California Court of Appeal Reminds Medical Groups That Certain Risk-Sharing Arrangements May Require

Health Highlights

Since its publication last summer, the California Court of Appeal's decision in Hambrick v. Healthcare Partners Medical Group, Inc., 238 Cal. App. 4th 124 (Cal. App. 2d Dist. 2015), has been cited numerous times as clarifying the scope of the judicial abstention doctrine. Less discussed, but just as timely and important, is the Court's acknowledgment that medical groups engaging in certain risk-sharing arrangements with Knox-Keene healthcare service plans may themselves need to obtain Knox-Keene licensure.


Hambrick was a putative class action alleging that a physician group was a de facto health plan operating without a proper license under the Knox-Keene Act. According to plaintiffs, the defendant constituted a health plan due to the level of risk it allegedly had assumed. The trial court dismissed the case on demurrer, invoking permissive judicial abstention. The Court of Appeal affirmed, holding that because neither the Knox-Keene Act nor its implementing regulations defined what level of risk is associated with a health plan, "having the court decide the level of acceptable risk that a medical group may bear without becoming a healthcare service plan would cause the court to wade into the complex economic policy and regulatory framework that are better left to the DMHC [Department of Managed Health Care]." 238 Cal. App. 4th at 143. On that basis, the Court declined to decide whether the medical group was actually a de facto health plan.

However, despite the Court's decision to abstain, the Court engaged in extensive discussion of the issue and took judicial notice of a 2002 California Financial Solvency Standards Board memorandum (FSSB memo) that established a framework for examining the issue. 238 Cal. App. 4th at 144.

Framework for Medical Group Versus Health Plan Analysis

The FSSB memo noted that risk arrangements usually fall within one of three basic structures, the third of which is prohibited unless the contracting medical group has obtained Knox-Keene licensure as a health plan:

1. Full Risk Contracting: A health plan enters into capitation agreements to shift the risk for the provision of non-institutional healthcare services to a physician network (e.g., medical groups, IPAs, or some combination of these) and also enters into a capitation agreement with a hospital for the provision of institutional healthcare services.

2. Shared Risk Contracting: A health plan enters into a capitation agreement with a medical group, but retains institutional risk. In these arrangements, the health plan may require the medical group to participate in limited risk arrangements relating to the provision of institutional healthcare services (i.e., risk pooling).

3. Global Risk Contracting: A health plan enters into a capitation agreement with only one healthcare provider (e.g., a medical group) to shift the entire risk for the provision of both institutional and non-institutional healthcare services to that single healthcare provider.

Open Issues: Definition of "Institutional Healthcare Services" and the Level of Risk-Shifting That Would Necessitate Health Plan Licensure

The Hambrick Court and FSSB memo noted that it was not clear (a) what types of services were "institutional healthcare services," or (b) exactly when the use of risk arrangements rises to a level constituting a prohibited shifting of institutional healthcare service risk to a medical group. 238 Cal. App. 4th at 145-46.

1. Definition of "Institutional Healthcare Services"

The Hambrick Court and FSSB memo both noted that preventive care and physician services listed on a physician license were non-institutional, whereas direct facility charges were indicative of institutional healthcare services, but acknowledged that "a large gray area" existed between the two ends of the spectrum. 238 Cal. App. 4th at 146.

  • Note that the facility charge test for institutional healthcare services may be less useful given the increasing trend of providing ambulatory physician services in hospital-owned buildings, resulting in both physician charges and facility fees. See Nolte v. Cedars-Sinai Medical Center, 236 Cal. App. 4th 1401 (Cal. App. 2d Dist. 2015) (patient signing a hospital condition of admission form held liable for "facility fee" that the hospital charged to enroll new patients into the hospital billing system, despite the fact that the patient received only ambulatory physician services and was not advised of facility fee in advance).

2. Prohibited Risk-Sharing Arrangements and Level of Risk-Shifting

The FSSB memo noted that using risk pooling mechanisms that combined the losses associated with institutional healthcare services against gains from non-institutional services, other forms of cross-service offsetting of losses, or accounting and collection practices that carry forward deficits (particularly institutional service deficits) from one year to another could potentially be viewed as a form of global capitation that would trigger Knox-Keene health plan licensure requirements.

Limitations and Applicability

The FSSB memo, as discussed in the Hambrick opinion, is somewhat limited not only by its lack of clarity, but also by the fact that the Hambrick Court ultimately abstained from making any substantive decision and, in doing so, expressly noted that the memo was designed only for discussion purposes by the FSSB and was not officially adopted by DMHC. 238 Cal. App. 4th at 144. Despite these limitations, the Hambrick Court's discussion did include some potentially helpful guidance and also shows that the FSSB memo's framework for analyzing global risk may still be useful.

Given the increase in numbers of medical groups engaged in risk-sharing arrangements with health plans and institutional providers in response to the proliferation of numerous reforms and initiatives incentivizing coordination, collaboration, and innovative payment models (e.g., certain commercial ACOs) that followed the passage of the Affordable Care Act, this guidance may serve as at least a helpful starting point for the Knox-Keene health plan licensure analysis.

Those medical groups that fail to conduct any such analysis may find themselves faced with not only the administrative burden associated with obtaining a Knox-Keene license (or potential exposure for operating an unlicensed health plan), but also with numerous, more stringent Knox-Keene health plan regulatory requirements relating to topics ranging from network adequacy to the review and processing of claims.



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