United States: New Regulation Clarifies DMHC's Position Regarding Knox-Keene Licensing

After a protracted comment period, the California Department of Managed Health Care (the "Department") formally adopted its much anticipated "global risk" regulation (the "Regulation"), which will go into effect on July 1, 2019. As more specifically set forth in Section 1300.49 of the California Code of Regulations ("CCR") and as described below, the Department has formalized its long-standing policy that any person that assumes "global risk" must obtain a license to operate a health care service plan and has added a process whereby such a person can seek an exemption from such licensure. As a result of new definitions for the terms "global risk" and "prepaid or periodic charge," the Regulation marks a significant expansion of the Department's oversight activity, and is likely to have a substantial impact on a variety of entities and arrangements in the State.

Scope of Knox-Keene Act Licensure Statutes and Regulations

Historically, the Knox-Keene Health Care Service Plan Act of 1975 and the regulations promulgated thereunder (collectively, the "Knox-Keene Act") established a framework for licensing health care service plans. The Knox-Keene Act defines a "health care service plan" as "[a]ny person who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees." The Regulation builds on other provisions of the Knox-Keene Act by providing that "any person who assumes global risk shall obtain a license to operate a health care service plan." Assuming "global risk" has been defined as accepting a prepaid or periodic charge from or on behalf of enrollees in return for the assumption of both professional and institutional risk.

Prepaid or Periodic Charge

The Department broadly defines a "prepaid or periodic charge" as "any amount of compensation, either at the start or end of a predetermined period, for assuming the risk, or arranging for others to assume the risk, of delivering or arranging for the delivery of the contracted-for health care services for subscribers or enrollees that may be fixed either in amount or percentage of savings or losses in which the entity shares." This means that whether an agreement is for a fixed amount or a percentage, a savings or a loss, at the start of a period or at the end, it can qualify as a prepaid or periodic charge. However, as noted in the definition above, acceptance of a prepaid or periodic charge alone does not trigger the Knox-Keene Act licensure requirements. There must also be an assumption of both professional and institutional risk.

Professional and Institutional Risk

The Regulation essentially defines professional risk as financial responsibility for the cost of the provision of professional medical services, and institutional risk as financial responsibility for the cost of the provision of hospital inpatient, hospital outpatient, or hospital ancillary services (to the extent not provided pursuant to the person's own license).

This expansive definition of "global risk" could bring a variety of arrangements under the regulatory purview of the Department, such as shared savings arrangements and hospital risk pool arrangements. Numerous commentators encouraged the Department to narrow the definition and/or explicitly carve out certain arrangements in order to avoid the Regulation having a chilling effect on the health care market. However the Department consistently replied that the requirement for reviewing and potentially licensing entities engaged in a "global risk" arrangement would not be disruptive, and instead would provide greater consumer protections; and further that any entity that desires to avoid the regulatory requirements could seek exemption, which will be discussed further below.

Restricted Health Care Service Plans

The Regulation codifies the Department's position regarding "restricted" health care service plans, a category of licensure previously acknowledged and granted by the Department, but not explicitly defined in the Knox-Keene Act. Under the Regulation, a restricted health care service plan is defined as "a person with a health care service plan license issued by the Department for the provision of, or the arranging, payment, or reimbursement for the provision of, health care services to subscribers or enrollees of another full service or specialized health care service plan under a contract or other arrangement whereby the person assumes both professional and institutional risk but does not directly market, solicit, or sell health care service plan contracts." Stated more simply, a restricted health care service plan is a person that contracts with a fully licensed health care service plan to assume global risk with respect to subscribers or enrollees of the fully licensed plan (effectively a risk intermediary).

Pursuant to the Regulation, a person seeking licensure as a restricted health care service plan must file the following with the Department:

  • an application for licensure in accordance with section 1351 of the Health and Safety Code and rule 1300.51 of the CCR (the application for licensure includes all exhibit types);
  • all contractual agreements between the applicant restricted health care service plan and the full service health care service plan, or specialized health care service plan; and
  • a Restricted Health Care Service Plan Responsibility Statement (an item not previously required under the restricted license application process), which Statement will describe the obligations of both the applicant restricted health care service plan and its fully licensed plan partner (i.e., a delineation of responsibility).

