Center for Studying Health System Change

Bankruptcies Prompt Questions of State Oversight
Northern New Jersey

Almost 100,000 enrollees, including 22,000 Medicaid beneficiaries, had to find new health coverage. While the state required other local plans to extend coverage at their existing rates to former HIP members, these rates were typically higher than HIP members were used to paying.

New Jersey officials took steps to keep HIP’s clinics open and to ease the transition of displaced subscribers to new plans, but critics charged that the state had not adequately scrutinized HIP’s sale to the Reston, Va.-based PHP Healthcare Corp., which was also financially troubled, and that if it had, warning signs of HIP’s serious financial difficulties could have been detected. HIP sold its physician practices and clinics-its full physician capacity-because it was close to foreclosure and badly needed a cash infusion.

Since the deal involved the sale of the practices and clinics but not the health plan-with HIP continuing to hold the HMO license and subcontracting back to PHP for care-state officials did not subject the transaction to public hearings or the intensive scrutiny typical of insurance company acquisitions. This arrangement as problematic on other fronts. HIP maintained responsibility for ensuring that care would be delivered, but was dependent on a single organization to deliver that care. New Jersey retained regulatory authority over the insuring entity (HIP), but not over the company that was delegated financial risk for the delivery of care.

Finally, while there were hopes that the money from the sale would help HIP get back on its feet financially, HIP New Jersey first moved to pay off a $40 million loan to its affiliate company, HIP of Greater New York, and then failed to stabilize.

HIP’s story raises a set of questions faced by state officials across the country:

• How rigorously should governments monitor the delegation of financial risk for delivery of health care services? How can states adequately scrutinize entities that take on financial responsibility for significant numbers of covered lives, particularly out-of-state organizations?
  
  
• How should states ensure that organizations, faced with a financial crisis, do not distribute their remaining cash to out-of-state parent corporations or favored creditors jeopardizing their ability to pay providers for care?
  
  
• How should states ensure continuity of care for patients when there is a bankruptcy?

States have taken extensive steps to regulate access to care through patient protection acts, with provisions such as requiring plans to offer external appeals procedures and easier access to emergency rooms. But most states have not kept pace with how the industry is evolving with respect to changing how they oversee financial solvency of plans and other risk-bearing entities.

Government officials in California have put some mechanisms in place to oversee the financial stability of provider organizations that accept comprehensive "downstream" risk from insurance companies. The issue is particularly pressing in this state, where physician organizations, including PPMCs, negotiate capitated contracts with HMOs for millions of covered lives. California obligates physician organizations that wish to accept global capitation (financial risk for the full range of services) to obtain a special limited plan license.

Under its licensing authority, the state stepped in to intervene when MedPartners, a national PPMC, decided to get out of the physician practice management business and tried to divest itself of all related subsidiaries, including its California-based, risk-bearing entity, MedPartners Provider Network (MPN). Before the divestiture was complete, the state’s Department of Corporations (DOC) determined that MPN was not a fiscally sound operation, and seized control of it to help ensure that doctors and hospitals were paid and patient care was uninterrupted. DOC had been criticized for not intervening early enough when another large national physician practice management firm went bankrupt, and it wanted to help ensure that MPN’s remaining assets went to pay approximately $73 million in outstanding provider payments.

Given these events in New Jersey and California, HSC researchers have identified regulating risk-bearing entities, particularly those involving multiple organizations in different states, as an emerging policy issue. Various options to oversee these entities are being considered by New Jersey and California legislators. One proposal under consideration is to start a solvency fund that would be financed with a levy on plans to provide a cushion in the case of bankruptcy; another is to limit plans from passing on pharmacy risk for costs to providers.

Health policy analysts have warned for many years that the efficiencies garnered from a market-based health system would be tempered by the fact that companies flounder and sometimes perish. In the health industry, the stability of health services and the continuity of care to communities depend on how those failures are supervised.

"States have had difficulty overseeing the financial solvency of rapidly evolving risk-bearing entities. Recent bankruptcies have driven this issue home for regulators as well as for providers and consumers who have experienced disruption firsthand."