Ruling 99-1, Health Care Center Tax
FACTS:
The operation of a health care center is a line of business conducted by a corporation ("the Health Care Center") that is formed for the purposes of, but not limited to, carrying out the activities and purposes set forth in Conn. Gen. Stat. §38a-176(b). The Health Care Center intends to enter into an administrative-services-only contract with self-insured employers.
Under such a contract, the Health Care Center, for an agreed upon administrative fee and in accordance with the terms of the employer’s benefit program, will process on behalf of the employer all covered claims of covered persons (who are covered employees of the employer and the covered dependents of such employees), and pay such claims on behalf of the employer.
Under such a contract, the employer will appoint the Health Care Center as the employer’s exclusive agent to investigate and exercise the employer’s right to recover payments made to covered persons by any other person, insurance company or other entity on account of any claim that is related to any covered claim. The employer will be obligated to reimburse the Health Care Center for all costs and expenses related to the investigation and exercise of the employer’s right of recovery.
Under such a contract, the Health Care Center may negotiate discounts, such as per diem rates, fee for service rates, capitalized charges as well as rebates, risk withholds or other pricing mechanisms, with health care providers, and the employer will be entitled to receive, in part or in whole, the benefit of such negotiated discounts that relate to covered claims.
Under such a contract, the employer will be required to establish and fund a bank account from which the Health Care Center is authorized to draw funds to pay covered claims on behalf of the employer and to pay the Health Care Center’s administrative fee and other costs arising out of the contract for which the employer is responsible. Under such a contract, the employer will be required to grant a security interest in the funds in the account to the Health Care Center as security for payment by the employer of all amounts due to the Health Care Center under such contract. The Health Care Center will be obligated under such a contract to pay such covered claims only to the extent that the employer has sufficient funds in such account to cover the payment of such claims, the Health Care Center’s administrative fee, and other costs arising out of the contract for which the employer is responsible.
Under such a contract, the employer will be solely liable to health care providers or to covered persons for payment of covered claims; the Health Care Center will not liable to health care providers or to covered persons for payment of any claims even if the employer fails to pay those claims, and the employer will indemnify and hold harmless the Health Care Center against any liability which arises out of a claim against the Health Care Center in connection with the administration of the benefit program or a claim for benefits under the benefit program.
ISSUE:
Where an employer is solely liable to its employees and to health care providers for the payment of employee health benefit claims but, under a contract with a health care center, those claims are to be paid by the health care center solely from funds that are provided in advance by the employer, whether those payments, and the administrative fees charged by the health care center to the employer for employee health benefits claims processing, are direct subscriber charges, as defined in Conn. Gen. Stat. §12-201(9), that are received by the health care center.
DISCUSSION:
It is apparent from reading Conn. Gen. Stat. §12-202a that two conditions must exist to create taxability. First, there must be a health care center, as defined in Conn. Gen. Stat. §38a-175; and second, the health care center must be receiving direct subscriber charges on new or renewal contracts or policies.
Health care center. "‘Health care center’ means either (A) A person, including a profit or a nonprofit corporation organized under the laws of this state for the purpose of carrying out the activities and purposes set forth in subsection (b) of section 38a-176, at the expense of the health care center, including the providing of health care, as herein defined, to members of the community, including subscribers to one or more plans under an agreement entitling such subscribers to health care in consideration of a basic advance or periodic charge and shall include a health maintenance organization, or (B) a line of business conducted by an organization that is formed, pursuant to the laws of this state for the purposes of, but not limited to, carrying out the activities and purposes set forth in subsection (b) of section 38a-176." Conn. Gen. Stat. §38a-175(9) [emphasis added]. The Health Care Center is a health care center, as defined in Conn. Gen. Stat. §38a-175, because the operation of a health care center is a line of business conducted by it, and because it is a corporation that is formed for the purposes of, but not limited to, carrying out the activities and purposes set forth in Conn. Gen. Stat. §38a-176(b). (endnote 1)
Direct subscriber charges on new or renewal contracts or policies. Conn. Gen. Stat. §12-202a imposes a tax on net direct subscriber charges received by health care centers. "‘Net direct subscriber charges’ means direct subscriber charges less returned charges, including cancellations." Conn. Gen. Stat. §12-201(10). "‘Direct subscriber charges’ means all charges made by a health care center, as defined in section 38a-175, to subscribers, as defined in section 38a-175, by whomever paid." Conn. Gen. Stat. §12-201(9). Thus, whether there are direct subscriber charges being received by a health care center hinges on whether there are subscribers.
