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. 08-11-02

The Office of General Counsel issued the following opinion on November 17, 2008, representing the position of the New York Insurance Department.

Re: Health Insurance, Non-Community Rated Groups

Question Presented:

Would an employer, employee, insurer, or insurance producer violate the law if an application for group health insurance is submitted to an insurer, which in order to secure a non-community rated1 policy, misrepresents the number of eligible employees?

Conclusion:

Yes. An employer, employee, or insurance producer that knowingly submits false information to an insurer stands in violation of the N.Y. Penal Law § 176.05 (McKinney 2005). An insurer that fails to investigate the bona fides of the group also might be subject to discipline by the Insurance Department.

Facts:

The inquirer presents a hypothetical situation whereby an employer with 47 employees desires to purchase a group health insurance policy to cover such employees. The employer provides a census of employees to an insurance producer, which producer may be either an insurance agent or insurance broker. The insurance producer adds false numbers to the census, so that the employer appears to have 51 employees. Presumably, the insurance producer also adds the names of the fictional employees to the material that will be furnished to the insurer. This information is furnished to a major health insurer, which then issues a non-community rated insurance policy to the employer. The inquirer asks about the possible legal consequences of such conduct.

Analysis:

This opinion is limited to the New York Insurance Law and the New York Penal Law, and should not be construed to express any position regarding any other relevant statute or regulation.

Insurance Law § 3231(a), which regulates the policies of commercial insurers, is relevant to the inquiry. That statute reads as follows:

No . . . group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits . . . shall be issued in this state unless such policy is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. Any . . . small group, including all employees or group members and dependents of employees or members, applying for . . . small group health insurance coverage . . . must be accepted at all times throughout the year for any hospital and/or medical coverage offered by the insurer to . . . small groups in this state. Once accepted for coverage, an individual or small group cannot be terminated by the insurer due to claims experience. . . . For the purposes of this section, "community rated" means a rating methodology in which the premium for all persons covered by a policy or contract form is 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. 

An identical requirement is imposed by Insurance Law § 4317(a) on not-for-profit health insurers and all health maintenance organizations (HMOs).

Penal Law § 176.05(2) is also relevant to the inquiry. That statute defines health insurance fraud as follows:

A fraudulent health care insurance act is committed by any person who, knowingly and with intent to defraud, presents, causes to be presented, or prepares with knowledge or belief that it will be presented to, or by, an insurer . . . or any agent thereof, any written statement or other physical evidence as part of, or in support of, an application for the issuance of a health insurance policy . . . which he knows to: (a) contain materially false information concerning any material fact thereto; or (b) conceal, for the purpose of misleading, information concerning any fact material thereto. . . . For purposes of this subdivision an "application for the issuance of a health insurance policy" shall not include (a) any application for a health insurance policy or contract approved by the superintendent of insurance pursuant to the provisions of sections three thousand two hundred sixteen [individual health insurance], four thousand three hundred four [individual health insurance], four thousand three hundred twenty-one [individual standardized HMO contracts] or four thousand three hundred twenty-two of the insurance law [standardized HMO individual contracts] or any other application for a health insurance policy or contract approved by the superintendent of insurance in the individual or direct payment market; and (b) any application for a certificate evidencing coverage under a . . . a group contract approved by the superintendent of insurance.

Under Penal Law § 176.05, an insurance producer or employer may be prosecuted for health insurance fraud, if it knowingly submits false information (such as a false census to an insurer). Further, in addition to, or in lieu of criminal prosecution, the Insurance Department could impose a civil penalty on the insurance producer, employer, and any employee who knowingly engages in the wrongful conduct. See Insurance Law § 403(c). Moreover, the Superintendent of Insurance could find that, pursuant to Insurance Law § 2110, the submission of a false census and supporting information by the insurance producer constitutes an “untrustworthy” act within the meaning of the Insurance Law, which could subject the producer to action by the Insurance Department against the producer’s license.

The insurer, too, has an obligation to ascertain that a particular group qualifies under the Insurance Law, and that the insured is not circumventing the community rating requirements established by law. Accordingly, an insurer has the right to terminate the group coverage if it learns that the employer has committed fraud. Alternatively, the insurer could then charge the correct community rated premium. If the Insurance Department were to determine that the insurer knew, or should have known, of the false census, but took no action, the Department could impose on the insurer a civil penalty, in accordance with Insurance Law § 109, on the insurer.

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

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1 Community rated means a rating methodology in which the premium for all persons covered by a policy or contract form is 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.