The Office of General Counsel issued the following opinion on December 10, 2004 representing the position of the New York State Insurance Department.
Re: Health Insurance, Minimum Premium Plan. Self-Funding of "Run-out" Claims
1. If a consortium of employers purchases a group health insurance policy under a "minimum premium" arrangement, would the consortium, be a Multiple Employer Welfare Arrangement (MEWA) if it self-funds the "run-off" claims, and be subject to regulation by the Insurance Department as doing an insurance business?
2. If each member of the consortium receives its own policy, would it be subject to regulation by the Insurance Department for doing an insurance business by virtue of self-funding the "run-off" claims?
1. The consortium would be considered a MEWA, as that term is defined in the Employee Retirement Income Security Act (ERISA), 29 U.S.C.A. § 1002(40) (West 1999). As a fully insured MEWA, in accordance with 29 U.S.C.A. § 1144(b)(6)(A)(i) (West 1999), it would be exempt from regulation by the Department with reference to the underlying insurance. However, with regard to allocating liability for "run-off" claims among the employer members, that would not be fully insured and each member might be considered to be doing an insurance business and thus be subject to regulation by the Department.
2. In that case, there would be no MEWA and each individual employer would not be subject to regulation by the Insurance Department with respect to the underlying benefits, because they would be provided by an insurance policy. With respect to the self-funding of "run-off" claims, as an employee welfare benefit plan in accordance with ERISA, the individual employee would be exempt from regulation.
The inquirers firm represents an entity that will offer advice to a consortium of employers, each of which has in excess of 50 employees, as to how best to structure the purchase of health insurance under a "minimum premium arrangement". While the client will, after purchase of the insurance, provide administrative services to the consortium, all claims will be fully administered by the insurer.
Among the issues still not determined by the inquirer's client are (1) whether the consortium will secure a policy covering all employer members or each employer will purchase its own policy and (2) how the liability for the run-off claims will be allocated. It is possible that, if the consortium purchases a single policy, each employer will retain the liability for its own "run-off" claims or the liability will be allocated among the consortium members in proportion to their share of the total premium charged by the insurer.
It is presumed that the inquirer's client will not be involved in the sale of the policies, and thus would not have to be licensed as an insurance agent in accordance with New York Insurance Law 2103(a) (McKinney 2000 and 2004). However, the inquirers client must be licensed as an insurance consultant in accordance with New York Insurance Law § 2107(a) (McKinney 2000). While New York does not license Third Party Administrators (TPA) qua TPA, if an entity performs a function requiring a license, it must secure that license. Since claims functions will be performed by the insurer, the inquirers client would not have to be licensed as an independent adjuster in accordance with New York Insurance Law § 2108(a)(3) (McKinney 2000 and 2004 Supplement).
Group health insurance policies may be issued in New York only to groups specified in New York Insurance Law § 4235(c)(1) (McKinney 2000 and 2004 Supplement):
(A) A policy issued to an employer or to a trustee or trustees of a fund established by an employer, which employer or trustee or trustees shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment or a combination of such conditions and conditions pertaining to the family status of the employee, for insurance coverage on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either from the employer's funds, or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. If all or part of the premium is to be derived from funds contributed by the insured employees, then such policy must insure not less than fifty percent of such eligible employees or, if less, fifty or more of such employees.
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(D) A policy issued to a trustee or trustees of a fund established, or participated in, by two or more employers . . . which trustee or trustees shall be deemed the policyholder, to insure employees of the employers . . . for the benefit of persons other than the employers . . . subject to the following requirements: (i) The persons eligible for insurance shall be all of the employees of the employers . . . or all of any class or classes thereof determined by conditions pertaining to their employment . . . (ii)The premium for the policy shall be paid by the trustee or trustees either wholly from funds contributed by the employer or employers of the insured person . . . or jointly from such funds and funds contributed by the insured persons specifically for their insurance or from contributions by the insured persons. A policy on which all or part of the premium is to be derived from funds contributed by the insured persons specifically for their insurance may be placed in force only if it insures not less than fifty percent of the then eligible persons, or, if less, fifty or more of such eligible persons excluding any as to whom evidence of individual insurability is not satisfactory to the insurer. A policy on which no part of the premium is to be derived from funds contributed by the insured persons specifically for their insurance must insure all eligible persons, excluding any as to whom evidence of individual insurability is not satisfactory to the insurer. (iii) The policy shall insure at least fifty persons at date of issue, except that if part of the premium is to be derived from funds to be contributed by the insured persons specifically for their insurance the policy shall insure at least one hundred employees or members at date of issue. (iv) The insurance coverage under the policy shall be based upon some plan precluding individual selection either by the insured persons or by the policyholders, employers. . . . .
If a policy or contract were to be issued to each employer, each such employer would be qualified in accordance with New York Insurance Law § 4235(c)(1)(A) to purchase its own policy. If a single policy or contract were to be issued to the consortium, the larger group would be qualified in accordance with New York Insurance Law § 4235(c)(1)(D) to purchase a consortium policy. Based upon the inquirers representation that each participating employer has in excess of 50 employees, and in accordance with N.Y. Comp. Codes R. & Regs. Tit. 11, § 360.8(e) (2000) (Regulation 145), the inquirer is correct in the inquirer's assumption that the policy may be issued on an experience rated basis.
