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HMO and Insurance Insolvency: The Benefits and Detriments of a Federal System
Published online by Cambridge University Press: 24 February 2021
Extract
Accompanying its expansive growth over the last fifteen years, the health maintenance organization (HMO) industry transformed from collections of HMOs in local markets into an increasingly national system under the control of centralized corporations. During that time, HMOs established national chains in an effort to capture market share. The move toward nationalization of the HMO industry suggests the need for a critical analysis of the current HMO regulatory structure to determine whether it effectively safeguards the proper functioning of HMOs. As national and regional HMOs compete among themselves and with local HMOs, the need for unified, consistent financial protections with respect to HMOs and similar entities becomes acute. Competition from national HMOs creates increased financial risk for the smaller HMOs whose regional markets were previously insulated from broad-based competition. The need for preventative rules to offset this added risk, as well as a means by which to adjudicate consistently cases of HMO and insurance insolvency, became sufficiently acute that in March 1993 the U.S. House of Representatives sought to regulate federally the solvency of insurance companies by proposing a Federal Insurance Solvency Commission. In addition, to deal effectively with these problems, various industry participants and regulatory entities currently seek other remedies and attempt action of varying degrees.
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- Notes and Comments
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- Copyright © American Society of Law, Medicine and Ethics and Boston University 1997
References
1 See Schrage, Michael, Are HMOs Too Big to Go Bust? Just Ask Your Favorite Failed S&L, L.A.Times, Feb. 11, 1996, at D2.Google Scholar
The rapid growth of today’s health maintenance organizations is eerily reminiscent of the early go-go good fortunes of the high-flying savings and loans. With comparable mismanagement, HMOs may well become the S&Ls of the next millennium. Bankruptcy law may have a bigger impact on access to quality health care than all the medical schools combined.
id.
2 See Luft, Harold S., Health Maintenance Organizations: Dimensions of Performance at vii (1987)Google Scholar (stating that “in 1980 one could describe the industry as being largely not-for-profit and local in nature, with the major exception of the Kaiser Foundation Health Plan, whichoperated in seven widely dispersed geographic areas of the U.S., but with substantial local autonomy”).
3 See id. (further stating that “in 1986, the bulk of enrollment is still in not-for-profit plans, butnational chains, both for-profit and not-for-profit, dominate the industry”). A recent example of theincreasingly national character of the health maintenance organization (HMO) industry can be seenin the proposed merger between Sierra Health Services Inc. and Physician Corp. of America. Themerger would create one of the ten largest managed care companies in the United States with abouttwo billion dollars in annual revenue. See Rundle, Rhonda L., Sierra Health, Physician Corp. toMerge Creating a Managed Care Powerhouse, Wall St. J., Nov. 4, 1996, at B6.Google Scholar The new companywould have “a major presence in Nevada, Florida, Texas and Puerto Rico" and would include “1.5 million members in 18 states, including 1.1 million people in health maintenance organizations.” id.Sierra’s chief executive officer (CEO) describes the merger as “a major opportunity ... to move outstrongly into other states,” expanding from its former position as “a single market entity.” Id.; see also Rundle, Rhonda L., Sierra Health Shares Drop 17% on News of Merger Plans with PhysicianCorp., Wall St. J., Nov. 5, 1996, at B8Google Scholar (stating that Sierra regarded the merger as an opportunity toexpand into other markets). A further example is the recent assumption of the membership of the insolvent Sunrise Healthcare Plan by HIP Plan of Florida, which is “affiliated with the l.l million-member HIP system.” HIP of Florida Assumes Failed Plan’s Membership, Bestwire, Sept. 5, 1997, available in LEXIS, News Library, Txtnws File. “Sunrise was founded in 1995 and offered HMO coverage to nearly 16,000 members in Dade, Broward and Palm Beach counties.” id. The merger was accomplished under Florida’s HMO Consumer Assistance Program. See id.
4 See Pear, Robert, H.M.O.’s Using Federal Law to Defeat Malpractice Suits, N.Y. Times, Nov. 17, 1996, at A24Google Scholar (noting in the context of ERISA’s impact on HMO malpractice that “[f]ederal andstate laws have not kept pace with changes in the health care industry, as huge corporations buy uphospitals, nursing homes and physician groups and gain powerful influence over the quality ofcare”).
5 See ICleiman, Mitchell A., Preparing for Capitated Hospital Services, Healthcare Fin.mgmt., July 1996, at 40,Google Scholar 40 (noting the trend of competition “among HMOs . . . particularly in areaswhere large regional or national HMOs are trying to establish a presence in new markets”).
6 See, e.g., Conn. HMO Loses Members, Shuts Doors After 25 Years, Managed Care Wk., Mar. 11, 1996, at 4,Google Scholar 4 (asserting that even within the State of Connecticut, “Staff-model HMOs arehaving a hard time competing with IPA-model HMOs that allow enrollees to see doctors in their ownoffices and that allow a wider choice of providers”); Justice, FBI and Consumer Groups TargetManaged Care, Bus. & Health, Jan. 1996, at 9,Google Scholar 9 (stating that “[t]he National Association of Insurance Commissioners warned at its winter meeting that many Medicaid managed care plans nationwide are at increased risk of insolvency”); Rich, Spencer, Senators Attack Clinton’s Medicare Proposal, Austin Am.-statesman, Jan. 24, 1997, at A2,Google Scholar available in 1997 WL 2810553 (noting Oregon Senator Ron Wyden’s comment that “[c]utting back the amount of money HMOs receive forproviding treatment to Medicare patients . . . could put some HMOs out of business”).
