Anticipating state regulation of physician-hospital organizations. What the future may hold

Faced with a regulatory void, state insurance officials are now considering whether and how physician-hospital organizations (PHOs) should be treated under state law. One main focus is the extent to which PHOs accept "risk" that health care services which the PHOs are contractually obligated to arrange may not be adequately funded from revenues received prior to actual delivery of patient care. From a regulatory perspective, the risk that consumers may not receive contracted services is arguably the proper function of insurance companies or other licensed entities. From the PHO viewpoint, however, the risk concerning a PHO's obligation to arrange for the delivery of services may only be a business risk which should not be burdened by costly insurance law requirements. Important factors in analyzing the question include the identity of the party contracting with a PHO and whether that party is itself a licensed insurer. In a rapidly changing regulatory environment, many states are likely to consider model legislation now being developed by the National Association of Insurance Commissioners, which imposes risk-based capital reserve and solvency requirements upon certain PHO arrangements to address these issues.