Is a capitated employer health benefits plan considered insurance that the state can regulate?

Plain-English summary

Healthnet was a health benefits program marketed to employers by Willse & Associates, an unlicensed third-party administrator. Employers ("sponsors") paid Willse a fixed monthly "capitation fee" per covered employee; Willse kept an administrative fee and passed the rest to contracted "health plans," some licensed HMOs and some not, which agreed to provide medical services to the covered employees. The contracts contained year-end adjustment formulas under which a health plan kept part of any surplus if care cost less than the fees, and absorbed part (sometimes all) of the loss if care cost more, including in one contract type a bonus-or-penalty tied to hospital and other out-of-plan costs. The Insurance Commissioner asked whether any of this was "insurance" he could regulate.

The Attorney General applied the classic five-element test for insurance (insurable interest, risk of loss, assumption of that risk, spreading of losses across a large group, and payment of a premium) and split the program in two. Willse, and a similar intermediary called Healthcare 2000, assumed no risk: they collected administrative fees and acted as conduits, so they were not insurers. The health plans and providers were different. By accepting fixed capitation payments and bearing the risk that the cost of care would exceed them, spreading that risk over the covered population, they were doing exactly what insurers do, and case law from other jurisdictions treated comparable capitated arrangements the same way. As insurers, they were subject to the Insurance Code's licensure, minimum capital, reserve, and rate-setting requirements. Inserting an administrator between insured and provider did not change that, and ERISA, which preempts state regulation of employer benefit plans, still leaves states free to regulate the sale of insurance, so the providers could not hide behind the employers' ERISA plans.

Currency note

This opinion was issued in 1990. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Maryland's Insurance Code has since been recodified, and both managed care regulation and ERISA preemption doctrine have evolved substantially since 1990.

Common questions

What made the Healthnet providers "insurers" rather than just doctors under contract?
Risk. They accepted a fixed capitation payment per person per month and were bound to provide the contracted services no matter what the care actually cost, with year-end formulas that made them absorb losses. The opinion found all five traditional elements of insurance present, with the capitation payment functioning as the premium.

Why wasn't the administrator regulated as an insurer too?
Because Willse bore no risk of loss. Its fee was fixed compensation for purchasing services and administering claims, and it passed the rest of the money through to the health plans. An entity that acts as a conduit without accepting the contractual responsibility to provide care in exchange for premiums is an administrator, not an insurer.

Did it matter that some employers' plans were ERISA plans?
No. The opinion explained that while ERISA supersedes state regulation of employee benefit plans, it allows states to keep regulating the sale of insurance, so providers selling what amounted to insurance to those plans remained subject to Maryland regulation.

Does assuming any risk under a contract make it insurance?
No. The opinion noted that warranties, for example, involve risk without being insurance. What mattered was that all five elements were present together: insurable interest, designated perils, assumption of the risk, distribution of losses across a large group, and a premium.

What did being an "insurer" mean for these health plans in practice?
Under the opinion, they were subject to the Insurance Commissioner's jurisdiction, including the Insurance Code's licensure, minimum capital, reserve, and rate-setting requirements.

Background and statutory framework

"Insurance" was defined in Article 48A, §2 of the Maryland Code as "a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies," which prior AG opinions had read to include contracts for the rendition of services (63 Opinions of the Attorney General 422 (1978)). The five-element framework came from 42 Opinions of the Attorney General 254 (1957), quoting Vance's Law of Insurance, with risk distribution described as the heart of the concept. The opinion's footnotes distinguished the Healthnet arrangement from administrative-services-only contracts (where the employer pays actual costs dollar for dollar), from typical HMOs under §19-701(e) of the Health-General Article, and from traditional preferred provider organizations, and noted that a program structured as a "preferred provider insurance policy" would fall under the newly enacted Chapter 578 (House Bill 558), Laws of Maryland 1990.

