The California Department of Managed Health Care (“DMHC”) is currently considering the regulatory landscape for Accountable Care Organizations (“ACOs”) in California. At a public meeting on January 19, 2011, the DMHC announced it will most likely require ACOs to be licensed. ACOs, created by a provision in the healthcare reform law, encourage care coordination by allowing physicians to integrate with other members of the health care system in order to reduce unnecessary costs and improve the quality of care for Medicare fee-for-service beneficiaries. On December 3, 2010, officials from the Centers for Medicare and Medicaid Services (“CMS”) announced they expect to issue proposed regulations for ACOs by mid-January 2011. To date, no regulations have been issued.

In anticipation of these new regulations, the DMHC has gathered stakeholder input and has released information regarding the future of state agency oversight. According to meeting minutes and presentations, the DMHC has announced that it believes federal criteria will not preempt DMHC jurisdiction over licensing and solvency of ACOs. To that end, the DMHC has pledged to balance public policy concerns, business interests and existing law in order to offer “a predictable regulatory environment through integration with existing rules.” The DMHC’s goals for ACO oversight include:

• Ensure financial stability to protect patients and providers
• Lower health care costs
• Improve quality of and access to care
• Foster innovation and experimentation

The DMHC’s Financial Solvency Standards Board (“FSSB”), composed of the Director of the DMHC and 7 appointed members, is tasked with recommending ACO oversight requirements. The purpose of the FSSB is to advise on matters of financial solvency that affect the delivery of health care services and to develop and recommend financial solvency requirements and standards. 

Under existing law, the DMHC has oversight over both health plans licensed pursuant to the Knox-Keene Health Care Service Plan Act of 1975, as amended, and non-licensed risk bearing organizations (“RBOs”). Licensed plans assume “global” financial risk, composed of, for example, risk for physician services, ambulatory services and institutional care. RBOs receive compensation from licensed plans on a capitated basis and assume financial risk and payment of claims for physician services and other delegated functions, but not for institutional care. RBOs must comply with financial solvency requirements, commonly referred to as SB 260 requirements, but not licensure requirements. In recent public meetings, the FSSB has communicated that is considering requiring ACOs to obtain restricted licenses from the DMHC since ACOs will assume global risk. The application for the restricted license will most likely be the same as the application for a full license, but exhibits will be limited to those relevant to ACOs. 

According to the DMHC, licensure requirements, tailored to the unique nature of ACOs, will most likely address financial solvency and stability, for example, ACOs may have to comply with tangible net equity requirements, as well as measures to ensure quality of health care. The license application will require ACOs to submit information such as:

• A summary/description of start-up and/or business operations
• Organization structure
• Leadership structure and contact information
• Contractual arrangements (including physicians, hospitals, health plans, etc.)
• Contracts with affiliates and principle creditors and for administrative services
• Disclosure of financial information
• Internal quality of care review system
• Enrollment projections
• Quarterly and annual financial statements
• Projected financial statements for 2 years
• Description of fiscal arrangements

The DMHC predicts it will require ACOs to contact the DMHC prior to engaging in global risk and to participate in a pre-filing conference. Once it receives the application, the DMHC estimates it will take 6 months to review and issue a restricted license for an ACO. As a result, an ACO should probably not plan on taking global risk until the license has been issued and it may be prudent to file the license application with a lead time longer than 6 months. The ultimate goal of the DMHC is to align the review and oversight of ACOs with the DMHC’s core function of promoting the delivery and quality of health care in California.