"‘Subscriber’ means an individual whose employment or other status ... is the basis for eligibility for enrolment (endnote 2) in the health care center, or in the case of an individual contract, the person in whose name the contract is issued." Conn. Gen. Stat. §38a-175(20). Two types of contracts (endnote 3) are defined in Conn. Gen. Stat. §38a-175: group contracts (endnote 4) and individual contracts (endnote 5). Each of these contracts is a "contract for health care services." While the definition of "health care" in Conn. Gen. Stat. §38a-175(8) (endnote 6) is not intended to be all-inclusive, the above-described services that the Health Care Center provides under the administrative-services-only contract to a self-insured employer bear no resemblance to the services listed in that definition. Because there is no contract for health care services between the Health Care Center and the self-insured employer under that administrative-services-only contract, the employees of that employer cannot be subscribers.
Because those employees are not subscribers, and the employer is solely liable to its employees and to health care providers for the payment of employee health benefit claims, payment of those claims by the Health Care Center solely from funds that are provided in advance by the employer, and the administrative fees charged by the Health Care Center to the employer for employee health benefits claims processing, are not direct subscriber charges, as defined in Conn. Gen. Stat. §12-201(9), that are received by the health care center. (endnote 7)
RULING:
Where an employer is solely liable to its employees and to health care providers for the payment of employee health benefit claims but, under a contract with a health care center, as defined in Conn. Gen. Stat. §38a-175, those claims are to be paid by the health care center solely from funds that are provided in advance by the employer, those payments, and the administrative fees charged by the health care center to the employer for employee health benefits claims processing, are not direct subscriber charges, as defined in Conn. Gen. Stat. §12-201(9), that are received by the health care center.
Endnotes:
1. While the Health Care Center is a health care center as described in Conn. Gen. Stat. §38a-175(9)(B), the conclusion would be the same, under the above-described facts, even if the Health Care Center were a health care center as described in Conn. Gen. Stat. §38a-175(9)(A). Health care is not being provided "at the expense of the health care center." Under the Health Care Center’s administrative-services-only contract with a self-insured employer, the employer will be solely liable to health care providers or to covered persons for payment of covered claims; the Health Care Center will not liable to health care providers or to covered persons for payment of any claims even if the employer fails to pay those claims, and the employer will indemnify and hold harmless the Health Care Center against any liability which arises out of a claim against the Health Care Center in connection with the administration of the benefit program or a claim for benefits under the benefit program. Also, the Health Care Center will be obligated under such a contract to pay such covered claims only to the extent that the employer has sufficient funds in such account to cover the payment of such claims, the Health Care Center’s administrative fee, and other costs arising out of the contract for which the employer is responsible.
2. "‘Enrolled population’ means a group of persons ... which receives health care from a health care center in consideration of a basic advance or periodic charge." Conn. Gen. Stat. §38a-175(17).
3. Conn. Gen. Stat. §38a-182, which pertains to health care center agreements with their subscribers, and agreement requirements, also refers to the same two types of agreements. "An agreement issued by a health care center governed by sections 38a-175 to 38a-192, inclusive, may be issued for health care or the costs thereof to a subscriber, to a subscriber and spouse, to a subscriber and family, to a subscriber and dependent or dependents related by blood, marriage or adoption or to a subscriber and ward. Such agreement or evidence of coverage document shall be in writing and a copy thereof furnished to the group contract holder or individual contract holder, as appropriate." Conn. Gen. Stat. §38a-182(a).
4. "‘Group contract’ means a contract for health care services which by its terms limits eligibility to members of a specified group. The group contract may include coverage for dependents." Conn. Gen. Stat. §38a-175(6).
5. "‘Individual contract’ means a contract for health care services issued to and covering an individual. The individual contract may include dependents of the subscriber." Conn. Gen. Stat. §38a-175(10).
6. "‘Health care’ includes, but shall not be limited to, the following: Medical, surgical and dental care provided through licensed practitioners, including any supporting and ancillary personnel, services and supplies; physical therapy service provided through licensed physical therapists upon the prescription of a physician; psychological examinations provided by registered psychologists; optometric service provided by licensed optometrists; hospital service, both inpatient and outpatient; convalescent institution care and nursing home care; nursing service provided by a registered nurse or by a licensed practical nurse; home care service of all types required for the health of a person; rehabilitation service required or desirable for the health of a person; preventive medical services of all and any types; furnishing necessary appliances, drugs, medicines and supplies; educational services for the health and well-being of a person; ambulance service; and any other care, service or treatment related to the prevention or treatment of disease, the correction of defects and the maintenance of the physical and mental well-being of human beings. Any diagnosis and treatment of diseases of human beings required for health care as defined in this section, if rendered, shall be under the supervision and control of the providers." Conn. Gen. Stat. §38a-175(8).
7. Cf. Ruling No. 95-13 (where employer is solely liable to its employees and to health care providers for the payment of employee health benefit claims, payment of those claims by an insurance company solely from funds that are provided in advance by the employer, and the administrative fees charges by the insurance company to the employer for employee health benefits claims processing, are not gross direct premiums, as defined in Conn. Gen. Stat. §12-201, that are received by the insurance company).
LEGAL DIVISION
Issued February 3, 1999