7 See Q&A with Alfred Gross, State Insurance Commissioner, Virginian-pilot, Aug. 25, 1996, at Dl,Google Scholar available in LEXIS, News Library, Busdtl File [hereinafter Alfred Gross] (“One has to remember that we have a free market, and whenever you have a free market, you have insolvencies.”);see also Huff, Charlotte, Small HMO Ailing, Las Vegas Rev.-j., Oct. 13, 1996, at lF,Google Scholar available in1996 WL 2351229 (noting that “Silmo Healthcare Services, which filed for bankruptcy Sept. 25, waslicensed in September 1995 and is one of the smallest HMOs in the state”).
8 See Federal Insurance Solvency: Hearings on H.R. 1290 Before the Subcomm. on Commerce,Consumer Protection, and Competitiveness of the Comm. on Energy and Commerce, 103d Cong. 7(1993) [hereinafter Federal Solvency Hearings]; Federal Solvency Bill Introduced by Dingell, Mealey’s Litig. Rep.: Ins. Insolvency, Mar. 17, 1993, at 19,Google Scholar 19 (describing the proposed bill asseeking to establish “national standards”).
9 See Howard, Jay M., The Aftermath of Insurance Insolvency: Considerations for Providers, 4 Annals Health L. 87, 92 (1995)Google Scholar (stating that “[t]he ‘dual quality’ aspect of certain contemporaryHMOs and insurance products, both reimbursing and arranging for care, creates a difficult situationfor courts and insurance commissioners confronted with an HMO facing bankruptcy”).
10 See Scott, Lisa, Colo. Sets Provider Network Rules, Mod. Healthcare, Oct. 14, 1996, at 34,34.Google Scholar
11 See infra note 76 and accompanying text.
12 See Noah, Barbara A., The Managed Care Dilemma: Can Theories of Tort Liability Adapt tothe Realities of Cost Containment?, 48 Mercer L. Rev. 1219, 1246 (1997).Google Scholar
13 See Louise Kertesz, Better Life/Health Results?: Best Sees Fewer Troubled Insurers in Wakeof Record Impairments in ′91, Bus. Ins., July 6, 1992, at 3, 3Google Scholar (noting, however, that the projections"clearly ... do not suggest that the industry is on the verge of a financial crisis equivalent to that ofthe savings and loan industry" (quoting A.M. Best Co., best’s insolvency study life/healthinsurers 1976-1991 (1991))).
14 See id.
15 See id.
16 See id.
17 id. at 27.
18 id.; see also Editorial, , The Challenge for Managed Care, N.Y. Times, Oct. 31, 1997, at A30Google Scholar (noting that, in addition to Oxford Health Plans, “many other H.M.O.’s are running into financialproblems. . . . The trend raises the question whether managed care’s best days are over”).
19 See Howard, supra note 9, at 88.
20 See id.
21 See Alfred Gross, supra note 7, at Dl.
22 See Investment Figures of the Week, Bus. Wk., Oct. 28, 1996, at 201, 201.Google Scholar
23 See Kertesz, supra note 13, at 5.
24 See, e.g., A.M. BEST CO., Best’s Managed Care Reports: HMO 42 (1996).Google Scholar The Best report contains company overviews of 67 HMOs for which complete data is available. See id. Bestreports on a number of the HMO companies that may be seen as indicative of the nationalizationtrend. Humana Inc. is a good example of the nationalization of the expanding HMO entity:
Humana Inc., a Delaware corporation organized in 1961, is a leading provider of managed care services. With 3.7 million members, Humana operates health maintenance organizations (HMOs) in 14 states and the District of Columbia. Major markets include Florida, Illinois, and Kentucky, and [sic] the 1995 acquisition of EMPHESYS Financial Group and its subsidiary Employers Health Insurance Company, Wisconsin became a considerably stronger market. In addition to Employers Health, Humana owns four life insurance companies, which underwrite preferred provider organization (PPO) plans and Medicare supplement business, and several specialty companies ....
id. In addition, Best reports that FHP International, Inc. “maintains a good position as one of the largest HMO groups in the country with over 1.9 million members in 11 states and Guam.” id. at 5.
Healthsource, Inc., Hooksett, New Hampshire owns and operates seven HMOs in Indiana, Maine, New Hampshire, (Syracuse) New York, North Carolina, South Carolina, Tennessee, and with its 1996 acquisition, entered Massachusetts. Through joint ventures it owns HMOs and operates in Arkansas (70% ownership), Georgia (95%), New York City (15%), and north-central Texas (70%). HMO operations are also being expanded in Ohio, Kentucky, and Connecticut....
id. at 34. Best also describes Maxicare Health Plans, Inc. as a “multi-state managed care company that operates seven Federally licensed HMOs in California, Indiana, Illinois, Louisiana, North Carolina, South Carolina, and Wisconsin.” id. at 64. Another leading HMO, “Pacificare Health Systems, Inc. (PHS), a California based health care holding company, owns and operates six independent health maintenance organizations located in California, Florida, Oklahoma, Oregon, Texas, and Washington.” id. at 73. “U.S. Healthcare, Inc. (USHC) is a managed care leader with over 2 million insured HMO members. . . . Membership is concentrated in the New York and Philadelphia metropolitan areas as well as the state of New Jersey. However, its 10 licensed HMOs operate in 13 contiguous states from Georgia to New Hampshire.” id. at 99. Also, Best notes that
United Healthcare Corporation is a national leader in health care management, currently ranked as the second largest consolidated HMO in the country with almost 4 million HMO members. . .. Major markets served by the owned plans include Chicago, St. Louis, Columbus, Milwaukee, and several areas of Florida and Alabama. Recent acquisitions include PHP, Inc., the 132,000 member North Carolina HMO which was formerly managed by United HealthCare, and Health Wise of America, Inc., serving 154,000 members in Maryland, Kentucky, Tennessee and Arkansas.
