The office of General Counsel issued the following informal opinion on November 20, 2001, representing the position of the New York State Insurance Department.
Re: Medicare+Choice (M+C) Provider Sponsored Organization (PSO), New York State Licensing
1. Is a PSO required to be licensed under the New York Insurance Law?
2. If so, may the Superintendent of Insurance impose financial requirements that are identical to those imposed under Federal regulations?
1. A PSO is required to be licensed under the New York Insurance Law.
2. The Superintendent has the discretion to impose financial requirements that are identical to those imposed under applicable Federal regulations.
The inquirers client, ("The Client"), is an aggregation of physicians licensed in New York State, is located in Staten Island, and is incorporated under the New York Business Corporation Law (McKinney 1986 and 2001 Supplement). The Client intends to enter into a contract with the United States Department of Health and Human Services to function as a M+C organization. While The Client will provide medical services, for required hospital services, it will negotiate contracts with local hospitals.
The Client is a PSO, as that term is defined under applicable Federal statutes, 42 U.S.C.A. § 1395w-25(d) (West 2000). The Client may, if such action is required by the applicable Federal authority, elect to purchase stop-loss insurance.
The inquirer previously sought to secure licensure of The Client from the New York State Department of Health and was informed by that agency that it could not license The Client, since it was not one of the entities specified in Article 44 of the New York Public Health Law (McKinney 1993 and 2001 Supplement). The Health Department indicated, however, that this Department might license The Client.
In the inquirers letter, he asked whether this Department would license The Client and, if it would, what financial requirements it would impose. In a subsequent telephone conversation, the inquirer indicated that he sought confirmation of his belief that The Client could not be licensed by the State of New York, to the end of seeking a waiver of such licensing requirement from the United States Department of Health and Human Services.
Applicable Federal Statutes and Regulations
The definition of a PSO is as set forth in statute, 42 U.S.C.A. § 1395w-25:
Provider-sponsored organization defined. (1) In general. In this part the term provider-sponsored organization means a public or private entity-- (A) that is established or organized, and operated, by a health care provider, or group of affiliated health care providers, (B) that provides a substantial proportion . . .of the health care items and services under the contract under this part directly through the provider or affiliated group of providers, and (C) with respect to which the affiliated providers share, directly or indirectly, substantial financial risk with respect to the provision of such items and services and have at least a majority financial interest in the entity.
(2) Substantial proportion. In defining what is a substantial proportion for purposes of paragraph (1)(B), the Secretary-[of Health and Human Services]- (A) shall take into account the need for such an organization to assume responsibility for providing--(i) significantly more than the majority of the items and services under the contract under this section through its own affiliated providers; and (ii) most of the remainder of the items and services under the contract through providers with which the organization has an agreement to provide such items and services, in order to assure financial stability and to address the practical considerations involved in integrating the delivery of a wide range of service providers; (B) shall take into account the need for such an organization to provide a limited proportion of the items and services under the contract through providers that are neither affiliated with nor have an agreement with the organization; and (C) may allow for variation in the definition of substantial proportion among such organizations based on relevant differences among the organizations, such as their location in an urban or rural area.
(3) Affiliation. For purposes of this subsection, a provider is affiliated with another provider if, through contract, ownership, or otherwise--(A) one provider, directly or indirectly, controls, is controlled by, or is under common control with the other, (B) both providers are part of a controlled group of corporations under section 1563 of the Internal Revenue Code of 1986 (C) each provider is a participant in a lawful combination under which each provider shares substantial financial risk in connection with the organization's operations, or (D) both providers are part of an affiliated service group under section 414 of such Code.
(4) Control. For purposes of paragraph (3), control is presumed to exist if one party, directly or indirectly, owns, controls, or holds the power to vote, or proxies for, not less than 51 percent of the voting rights or governance rights of another.
(5) Health care provider defined. In this subsection, the term health care provider means-- (A) any individual who is engaged in the delivery of health care services in a State and who is required by State law or regulation to be licensed or certified by the State to engage in the delivery of such services in the State, and (B) any entity that is engaged in the delivery of health care services in a State and that, if it is required by State law or regulation to be licensed or certified by the State to engage in the delivery of such services in the State, is so licensed.
