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 towhether or not the business proposed to be conducted by Prepaid Prescription Plan, Inc. is an insurance business. finthis 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:~ .Inyour 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 whoare 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 ona group plan or a pay-direct plan uponmaking application for enrollment onan application form furnished by the company, payment of service fees, anduponacceptance 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 ona form furnished by the company, payment ofmembership 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 ofthese instruments. “The Prepaid Prescription Plan, Inc., is a stock company with the stockholders being the owners of the corporation and entitled to receive profits upontheir investment in the stock.
“For and,in the consideration of the payment of themonthly 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 ofthe prescription selling price according to the Service Agreement. Prescriptions, may be obtained from other thana Member Pharmacy only under certain conditions as set outin 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 upona schedule ofprices as provided for inthe Pharmacy Contract. The “prescription selling price” uponwhich the subscriber’s onethird or one-half is computed may be different from the price uponwhich the company’s two-third or one-half is computed. “The Prepaid Prescription Plan, Inc., acts as anagent,for the subscriber andfor the member pharmacist but specifically assumes noliability 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: “‘Anundertaking by one party toprotect .the other party from loss arising from named risks, for the consideration..

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

anduponthe terms and,under the conditions recited” citing C.ouch’s Cyclopediasof Insurance Law, Vol. I,. page,2,, As stated inNational Auto Service Corporation V. State, 55 S. W. 2d 209. ,(Civ.App. 193): error diem.) : "Whether or nota 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 thoughit contain declarations tothe contrary.

. .I’ We have concluded thatunder thefacts 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 thatthe benefit to theholder ofthe service agreement is the obtaining ofprescription drugs at a.reduced rate, the difference between the amount paid by the subscriber tothe 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. ofwhich prescriptions would entail an expenditure by the subscriber. Inthe event of serious illness tothe 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 (byvirtue ofthe contract between it and the subscriber andbetween it andthe member pharmacy) in consideration of the monthly payment of $1.50 or $1.60 (depending onwhether 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 uponwhich the payment rests is the filling bythe pharmacy of a prescription written by a doctor and submitted to the pharmacy by a subscriber to the’Plan. Itwill be noted thatthe pharmacy takes no risk. Itis completely reimbursed, partly by the subscriber and partly bythe cqrporation -- in some respects analogous to deductible hospitalisation policies. Onthe other handthe corporation, organized for profit, is gambling. that its cost for prescriptions filled

i/ As pointed out inyour opinion request, the prescription selling price uponwhich the subscriber’s payment is computed may be different from the price uponwhich 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 thanthe amount taken in through the monthly payments.

We can find no cases in this or others jurisdictions passing uponarrangements exactly the same as that &rein involved. It resembles in some respects and is presumably based uponmedical plans previously passed uponby the courts of certain otherjurisdictions, 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 anaction bythe insurance commissioner ofthe Statesof Washingtonto 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, anda shoe dealer, the dealers contracting to sell their products at a fixed rate or a fixed discount andthe 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 theagreement. The products purchased from the dealers were paid for bythe individuals purchasing~same andthe doctor’s~compensation was a fixed amount out of each membership fee anddidnotvary with the treatments rendered. The agency assumed I noliability for breach of the contract by the doctor or,the dealers. The court held thatthe agency was not inthe insurance business be**cause** itwas insuring.against noperil. Itcan be seen,that the arrangement is **not** the same as thatpassed upon in this opinion, for the agency obviously assumed no risk thatthe payments itwas called upon to make would exceed the amount which itwas taking in from the contract hold8re. There are also in existence a group of op,inionsdealing with groupmedical plans which **are** epitomized by the opinions in California Physicians’ Service v. Garrison, 172 Pp..2d 4, (Cal. Sup. 1946), 167 ALR 306, andJordan v. Croup Health Association, 107 F. 2d 239 , U. S. Court ofAppeals. (1939). Inboth, the formation of the particular type of corporation involved’was authorized by statute, bothwere non-profit and bothencompassed group,service only. Inthe 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 ona unitbasis, i.e., a pro rata distributionofthe dues collected for thatmonth, depending uponthe amount of service which they rendered. Inthe Jordan case, the doctors were paida fixed annual compensation. Inboms the business was heldMr. William A. Harrison, page 5 (WW-1475)

_not to be insurance innature. As pointed outin the Jerdan opinion, the corporation assumed no risk and acted only as an agent. Ifany risk was assumed it was assumed bythe doctor. There was no possibility in either case thatthe cost tothe 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 theamount ofwhich varied with the number of individual contract holders butnotwith the amount of service rendered. The court held onthe authority ofthe Fishback case thatthis ws not an insurance business. Ofinterest to the question before us is the fact thatthe state contended thatthe amount of compensation to be paid tothe doctor depended uponand would vary with the amount of services rendered regardless of the amount of dues taken in. The court clearly pointed outthat it had been stipulated that the compensation was fixed andthat the amount ofthe 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 withwhich 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 thoughthe particular type of corporation was specifically authorized by’statute. Inthat case ~the. amount to be paid to the hospital bythe 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 ofhis contract, requires payment in money which is definitely measured by the extent of service rendered to the subscriber bythe hospital to which he elects to go. It is payable upon a contingency, namely, that it is certified byhis attending physician that the subscriber requires hospitalization.

. .The contract, in probability, is notto 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 bythe subscriber is a charge based uponanr
. .

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

actuarial determination of the probable risk incurred In issuing the contract, although thatw’aichis ‘provided the subscriber uponthe 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 ofthat service to the subscriber onbehalf of theplaintiff 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 ofgroup 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 ofprepayment--to insure the potential patient against the unpredictable occurrence of sickness. ” Likewise, in 52 Harvard Law Review.809 appears thefollowing: “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 thanthe unique services of the physician is the principal object of the relationship. I’

These principles seem even more applicable toa corporation for profit oftthe type with which we are here concerned. We, therefore, conclude thatthe plan of operation intended tobe followed by Prepaid Prescription Plan, Inc. , would involve the doing of an insurance business inthis state.

This opinion conflicts in noway withthe holding in Opinion No. 0-4986-A. The facts which were at thattime before this office and,which are revealed in the opinion itself, show thatthe health service was ofthe cooperative type, squarely within the holding ofthe 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 trxxlyyours. 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