Is a health maintenance organization licensed under Article 44 of the Public Health Law an insurance corporation taxable under Article 33?
Plain-English summary
KPMG Peat Marwick asked whether a health maintenance organization (HMO) licensed under Article 44 of the Public Health Law is an insurance corporation taxable under Article 33 of the Tax Law. In the example, HMO "X" is a fee-for-service, IPA-model HMO that contracts with independent physicians and institutions and charges its member groups a monthly prepaid fixed fee for covered medical services; it is affiliated with a licensed accident-and-health insurer "Y," and together they offer a point-of-service (POS) product combining X's HMO coverage with Y's out-of-plan indemnity coverage.
The HMO is not an insurance corporation -- it is taxed under Article 9-A. Article 33 does not define "doing an insurance business," but the Department concluded that the business an Article 44 HMO conducts -- arranging and paying for medical services for its members through contracted providers on a prepaid basis -- is not "doing an insurance business" for Article 33 purposes. So as long as X complies with Article 44, it is not an insurance corporation under Article 33; instead, it is subject to the general business corporation franchise tax under Article 9-A.
The POS product does not change the result for the HMO: the HMO coverage is X's non-insurance business, while the out-of-plan indemnity coverage is underwritten by the licensed insurer Y and remains insurance taxed to Y under Article 33.
What this means for you
An Article 44 HMO is a 9-A taxpayer, not an Article 33 insurer
Providing prepaid medical-service coverage through contracted providers is not "doing an insurance business," so a compliant HMO is taxed under the general business corporation franchise tax.
Compliance with Article 44 is the dividing line
The non-insurance treatment depends on the HMO operating within Article 44 of the Public Health Law.
Affiliated indemnity coverage stays with the insurer
In a point-of-service arrangement, the out-of-plan indemnity portion underwritten by a licensed insurer remains insurance taxed to that insurer under Article 33.
Common questions
Q: Is my Article 44 HMO an insurance corporation under Article 33?
A: No. A compliant HMO is not "doing an insurance business" for Article 33 purposes; it is taxed under Article 9-A.
Q: What tax does the HMO pay?
A: The general business corporation franchise tax under Article 9-A.
Q: What about a point-of-service product with indemnity coverage?
A: The HMO coverage is the HMO's non-insurance business; the out-of-plan indemnity coverage underwritten by an affiliated licensed insurer remains insurance taxed to that insurer.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 1500 (definition relating to insurance corporations) and section 1501 (franchise tax on insurance corporations)
- Tax Law section 1505 (cap on Article 33 taxes)
- Tax Law section 209.1 (Article 9-A franchise tax)
- Public Health Law Article 44 (health maintenance organizations)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1993.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a93_4c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-93 (4) C
Corporation Tax
January 12, 1993
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C911211B
On December 11, 1991, a Petition for Advisory Opinion was received from KPMG Peat
Marwick, 345 Park Avenue, New York, New York 10154.
The issue raised by Petitioner, KPMG Peat Marwick, is whether a health maintenance
organization ("HMO") licensed under Article 44 of the Public Health Law is an insurance
corporation for franchise tax purposes and taxable under Article 33 of the Tax Law.
Under Petitioner's hypothetical fact situation an HMO X is incorporated in New York State
and is licensed as an HMO under Article 44 of the Public Health Law. X is a member of an affiliated
group of corporations which includes insurance company Y. Y is an accident and health insurance
company incorporated in New York State and is licensed under the Insurance Law to write accident
and health insurance.
As an HMO in New York, X is approved to write several types of managed care products.
The various types of products can be summarized as follows:
1.
Traditional HMO Services - This product represents the traditional Individual
Practice Association ("IPA") model HMO business. Participating physicians and
health care institutions are reimbursed for medical services to members on a fee-for
service ("FFS") basis.
2.
Point-of-Service ("POS") Product - POS is an integrated product which offers the
member dual coverage of both traditional HMO coverage underwritten by X and
indemnity coverage underwritten by Y.
This product would be marketed and sold jointly by X and Y. For regulatory
purposes, the HMO coverage of this product is underwritten by X and "out-of-plan"
indemnity coverage is underwritten by Y. Two separate certificates are issued to
each POS member. Traditional HMO coverage is provided by X through its HMO
certificate. Indemnity type coverage using non-HMO providers is provided by Y
through its indemnity certificate.
To establish its network for the provision of medical services to its members, X contracts
directly with individual physicians in private practice, IPAs (i.e., groups of physicians) and health
care institutions. The physicians are independent contractors of X and are not employees or agents
of X. Moreover, they are not contractually prohibited from entering into similar agreements with X's
competitors.
Since X is a FFS, IPA-model HMO, it charges its groups a monthly pre-paid fixed fee for the
medical service coverage provided to the group members under the terms of its traditional HMO
TP-9 (9/88)
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product. As stated above, X contracts with medical providers for the provision of medical services
to its membership. The providers are reimbursed for these services based upon a fixed fee schedule.