id. at 116. In addition to the nationalization trend, HMOs are subject to structural pressures such as the competition between staff-model plans and independent-practice-association model plans. See Conn. HMO Loses Members, Shuts Doors After 25 Years, supra note 6, at 4 (noting that “[t]he staff-model HMO . . . began to founder as more IPA-model plans took root”).
25 See, e.g., Findlay, Steven, When Not-for-Profits Decide to Make a Buck, Bus. & Health, Mar. 1996, at 38, 42Google Scholar (discussing a study which found that between 1985 and 1992 over 40% of allHMO startups went bankrupt).
26 See Overbay, Allison & Hall, Mark, Insurance Regulation of Providers That Bear Risk, 22 Am. J.L. & Med. 361, 362 (1996) (stating that “[s]tates are now beginning to realize that RBPGs[risk-bearing provider groups] pose a significant potential for financial insolvency that could leavesubscribers without a source of medical care”).Google ScholarPubMed
27 See Schrage, supra note 1, at D2 (suggesting several institutional protections for consumersthat drive the industry toward insolvency and creating severe risks for consumers).
But won't competition slow health-care price increases? ... If it can't be bought that way, well, perhaps bankruptcy would be a useful tactic to lower operating costs. . . . [And, w]ho is going to be called upon to provide a safety net for all those middle-class voters left with minimal health-care coverage after faithfully paying their premiums?
Then again, HMOs could make more rigorous efforts to screen out the potentially more expensive enrollees from their plans. But that might set the stage for the sort of class-action lawsuit (think asbestos, IUDs) that could plunge an HMO into bankruptcy. What’s more, those suits could force HMOs to accept those undesirables as part of the settlement and thus create the very problems the HMOs were trying to avoid.
Similarly, HMOs could cut costs by cutting their quality of care. . . . Of course, if the courts find that plans have fallen below a certain standard of care, those lawsuits will cost HMOs dearly too.
id.
28 See Overbay & Hall, supra note 26, at 363 (stating that “financial risk can lead to financialruin, which could result in subscribers being left without a source of treatment”); see also AlfredGross, supra note 7, at Dl (stating that “What I remember most is the impact that the insolvency hadon policyholders. There was no safety net at all because Commonwealth [Health Alliance] wasn't atrue insurance company. Suddenly you had individuals with thousands of dollars in medical billsthat wouldn't be paid”); Schrage, supra note 1, at D2 (concluding that “with health care, the stakes[of financial ruin] are even higher [than with the S&L crisis]”).
29 See Akula, John L., Insolvency Risk in Health Carriers: Innovation, Competition, and PublicProtection, Health Aff., Jan./Feb. 1997, at 9, 25.Google Scholar
30 See Insolvencies/Guaranty Funds, Ins. Issues Update (Insurance Information Institute, NewYork, N.Y.), Oct. 1996, at 1, 1 (stating that “[t]he regulation of insurance company solvency is afunction of the state”).Google Scholar
31 See Federal Solvency Hearings, supra note 8, at 316-17 (noting that “[t]he insurance commissioner of each state is charged with the responsibility of examining and detecting solvency issues”); Adam Hodkin, Note, Insurer Insolvency: Problems & Solutions, 20 Hofstra L. Rev. 727,745(1992).Google Scholar
32 See Federal Solvency Hearings, supra note 8, at 316.
33 See id. at 1; see also Hodkin, supra note 31, at 741-42 (stating how the National Associationof Insurance Commissioners works with states to gather data on the financial health of insurancecompanies).
34 See Hodkin, supra note 31, at 742; Insolvencies/Guaranty Funds, supra note 30, at 9.
35 See Federal Solvency Hearings, supra note 8, at 316.
36 See Wishful Thinking’ Report Critical of State Insolvency Regulation, Mealey’s Litig.Rep.: Ins. Insolvency, Nov. 16, 1994, at 11, 11Google Scholar [hereinafter Wishful Thinking Report]. Both themajority and the minority opinions agree that “state regulators’ failure to anticipate and stopfraudulent behavior before it occurs is an ongoing problem.” id. The proponents of the bill go on tostate that “actual insolvencies ... are typically characterized by a flagrant disregard for insurancelaws, sound business standards, and honest reporting to regulators.” id.
37 Federal Solvency Hearings, supra note 8, at 316.
38 See id.
39 See id. at 316-17.
40 See Hodkin, supra note 31, at 746.
41 See Federal Solvency Hearings, supra note 8, at 317 n.8 (defining rehabilitation as the"preservation, whenever possible, of the business of an insurance company threatened with insolvency" (citing People ex. rel. Schacht v. Main Ins. Co., 448 N.E.2d 950, 952 (111. App. Ct. 1983))and stating that liquidation “precludes the transaction of further business by the company and resultsin a final distribution of its assets”); Feinstein, Marc, Plan Set-Up Guides States in Regulating HMOsas Insurance Companies or Providers of Care, Managed Care L. Outlook, July 1994, at 8, 9Google Scholar (“The [state] proceeding typically takes the form of a liquidation or a rehabilitation, depending onthe possibility of restoring the HMO to profitability. In many states, however, a liquidation is unavoidable because a declaration of insolvency requires revocation of an HMO’s operating license.”).
