Mr. William A. Harrison 

Commissioner of Insurance 

International Life Building 

Austin 14, Texas 

Dear Mr. Harrison: 

Opinion No. WW-1475 

Re: Whether, under the facts 

stated, Prepaid Prescription 

Plan, Inc. would be engaging 

in the business of insurance 

in furnishing the prescription service required by its 

service agreements and 

pharmacy contracts. and 

related questions. 

You have asked our opinion as to whether or not the business 

proposed to be conducted by Prepaid Prescription Plan, Inc. is an insurance 

business. fin this connection you point to Attorney General’s Opinion No. 

O-4986-A dealing with a somewhat similar problem and ask,whe,ther or not 

it is~ still in effect and, if so, whether or not it is correct. 

follows:~ 

.In your request you outline the facts to be considered as 

. 

“The Prepaid Prescription Plan, Inc., is a domestic corporation chartered August 4, 1959, under the Texas Business Carporation. Act. The Purpose Clause of its Articles of Incorporation 

provides as follows: 

“‘ARTICLE THREE: The purposes for which the corporation is organized are: 

To establish, maintain and operate a prepaid preecription plan or plans whereby prescriptions, either oral 

or written by duly licensed physicians, may be dispensed by duly licensed pharmacists to individuals, 

either singly or in groups, who become subscribers 

thereto: 

And in furtherance thereof to enter into contracts 

with duly licensed pharmacists who are authorized 

to dispense prescriptions in compliance with the laws 

of the state in which they do business, whereby such 

’ pharmacists agree to provide such prescription service to its subscribers. ’ 
I c 

Mr. William A. Harrison, page 2 (WW-1475) 

“Membership for a subscriber and/or his dependents is 

available on a group plan or a pay-direct plan upon making 

application for enrollment on an application form furnished 

by the company, payment of service fees, and upon acceptance of such application by the company and the issuance of 

Service Agreement. Membership for a pharmacy in ~the plan 

may be obtained by submitting application on a form furnished 

by the company, payment of membership fee, and execution 

of Pharmacy Contract. Copies of both type applications and 

a copy of the +rvice Agreement and Pharmacy Contract are 

enclosed herewith for your information.as to the exact terms 

of these instruments. 

“The Prepaid Prescription Plan, Inc., is a stock company with 

the stockholders being the owners of the corporation and entitled 

to receive profits upon their investment in the stock. 

“For and,in the consideration of the payment of the monthly 

service fee provided for in the Service- Agreement a subscriber, 

af;ter obtaining a legal prescription from a ,licensed physician, 

may have ~the prescription filled by any Member Pharmacy and 

pay one-third or one-half of the prescription selling price 

according to the Service Agreement. Prescriptions, may be 

obtained from other than a Member Pharmacy only under certain conditions as set out in the Service Agreement after 

securing, approval of the pharmaceutical director of the compap% The company payo directly to the Member Pharmacy the 

two-thirds or one-half the price of the prescription, as the 

case may be, which is computed and based upon a schedule 

of prices as provided for in the Pharmacy Contract. The 

“prescription selling price” upon which the subscriber’s onethird or one-half is computed may be different from the 

price upon which the company’s two-third or one-half is 

computed. 

“The Prepaid Prescription Plan, Inc., acts as an agent, for 

the subscriber and for the member pharmacist but specifically 

assumes no liability for the performance of the Member 

Pharmacy. I4 

Insurance has been defined~in Ware v. Heath, 237 S. W. 2d 

362, (Civ.App. 1951), as: “‘An undertaking by one party to protect .the 

other party from loss arising from named risks, for the consideration 
. . 

-Mr.. William A.-Harrison, page 3:(WW-1475) 

and upon the terms and, under the conditions recited” citing C.ouch’s 

Cyclopedias of Insurance Law, Vol. I,. page, 2,, As stated in National 

Auto Service Corporation V. State, 55 S. W. 2d 209. ,(Civ.App. 193): 

error diem.) : "Whether or not a contract is one of insurance is to be 

determined, by its purpose, effect, contents, and import, and~not 

necessarily by the terminology used, and even though it contain declarations to the contrary. . . I’ We have concluded that under the facts 

presented Prepaid Prescription Plan, Inc. , hereinafter referred, to 

as the corporation, will be conducting an insurance business. 

