Changes to California’s Knox-Keene Act Potentially Impact California Health Care Providers

On July 1, a new regulation from California’s Department of Managed Health Care (DMHC) will go into effect, and will require health care providers that engage in global risk arrangements to apply for a license or exemption from the DHMC.

What is California’s Knox-Keene Act?

California’s Knox-Keene Act requires California managed care plans to obtain a license from the DMHC. The Knox-Keene Act requires licenses for “full service health plans,” which are entities that arrange for the provision of health care services to enrollees in return for a prepaid or periodic charge.

Historically, the DMHC also regulated “limited” or “restricted” Knox-Keene plans, which are entities that accept capitated payments from a fully-licensed Knox-Keene plan, and arranged for the provision of health care services to the plan’s members, but do not engage in marketing or individual enrollment activities. The requirements for obtaining a limited Knox-Keene license were not clearly established in the Knox-Keene Act or its implementing regulations, and the DMHC clarified these requirements in the new regulations.

The DMHC also monitors the activities of risk-bearing organizations, which are professional medical organizations that contract with fully-licensed Knox-Keene plans on a capitated basis for professional services, and engage in certain claims processing activities on behalf of the plan.

Changes as of July 1st, 2019

As of July 1, an entity that assumes “global risk” must obtain a license to operate a health care service plan, or apply for an exemption. The DMHC defines “global risk” as the acceptance of a prepaid or periodic charge from or on behalf of enrollees in return for the assumption of both professional and institutional risk. Professional risk is defined to include the cost of providing licensed professional services to a plan member, while institutional risk means the cost associated with providing hospital services.

The DMHC issued further guidance on the new regulations, which clarifies that the following arrangements between licensed plans, hospitals, and provider groups do not need to apply for a license or exemption: bundled payments, case rates, diagnosis-related group payments, contracts for professional services provided by a hospital emergency department, certain per diem payment arrangements, and certain arrangements where a provider is only assuming financial responsibility for professional services that may be provided in a hospital facility but the provider does not share in any hospital savings or losses. Providers also do not need to apply for a license or exemption for participating in an Accountable Care Organization arrangement, or for risk sharing arrangements with insurers licensed by the California Department of Insurance.

In recent years, many health care providers have entered into value-based or risk pool arrangements, where part of the payments they are eligible for are based on professional and institutional risk. Under the new regulations, these types of arrangements could be considered “global risk” arrangements that obligate the health care provider to obtain a health care service plan license or exemption from the DMHC. Health care providers may request a license exemption for a particular arrangement by filing financial forms, copies of the global risk agreement, and other documents as required by the DMHC.

The new regulation applies to global risk contracts that are issued, amended, or renewed on or after July 1, 2019. The DMHC will adopt a “phase-in” approach from July 1, 2019 through June 30, 2020, where exemption requests will be automatically granted if the requestor follows the DMHC’s “expedited exemption” process. This phased approach offers some immediate relief to health care providers entering into these arrangements. California health care providers will need to continuously evaluate whether their risk sharing arrangements implicate the new requirements, and may need to file exemption applications with the DMHC for their risk sharing arrangements.