The Office of General Counsel issued the following opinion on February 18, 2004, representing the position of the New York State Insurance Department.
Re: Health Care Provider Network Arrangements with Self-Funded Entities
1. May a limited liability company, without becoming licensed as an insurer, enter into an agreement with a third party administrator, which is acting on behalf of a self-funded entity, to provide outpatient clinical laboratory services, on a capitated basis, to individuals that are covered under the self-funded health benefit plan?
2. May a clinical laboratory, without becoming licensed as an insurer, enter into a subcontract with the limited liability company described in question 1 to provide outpatient clinical laboratory services, on a capitated basis?
3. In the alternative, may a clinical laboratory, without becoming licensed as an insurer, enter into an agreement directly with a third party administrator, which is acting on behalf of a self-funded entity, to provide outpatient clinical laboratory services on a capitated basis?
4. May the clinical laboratory described in question 3 enter into a subcontract with another clinical laboratory, wherein the subcontracting clinical laboratory will provide outpatient clinical laboratory services, on a fee-for-service basis?
5. May a third party administrator, that is acting on behalf of a self-funded entity, aid a limited liability company or a primary clinical laboratory, in facilitating the financial arrangements described in the facts portion of this opinion?
1. No. A limited liability company may not enter into such an agreement, without becoming licensed as an insurer.
2. No. A clinical laboratory may not enter into such a subcontract, without becoming licensed as an insurer.
3. No. A clinical laboratory may not enter into such an agreement, without becoming licensed as an insurer.
4. No. The clinical laboratory, which is not licensed as an insurer, may not enter into such a subcontract with another clinical laboratory.
5. No. A third party administrator, that is acting on behalf of a self-funded entity, may not aid a limited liability company or a primary clinical liability company that is doing an insurance business without being licensed as an insurer, in facilitating the financial arrangements described in the facts portion of this opinion.
The inquirers firm represents a proposed network of clinical laboratories that are free-standing or hospital-based. The inquirers client is concerned about whether certain potential arrangements between limited liability companies (LLCs), clinical laboratories and third party administrators (TPAs) are permissible under the Insurance Law and its corresponding regulations in connection with self-funded employers, Taft-Hartley health and welfare funds, and labor union benefit plans. (Collectively hereinafter referred to as an "exempt insurer", because of the exemption provided by the Employee Retirement and Income Security Act). The inquirer described two possible approaches in his inquiry:
A. Under the first approach, a TPA, acting as an agent for an exempt insurer would enter into a contract with an LLC. The LLC would perform functions that are similar in nature to those performed by Independent Practice Associations (IPAs).1 The LLC would be the primary contracting party with the exempt insurer and would agree to perform certain services, on a capitated basis, for individuals that are covered under health plans sponsored by the exempt insurer. The LLC would form a network by entering into subcontracts with a group of clinical laboratories in which the clinical laboratories would agree to provide outpatient clinical laboratory services, according to the terms established by the TPA. The LLC would be responsible for holding the capitated funds, as a pool and allocating and distributing the funds to the clinical laboratory providers every month. Specifically, the inquirer stated that the capitated amounts would be allocated and distributed based upon the value of all clinical laboratory services performed by each participating provider compared to the total value of all clinical laboratory services performed by the participating providers in each month. Thus, the participating providers would be assuming the risk related to the volume and cost of services. The LLC would retain a fee, out of the capitated funds, of up to 10%.
B. Under the second approach, a limited liability company would not be used. Instead, one clinical laboratory would contract directly with the TPA and subcontract with other clinical laboratories in the proposed service area. The primary clinical laboratory would contract with an exempt insurer on a capitated basis. The subcontracts would either be based on the capitated funds received each month with a pooling arrangement (as discussed in the first approach) or the subcontracts could be on a fee-for-service basis.
As a preliminary matter, although the inquirer referred to the entities that he described as being "self-insured", the term "self-insurance" is actually a misnomer since these entities are actually insuring the risks of the individuals covered under their health plans. For purposes of this opinion, we will assume that these entities are self-funded plans that are governed by the federal Employee Retirement and Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461 (West 1999 and Supp. 2003), which preempts the New York State Insurance Law. As such, they are exempt from the licensing requirements of the New York State Insurance Law. However, this exemption does not extend to entities that function on behalf of such exempt insurers.
N.Y. Ins. Law § 1102(a) (McKinney 2000 & Supp. 2004) prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing.
N.Y. Ins. Law § 1101(b)(1) (McKinney 2000 & Supp. 2004) defines the term "doing an insurance business", in pertinent part, as follows:
(A) making, or proposing to make, as an insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts; . . .
N.Y. Ins. Law § 1101(a)(1) (McKinney 2000 & Supp. 2004) defines "insurance contract" as follows:
(a)(1) [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.
(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. . . .
The Department has consistently opined that if an entity agrees to provide unlimited services that are based upon the happening of a fortuitous event, such as illness, injury, etc., on a prepaid fee basis (capitated basis) or similar arrangement, the entity would be doing the business of insurance in New York in violation of Sections 1101 and 1102. However, if the entity agrees, for a prepaid fee, to provide services that are not dependent upon the happening of a fortuitous event, the entity would not be doing an insurance business. The Department has also opined that a party may agree to provide services dependent upon fortuitous events for an additional fee-per-service, which is discounted from the providers usual fee for such services, so long as the discounted fee covers the cost of rendition of the services (i.e., cost of labor, material and reasonable overhead expenses).