FFS is simply the reimbursement of a provider based upon a schedule of fees for the various medical
services. To the extent that a member requires a specialist, the member can obtain these services
based upon a referral from the member's primary care physician. Specialists are also reimbursed on
a FFS basis and participate in the physician network established by X. In addition, members can
receive medical services out-of-network (i.e. out-of-area services) solely for true medical
emergencies. For emergency services, non-contracted providers are reimbursed based upon the cost
of the medical service that was provided.
For its monthly pre-paid fees, X incurs the following costs with respect to the medical service
coverages:
1.
The frequency cost for in-network medical services provided by primary care
physicians. X would control the level of the medical service charge through the
terms of its provider agreements. Under those agreements, X is only required to
reimburse its providers utilizing the established fixed fee schedule.
2.
A frequency cost also exists with respect to the medical services provided by
consulting specialists from referrals by primary care physicians. Medical service
costs are controlled in the same manner as the in-network services described above.
3.
X has a frequency cost with respect to emergency out-of-area medical services.
Unlike in-network medical services, X would be unable to control the level of the
charge it may be required to reimburse.
Pursuant to Article 33 of the Tax Law, two of the franchise taxes imposed on • insurance
corporations are contained in sections 1501 and 1510 with a cap contained in section 1505.
The tax imposed pursuant to section 1501(a) of the Tax Law provides:
Every domestic insurance corporation and every foreign or alien insurance
corporation, for the privilege of exercising its corporate franchise, or of doing
business, or of employing capital, or of owning or leasing property in this state in a
corporate or organized capacity, or of maintaining an office in this state ... shall
annually pay a franchise tax ....
Section 1510 of the Tax Law provides for an additional premiums tax on insurance
corporations as follows:
Except as hereinafter provided, every domestic insurance corporation and every
foreign insurance corporation and every alien insurance corporation, other than such
corporations transacting the business of life insurance, (1) authorized to transact
business in this state under a certificate of authority from the superintendent of
insurance ...
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shall, for the privilege of exercising corporate franchises or for carrying on business
in a corporate or organized capacity within this state, and in addition to any other
taxes imposed for such privilege, pay a tax on all gross direct premiums, less return
premiums thereon, written on risks located or resident in this state ....
The taxes imposed under Article 33 of the Tax Law are limited by section 1505 of the Tax
Law as follows:
Notwithstanding the provisions of sections fifteen hundred one and fifteen hundred
ten, the amount of taxes imposed under such sections ... shall not exceed an amount
computed as if such taxes were determined solely under section fifteen hundred ten....
Section 1500 of Article 33 of the Tax Law states that:
(a) The term "insurance corporation" includes a corporation, association, joint stock
company or association, person, society, aggregation or partnership, by whatever
name known, doing an insurance business ...
(b) The term "domestic insurance corporation" means an insurance corporation
incorporated or organized under the laws of this state ....
Under Article 33 of the Tax Law, "doing an insurance business" is not defined. However,
historically the Department of Taxation and Finance looks to the Insurance Law for such definition.
"Doing an insurance business" is defined in section ll01(b)(1) of the Insurance Law as
follows:
Except as provided in paragraph two hereof, any of the following acts in this
state, effected by mail from outside this state or otherwise, by any person, firm,
association, corporation or joint-stock company shall constitute doing an insurance
business in this state and shall constitute doing an insurance business in this state
within the meaning of section three hundred two of the civil practice law and rules:
(A) making, or proposing to make, as insurer, any insurance contract,
including either issuance or delivery of a policy or contract of insurance to a resident
of this state or to any firm, association, or corporation authorized to do business
herein, or solicitation of applications for any such policies or contracts;
(B) making, or proposing to make, as warrantor, guarantor or surety, any
contract of warranty, guaranty or suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the warrantor, guarantor or
surety;
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(C) collecting any premium, membership fee, assessment or other
consideration for any policy or contract of insurance;
(D) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of
this chapter;
(E) doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provisions of this chapter.
Section 1102 of the Insurance Law provides that no person, firm, association, corporation
or joint-stock company shall do an insurance business in New York State unless authorized by a
license in force pursuant to the provisions of the Insurance Law or exempted by the provisions of
the Insurance Law from such requirement.
Section 1109 of the Insurance Law provides that HMOs are exempt from the licensing
requirements of the Insurance Law as follows:
(a) An organization complying with the provisions of article forty-four of the
public health law may operate without being licensed under this chapter ...
(b) An organization which provides health care services for a periodic fee
paid in advance but which does not comply with the provisions of article forty-four
of the public health law shall be deemed to be engaged in the business of insurance
and may not operate without being licensed under this chapter ....
Therefore, if the business conducted by an HMO organized under Article 44 of the Public
Health Law complies with the provisions of Article 44 of the Public Health Law, such HMO is not
considered to be doing an insurance business for purposes of Article 33 of the Tax Law.
Accordingly, as long as X complies with the provisions of Article 44 of the Public Health
Law, X is not an insurance corporation for purposes of Article 33 of the Tax Law. However, X is
subject to tax under Article 9-A of the Tax Law.
DATED: January 12, 1993
s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division
NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.