Mr. John L. Crill, Esq. Newsome, Graham, Hedrick & Kennon, P.A. Suite 1200 University Tower 3100 Tower Boulevard Durham, N.C. 27707
Re: Advisory Opinion: Durham County Hospital Corp–Contracting with Self-Insured Employee Benefit Plans and Health Care Providers; 29 U.S.C. § 1144; N.C.G.S.§§ 58-67-1, et seq.
Dear Mr. Crill:
You have asked whether a health care provider organization that contracts with an ERISA selfinsured employee benefit plan is subject to regulation as an HMO by the North Carolina Department of Insurance. You have provided the following facts concerning the contract terms:
(1)A direct contract is entered between a health care provider organization (the Aprovider@) and a self-insured employer (the Aemployer@).
(2)The provider is a network or other integrated system of physicians, hospitals, clinics, and other health care providers or facilities, or any combination thereof (the Anetwork@), duly licensed as providers by their respective licensing boards or agencies.
(3)The employer administers a self-insured employee health benefit welfare plan subject to ERISA.
(4)Under the contract, the provider is to directly provide a specific, defined set of health care services, as needed, to a specific number of identified employees and their dependents pursuant to the self-insured employee health benefit welfare plan.
(5)Under the contract, the provider is prepaid by the employer in a manner that could potentially cause the provider’s reimbursement to be less favorable in the event that utilization by the provider is high. This reimbursement system is not true Acapitation,@ however, for the reasons indicated below.
(6)Under the contract, the provider has no financial risk for provision of services outside the provider’s scope of practice, due to medical emergencies, out-of-network services or referrals beyond the extent that the provider can manage the care, or tertiary or catastrophic care, unless directly provided within the network. In essence, the provider is responsible only for a limited set of services that are specified under the contract. The employer retains the responsibility for health care services to its employees should the provider be unable to provide such care. If the employer deems it necessary, the employer would obtain reinsurance or stop-loss insurance to protect itself against catastrophic claims.
- (7)Under
- the contract, the provider covenants that providing health care services to the employees will not unreasonably overextend the provider’s ability to provide services to the provider’s patients.
- I.
- LEGAL BACKGROUND
- A.
- The Federal Employee Retirement Income Security Act.
The provider network proposes to contract with a self-insured employee benefit plan subject to ERISA. ERISA is the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq., which regulates employee benefit plans. Employee benefit plans include employee welfare plans, which are defined as follows:
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, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care center, scholarship funds, or prepaid legal services…29 U.S.C. § 1002(1).
The services proposed to be provided by the provider network are services within the scope of employee welfare benefit plans subject to ERISA.
ERISA provides that its provisions Asupersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . . .@ 29 U.S.C. § 1144(a). This broad preemption provision contains a Asavings@ clause which provides that nothing in the ERISA provisions Ashall be construed to exempt or relieve any person from any law of any State which regulates insurance . . . .@ 29 U.S.C. § 1144(b)(2)(A). Finally, ERISA provides that for purposes of this exception to the preemption clause an employee welfare benefit plan subject to ERISA shall not be deemed an insurance company. 29 U.S.C. § 1144(b)(2)(B). In essence, ERISA preempts state laws that relate to employee welfare benefit plans, except for state laws that regulate insurance; however, for purposes of this exception an employee welfare benefit plan is not an insurance company.
The ERISA preemption expresses Congress’ intention Ato ensure that [welfare benefit] plans and plan sponsors would be subject to a uniform body of benefits law; the goal was to minimize the administrative and financial burden of complying with conflicting directives among States or between States and the Federal Government and to prevent the potential for conflict in substantive law requiring the tailoring of plans and employer conduct to the particularities of the law in each jurisdiction.@ New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 115 S. Ct. 1671, 1677 (1995) (quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990)). The broad preemption clause indicates congressional intent to regulate employee welfare benefit plans Aas exclusively a federal concern.@ Travelers, supra, 115 S.Ct. at 1677 (quoting Alessi v. Raybestos-Manhattan Inc., 451 U.S. 504, 523 (1981)).
