Browse By:

Tuesday January 22, 2019 Login |Register

A Project of

sponsored by

Managed Health Care: Federal and State Regulation

Bookmark and Share Report Misuse or Glitches

Publication Date: October 1997

Publisher(s): Library of Congress. Congressional Research Service

Series: 97-938

Topic: Health (Health services administration)


Numerous bills have been introduced in the 105th Congress to regulate managed health care. Some target specific aspects of the delivery of care, such as hospital length-of-stay for mastectomies. Others address a broad range of consumer and provider concerns that have emerged as managed care has become more commonplace. State legislatures have been even more active on this issue with over 1,000 managed care bills introduced in 1996 alone. Key to understanding these federal and state proposals is the current regulatory environment in which managed care organizations (MCOs) function.

The regulation of managed care depends on who sponsors the plan and who bears the risk for paying for the insured services. Generally, the federal government regulates managed care and other health plans sponsored by private-sector employers. On the other hand, the states regulate the business of insurance, which includes the MCO (such as a health maintenance organization (HMO)) that offers a managed care policy to an individual, employer, or other purchaser. If a private sector employer sponsors a plan that is not purchased from an MCO (i.e., the plan is self-insured), then the plan is regulated solely by the federal government. If that employer contracts with an MCO to provide managed care services to his or her employees, then the regulation of that plan depends on who bears the risk. If it is the MCO, the plan is regulated by the state; if the risk is borne to any degree by the employer, then the plan is subject to federal law only.

The traditional division of regulatory responsibilities between the federal government and the states resulted from provisions of several federal laws and subsequent decisions of federal courts. Most importantly, the Employee Retirement Income Security Act of 1974 (ERISA) preempted the states from regulating health plans of private sector employers but left to the states the regulation of the business of insurance. While the HMO Act of 1973 established certain federal standards for HMOs that elected to operate under federal law, almost all other regulatory authority over the business of health insurance remained with the states. This deferral to state regulation of insurers has been somewhat altered with the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191) to the extent that it applies certain federal minimum requirements to state-regulated insurers as well as to employer-sponsored plans, including managed care plans.

The regulation of managed care varies significantly across the 50 states. Many have HMO laws and regulations that are based on the National Association of Insurance Commissioner’s (NAIC) HMO Model Act. Some have used the NAIC model as a floor and have adopted more stringent requirements on MCOs. Responding to the emergence of varying types of risk-bearing entities that provide both insurance and medical services, the NAIC has issued model laws on quality
assessment and improvement, provider credentialing, network adequacy, grievance procedures, standards for utilization review, and will be issuing one on capital standards to ensure solvency. State laws may begin to incorporate these models as they respond to these and other issues arising from the growth of managed care.