OGC Op. No. 10-02-04

The Office of General Counsel issued the following opinion on February 12, 2010, representing the position of the New York State Insurance Department.

Re: Applicability of Insurance Law § 4224(c) to Health Maintenance Organizations

Question Presented:

Does N.Y. Ins. Law § 4224(c)/ (McKinney Supp. 2009), which prohibits rebating and inducements, apply to health maintenance organizations (“HMOs”)?

Yes. Since an HMO contract is subject to Article 43 of the Insurance Law as if the HMO contract was a subscriber contract issued by a non-profit medical and dental indemnity or health and hospital service corporation, Insurance Law § 4224(c) applies to HMOs, which issue HMO contracts.

Facts:

ABC Health Plan, Inc. (“ABC”) is an HMO operating in New York with a certificate of authority in accordance with N.Y. Pub. Health Law § 4403 (McKinney Supp. 2009). In 2007, the Department became aware that ABC was offering a rewards program (the “Program”), which provides an array of services and discounts for a monthly fee, including retail discounts, auto services, health and wellness benefits, family and lifestyle benefits, and financial and business services. ABC does not describe any of the benefits offered under the Program in any of its policy forms, and some of the benefits offered through the Program are unrelated to accident and health insurance.

On September 6, 2007, the Department’s Health Bureau and Office of General Counsel (“OGC”) met with ABC and its counsel concerning the Program, at which time OGC communicated its position that the benefits ABC offers through the Program constitute the doing of an insurance business as defined in the Insurance Law. ABC informed the Department that it would submit to the Department a revised Program that conforms to the Insurance Law, and ABC’s counsel confirmed such in a letter to OGC’s Assistant Deputy Superintendent dated November 13, 2007. On December 27, 2007, OGC requested that counsel for ABC submit the revised Program. However, counsel for ABC informed OGC that it had not received any revised Program from its client, and that it would submit a revised Program upon receipt. On April 14, 2008, when OGC contacted counsel for ABC again for the status of the Program, counsel was unable to offer any information.

Since the Department never received a revised Program, the Assistant Deputy Superintendent and Health Bureau Chief directed ABC in a letter to ABC’s Chairman and Chief Executive Officer (“CEO”) dated October 28, 2008 to cease offering the Program in New York unless and until ABC demonstrates that the Program fully complies with the Insurance Law and regulations promulgated thereunder. In a letter to the Assistant Deputy Superintendent and Health Bureau Chief dated November 7, 2008, ABC’s Chairman and CEO represented that ABC had removed the objectionable benefits, and that “[n]one of the Program’s benefits promote participation in a wellness plan and therefore do not appear to be covered by the provisions of Section 3239.”

Nonetheless, the Department’s Health Bureau has concerns that certain benefits that the Program continues to offer may constitute rebates or inducements. Therefore, the Health Bureau asked OGC to clarify whether Insurance Law § 4224(c), which prohibits rebates and inducements, applies to HMOs.

Analysis:

Insurance Law § 1109(a) states in pertinent part that “[a]n organization complying with the provisions of article forty-four of the public health law may operate without being licensed under this chapter and without being subject to any provisions of this chapter….” Thus, as a general matter, an organization complying with Article 44 of the Public Health Law may operate in New York without a license from the Insurance Department, and without being subject to the Insurance Law and regulations promulgated thereunder, except as otherwise required by Insurance Law § 1109(a)(1) and (2).

Although Insurance Law § 1109(a) appears to limit the applicability of the Insurance Law to HMOs by specifically setting forth the sections of the Insurance Law that apply to HMOs, Public Health Law § 4406(1) subjects HMO contracts to the Superintendent’s regulation as if those contracts were subscriber contracts. Specifically, Public Health Law § 4406(1) applies to the regulation of HMO contracts, and states in relevant part that “[t]he contract between a health maintenance organization and an enrollee shall be subject to regulation by the superintendent [of insurance] as if it were a health insurance subscriber contract, and shall include, but not be limited to, all mandated benefits required by article forty-three of the insurance law….” Therefore, an HMO contract is subject to Article 43 of the Insurance Law as if it were a subscriber contract issued by a non-profit medical and dental indemnity or health and hospital service corporation (an “Article 43 corporation”), and must provide all mandated benefits set forth in Article 43.