B. The North Carolina Health Maintenance Organization (HMO) Act. The North Carolina HMO Act requires that all persons operating an HMO in the state must first obtain a certificate of authority from the Commissioner of Insurance. Substantial financial disclosure, working capital and operations information is required for certification. The Commissioner of Insurance is given regulatory authority over the charges, benefits and contractual arrangements of certificated HMOs. In addition, the Act imposes specific mandatory benefits requirements upon HMOs. See generally, N.C.G.S. § 58-67-1, et seq.
An HMO is defined under N.C.G.S. § 58-67-5(f) as Aany person who undertakes to provide or arrange for the delivery of basic health care services to enrollees on a prepaid basis except for enrollees responsibility for copayments and deductibles.@ The Act defines Aperson@ to include Aassociations, trusts, or corporations, but does not include professional associations, or individuals.@ N.C.G.S. § 58-67-5(g). The Act also provides that it does Anot apply to any employee benefit plan to the extent that the Federal Employee Retirement Income Security Act of 1974 preempts state regulation thereof.@ N.C.G.S. § 58-67-10(B)(3).
The express exception of Aprofessional associations@ from the definition of Apersons@ in the Act would appear to permit individual health care practice physician groups to contract directly with an ERISA employer to provide services under the contractual provisions described. A network of physician groups would reasonably fall within the same exception since all members of the network would be professional associations. Inclusion of a hospital or other health care provider that is not a professional association in the network, however, appears to bring that network within the definition of an HMO under the North Carolina statute.
For purposes of this advisory opinion, the question becomes whether the North Carolina HMO Act relates to an employee benefit plan subject to ERISA, and if it does relate, whether the HMO Act regulates insurance. If the HMO Act does not relate to an ERISA plan, the state law is not preempted under ERISA. If the HMO provisions relate to an ERISA plan, they are preempted unless they regulate insurance.
II. DISCUSSION The question whether the HMO Act relates to an ERISA plan and is therefore preempted has not been litigated in North Carolina or elsewhere to our knowledge. The scope of ERISA’s preemption clause has, however, been the subject of a substantial amount of litigation. Under these cases, a state law Arelates to@ an ERISA plan if it has Aa connection with or reference to such a plan.@ Travelers, supra, 115 S.Ct. at 1677. Using this test, courts have consistently held that state laws Arelate to@ ERISA plans and are therefore preempted when they mandate benefits to be provided, specify the manner in which those benefits are to be provided or direct which health care providers must provide those benefits. For example, in Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985), the United States Supreme Court held that a mandated benefits law relates to an ERISA plan. In Stuart Circle Hospital Corp. v. Aetna Health Management, 995 F.2d 500 (4th Cir.), cert. denied, 510 U.S. 1003 (1993), the Fourth Circuit held that Virginia’s any willing provider law relates to an ERISA plan. See also Blue Cross & Blue Shield of Kansas City v. Bell, 798 F.2d 1331 (10th Cir. 1986) (mandated provider law); CIGNA Healthplan of Louisiana v. State, 82 F.3d 642 (5th Cir. 1996) (any willing provider law); Blue Cross & Blue Shield of Alabama v. Nielsen, 917 F. Supp. 1532, 1538 (N.D. Al. 1996) (state statutory reference to third party payors Aencompasses self-funded ERISA plans thereby satisfying the ‘relates to’ requirement of ERISA’s preemption clause.@).
Recently, the United States Supreme Court reviewed a New York law that required hospitals to add a surcharge to patients served by commercial insurers and HMOs, but not to patients served by Blue Cross & Blue Shield plans. Travelers, supra. In Travelers, the plaintiff argued that although the surcharge did not single out ERISA plans, it should be preempted under ERISA because it caused a not insignificant increase in costs for such plans. The Court held that the law did not Arelate to@ insured ERISA plans because its only impact on those plans was to increase indirectly the amount of their insurance premiums. In reaching this result, the Court distinguished past decisions holding that state laws that have the effect of mandating employee benefit structure or their administration Arelate to@ such plans and are preempted. Travelers, 115 S. Ct. at 1678. The Court distinguished the New York hospital surcharge on the grounds that by affecting only the price of various available insurance products, it Adoes not bind plan administrators to any particular choice and thus function as a regulation of an ERISA plan itself.@ Travelers, 115 S. Ct. at 1679. The Court explained its decision stating that Apreemption does not occur . . . if the state law has only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general applicability . . . nothing in the language of the Act or the context of its passage indicates that Congress chose to displace general health care regulation, which historically has been a matter of local concern.@ Travelers, 115 S.Ct. at 1680.
