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Managed Care Health Benefit Plans

May 9, 1996

The Honorable Roy A. Cooper, III North Carolina General Assembly Senate Chamber Room 2117, State Legislative Building Raleigh, North Carolina 27601-2808

Re: North Carolina Department of Insurance-Proposed Regulations: Chapter 20-Managed Care Health Benefit Plans. 10 North Carolina Register 16A (November 15, 1995), as subsequently revised by the Department of Insurance on December 18, 1995.

Dear Senator Cooper:

This letter is in response to your request for an opinion regarding several questions about the proposed rules of the Department of Insurance. You asked the following questions:

  1. Does the Commissioner of Insurance have the authority to regulate directly or indirectly the formation, operation, or standards of practice of a physician organization, physician network, or physician-hospital organization?

  2. Does the Commissioner of Insurance have the authority to specify terms in health care provider contracts as proposed in Section .0200 of the Proposed Regulations?

  3. Does the Department of Insurance have the authority to promulgate regulations of PPO’s (Preferred Provider Organizations) in areas not specified by N.C.G.S. § § 58-50-55(b) and 5865-140(b)?

It is our opinion based upon a review of the proposed rules, the relevant statutes, the statutory authority cited in support of the proposed rules, and the applicable case law that:

  1. The Commissioner may regulate provider networks to the extent the contractual arrangements of the networks constitute contracts of insurance, the business of insurance, or to the extent the arrangements are subject to Article 65 of Chapter 58 (Hospital, Medical and Dental Service Corporations) or Article 67 of Chapter 58 (Health Maintenance Organization Act).

  2. While the Commissioner has the authority to identify or describe the topics or areas to be addressed in health care provider contracts, he may not, by rule, dictate substantive terms and conditions not otherwise required or authorized by law.

  3. N.C.G.S. §§ 58-50-55(b) and 58-65-140(b) are not the Commissioner’s only sources of authority to promulgate regulations regarding preferred provider organizations. However, his additional regulatory authority is limited and does not support all of the regulations proposed under section .0200 (contract provisions) and section .0400 (credentialing) of the proposed rules.

I. REGULATION OF NETWORK PROVIDERS Although your letter does not define the general nature of these entities, we assume they are health care providers or provider networks entering into direct arrangements to provide future health care services directly to the entity making the arrangements. The provider networks are not entities specifically referenced in Chapter 58. However, N.C.G.S. § 58-3-5 provides that it "is unlawful for any company to make any contract of insurance upon or concerning any property or interest or lives in this State, or with any resident thereof, or for any person as insurance agent, or insurance broker to make, negotiate, solicit, or in any manner aid in the transaction of such insurance, unless and except as authorized under the provisions of Articles 1 through 64 of this Chapter." N.C.G.S. § 58-1-10 defines a contract of insurance as "an agreement by which the insurer is bound to pay money or its equivalent or to do some act of value to the insured upon, and as an indemnity or reimbursement for the destruction, loss or injury of something in which the other party has an interest."

It is our opinion that the Commissioner’s authority to regulate insurance contracts and the insurance business would include these entities to the extent that health care providers or provider networks are either entering into insurance contracts as insurers, are engaged in the business of insurance, or are subject to Articles 65 or 67, and are not otherwise subject to an exemption from regulation.

The opinion request did not provide a specific contractual arrangement that the network providers would offer. Consequently, whether provider networks would be subject to regulation by the Commissioner of Insurance depends upon whether their contractual arrangements are contracts of insurance.

II. CONTRACT PROVISIONS It is a fundamental principle of administrative law that the legislature may grant power to administrative agencies, within definite limits, to promulgate rules and regulations for the administration of a law. An agency must find within the statutes justification for any authority which it purports to exercise. An administrative agency has no power to promulgate rules and regulations which alter or add to the law it was set up to administer and can not promulgate rules and regulations which have the effect of substantive law. State ex rel. Commissioner of Insurance v. Integon Life Insurance Co., 28 N.C. App. 7, 220 S.E.2d 409 (1975).

The general rulemaking powers of the Commissioner are found in Article 2 of Chapter 58 of the North Carolina General Statutes. In establishing the Department of Insurance and detailing the broad powers and duties of the Commissioner of Insurance, the legislature mandated that the Commissioner see that all laws that he is responsible for administering and the provisions of Chapter 58 are faithfully executed. To that end, the Commissioner is authorized to adopt "rules … to enforce, carry out and make effective the provisions of those laws" and to promulgate "such further rules not contrary to those laws that will prevent persons subject to the Commissioner’s regulatory authority from engaging in practices injurious to the public." N.C.G.S. § 58-2-40(1). Specifically with respect to the regulation of persons or corporations offering preferred provider plans, contracts or policies, the Commissioner may adopt rules to the extent that the rules are designed to provide for the accessibility, adequate number and locations of institutions and practitioners, availability of services at reasonable times, and financial solvency. N.C.G.S. § 5850-55(b); § 58-65-140(b) .

