Ausrrx~. T-s 78711 

July 11, 1974 

The Honorable A. R. Schwartz Opinion No. H- 344 

Chairman, Senate Jurisprudence Committee 

State Capitol Building Re: Whether prepaid health 

Austin, Texas insurance plans are subject 

to insurance regulatory laws. 

Dear Senator Schwartz: 

Your letter on behalf of the Senate Jurisprudence Committee asking 

our opinion about prepaid health maintenance organizations and hereafter 

referred to as HMO’s for convenience, points to the great variety of such 

plans and asks us to assume various factual situations and to state whether 

in each instance the plan would constitute a transaction of the business of 

insurance (and thus require regulation by the State Board of Insurance) or 

would be outside the insurance laws. 

The question you pose is one which has long bothered the courts 

of the United States. See for instance, Jordan v. Group Health Association, 107 F. 2d 239 (D. C. Cir. 1939); Cleveland Hospital Service Association.v. Ebright, 45 N. E. 2d 157 (Ohio App. 1942); Commissioner of 

Banking and Insurance V. Community Health Service, Inc., 30 A. 2d 44 

(N. J. 1943); California Physicians’ Service v. Garrison, 172 P. 2d 4 

(Cal. 1946): Maloney v. American Independent Medical and Health Association, 259 P. 2d 503 (Cal. App. 1953); Complete Service Bureau v. San 

Diego County Medical Society, 260 P. 2d 1038 (Cal. App. 1953); People 

v. California Mutual Association, 441 P. 2d 97 (Cal. 1968); Bloom v. 

Northern Pacific Beneficial Association, 193 N. W. 2d 244 (N. D. 1971). 

And see annotation “Validity and Nature of Group Medical and Hospital 

Service Plans, ” 167 ALR 322, 323. 

In large part the problem has been compoinded by the many and 

p. 1604 
. 

The Honorable A. R. Schwartz wge 2 (H-344) 

varied definitions of what does constitute “insurance”. See for instance 

Jordan v. Group Health Association,, sppra; Barmeier v. Oregon Physicians’ 

Service, 243 P. 2d 1053 (Ore.1952); Epmeier v. U.S., 199 F. 2d 508 

(7th Cir. 1952); Metropolitan Police Retiring Association, Inc. v. Tobriner, 

306 F. 2d 775 (D. C. Cir. 1962); Cleveland Hospital Service Association v. 

Ebright, 49 N. E. 2d 929 (Ohio 1943). 

In Attorney General Opinion O-4986-A (1943) the question was 

whether a non-profit rural health service, incorporated for the purpose 

of promoting the health of its members, was engaged in the insurance 

business and thus subject to the supervision of the State Insurance Department. Members paid a membership fee in return for which they were 

furnished dental care, medical care, and drugs, etc., on a non-profit 

basis. The service had entered into agreement wifh various hospitals, 

physicians, dentists, and drugstores whereby the latter would agree to 

render services to members at agreed and standardized fees. However, 

a member was free to obtain needed services from any of the contracting 

physicians. Citing the definitions of then Article 4716, V. T. C. S. (now 

Article 3.01 of the Insurance Code), this office was unable to find that 

the health service fit the description of any type of insurance subject to 

state regulation and found that the service was not in the insurance business 

and was not subject to supervision of the State Insurance Department. 

Opinion O-4986-A was ratified in Attorney General Opinion WW-1475 

(1962) which held that a prepaid prescription plan under which a member 

could have a prescription filled for less than its normal selling price 

was insurance. 

- 

We agree with the conclusion of Opinion O-4986-A insofar as we 

conclude that none of the variations of the prepaid health care delivery 

systems which you describe fall within the defined types of insurance of 

Article 3.01 of the Insurance Code. 

In fact, we have found only two instances where our statutes purport 

to regulate health maintenance services. One authorizes plans written for 

p. 1605 
The Honorable A.R. Schwartz page 3 (H-344) 

residents of the State who are 65 years of age, or older. Article 3.71, 

Insurance Code, V. T. C. S. Another authorizes group hospital service 

plans under extremely limited circumstances. Articles 20.01 to 20. 21, 

Insurance Code. 

Therefore, whatever the details of the proposed prepaid health 

delivery system may be, we find no authorization in the Insurance Code 

for the State Board of Insurance to regulate such a plan, unless it comes 

within the scope of regulation authorized by either of these two articles 

or by some other article of the Insurance Code such as those for the 

provision of life, accident, health or casualty insurance. 

In 1971 (Acts 1971. 62nd Leg., ch. 627, p. 2041) the Legislature 

adopted what appears as Article 4509a, authorizing the Texas State 

Board of Medical Examiners to approve and certify health organizations upon certain conditions. Delivery of health care to the public 

is one of several purposes for which such organizations may be formed. 

We do not pass upon or express any opinion as to the validity of Article 

4509a in view of the fact that that very question is presently before the 

United States Court of Appeals for the 5th Circuit in Cause No. 73-2557, 

styled, Genaro Garcia v. Texas State Board of Medical Examiners, et al. 

See also Article 1396-2.01, V. T. C.S., and Attorney General Opinion 

H-128 (1973) with reference to the organization of Dental Health Service 

Corporations. 

Whatever the validity of Article 4509a. its enactment by the Legislature in 1971 evidenced the intention of the Legislature that such an 

organization be regulated by the State Board of Medical Examiners and 

not by the Board of Insurance. California Physicians’ Service v. Garrison. 

We believe we may summarize what we have said as follows: While 

some of the plans which you have submitted to us may constitute the doing 

of an insurance business, there is no provision of the Code which would 

authorize the State Insurance Board to regulate or lay down guidelines for 

prepaid health delivery systems. The fact that the Legislature has enacted 

p. 1606 
The Honorable A. R. Schwartz page 4 (H-344) 

Article 4509a, whether invalid or not, is another indication of the intent 

of the Legislature that such plans not be considered insurance. 

While it has always been our practice to attempt to avoid answering 

hypothetical questions, we have answered your general question as well 

as we can because of the widespread interest in this important matter. 

However, it would be impossible for us to take each of the situations you 

pose and determine its validity, So too it would be impossible for us to 

answer the question you posed earlier in your letter as to whether there 

exist any so-called “legal barriers ” to health care professional plans. 

We would only point out. as you are already aware, the limitations 

imposed by the Texas Medical Practice Act (Article 4495, V. T. C. S., 

et seq.) and the Hospital Authority Act, (Article 4437e, V. T. C. S.) as 

well as others of similar nature. Again, we express no opinion as to 

the validity of those limitations. 

SUMMARY 

Except as to possible general regulation of an 

insurance company involved in a health maintenance 

organization, the State Board of Insurance has no 

regulatory power over prepaid health care delivery 

systems. Whether or not other regulatory authorities 

may have an impact on such systems will depend upon 

the facts of each type of plan. 

Very truly yours, 

Attorney General of Texas 

p. 1607 
The Honorable A. R. Schwartz Page 5 (H-344) 

\ ‘y Ii? 

K, First A sistant 

LlC47 2 

DAVID M. KENDALL, Chairman 

Opinion Committee 

p. 1608