Care Wk. (Atl. Info. Serv.) No. 40 (Nov. 4, 1996)Google Scholar, available in 1996 WL 13126993; Regulation of Risk- Bearing Networks, supra note 156 (discussing the status of state regulations in California, Colorado, Iowa, Maine and Minnesota); States Creating Provider-Sponsored Organization Chapters in Insurance Codes as Congress Gears up for Renewed Debate for Medicare, Medicaid PSO Contractors, 8 Health News Daily (FDC) No. 249 (Dec. 30, 1996)Google Scholar, available in 1997 WL HND (discussing Georgia, Kentucky and Ohio); State Health Week, 4 Wash. Health Wk. (Atl. Info. Serv.) No. 40 (Nov. 4, 1996)Google Scholar, available in 1996 WL 14375904 (discussing efforts in North Carolina).

221 Despite the lack of comprehensive federal legislative guidance for PSO risk contracting, Congress recently enacted legislation permitting PSO participation in Medicare. The Balanced Budget Act of 1997 (BBA), signed into law by President Clinton on August 5, enacted some of the most significant changes to the structure of the Medicare and Medicaid programs that have been made since their inception. Pub. L. No. 105-33, 111 Stat. 251 (1997). The BBA creates a new Medicare Part C program called Medicare+Choice, through which Medicare beneficiaries can elect to receive benefits from HMOs, point-of-service plans, PPOs, MSA plans, private FFS plans and, significantly, plans offered by PSOs. See id. § 4001. The BBA promotes PSO formation by allow ing them, under certain conditions, to contract directly with Medicare to offer health care services to Medicare-eligible patients.

The BBA requires that “a Medicare+Choice organization shall be organized and licensed under state law as a risk-bearing entity eligible to offer health insurance or health benefits coverage in each state in which it offers a Medicare+Choice plan.” Id. § 1855(a)(1). A special exception applies, however, to PSOs. In general, a PSO seeking to offer a Medicare+Choice plan can apply to the Secretary of HHS for a waiver of the state licensing requirement by filing an application no later than November 1, 2002. See id. § 1855(a)(2)(A). Such a waiver, though, is available only if certain conditions are met and grants limited benefits. See id. § 1855(a)(2)(A)-(D). A PSO that seeks to offer a Medicare+Choice plan in a state will be able to apply for a federal waiver of that state’s licensure requirements if the state has denied the PSO a license based on solvency, discriminatory reasons, or if the state fails to approve the license within ninety days of the PSO’s application. See id. The waiver would be effective for three years, would not apply to any other state and would not be renewable. See id. § 1855(a)(2)(E). By December 31, 2001, the Secretary must submit to Congress a report regarding whether HHS should continue the waiver process after December 31, 2002. See id. § 1855(a)(2)(H).

The BBA also requires that the Secretary establish, using a negotiated rulemaking task force, solvency requirements for organizations seeking to qualify as PSOs participating in the Medi-care+Choice program. See id. § 1856(a)(1)(A). The Secretary recently issued a Notice of Intent to establish a negotiated rulemaking committee to develop the solvency standards for PSOs. See 62 Fed. Reg. 49,649 (1997). In establishing PSO solvency standards, the Secretary must take into consideration any standards the NAIC develops specifically for risk-based health care delivery organizations. See Balanced Budget Act § 1856(a)(1)(B)(iii).

Because the BBA Medicare+Choice provisions will likely enhance PSO formation, PSO licensure requirements are now, more than ever, under a microscope. The extent to which PSOs choose to offer Medicare+Choice plans, thereby obligating themselves to abide by minimum enrollment and other requirements placed on providers offering such plans, will reveal itself only with the passage of time. Because waiver of state licensure is an option under only limited circumstances, the impact of the new BBA provisions is another unknown. See id. § 1857. State licensure continues as an impediment to PSOs not participating in Medicare+Choice, including, vitally, all nonparticipating PSOs that contract directly with self-insured employers. Furthermore, because establishing solvency standards for PSOs, as mandated in the BBA, explicitly requires the Secretary to take into account the risk-based capital formula that the NAIC develops, the NAIC’s approach toward the regulation of PSOs remains a crucial determining factor. See id. § 1856(a)(1)(B)(iii). If the NAIC continues to fail to recognize the unique properties and operating characteristics of PSOs, risk-based capital standards, as well as the Medicare+Choice program with which they are now linked, will leave unresolved barriers to PSOs seeking to compete with traditional indemnity plans and HMOs. See D. Ward Pimley, HMOs Report Solvency Problems on Test of Revised Risk-Based Capital, 6 Health Law Rep. (BNA) No. 38 (Sept. 25, 1997),Google Scholara available in LEXIS, Bna Library, Bnahlt File.