Moreover, Insurance Law § 4313(a) sets forth the applicability of other provisions of the Insurance Law, and states that:

Except as otherwise provided and except as the context otherwise requires, every medical expense indemnity corporation, dental expense indemnity corporation, health service corporation, and hospital service corporation shall be subject to all requirements of this chapter made applicable to insurance companies generally, and to the rules and regulations of the superintendent except in so far as said laws, rules and regulations may be inconsistent with other provisions of this article.

Thus, any corporation subject to Article 43 of the Insurance Law is subject to all Insurance Law requirements applicable to insurers generally.

There are a number of sections of the Insurance Law that pertain to rebating and inducements, including Insurance Law §§ 2324, 4224, 6409, 6504, and 6904, that collectively set forth a general prohibition against an authorized insurer or any person acting on behalf of any such insurer from directly or indirectly paying or offering to pay an insured any rebate from the insurance premium specified in the insurance policy or contract, or giving or offering to give any valuable consideration or inducement, not specified in the insurance policy or contract. See Circular Letter No. 9 (2009). The question that then arises is which section applies to Article 43 corporations.

Insurance Law § 2324 applies generally to all kinds of insurers and insurance, except as specifically excluded under Insurance Law § 2324(e). Insurance Law § 2324 states in relevant part that:

(a) No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker….

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(e) This section shall not apply to any policy or contract of reinsurance nor to any contract or policy of life insurance, accident insurance or health insurance which is subject to the provisions of section four thousand two hundred twenty-four of this chapter, nor to any contract or policy of marine insurance, other than contracts or policies of automobile insurance, or of marine protection and indemnity insurance, nor to any insurance contract, or rate of insurance in connection with any insurance contract either against loss or damage to, or legal liability in connection with, any property located wholly outside of this state or any activity carried on outside of this state or any motor vehicle or aircraft principally garaged and used outside of this state.

While Insurance Law § 2324(e) excludes insurers authorized to write accident and health insurance, Article 43 corporations technically do not do the business of “accident and health insurance,” because they are not licensed under Article 42 of the Insurance Law to write accident and health insurance pursuant to Insurance Law § 1113(a)(3). Nonetheless, Article 43 corporations are in all other material respects like insurers authorized to write accident and health insurance, because Article 43 corporations issue contracts that provide coverage for health care services, such as medical, dental, optometric, podiatric, and psychiatric services. See Ins. Law § 4301. Therefore, of all of the Insurance Law sections that collectively set forth a general prohibition against rebating and inducements, the section that applies to accident and health insurers should govern Article 43 corporations, because the coverage provided by Article 43 corporations is essentially accident and health insurance.

Insurance Law § 4224(c) applies to accident and health insurance, life insurance, and annuities, and states that:

Except as permitted by section three thousand two hundred thirty-nine of this chapter, ¹ no such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.

Since an HMO contract is subject to Article 43 of the Insurance Law as if the HMO contract was a subscriber contract, Insurance Law § 4224(c) applies to HMOs, like ABC, which issue HMO contracts. ² See OGC Opinion 02-04-32 (Apr. 29, 2002).

In light of the foregoing, ABC’s Chairman and CEO was informed that the Department’s Health Bureau will contact him soon to discuss the changes that ABC must make to the Program.

For further information, you may contact Senior Attorney Joana Lucashuk at the New York City office.

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¹ Insurance Law § 3239 applies to wellness programs.

² In OGC Opinion 86-38 (NILS) (Apr. 17, 1986), the Department opined that “[s]ection 1109(a) of the Insurance Law limits our jurisdiction over HMOs authorized under Article 44 of the Public Health Law to those areas mentioned in that statute. Neither § 4403(1)(h) nor § 4406 of the Public Health Law appears to make such HMOs subject to § 4224(c) of the Insurance Law. Accordingly, this would appear to be within the jurisdiction of the Health Department.” However, in OGC Opinion 02-04-32 (Apr. 29, 2002), the Department opined that “[w]hile § 4224 only applies to accident and health insurers, it is the position of the Department that the principles of § 4224 also apply to HMOs,” and that an “HMO is prohibited from offering an illegal inducement or premium rebate” pursuant to Insurance Law § 4224(c). To the extent that OGC Opinion 86-38 (NILS) is inconsistent with OGC Opinion 02-04-32 and the opinion set forth herein, OGC Opinion 86-38 (NILS) should no longer be followed.