The Office of General Counsel issued the following opinion on April 28, 2004, representing the position of the New York State Insurance Department.

Re: Financial Risk Sharing/Capitation Arrangements: Adjuster/Insurer Licensing

Questions Presented:

1) Must an independent practice association ("IPA") be licensed as an insurer to enter into an arrangement with a health maintenance organization ("HMO") whereby it provides medical services to the HMO’s enrollees?

2) Would a third party administrator ("TPA") that processes and manages claims for the IPA and its network of providers, pursuant to the arrangement above, be required to obtain a license as an independent adjuster?

Conclusions:

1) An IPA would not be required to obtain a license as an insurer so long as the arrangement in question is in compliance with the provisions in N.Y. Comp. Codes R. & Regs. tit. 11, Part 101 (2002) (Regulation 164) and N.Y. Pub. Health Law § 4403(1)(c) (2002).

2) Under the set of facts presented, a TPA would be required to obtain a license as an independent adjuster.

Facts:

A New York licensed HMO has entered into an arrangement with a New York based IPA to provide certain medical services to the HMO’s enrollees. The IPA contracted with an entity, owned by the same parties as the IPA, to act as a TPA to process claims for the IPA and to manage payments between the IPA and the IPA’s network of providers. The TPA does not engage in any other claims processing activities in New York.

Analysis:

At issue is whether an IPA that enters into an arrangement with an HMO to provide medical services to the HMO’s enrollees, must obtain a license as an insurer. Article 44 of New York Public Health Law authorizes and regulates HMOs in New York. Specifically, N.Y. Pub. Health Law § 4403(1)(c) (2002), entitled: Health Maintenance Organizations; Issuance of Certificate of Authority provides, in pertinent part, that:

(1) The commissioner shall not issue a certificate of authority to an applicant therefor unless the applicant demonstrates that:

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(c) it is financially responsible and may be expected to meet its obligations to its enrolled members. For the purpose of this paragraph, "financially responsible" means that the applicant shall assume full financial risk on a prospective basis for the provision of comprehensive health services, including hospital care and emergency medical services within the area served by the plan, except that it may require providers to share financial risk under the terms of their contract, it may have financial incentive arrangements with providers or it may obtain insurance or make other arrangements for the cost of providing comprehensive health services to enrollees; any insurance or other arrangement required by this paragraph shall be approved as to adequacy by the superintendent as a prerequisite to the issuance of any certificate of authority by the commissioner; ….

N.Y. Comp. Codes R. & Regs. tit. 10, § 98-1.2(aa) (2001) defines an IPA as follows:

(aa) Independent Practice Association or IPA means a not-for-profit corporation or a business corporation, other than a corporation established pursuant to article 28 of the Public Health Law, which contracts with physicians and other providers of medical or medically related services in order that it may then contract with a single HMO to make the services of such providers available to the HMO and its enrollees.

The Commissioner of Health permits IPAs to contract with HMOs to provide medical services pursuant to N.Y. Comp. Codes R. & Regs. tit. 10, § 98-1.18 (2001), which provides in pertinent part, as follows:

(a) An HMO shall be responsible for its agreements with an IPA, for the agreements between the IPA and physicians and other health care providers and suppliers and for the care provided through such arrangements to the same extent as it is responsible for arrangements with all other types of health care providers.

(b) The requirements of article 44 of the Public Health Law and this Part shall apply to an IPA and all physicians, other health care providers and suppliers contracting with an IPA to the same extent they apply to all other health care providers participating with an HMO in a comprehensive health services plan.

(c) Nothing in this Part shall prohibit an IPA from employing physicians or other persons to provide review of medical care utilization patterns, quality of care issues, or other program review functions, even though such physicians may also have contracted with the IPA as an independent member or participating physician.

(d) An HMO contracting with an IPA shall require that the financial records of the IPA shall account in detail for all funds received from the HMO, including, where applicable, fees for services performed by the IPA, and for the disbursement of all such funds.