Examining the contracts furnished~ us in connection with the 

opinion request, it can be seen that the benefit to the holder of the service 

agreement is the obtaining of prescription drugs at a. reduced rate, the 

difference between the amount paid by the subscriber to the pharmacy and 

the actual sale price being paid. to the pharmacist by the corporation. ’ 

The risk insured~against is the possibility that the subscriber’s doctor, 

during the period covered by the service agreement, might see fit to 

prescribe drugs for his. treatment, the filling. of which prescriptions 

would entail an expenditure by the subscriber. In the event of serious 

illness to the subscriber, he conceivably could be financially unable 

to purchase the necessary drugs. at the current market price. After 

entering into the service agreement in question, a portion of this risk 

is distributed to the corporation, for it has agreed (by virtue of the 

contract between it and the subscriber and between it and the member 

pharmacy) in consideration of the monthly payment of $1.50 or $1.60 

(depending on whether or not a group or an individual is a contracting 

party) to reimburse a member pharmacy a portion of the price of each 

prescription filled by the pharmacy for the subscriber. The contingency 

upon which the payment rests is the filling by the pharmacy of a 

prescription written by a doctor and submitted to the pharmacy by a 

subscriber to the’ Plan. It will be noted that the pharmacy takes no 

risk. It is completely reimbursed, partly by the subscriber and 

partly by the cqrporation -- in some respects analogous to deductible 

hospitalisation policies. On the other hand the corporation, organized 

for profit, is gambling. that its cost for prescriptions filled 

i/ As pointed out in your opinion request, the prescription 

selling price upon which the subscriber’s payment is computed 

may be different from the price upon which the corporatinn’s 

payment is computed. This , however, is not material to 

the question presented. 
Mr. William A. Harrison, page 4 (WW-1475) 

for its subscribers will be less than the amount taken in through the 

monthly payments. 

We can find no cases in this or others jurisdictions passing 

upon arrangements exactly the same as that &rein involved. It resembles 

in some respects and is presumably based upon medical plans previously 

passed upon by the courts of certain other jurisdictions, primarily the 

group health or group medical plans which came into vogue during the 

depression. The earliest case in this general field is State ex rel. Fishbath v. Universal Service Agency, 151;Pac. 768, (Wash. Sup. 1915), 

which was an action by the insurance commissioner of the States of Washington to forfeit the charter of the Universal Service Agency for doing 

an insurance business without complying with the insurance regulations. 

The agency entered into contracts with a pharmacist, a doctor, a grocer, 

and a shoe dealer, the dealers contracting to sell their products at a 

fixed rate or a fixed discount and the doctor contracting to render medical service for a fixed consideration. The agency also, entered into 

contracts with individuals for the fixed sum of $15.00 per year plus $5.00 

for each child covered by the agreement. The products purchased from 

the dealers were paid for by the individuals purchasing~ same and the 

doctor’s~ compensation was a fixed amount out of each membership fee 

and did not vary with the treatments rendered. The agency assumed I 

no liability for breach of the contract by the doctor or ,the dealers. 

The court held that the agency was not in the insurance business because it was insuring.against no peril. It can be seen,that the arrangement is not the same as that passed upon in this opinion, for the 

agency obviously assumed no risk that the payments it was called upon 

to make would exceed the amount which it was taking in from the contract 

hold8re. 

There are also in existence a group of op,inions dealing 

with group medical plans which are epitomized by the opinions in California 

Physicians’ Service v. Garrison, 172 Pp. .2d 4, (Cal. Sup. 1946), 167 ALR 

306, and Jordan v. Croup Health Association, 107 F. 2d 239 , U. S. Court 

of Appeals. (1939). In both, the formation of the particular type of 

corporation involved’was authorized by statute, both were non-profit 

and both encompassed group,service only. In the Garrison case the 

subscriber’s dues amounted to $1.70 (male) and $2.00 (female) a manth. 

The doctors contracted~with the service to make available their medical 

services in return for a payment on a unit basis, i.e., a pro rata distribution of the dues collected for that month, depending upon the amount 

of service which they rendered. In the Jordan case, the doctors were 

paid a fixed annual compensation. Inboms the business was held 
Mr. William A. Harrison, page 5 (WW-1475) 

_ not to be insurance in nature. As pointed out in the Jerdan opinion, the 

corporation assumed no risk and acted only as an agent. If any risk 

was assumed it was assumed by the doctor. There was no possibility in 

either case that the cost to the service or group association for the services 

rendered by the doctors would exceed the amount taken in in monthly dues. 