42 See Hodkin, supra note 31, at 745-46 (comparing the powers of the receiver in an insuranceproceeding to those of the conservator of a trust).
43 See Federal Solvency Hearings, supra note 8, at 317.
44 See, e.g., Federal Solvency Hearings, supra note 8, at 319. See also State HMO Laws,Regulations Don't Fully Protect Members, Managed Care Wk. (Managed Care Stats & Facts), Jan. 8, 1996, at 1, 1Google Scholar [hereinafter State HMO Laws], which states:
Most states don't provide adequate protections for HMO enrollees, particularly in the areas of access, quality of care, grievance procedures, quality-of-care data, and HMO data dissemination, according to a new study of state HMO laws and regulations by the Los Angeles-based Center for Health Care Rights.
Among the deficiencies in state laws identified: . . . Only nine states explicitly require HMOs to buy reinsurance in case of insolvency.
45 Federal Solvency Hearings, supra note 8, at 319.
46 See Wishful Thinking Report, supra note 36, at 11.
47 See Insolvencies/Guaranty Funds, supra note 30, at 1.
48 See Hodkin, supra note 31, at 742.
49 See Federal Solvency Hearings, supra note 8, at 319.
50 See id. at 321.
51 See id.
52 Wishful Thinking Report, supra note 36, at 12 (citing report issued by House Subcommitteeon Oversight and Investigations).
53 See Federal Solvency Hearings, supra note 8, at 322; see also Wishful Thinking Report, supra note 36, at 12 (reporting that granting unlicensed foreign companies ready access to domesticmarkets produces substantial difficulties for American regulators).
54 See Federal Solvency Hearings, supra note 8, at 322; see also HMO Regulation Consolidated in Insurance Department, Austin Am.-Statesman, Aug. 16, 1996, at D2,Google Scholar available in 1996 WL 3440937 (discussing the change in state regulatory structure regarding HMOs stating that"[r]egulatory control of the state’s health maintenance organizations will rest entirely with the TexasDepartment of Insurance under plans to cease sharing consumer complaints with the Texas HealthDepartment"; this modification served to correct the previous structure’s “inadequate, confusing andoverlapping" responsibility); New Hampshire HMO Kills Deal, Won't Sell to Harvard Pilgrim, Managed Care Wk., Feb. 5, 1996, at 1, 4Google Scholar (HMO merger canceled because New Hampshire Insurance Department sought to impose further restrictions on Harvard Pilgrim’s operations there beyondwhat are required in Massachusetts or with respect to other HMOs in New Hampshire).
55 See Hodkin, supra note 31, at 744 (footnotes omitted), which states: In some states, assessments are recouped by applying a surcharge to policies, and in others, by raising the premium taxes paid by policy holders. In addition, the funds have limitations: not all states cover all types of insurance, and some states have ceilings limiting any single guaranty fund payout. The result is that the same insurer’s policy holders, if located in different states, may be treated very differently in the event of an insolvency.
56 Wishful Thinking Report, supra note 36, at 12 (quoting Rep. John D. Dingell, Chairman,House Subcommittee on Oversight and Investigations).
57 See Queenan, James F. Jr., Eligibility & Bad Faith Filings, in Chapter 11 Theory Andpractice: A Guide To Reorganization 6:1, 6:11 (Queenan, James F. Jr. et al. eds., 1994)Google Scholar (notingthat “[i]n more recent years the classification of [HMOs] has kept the courts busy. If the debtorHMO assumes the risk of paying the medical expenses of its members, the court will invariably holdit is an ineligible insurance company”).
58 Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 109(b)(2), 92 Stat. 2549, 2557 (codified as amended at 11 U.S.C. §§ 101-1330 (1994)). For a recent example, see Ga. Federal JudgeDeclines to Stay Pending Appeal, Ruling HMO Is Ineligible for Bankruptcy Protection, Mealey’s Litig. Rep.: Ins. Insolvency, July 16, 1997,Google Scholar available in LEXIS, Insure Library, Mealey File (discussing bankruptcy court decision holding HMO to be a “Domestic Insurance Company" and therefore ineligible for bankruptcy protection). In comparing the state procedure to adjudication underthe Bankruptcy Code, the Master Health Plan court noted:
“I personally believe the Bankruptcy Court, armed and engined for the purpose, could manage the rehabilitation process more effectively,” the judge held. “However, this matter cannot turn upon speculation as to the best procedure. While the Debtor would vastly prefer to be thrown into the ‘briarpatch’ of Chapter 11 rather than onto the sidelines during a state receivership, federalism demands deference to state law.”
id. (quoting In re Master Health Plan, Inc., No. MC197-021 (S.D. Ga. June 18, 1997)).
