When the North Carolina Commissioner of Insurance proposed rules on managed care, preferred provider organizations, and provider contracts, did the Commissioner have authority to dictate substantive terms of provider contracts and to credential providers, or do those rules go beyond what the legislature authorized?
Plain-English summary
In the mid-1990s, managed care was reshaping American health insurance. Preferred provider organizations (PPOs), physician-hospital organizations (PHOs), and provider networks were proliferating, and the North Carolina Department of Insurance proposed regulations to put structure around them. The Commissioner of Insurance asked the AG whether the proposed rules were within the Commissioner's statutory authority.
Chief Counsel John R. McArthur and Assistant AG Ted R. Williams gave a careful three-part answer.
First, on regulating physician networks generally. Chapter 58 of the General Statutes regulates the business of insurance. N.C.G.S. § 58-3-5 makes it unlawful to make insurance contracts in North Carolina or aid in transacting such insurance without authorization. N.C.G.S. § 58-1-10 defines a contract of insurance as "an agreement by which the insurer is bound to pay money or its equivalent or to do some act of value to the insured upon, and as an indemnity or reimbursement for the destruction, loss or injury of something in which the other party has an interest." If a provider network is entering into insurance contracts as an insurer, engaged in the business of insurance, or operating as a hospital service corporation under Article 65 or as an HMO under Article 67, the Commissioner has regulatory authority. Pure provider arrangements that do not meet those structural definitions fall outside the Commissioner's jurisdiction.
Second, on dictating contract terms. This was where the proposed rules ran into the most trouble. The AG cited State ex rel. Commissioner of Insurance v. Integon Life Insurance Co., 28 N.C. App. 7, 220 S.E.2d 409 (1975), for the foundational administrative-law principle that an agency must find within its statutes the justification for any authority it claims, and an agency "has no power to promulgate rules and regulations which alter or add to the law it was set up to administer." The Commissioner can identify or describe topics that provider contracts must address, but cannot dictate substantive terms not otherwise required or authorized by law. Sections 58-50-55(b) and 58-65-140(b) authorize rules designed to provide for "(i) accessibility of preferred provider services to individuals comprising the insured or contracted group, (ii) the adequacy of the number and locations of institutions and practitioners, (iii) the availability of services at reasonable times, and (iv) financial solvency." Rules outside those four buckets exceed the rulemaking authority.
Third, on PPOs specifically. The proposed Section .0200 (contract provisions) and Section .0400 (credentialing) rules were not supported by the statutory framework for PPOs. Provider credentialing and the substantive terms and conditions of provider contracts did not appear to relate to accessibility, adequacy of number and location, availability of services, or financial solvency. The Commissioner has additional authority under §§ 58-50-50 and 58-65-1 (definitions) and § 58-50-60 (precertification), but those do not cover the topics in Sections .0200 and .0400. The AG concluded that the proposed rules went beyond the Commissioner's statutory authority in those areas.
The substantive theme running through the opinion was that the Commissioner cannot use rulemaking as a substitute for legislative policymaking. Insurance regulation in North Carolina is statute-bound. The legislature decides what insurance contracts must contain, what provider relationships look like, and how networks form; the Commissioner administers the statutes and fills in operational details consistent with the statutory grants. When the proposed rules tried to add substantive content to provider contracts or to require credentialing standards not authorized by statute, they crossed the line from administration into legislation. Integon was the leading appellate restatement of that principle.
Currency note
This opinion was issued in 1996. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. North Carolina's managed-care regulatory framework has changed substantially since 1996, including legislative grants of authority that expand the Insurance Commissioner's role over managed-care contracts, network adequacy, prompt-payment requirements, and consumer protection. The principle that an administrative agency cannot exceed its statutory rulemaking grant remains foundational under Integon, but the specific scope of the Commissioner's authority over PPO contract terms and credentialing has expanded by statute. Anyone working on a current managed-care rulemaking question should check Chapter 58 in its current form and the relevant case law.
Background and statutory framework
The mid-1990s wave of managed-care growth was a stress test for state insurance regulators across the country. PPOs were a hybrid: they were not classic indemnity insurance, and not quite HMOs either. Patients chose providers from a network at a lower cost-share; providers accepted discounted fees in exchange for steered patient volume. The mechanics involved contracts between insurers, providers, and patients, but the form varied widely.
