Department of Managed Health Care Issues Final Guidance on Licensure Regulation

On June 14, 2019, the Department of Managed Health Care (DMHC) issued final guidance regarding its new licensure regulation, California Code of Regulations, title 28, §1300.49 ("Licensure Regulation"), which becomes effective July 1, 2019. The DMHC’s final guidance identifies arrangements that fall outside the Licensure Regulation’s purview and establishes a phase-in period whereby an entity can request an expedited exemption ("Expedited Exemption") from the requirement to obtain a license under the Licensure Regulation. 

Arrangements not Falling Under the Licensure Regulation’s Purview 

The DMHC identified the following arrangements between DMHC licensed health care service plans ("Plans") and other entities that do not need to comply with the Licensure Regulation at this time:

• Certain limited-risk payment arrangements, consisting of bundled payments, case rates, DRGs, per diem payments, contracts for professional services in a hospital emergency department, and contracts between a health plan and provider group where the group assumes financial risk for professional services rendered in a hospital setting but the provider group does share in any savings or losses the hospital may incur;
• CMS Accountable Care Organization contracts regardless of the level of risk assumed; and
• California Department of Insurance licensed insurer product provider contracts, regardless of the level of risk assumed.

The DMHC’s final guidance clarifies that DMHC considers these arrangements to be outside the scope of the Licensure Regulation, although that could potentially change with further guidance. Entities may continue operating under these arrangements without obtaining an exemption from, or submitting anything to, the DMHC. However, for items under the first category above, if the arrangement also includes other types of global risk sharing, such as shared savings or shared risk arrangements, the entity would need to seek an exemption. 

Phase-in Period for Arrangements Falling Under the Licensure Regulation’s Purview

For arrangements falling under the Licensure Regulation’s purview, the DMHC’s final guidance establishes a phase-in period for arrangements entered, amended or renewed between July 1, 2019 and June 30, 2020 (the "Phase-in Period"). During the Phase-in Period, entities taking global risk may request an Expedited Exemption and the exemption will be automatically granted. Under the Licensure Regulation, arrangements entered, amended or renewed prior to July 1, 2019 are grandfathered and therefore not subject to the Licensure Regulation until they are amended or renewed after July 1, 2019. 

1. Duration of Expedited Exemption

For entities contracting with a licensed Plan, the duration of the Expedited Exemption will be the term of the contract. Parties may establish a longer contractual term and thereby limit the application of the Licensure Regulation until the contract is amended or renewed.

For entities whose global risk arrangement does not involve a contract with licensed Plan (e.g., an arrangement between a global risk provider and a self-funded employer), the duration of an Expedited Exemption will be the shorter of:

• Two years from the date the DMHC grants the Expedited Exemption; or
• The renewal or amendment of the contract. 

2. Expedited Exemption Process

The process to request an Expedited Exemption is straightforward. The entity assuming global risk must submit the contract and a completed Expedited Exemption Form. Multiple contracts may be submitted using one Expedited Exemption Form and one entity may file on behalf of another. Financial information is not required for the Expedited Exemption. In fact, the final guidance states that an entity submitting an Expedited Exemption request “should not submit to the DMHC any other information required under the regulation (e.g. financial statements, geographic service areas, percentage of annualized income from institutional risk, estimated number of enrollees) at the time” the Expedited Exemption is submitted. Entities may also request confidentiality for the contract by using the Request for Confidentiality Form. 

During the Phase-in Period, a party seeking an Expedited Exemption would submit the request by the later of:

• Thirty (30) days after all parties have executed the contract, amendment or renewal; or
• Thirty (30) days after the effective date of the contract, amendment or renewal.

For example, if a contract is entered, but is not effective until a later date, the effective date would control for purposes of the DMHC Phase-in Period. 

If an entity enters, renews, or amends a contract submitted to the DMHC for an exemption within the last 30 days of the Phase-in Period, or the contract has an effective date during the last 30 days of the Phase-in Period, the entity’s submission of the contract and exemption request is timely if submitted within 30 days following execution or the effective date, even if the 30th day is later than June 30, 2020.

An “evergreen” renewal is considered a renewal.

3. Non-Substantive Amendments

The DMHC’s final guidance also clarified that if there is a non-substantive amendment to a contract that was previously exempted by the DMHC, the amended contract need not be resubmitted. Substantive amendments that must be filed include but are not limited to: 

• Changes to the risk sharing arrangements described in the contract;
• Extensions to the duration of contract; or
• Amendments regarding the parties to the contract.

Noticeably absent from the substantive amendment list is compensation, although the DMHC would likely take the position that changes to compensation are substantive and would need to be filed. 

Summary of Relevant Dates

Below are the relevant dates from the Licensure Regulation and final guidance and their implications:

Prior to July 1, 2019 (grandfather period). An entity that enters, amends or renews a contract prior to this date is grandfathered and does not need to comply with the Licensure Regulation until such time as the contract is amended or renewed. 

Between July 1, 2019 and June 30, 2020 (phase-in period). An entity that enters, amends or renews a contract during the Phase-in Period may avoid the application of the Licensure Regulation by submitting an Expedited Exemption request. 

On or after July 1, 2020. An entity that enters, amends or renews a contract after this date must comply with the Licensure Regulation and obtain a license or an exemption if the entity is taking global risk.

Click here to read our March 6, 2019 alert on the Licensure Regulation.