If a network of doctors and hospitals contracts directly with a self-insured employer's ERISA plan to provide healthcare to employees on a capitated basis, does the network have to be licensed as an HMO under North Carolina law, or does federal ERISA preempt the state HMO Act?

Plain-English summary

John Crill at Durham County Hospital Corp asked whether a planned provider network that would contract directly with a self-insured employer's ERISA benefit plan would need to obtain HMO licensure from the North Carolina Commissioner of Insurance under § 58-67-1 et seq.

The proposed structure: a network of doctors, hospitals, and other providers would contract with the employer to deliver healthcare services to employees, possibly on a capitated basis (fixed monthly payment per enrollee). The network would include hospitals (not just physician groups), so the NC HMO Act's exclusion for "professional associations" would not apply.

Chief Counsel John McArthur and Chief Deputy Andrew Vanore Jr. answered: ERISA preempts the HMO Act here.

The two-step ERISA preemption analysis.

Step one: does the state law "relate to" an ERISA plan? Under New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co. (1995), a state law relates to an ERISA plan if it has "a connection with or reference to such a plan." Federal courts have consistently held that state laws relate to ERISA plans when they mandate benefits, specify how benefits must be provided, or direct which providers must provide them. Metropolitan Life Ins. Co. v. Massachusetts (1985) (mandated benefits law); Stuart Circle Hospital Corp. v. Aetna Health Management (4th Cir. 1993) (Virginia "any willing provider" law); CIGNA Healthplan of Louisiana v. State (5th Cir. 1996) (Louisiana any willing provider law).

The North Carolina HMO Act's mandated benefit provisions (e.g., § 58-67-76) clearly relate to ERISA plans and are preempted. The harder question is the HMO licensure requirement itself. The opinion concludes the licensure requirement also relates to ERISA plans, by analogy to "any willing provider" laws: "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." Oracare DPO v. Merin (D.N.J. 1991) explicitly held that state licensure of dental provider organizations was preempted because it "purports to invalidate a proposed element of [the employer's] employee benefit plan."

Step two: does the state law "regulate insurance," triggering the savings clause? Under ERISA § 514(b)(2)(A) (29 U.S.C. § 1144(b)(2)(A)), state laws that regulate insurance escape preemption. The touchstone for whether something is insurance: is insurance risk shifted? Blackwelder v. City of Winston-Salem (1992) and Phoenix Mutual Life Ins. Co. v. Adams (4th Cir. 1994). "If no risk is shifted, there is not an insurance contract."

The proposed provider-network contract's principal purpose is obtaining healthcare services, not protecting against financial risk. There is no insurance contract under § 58-110, and no regulation of insurance. The savings clause does not save the HMO Act from preemption. Group Life and Health Ins. v. Royal Drug Co. (1979) supports this conclusion (pharmacy provider agreements are not "the business of insurance"); Jordan v. Group Health Assn. (D.C. Cir. 1939) is an even earlier articulation of the same principle (a prepaid group practice arrangement is not insurance because it commits to delivery of services, not to indemnification against loss).

The conclusion. A provider network that contracts with an ERISA self-insured plan for healthcare service delivery is not subject to North Carolina HMO regulation. The HMO Act's licensure requirement is preempted by ERISA, and the savings clause does not save it because the underlying contract is not an insurance contract.

Two important caveats. The opinion explicitly notes that prediction with certainty in ERISA preemption is rare and courts could differ. And the conclusion turns on the specific contractual structure: the provider network is delivering services, the employer self-insures the financial risk. A different structure (the network assuming the risk in exchange for fixed premiums) might cross the line into insurance and trigger HMO regulation.

Currency note

This opinion was issued in 1996. 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. ERISA preemption doctrine has continued to evolve since 1996. Major decisions include Rush Prudential HMO, Inc. v. Moran (2002), Aetna Health Inc. v. Davila (2004), and Gobeille v. Liberty Mutual Insurance Co. (2016), which have refined the line between "relates to" and "regulates insurance" for healthcare contexts. Any current self-insured-plan provider arrangement should be analyzed under the current ERISA preemption framework and current North Carolina HMO Act, both of which may have changed materially.

Background and statutory framework

ERISA, enacted in 1974 to address fragmentary state regulation of pension and welfare plans, contains one of the broadest preemption clauses in federal law. § 514(a) (29 U.S.C. § 1144(a)) preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." The savings clause at § 514(b)(2)(A) carves back the preemption for state laws that "regulate insurance." The deemer clause at § 514(b)(2)(B) prevents states from getting around the preemption by deeming an ERISA plan to be an insurance company.

This three-step framework (preemption-savings-deemer) generates persistent litigation over the boundaries of "relates to" and "regulates insurance." Self-insured employer plans (where the employer keeps the financial risk and just contracts for administration) are particularly hard to reach with state regulation, because the deemer clause forbids treating them as insurance companies.

North Carolina enacted its HMO Act in the 1970s to provide an alternative to traditional indemnity insurance. The Act requires HMOs to obtain a certificate of authority from the Commissioner of Insurance, demonstrate financial reserves, accept regulatory oversight of charges and contracts, and provide statutorily mandated benefits. The Act's policy objective was consumer protection in the HMO market; it was not drafted with self-insured ERISA plans in mind.

The "professional association" exclusion in § 58-67-5(g) creates an obvious workaround: a network of physician groups can contract directly with employers without becoming an HMO. But once the network includes a hospital, the workaround fails. Hospitals are not "professional associations" within the statute's meaning. The Durham County Hospital Corp proposal was a network including hospitals, which is why the HMO question arose at all.

