Material differences exist in HMO vs. Insurer regulations

May 1, 2005

In the early-to-mid 1990s, employers began choosing HMO products over PPOs and traditional health insurance plans because of cost concerns.

In the early-to-mid 1990s, employers began choosing HMO products over PPOs and traditional health insurance plans because of cost concerns. Beginning in 1999, when the gap in cost narrowed, they began to switch back to PPO plans to allow for more choice in providers. From data pertaining to January 2005 renewals, it now appears that the exodus from HMO plans has leveled off.

Let's revisit the major financial and regulatory distinctions between the operations of HMOs and health insurers. First, health insurers are normally licensed to write multiple lines of business, including life insurance and annuities, as well as accident and health insurance; HMOs generally are limited to major medical coverage. While insurance companies and HMOs are usually licensed by state insurance departments, some states still have separate licensing agencies for HMOs. Most health insurers are licensed to do business, and operate, in many states; whereas, HMOs generally are only licensed in their state of incorporation and do not operate in other states.

COMPREHENSIVE REGULATIONS All states have comprehensive regulations that establish requirements for commercial HMO and health insurance products. These requirements fall into the categories of (a) mandated benefits and mandated offers; (b) contract specifications such as mandatory grace periods; and (c) requirements pertaining to guaranteed issuance and guaranteed renewability. Most issuance and renewal guarantees apply equally to HMOs and health insurers. However, many states have a longer list of mandated benefits/offers that apply to insurance companies than apply to HMOs. Most states require HMOs to accurately define their service areas; whereas, insurance companies are generally not subject to the same requirements. Many states prohibit or limit an insurance company's ability to establish closed panel networks; consequently, these states place restrictions on the degree of economic incentive an insurer may offer to its insureds to steer them toward network providers.

Most states have statutes or regulations governing authorization systems and concurrent and retrospective reviews of medical necessity. Many of these statutes were initially made only applicable to HMOs; now, they are generally applicable to any health benefit plan that utilizes managed care cost containment mechanisms. Most states also have requirements for internal complaint and appeal procedures, and many states now require external appeal procedures through independent review organizations. Requirements for complaint and appeal procedures are not as well developed for insurance companies.

Policyholders of failed insurance companies are normally protected under state guaranty funds. These funds cover unpaid claims-up to a certain limit-of insolvent insurance companies. As a general rule, HMOs are not covered by state guaranty fund protection.

The provider reimbursement methods utilized by HMOs include (a) capitated or risk-sharing arrangements, (b) discounted fee-for-service arrangements, (c) hospital and facility per diems, (d) hospital DRG arrangements, and (e) arrangements involving withholds and risk/bonus arrangements. Insurance companies traditionally have used discounted fee-for-service arrangements and hospital per diems. Many states do not allow insurance companies to capitate providers.

Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP, and is located in the firm's Austin, Texas, office.