Under these precedents, it is clear that those provisions in the North Carolina HMO Act that have the effect of mandating benefits in an ERISA plan Arelate to@ such plans and are preempted. See, e.g., N.C.G.S. § 58-67-76. It is less clear from these cases whether the licensure requirements and plan administration regulations are also preempted. On one hand, it could be argued that general licensure requirements are in the nature of broad health care provisions that do not directly relate to ERISA plans’ benefits or administration. On the other hand, prohibiting health care service providers from contracting with an ERISA plan unless they are licensed as an HMO directly limits the providers available to any ERISA plan in the state. In this way, the HMO licensure requirement is similar to state any willing provider statutes which courts have consistently held are preempted by ERISA. See, supra, Stuart Circle Hospital Corp.; CIGNA Healthplan of Louisiana; Nielsen.
The only case we are aware of that has addressed the question of preemption of state licensure requirements is an unreported case from the United States District Court in New Jersey. In Oracare DPO v. Merin, 1991 WL 113149, 13 EBC [Employee Benefits Cases] 2720 (D. N.J. 1991), a New Jersey law required a dental provider organization to be licensed before it could provide services to an ERISA plan under a capitated contract. The Court held that the licensure requirement would Arelate to@ the ERISA plan and was therefore preempted because the very focus of this action is the direct regulation of the Oracare [DPO] plan which was proposed for purchase by Cooper Hospital as part of its employee benefit plan. The regulatory activity authorized by the DPO Act purports to invalidate a proposed element of Cooper Hospital’s employee benefit plan, and it cannot be seriously argued that the DPO Act and the regulatory activity conducted pursuant thereto do not ‘relate to’ that employee benefit plan.
Limiting choice of providers through HMO licensure requirements is more similar to mandated benefits structures or their administration than it is to an indirect increase in plan costs. Significantly, the Fifth Circuit recently applied Travelers in holding that Louisiana’s any willing provider law is preempted by ERISA. Finding that licensure requirements Arelate to@ an ERISA plan and are therefore preempted is also consistent with congressional intent. To find otherwise would subject ERISA plans to different state regulatory schemes for entities with whom they wish to contract for health care services.
Although this is an area of the law where prediction with certainty is rare, and we cannot guarantee how a court would rule, we believe that the North Carolina HMO Act licensure provisions Arelate to@ the proposed ERISA plan contract because they apply directly to such plans by determining which entities the plan may and may not contract with for proposed services. Those provisions are, therefore, preempted by ERISA.
The final issue is whether the North Carolina HMO law Aregulates insurance,@ and is thereby saved from preemption under ERISA’s Asavings@ clause. 29 U.S.C. § 1144(b)(2)(A). If the proposed contractual arrangement for health care services is insurance, regulation thereof through the HMO Act is Asaved@ from preemption. The touchstone of this analysis is whether there is a shift or assumption of an insurance risk. AIf no risk is shifted, there is not an insurance contract.@ Blackwelder v. City of Winston-Salem, 332 N.C. 319, 420 S.E.2d 432 (1992). See also, Phoenix Mutual Life Ins. Co. v. Adams, 30 F.3d 554 (4th Cir. 1994). Here, the principal purpose of the proposed contract is obtaining health care services, not protecting against a financial risk. Under these facts, there is no insurance contract, as defined in N.C. G.S. § 58-110, and no regulation of insurance. Blackwelder, supra; Group Life and Health Ins. v. Royal Drug Co., 440 U.S. 205 (1970); Jordan v. Group Health Assn., 107 F.2d 239 (D.C. Cir. 1939). ERISA’s savings clause does not Asave@ the HMO Act from preemption. Powell v. Chesapeake and Potomac Tel. Co. of Virginia, 780 F.2d 419 (4th Cir. 1985), cert. denied, 476 U.S. 1170 (1986).
For the reasons discussed above, it is our opinion that health care provider organizations that contracts with an ERISA employee benefit plans to provide health care services under the contract provisions described are not subject to regulation as an HMO in North Carolina because the HMO Act is preempted by ERISA.
If you have additional questions, please do not hesitate to contact us.
John R. McArthur Chief Counsel
Andrew A. Vanore, Jr.
Chief Deputy