Insurance commissioners faced two impulses. One impulse was to bring everything under regulation to protect consumers, ensure access, and prevent insolvencies. The other was to leave market arrangements to the parties as long as no one was operating as an insurer without a license. North Carolina's Insurance Commissioner had drafted regulations that leaned toward the first impulse. The AG opinion pushed back on the second.
The four-category statutory framework in §§ 58-50-55(b) and 58-65-140(b) is unusually specific. The legislature named the topics on which rules could be made (accessibility, adequacy, availability, solvency) and implicitly excluded others. That specificity is what the AG used to limit the rulemaking. If the legislature had wanted broader Commissioner authority, it could have said so.
The Commissioner's general rulemaking authority in § 58-2-40(1) was the only counterargument worth examining. That section allows the Commissioner to "adopt rules . . . to enforce, carry out and make effective the provisions of those laws" and to "prevent persons subject to the Commissioner's regulatory authority from engaging in practices injurious to the public." The AG accepted the broad language but pointed out that even general rulemaking authority cannot create substantive law that the underlying statutes do not authorize. The "make effective" and "prevent injurious practices" language has to operate within the statutory scaffolding, not transcend it.
The opinion's PPO-specific analysis was the most operationally significant part for the industry. By concluding that the proposed credentialing and contract-content rules exceeded the Commissioner's authority, the AG essentially told the Department to either go to the legislature for expanded authority or scale back the rules. The Department did revise and rescope much of this regulatory effort in subsequent years.
Common questions
What is a PPO, and why does it matter for North Carolina insurance regulation?
A PPO is a network of providers (doctors, hospitals) that have agreed to discounted rates with an insurer in exchange for being on the insurer's preferred-provider list. Patients pay less out-of-pocket when they use preferred providers. The insurer contracts with both the patient (insurance policy) and the providers (network agreements). North Carolina regulates the network agreements in some specific ways, but the AG opinion limited that regulation to the four statutory categories.
Can the Insurance Commissioner require provider credentialing standards?
Not by general rule, at least not under the 1996 statutory framework as the AG read it. Provider credentialing did not fit within accessibility, adequacy, availability, or financial solvency. The Commissioner could have asked the legislature to expand the authority; the AG opinion did not say credentialing was inherently inappropriate, just that it lacked statutory authorization at the time.
Could individual provider contracts still have credentialing terms?
Yes, voluntarily. The AG's opinion was about the Commissioner's regulatory authority, not about what insurers and providers could agree to in their private contracts.
Did this opinion mean PPOs were unregulated?
Not at all. The Commissioner retained authority over the four statutory categories. Plus, any PPO operating as an insurer, engaged in the business of insurance, or covered by Article 65 or Article 67 was subject to those broader regulatory schemes.
Source
Citations
- N.C.G.S. §§ 58-1-10, 58-2-40(1), 58-3-5
- N.C.G.S. §§ 58-50-50, 58-50-55, 58-50-55(b), 58-50-60
- N.C.G.S. §§ 58-65-1, 58-65-140, 58-65-140(b)
- Article 65 of Chapter 58 (Hospital, Medical and Dental Service Corporations)
- Article 67 of Chapter 58 (HMO Act)
- State ex rel. Commissioner of Insurance v. Integon Life Insurance Co., 28 N.C. App. 7, 220 S.E.2d 409 (1975)
Original opinion text
- Does the Commissioner of Insurance have the authority to regulate directly or indirectly the formation, operation, or standards of practice of a physician organization, physician network, or physician-hospital organization?
- Does the Commissioner of Insurance have the authority to specify terms in health care provider contracts as proposed in Section .0200 of the Proposed Regulations?
- Does the Department of Insurance have the authority to promulgate regulations of PPO's (Preferred Provider Organizations) in areas not specified by N.C.G.S. §§ 58-50-55(b) and 58-65-140(b)?
