One of the most controversial issues in the acupuncture profession over the last few months has been the legality of unlicensed doctor-patient prepay plans. The controversy started when the National Association of Insurance Commissioners (NAIC) issued a bulletin stating that many prepay arrangements were illegal unless the doctor obtained an appropriate license from the Department of Corporations or Department of Insurance of that doctor's state.

Three articles by the author summarizing this bulletin generated widespread comment throughout the profession. Since that time, one state Department of Insurance has issued a specific opinion regarding these articles and has found them to accurately summarize the state of the law regarding unlicensed doctor-patient prepayment plans.

The purpose of this article is to present the various types of prepay plans and to attempt to summarize the relative degrees of risk involved in operating each plan.

Types of Prepay Plans

While there are many variations on the theme, most prepay plans fall into two broad categories - defined benefits plans and bulk purchase discount plans.

Defined Benefits Plan

This plan provides either unlimited care or a defined set of benefits in return for either a monthly payment or a single advance payment. Whether an acupuncturist agrees either to provide all necessary acupuncture care or to provide more limited care (such as up to 30 visits a month, one massage per month, and certain herbal care), both of these would constitute a defined benefit plan.

Some acupuncturists believe only prepay arrangements that provide for unlimited care are defined benefits plans. This is usually based upon the mistaken belief that all health maintenance organization plans provide unlimited care. This is not true. In fact, virtually no remaining health maintenance organizations offer unlimited care. Virtually all of them offer a defined benefits plan, with limits in each area. Thus, there is no difference between most HMO plans and an acupuncture prepay plan that offers a limited defined benefits plan.

Bulk Purchase Discount Plans

In a bulk purchase discount plan, the acupuncturist gives the patient a discount in return for the patient's agreement to prepay for a specific number of visits in advance. If an acupuncturist's normal charge for an office visit is $50, the acupuncturist could charge only $40 per visit if the patient purchases and pays for 20 visits in advance.

Retainer Plans

Under this arrangement, a patient posts an advance payment as a "retainer" or "credit balance." Services are then billed against this retainer at the usual rate. Law firms have done this for years. These arrangements have never been found to constitute the business of insurance in the past.

There are two strong caveats, however. First, health care is much more heavily regulated than other areas as to these arrangements. There is no special statutory structure for legal service plans (or any other service plans) comparable to the structure set up for health care service plans.

In addition, most prepay plans don't simply set up a credit balance and then bill against it. Most plans specify a certain number of office visits or other services in return for payment of a certain amount of money. This makes the arrangement look more like a defined benefits plan than a retainer or credit balance. That an acupuncturist is willing to refund the credit balance does not change the analysis. The analysis is dependent upon whether or not it is a true credit balance or a defined benefits plan.

Legal Issues Raised by Prepay Plans

Prepay plans make good business and are sometimes the only way an acupuncture patient can afford care. There is no question that all of the plans described above are legal if the appropriate licenses are obtained. Still, acupuncturists face many potential legal perils when they decide to operate an unlicensed prepay plan. The following is a summary of the legal issues that apply.

Prepaid Plans are the Business of Insurance

The operation of a prepay plan is the business of insurance. While it is not illegal to transact the business of insurance, one must be licensed as an insurance company or HMO to do so. Five elements usually must exist for an activity to constitute the business of insurance:¹

1. an insurable interest;
2. a risk of loss;
3. an assumption of risk by the insurer;
4. distribution of the loss among a larger group of persons bearing similar risks; and
5. payment of a premium for assumption of risk.

Each of these elements exists in a typical acupuncture prepayment plan.

1. An insurable interest. Each person has an insurable interest in their health and welfare.
2. A risk of loss. Each person has a potential risk that they will need to pay for health care. If they are eligible for health care benefits through their employer, their employer has the risk of loss of paying for these benefits.
3. Assumption of risk. In a prepay plan, an acupuncturist assumes the risk that a patient will need or use acupuncture care. This risk could be minimal to substantial depending on how much care each acupuncture patient needs.
4. Distribution of the losses among a larger group of persons bearing similar risks. Acupuncturists who enter into these plans with some or all of their patients fit this definition exactly. The theory behind these plans is that some patients will overutilize, some will underutilize, and it will even out for the acupuncturist. Even if an acupuncturist entered into this plan with a single patient, this analysis would still hold true; namely, that the activities would be the business of insurance.²
5. The payment of a premium for the assumption of risk. This factor clearly applies, since in all of these plans the acupuncturist receives payment in advance for the assumption of an insurable risk. A question that often comes up is why prepayment for health care services is considered the business of insurance, but prepayment of other services (such as health club memberships) are not. Health club memberships or season tickets to Disneyland are not a form of nonexclusive lease known as a "licensing agreement" under the statutory definitions contained in state insurance codes. They are not considered "insurance," but rather a permit allowing a person to be on a certain premises.