In the inquirers first approach, the LLC would be the primary contracting party with the exempt insurer and would agree to provide outpatient services to the covered persons on a capitated basis. The LLC would enter into subcontracts with the clinical laboratory to provide these services, and would share a percentage of the capitated funds that the exempt insurer pays to each clinical provider. Therefore, in providing services dependent upon fortuitous events, since the LLC and the clinical laboratory would be compensated on a capitated basis, they would be doing an insurance business and would have to become licensed as insurers.
In the second approach, the primary contracting clinical laboratory would be doing an insurance business, if it agrees to perform services, on a capitated basis, that are based upon the happening of a fortuitous event. However, the inquirer stated that the clinical laboratory that subcontracts with the primary clinical laboratory would either be compensated on a capitated or on a fee-for-service basis. If the subcontracting clinical laboratory would be compensated on a capitated basis for services that would be based upon a fortuitous event, then it would be doing an insurance business and must be licensed as an insurer. If it would be compensated on a fee-for-service basis, for services that would be based upon a fortuitous event, and the fee would cover the cost of rendition of the services, then it would not be considered to be doing an insurance business. However, the arrangement would nonetheless still be improper because the primary clinical laboratory is being compensated on a capitated basis.
It should also be noted that N.Y. Ins. Law §§ 3217-b(f) and 4325(f) (McKinney 2000) and N.Y. Comp. Codes R. & Regs tit. 11, §§ 101.1-101.10 (Regulation 164) permit certain insurers to enter into financial risk transfer agreements2 through a capitation arrangement3 with providers4, so long as the arrangement is in compliance with the requirements of Section 4403(1)(c) of the Public Health Law and Regulation 164.
However, the Regulation applies only to entities that are certified under Article 44 of the Public Health Law, insurance companies authorized to do accident and health insurance in the State of New York and corporations licensed pursuant to Article 43 of the Insurance Law. See Section 101.2 of Regulation 164. Thus, the Regulation does not apply to self-funded entities and would, therefore, not apply to this situation.
The inquirer should also be aware that there is no licensing or registration requirement for TPAs as such under the New York Insurance Law. However, any person or entity, including a TPA, that performs functions that require licensing as an independent adjuster or otherwise must be accordingly licensed. It is unclear from the inquiry the nature and scope of administrative activities that would be performed by the TPA. If the third party administrator would be acting as an independent adjuster or as an insurance agent or broker, it would have to be licensed as such in accordance with Article 21 of the Insurance Law.
Moreover, N.Y. Ins. Law § 2117(a) (McKinney 2000 and Supp. 2004) prohibits any person in this state from acting on behalf of or aiding an unauthorized insurer and provides, in relevant part, as follows:
(a) No person, firm, association or corporation shall in this state act as agent for any insurer or health maintenance organization which is not licensed or authorized to do an insurance or health maintenance organization business in this state, in the doing of any insurance or health maintenance organization business in this state or in soliciting, negotiating or effectuating any insurance, health maintenance organization or annuity contract or shall in this state act as insurance broker in soliciting, negotiating or in any way effectuating any insurance, health maintenance organization or annuity contract of, or in placing risks with, any such insurer or health maintenance organization, or shall in this state in any way or manner aid any such insurer or health maintenance organization in effecting any insurance, health maintenance organization or annuity contract.
Although Section 2117 provides exceptions to this prohibition, none of them are applicable to this inquiry. Thus, if the exempt insurer, through the activities of the TPA, entered into a capitated fee arrangement with the LLC or primary clinical laboratory, who are not licensed as insurers, the TPA and the exempt insurer would be aiding an unauthorized insurer in violation of Section 2117. Moreover, the LLC would be aiding an unauthorized insurer if it were to enter into a subcontract with a clinical laboratory that would provide services on a capitated basis, without becoming licensed as an insurer.
This opinion is limited to licensing requirements under the Insurance Law. No opinion is rendered regarding the licensing provisions of any other law.
For further information you may contact Senior Attorney Pascale Joasil at the New York City Office.
1 N.Y. Comp. Codes R. & Regs. tit. 10, § 98.1.5(b)(6)(iv)(a) (2000), defines an IPA as an entity that is engaged in:
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; . . .
2 Pursuant to Section 101.3(c) of Regulation 164, the term "financial risk transfer" is defined as, "the contractual assumption of liability by the health care provider by means of a capitation arrangement for the delivery of specified health care services to subscribers of the insurer."
3 The term "capitation arrangement" is defined in Section 101.3(a) of Regulation 164 as "contractually based prepayments (any payments made prior to the last day of the month shall be deemed a prepayment of the entire months capitation) made to a health care provider, on a per member per month or a percentage of premium basis, in exchange for one or more covered health care services to be rendered, referred or otherwise arranged by such provider and its participating providers; . . ."
4 Pursuant to Section 101.3(g) of Regulation 164, the term "health care provider" includes a clinical laboratory certified pursuant to Title V of the Public Health Law and an intermediary entity as defined by Section 101.3(i). Section 101.3(i) defines an intermediary entity as " a person or entity which enters into a financial risk transfer agreement with one or more insurers and who contracts with one or more participating providers to perform services which are set forth in the financial risk transfer agreement."