OGC Opinion No. 04-09-07: ABC Physicians Organization, PLLC (ABC) and Health Insurance

OGC Op. No. 04-09-07

The Office of General Counsel issued the following opinion on September 15, 2004 representing the position of the New York State Insurance Department.

Re: ABC Physicians Organization, PLLC (ABC) and Health Insurance

Questions Presented:

1. May ABC purchase a group health insurance policy covering the employees of its members?

2. May ABC self-fund a program to reimburse the employees of its members for the applicable deductible under the group health insurance policy?

3. If no insurer is willing to issue a policy to ABC, may ABC self-fund the health benefits of its members employees.

Conclusions:

1. ABC would qualify to purchase a group health insurance policy.

2. Since the self-funding of such a program would constitute the doing of an insurance business and since ABC would not be entitled to any exemption from the requirement that it be licensed as an insurer, ABC could not self-fund the program without securing a license as an insurer.

3. An insurer issuing policies in the "association market" could not refuse to issue a policy to ABC. If, however, ABC opted to self-fund, since the self-funding of such a program would constitute the doing of an insurance business and since ABC would not be entitled to any exemption from the requirement that it be licensed as an insurer, ABC could not self-fund the program without securing a license as an insurer.

Facts:

ABC was formed in January 1996 under the name of County X Physicians Organization as a Professional Limited Liability Company in accordance with New York Limited Liability Company Law Article 12 (McKinney 2004 Supplement) and assumed its present name in February 1996. The members of ABC are all physicians practicing in County X and adjacent counties.

Notwithstanding that ABCs Certificate of Organization lists the practice of medicine as one of its purposes, each of ABCs members maintains all aspects of its own practice, which may be as a sole proprietorship, partnership, professional corporation or limited liability company, including billing for their services. ABC provides marketing and administrative services on behalf of its members in connection with the development of contractual arrangements with purchasers of health care, including insurers, Health Maintenance Organizations, and employers. In furtherance of that function, ABC is the sole shareholder of XYZ-IPA, Inc., which was formed under the New York Business Corporation Law (McKinney 2003 and 2004 Supplement) and is recognized as an Independent Practice Association in accordance with New York Public Health Law Article 44 (McKinney 2002 and 2004 Supplement) and the regulations promulgated thereunder.

At present, each of ABCs members purchases a health insurance policy covering that physicians employees. Some of the ABC members have purchased a high deductible health plan, where the deductible may reach $7,500 for family coverage. Those physicians that have purchased such a high deductible plan reimburse employees for all or a portion of the deductible on a self-funded basis.

ABC desires to aggregate the health coverage of its members employees and purchase a policy or contract from an insurer or HMO authorized in New York covering the ABC members and its employees. In addition, ABC desires itself to aggregate the funding of the high deductible reimbursement program. Finally, if no insurer is willing to issue it a policy of health insurance, ABC desires to self-fund the entire program of health coverage.

Analysis:

Purchase of Health Insurance Policy by ABC

It appears that the members of ABC each currently purchase a policy of group health insurance in accordance with New York Insurance Law § 4235(c)(1)(A) (McKinney 2000 and 2004 Supplement):

A policy issued to an employer . . . which employer . . . shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring . . . 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. . . .

In addition to employer-employee groups, New York Insurance Law § 4235(c)(1)(A), New York Insurance Law § 4235(c)(1)(D) & (H) authorize:

(D) A policy issued to a trustee or trustees of a fund established, or participated in, by two or more employers . . . which trustee or trustees shall be deemed the policyholder, to insure employees of the employers . . . for the benefit of persons other than the employers . . . subject to the following requirements: (i) The persons eligible for insurance shall be all of the employees of the employers . . . or all of any class or classes thereof determined by conditions pertaining to their employment . . . (ii) The premium for the policy shall be paid by the trustee or trustees either wholly from funds contributed by the employer or employers of the insured person . . . or jointly from such funds and funds contributed by the insured persons specifically for their insurance or from contributions by the insured persons. . . . (iii) The policy shall insure at least fifty persons at date of issue, except that if part of the premium is to be derived from funds to be contributed by the insured persons specifically for their insurance the policy shall insure at least one hundred employees or members at date of issue. (iv) The insurance coverage under the policy shall be based upon some plan precluding individual selection either by the insured persons or by the policyholders, employers, or unions. . . .

(H) A policy issued to an association . . . 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 . . . 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. A policy on which all or part of the premium is to be derived from funds contributed by the insured individuals specifically for their insurance must insure at least fifty percent of the then eligible individuals or a minimum of two hundred individuals, whichever is less . . . A policy on which no part of the premium is to be derived from funds contributed by the insured individuals specifically for their insurance must cover all eligible 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. . . . If a policy dividend is declared or a reduction in rate is made under such a policy, the excess, if any, of the aggregate dividends or rate reductions under the policy over the aggregate expenditure for insurance under such policy made from association or employer funds, including expenditures made in connection with administration of such policy, shall be applied by the policyholder for the sole benefit of the insured individuals. . . .

Based upon the information furnished, it appears that ABC is an association whose members all have the same occupation, medicine, was formed more than two years ago, and not for the purpose of securing insurance. Accordingly, ABC could purchase a group health insurance policy, either as an aggregation of employers in accordance with New York Insurance Law § 4235(c)(1)(D), or as an association, in accordance with New York Insurance Law § 4235(c)(1)(H).