59 See Hodkin, supra note 31, at 728-29.
60 See id. at 730-31.
61 See id. at 730.
62 See Feinstein, Marc, Case Law Mixed on How to Assess HMOs’ Eligibility for Federal Bankruptcy Protection, Managed Care L. Outlook, Aug. 15, 1994,Google Scholar available in 1994 WL 2617524.The specificity with which Congress drafted the § 109(b) exclusions might suggest an intention toinclude any entity not specifically excluded. See id. Moreover, Congress cannot claim ignorance ofthe nature of an HMO which might lead to definitional problems, having passed the Health Maintenance Organization Act of 1973, 42 U.S.C. §§ 300e to 300e-17 (1994). See id.
63 See id.
64 id.
65 See Patrick Collins, Note, HMO Eligibility for Bankruptcy: The Case for Federal Definitionsof 109(b)(2) Entities, 2 Am. Bankr. Inst. L. Rev. 425, 426-27 (1994).Google Scholar
66 See id. at 428-39 (describing the practical workings of each test in some detail); Howard,supra note 9, at 110-15 (same).
67 See In re Estate of Medcare HMO, 998 F.2d 436, 442 (7th Cir. 1993); see also Collins, supranote 65, at 438 (asserting that the state classification test is the exclusive test for § 109(b)(2) definition).
68 See Medcare, 998 F.2d at 446; Collins, supra note 65, at 427.
69 id. at 438.
70 90 B.R. 274, 275 (E.D. Mich. 1985).
71 See id. at 276.
72 See id. at 277.
73 101 B.R. 636, 644-45 (Bankr. CD. Cal. 1989).
74 id. at 643.
75 See id. at 644.
76 See Collins, supra note 65, at 426-27 (citing cases). But see Reed, Vita, Las Vegas HealthCare Company Files for Chapter 11, Las Vegas Bus. Press, Oct. 7, 1996, at 3,Google Scholar available in 1996WL 8878688 (noting that “[t]he corporation [Silmo Management Corp., the owner of one of Nevada’s newer HMOs] has also filed for Chapter 11 reorganization in U.S. Bankruptcy Court”); seealso Huff, supra note 7 (stating that “Silmo Healthcare Services, which filed for bankruptcy Sept.25, was licensed in September 1995 and is one of the smallest HMOs in the state.”). However, subsequent to the Chapter 11 filing, Silmo Healthcare “was ordered into liquidation on Feb. 5" and"Deputy Attorney General Jim Smith said the state halted the bankruptcy action in January andplaced Silmo into receivership.” Nevada HMO Placed into Liquidation, Mealey’s Litig. Rep.: Ins.Insolvency, Feb. 19, 1997Google Scholar, available in LEXIS, Insure Library, Mealey File. Thus, although nocase law has been published as of the date of this Note, it appears that the bankruptcy court has followed the trend noted above and dismissed the case, leaving resolution of the insolvency to the state.
77 See supra notes 9-10 and accompanying text; see also Resnik, Colette B., Comment, Maxi-care as a Guide for Health Maintenance Organizations (HMO) in Bankruptcy, 8 Bankr. Devs. J. 271, 287 (1991)Google Scholar (stating that “presently, the dispute surrounding the classification of HMOs—ascorporations or insurers—has left unanswered the question of how HMO bankruptcies will be handled in the future”).
78 See generally Howard, supra note 9, at 89-93 (describing different types of HMOs and thelegal issues confronted when an HMO becomes insolvent).
79 See. e.g., Overbay & Hall, supra note 26, at 363 (applying a similar analysis to providergroups who accept risk under capitated payment systems to consider whether such groups would becovered by state insurance insolvency statutes).
80 See Howard, supra note 9, at 91-92.
81 See infra note 136 and accompanying text.
82 See Collins, supra note 65, at 431.
83 See 11 U.S.C. § 507(a) (1994).
84 See Collins, supra note 65, at 431.
85 See Feinstein, supra note 62.
86 Collins, supra note 65, at 447.
87 Pub. L. No. 93-222, 87 Stat. 931 (1973) (codified as amended at 42 U.S.C. §§ 300e to 300e-17(1994)).
88 See Howard, supra note 9, at 93.
89 42 U.S.C. § 300e(c)(1)(i).
90 id. § 300e(c)(1)(ii).
91 See id. § 300e-17(a).
92 See In re Estate of Medcare HMO, 998 F.2d 436, 440 (7th Cir. 1993) (setting forth and rejecting the argument that because Congress amended § 109 after the enactment of § 300e, Congresswas aware of HMOs and thus chose not to exclude them specifically); Feinstein, supra note 62(same).
93 See Howard, supra note 9, at 93-94.
94 See id. at 95 (noting that “[r]egulation by the federal government over federally qualifiedHMOs conflicts with the regulation of insurers, which is nearly the exclusive jurisdiction of thestates”).
95 See id.
96 See id.
97 See, e.g., infra note 199 and accompanying text (discussing concerns over the possibilitythat the Federal Insurance Solvency Act of 1993 would create a “costly dual regulatory system" thatwould ultimately do more harm than good for both insurance regulators and consumers).
98 See, e.g., Federal Solvency Hearings, supra note 8, at 392-93 (statement of Steven T. Foster,President, National Association of Insurance Commissioners); infra notes 199-202 and accompanying text.
99 See generally Federal Solvency Hearings, supra note 8 (testimony of numerous witnesses forH.R. 1290 relating to adequacy of the current insurance insolvency system).
100 See, e.g., id. (noting testimony of several witnesses with different views on the federal government’s role in changing the insurance system).