The out-of-state authority ran the same way: Manasen v. California Dental Services treated a fixed per-capita prepaid dental plan as the business of insurance; Klamath-Lake and Blue Crest Plans found insurance where capitated or prepaid arrangements shifted medical or legal cost risk to providers; Professional Lens Plan went the other way where no premium, risk assumption, or risk spreading existed. On ERISA, the opinion relied on Taggart Corp. v. Efros, Matthew 25 Ministries, Inc. v. Corcoran, and Bell v. Employee Security Benefit Association for the proposition that state regulation of insurance sales survives ERISA preemption, consistent with the conference report on the Act.

Citations and references

Statutes:

• Article 48A, §2 of the Maryland Code (definition of insurance) and §8 (definition of the insurance business)
• §19-701(e) of the Health-General Article (HMO definition); Chapter 578 (House Bill 558), Laws of Maryland 1990 (preferred provider insurance policies)
• Employee Retirement Income Security Act, 29 U.S.C.A. §1001 et seq.

Cases:

• Maryland Medical Services v. Carver, 238 Md. 466, 209 A.2d 582 (1965) (Maryland Court of Appeals, state power to regulate insurance)
• Manasen v. California Dental Services, 424 F.Supp. 657 (N.D. Cal. 1976); Klamath-Lake Pharm. Ass'n v. Klamath Med. Serv. Bureau, 701 F.2d 1276 (9th Cir. 1983); Taggart Corp. v. Efros, 475 F. Supp. 124 (S.D. Tex. 1979); Matthew 25 Ministries, Inc. v. Corcoran, 771 F.2d 21 (2d Cir. 1985); Bell v. Employee Security Benefit Association, 437 F. Supp. 382 (D. Kan. 1977) (federal courts)
• State v. Blue Crest Plans, Inc., 421 N.Y.S. 2d 579, 72 A.D.2d 713 (1979); Professional Lens Plan v. Department of Insurance, 387 So. 2d 548 (Fla. App. 1980) (state courts)

Related AG opinions: 42 Opinions of the Attorney General 254 (1957); 55 Opinions of the Attorney General 196 (1970); 63 Opinions of the Attorney General 422 (1978); 72 Opinions of the Attorney General 167 (1987)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1990/Volume75_1990.pdf (this opinion appears at printed pages 319-327 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

INSURANCE

Jurisdiction of Insurance Commissioner — Health Benefits Program

June 19, 1990

Mr. John A. Donaho
Insurance Commissioner

 You have requested our opinion on whether a health benefits program known as "Healthnet" is subject, in whole or in part, to the jurisdiction of the Insurance Commission. Although Healthnet, which is currently being marketed, prompted your inquiry, other similar programs have been proposed.

 For the reasons stated below, we conclude that the providers of health care under Healthnet and other similar programs are engaged in the business of insurance and are thus subject to the jurisdiction of the Insurance Commission. As insurers, the providers are subject to the licensure, minimum capital, reserve, rate-setting, and other applicable requirements of the Insurance Code. The intermediary administrative entity, however, is not engaged in the business of insurance.1

I

The Healthnet Plan

 The Healthnet plan is a means through which health benefits are provided to employer groups. The plan is marketed and advertised by Willse & Associates ("Willse"), an unlicensed third-party administrator, to employer groups known as sponsors. The sponsors enter into a contract with Willse, pursuant to which Willse undertakes to purchase medical services for the sponsors' employees and their dependents (called "covered persons" in the contract).

 Sponsors pay Willse a predetermined fee, called a "capitation fee," that is set at X dollars per covered person per month. A portion of this fee is retained by Willse as compensation for purchasing the medical services and for administering the payment of medical bills during the life of the contract. Willse's administrative fee is fixed by this contract. While the total amount paid to Willse may vary depending upon plan utilization, the capitation fee does not.

