A doctor charges an annual membership fee to her patients in exchange for a comprehensive physical exam, same day access to the doctor for appointments (but not to include any actual services provided by the doctor during the appointment) and a written summary of all office visits.
The same doctor in the first scenario decides to add five office visits, which would also be covered by the same annual membership fee.
A hospital system sells an executive health assessment program directly to employers. The employers pay the hospital a fee for executives to receive a comprehensive physical exam, lab work, a wellness plan and limited services with respect to certain diagnoses. The hospital, in turn, contracts with physicians to provide these services on a flat fee basis.
All of these scenarios raise the issue regarding whether the pre-payment for services constitutes the business of insurance. As we know, the penalties are stiff for those who are found to be engaging in the insurance business without a license. This article sets forth an analysis of these types of scenarios.
Statutory Definitions of Insurance
The first step in determining whether a provider could be engaging in the business of insurance is to look for a statutory definition of insurance in the applicable insurance code. In Colorado, "insurance" is defined in Section 10-1-102(12) as:
[A] contract whereby one, for consideration, undertakes to indemnify another or to pay a specified or ascertainable amount or benefit upon determinable risk contingencies …
Other statutory definitions are similar in that they are so broad that they are not very useful as many contracts could fit under the definition. Fortunately, case law, attorney general opinions and bulletins often provide valuable guidance. Colorado Bulletin B-2.3 is helpful with respect to the first two scenarios:
The business of insurance is a regulated activity and requires a certificate of authority. The transfer of risk for consideration, such as capitated contracts for the provision of health care services, constitutes the transaction of insurance business ... Where unlicensed providers directly accept risk for health care services from another unlicensed entity [e.g., consumers], the providers are engaging in the transaction of insurance business without a license. [Emphasis added.]
Looking at the second scenario, the question becomes whether the doctor is accepting risk by charging a membership fee in exchange for services. Let’s take a look at some examples.
Assume that (1) the membership fee is $1500; (2) if purchased separately, the exam would cost $1000 and each visit would be $100; and (3) the other services such as the same day appointments are no-cost add-ons. Since the fee covers the cost of all of the services, there is no risk that the doctor would lose money.
However, if the fee is only $1000, the doctor risks a possible loss of $500 if a patient uses all five visits. This looks more like insurance as the doctor would be counting on the fact that some patients would not use all five visits thereby making up for those who do use all visits. This distribution of risk among a group of patients could be viewed as insurance. The greater the difference between the amount of the fee and the value of the services, the stronger the argument that the plan is insurance.
If a state does not set forth a statutory definition and there is no other guidance in the regulations or bulletins, there may be case law that has addressed whether a particular product is insurance. One popular test used by many courts in various jurisdictions in analyzing whether a particular product is insurance is a test created by Professor Vance, which sets forth five elements that are common to all insurance contracts:
- The insured possesses an interest of some kind susceptible of pecuniary estimation, known as an insurable interest.
- The insured is subject to a risk of loss for the destruction or impairment of that interest by the happening of designated perils.
- The insurer assumes that risk of loss.
- Such assumption is part of a general scheme to distribute actual losses among a large group of persons bearing similar risks.
- As consideration for the insurer’s promise, the insured makes a ratable contribution to a general insurance fund, called a premium.
A contract possessing only the three elements first named is a risk-shifting device, but not a contract of insurance, which is a risk-distributing device; but, if it possesses the other two as well, it is a contract of insurance, whatever be its name or its form.[i]
Each of these elements is discussed below with respect to the facts set forth in the second scenario above.
Insurance contracts protect an insurable interest. Before an insured may purchase an insurance policy, he must first demonstrate that he has an interest in the item to be insured such that the destruction of that item will cause him financial loss (e.g., damage to physical property).[ii] In this case, a person certainly has an insurable interest in his health.
Risk of Loss
The types of loss typically covered by insurance include a house being destroyed by a tornado, hail damage to a car or the loss of life. In this case, an accident, disease or sickness that impairs one’s health certainly seems to meet this particular element.
Also a part of this element is the fact that insurance products insure against the risk of a loss caused by a contingent event. A contingent event is defined in Black’s Law Dictionary as a “fortuitous event, which comes without design, foresight, or expectation.”[iii] A fortuitous event is an event happening by chance or accident; an “unforeseen occurrence, not caused by either of the parties, nor such as they could prevent.”[iv] With respect to the second scenario, whether a contingent event is involved depends on the circumstances that bring the patient in for a visit. It would certainly seem that most circumstances would be related to a contingent event (e.g., sickness, disease, accidental injury).
Risk Assumption and Risk Distribution
Risk assumption and distribution refer to the process in a typical insurance contract whereby an insured shifts the risk of a potential loss to the insurer which then distributes that risk among a large group. In our scenario, the provider is arguably assuming the risk that patients will get sick or injured and need services and then distributing that risk among all her patients in hopes that some use very few visits which will subsidize those that use all five visits.
Payment of Premium
Insurance contracts commonly involve the payment of a premium. An insurer calculates a premium based on a number of factors including the probability of the contingency occurring, the expected loss in the event the contingency occurs, past loss history, etc. The acceptance of the risk and the calculation of the premium are all part of the underwriting process. Because of various factors that go into a premium calculation, premiums may vary widely according to each policyholder.
Whether a particular fee may be characterized as a premium really depends, in large part, on whether it is fixed for everyone or whether it varies. If it varies based on a particular set of facts, that makes it look more like a premium in that certain scenarios present greater risk. For example, if a physician charges a higher membership fee for chronically ill people, the logical conclusion is that she is assuming that those individuals will use more services.
Insurance is a highly regulated industry as insurance departments must ensure that insurers remain solvent so that they can fulfill their obligations to policyholders. Anytime there is a risk that a prepayment of money will not cover the promised services or benefits, there is a chance that the arrangement will be viewed as insurance.
Since health care providers are not likely to recognize the issue of potential insurance regulation, one of our jobs as insurance regulatory lawyers is to educate healthcare attorneys. If healthcare attorneys are able to spot the issue, they can then seek assistance from a lawyer well-versed in insurance regulatory and compliance issues.
Some red flags for healthcare attorneys to watch for include (1) references by the provider to a retainer or concierge practice, which typically involve a prepaid fee in return for certain services; (2) direct contracts between providers and employer groups for the provision of services; and (3) the payment of an annual or monthly fee in exchange for discounts on services.