101 See supra notes 44-56 and accompanying text.
102 See Howard, supra note 9, at 95. See generally Health Maintenance Org. Model Act§§ 1-34 (1995), reprinted in 2 NIARS Corp., National Ass'n of Ins. Comm'rs, Official N.A.I.C.Model Laws, regulations and guidelines 430-1 (Thomas C. Billig & Del Sachwitz eds., 1995)[hereinafter N.A.I.C. Model Laws].
103 See Howard, Lisa S., NAIC Advisers Call for HMO Insolvency Guards, Nat'l Underwriter: Life & Health/Fin. Services Edition, July 4, 1988, at 5, 5Google Scholar (stating that “[t]he best protection for enrollees in health maintenance organizations is through insolvency prevention ratherthan through guaranty association coverage" and that ‘“the most important HMO regulatory task isto prevent insolvencies from occurring’” (quoting an NAIC advisory committee report)).
104 See id. (discussing hold-harmless provisions, minimum net worth requirements, deposits tocover contractual liabilities, stronger reporting requirements and monitoring as desirable prophylactic insolvency protections).
105 See id.
106 id. (quoting the advisory committee report).
107 See id. (noting the existing limit had been $100,000).
108 See id.
109 See id.
110 See Howard, supra note 9, at 97. The NAIC Model Act governing the regulation of insolvent HMOs states that “a rehabilitation, liquidation or conservation of a health maintenance organization shall be deemed to be the rehabilitation, liquidation or conservation of an insurance company and shall be conducted under the supervision of the [commissioner] pursuant to the law governing the rehabilitation, liquidation or conservation of insurance companies.” Health Maintenance Org. model act § 21 (1995), reprinted in N.A.I.C. Model Laws, supra note 102, at 430-25. “This provision essentially labels the HMO a ‘domestic insurer’ for these purposes, thereby specifically preventing the HMO from seeking the protection of the Bankruptcy Code.” Howard, supra note 9, at 97.
111 See supra notes 44-56 and accompanying text.
112 See Federal Solvency Hearings, supra note 8, at 393 (statement of Foster).
113 id.
114 See id. at 398.
115 See id.
116 See id. at 399 (statement of David B. Simmons, Executive Director, National Association of Insurance Commissioners).
117 See id.
118 See Insolvencies/Guaranty Funds, supra note 30, at 4 (discussing proposal of the president of the National Conference of Insurance Legislators to make the state solvency procedures “more uniform through an interstate compact”); see also Federal Solvency Hearings, supra note 8, at 403 (“[C]ertainly I as one commissioner, think there is a lot of appeal in some of the concepts we have seen in regards to interstate compacts.”) (statement of Foster).
119 See Nebraska Ratifies Interstate Insurance Receivership Compact, Mealey’s Litig. Rep.: Ins. Insolvency, May 3, 1995, at 13, 13Google Scholar [hereinafter Nebraska Ratifies]. On April 19, 1995, Nebraska became the first state to ratify the compact. See id. The Nebraska bill requires a minimum of two states to ratify it before it becomes effective. See id. “The major purpose of LB 178 is to improve insurance solvency regulation on a multi-state basis without federal legislation.” id. (quoting Nebraska Sen. Chris Abboud). In 1995, California, Illinois, Nebraska and New Hampshire adopted the compact. See Semaya, Francine L. & Ballas, Haroula K., Current Trends in the Regulation of Reinsurance Insolvencies, in Reinsurance Law and Practice 63, 77 (PLI Litig. & Admin. Practice Course Handbook Series No. H-546, 1996)Google Scholar. Further, legislatures in Indiana, New York, Texas and Vermont have considered the Interstate Insurance Receivership Compact (IIRC). See Nebraska Ratifies, supra, at 13. The IIRC has been considered and/or is at various stages in the approval process in Wisconsin, Hawaii, Michigan and West Virginia. See Semaya & Ballas, supra, at 77.
120 Semaya & Ballas, supra note 119, at 77.
121 See Nebraska Ratifies, supra note 119, at 14.
122 See id.; see also Federal Solvency Hearings, supra note 8, at 403 (“We recognize in anysystem of 50 State guaranty funds there will be inherent inefficiencies. Perhaps that’s an area thatwould best be suited for interstate compacts.”) (statement of Foster).
123 See Nebraska Ratifies, supra note 119, at 14 (“Additionally, the commission would provideadvice and training to receivership personnel of compacting states and serve as a resource by maintaining a reference library.”).
124 See id.
125 See Extending the Consent of Congress to the Interstate Insurance Receivership Compact:Hearings on H.J. Res. 189 Before the Subcomm. on Commercial and Admin. Law of the House Judiciary Comm., 104th Cong. (1996), available in 1996 WL 10831026 (opening statement of GeorgeW. Gekas, Chairman).
126 Extending the Consent of Congress to the Interstate Insurance Receivership Compact: Hearings on H.J. Res. 189 Before the Subcomm. on Commercial and Admin. Law of the House Judiciary Comm., 104th Cong. (1996), available in 1996 WL 10831012 (testimony of Robert G. Lange).
127 See, e.g., States Should Stick Together on Interstate Receivership Compact, Nat'l Underwriter, Life & Health/Fin. Services Edition, July 21, 1997, at 44Google Scholar, 44.
In recent months, rather than visible support growing for a compact of states, the opposite has happened, with two states—California and New Hampshire—dropping out of the compact in its infancy, leaving just three participating states—Illinois, Michigan and Nebraska. This news would be unsettling enough, but what is worse is the fact that the same parochial state interests the compact was instituted to rise above appear to be at least partly behind the recent decision by one of its longest and most vocal supporters, New Hampshire, to abandon it.
id.