In light of the foregoing, the Commissioner clearly has the authority to adopt rules requiring written contracts and the filing of forms prior to execution. He may also require that each preferred provider plan provide, inter alia, the names and addresses of all providers of health care designated by the preferred provider and the terms of the agreements entered into with these providers. Finally, the Commissioner may, by rule, impose such other requirements as are necessary to ensure the accessibility of services, the adequacy of number and location of providers, the availability of services at reasonable times and the financial solvency of the preferred provider plan. See N.C.G.S. §§ 58-50-55(b); 58-65-140(b). The Commissioner may also identify or describe other topics or areas to be addressed in the contracts to the extent that such topics have a direct relationship to the areas enumerated in N.C.G.S. §§ 58-50-55(b) and 58-65-140(b). Any provisions of Section .0200 of the proposed rules applicable to preferred provider plans which go beyond these limits, in our opinion, exceed the rulemaking powers granted to the Commissioner.

For example, some provisions of the proposed rules dictate substantive terms and conditions of the contracts and impose affirmative, mandatory obligations upon preferred provider plans which, in effect, add to or alter the law or have the effect of substantive law. In our opinion, any proposed rule which is not reasonably necessary to ensure the accessibility of services, the adequacy of number and location of providers, the availability of services at reasonable times and the financial solvency of the preferred provider plan and which adds to or alters the law or has the effect of substantive law is not a proper exercise of the Commissioner’s rulemaking function.

III. REGULATIONS FOR PREFERRED PROVIDER ORGANIZATIONS

Both N.C.G.S. §§ 58-50-55(b) and 58-65-140(b), titled "Preferred provider contracts," provide that the Department of Insurance shall have authority to promulgate rules applicable to persons or corporation offering preferred provider contracts. Each statute clarifies that

[t]hese rules shall be designed to provide for (i) accessibility of preferred provider

services to individuals comprising the insured or contracted group, (ii) the adequacy of

the number and locations of institutions and practitioners, (iii) the availability of services

at reasonable times, and (iv) financial solvency.

The other provisions N.C.G.S. §§ 58-50-55 and 58-65-140 govern the payment of providers not participating in a particular plan, the admittance of other providers to the plans, and discuss marketing and advertising issues.

There are also other statutes which specifically refer to preferred providers. N.C.G.S. § 58-50-50 is a definition of a preferred provider. It provides that

…except where specifically prohibited either by N.C.G.S. § 58-50-55 or by regulations

promulgated by the Department of Insurance, not inconsistent with Articles 1 through 64

of this Chapter, the contractual terms and conditions for special reimbursements shall be

those which the insurer, health care provider and the preferred provider find to be

mutually agreeable.

N.C.G.S. § 58-65-1 also contains a definition of preferred provider and an exception consistent with the provisions of N.C.G.S. § 58-50-50. N.C.G.S. § 58-50-60, which governs rules for precertification practices, is applicable to preferred provider arrangements.

These additional statutes relate to areas for the regulation of preferred provider organizations which are not addressed under the provisions of N.C.G.S. §§ 58-50-55(b) or 58-65-140(b). However, a review of the proposed rules relating to preferred provider organizations indicates that some provisions are not supported by any of the statutory provisions specifically applicable to preferred provider organizations.

Section .0700 of the proposed rules specifically applies to preferred provider organizations. These proposed rules relate to the accessibility of providers and the financial solvency of preferred provider organizations. The rules governing accessibility include provisions which require preferred provider organizations to comply with the provisions of .0400 and .0200 of the proposed rules.

Section .0400 of the proposed rules governs provider credentialing and section .0200 relates to health care provider contracts. Neither provider credentialing nor the terms and conditions of health care provider contracts appears to relate to accessibility of services, adequacy of number and location of providers, availability of services, and financial solvency, pursuant to N.C.G.S. §§ 58-50-55(b) and 58-64-140(b). Thus the additional authority cited above which the Department has to regulate preferred provider organizations does not appear to support the proposed rules under Section .0200 and .0400. The proposed rules appear to go beyond the specific requirements of N.C.G.S. §§ 58-50-50, 58-50-55, 58-50-60, 58-65-1, and 58-65-140.

There is one other point which should be mentioned. It is our understanding that the proposed regulations at issue have undergone additional revisions. Please note that the scope of this opinion is limited: it relates only to those entities offering preferred provider contracts pursuant to G.S. 58-50-55 and 58-65-140; and it is limited to the regulations appearing in the November 15, 1995 North Carolina Register, as subsequently revised on December 18, 1995. If you have any questions, feel free to contact us.

John R. McArthur Chief Counsel

Ted R. Williams

Assistant Attorney General