To the same effect is the case of Commissioner of Banking 

and, Insurance v. Community Health Service, Court of Errors, New Jersey, 

30 A. 2d 44 (1943). The stipulated facts in that case were to the effect that 

the defendant corporation contracted with doctors for one year periods 

for fixed consideration the amount of which varied with the number of 

individual contract holders but not with the amount of service rendered. 

The court held on the authority of the Fishback case that this ws not 

an insurance business. Of interest to the question before us is the fact 

that the state contended that the amount of compensation to be paid to the 

doctor depended upon and would vary with the amount of services rendered 

regardless of the amount of dues taken in. The court clearly pointed 

out that it had been stipulated that the compensation was fixed and that the 

amount of the service rendered would not affect in any way the compensation 

paid by the service to the doctor. The converse of that situation, of course, 

is the one with which we are dealing. 

Even in the group health field, however, some jurisdictions 

have held these arrangements to constitute insurance. This is true in the 

case of Cleveland Hospital Service Association v. Ebright , Court of 

Appeals of Ohio, 45 N. E. 2d 157, affirmed by the Supreme Court of Ohio, 

49 N. E. 2d 929 (1943), even though the particular type of corporation was 

specifically authorized by’statute. In that case ~the. amount to be paid to 

the hospital by the Service,Association varied with the amount of service 

rendered. The opinion reads in part as follows: 

“The advantage to the subscriber, if he invokes the 

benefits of his contract, requires payment in money which 

is definitely measured by the extent of service rendered to 

the subscriber by the hospital to which he elects to go. It 

is payable upon a contingency, namely, that it is certified 

by his attending physician that the subscriber requires 

hospitalization. . . The contract, in probability, is not to 

indemnify the subscriber because the hospital which he 

selects does not extend credit to him and, therefore, there 

is no primary liability on his part which would be essential 

to make the service association an indemnifier. The amount 

which is paid by the subscriber is a charge based upon an 
r . . 

Mr. William A. Harrison, page 6 (WW-1475) 

actuarial determination of the probable risk incurred In 

issuing the contract, although that w’aich is ‘provided the 

subscriber upon the happening of a contingency is so far 

as he is concerned, service, yet it is measured by a money 

consideration payable to the hospital because of the rendering 

of that service to the subscriber on behalf of the plaintiff 

association. ” 

The group of cases holding that group medical service 

contracts do not constitute insurance have been attacked insofar as the 

legal soundness of their reasoning is concerned by law review articles 

which are, however, favorable to the concept of group health service. 

For example, the writer in 53 Yale L. J. 162 in speaking of the Jordan 

case criticizes the failure of the court “to recognize the underlying 

risk--distribution function of prepayment--to insure the potential 

patient against the unpredictable occurrence of sickness. ” Likewise, 

in 52 Harvard Law Review.809 appears the following: “And while 

the distinction between contracts for services and contracts of insurane is. sometimes shadowy, it seems clear; that in the case of 

cooperative health associations, indemnification against medical cost 

rather than the unique services of the physician is the principal object 

of the relationship. I’ 

These principles seem even more applicable to a corporation 

for profit oft the type with which we are here concerned. We, therefore, 

conclude that the plan of operation intended to be followed by Prepaid 

Prescription Plan, Inc. , would involve the doing of an insurance business in this state. 

This opinion conflicts in no way with the holding in Opinion 

No. 0-4986-A. The facts which were at that time before this office 

and, which are revealed in the opinion itself, show that the health service was of the cooperative type, squarely within the holding of the 

Jordan case above cited. We, therefore, affirm the holding of that 

opinion. 
Mr. William A. Harrison, page 7 (WW-1475) 

SUMMARY 

Under the facts stated, Repaid 

Prescription Plan, Inc., would 

be engaging in the business of 

insurance, in furnishing the 

prescription service required 

by its service a&s?mantr and 

pharmacy contracts. 

Very trxxly yours. 

WILL WTLSON 

Attorney General of Texas 

Assistant Attorney Gene4 

DDMzma 

APPROVED: 

.dp”” Ck4MITTEE: 

W. V. Geppert, Chairman 

Vernon 0. Teofan 

J. Gordon Zuber 

Bob E. Shannon 

REVIEWED FOR THE ATTORNEY GENERAL BY: 

Leonard Passmore