Further, N.Y. Comp. Codes R. & Regs. tit. 10, § 98-1.5(b)(5)(iv)(a) (2001) provides:

(iv) An HMO shall not enter into a contract with a not-for-profit or business corporation which did not receive all approvals required for incorporation prior to August 8, 1986, and proposing to provide the services of an independent practice association (IPA) unless:

(a) the certificate of incorporation of the IPA contains powers and purposes limited to arranging by contract for the delivery or provision of health services by individuals, entities and facilities licensed or certified to practice medicine and other health professions, and, as appropriate, ancillary medical services and equipment by which arrangements such health care providers and suppliers will provide their services in accordance with and for such compensation as may be established by a contract between the corporation and one or more health maintenance organizations which have been granted a certificate of authority pursuant to the provisions of article 44 of the Public Health Law of the State of New York, as amended.

In addition, IPAs are indirectly regulated by N.Y. Comp. Codes R. & Regs. tit. 11 § 101 (2001) (Regulation 164), which specifically applies to financial risk sharing arrangements.

Without repeating all the conclusions reached in our August 26, 2003 opinion, the Department has previously opined that since the Public Health Law authorizes the Commissioner of Health to allow HMOs to share financial risk with providers, the Legislature has impliedly authorized capitation payments to HMO providers, including IPAs.1   As such, the Department has not required licensing for IPAs that enter into such arrangements with HMOs so long as the arrangement complies with all the requirements in Regulation 164 of the Insurance Law and § 4403(1)(c) of the Public Health Law. As that opinion also stated, any arrangement that falls outside of or violates such requirements requires licensing on the part of the provider or IPA.

An additional inquiry was made as to whether a third party administrator2 that processes and manages claims on behalf of the IPA would need to be licensed as an independent adjuster.

N.Y. Ins. Law § 2108(a)(1) & (3) (McKinney 2000) provides:

(a)(1) Adjusters shall be licensed as independent adjusters or as public adjusters.

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(3) No adjuster shall act on behalf of an insurer unless licensed as an independent adjuster, and no adjuster shall act on behalf of an insured unless licensed as a public adjuster.

N.Y. Ins. Law § 2101(g) (1) (McKinney 2000) defines an independent adjuster, as follows:

(1) The term "independent adjuster" means any person, firm, association or corporation who, or which, for money, commission or any other thing of value, acts in this state on behalf of an insurer in the work of investigating and adjusting claims arising under insurance contracts issued by such insurer and who performs such duties required by such insurer as are incidental to such claims and also includes any person who for compensation or anything of value investigates and adjusts claims on behalf of any independent adjuster….

Section 2101(g)(1) does not limit the adjuster licensing requirement to those persons or entities that act only on behalf of a licensed insurer. Therefore, those who adjust claims -- that arise under insurance contracts -- on behalf of an insurer must be licensed irrespective of whether the insurer itself is exempt from the licensing requirements. Here, the IPA, while acting for the HMO as an insurer by virtue of the fortuitous nature of the capitation arrangement,3 is exempt from the licensing requirements, as discussed above. Notwithstanding such exemption, the IPA is still considered an insurer. Thus, if a person or entity, such as a TPA, adjusts insurance claims on behalf of such exempt insurer, such TPA must obtain an independent adjuster’s license.

For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.

1  See e.g., OGC Opinions dated December 18, 2000 and February 21, 1998, authored by Alan Rachlin.

2

 New York Insurance Law does not use or define the term "third party administrator" and there is no licensing or registration requirement for such person or entity. However, a person or entity, including a third party administrator, that performs functions in New York that require licensing, such as acting as an insurance adjuster, insurance consultant or insurance agent, must be so licensed.

3

See, the August 26, 2003 opinion that provides that a capitation arrangement constitutes insurance under N.Y. Ins. Law § 1101.