128 This determination would likely rest on the respective definitions of “HMO" and “insurancecompany" by the states.
129 See California Withdraws from Interstate Compact on Receiverships, Mealey’s Litig.Rep.: Ins. Insolvency, Dec. 2, 1996, at 15,Google Scholar 15 (noting that “efforts are being made across thecountry to convince potential member states to adopt uniform legislation”); see also Otis, L.H., California Exits Receiverships Compact, 32 Nat'l Underwriter Life & Health/Fin. Services Edition, Dec. 2, 1996, at 32, 32Google Scholar [hereinafter California Exits] (noting California’s withdrawal"could be a blow to the fledgling interstate insurance receivership compact”).
130 See Otis, L.H., N.H. Leaves Interstate Compact, Nat'l Underwriter Life & Health/Fin.Services Edition, July 21, 1997, at 29, 29.CrossRefGoogle Scholar
131 California Exits, supra note 129, at 32.
132 See Feinstein, supra note 41, at 8 (describing rulings on bankruptcy eligibility as “mixed”).
133 See Feinstein, supra note 62.
Ultimately, the legal treatment of failed HMOs may well be decided explicitly by Congress. . . . Any of a number of forces, including ever-growing line-drawing problems, might spur Congress to extend federal bankruptcy relief to all health care providers. But until and unless Congress specifically provides for such relief, the legal treatment of insolvent HMOs will remain an open question for the courts. id.
134 See Collins, supra note 65, at 443.
135 See id.
136 See In re Republic Trust & Savings Co., 59 B.R. 606, 611 (Bankr. N.D. Okla. 1986) (discussing the state classification test as problematic because “no State scheme could override Congress’s own intention as to who should be eligible for bankruptcy relief).
137 See, e.g., 11 U.S.C. § 365(c)(1)(A) (1994) (regulating in part a trustee’s ability to assign anexecutory contract or unexpired lease of a debtor).
138 See Collins, supra note 65, at 446.
Since there does not appear to be a precise set of criteria for identifying insurance companies and it is equally unclear whether HMOs fall under any generalized notion of insurance companies, the question of whether an HMO is an insurance company for the purposes of section 109(b)(2) must be determined with reference to the code and the manner in which it is generally construed. In other words, are the same concerns which prompted Congress to exclude insurance companies from bankruptcy relief present with HMOs? id.
139 See Feinstein, supra note 62 (noting that “the combination of a single law and proceedingpromotes stability and predictability”).
140 See Feinstein, supra note 41, at 9 (noting that “[i]n a Chapter 7 liquidation [the] primarygoal is equality of treatment among creditors”).
141 See Feinstein, supra note 62. “[C]ompared with state insolvency law, the Bankruptcy Codebetter maximizes the overall reorganization value available to creditors by enabling a debtor HMOto rid itself of high utilization accounts and to compel providers to remain in place.” id. Further,under Chapter 11, HMO management can stay in place, a fact which makes the Chapter 11 alternative attractive to management and creditors. See Feinstein, supra note 41, at 10.
142 See In re Estate of Medcare HMO, 998 F.2d 436, 447 (7th Cir. 1993) (noting the argumentbut striking it down).
143 See In re Family Health Services, Inc., 101 B.R. 636, 645 (Bankr. CD. Cal. 1989) (notingthat the Ninth Circuit Court of Appeals has held preferred treatment of one state’s resident creditorsto be impermissible under the Bankruptcy Act and concluding that “[c]learly, a global reorganizationof the entire Maxicare network under federal bankruptcy law is the preferred method of protectingall creditors and enrollees, nationwide”).
144 See 11 U.S.C. §§ 362, 506-507 (1994) (establishing provisions for automatic stay, determination of secured status and prioritization of expenses and claims).
145 See Resnik, supra note 77, at 283-84.
146 See Collins, supra note 65, at 447.
147 See Resnik, supra note 77, at 280-81.
[P]ostpetition services are accorded priority status as administrative expenses in the Code. Administrative expense priority ensured Maxicare’s providers that payment for services provided postpetition would receive preferential treatment. Section 507(a)(1) provides that “administrative expenses allowed" receive priority in the distribution of claims to the unsecured creditors. As unsecured creditors, the contract providers will have to “wait in line" for money already owed to them. However, the only class ahead of unsecured creditors with administrative expense priority are holders of secured claims, who do not constitute a significant portion of the HMO’s creditors.
id. (citing 11 U.S.C. §§ 503(b)(1)(A), 507-507(a)(1) (1988); Milt Freudenheim, Maxicare Health Seeks Bankruptcy Protection, N.Y. Times, Mar. 17, 1989, at D4).
148 See Resnik, supra note 77, at 286.
149 See id.
150 See id. at 287.
151 See, e.g., Kroger v. Owen Equipment & Erection Co., 558 F.2d 417, 423 (8th Cir. 1977)(noting, in the Article III context, that “federal dockets are so overcrowded that the federal courtsshould not reach out for state law based litigation”); In re Small, 38 B.R. 143, 147 (Bankr. D. Md.1984) (noting the existence of overcrowded bankruptcy dockets); Siegel, Judith L., Reforming RICO:Delegating Authority to Federal Regulators in Bank Fraud Cases, 10 Ann. Rev. Banking L. 603,627 (1991) (discussing the Racketeer Influenced and Corrupt Organizations Act (RICO) opponents'view of overcrowded federal dockets as a reason not to apply RICO to banks).Google Scholar
152 See, e.g., Holland, Gayle L., Health Maintenance Organizations: Member Physicians Assuming the Risk of Loss Under State and Federal Bankruptcy Laws, 15 J. Legal Med. 445, 470 (1994) (noting that “federal judicial economy will be served by allowing states to regulate the liquidation and reorganization of HMOs incorporated under their laws”).CrossRefGoogle ScholarPubMed
153 See Collins, supra note 65, at 445 (noting “all arrangements in which the consideration to be provided by one party is contingent on some future event transfer risk to a certain extent”).