222 See Mjoseth, supra note 160, at 1665.

223 See id.

224 See id. (quoting Jason B. Adkins, President of the Center for Insurance Research, Cambridge, Massachusetts). An illustration of this point is that the NAIC Health Maintenance Organization Model Act (model 430) has provided great input toward state-based HMO regulation. See id.

225 See id.

226 In sum, NAIC efforts in this area are crafted to “enhance efficiency of licensing and oversight of various forms of health insurance providers, aid the insurance industry in creating a level playing field, and help consumers in disputes with health insurance carriers.” Id. (quoting Gregory B. Stites, NAIC official).

227 See NAIC White Paper, supra note 8, at 32.

228 See id.

229 See id.

230 Id.

231 See Mjoseth, supra note 160, at 1665.

232 See NAIC White Paper, supra note 8, at 33. This, of course, is debatable, particularly in light of the questionable effect of ERISA preemption on states’ abilities to regulate certain self- insured employers. See supra Part III.C.1-2. The NAIC cites with approval the Ohio DOI’s efforts in developing its Managed Care Uniform Licensure Act for Health Insuring Corporations and creating a single regulated entity. See supra Part IV.B.2.

233 See NAIC White Paper, supra note 8, at 33.

234 See id.

235 See id. These models, respectively, establish standards for health carriers’ creation and maintenance of provider networks; health carriers’ establishment of procedures to resolve enrollee grievances; and for the structure and application of utilization review services. See id. at 33-34. The NAIC is currently reviewing related issues, including the confidentiality and reporting of health information and health care consumer disclosure. See id. at 34.

236 See Mjoseth, supra note 160, at 1666.

237 See NAIC White Paper, supra note 8, at 34. In principle, arguing about the logic and wisdom behind risk-based capital standards is difficult. These standards already apply in the contexts of life, health, property and casualty insurance companies. See id. The debate will rage, however, concerning to which entities these risk-based formulas should apply. The same difficulties—determining what is the business of insurance, the scope of ERISA preemption and the precise nature of downstream and direct contracting—will remain debate topics, even if the ontological underpinnings of risk-based capital standards are accepted. In addition, crafting risk criteria acceptable to all types of risk-bearing entities with competing interests, including HMOs, insurers and providers is itself a monumental challenge. See Mjoseth, supra note 160, at 1666 (noting some of the concerns of Ellen Pryga, Director of Policy Development for the American Hospital Association).

238 See Memorandum from Kenney Shipley, Chair (Florida), Health Plan Accountability Working Group, to the Insurance Commissioners, Directors and Superintendents 1 (Aug. 10, 1995) (on file with the NAIC) [hereinafter HPAWG Memorandum].

239 See id.

240 See id. The HPAWG Memorandum notes that “[t]he only exception to this opinion is where the entity is accepting ‘downstream risk’ from a duly licensed health carrier.” Id. at 2. Kenney Shipley indicated elsewhere, however, that because the memorandum fails to deal with downstream risk does not mean that the NAIC is not interested in downstream arrangements; on the contrary, the HPAWG Memorandum was simply focused elsewhere. See Health Attorneys Very Supportive of NAIC Risk Bearing Entities Bulletin, 3 Health Care Pol. Rep. (BNA) No. 37 (Sept. 18, 1995)Google Scholar, available in LEXIS, Bna Library, Bnahcp File. Interestingly, though, the “draft bulletin" portion of the memorandum reads in relevant part: "The only arrangement where a provider need not obtain a license from the Department of Insurance is when the provider agrees to assume all or part of the risk for health care expenses or service delivery under a contract with a duly licensed insurer, for that insurer’s policyholders, certificate-holders or enrollees.” HPAWG Memorandum, supra note 238, at 3. The most plausible interpretation of this sentence is that the memorandum exempts downstream PSOs from any suggestion that they need to fulfill state licensing requirements as bearers of insurance risk.