In so far as the insured employee is concerned, subject to applicable deductibles and co-insurance requirements, a policy issued on a "minimum premium" basis provides first dollar coverage. However, as between the insured employer or consortium and the insurer, the premium to be paid is calculated in such way that it will cover anticipated claims for the next policy period, usually a month. If the claims are higher than anticipated, the insured employer or consortium is required to make up the deficit in the following policy period. If the claims are lower than anticipated, the excess is credited to the policyholder and brought forward for future policy periods.
New York Insurance Law § 3221(a) (McKinney 2000 and 2004 Supplement) provides:
No policy of group . . . accident and health insurance shall . . . be delivered or issued for delivery in this state unless it contains in substance the following provisions or provisions which in the opinion of the superintendent are more favorable to the holders of such certificates or not less favorable to the holders of such certificates and more favorable to policyholders. . . : . . . (8) That written notice of claim must be given to the insurer within twenty days after the occurrence or commencement of any loss covered by the policy. Failure to give notice within such time shall not invalidate or reduce any claim if it shall be shown not to have been reasonably possible to give such notice and that notice was given as soon as was reasonably possible.
N.Y. Comp. Codes R. & Regs. Tit. 11, § 52.18(c)(2) (2002) (2002) (Regulation 62) provides:
No termination of coverage shall prejudice the right to a claim for benefits which arose prior to such termination.
Accordingly, the inquirer is mistaken in stating that the insurer would not be responsible for claims incurred during the effectiveness of the policy but submitted after termination of the coverage.
While it is common for the insurer to charge a termination premium, calculated on the basis of past experience under the policy, for such "run-off" claims, it would not be contrary to the New York Insurance Law (McKinney 2000 and 2004 Supplement) for the insurer to "charge back" such "run-off" amounts to the insured employer or consortium. Since it is common for the insurer to insist on a letter of credit or bond to assure payment of claim deficits or termination premiums, the ability to receive such "charge backs" could similarly be protected.
In the inquirer's September 24, 2004 e-mail, the inquirer stated:
If the insurer were not able to obtain reimbursement [from the employer] it would seek to recover the payment it made from the health care provider on the grounds that the cost of coverage was not paid and that coverage therefore was not available.
With respect to policyholder contracts issued by Health Maintenance Organizations or managed care policies, as that term is defined in New York Insurance Law §4801(a) (McKinney 2000), the insurer may, by contract with a participating health care provider, have the right to recover amounts paid to such participating health care provider. The inquirer has not furnished the legal theory by which an could collect amounts from a non-participating health care provider.
New York Insurance Law § 1101(a) (McKinney 2000 and 2004 Supplement) defines the doing of an insurance business:
(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.
Until the enactment of ERISA in 1974, Pub. Law No. 93-406, the provision of health benefits by an employer to employees on a self-funded basis was regarded by the Insurance Department as doing an insurance business. ERISA, 29 U.SC.A. § 1002(1) defines:
The terms "employee welfare benefit plan" and "welfare plan" mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability . . . .
ERISA, 29 U.S.C.A. § 1144(b)(2)(B) provides:
Neither an employee benefit plan described in section 4(a) which is not exempt under section 4(b) . . . nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.
Accordingly, other than with respect to church and governmental plans, 29 U.S.C.A. § 1003(b) (West 1999 and 2003 Supplement), the Insurance Department was divested of jurisdiction over employee welfare benefit plans.
In 1983, Pub. Law No. 97-473, Congress amended ERISA to provide an exception to the general rule of state preemption, 29 U.S.C.A. § 1144(b)(6):
(A) Notwithstanding any other provision of this section--(i) in the case of an employee welfare benefit plan which is a multiple employer welfare arrangement and is fully insured . . . any law of any State which regulates insurance may apply to such arrangement to the extent that such law provides-- (I) standards, requiring the maintenance of specified levels of reserves and specified levels of contributions, which any such plan, or any trust established under such a plan, must meet in order to be considered under such law able to pay benefits in full when due, and (II) provisions to enforce such standards, and (ii) in the case of any other employee welfare benefit plan which is a multiple employer welfare arrangement, in addition to this title, any law of any State which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title.
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(D) For purposes of this paragraph, a multiple employer welfare arrangement shall be considered fully insured only if the terms of the arrangement provide for benefits the amount of all of which the Secretary determines are guaranteed under a contract, or policy of insurance, issued by an insurance company, insurance service, or insurance organization, qualified to conduct business in a State.
A MEWA is defined, 29 U.S.C.A. § 1002(40)(A):
The term "multiple employer welfare arrangement" means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries, except that such term does not include any such plan or other arrangement which is established or maintained--(i) under or pursuant to one or more agreements which the Secretary finds to be collective bargaining agreements . . . .
If a policy or contract were to be issued to each employer, then no MEWA would be involved. With respect to the "charge-back", while it would constitute the doing of an insurance business, it would be the functional equivalent of the employer reimbursing a claims payment agent and entitled to the ERISA exemption.
If, however, a single policy or contract were to be issued to the consortium, and presuming that the individual employers/consortium members are not under common control, as required by 29 U.S.C.A. § 1002(40)(B)(ii), the group would constitute a MEWA. While the provision of the underlying benefits to employees would be fully insured, and thus the Insurance Department would not assert any jurisdiction over the consortium; the "charge back" by the insurer would not, if the allocation was by premium rather than claim, be fully insured and would, thus, constitute the doing of an insurance business by the consortium.
For further information one may contact Principal Attorney Alan Rachlin at the New York City Office.