The Office of General Counsel issued the following opinion on August 27, 2003, representing the position of the New York State Insurance Department.
RE: Membership Organizations Purchase of Health Insurance for Its Members
May a membership organization purchase health insurance for its members?
Yes, provided the organization has been in existence for two years and was formed for a purpose other than securing insurance.
You anticipate that, based upon the heightened emphasis on faith-based initiatives by the present Federal administration, that many churches will be providing social services. Since many of these church-based operations will be small, 3 to 5 employees, you believe that, if the churches joined together, economies of scale would permit the purchase of health insurance at a better rate than each church could achieve on its own.
Accordingly, you are exploring the establishment of a membership organization, to be incorporated under the New York Not-For-Profit Corporation Law (McKinney 2000 and 2003 Supplement) that would secure recognition as a tax exempt organization pursuant to § 501(c)(3) of the Internal Revenue Code (West 2002), composed of such churches, and inquire as to what laws and regulations would apply.
Policies of group health insurance may be issued only to those groups specified in New York Insurance Law § 4235(c)(1) (McKinney 2000 and 2003 Supplement). Based upon the information you furnished, it appears that the employees of each member church would qualify as a group in accordance with New York Insurance Law § 4235(c)(1)(A):
A policy issued to an employer or to a trustee or trustees of a fund established by an employer, which employer or trustee or trustees shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment or a combination of such conditions and conditions pertaining to the family status of the employee, for insurance coverage on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either from the employer's funds, or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. . . .
The following subparagraphs of New York Insurance Law § 4235(c)(1) setting forth recognized groups would probably be relevant to your proposed organization:
(B) A policy issued to a trustee or trustees of a fund established by, or participated in, by the employer members of a trade association, which trustees shall be deemed the policyholder, for the sole benefit of the employees of such employers, the policy must conform subject to the following requirements: (i) The policy may be issued only if: (I) the association has been in existence for at least two years and was formed for purposes principally other than obtaining insurance, and (II) the participating employers, meaning such employer members whose employees are to be insured, constitute at date of issue at least fifty percent of the total employers eligible to participate, unless the total number of persons covered at date of issue exceeds six hundred, in which event such participating employers must constitute at least twenty-five percent of such total employers, in either case omitting from consideration any employer whose employees are already insured under a similar group accident and health insurance policy. (ii) The persons eligible for insurance under the policy shall be all of the employees of the participating employers, or all of any class or classes thereof determined by conditions pertaining to their employment. (iii) The premium for the policy shall be paid by the trustee or trustees either from funds contributed by the employers or by the employees; or funds contributed jointly by the employers and the employees. . . . (iv) The policy must cover at least fifty employees at date of issue. (v) The insurance coverage under the policy must be based upon some plan precluding individual selection either by the employees or by the policyholder or the employer. . . .
(H) A policy issued to an association, or to a trustee or trustees of a fund established, created or maintained for the benefit of members of one or more associations, all of whose eligible members have the same profession, trade or occupation, which association or associations have been organized and maintained in good faith for purposes principally other than that of obtaining insurance and have been in active existence for at least two years. The policy shall insure members, or employees of members, of such association or associations for the benefit of persons other than employers and the association or associations, or any officials, representatives, trustees or agents thereof and shall provide for the issuance of a certificate to the persons insured or such beneficiary as evidence of such insurance. The members or employees eligible for the insurance under the policy shall be all the members, or all the members and their employees, or all of any class or classes thereof determined by conditions pertaining to their employment or to association membership or both. The premiums for the policy shall be paid from association or members" funds, or partly from such funds and partly from funds contributed by the insured individuals, or from funds wholly contributed by the insured individuals. . . . In every case the policy must cover at least one hundred individuals at date of issue. The insurance coverage on employees insured under the policy shall be based upon some plan precluding individual selection. . . .
(K) A policy issued to an association or the trustee or trustees of a trust established, or participated in, by one or more associations, to insure association members, subject to the following: (i) Each association shall have: (I) A minimum of two hundred insured members at the policy's date of issue; (II) Been organized and maintained in good faith for purposes principally other than that of obtaining insurance; (III) Been in active existence for at least two years; and (IV) A constitution and by-laws which provide that: (aa) The association hold regular meetings not less than annually to further the purposes of the association; . . . (cc) The members have voting privileges and representation on the governing board and committees. (ii) The premium for the policy shall be paid by the association or the trustees either wholly from funds contributed by the association or by the insured individuals, or from funds contributed jointly by the association and insured individuals. . . . (iii) The amount of insurance under the policy shall be based upon some plan precluding individual selection either by the insured members or by the association. . . . (v) The premiums charged must be reasonable in relation to the benefits provided.
Since the organization you propose is not yet in existence, it could not qualify under any of the three aforementioned subparagraphs of New York Insurance Law § 4235(c)(1) because each of these subparagraphs require that the organization have been in existence at least two years before the policy is issued.
In addition, New York Insurance Law § 3231 (McKinney 2000 and 2003 Supplement) provides:
(a) No individual health insurance policy and no group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits . . . shall be issued in this state unless such policy is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. Any individual, and dependents of such individual, and any small group, including all employees or group members and dependents of employees or members, applying for . . . small group health insurance coverage . . . must be accepted at all times throughout the year for any hospital and/or medical coverage offered by the insurer to individuals or small groups in this state. . . . For the purposes of this section, community rated means a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.
In order to effectuate New York Insurance Law § 3231(a), the Superintendent of Insurance has promulgated N.Y. Comp. Codes R. & Regs. tit. 11, § 360.8(e)(1) (2000):
A policy issued to an association group covering at least one participating group member with 50 or fewer employees or members exclusive of spouses and dependents requires the insurer to charge the same community rate to all association members.
While there is provision for some groups to have their own community rate, N.Y. Comp. Codes R & Regs. tit 11, § 360.8(a), the group must include at least 10,000 persons, including spouses and dependents in New York, and include members from diverse and unrelated industries or occupations. Accordingly, it is unlikely that your proposed membership organization would qualify for its own community rate.
In summary, although each member church may lawfully cover its employees under New York Insurance Law § 4235(c)(1)(A), the proposed membership organization could not qualify for a group policy to cover its members under New York Insurance Law § 4235(c)(1) (B), (H), or (K) until the organization shall have been in existence for two years and had been organized for purposes other than obtaining insurance. Further, because of community rating, there would be no economies of scale in purchase of health insurance through the proposed organization.
For further information you may contact Principal Attorney Alan Rachlin at the New York City office.