241 See HPAWG Memorandum, supra note 238, at 3.

242 See id.

243 See id.

244 The hypothetical fact situation reads as follows: "For example, if a group of doctors or a hospital enters into an arrangement with an employer to provide future health care services to its employees for a fixed prepayment (i.e., full or partial capitation) the doctors or hospital are engaged in the business of insurance.” HPAWG Memorandum, supra note 238, at 4. The analysis used Florida’s definition of insurance and referred to Florida case law construing this definition. See Professional Lens Plan v. Department of Ins., 387 So. 2d 548, 550 (Fla. Dist. Ct. App. 1980).

245 See HPAWG Memorandum, supra note 238, at 5-6. The analysis makes some interesting, if not puzzling, observations. In evaluating the providers’ assumption of risk, the HPAWG Memorandum notes that “if this scenario was not an example of the ‘assumption of risk,’ departments of insurance around the country would not be receiving policy form filings from duly licensed insurance companies who have been asked by providers to insure this very risk (e.g., the risk of capitation).” Id. at 5. What this statement proves is far from clear. Furthermore, the memorandum rejects the idea that arrangements in which the employer remains obligated to provide health benefits, even if the provider group goes bankrupt, are not the business of insurance. See id. at 5-6. Instead, the memorandum holds that employers are consumers who themselves are purchasing insurance to protect against risks for which they are primarily obligated. See id. This holding seems to miss entirely the point that ERISA serves to preempt state regulations that would cover these activities, even if such activities were correctly classified as the business of insurance.

246 Id.

247 See generally NAIC White Paper, supra note 8 (addressing insurance risk, forms of risk- bearing entities operating in the health insurance market and state regulation of risk-bearing entities).

248 See id. at 2.

249 See supra notes 237-47 and accompanying text.

250 See NAIC White Paper, supra note 8, at 26. This is because:

Id.

251 See supra Part III.B.1-2. Although the White Paper does refer, in this context, to an NAIC document dealing specifically with ERISA, the absence of further discussion of ERISA preemption and direct contracting arrangements is somewhat conspicuous here. Apparently other readers have made this observation as well. See Meeting Minutes from Risk-Bearing Entities Working Group of the State and Federal Health Insurance Legislative Policy (B) Task Force 1 (Dec. 16, 1996) (on file with the NAIC).

252 See NAIC White Paper, supra note 8, at 27-28.

253 See id. at 28-32.

254 See Unland, supra note 12, at 65.

255 See supra Part IV.A.1-2.

256 See generally EHCIP Letter, supra note 94 (discussing the EHCIP’s views on the NAIC White Paper).

257 See id.

258 See id.

259 See id.

260 See id.

261 Id. The Employer Health Care Innovation Project (EHCIP) extends this argument to downstream arrangements as follows: "The risk to a consumer whose HMO contracts with an independent medical group to provide medical services for a capitation payment is defined by the capacity of the HMO to deliver promised benefits, and not by the financial condition of the medical group.” Id.

262 See supra notes 113-15 and accompanying text for the factors in Pireno.

263 See EHCIP Letter, supra note 94, at 2.

264 See id.

265 See id.

266 See id. The EHCIP has elaborated on this point elsewhere. See Memorandum from the Employer Health Care Innovation Project on Self-Insurance 1 (Mar. 14, 1996) [hereinafter EHCIP Project].

267 See EHCIP Letter, supra note 94, at 2. However, “[u]nlike an insurance carrier that bears risk with little control over the delivery of services, a provider group will have substantial control over how services are provided.” Id.

268 Id. The letter emphasizes here that the employer remains “ultimately responsible" for health services for the employee and cites the Illinois DOI as supporting this position. See id. For discussion of the Illinois approach, see supra Part IV.B.3.

269 EHCIP Letter, supra note 94, at 3.

270 Recent statistics show that provider-sponsored health plans do not need special regulatory breaks to attract investors. See American Ass'n of Health Plans, AAHP Survey of State Regulators Shows Provider-Sponsored Health Plans Don't Need Special Regulatory Breaks (visited Nov. 7, 1997)Google Scholar <http://www.aahp.org/servoces/pr_update/media/pr6_3_97.htm> .