Exemption Process

The Regulation provides an exemption process for persons that wish to be excluded from the license application process and ongoing compliance obligations under the Knox-Keene Act. Specifically, the Director of the Department is required to grant an exemption upon review and a finding that the action is in the public interest and not detrimental to subscribers, enrollees or other persons regulated under the Knox-Keene Act.

To apply for an exemption, a person must submit the following information for consideration:

  • financial statements related to the applicant's viability;
  • the total percentage of annualized income of institutional risk the applicant will assume;
  • the contract(s) for the assumption of risk;
  • the estimated number of subscribers and enrollees;
  • the geographic service area under consideration; and
  • any other information the applicant believes to be appropriate or relevant for the Department to consider.

The Department is required to issue a decision regarding a request for exemption within 30 days of receipt of the request. In reviewing the above-described information, the Director is required to consider the following factors:

  • the person's portion of contracted global risk when compared to the person's overall business;
  • the portion of market share the person assumes for global risk in the geographical region compared to the market share assumed by other persons within the region, and whether disruption will occur in the marketplace if the person fails to maintain financial solvency;
  • the financial capacity to assume a portion of global risk without jeopardizing enrollee access to basic health care services in the geographical region;
  • the potential impact on the health care marketplace in the geographical region in which the person operates, including the impact on contracted institutional and professional providers, if the person is unable to maintain financial solvency; and
  • whether the issuance of an exemption will negatively impact public interest or protection of the public, subscribers, enrollees, or persons subject to the Knox-Keene Act, if the person assumes global risk.

Although the exemption application process has yet to be implemented, it stands to reason that an applicant would be well advised to submit supplementary materials and information – as permitted under the Regulation – that would support a positive finding with respect to the above factors.

Legacy Agreements

The Regulation only affects contracts issued, amended, or renewed on or after July 1, 2019. Beyond granting a temporary reprieve from potential licensure, this limitation enables existing persons or arrangements within the scope of the Regulation to apply for licensure or an exemption before their existing contract is amended or renewed.

The Regulation also allows limited health care service plans and restricted health care service plans licensed by the Department or its predecessor as of July 1, 2019 to continue to engage in business as limited health care service plans or restricted health care service plans, as applicable.

Interaction with Other Programs

The Department stated during the public comment period that the Regulation will not affect products that are licensed by the California Department of Insurance or the Centers for Medicare and Medicaid Services. However, this statement is murky since entities that assume "global risk" from Medicare Advantage plans must be licensed as health care service plans. Additionally, the Department noted that "the proposed regulation may impact Accountable Care Organizations or other arrangements that, considering the proposed regulation, meet the definition of a health care service plan [...] [though] such entities may always seek exemption from licensure." In its Final Statement of Reasons, the Department estimates that it may license up to two-thirds of the estimated 67 ACOs in California – which we believe could include Medicare ACOs.

Providers that assume only professional risk will not be required to apply for licensure as a health care service plan (rather, historical regulations relating to risk-bearing organizations (RBOs) would govern). However, the assumption of any portion of institutional risk could subject such providers to licensure requirements under the Regulation, including, but not limited to, participation in a hospital risk pool.

Given its significant reach and its potentially wide-ranging implications, the Regulation has garnered significant attention from industry participants. Providers and other organizations that assume risk in California would do well to take advantage of the interim period prior to the Regulation's effective date to assess their existing contractual relationships and develop strategies to ensure post-implementation compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
17 Oct 2019, Seminar, San Diego, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series. There are many new developments in California labor and employment laws that will significantly affect the way you run your day-to-day business operations.

22 Oct 2019, Roundtable, Los Angeles, United States

Please join us for Sheppard Mullin's Ethics and Eggs: A Breakfast Roundtable to Discuss Ethics Issues in IP Matters.

23 Oct 2019, Other, Dallas, United States

Marketing Wants To Do What? Sweepstakes, Influencers, Loyalty, and Other Advertising and Promotional Fun

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions