Health care sharing ministries: scam or solution?

• Author: Boyd, Benjamin
• Position: VI. How Should Courts and State Regulators Treat HCSMS? C. What to Do With the Dearth of Case Law on HCSMs through IX. Conclusion: Observations and Analysis, with footnotes, p. 254-283

3. What to Do With the Dearth of Case Law on HCSMs

   The general dearth of case law on HCSMs means the Kentucky Supreme Court dealt with HCSMs by making analogies to certain egregious cases involving other agencies, as noted above. Interestingly, the Reinhold majority did cite Iowa's Barberton case, the only other reported case on point. (284) The Reinhold majority did not distinguish Barberton's holding or explain why the Reinhold case required the opposite result. However, no other reported cases deal with the specific issues of whether HCSMs are engaged in the business of insurance and whether the "safe harbor" statute applies. (285) In order to deal with this lack of case law, this Article first examines precedent from the U.S. Supreme Court, secondly argues that courts should apply the "safe harbor" statutes to HCSMs, and lastly offers some analysis on whether HCSMs should be compared to other types of organizations to determine whether HCSMs are insurance, as the Kentucky Supreme Court did.

   1. Some Guidance from U.S. Supreme Court Precedent

      The assumption of the risk is a key element for insurance. (286) The key question here is, given the fact HCSMs specifically disclaim any assumption of the risk, whether HCSM members indeed assume the risk of payment of medical costs among themselves. However, while the assumption of risk is a key element, it is not the only element of insurance. (287) Three U.S. Supreme Court precedents in the area of insurance law provide helpful guidance for cases beyond the borders of Iowa and Kentucky.

      First, the U.S. Supreme Court defined insurance as "an arrangement for transferring and distributing risk" in Group Life & Health Company v. Royal Drug Company. (288) In Group Life, certain pharmacists alleged some pharmacy agreements violated the Sherman Act. (289) The question was whether these pharmacy agreements were the "business of insurance." (290) The Group Life Court stated, "[t]he primary elements of an insurance contract are the spreading and underwriting of a policyholder's risk." (291) The court explained, "[i]t is characteristic of insurance that a number of risks are accepted, some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability upon it." (292) The Court further explained, "[t]he Pharmacy Agreements thus do not involve any underwriting or spreading of risk ... they are not the "business of insurance." (293)

      Second, the U.S. Supreme Court provided a more complete definition of "the business of insurance" in Metropolitan Life Ins. Co. v. Massachusetts (294) Three relevant criteria indicate whether a particular practice falls within "the business of insurance:"

      (1) whether the practice has the effect of transferring or spreading a policyholder's risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry. (295)

      Third, in Securities and Exchange Commission v. Variable Annuity Life Insurance Company, the U.S. Supreme Court considered whether variable annuities were "contracts for insurance." (296) variable annuity benefit payments vary with the success of the investment. (297) The annuitant "cannot look forward to a fixed monthly or yearly amount." (298) variable annuities share characteristics with fixed annuities, including periodic payments continuing until the annuitant's death or the end of a fixed term. (299) Issuers "assume the risk of mortality ... an actuarial prognostication that a certain number of annuitants will survive to specified ages." (300) The annuity contract reflects the mortality prediction, which is a risk "assumed both by respondents and by those who issue fixed annuities." (301) The "[respondents ... urge [this feature] ... is basically an insurance device." (302) The U.S. Supreme Court disagreed: "absent some guarantee of fixed income, the variable annuity places all the investment risks on the annuitant, none on the company." (303) The Court concluded, "the concept of 'insurance' involves some investment risk-taking on the part of the company." (304) The variable annuity companies guaranteed "nothing to the annuitant except an interest in a portfolio of common stocks. ..." (305) Further, "[t]here is no true underwriting of risks, the one earmark of insurance. ..." (306)

      Analyzing these cases with respect to HCSMs reveals several things. First, HCSMs as organizations lack the primary element of insurance under Group Life: the underwriting of policyholder risk. (307) HCSMs lack the "characteristic of insurance" that enables "the insurer to accept each risk at a slight fraction of the possible liability upon it." (308) The Reinhold dissent correctly pointed out "Medi-Share takes no responsibility for the payment of the members' medical bills," and thus bears no liability or risk of loss. (309) In other words, HCSMs do not underwrite "policyholder risk." Further, HCSMs do not "accept each risk at a slight fraction of the possible liability upon it." Rather, Medi-Share and other HCSMs do not have even a fraction of possible liability for member medical bills, which are voluntarily shared by other members and not by these HCSMs themselves.

      Second, under Met Life, for courts to consider an HCSM the practice of insurance, the HCSM has to have the effect of transferring or spreading a policyholder's risk and the practice must be an "integral part" of the relationship between the insurer and insured. (310) The Reinhold dissent and the majority effectively acknowledged Medi-Share's cost-sharing contract "has the effect of ... spreading a policyholder's risk." (311) Yet, the dissent noted Medi-Share's assumption of risk did not occur "between the insurer and the insured." (312) The majority also stated it was the members, not Medi-Share, who "undertake[] to pay or indemnify another as to loss from certain ... 'risks'." (313) Thus, under the Reinhold majority's view of these facts, Medi-Share's contractual "spreading of the risk" cannot be said to be an "integral part of the ... policy relationship between the insurer and the insured." Thus, under the Met Life test, HCSMs do not fall within the "business of insurance."

      Third, under Variable Annuity, HCSMs may have some "aspect[s] of insurance" --like variable annuities do. (314) Yet, these aspects are apparent, not real; superficial, not substantial, because HCSM contracts or member agreements have "no element of fixed return" obligatory upon the ministry, much like variable annuities. HCSMs are not involved in "investment risk-taking." Much like variable annuities, HCSMs essentially "guarantee nothing" to their members except the provision of certain services as a clearinghouse for information on medical needs. Admittedly, CBN's disavowal of any guarantees is much stronger worded than Medi-Share's disavowal of guarantees. (315) Yet, there is no way to remain faithful to the language of these HCSM contracts and arrive where the Reinhold majority did. In short, HCSMs feature "no true underwriting of risks, the one earmark of insurance." (316) Much like variable annuities, "in hard reality the issuer of a [HCSM commitment contract] that has no element of fixed return assumes no true risk in the insurance sense." (317)

   2. Courts Should Apply the "Safe Harbor" HCSM Statutes

      Courts can easily make a detailed list of the need-sharing "processes" HCSMs engage in and from there maintain health care cost sharing constitutes the business of insurance by focusing on a few aspects of HCSMs. (318) Indeed, the Reinhold majority pointed out just a few ways Medi-Share held similarities with insurance. (319) Instead, courts should consider whether the HCSM complies with their own statutory definition of HCSMs in a "safe harbor" statute. (320) When viewed from this angle, Medi-Share complied with Kentucky's "religious publication" statute in total, with only one exception. (321) The Reinhold majority held, "[i]t is clear from the statutory language of KRS 304.1-120(7) that for Medi-Share to qualify for the Religious Publications Exception, it must meet every criterion listed (322). ... Medi-Share does not." (323) The majority stated, "[e]ach 'subscribers' needs' are ... not paid directly from one subscriber to another, but through Medi-Share. Since Medi-Share does not satisfy KRS 304.1-120(7)(d), it does not qualify for the Religious Publication Exception." (324)

      However, the Reinhold majority did not point out any other subsection of K.R.S. [section] 304.1-120(7) that Medi-Share failed to comply with. Unlike the Ben Hur Life Association's inattention to its required fraternal duties in Wheeler, Medi-Share gave much more than superficial attention to its HCSM duties. (325) If the Kentucky Reinhold majority had discussed and then applied Kentucky's entire religious publication statute to Medi-Share, the majority should have observed that Medi-Share does the following things:

      * Medi-Share is a religious publication identified in K.R.S. [section] 304.1-120(7) that limits their operations to those activities permitted by that statutory subsection. (326)

      * Medi-Share is a non-profit religious organization, (327) limited to subscribers who are members of the same denomination or religion. (328)

      * Medi-Share acts as an organizational clearinghouse for information between subscribers who have needs and subscribers who choose to assist with those needs. (329)

      * Medi-Share matches subscribers with the present ability to pay with subscribers with a present need. (330)

      * Medi-Share suggests amounts to give that are voluntary among the subscribers. (331)

      * Medi-Share's need-sharing has no assumption of risk or promise to pay either among the subscribers or between the subscribers and the publication. (332)

      * Lastly, Medi-Share provides the statutorily required disclosure...