271 See Mcllrath, supra note 202, at 23.

272 Commentators have recognized the validity of each of these approaches. See, e.g., Hirshfeld & Kolb, supra note 89, at 22 (endorsing risk-based regulation); Overbay & Hall, supra note 1, at 386 (favoring regulation specific to PSOs).

273 See Overbay & Hall, supra note 1, at 372.

274 See id. at 372-73. This is particularly true in states requiring that PSOs guarantee their obligations to upstream entities and that the providers agree to “hold harmless" provisions that would prevent them from seeking recourse from plan enrollees in case the upstream entity defaults. See id.

275 A number of HMOs sought protection under federal bankruptcy laws during the last decade. See, e.g., In re Estate of Medcare HMO, 998 F.2d 436 (7th Cir. 1993); In re Beacon Health, Inc., 105 B.R. 178 (Bankr. D. N.H. 1989); In re Family Health Servs., Inc., 104 B.R. 279 (Bankr. CD. Cal. 1989); In re Michigan Master Health Plan, Inc., 44 B.R. 642 (Bankr. E.D. Mich. 1984); In re Portland Metro Health, Inc., 15 B.R. 102 (Bankr. D. Or. 1981). See generally Holland, Gayle L., Health Maintenance Organizations: Member Physicians Assuming the Risk of Loss Under State and Federal Bankruptcy Laws, 15 J. Legal Med. 445 (1994)CrossRefGoogle ScholarPubMed (exploring the controversy over protecting HMOs under federal bankruptcy laws, and discussing whether HMOs are insurance companies for bankruptcy purposes).

276 See HPAWG Memorandum, supra note 238, at 1; see also supra Part V.A.3 (discussing the NAIC’s position in depth).

277 New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). See supra notes 137—43 and accompanying text.

278 See generally supra Part II.A-B.l (discussing the various entities involved and the risk arrangements that have developed in the health care marketplace).

279 15U.S.C. §§ 1011-1015 (1994); see supra Part III.A.2.

280 This is a point made clear by the EHCIP. See EHCIP Project, supra note 266, at 1. On the other hand, recognizing the difference between disclosure-oriented ERISA regulations and state- driven solvency regulations may explain such disparate treatment of direct and downstream arrangements.

281 See Overbay & Hall, supra note 1, at 382-83 (citing Holloway, James E., ERISA. Preemption and Comprehensive Federal Health Care: A Call for “Cooperative Federalism “ to Preserve the States’ Role in Formulating Health Care Policy, 16 Campbell L. Rev. 405, 416 (1994)).Google Scholara

282 See Overbay & Hall, supra note 1, at 383.

283 See EHCIP Project, supra note 266, at 1.

284 Some of the commentators’ "clear" conclusions concerning ERISA’s preemptive effect on PSO direct contracting regulation stand in conflict with each other. Although one may conclude “it is clear that states may regulate provider groups that contract directly with employers on a capitated basis,” Overbay & Hall, supra note 1, at 380, one may also conclude that it is “uncertain whether ERISA preemption applies" to similar arrangements. Hirshfeld & Kolb, supra note 89, at 25. One could also favor a balancing approach and the notion that regulating employers who are not financially strong would not be inappropriate. See Rutenberg, supra note 29, at 321-22.

285 See supra note 221; see also Kudner, supra note 45, at 5 (discussing Medicare and Medicaid managed care requirements).

286 See H.R. 995, 104th Cong. (1995).

287 See Testimony of the Nat 7 Ass ‘n of Ins. Comm ‘rs (EX) Special Comm. on Health Ins. Before the Health Subcomm. of the Comm. on Ways and Means of the United States House of Representatives on Medicare HMO Regulation and Quality, 105th Cong. (1997), available in LEXIS, Legis Library, Cngtst File (testimony of David Randall, Deputy Director of the State of Ohio Department of Insurance); Level the Playing Field for Health Insuring Organizations, State Insurance Regulators Tell Hill (visited Nov. 4, 1997) <http://www.naic.org/geninfo/releases/031997hg.htm> .

288 See EHCIP Project, supra note 266, at 1.

289 see id. The use of “hold harmless" clauses, which prevent employees from being subject to out-of-pocket expenses for health care in the event of PSO insolvency, further enhances protection of employees as consumers and weakens the argument for state regulation. See id.

290 NAIC White Paper, supra note 8, at 2.

291 See supra note 221.