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

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 08-11-01

The Office of General Counsel issued the following opinion on November 13, 2008 representing the position of the New York State Insurance Department.

Re: Community-rated HMO’s right to decrease premiums

Question presented:

Is a community-rated HMO precluded from charging a lower premium to the HMO’s retired members who are Medicare-eligible than to its other members?

Conclusion:

No. A community-rated HMO is not precluded from charging a lower premium to the HMO’s retired members who are Medicare-eligible than it charges to its other members, provided that the HMO files an appropriate rate reduction for contracts that offer substantially reduced benefits where Medicare provides primary coverage.

Facts:

The inquirer reports that he is counsel to a federation of local unions. Many union members retain their membership after retirement. One employer that has a negotiated agreement with one of the local unions informed the president of the local union that Circular Letter ("CL") 16, which addresses rate distinctions for Medicare beneficiaries, precludes a community-rated HMO that provides insurance to the union’s members from charging a lower premium to the HMO’s retired members who are Medicare-eligible. In turn, the inquirer asks the Department’s Office of General Counsel (“OGC”) whether CL 16 intends to preclude a community-rated HMO from charging a lower premium to an HMO’s retired members that are Medicare-eligible.

Analysis:

Medicare Part A is a federal insurance program that provides basic protection against the costs of hospital, related post-hospital, home health services, and hospice care for certain individuals, including those aged 65 and over and eligible for retirement. Medicare Part B provides medical insurance benefits for aged and disabled individuals who elect to enroll under the program. Medicare Part B is financed from premium payments by enrollees, together with contributions from funds appropriated by the federal government. Title XVIII of the federal Social Security Act governs Medicare benefits.

For the purposes of Article 43 of the Insurance Law, which governs HMO contracts,1 community rating is a methodology in which the premiums for all persons covered by a policy or contract form are 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. See Insurance Law § 4317(a) (McKinney 2007);2 see also Insurance Law § 3231 (which applies to health insurance contracts issued by for-profit insurers).

In other words, community rating means that the risks of a community are pooled together, and the age, sex, health status, or occupation of each member that comprises the community is not considered in pricing the risk. Effectively, every person in the community pays the same premium for the same coverage.

In September 2002, the Department issued CL 16 in response to the fact that some insurers and HMOs had drawn a distinction for benefits that Medicare did not cover in community-rated premium rates between individuals who were Medicare-eligible and those who were not. Specifically, the impetus for CL 16 was the practice of some insurers and HMOs charging more to insureds and members that were Medicare-enrollees on the assumption that their claims would be more expensive. Therefore, CL 16 advised insurers and HMOs that, except for those situations where an insurer or HMO opts to file an appropriate rate reduction because of the primacy of Medicare, an insurer or HMO may not impose any premium differential where an individual is Medicare-eligible due to age or disability.

Furthermore, § 52.26(c) of New York Comp. Codes R. & Reg. (“NYCRR”), tit. 11, Pt. 52 (Regulation 62) sets forth rules relating to the exclusion of Medicare benefits, and states:

Policies may provide for the exclusion of Medicare benefits when coverage continues beyond the covered person’s eligibility for Medicare benefits, provided appropriate adjustment is made in the premium.

Thus, 11 NYCRR § 52.26(c) permits an insurance contract to exclude benefits, and to adjust the premium accordingly, if the insurance coverage continues beyond the insured’s Medicare eligibility. However, the regulation does not mandate an HMO to exclude benefits that Medicare covers. Nor does the regulation mandate that the HMO, if it so chooses to exclude benefits, adjust its premiums accordingly.

In the present instance, the retirees receive their primary benefits from Medicare, and their secondary benefits from the HMO.3 Therefore, their HMO coverage continues beyond their eligibility for Medicare. Thus, the HMO may—but is not required to— exclude benefits covered by Medicare. However, if it does so, the HMO must adjust the premium accordingly.

But because the HMO is community-rated, the HMO must provide for a separate rate for Medicare beneficiaries where the contract provides reduced benefits when Medicare is primary. And in cases where the HMO does provide a separate rate for the Medicare beneficiaries, the HMO may only adjust the premium downward. See Circular Letter 16 (2002). However, there is no requirement under law that obligates an insurer to recognize Medicare beneficiaries as a discrete group, since the experience of either the community pool or a particular group should reflect the primacy of Medicare coverage for some insureds.  See OGC Opinion dated February 8, 2005.

In sum, a community-rated HMO may not adjust without a new rate filing the rate of those members within the community that are Medicare eligible, because by definition all members within the community pay the same premium regardless of age, sex, health status, or occupation. However, the HMO may file a separate lower rate for Medicare beneficiaries where the HMO contract provides substantially reduced benefits on account of the fact that Medicare is primary.

For further information you may contact Senior Attorney Sapna S. Maloor at the New York City Office.

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1 Although HMOs are primarily regulated by the New York State Department of Health, their subscriber contracts are regulated by the Insurance Department as if they were subscriber contracts of not-for-profit medical and dental indemnity, or health and hospital service corporations. See New York Public Health Law § 4406(1) (McKinney 2002 & Supp. 2008).

2 New York Comp. Codes R. & Reg. (“NYCRR”), tit. 10, § 98-1.5(e)(18), a New York State Department of Health regulation governing HMOs, also requires that HMO premiums be consistent with the principles of community rating.

3 Until 1980, Medicare was the primary benefit payer for its beneficiaries. Since then, legislative and regulatory changes have made Medicare secondary to employer group health plans of "working aged" beneficiaries aged 65 and older, and the secondary payer for beneficiaries aged 65 and older who have working spouses of any age with employer group health plan coverage. See 42 U.S.C. § 1395y(b) (2006); see also Circular Letter 3 (1987).