New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The office of General Counsel issued the following informal opinion on July 19, 2000, representing the position of the New York State Insurance Department.

Re: Capitation Arrangements Involving Professional Corporations

Question Presented:

May a corporation that has a managed care agreement with an HMO contract with physicians for the provision of health care services to HMO enrollees and compensate the physicians on a capitated fee basis?

Conclusion:

No. This would be a violation N.Y. Ins. Law §1102(McKinney 1985).

Facts:

A New York professional corporation (the "Corporation") maintains a managed care agreement (the "HMO Agreement") with a health maintenance organization (the "HMO"), pursuant to which the corporation agrees to arrange for the provision of health care services to enrollees of the HMO. The Corporation maintains service agreements (each, a "Physician Agreement") with various independent contractor, primary care physicians (the "Contractor Physicians"), pursuant to which the Contractor Physicians agree to provide comprehensive primary care physician services to enrollees of the HMO in accordance with the terms and provisions of the HMO Agreement.

The Physician Agreement provides that the Corporation and the applicable Contractor Physician are independent contractors. The Physician Agreement further provides that the Corporation shall pay to the Contractor Physician, as compensation for the provision of primary care services under the Physician Agreement, a capitated, monthly amount for each enrollee of the HMO who selects the Contractor Physician as a primary care physician.

Analysis:

N.Y. Ins. Law §1101(a) (McKinney 1985) defines an "insurance contract" as:

(A)ny 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.

N.Y. Ins. Law §1101(b) (McKinney 1985) defines a "fortuitous event" as:

(A)ny 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.

N.Y. Ins. Law §1102(a) (McKinney) provides:

No person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter, or exempted by the provisions of this chapter from such requirement….

Under the Physician Agreement the Contractor Physician is obligated to furnish the enrollee with all primary care services in accordance with the terms of the HMO Agreement. To the extent that the cost of the provision of these medical services exceeds the fixed capitation fee, the Contractor Physician will suffer a loss. It has been the consistent position of this Department that payment on a capitated basis has sufficient fortuity to require the recipient to be licensed as an insurer, unless otherwise exempt from licensure.

N.Y. Ins. Law §1109 (McKinney 1985 & Supp. 2000) contains a limited exemption from licensing for health maintenance organizations. The Department has viewed the authorization of health maintenance organizations to enter into risk sharing arrangements with health providers, N.Y. Pub. Health Law §4403(1)(c) (McKinney 1985), as falling within the N.Y. Ins. Law §1109 (McKinney 1985 & Supp. 2000) exemption from the general prohibition against doing an insurance business without a license. Accordingly, capitation arrangements have been acceptable only when entered into by a provider and a health maintenance organization.

However, under the instant facts, the capitation arrangement is between the Corporation and the Contracting Physician, neither of which enjoys an exemption from licensing and, consequently, the arrangement is impermissible.

For further information you may contact Associate Attorney Joan Siegel at the New York City Office.