What constitutes a substantial proportion has been defined by the Secretary, 42 C.F.R. § 422.352(b) (2000):
Provision of services. A PSO must demonstrate to CMS's satisfaction that it is capable of delivering to Medicare enrollees the range of services required under a contract with CMS. Each PSO must deliver a substantial proportion of those services directly through the provider or the affiliated providers responsible for operating the PSO. Substantial proportion means -- (1) For a non-rural PSO, not less than 70% of Medicare services covered under the contract. (2) For a rural PSO, not less than 60% of Medicare services covered under the contract.
A PSO must offer what is known as a coordinated care plan, as defined in 42 U.S.C.A. § 1395w-21(a)(2)(A) (West 2000). The benefits that must be provided by the PSO are those usually required of an M+C organization pursuant to regulations of the Secretary, 42 C.F.R. § 422.2 (2000):
M+C plan means health benefits coverage offered under a policy or contract by an M+C organization that includes a specific set of health benefits offered at a uniform premium and uniform level of cost-sharing to all Medicare beneficiaries residing in the service area of the M+C plan (or in individual segments of a service area, . . . .
Benefits are health care services that are intended to maintain or improve the health status of enrollees, for which the M+C organization incurs a cost or liability under an M+C plan (not solely an administrative processing cost). Benefits are submitted and approved through the ACR [Adjusted Community Rate] process.
At a minimum, a M+C organization must provide benefits equivalent to those available to individuals electing Medicare Parts A & B. 42 U.S.C.A. § 1395w-22(a)(1)(A) (West 2000).
The inquirer indicated that The Client would do business in Staten Island. Since Staten Island is not a rural area as defined by the Secretary, 42 C.F.R. § 412.62(f)(iii) (2000), The Client must provide 70% of benefits directly or through affiliates.
Generally, an M+C organization must be licensed as a risk bearing entity by the state in which it does business. 42 U.S.C.A. § 1395w-25(a)(1). There is, however, an exception for a PSO, 42 U.S.C.A. § 1395w-25(a)(2):
(A) In general. In the case of a provider-sponsored organization that seeks to offer a Medicare + Choice plan in a State, the Secretary shall waive the requirement of paragraph (1) that the organization be licensed in that State if-- (i) the organization files an application for such waiver with the Secretary by not later than November 1, 2002, and (ii) the Secretary determines, based on the application and other evidence presented to the Secretary, that any of the grounds for approval of the application described in subparagraph (B), (C), or (D) has been met.
(B) Failure to act on licensure application on a timely basis. The ground for approval of such a waiver application described in this subparagraph is that the State has failed to complete action on a licensing application of the organization within 90 days of the date of the State's receipt of a substantially complete application. . . .
(C) Denial of application based on discriminatory treatment. The ground for approval of such a waiver application described in this subparagraph is that the State has denied such a licensing application and-- (i) the standards or review process imposed by the State as a condition of approval of the license imposes any material requirements, procedures, or standards (other than solvency requirements) to such organizations that are not generally applicable to other entities engaged in a substantially similar business, or (ii) the State requires the organization, as a condition of licensure, to offer any product or plan other than a Medicare + Choice plan.
(D) Denial of application based on application of solvency requirements. With respect to waiver applications . . . the ground for approval of such a waiver application described in this subparagraph is that the State has denied such a licensing application based (in whole or in part) on the organization's failure to meet applicable solvency requirements and-- (i) such requirements are not the same as the solvency standards established under section 1856(a) or (ii) the State has imposed as a condition of approval of the license documentation or information requirements relating to solvency or other material requirements, procedures, or standards relating to solvency that are different from the requirements, procedures, and standards applied by the Secretary . . . . For purposes of this paragraph, the term "solvency requirements" means requirements relating to solvency and other matters covered under the standards established under section 1856(a).
The Secretary was required, 42 U.S.C.A. § 1395w-26 (West 2000), to establish solvency standards for PSOs. In accordance with that directive, the Secretary promulgated standards that establish minimum net worth requirements for PSOs, 42 C.F.R. § 422.382 (2000):
(a) At the time an organization applies to contract with CMS as a PSO under this part, the organization must have a minimum net worth amount, . . .of: (1) At least $ 1,500,000, except as provided in paragraph (a)(2) of this section. (2) No less than $ 1,000,000 based on evidence from the organization's financial plan . . . demonstrating to CMS's satisfaction that the organization has available to it an administrative infrastructure that CMS considers appropriate to reduce, control or eliminate start-up administrative costs.