It is our opinion based upon a review of the proposed rules, the relevant statutes, the statutory authority cited in support of the proposed rules, and the applicable case law that:
- The Commissioner may regulate provider networks to the extent the contractual arrangements of the networks constitute contracts of insurance, the business of insurance, or to the extent the arrangements are subject to Article 65 of Chapter 58 (Hospital, Medical and Dental Service Corporations) or Article 67 of Chapter 58 (Health Maintenance Organization Act).
- While the Commissioner has the authority to identify or describe the topics or areas to be addressed in health care provider contracts, he may not, by rule, dictate substantive terms and conditions not otherwise required or authorized by law.
- N.C.G.S. §§ 58-50-55(b) and 58-65-140(b) are not the Commissioner's only sources of authority to promulgate regulations regarding preferred provider organizations. However, his additional regulatory authority is limited and does not support all of the regulations proposed under section .0200 (contract provisions) and section .0400 (credentialing) of the proposed rules.
I. REGULATION OF NETWORK PROVIDERS Although your letter does not define the general nature of these entities, we assume they are health care providers or provider networks entering into direct arrangements to provide future health care services directly to the entity making the arrangements. The provider networks are not entities specifically referenced in Chapter 58. However, N.C.G.S. § 58-3-5 provides that it "is unlawful for any company to make any contract of insurance upon or concerning any property or interest or lives in this State, or with any resident thereof, or for any person as insurance agent, or insurance broker to make, negotiate, solicit, or in any manner aid in the transaction of such insurance, unless and except as authorized under the provisions of Articles 1 through 64 of this Chapter." N.C.G.S. § 58-1-10 defines a contract of insurance as "an agreement by which the insurer is bound to pay money or its equivalent or to do some act of value to the insured upon, and as an indemnity or reimbursement for the destruction, loss or injury of something in which the other party has an interest."
It is our opinion that the Commissioner's authority to regulate insurance contracts and the insurance business would include these entities to the extent that health care providers or provider networks are either entering into insurance contracts as insurers, are engaged in the business of insurance, or are subject to Articles 65 or 67, and are not otherwise subject to an exemption from regulation.
The opinion request did not provide a specific contractual arrangement that the network providers would offer. Consequently, whether provider networks would be subject to regulation by the Commissioner of Insurance depends upon whether their contractual arrangements are contracts of insurance.
II. CONTRACT PROVISIONS It is a fundamental principle of administrative law that the legislature may grant power to administrative agencies, within definite limits, to promulgate rules and regulations for the administration of a law. An agency must find within the statutes justification for any authority which it purports to exercise. An administrative agency has no power to promulgate rules and regulations which alter or add to the law it was set up to administer and can not promulgate rules and regulations which have the effect of substantive law. State ex rel. Commissioner of Insurance v. Integon Life Insurance Co., 28 N.C. App. 7, 220 S.E.2d 409 (1975).
The general rulemaking powers of the Commissioner are found in Article 2 of Chapter 58 of the North Carolina General Statutes. In establishing the Department of Insurance and detailing the broad powers and duties of the Commissioner of Insurance, the legislature mandated that the Commissioner see that all laws that he is responsible for administering and the provisions of Chapter 58 are faithfully executed. To that end, the Commissioner is authorized to adopt "rules … to enforce, carry out and make effective the provisions of those laws" and to promulgate "such further rules not contrary to those laws that will prevent persons subject to the Commissioner's regulatory authority from engaging in practices injurious to the public." N.C.G.S. § 58-2-40(1). Specifically with respect to the regulation of persons or corporations offering preferred provider plans, contracts or policies, the Commissioner may adopt rules to the extent that the rules are designed to provide for the accessibility, adequate number and locations of institutions and practitioners, availability of services at reasonable times, and financial solvency. N.C.G.S. § 58-50-55(b); § 58-65-140(b).
In light of the foregoing, the Commissioner clearly has the authority to adopt rules requiring written contracts and the filing of forms prior to execution. He may also require that each preferred provider plan provide, inter alia, the names and addresses of all providers of health care designated by the preferred provider and the terms of the agreements entered into with these providers. Finally, the Commissioner may, by rule, impose such other requirements as are necessary to ensure the accessibility of services, the adequacy of number and location of providers, the availability of services at reasonable times and the financial solvency of the preferred provider plan. See N.C.G.S. §§ 58-50-55(b); 58-65-140(b). The Commissioner may also identify or describe other topics or areas to be addressed in the contracts to the extent that such topics have a direct relationship to the areas enumerated in N.C.G.S. §§ 58-50-55(b) and 58-65-140(b). Any provisions of Section .0200 of the proposed rules applicable to preferred provider plans which go beyond these limits, in our opinion, exceed the rulemaking powers granted to the Commissioner.
