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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on July 20, 2005 representing the position of the New York State Insurance Department.

RE: Health Maintenance Organization, Commissions.

Questions Presented:

1. Is a Health Maintenance Organization required to pay commissions to a "broker of record"?

2. May an HMO pay a commission at a rate lower than the maximum permitted under the regulations promulgated by the Insurance Department and the Department of Health?

Conclusions:

1. A decision to pay commissions is within the business judgment of the HMO.

2. So long as the commission rate is within the regulatory maximum, the actual rate paid is within the business judgment of the HMO.

Facts:

The inquirer and his employer are both licensed as non-resident insurance agents pursuant to New York Insurance Law § 2103(a) (McKinney 2000 and 2005 Supplement). At present, the employer has a New York client, for which it provides fee based services, which had previously purchased an HMO contract from a New York HMO. The client desires to designate the employer as "broker of record", so the employer’s compensation will, in the future, be based upon commissions paid by the HMO.

The inquirer has indicated that some HMOs restrict the payment of commissions to new business and will not pay a commission where a broker of record is designated for an existing contract. Since the HMO has already factored the commission into its rates, the inquirer believes that such a restriction is improper.

Analysis:

Since both the inquirer and his employer are licensed as insurance agents, the term "broker of record" is a misnomer. The correct term would be "producer of record". It is presumed that the fees presently being paid to the employer are in accordance with New York Insurance Law § 2119 (McKinney 2000 and 2005 Supplement):

(a) (1) No person licensed as an insurance agent . . . may receive any fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above, unless such compensation is based upon a written memorandum signed by the party to be charged and specifying or clearly defining the amount or extent of such compensation. . . .

(b) (1) No person licensed as an insurance agent . . . may receive any compensation, direct or indirect, as a result of the sale of insurance or annuities to, or the use of securities or trusts in connection with pensions for, any person to whom any such licensee has performed any related consulting service for which he has received a fee or contracted to receive a fee within the preceding twelve months unless such compensation is provided for in the memorandum or contract required pursuant to subsection (a) hereof.

(2) This chapter shall not prohibit the offset, in whole or in part, of compensation payable under subsection (a) hereof by compensation otherwise payable to such consultant as agent or broker as a result of such sale of insurance or annuities or the use of securities or trusts in connection with pensions, if any such offset is provided for in the written memorandum or contract required under subsection (a) hereof

. . .

Regulation of HMOs is bifurcated between the Department of Health, which primarily regulates quality of care, and the Insurance Department, which primarily regulates the relationship between the HMO and subscriber. A regulation of the Department of Health, N.Y. Comp. Codes R. & Regs., tit. 10, § 98-1.11(t) (2005) provides:

An MCO [Managed Care Organization, which includes HMOs] may employ salaried solicitors and accept business from licensed insurance brokers and agents . . . on a commission basis provided, however, that (1) HMOs shall comply with section 4312 of the State Insurance Law with respect to accepting business from licensed insurance brokers and agents on a commission basis; . . . (3) any broker or agent selling MCO coverage shall be licensed by the Insurance Department as an insurance broker or agent; . . . (5) any fees or commission rates payable by an MCO to a broker or agent, which shall be at the same rate for all brokers and agents utilized by such MCO, shall be reviewed by the Superintendent of Insurance as part of the MCO's rate filing process and pursuant to any other applicable provisions of the Insurance Law and regulations.

New York Insurance Law § 4312(a) (McKinney 2000) provides:

1. Every corporation subject to the provisions of this article may employ solicitors or accept business from agents and brokers on a commission basis, but all solicitors shall be paid on a salary basis only. . . . Commissions shall be included in the corporation's rate manual and rate filings and commissions payable by health maintenance organizations organized under this article or health maintenance organizations operating as a line of business of corporations organized under this article shall continue to be subject to existing regulations governing commissions payable by health maintenance organizations.

2. Any corporation exercising the authority granted in paragraph one of this subsection shall provide to the superintendent at the time a corporation commences the use of agents and brokers on a commission basis, a detailed plan explaining the purpose for which agents and brokers are to be utilized, the lines of business or products where agents and brokers are to be utilized, the commission scales to be employed in compensating such agents and brokers, and such other information as required by the superintendent.

A regulation of the Insurance Department, N.Y. Comp. Codes R. & Regs. tit 11, § 52.42(e)(1995) (Regulation 62), provides:

A health maintenance organization (HMO) issued a certificate of authority pursuant to article 44 of the Public Health Law . . . as authorized by 10 N.Y.C.R.R. Part 98, pay commissions or fees to a licensed insurance broker. . . . No licensed insurance broker shall receive such commissions or fees from an HMO, unless the HMO has filed the actual rate to be paid and included the anticipated expenses for such payments to insurance brokers in its application to amend its community premium rates pursuant to the provisions of section 4308 of the Insurance Law. Such rate shall be incorporated into the HMO's premium rate manual. The actual rate per annum may not exceed four percent of the HMO's approved premium for the contract sold.

A decision by an HMO as to whether it will pay a commission, or the rate of commission to be paid (not in excess of 4% of the premium), is within the business judgment of the HMO. Even if the commission rate is factored into the premium rate, the HMO is allowed to restrict the payment of commissions to "new" business, provided that such a restriction is included in the rate filing.

For further information you may contact Principal Attorney Alan Rachlin at the New York City office.