The Legislature, 1992 N.Y. Laws 501, enacted a major reform of health insurance availability that, among other requirements, mandated community rating and open enrollment for individual and small group health insurance. Accordingly, New York Insurance Law § 3231(a) (McKinney 2000 and 2004 Supplement), regulating policies of commercial insurers, provides:

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 . . . 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 . . . small groups in this state. Once accepted for coverage, an individual or small group cannot be terminated by the insurer due to claims experience. . . . 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.

New York Insurance Law § 4317(a) (McKinney 2000 and 2004 Supplement) imposes the same restrictions on contracts of not-for-profit insurers and all HMOs.

In order to effectuate the open enrollment community rating requirements, the Department promulgated N, Y. Comp. Codes R. & Regs. tit. 11, Part 360 (2000) (Regulation 145). Regulation 145 provides, N.Y. Comp. Codes R. & Regs. tit. 11, § 360.2(a) (2000), that, among others, policies issued pursuant to New York Insurance Law § 4235(c)(1)(D) or (H) are considered "association groups". The Regulation further provides, N.Y. Comp. Codes R. & Regs. tit. 11, § 360.8(e)(1):

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.

Accordingly, if at any ABC member has less than 50 employees and a policy is issued to ABC, the policy would have to be community rated.

Self-Funding of Deductible Reimbursement

New York Insurance Law § 1101(a) (McKinney 2000 and 2004 Supplement) defines doing an insurance business:

(1) Insurance contract means any agreement or other transaction whereby one party, the insurer, is obligated to confer benefit of pecuniary value upon another party, the insured or beneficiary, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event

(2) Fortuitous event means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.

New York Insurance Law § 1102(a) (McKinney 2000 and 2004 Supplement) proscribes the doing of an insurance business unless one is either licensed or exempt from the requirement to secure a license.

The self-funding of a deductible reimbursement is both the conferment of a benefit of pecuniary value and based upon a fortuitous event. However, such a benefit falls within the definition of employee welfare benefit plan under the Employee Retirement Income Security Act (ERISA). 29 U.S.C.A. § 1002(1) (West 1999):

The terms employee welfare benefit plan and welfare plan mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer . . . to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability . . . .

Since ERISA, 29 U.S.C.A. § 1144(b)(2)(B) (West 1999), provides that employee welfare benefit plans are not to be considered as insurers under state law, the members of ABC are presently exempt from the strictures of New York Insurance Law § 1102(a) in the reimbursement of the deductible.

Congress has, however, provided an exception to the ERISA exemption from state laws for employee welfare benefit plans for those characterized as Multiple Employer Welfare Arrangements (MEWA). A MEWA is defined, 29 U.S.C.A. § 1003(40)(A):

The term multiple employer welfare arrangement means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries, except that such term does not include any such plan or other arrangement which is established or maintained-- (i) under or pursuant to one or more agreements which the Secretary finds to be collective bargaining agreements, (ii) by a rural electric cooperative, or (iii) by a rural telephone cooperative association.

As to MEWAs, ERISA provides, 29 U.S.C.A. § 1144(b)(6):

(A) Notwithstanding any other provision of this section-- (i) in the case of an employee welfare benefit plan which is a multiple employer welfare arrangement and is fully insured (or which is a multiple employer welfare arrangement subject to an exemption under subparagraph (B)), any law of any State which regulates insurance may apply to such arrangement to the extent that such law provides-- (I) standards, requiring the maintenance of specified levels of reserves and specified levels of contributions, which any such plan, or any trust established under such a plan, must meet in order to be considered under such law able to pay benefits in full when due, and (II) provisions to enforce such standards, and (ii) in the case of any other employee welfare benefit plan which is a multiple employer welfare arrangement, in addition to this title, any law of any State which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title.

(B) The Secretary [of Labor] may, under regulations which may be prescribed by the Secretary, exempt from subparagraph (A)(ii), individually or by class, multiple employer welfare arrangements which are not fully insured. . . .

. . .

(D) For purposes of this paragraph, a multiple employer welfare arrangement shall be considered fully insured only if the terms of the arrangement provide for benefits the amount of all of which the Secretary determines are guaranteed under a contract, or policy of insurance, issued by an insurance company, insurance service, or insurance organization, qualified to conduct business in a State.

Accordingly, because ABC would under the proposal constitute an uninsured MEWA, the full panoply of the New York Insurance Law would be applicable. Therefore, ABC could not self-fund the reimbursement of the employees deductibles unless it were licensed as an insurer.

Self-Funding of Health Benefits byABC

Although an insurer is not required to issue policies to associations groups, N.Y. Comp. Codes R. & Regs. tit. 11, § 360.8(b)(5), if an insurer does issue policies to association groups, it is bound by the community rating and open enrollment requirements. Accordingly, an insurer that issues policies in the association market in the geographic area covered by ABC would be required to issue it a policy.

If, however, for any reason, ABC opts to self-fund the health benefits, for the reason given above ABC could not so self-fund without being licensed as an insurer. Information about obtaining such a license may be secured from the Departments Health Bureau.