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State Begins to License Discount Fee Health Plans

By: Richard B. Spohn
10/19/06

The California Department of Managed Health Care has just taken two clear and definitive actions underscoring its determination to license discount fee health plans under the Knox-Keene Health Care Service Plan Act.

A discount fee health plan is one where the subscriber pays modest initial and periodic fees to participate in the plan, which allows the subscriber and dependents access to networks of providers who have contracted to charge reduced fees for their services.   According to the Department, there are over 100 such plans in California.

The Department in recent months has filed a number of enforcement actions and launched scores of investigations of unlicensed discount fee health plans.

Then, on September 26, 2006, in the case In the Matter of the Cease and Desist Order Issued to The Capella Group, Inc. dba Care Entrée, the Department adopted an Administrative Law Judge's decision that strongly rejected a challenge to the Department's jurisdiction over discount plans, affirming that jurisdiction.  The Department then took the extraordinary step of formally declaring the ruling a "precedent decision" under California Government Code Section 11425.60, thereby declaring it a decision containing "significant legal or policy findings that apply beyond the facts of the particular case."  The Department intends this Care Entrée ruling to be a defining, controlling decision with respect to discount plans.

If an unlicensed entity is receiving prepayment or periodic payment in return for arranging for discounts on health care services, it has triggered Health & Safety Code Section 1345(f) of the Knox-Keene Act and must get a license.

On October 10, 2006, in a dramatic illustration of this interpretation of the Act, the Department issued its first "discount card" license, to First Dental Health, headquartered in San Diego but operating throughout California.  (First Dental Health had not been targeted by the Department, but rather decided in August 2005 to seek licensure as a sound business decision.) 

At the press conference announcing the licensure, Department Director "Cindy" Ehnes emphasized that discount health "plans" must apply for licensure, stressing that the Department would work with them but that avoidance would not be tolerated.

The Department's insistence on discount fee plan licensure does not extend to currently licensed plans.  Current licensees may offer discount fee products, within the scope of their respective licensure, by filing and securing approval from the Department for a "Material Modification" of their licensure.

Nossaman counseled First Dental Health and assisted in the preparation, negotiation and processing of the application for this first-ever discount plan license.

We worked closely with the Department counsel and staff in preparing this prototype discount fee licensure application.  It was a carefully tailored adaptation of the regulatory format that had been designed for the standard pre-payment, risk-bearing model.  The application entailed requests for various waivers and numerous assertions of "not applicable."  It was a nuanced application, distinctly crafted for a discount plan by Nossaman's experienced lawyers, that won the Department's first discount plan licensure.

Nossaman for many years has assisted applicants for both full service and specialized plan licensure, large and small, private and public, and expertly serves them following licensure.  Our partner, John T. Knox, was the co-author of the Knox-Keene Act.  Over the years we have worked closely with clients in conceptualizing and structuring many innovations under the Act.  Once again, the firm is in the forefront of Knox-Keene licensure.

Richard B. Spohn, partner in Nossaman's San Francisco office, specializes in managed healthcare law and administrative law.  Richard represents HMO's, health delivery systems, medical groups and other healthcare clients, including full-service, dental, mental and eye care plans, in both the public and private sector.  Richard is Chair of Nossaman's Healthcare Practice Group and can be reached at (415) 438-7206 or rspohn@nossaman.com.

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