 In order to have medical services available for covered persons, Willse also enters into contracts with various "health plans," some of which are licensed health maintenance organizations ("HMOs") and some of which are not. Indeed, we understand that at least one and possibly more of the health plans participating in Healthnet do not provide health care benefits at all. Rather, these plans themselves enter into contracts with physicians or physician groups, and sometimes with HMOs, to render the necessary care.

 You have informed us that, while payment to these health plans is made in a variety of ways, in all contracts Willse first deducts its administrative fees from the capitation payment and then forwards the remainder of that payment to the health plan.2 In exchange, the health plan agrees to provide the medical services enumerated in its contract with Willse to the covered persons.3 Some contracts require copayments for certain services; others do not. No plan provides hospitalization for covered persons. The cost of hospitalization is borne solely by the sponsor, although Willse undertakes to oversee bill payments. Nor does any contract provide benefits for emergency services.

At this point in the compensation scheme, the contracts fall into two differing types:

 Under the first type of contract, there is an annual "adjustment" to the capitation fees paid by Willse on the sponsor's behalf. You described this adjustment formula as follows: The sum of each sponsor's capitation fees and the copayments made by the covered persons are compared to the actual costs to the health plan of providing the services. If the cost of services is less than the sum of fees paid to the health plan, the health plan refunds 50% of the difference to Willse, which forwards this amount to the sponsor. The health plan retains the other 50%. If the cost of services is more than the sum of the fees paid the health plan, the sponsor is not required to pay any further fee. The loss is absorbed by the health plan.

 In addition, under this type of contract, the health plan receives a bonus or incurs a penalty based on the services outside the contract with the health plan. That is, the health plan either receives or pays 50% of the difference between projected costs of these out-of-plan services and the actual costs.4

 The second group of contracts contains a different approach to annual adjustments. First, an annual projected cost per-employee per-month is developed for each sponsor. The annual projected cost includes not only the capitation fees paid the health plan, but also the projected amount that will be spent for each sponsor's covered persons for the year for hospital fees, emergency care, and other out-of-health-plan benefits. At the end of the year, a comparison is made between the annual projected cost and the actual cost of services. The actual cost of services equals the cost of services provided by the health plan plus the cost of hospital, emergency, and other out-of-health-plan benefits actually paid. If the actual cost of services exceeds the annual projected cost, a penalty is assessed against the health plan equal to 50% of the difference, with an overall dollar limit. Willse administers the penalty for the sponsor against the health plan by reducing the capitation payments made to the health plan. The sponsor is responsible for the remainder of the loss. If the actual cost of services is less than the annual projected cost, a bonus equal to 50% of the difference is paid to the health plan.

II

Applicability of Insurance Code

A. Introduction

 The legal question is whether the Healthnet program, in whole or in part, is "insurance" and thus subject to regulation.5

 "Insurance" is defined in Article 48A, §2 of the Maryland Code as "a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies." This definition "includes not only promises of strict indemnity but also promises to pay or provide a specific or determinable amount or benefit upon determinable contingencies. By using the term 'provide' the statute includes contracts for the rendition of service." 63 Opinions of the Attorney General 422, 424 (1978).6

 The following five elements of an insurance contract have long been applied in determining whether a particular plan falls within the definition of "insurance":

                (a) The insured possesses an interest of some kind susceptible of pecuniary estimation, known as an insurable interest.

                (b) The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils.

                (c) The insurer assumes that risk of loss.

          (d) Such assumption is part of a general scheme to distribute actual losses among a large group of persons bearing somewhat similar risks.

          (e) As consideration for the insurer's promise, the insured makes a ratable contribution, called a premium, to a general insurance fund.

42 Opinions of the Attorney General 254, 256-57 (1957) (quoting Vance, Law of Insurance §1 (3d ed. 1951)). See also 72 Opinions of the Attorney General 167 (1987); 55 Opinions of the Attorney General 196 (1970). As this office also noted, "[d]istribution of risk of loss among a large group of persons bearing somewhat similar risks lies at the heart of the concept of insurance." 63 Opinions of the Attorney General at 425.

