Negligent Delegation: Implications for Capitation

R. Myles Riner , MD, FACEP

Partner Emeritus

Published March 18, 2014

Recently, an emergency physician group in California successfully appealed a prior Superior Court ruling and won an important case that held Health Net responsible for payment when the plan's delegated payer, La Vida Medical Group, went bankrupt, leaving the out-of-network claims of the emergency physicians unpaid.

The principle at issue was negligent delegation, the failure of the health plan to properly oversee the financial viability of the IPA/medical group to which the plan had made capitation payments and to which the plan had delegated the responsibility for paying these claims.

Prior to this ruling, health plans claimed that once they had contractually delegated these responsibilities to the risk-bearing organization (RBO) and paid the RBO through a capitation arrangement to cover the professional services rendered to the plan's assigned enrollees, the plan had washed its hands of any further responsibility for the services that were provided to these assigned enrollees under the capitation agreement.

In reversing the prior court's decision, the Court of Appeal in Centinela Freeman Emergency Medical Associates v. Health Net of California held that:

"… where (1) a physician is obligated by statute to provide emergency care to a patient who is enrolled in both an HMO and an IPA with whom the physician has no contractual relationship; (2) the physician provides emergency care to the patient; (3) the HMO, which has a statutory duty to reimburse the physician, chose to delegate that duty to an IPA it knew, or had reason to know, would be unable to fulfill the delegated obligation; and (4) the IPA fails to make the necessary reimbursement, the resulting loss should be borne by the HMO and not the physician."

Although the delegated model for capitation in California is unique in some respects (under the Knox-Keene law that established the framework for HMOs in the state), the court's decision may have significant implications for many capitation arrangements around the country.

Capitation has long been touted as a means of controlling healthcare costs by putting physicians at risk for the cost of care. From my perspective, it is simply a transfer of liability from insurers to physicians, and in some ways is just a loophole allowing health insurance companies to collect premiums as insurers, transfer the insurance risk to physicians and essentially act as highly overpaid brokers.

What this ruling did was to tell the health plans: "Sorry, you can't run away entirely from your obligation as insurers just because you delegate your responsibilities to another entity."

In fact, Knox-Keene "imposes specific requirements on any contract between an HMO and an independent practice association (IPA), including a contractual provision requiring the IPA to provide regular financial information to the HMO to assist the [HMO] in maintaining the financial viability of its arrangements for the provision of health care services." And when an HMO's contract with its IPA requires the IPA to pay claims, regulations require the IPA to submit to the plan a quarterly claims payment performance report 30 days after the close of each quarter, disclosing its compliance status with relevant statutes. These delegation contracts must include a provision "authorizing the plan to assume responsibility for the processing and timely reimbursement of provider claims in the event that the [IPA] fails to timely and accurately reimburse its claims."

Incidentally, but importantly, Knox-Keene regulations also require HMOs (and their delegated payers) to directly reimburse emergency care physicians for their services.

In this particular case, the emergency physicians complained that Health Net knew, or should have known, of La Vida's insolvency based on:

[1] Financial reports submitted periodically by La Vida

[2] Notice directly from La Vida and indirectly from plaintiffs and other healthcare providers

[3] The inadequate amounts of their own capitation payments to La Vida.

This failure by the plan (and other plans that had capitated La Vida) to acknowledge and rectify their delegated payer's financial insolvency did not go unnoticed by the Department of Managed Health Care, which put the IPA on a corrective action plan. Sadly, the DMHC failed to require the plans to terminate these delegation arrangements or at least to take back the responsibility to pay the emergency physicians, even though the department knew that La Vida remained non-compliant with the corrective action plan.

I believe the DMHC was more concerned with shoring up a failed delegation model than with protecting EMTALA-obligated emergency care providers. Per the CMA's amicus brief in this case:

"Wide scale failures of delegated risk-bearing organizations ("RBOs") in the late 1990s and early 2000s affected more than one million Californians and left thousands of physicians and other health care providers in the lurch with millions of dollars in unpaid medical claims."

The CMA attributed the problem of RBO failures to:

"A reckless delegation of responsibility by some health plans (usually due to inadequate capitation rates) coupled with an inability of some RBOs to responsibly take on risk and manage their financial affairs, without adequate oversight from their contracting health plans and regulators like the Department of Managed Health Care."

In the case of La Vida and other insolvent IPAs and medical groups, the DMHC has ignored the fact that "the prompt and appropriate reimbursement of emergency providers ensures the continued financial viability of California's health care delivery system." (Bell v. Blue Cross of California, supra, 131 Cal.App.4th at p. 218.) The department simply should have required the plans to pay these unpaid emergency physician claims and any unpaid claims of other specialists providing emergency care, especially since it was the DMHC that promulgated rules that prohibit these out-of-network providers from balance billing HMO enrollees when their claims go unpaid.

What are the implications of the Centinela decision for capitation in general? Although plans are protected to some degree from the responsibility for unpaid claims when physicians are contracted with the delegated RBO, even in-network physicians who are left in the lurch when the RBO goes bankrupt may have a case to take before a court or an arbitrator if they complain to the health plan about the contracting medical group's failure to reimburse them properly.

Some states, such as Maryland and Colorado, have put the onus for ensuring contracted RBO viability clearly on the health plan. Per a December 2000 report in Managed Care, "The HMO that contracted with the failed downstream provider must pony up twice — once when it initially sends capitation and fee-for-service checks to medical group administrators, and a second time when the downstream group fails to pay physician members." Health plans, of course, counter that, "It seems unfair that if a medical group mismanages or steals the money, the insurer has to pay."

Underlying these issues is the question of whether capitation is truly a viable strategy, and in the age of commercial ACOs, PHOs and other risk-sharing and risk-transferring payment models, the question is raising its head once again. As noted in the Managed Care article: "…insurers, trained to manage risk, have real estate, bonds, new businesses and deep pockets to handle unforeseen health disasters. Undercapitalized doctors (and even hospitals) have no such resources or cushions."

The Centinela decision should make it even more clear that health plans have a financial and a moral obligation to ensure that capitation payments are sufficient to meet the needs of enrollees and that capitated medical groups and RBOs have the wherewithal (and the capital) to suffer the inevitable losses that come with taking on healthcare risk.

This post was originally published at The Fickle Finger on March 1, 2014.

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