After the effective date of a PSO's M+C contract, a PSO must maintain a minimum net worth amount equal to the greater of -- (1) One million dollars; (2) Two percent of annual premium revenues as reported on the most recent annual financial statement filed with CMS for up to and including the first $ 150,000,000 of annual premiums and 1 percent of annual premium revenues on premiums in excess of $ 150,000,000; (3) An amount equal to the sum of three months of uncovered health care expenditures . . . or (4) . . . an amount equal to the sum of -- (i) Eight percent of annual health care expenditures paid on a non-capitated basis to non-affiliated providers; and (ii) Four percent of annual health care expenditures paid on a capitated basis to non-affiliated providers plus annual health care expenditures paid on a non-capitated basis to affiliated providers. . . .
(c) Calculation of the minimum net worth amount -- (1) Cash requirement. (i) At the time of application; the organization must maintain at least $ 750,000 of the minimum net worth amount in cash or cash equivalents. (ii) After the effective date of a PSO's M+C contract, a PSO must maintain the greater of $ 750,000 or 40 percent of the minimum net worth amount in cash or cash equivalents.
At the time of application, a PSO must submit a financial plan. 42 C.F.R. § 422.384 (2000). Among the items that must be included in the financial plan is a demonstration of the PSOs prospective positive cash flow, which are subject to the standards set forth by the Secretary. 42 C.F.R. § 422.386 (2000). A PSO is required to make specified deposits, 42 C.F.R. §422.388 (2000):
(a) Insolvency deposit. (1) At the time of application, an organization must deposit $ 100,000 in cash or securities (or any combination thereof) into an account in a manner that is acceptable to CMS. (2) The deposit must be restricted to use in the event of insolvency to help assure continuation of services or pay costs associated with receivership or liquidation. (3) At the time of the PSO's application for an M+C contract and, thereafter, upon CMS's request, a PSO must provide CMS with proof of the insolvency deposit, such proof to be in a form that CMS considers appropriate.
(b) Uncovered expenditures deposit. (1) If at any time uncovered expenditures exceed 10 percent of a PSO's total health care expenditures, then the PSO must place an uncovered expenditures deposit into an account with any organization or trustee that is acceptable to CMS. (2) The deposit must at all times have a fair market value of an amount that is 120 percent of the PSO's outstanding liability for uncovered expenditures for enrollees, including incurred, but not reported claims. . . (5) The deposit required under this section is restricted and in trust for CMS's use to protect the interests of the PSO's Medicare enrollees and to pay the costs associated with administering the insolvency. It may be used only as provided under this section.
(c) A PSO may use the deposits required under paragraphs (a) and (b) of this section to satisfy the PSO's minimum net worth amount required under § 422.382(a) and (b).
A PSO may make application to utilize a guaranty by another entity, which may be a licensed insurer, to meet otherwise applicable financial requirements. Based upon the regulation, stop-loss coverage with a licensed insurer would appear to qualify as a guaranty. 42 C.F.R. § 422.390 (2000).
In addition to financial standards, the Secretary was required to establish other standards for M+C organizations, 42 U.S.C.A. § 1395w-26(b)(1), and has established additional standards. Generally, such additional standards shall supersede any state law or regulation that is inconsistent with the standards, 42 U.S.C. § 1395w-26(b)(3)(A), except those standards that are specifically superseded pursuant to 42 U.S.C.A. §1395w-26(b)(3)(B):
Standards specifically superseded. State standards relating to the following are superseded under this paragraph: (i) Benefit requirements (including cost-sharing requirements). (ii) Requirements relating to inclusion or treatment of providers. (iii) Coverage determinations (including related appeals and grievance processes). (iv) Requirements relating to marketing materials and summaries and schedules of benefits regarding a Medicare + Choice plan.
