Answering to the Regulators

Health Care: The HMOs

An HMO, otherwise and commonly known as a health maintenance organization, has become commonplace in today's health care arena. In many respects, it is an insurance company with a specialization of covering the costs, at a fixed price to a patient, of health care costs. But, what if due to poor contracts, high claims, or poor money management, the HMO runs out of money and can no longer pay its claims to physicians and providers? The answer was, until last month, filing for Chapter 11 protection. Now there is a wrinkle to the answer.

HMOs are highly regulated and generally licensed by states that establish mandatory reporting requirements, mandatory levels of service, mandatory claims payment procedures and timing, and mandatory levels of 'tangible net equity' in order to pay claims. Sounds much like an insurance company.

In 2000, California established what is considered by many to be a model for regulating, licensing and disciplining HMOs. California's Department of Managed Health Care took over the regulatory, licensing and disciplining function of what was formerly handled by the state's Department of Corporations. Still other states reserve these functions to their departments of insurance.

Beginning with MedPartners Provider Network (an unregulated wholesale HMO) and continuing through Health Plan of the Redwoods (a regulated HMO), such entities have found debt relief and the ability to conduct orderly liquidations ' and the transition of capitated lives ' by utilizing the protections afforded by Chapter 11. Notwithstanding the filing of Chapter 11, California's Department of Managed Health Care, debtors, creditors and bankruptcy courts have recognized and acknowledged the ongoing regulatory functions that overlay failing or failed HMOs.

The wrinkle to what has been assumed to be the bankruptcy alternative for failing or failed HMOs was established in the United States Bankruptcy Court for the District of Colorado when that state's first HMO to seek Chapter 11 protection was rejected. The Bankruptcy Court agreed with Colorado's Division of Insurance, which argued that the 36,500-member Community Heath Plan of the Rockies may not file for protection under Chapter 11. The argument was to the effect that since state court receivership was the legislative solution to liquidate an HMO, the United States Bankruptcy Court lacked jurisdiction or should not attempt to assert jurisdiction over the HMO.

While a flood of insurance company bankruptcies are unlikely, the day may come when regulators and the courts will view the bankruptcy court as the proper place to liquidate or reorganize. There is some precedent for this, particularly in the specialized insurance arena. Congress may need to get into the fray, though this appears unlikely as the amendments to the bankruptcy code have been stalled for years.

Ivan L. Kallick is a partner in the law firm of Manatt, Phelps & Phillips, LLP and is the head of the firm's Bankruptcy and Financial Restructuring Practice Group. Resident in the firm's Los Angeles office, Kallick has practiced in the insolvency area for more than 20 years.

Insurance companies, like any other segment of today's fragile economy, have shareholders, creditors, insureds, and regulators to whom they are answerable. They are hardly immune from the ups and downs of so-called new economy companies, nor the more time-tested old economy companies. As such, what is the likely result from a jurisdictional and regulatory standpoint of an insurance company seeking relief by the filing of a bankruptcy proceeding? At first glance, the answer seems quite simple. Pursuant to 11 USC Section 109(b)(2), domestic insurance companies are not eligible to be debtors under Chapter 7. That having been said, what has happened in the Conseco bankruptcy proceedings and in other 'insurance' bankruptcy proceedings are worth reviewing.

Most insurance companies are regulated and licensed by state governments and must fulfill certain reporting requirements and meet certain financial standards. Typically, a state will have a division of insurance or a department or agency of insurance. What complicates the cross-over of a regulatory and bankruptcy analysis is that insurance companies have migrated over the past decade or two into so many other businesses and are typically viewed today as full-service financial companies. Conseco is the classic 'holding' company with a wholly-owned entity that is an insurance company.

If an insurance company, as distinct from its full-service financial company parent entity, seeks the protection of the bankruptcy court, the likely result is a dismissal. If the holding company files, the result is different. Perhaps, though, an argument could be made that a specialized insurer ' focused on one industry or exposure ' could be subject to the jurisdiction of the bankruptcy court. The health care industry may well be the most instructive setting to determine how insurance companies, regulators and bankruptcy courts will react to an insurance company seeking the protection of the bankruptcy court.

Health Care: The HMOs

An HMO, otherwise and commonly known as a health maintenance organization, has become commonplace in today's health care arena. In many respects, it is an insurance company with a specialization of covering the costs, at a fixed price to a patient, of health care costs. But, what if due to poor contracts, high claims, or poor money management, the HMO runs out of money and can no longer pay its claims to physicians and providers? The answer was, until last month, filing for Chapter 11 protection. Now there is a wrinkle to the answer.

HMOs are highly regulated and generally licensed by states that establish mandatory reporting requirements, mandatory levels of service, mandatory claims payment procedures and timing, and mandatory levels of 'tangible net equity' in order to pay claims. Sounds much like an insurance company.

In 2000, California established what is considered by many to be a model for regulating, licensing and disciplining HMOs. California's Department of Managed Health Care took over the regulatory, licensing and disciplining function of what was formerly handled by the state's Department of Corporations. Still other states reserve these functions to their departments of insurance.

Beginning with MedPartners Provider Network (an unregulated wholesale HMO) and continuing through Health Plan of the Redwoods (a regulated HMO), such entities have found debt relief and the ability to conduct orderly liquidations ' and the transition of capitated lives ' by utilizing the protections afforded by Chapter 11. Notwithstanding the filing of Chapter 11, California's Department of Managed Health Care, debtors, creditors and bankruptcy courts have recognized and acknowledged the ongoing regulatory functions that overlay failing or failed HMOs.

The wrinkle to what has been assumed to be the bankruptcy alternative for failing or failed HMOs was established in the United States Bankruptcy Court for the District of Colorado when that state's first HMO to seek Chapter 11 protection was rejected. The Bankruptcy Court agreed with Colorado's Division of Insurance, which argued that the 36,500-member Community Heath Plan of the Rockies may not file for protection under Chapter 11. The argument was to the effect that since state court receivership was the legislative solution to liquidate an HMO, the United States Bankruptcy Court lacked jurisdiction or should not attempt to assert jurisdiction over the HMO.

While a flood of insurance company bankruptcies are unlikely, the day may come when regulators and the courts will view the bankruptcy court as the proper place to liquidate or reorganize. There is some precedent for this, particularly in the specialized insurance arena. Congress may need to get into the fray, though this appears unlikely as the amendments to the bankruptcy code have been stalled for years.

Ivan L. Kallick is a partner in the law firm of Manatt, Phelps & Phillips, LLP and is the head of the firm's Bankruptcy and Financial Restructuring Practice Group. Resident in the firm's Los Angeles office, Kallick has practiced in the insolvency area for more than 20 years.