B. Status of Intermediaries

 In our view, no contract of insurance exists between Willse and the sponsors. Willse assumes no risk of loss, and the fees that it receives from the sponsors pay for administration, not for the actuarial cost of spreading that risk. It carries out its contractual obligation by entering into contracts, either directly with the providers of medical services or with entities that then contract with the providers.

In acting as a conduit and not accepting the contractual responsibility to provide the medical care in exchange for premiums, Willse is not an insurer. Its role is merely that of administrator.

 We have been informed that in certain instances an entity, Healthcare 2000, contracts with Willse to provide health care services and, in turn, enters into its own contracts with providers. Much as does Willse, Healthcare 2000 receives an administrative fee and passes the premium along to the actual providers. Again, the entity accepts no financial risk, receives no premiums, and provides only administrative services. It is not an insurer.

C. Status of Providers

 When Willse contracts directly with providers, we understand that Willse pays them for services at reduced rates. The theory behind this arrangement is that the volume of business generated for the providers will offset the income forgone through the reductions. Under both the contract types described in Part I above, the providers assume the risk of loss, which, we have been informed, can be quite substantial. Here we reach the insurance component of the plan.

It is true that assumption of risk of loss does not automatically convert a contractual obligation into one of insurance. Were that true, all contracts of warranty would automatically become insurance contracts. This office has opined to the contrary. See 42 Opinions of the Attorney General 254 (1957).

 Here, however, all five elements necessary to find an "insurance" arrangement are present:

          (1) The insureds, the "covered persons," possess an insurable interest in their health.

           (2) The covered persons face substantial risk of loss through the occurrence of designated perils, such as disease or accident.

             (3) The health care provider assumes the risk of loss by accepting capitation payments under the contracts described above.

            (4) The health care provider spreads the cost over a large group of covered persons.

             (5) The provider accepts a "premium" — the capitation payment.

  Our conclusion is in accord with pertinent decisions from other jurisdictions. For example, Manasen v. California Dental Services, 424 F.Supp. 657 (N.D. Cal. 1976), rev'd on other grounds 638 F.2d 1152 (9th Cir. 1979), involved a plan under which employers paid fixed, per capita premiums to a provider in exchange for dental services to the plan's beneficiaries. The provider assumed the risk that these premiums would be enough to cover the costs of the services. This plan was the "business of insurance," the court held. See also, e.g., Klamath-Lake Pharm. Ass'n v. Klamath Med. Serv. Bureau, 701 F.2d 1276, 1286 (9th Cir. 1983) (health care provider's policies with insureds are the business of insurance "insofar as they shift the risks of medical costs" to the provider); State v. Blue Crest Plans, Inc., 421 N.Y.S. 2d 579, 580, 72 A.D.2d 713 (1979) (legal services plan constitutes insurance when contract contains prepayment; distributes loss among large group; has insurable interest; and contains legally binding promise, premium payments and profit motive for service providers). Cf. Professional Lens Plan v. Department of Insurance, 387 So. 2d 548 (Fla. App. 1980) (contract to furnish replacement lenses is not insurance where there exists neither premium payments, assumptions of a risk, or a risk-spreading mechanism).

 Our conclusion is not changed by the fact that Willse enters into the contract with the provider on behalf of the employer. Willse, in entering into these contracts, is expressly acting as agent for the employer. The ultimate beneficiary of the services remains the employees. Moreover, we do not believe that merely interjecting a claims payment administrator into the relationship alters the provider's underlying obligation to provide care to those employees who participate in the benefits plan. Simply placing a conduit between insured and provider does not render the provider's obligation to employees anything other than "insurance."7

 Finally, we do not believe that the employer's creation of a self-funded employee benefits package, protected from state regulation by the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C.A. §1001 et seq., exempts the providers of those services from state regulation as well. "While ERISA supersedes state law regulation of employee benefit plans, the Act allows the States to continue to regulate the sale of insurance." Taggart Corp. v. Efros, 475 F. Supp. 124, 125 (S.D. Tex. 1979). See Matthew 25 Ministries, Inc. v. Corcoran, 771 F.2d 21 (2d Cir. 1985); Bell v. Employee Security Benefit Association, 437 F. Supp. 382 (D. Kan. 1977).