However, a PSO that has been granted a waiver by the Secretary is still required to comply with all state consumer protection and quality standards that would be applicable if the PSO were licensed by the state and such standards would generally be applicable to other M+C organizations. 42 U.S.C.A. § 1395w-25(a)(2)(G)(i). The Secretary may contract with a state to enforce the states standards on behalf of the Secretary. 42 U.S.C.A. § 1395w-25(a)(2)(G)(iii).
Applicable New York Statutes and Regulations
New York Insurance Law §1101(a)(1) (McKinney 2000) defines the doing of an insurance business:
In this article: (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 (McKinney 2000) proscribes the doing of an insurance business without a license, unless the entity is exempt from the requirement to secure a license.
A Health Maintenance Organization is defined, New York Public Health Law § 4401 (McKinney 1993 and 2001 Supplement):
For the purpose of this article: 1. Health maintenance organization or organization means any person, natural or corporate, or any groups of such persons who enter into an arrangement, agreement or plan or any combination of arrangements or plans which propose to provide or offer, or which do provide or offer, a comprehensive health services plan.
2. Comprehensive health services plan or plan means a plan through which each member of an enrolled population is entitled to receive comprehensive health services in consideration for a basic advance or periodic charge. . . .
3. Comprehensive health services means all those health services which an enrolled population might require in order to be maintained in good health, . . . . . . Such term may be further defined by agreement with enrolled populations providing additional benefits necessary, desirable or appropriate to meet their health care needs.
A contract issued by an HMO would be an insurance contract in accordance with the definition of New York Insurance Law § 1101.
New York Insurance Law § 1109(a) (McKinney 2000) exempts an HMO holding a Certificate of Authority from the Commissioner of Health (Commissioner) pursuant to New York Public Health Law Article 44 from the requirement to secure a license from this Department. New York Insurance Law § 1109(b), however, provides:
An organization which provides health care services for a periodic fee paid in advance but which does not comply with the provisions of article forty-four of the public health law shall be deemed to be engaged in the business of insurance and may not operate without being licensed under this chapter.
Based upon the information the inquirer furnished, since The Client is doing an insurance business as defined in New York Insurance Law §1101 and will not have a Certificate of Authority from the Commissioner, in accordance with New York Insurance Law § 1109(b), The Client would have to be licensed by this Department.
In the inquirers July 11, 2001 letter to the Health Department, he asked whether the financial requirements established by the Secretary would be substituted by the Health Department for those established by the Commissioner, specifically those promulgated as part of N.Y. Comp. R. & Regs. tit. 10, § 98-1.11 (2000). Since the Health Department declined jurisdiction over The Client, it did not respond to that portion of his inquiry. In the inquirers September 20, 2001 letter to this Department, he asked whether this Department would substitute the Secretarys requirements for any applicable New York requirements.
Since The Client is a business corporation the financial requirements imposed on Not-For-Profit Health Service Corporations, New York Insurance Law § 4310(d) (McKinney 2000), would not be applicable. The relevant requirement would ordinarily be that imposed by New York Insurance Law § 4204(a) (McKinney 2000):
(1) A stock company may be organized . . . and licensed to do only the kind of insurance business specified in item (i) of paragraph three of subsection (a) of section one thousand one hundred thirteen of this chapter [accident & health insurance], with a paid-in capital of not less than one hundred thousand dollars, and a paid-in surplus at least equal to fifty percent of its capital. Every such company shall at all times thereafter maintain a minimum capital of one hundred thousand dollars.
(2) Notwithstanding the foregoing, any such stock company initially licensed on or after July first, nineteen hundred eighty-two shall have a paid-in capital of not less than two hundred thousand dollars and a paid-in surplus at least equal to fifty percent of its capital and shall at all times maintain a minimum capital of at least two hundred thousand dollars.
The Superintendent of Insurance (Superintendent) could, however, if The Client were organized under the New York Insurance Law, exercise the discretion conferred by New York Insurance Law § 4301(e)(5) (McKinney 2000) and substitute the financial requirements established by the Secretary. Further information concerning the requirements for incorporation under the New York Insurance Law and material required for the Superintendent to consider any waiver of otherwise applicable New York requirements may be secured from:
Mary Lee Kreuter, CFE
New York State Insurance Department
25 Beaver Street
New York, NY 10004
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.