The National Association of Insurance Commissioners' Bulletin Has Determined that Prepay Plans are Illegal

In an August 10, 1995 bulletin, the National Association of Insurance Commissioners analyzed whether prepay plans constituted the business of insurance. The NAIC concluded that when health care providers receive "prepayment (i.e., either full or partial capitation), the doctors or hospital are engaged in the business of insurance."³ The NAIC bulletin analyzed each element constituting the bulletin of insurance and found that each element clearly applied to health care providers who would accept prepayment.⁴The NAIC also attached and relied on opinions from the attorneys general and insurance commissioners of Georgia, Ohio, Minnesota and Maryland, and a federal court decision in California, which all reached identical conclusions.⁵

The Louisiana Department of Insurance Weighs in on Prepay Plans

Lester J. Dunlap, assistant commissioner of the Louisiana Department of Insurance, was asked to review a recent article by this author entitled "Insurance Commissioners Rule Patient Prepay Plans Illegal." Mr. Dunlap stated:

As you know, the Department previously issued Louisiana Directive #133 on September 22, 1995 (copy enclosed) as notice to all concerned that prepaid health care plans which involve the assumption of insurance risk are illegal unless the provider is licensed as an insurer or health maintenance organization. Our department directive is based upon the National Association of Insurance Commissioners' bulletin mentioned in Mr. Schroeder's article. As a matter of fact, Mr. Schroeder's article provides a superb explanation of why certain prepay plans are considered the business of insurance and subject to state insurance licensure requirements.

In your letter, you presented two scenarios and asked whether either represents the "business of insurance."

Scenario 1: Doctor projects extended treatment plan of "x" number of visits and the patient can arrange/contract to prepay in cash for that course of treatment.

This is probably not insurance if the acupuncturist diagnoses a condition requiring treatment. This appears synonymous to the case of an orthodontist who requires full or partial prepayment for treatment of misalignment of the teeth over an extended time period.

Scenario 2: For a flat up-front payment (annual), patient is entitled to unlimited acupuncture care on an as-needed basis. Prepayment covers everything except P.I. and worker's comp cases.

This case appears to definitely represent insurance because over the term of the agreement, the acupuncturist may or may not be required to provide treatment. To a limited degree, the acupuncturist is acting as a health maintenance organization.

In summary, the best advice I can give you is to suggest that a doctor intending to offer prepaid plans follow Mr. Schroeder's advice in avoiding activities which constitute the unauthorized and illegal business of insurance. I do not believe I have seen a better outline and explanation relative to this issue.

The Louisiana Department of Insurance takes what appears to be the more logically consistent view, which is that a straight advanced bulk purchase discount plan should not be treated as the business of insurance. As a cautionary note, acupuncturists considering these plans in states other than Louisiana should proceed cautiously, because departments of insurance in other states have taken the more narrow view that they do constitute the business of insurance. It is imperative that before deciding to operate an advanced bulk purchase plan, an acupuncturist should obtain a written opinion from their state department of insurance.

The California Board of Chiropractic Examiners Rules that Most Prepay Plans Are the Business of Insurance

In January 1997, the California Board of Chiropractic Examiners issued the following ruling:

There have been many inquiries regarding use of prepaid plans in chiropractic offices as a method of having patients pay for services. After extensive research into the statutes, regulatory agencies and printed material which has been disseminated in the past, the following information regarding this important issue is provided:

• As a general rule, any prepaid plan which involves the assumption of a risk may be the business of insurance. The person or organization intending to offer any prepaid plan, whether it is a plan of prepayment of a certain number of visits or for a certain period of time, may be required to conform with the provisions of the insurance code and health & safety code.
• Prior to instituting such a program, licensees should contact the following agencies and arrange to submit to them a detailed description of the proposed plan.