154 See id.
155 H.R. 1290, 103d Cong. § 1(a) (1993).
156 Federal Solvency Bill Introduced by Dingell, supra note 8, at 19.
157 See H.R. 1290, § 101.
158 id. § 102(1).
159 id. § 102(3).
160 See id. § 102(2).
161 See id. § 102(5)-(6).
162 id. § 102(8).
163 See id. § 102(9)-(11).
164 id.§§ 501-502,504(a).
165 See id. § 102(12).
166 See id. §521:
167 See id. § 522.
168 See id. § 207(a).
169 See id. § 203(a)(1).
170 See id. § 203(a)(1)(A).
171 See id. § 203(a)(1)(B).
172 See id. § 203(a)(1)(C).
173 See id. § 203(a)(1)(E).
174 See id. § 203(a)(1)(K).
175 See id. § 203(a)(1)(M).
176 See id. § 203(a)(1)(O).
177 See id. § 203(a)(1)(Q).
178 See id. § 207(a)(1).
179 See id. § 207(a)(6).
180 See id. § 207(a)(2).
181 See id. §§ 720-729 (explaining the rehabilitation and liquidation procedural standards).
182 See id. § 702(b).
183 See id. § 701(a)(1).
184 See id. § 701(c).
185 See id. § 707(a).
186 See id. §706.
187 See id. §743(3).
188 See Federal Solvency Hearings, supra note 8, at 1.
Although State regulation of insurance has served this country well for over 100 years, the industry has become extremely complex during the past 20 years, going beyond its original role of providing a mechanism for spreading the risk of financial loss. Recently, we have seen many highly-visible and costly insolvencies that reflected a failure of State regulation to deal with problems in a timely fashion. State regulators freely admitted that, until very recently, solvency regulation received little attention. id. at 1-2 (statement of Cardiss Collins, Chairwoman for the Subcommittee on Commerce, Consumer Protection and Competitiveness).
189 See Federal Solvency Bill Introduced by Dingell, supra note 8, at 19.
190 See H.R. 1290, § 502.
191 See supra note 187 and accompanying text.
192 See Federal Solvency Hearings, supra note 8, at 263.
193 see id. at 325.
194 See id. at 324-25.
195 See Hodkin, supra note 31, at 755. In discussing a similar bill, S. 1644, 102d Cong. (1991),which also would establish a federal insurance solvency system, the author concludes that “passageof the bill would strengthen the insurance regulation industry as well as expedite insolvency proceedings should an insurer fail.” id.
196 See Federal Solvency Hearings, supra note 8, at 325-26.
197 See id. at 260 (statement of Dingell).
198 See H.R. 1290, 103d Cong. §§ 301-409 (1993) (outlining procedures for federal certification that provide reinsurance and enforcement standards).
199 Federal Solvency Hearings, supra note 8, at 392-93 (statement of Foster).
[W]hile this bill may be loaded with good intentions, it does little more than add an unnecessary layer of Federal bureaucracy, we believe, that will do perhaps more harmthan good to insurance consumers, particularly given the extent to which the Stateswould be preempted from doing those things they have been doing for the past fewdecades.
We have concerns that H.R. 1290 will in fact create a costly dual regulatory system that could perhaps harm rather than help both insurance regulation and consumers. This bill proposes to replace State oversight in some areas, establish joint regulation in still others, and leave existing State responsibilities completely intact in the remainder.
id. at 392-93. The Bill establishes a system that “certainly ... the average consumer will have a difficult time understanding.” id. at 393.
200 See, e.g., id. at 393-94 (noting the “built-in advantages" of state regulation).
201 See id. at 341.
202 See id.
203 See Howard, supra note 103, at 5.
204 See H.R. 1290, 103d Cong. § 801(18)(A).
205 id. § 801(18)(B).
206 See Federal Solvency Hearings, supra note 8, at 1.
207 See Insolvencies/Guaranty Funds, supra note 30, at 3.
Although the Republican-controlled 104th Congress has shown little interest in taking up Rep. Dingell’s deregulation proposal and is unlikely to do so at this point, early in the session Republicans on the Commerce Committee indicated they might pursue changes in three areas: a federal grant of authority to register non-U.S. insurers; an interstate compact to improve coordination among states; and setting federal minimum solvency standards which would be overseen by the U.S. Commerce Department.
id.
208 In the most recent expression of Congress’s intent, the 105th Cong, reaffirmed its intent to regulate HMOs at the state level. See Balanced Budget Act of 1997, Pub. L. No. 105-33, sec. 4706, § 1903(m)(1), 111 Stat. 251, 501 (to be codified at 42 U.S.C. § 1396b(m)(1)(A)(ii)) (providing that HMOs must meet state insolvency standards or be state licensed or certified as risk-bearing entities in order to participate in Medicare).