 Insurers and those acting as insurers are not released from state statutory obligations merely because those to whom they sell their products and services fall under the protection of ERISA. ERISA was intended to permit employers to craft creative methods of providing benefits to employees. But ERISA was not intended to exempt sellers of insurance from applicable state laws. H. Conf. Rep. No. 93-1280, 93d Cong., 2d Sess. (1974), reprinted in 1974 U.S. Code Cong. & Admin. News 5038, 5162.

IV

Conclusion

  In summary, it is our opinion that the Healthnet program is partially subject to the jurisdiction of the Insurance Commissioner. Willse, acting as agent of the employer, does not fall within that jurisdiction. However, we believe that the providers of health care services themselves are engaging in the business of insurance by insuring the provision of health care benefits on the occurrence of certain determinable contingencies, for the payment of a premium in the form of a capitation payment.

                                         J. Joseph Curran, Jr.
                                         Attorney General

                                         Randi F. Reichel
                                         Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions & Advice

1
These conclusions apply only to the Healthnet program and others that might be structured similarly. An assessment of whether an entity is engaged in the provision of "insurance" can only be made case-by-case, after close analysis of the particular facts.

  We also note that if a program were to be structured so as to be a "preferred provider insurance policy," it would be subject to regulation under newly enacted Chapter 578 (House Bill 558), Laws of Maryland 1990 (effective July 1, 1990).

2
The capitation payment is determined by including Willse's negotiated administrative fee into the health plan's negotiated payment. In other words, Willse negotiates a "per-member per-month" contract with the health plan, adds its own "per-member per-month" administrative charge, and then uses that figure as its total cost to the sponsor.

3
Typically, the health plan agrees at a minimum to provide physician services, diagnostic services, chemotherapy, ambulance services, physical examinations, maternity care, and well-baby care.

4
In this respect the plan differs from a plan in which the employer, through an administrative services-only ("ASO") contract, undertakes the provision of health care benefits. An ASO contract, in which the employer pays dollar-for-dollar the actual amount of the cost of the benefits, does not contain the bonus or penalty provisions of the plans at issue here. The plan also differs from a typical HMO. See §19-701(e) of the Health-General Article.

 The Healthnet program in some respects resembles a traditional preferred provider organization ("PPO"), in which insureds are offered panels of physicians from which to choose their care. In both types of programs, these panels of physicians work under contract to the plan administrator or insurer. However, it is our understanding that the PPO structure does not contain certain provisions, such as the hospitalization bonus or penalty, contained in the Healthnet contracts. We find this distinction to be significant.

5
It is almost universally held that "the insurance industry is affected with a public interest and may be regulated by the states within constitutional limits." Maryland Medical Services v. Carver, 238 Md. 466, 484, 209 A.2d 582 (1965). See also, e.g., Saffore v. Atlantic Casualty Insurance Co., 21 N.J. 300, 121 A.2d 543 (1956); Insurance Department v. City of Philadelphia, 196 Pa. Super. 221, 173 A.2d 811 (1961); Brown v. Bernard, 376 So.2d 1034 (La. App. 1979).

6
The "insurance business" is defined as follows in §8:

      (a) The "insurance business" includes the transaction of all matters pertaining to a contract of insurance, both prior to and subsequent to the effectuation of such a contract, and all matters arising out of such a contract or any claim thereunder.

      (b) The "insurance business" does not include the pooling together by public entities for the purpose of self-insuring casualty risks.

7
Nor does it matter if Willse contracts with Healthcare 2000 or some other additional administrative intermediary.