Department of Corporations
Division of Health Care Service Plans
ATTN: Charles Gibbs, Esq.
980 Ninth Street, Suite 500
Sacramento, CA 95814-2725

Department of Insurance
Legal Division
45 Fremont Street
San Francisco, CA 94105

• All licensees are hereby notified that they may be in violation of the provisions of the insurance code and the health and safety code, and therefore subject to discipline by the board for unprofessional conduct, if they attempt to implement a prepay without first obtaining an opinion regarding that plan from both the Department of Corporations, Division of Health Care Service Plans and the Department of Insurance.
• All licensees who advocate or teach a method of using prepayment plans without first becoming informed as above and informing the class or seminar participants of the above information will be considered to have acted in an unprofessional manner and may be subject to discipline by the board.

What Liability Do Acupuncturists Have Who Accept Prepayment?

Criminal liability. To engage in the business of insurance, one must have a license to do so.⁶ Engaging in the business of insurance without a license is a crime.⁷ In states where transacting insurance without a license is a misdemeanor, conspiracy to commit a misdemeanor is a felony.⁸ The fact that NAIC felt the need to issue its recent bulletin suggests strongly that this area is going to become an increased enforcement priority for state department of insurance investigators.

Civil exposure. Acupuncturists who operate unlicensed prepay plans face two areas of civil exposure. First, patients who, for whatever reason, are dissatisfied with their acupuncture care from a prepay acupuncturist, can wield a powerful weapon against their acupuncturist. They have the option of turning the acupuncturist in for criminal prosecution and/or using this claim to bolster a malpractice claim or other type of professional negligence claim.

Further, many malpractice carriers will not cover acupuncturists for a malpractice claim if the underlying conduct was illegal in nature. Some malpractice carriers are even no longer willing to take acupuncturists who engage in prepay. According to the American Acupuncture Council, countersuits by acupuncture patients against acupuncturists in prepayment situations have been among the top five causes of malpractice claims for the last 10 years.⁹

What Should Acupuncturists Do?

Acupuncturists should move cautiously and not merely rely upon conclusory statements from practice management consultants. They should no longer accept bland assurances from management consultants that simply labeling an otherwise illegal plan as a "wellness plan" or "maintenance plan" will suddenly and magically transform that plan into a legal endeavor.

A sure way to protect oneself from regulatory liability is to obtain a written opinion from the state department of insurance that the acupuncturist's prepay plan complies with state law. Acupuncturists should also immediately stop implementing any kind of defined benefits plan without written authorization from their state department of insurance. It is clear from the NAIC Bulletin and subsequent opinions that these plans constitute the business of insurance and require an appropriate license.

Acupuncturists should also be careful about implementing bulk purchase discount plans without a written opinion from the relevant regulatory authorities. Not only can these constitute the business of insurance, in many cases, state laws or health insurance policy provisions require acupuncturist to charge an insurance company only that amount they would accept as cash payment on the day of service.

The regulatory climate has changed such that it is foolhardy to operate one of these plans without competent legal advice and without obtaining the appropriate licensing or opinions. This article should serve as a starting point, not a substitute for competent legal advice.

Conclusion

Acupuncturists operating unlicensed prepay plans should immediately stop doing so. In light of the clear evidence that this activity is illegal, it is foolhardy to continue exposing oneself to substantial criminal and civil penalties simply to increase one's cash flow. Copies of the NAIC Bulletin are available upon request by writing to Acupuncture Today, PO Box 6070, Huntington Beach, CA 92615.

References

1. Professional Lens Plan, Inc. v. Department of Insurance, 387 So. 2d 548 (1980).
2. NAIC Bulletin page 6, paragraph 4.
3. NAIC Bulletin page 4, paragraph A.
4. NAIC Bulletin pp. 4-6.
5. Georgia Atty. Gen. Op. 82-71 (August 21, 1982); Ohio Ins. Com. Bulletin July 28, 1994, from David J. Randall; Minnesota Joint Bulletin September 26, 1994 (94-3); Maryland Atty. Gen. Op. 90-030 (June 19, 1990); Mansen v. California Dental Assn., 638 F. 2d 1152 (9th 1979).
6. See Cal. Ins. Code ¤700(a); Cal Health & Safety Code ¤1349.
7. See Cal. Ins. Code ¤700(b).
8. See Cal. Penal Code ¤182.
9. American Acupuncture Council claims registry, 1987-1999.

Michael Schroeder has formed more than 300 chiropractic-medical practices since 1982. He is the current vice president and general counsel for the American Acupuncture Council, and for the last twelve years has been the vice president of the National Association of Chiropractic Attorneys (NACA). In 1995, NACA honored Mr. Schroeder as their "Attorney of the Year."