Managed Care Legal and
Regulatory Compliance
Managed care organizations (MCOs), like the health care industry, are subject to
rules and regulations regarding their operations and their relationships with other
entities. The various rules and regulations fall into three general categories:
compliant relationships with regulations of government agencies,
contracts between MCOs and practitioners/providers, and
patient rights and member relationships with payers/caregivers (see
Chapter 5).
Thousands of pages in books and periodicals have been devoted to the explana-
tion of these relationships and how to manage them. Therefore, it is impossible to
cover every legal aspect of MCOs in this chapter. Chapter 8 is intended merely as
an overview of the most important and pervasive managed care issues for health
care nancial managers and is not a replacement for law school or legal counsel.
As a result of their participation in Medicare Part C or Medicare Advantage (i.e.,
Part D), MCOs must comply with the regulations, rulings, and specic interpre-
tations of the Ofce of the Inspector General (OIG) of the U.S. Department of
Health and Human Services (DHHS). MCOs must also comply with regulations
to which practitioners/providers have long been held, such as the False Claims
Act (FCA), Emergency Medical Treatment and Active Labor Act (EMTALA)
and Health Insurance Portability and Accountability Act of 1996 (HIPAA), Stark
I and II, as well as the need for a compliance ofcer.
The compliance ofcer ensures that medical and surgical decision making are
not based on any nonmedical factors (however enticing they may be), such as
incentives and disincentives that do not accrue to a patient’s benet.
pAyeR compliAnce
The chief aspect of payer compliance under federal law relates to their market-
ing activities as well as their contractual relationships with practitioners/pro-
viders. Marketing compliance, for example, remains a signicant problem in
194 Managed Health Care in the New Millennium
the Medicare program. Prohibited marketing activities include activities that dis-
criminate, confuse, or mislead beneciaries.
Many beneciaries inadequately understand the advantages and trade-offs
of joining a Medicare MCO (see Chapter 4). At the same time, MCOs spend
signicant monetary, promotional, and labor resources to market their products
under both Medicare risk (pursuant to Public Law 105–33) and Medicare Part
C (Balanced Budget Act of 1997) and the subsequent passage of Medicare Part
D prescription coverage under the Medicare Advantage program. As Medicare
Advantage pays more to MCOs than did the Medicare risk program, this new
program created signicant competition in subscribing beneciaries. MCOs try
to channel Medicare beneciaries so that they can subscribe the “right” ones.
Healthier beneciaries generate a lower medical loss ratio (MLR) because they
use fewer medical services per premium paid.
MCO marketing activities cannot discriminate by minimizing adverse selec-
tion in trying to attract healthier people. The manner in which this discrimination
occurs may involve confusing or misleading beneciaries. The rationale for these
strategies to discriminate or mislead is that MCOs might
weed out new members likely to overconsume health care,
prevent unhealthy beneciaries from enrolling, and
reduce use of expensive health care services attributable to these
Examples of such discriminatory marketing include
attracting beneciaries with a college-level education, as MCOs often
equate higher education with lower levels of needless consumption;
conducting seminars for individuals with high income, as income and
health care consumption are also inversely proportional (higher income
equates to lower costs); and
spending more time at places where healthier and wealthier senior citi-
zens are found, such as at golf courses or health clubs, and less time at
nursing homes.
DHHS therefore scrutinizes marketing materials prior to their dissemination
to Medicare beneciaries and will deny those that are discriminatory, confusing,
or misleading, using a “layperson standard. Solicitous marketing that is pre-
mium driven, such as gift giving, as well as activities that violate a marketer’s
duty are also contrary to approved marketing for Medicare MCOs.
Medicare beneciary discrimination is not limited to discriminatory market-
ing activities. This form of “cherry-picking” can also occur in materials viewed as
misleading or confusing, in an opposite manner from those described.
Misleading collaterals involve intentionally confusing all but the most educated
or savvy beneciaries. For example, some marketers have been known to unethi-
cally trick desirable beneciaries, not immediately receptive to the presentation,

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