The 1990s were a period of intense ERISA preemption litigation in the healthcare context. States tried to regulate managed care through "any willing provider" laws, mandated benefits, anti-discrimination provisions, and licensure schemes. Federal courts, applying Travelers, held most of these state-law constraints preempted as to ERISA plans. The opinion sits squarely within that body of law and reaches the result those cases foreshadowed.

The Blackwelder no-risk-no-insurance principle has deep roots. Jordan v. Group Health Assn. in 1939 articulated it; Group Life and Health v. Royal Drug Co. extended it to McCarran-Ferguson contexts. The principle remains active law. If a provider organization is committing to deliver services in exchange for fixed payments, it is closer to a service contract than to insurance. The insurance characterization requires that the organization assume the risk of fluctuating utilization in exchange for the fixed premium. When the employer self-insures, the organization is not assuming that risk; the employer is.

Common questions

What about fully insured group plans (the employer buys insurance from an insurer)?

The analysis is different. A fully insured plan involves a state-regulated insurance contract between the employer and the insurer. The insurer is subject to state insurance regulation directly, and the savings clause likely applies to laws regulating the insurer. The state can reach the insurer through insurance regulation even though it cannot reach the ERISA plan directly.

What if the provider network does assume some risk?

If the network takes capitated payments that put it at financial risk for utilization, it begins to look more like insurance. Some federal courts have held that capitation arrangements with significant downside risk can cross the line. The opinion's no-insurance conclusion assumes that the contract's principal purpose is service delivery, not risk transfer. The line between service contract with cost-plus risk-sharing and full insurance is fact-specific.

Could North Carolina amend its HMO Act to reach provider networks contracting with ERISA plans?

Probably not effectively. The same ERISA preemption analysis would apply to the amended law. The state can regulate the insurance side (the financial intermediary, the risk-bearing entity) but it cannot regulate the contracting structure of an ERISA plan directly.

Does this apply to fully insured employer plans purchased from commercial HMOs?

No. A commercial HMO licensed by the Commissioner of Insurance and selling group coverage to employers is the insurer in the relationship, and the savings clause likely shields the HMO Act's regulation of the HMO. The opinion's narrow holding is about networks contracting with self-insured plans, not about commercial HMOs.

What is the practical takeaway for hospitals and provider networks?

The opinion creates a path for self-insured employers to contract directly with provider networks without triggering state HMO regulation. Hospitals contemplating direct contracting with self-insured employers can structure the deal as a service contract with the employer keeping the insurance risk. The hospital does not need an HMO certificate. The savings depend on the employer truly self-insuring (not just being a pass-through for a captive insurer or risk-bearing intermediary).

Has the Fourth Circuit followed this reasoning?

Stuart Circle Hospital Corp. (1993), cited in the opinion, is the Fourth Circuit precedent on the question of whether state any-willing-provider-style laws relate to ERISA plans. The Fourth Circuit has continued to apply ERISA preemption broadly in healthcare contexts. Subsequent cases have refined the doctrine, but the basic framework the 1996 opinion applied remains valid in the Fourth Circuit.

Source

• Landing page: https://ncdoj.gov/opinions/durham-county-hospital-corp/

Citations

• N.C. Gen. Stat. § 58-67-1
• N.C. Gen. Stat. § 58-67-5
• N.C. Gen. Stat. § 58-67-10
• N.C. Gen. Stat. § 58-67-76
• N.C. Gen. Stat. § 58-110
• 29 U.S.C. § 1001
• 29 U.S.C. § 1002
• 29 U.S.C. § 1144
• New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 115 S. Ct. 1671 (1995)
• Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990)
• Alessi v. Raybestos-Manhattan Inc., 451 U.S. 504 (1981)
• Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985)
• Stuart Circle Hospital Corp. v. Aetna Health Management, 995 F.2d 500 (4th Cir. 1993)
• Blue Cross & Blue Shield of Kansas City v. Bell, 798 F.2d 1331 (10th Cir. 1986)
• CIGNA Healthplan of Louisiana v. State, 82 F.3d 642 (5th Cir. 1996)
• Blue Cross & Blue Shield of Alabama v. Nielsen, 917 F. Supp. 1532 (N.D. Al. 1996)
• Oracare DPO v. Merin, 1991 WL 113149, 13 EBC 2720 (D.N.J. 1991)
• Blackwelder v. City of Winston-Salem, 332 N.C. 319, 420 S.E.2d 432 (1992)
• Phoenix Mutual Life Ins. Co. v. Adams, 30 F.3d 554 (4th Cir. 1994)
• Group Life and Health Ins. v. Royal Drug Co., 440 U.S. 205 (1979)
• Jordan v. Group Health Assn., 107 F.2d 239 (D.C. Cir. 1939)
• Powell v. Chesapeake and Potomac Tel. Co. of Virginia, 780 F.2d 419 (4th Cir. 1985)

Original opinion text

[The available source body begins partway through the contract-terms enumeration. The portions reproduced below are as the source presents them.]

(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 "supersede 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 "savings" clause which provides that nothing in the ERISA provisions "shall 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 "to 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 "as 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 "any 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 "person" to include "associations, 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 "not 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 "professional associations" from the definition of "persons" 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 "relates to" an ERISA plan if it has "a 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 "relate 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 "encompasses 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 "relate 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 "relate 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 "does 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 "preemption 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 "relate 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 "relate 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 "relate 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 "relate 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 "regulates insurance," and is thereby saved from preemption under ERISA's "savings" 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 "saved" from preemption. The touchstone of this analysis is whether there is a shift or assumption of an insurance risk. "If 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 "save" 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