The Office of General Counsel issued the following opinion on July 16, 2004, representing the position of the New York State Insurance Department.
Pharmacy Management, Insurance Law Licensing Requirements
Is a Third Party Administrator (TPA) that functions for self-funded health insurance plans required to be licensed by the Insurance Department?
Whether a TPA is required to be licensed depends upon the functions it performs. Based upon the information you have furnished, the activities your organization engages in for the self-funded governmental health plan would not require a license from this Department, while some of the functions you perform for the self-funded private health plan would require a license from the Department as an independent adjuster.
Your organization is licensed in Michigan pursuant to that state's Third Party Administrator's Act, Mich. Comp. Laws § 550.901 et seq. (West 2002) and performs functions in New York for two self-funded health benefit plans. You inquire whether your organizations activities in New York would require licensing by the Insurance Department.
As to one plan, your organization has contracted with the United States Department of Veterans Affairs (Department) to serve as a limited Pharmacy Benefit Manager (PBM) for a hospital operated by Department and located in New York State, with regard to prescription drugs for out-patients. While the hospital is located in New York, some of the satellite clinics and the beneficiaries are located in a contiguous state.
The program is designed to allow patients to receive an "emergency supply" of drugs, i.e. no more than a 10 day supply, when the pharmacy located in the hospital or clinic is closed. Your organization has contracted with at least one pharmacy in each of six regions served by the hospital, which pharmacy will furnish the qualified patients with the required drug.
Your organization will reimburse the pharmacy for generic drugs at an average discount of 50% and for brand name drugs at an average discount of 14% from the price usually charged by the pharmacy, plus pay a dispensing fee. The patient is required to make a co-payment to the pharmacy. Your organization will bill the Department for the amount paid to the pharmacy plus an administration fee for each prescription.
As to the other plan, your organization has contracted with an industrial corporation incorporated in Michigan, but headquartered in New York, with employees in both states to provide administrative and
claims processing services to its self-funded employee benefit plan. While the plan has many aspects, your organization administers only its flexible spending account program and provides claim services for its dental plan.
While the New York Insurance Law (McKinney 2000 and 2004 Supplement) does not require licensing of TPAs, as such, if the TPA performs a function that would require a license, such a license must be obtained. One of the functions frequently performed by TPAs is the adjustment of claims. New York Insurance Law § 2108(a)(3) (McKinney 2000 and 2004 Supplement) restricts acting as an adjuster for insurers to those licensed as independent adjusters, which term is defined in New York Insurance Law § 2101(g)(1) (McKinney 2000):
The term "independent adjuster" means any person, firm, association or corporation who, or which, for money, commission or any other thing of value, acts in this state on behalf of an insurer in the work of investigating and adjusting claims arising under insurance contracts issued by such insurer and who performs such duties required by such insurer as are incidental to such claims and also includes any person who for compensation or anything of value investigates and adjusts claims on behalf of any independent adjuster . . . .
Doing an insurance business is defined in New York Insurance Law § 1101(a) (McKinney 2000 and 2004 Supplement):
(1) "Insurance contract" means any 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.
(2) "Fortuitous event" means any 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 provision of either emergency prescription drugs or of dental care is considered a fortuitous event, and thus requiring the promisor to be licensed as an insurer. However, the first program, because it is operated by a Federal agency, the Department of Veterans Affairs, is outside the jurisdiction of the Department and the two aspects of the health plan of the industrial corporation are part of an employee welfare benefit plan, as that term is defined in the Employee Retirement Income Security Act, 29 U.S.C.A. § 1002(1) (West 1999), and the jurisdiction of the Department over the plans themselves is thus preempted. 29 U.S.C.A. § 1144(a) (West 1999).
Both the Department of Veterans Affairs and the industrial corporation are thus exempt insurers. It is the position of the Department that an individual or organization that adjusts claims on behalf of an exempt insurer must still be licensed as an independent adjuster.
Based upon your representations and the requirements imposed by the applicable statute, 38 U.S.C.A. § 1722A (West 2002), and regulation, 38 C.F.R. § 17.110 (2001), it appears that, in acting as a PBM for the Department, your organization will not exercise any discretion and will only be providing ministerial services. Accordingly, your organization will not be adjusting for the Department within the meaning of New York Insurance Law § 2101(g)(1).
As to the industrial corporation, I presume that when you refer to a flexible spending account you mean that type of program which is recognized under Internal Revenue Code § 106(c)(2) (West 2002), under which an employee may set aside a sum of money to pay for "medical" expenses that are not otherwise covered under the employers medical plan. As an administrator of such a plan, your organization will review requests for reimbursement and verify both that the service may be covered under the program and that there are sufficient funds in the account to cover the expenditure. Since neither activity constitutes adjusting within the meaning of New York Insurance Law § 2101(g)(1), your organization would not have to be licensed as an independent adjuster to so function.
The dental plan, on the other hand, presents a different situation. Since your organization will be providing full claims services, including making determinations on how much to reimburse the individual, for the employer, your organization's activities would be encompassed within the definition of adjusting as set forth in New York Insurance Law § 2101(g)(1) and, thus, your organization would have to be licensed as an independent adjuster.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.