For example, some provisions of the proposed rules dictate substantive terms and conditions of the contracts and impose affirmative, mandatory obligations upon preferred provider plans which, in effect, add to or alter the law or have the effect of substantive law. In our opinion, any proposed rule which is not reasonably necessary to ensure the accessibility of services, the adequacy of number and location of providers, the availability of services at reasonable times and the financial solvency of the preferred provider plan and which adds to or alters the law or has the effect of substantive law is not a proper exercise of the Commissioner's rulemaking function.
III. REGULATIONS FOR PREFERRED PROVIDER ORGANIZATIONS
Both N.C.G.S. §§ 58-50-55(b) and 58-65-140(b), titled "Preferred provider contracts," provide that the Department of Insurance shall have authority to promulgate rules applicable to persons or corporation offering preferred provider contracts. Each statute clarifies that
[t]hese rules shall be designed to provide for (i) accessibility of preferred provider services to individuals comprising the insured or contracted group, (ii) the adequacy of the number and locations of institutions and practitioners, (iii) the availability of services at reasonable times, and (iv) financial solvency.
The other provisions N.C.G.S. §§ 58-50-55 and 58-65-140 govern the payment of providers not participating in a particular plan, the admittance of other providers to the plans, and discuss marketing and advertising issues.
There are also other statutes which specifically refer to preferred providers. N.C.G.S. § 58-50-50 is a definition of a preferred provider. It provides that
…except where specifically prohibited either by N.C.G.S. § 58-50-55 or by regulations promulgated by the Department of Insurance, not inconsistent with Articles 1 through 64 of this Chapter, the contractual terms and conditions for special reimbursements shall be those which the insurer, health care provider and the preferred provider find to be mutually agreeable.
N.C.G.S. § 58-65-1 also contains a definition of preferred provider and an exception consistent with the provisions of N.C.G.S. § 58-50-50. N.C.G.S. § 58-50-60, which governs rules for precertification practices, is applicable to preferred provider arrangements.
These additional statutes relate to areas for the regulation of preferred provider organizations which are not addressed under the provisions of N.C.G.S. §§ 58-50-55(b) or 58-65-140(b). However, a review of the proposed rules relating to preferred provider organizations indicates that some provisions are not supported by any of the statutory provisions specifically applicable to preferred provider organizations.
Section .0700 of the proposed rules specifically applies to preferred provider organizations. These proposed rules relate to the accessibility of providers and the financial solvency of preferred provider organizations. The rules governing accessibility include provisions which require preferred provider organizations to comply with the provisions of .0400 and .0200 of the proposed rules.
Section .0400 of the proposed rules governs provider credentialing and section .0200 relates to health care provider contracts. Neither provider credentialing nor the terms and conditions of health care provider contracts appears to relate to accessibility of services, adequacy of number and location of providers, availability of services, and financial solvency, pursuant to N.C.G.S. §§ 58-50-55(b) and 58-64-140(b). Thus the additional authority cited above which the Department has to regulate preferred provider organizations does not appear to support the proposed rules under Section .0200 and .0400. The proposed rules appear to go beyond the specific requirements of N.C.G.S. §§ 58-50-50, 58-50-55, 58-50-60, 58-65-1, and 58-65-140.
There is one other point which should be mentioned. It is our understanding that the proposed regulations at issue have undergone additional revisions. Please note that the scope of this opinion is limited: it relates only to those entities offering preferred provider contracts pursuant to G.S. 58-50-55 and 58-65-140; and it is limited to the regulations appearing in the November 15, 1995 North Carolina Register, as subsequently revised on December 18, 1995. If you have any questions, feel free to contact us.
John R. McArthur Chief Counsel
Ted R. Williams
Assistant Attorney General