David A. Paterson
James J. Wrynn
The Office of General Counsel issued the following opinion on March 16, 2010 representing the position of the New York State Insurance Department.
Re: Licensing Requirements for Prepaid Medical Services Plans
Would the proposed prepaid medical services plans (the “Plans”) constitute the doing of an insurance business, as defined in N.Y. Ins. Law § 1101 (McKinney 2006), where each plan would provide a limited bundle of medical services to its members for a prepaid fee, and charge a discounted fee for each additional service?
Yes. The Plans would constitute doing an insurance business within the meaning of Insurance Law § 1101, unless they are altered to: (1) charge members an additional discounted fee for each service based upon a fortuitous event, which would cover the cost of rendering the service, including reasonable overhead, and (2) include the disclosure notices discussed below.
The inquirer reports that his client, ABC Co., is considering offering two prepaid medical services plans, whereby ABC Co. would provide a limited bundle of medical services at its New York office. The bundle of medical services under both plans would include an annual preventative care exam, flu shot, patient education, and a limited number of sick call visits (six under one plan, and three under the other plan), as well as certain other medical services, as medically appropriate. Under both plans, members would remit a pre-paid fee of less than $500 that would cover the reasonable costs and overhead associated with rendering such services. ABC Co. would offer additional services beyond the two plans at a discounted rate if the patient were to exceed the prescribed number of visits under the Plans. Services that the member does not use during the contract year would not carry over into the next year. Patients under the Plans may also avail themselves of low cost hospital insurance coverage offered by insurers, and free or discounted medication programs.
The inquirer asks whether the proposed arrangement comports with the Insurance Law.
Insurance Law § 1102(a) is relevant to the inquiry. That section 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.
Insurance Law § 1101(b)(1) defines the term “doing an insurance business”, in pertinent part, as follows:
(A) making, or proposing to make, as 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;
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(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.
Insurance Law § 1101(a)(1) defines the term “insurance contract” as follows:
[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.
Insurance Law § 1101(a)(2), in turn, defines the term "fortuitous event" as:
[A]ny 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 Insurance Department’s Office of General Counsel (“OGC”) 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 or injury) on a prepaid fee basis or similar arrangement, the agreement constitutes an insurance contract and the entity is doing the business of insurance within the meaning of Insurance Law § 1101, which requires a license duly issued in accordance with Insurance Law § 1102. In that circumstance, the entity bears the risk of incurring a loss if the cost of the services exceeds the paid fees. See, e.g., OGC Opinion No. 09-11-01 (Nov. 2, 2009); OGC Opinion No. 09-02-02 (Feb. 2, 2009); OGC Opinion No. 07-03-11 (Mar.15, 2007); OGC Opinion No. 03-10-02 (October 2, 2003).
However, where an entity agrees, for a prepaid fee, to provide services that are not dependent upon the happening of a fortuitous event (e.g., routine annual examinations), the entity is not doing an insurance business. OGC Opinion No. 09-11-01; OGC Opinion No. 09-02-02; OGC Opinion No. 03-10-02.
Additionally, the Department has long interpreted Insurance Law § 1101(a)(1) not to encompass an agreement (which still could be technically construed as an insurance contract) in which there is a separate charge for services dependent upon the happening of fortuitous events (e.g., sick doctor’s visit) provided that the charge covers the actual cost of rendering the service, including reasonable overhead expenses. See, e.g., OGC Op. No. 09-11-01; OGC Opinion No. 09-02-02; OGC Opinion No. 03-10-02.
Nonetheless, the analysis should not properly end there. As noted above, Insurance Law § 1101(b)(1)(E) provides that doing an insurance business includes “doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.” The superintendent may deem as insurance any agreement that is marketed in a manner that could lead the public to believe that the program is a substitute for insurance.
In order to avoid consumer confusion, and for the superintendent to construe a program in a manner that would not run afoul of the Insurance Law, advertising and contractual materials must clearly, conspicuously and unambiguously state that the program is not insurance and, in the case of agreements pertaining to health care, note that such program does not serve as a substitute for comprehensive health insurance coverage. The superintendent may well consider the amount of the charges for the program in its totality, as well as specific services provided, in evaluating whether the program constitutes the doing of an insurance business.
Here, the inquirer indicates that the Plans would offer a limited bundle of services, including an annual preventative care exam, flu shot, patient education and a limited number of sick call visits (six under one plan, and three under the other plan), as well as certain other services, as medically appropriate. Members of each plan would remit a pre-paid fee of less than $500 to cover the reasonable costs and overhead associated with rendering such services. Additional services beyond the two plans would be made available at a discounted rate if the patient were to exceed the number of visits under the Plans.
With respect to the annual preventative care exam, flu shot and patient education services that are not triggered by the illness of the patient, such services are not dependent upon the happening of a fortuitous event. Thus, ABC Co. would not be doing an insurance business by charging a prepaid fee for such services.
However, with respect to services occasioned by the happening of a fortuitous event (i.e., sick call visits that are triggered by the illness of the patient), the Plans would have to charge their members an additional fee for each such service to cover the cost of rendering the service, including reasonable overhead. See OGC Op. No. 09-11-01 (Nov. 2, 2009). Otherwise, ABC Co. would be doing an insurance business under the Insurance Law, and would have to be licensed as an insurer. Further, all of ABC Co.’s marketing, advertising and contractual materials must clearly, conspicuously and unambiguously state that the program is not insurance and does not serve as a substitute for comprehensive health insurance coverage.
Please note that the conclusions expressed in this opinion are strictly limited to the New York Insurance Law. The Department offers no opinion regarding any other laws that may apply to the Plans.
For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.