States decide business of insurance

July 1, 2008

Capitation and other risk-sharing arrangements have been pursued by provider organizations for the past two decades. Yet the law on whether such arrangements result in the provider organization being in the business of insurance has not fully evolved in all states.

Many states do not have a statutory definition of "insurance." Case law, attorney general opinions, and statutes related to unauthorized insurance provide guidance to determine whether a particular business arrangement constitutes insurance. Courts often look to the same common elements as most other jurisdictions when evaluating whether a contract is insurance:

One court found that viatical settlements were not the business of insurance, even though the settlements were directly tied to an insurance policy, because there was no longer any risk involved when the insured had a terminal illness. The court concluded that an essential characteristic of insurance is risk pooling and that there was no evidence that the investors in the viatical settlements pooled the financial risk that the seller will live longer than expected.

The Supreme Court further found that the establishment of the pharmacy network did not involve any underwriting or spreading of risk, but were merely arrangements for the purchase of goods and services by the health plan. By agreeing with pharmacies on the maximum prices it would pay for drugs, the health plan effectively reduced the total amount it would pay to its policy holders. The court believed that such cost savings arrangements inured ultimately to the benefit of policyholders in the form of lower premiums, but that they were not the "business of insurance."

A National Association of Insurance Commissioners (NAIC) white paper analyzed the regulation of risk-bearing entities in the mid-1990s, when regulators were faced with rapid expansion of managed care and increasingly complicated reimbursement methodologies. It showed that an analysis of the payment structure was fundamental to the determination of whether insurance risk had been assumed since payment was the manner in which the risk is transferred, and noted that not all payment methods amount to insurance risk. NAIC distinguished between reimbursement methodologies that were directly tied to delivery of services from those that were not. The report found that service-based reimbursement methodologies, such as discounted fee for service, per diem payments, case rates and DRGs, were not usually regulated as insurance risk.

Other research papers and law review articles triggered by the NAIC white paper found that the general consensus is that provider organizations that contract directly with employers or individuals and assume the risk of providing services, even on a partial basis, are more likely to be regulated than providers that contract with licensed HMOs or insurers.

This column is written for informational purposes only and should not be construed as legal advice.