Opinion
For Opinion on Hearing, see 68 Cal.Rptr. 585, 441 P.2d 97. Thomas C. Lynch, Atty. Gen. of State of California, Arthur C. de Goede, Anthony C. Joseph, Edmond B. Mamer, Deputy Attys. Gen., Los Angeles, for appellants.
Arthur J. Manley, Los Angeles, Marvin D. Donine, La Puente, for respondents.
CHRISTIAN, Associate Justice.
The Insurance Commissioner brings this action under the authority of Insurance Code section 12928.6 to restrain the individual defendant, who have been operating under the fictitious name 'California Mutual Association' (hereinafter CMA), from conducting an insurance business without the certificate of authority required by Insurance Code section 700. CMA cross-complained, seeking a declaration that they are operating a health service plan and are therefore not subject to regulation as an insurer. Defendants prevailed in the trial court; the commissioner appeals, contending that the evidence and the findings of fact made thereon do not support the judgment. We have concluded that the business is insurance within the meaning of the statute, and therefore reverse the judgment.
Insurance is defined as 'a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.' (Insurance Code, § 22; Civ.Code, § 2527.) Our task is to review the trial court's application of that rather general test to the business carried on by CMA. The facts were presented to the trial court through a written stipulation incorporating numerous documents which display in detail the organization and operations of CMA. This presentation was supplemented by the testimony of witnesses. There is no substantial conflict as to the basic facts; the Insurance Commissioner does not question the accuracy of the court's finding of fact, and we are concerned only with the question whether the agreed facts show that CMA was conducting an insurance business.
A review of some events in the history of health insurance regulation in California will be a useful preliminary to our analysis of the workings of CMA. It has been common knowledge for many years that families of modest means have great difficulty in trying to meet the cost of medical care. The hardship is most severe in instances. of accident or major illness which cannot be provided for within a family budget. This problem has been an anxious concern of the general public, the Legislature and the medical profession for more than a generation; we need to review only a few of the events in this history. The first legislative step was the enactment in 1941 of a provision (now Corp.Code, § 9201) authorizing the formation of nonprofit corporations to meet the cost of medical care. The participation of at least one-fourth of all members of the particular health profession organizing the corporation was made a prerequisite to the exercise of this franchise. Operations of the corporation were made subject to supervision by the appropriate professional board, and the Attorney General's powers to visit charitable trusts under Corporations Code section 9505 were extended to any corporation established under section 9201.
The California Medical Association had already formed California Physicians' Service (hereinafter CPS), a non-profit corporation. CPS immediately qualified under the new statute and began providing physicians' services to families of limited means. CPS's plan of operation was that The organizers of CPS sought to avoid treatment as an insurance business so as to escape the burdens of continuing supervision by the Insurance Commissioner and to avoid meeting the requirements imposed by law upon insurance corporations regarding paid-in capital and reserves. Despite the novel features of the CPS plan, the Insurance Commissioner attempted to assert jurisdiction. In California Physicians' Service v. Garrison (1946) 28 Cal.2d 790, 804-805, 172 P.2d 4, 13, 167 A.L.R. 306, the Supreme Court, after referring to the same statutory definition of 'insurance' which we are concerned with here, held: 'The business of the Service lacks one essential element necessary to bring it within the scope of the insurance laws, for clearly it assumes no risk. Under the provisions of the contracts or group agreements, it is a mere agent or distributor of funds. It does not promise the beneficiary members that it will provide medical care; on the contrary, 'the services which are offered to * * * beneficiary members of C.P.S. are offered personally to said members by the professional members of C.P.S. * * *' [Citations.] The professional member is compensated for his services solely from the fund created by the monthly dues of the beneficiary members. Payments from the fund are made to the physicians pro rata in accordance with an established schedule. Under that plan, the amount of compensation of the professional members is variable and may be high or low, depending upon the incidence of sickness and the number of beneficiary members paying dues. Stated in terms of insurance, all risk is assumed by the physicians, not by the corporation, hence the only effect of requiring compliance with regulatory statutes would be to compel the acquisition of reserves contrary to the established method of operation.'
An alternative ground of holding CPS exempt from regulation by the commissioner was that the language of Civil Code section 593a (now Corp.Code, § 9201, discussed above) indicated an implied legislative intention to exempt non-profit corporations formed thereunder from the jurisdiction of the commissioner.
After the CPS case was decided private health care coverage, both through CPS and other service plans and through health insurance, rapidly increased in volume and in the scope of protection afforded to the participants. Not unexpectedly, ingenious attempts have been made, through specious conformance to the tests laid down in California Physicians' Service v. Garrison, to promote and publicly market health coverage which is in one way or another profitable to its managers while it avoids the jurisdiction of the Insurance Commissioner.
A useful example is seen in Maloney v. American Independent Medical and Health Association (1953) 119 Cal.App.2d 319, 259 P.2d 503. There the promoters organized a non-profit corporation ostensibly for the purpose of making health care available to its members. The corporation was then caused to enter into contracts which called for the promoters to provide certain management services and receive in return compensation which had the practical effect of diverting 85 per cent of all dues and fees collected by the corporation into overhead and promotion. Upon insolvency, the Insurance Commissioner asserted jurisdiction over the corporation as an insurer, 'By the certificates of beneficial membership issued [the corporation] agreed that it would make the specified benefits available to the member when needed, in return for the dues paid. [The corporation] employed no physicians and made no contracts with hospitals, and its contract clearly discloses that it was itself rendering or furnishing no such service. The member, when needing such services, was to secure them wherever he desired and anywhere in the world. The corporation agreed to pay the bills therefor, within specified limits, and this was not dependent upon the amount of dues that might be collected from other members within any period. Under this contract [the corporation] undertook to indemnify the beneficiary member against the hazards of illness or injury by paying the medical and hospital bills specified.' (Maloney v. American I. M. & H. Assn., supra, 119 Cal.App.2d 319, 325, 259 P.2d 503, 506.) Under these circumstances, the court of appeal held that the corporation was an insurer, with the result that its insolvency justified the commissioner's action leading to seizure and liquidation. (119 Cal.App.2d at 326, 259 P.2d 503.)
As the managers of health service plans and persons seeking health care protection have gained experience over the years, a trend toward increased duration and scope of benefits has persisted throughout the industry. As an inevitable result of this development, and of increased costs of medical care, the monthly fees characteristically levied from members of various groups covered by CPS and other service organizations have multiplied. This has put the more common forms of health coverage at the very margin of the economic reach of low income workers. These events have created in many communities a substantial market for low cost health care protection with correlatively limited benefits. Respondents in the present case planned CMA as a health service program designed to fit that market.
The business was commenced in 1962 by respondents E. S. Jewett and J. R. Lynn. They established California Mutual Association by promulgating by-laws under which the two promoters and their wives hold office for life as an 'executive board' with the sole power to 'manage the funds and property of the Association; decide the policies and have the power to adopt, repeal and amend by-laws.' The members of the executive board fill vacancies on the board without a vote by subscribing members of the association and fix their own salaries. Subscribing members have no voting power over the business or policies of the association.
The plan offered by CMA is embodied in a membership application, a service contract, and the by-laws. Copies of these documents are provided to each subscribing member. A member pays an annual membership fee ranging from $10 to $30 depending upon the number of persons included in the membership. In addition, each member is assessed $.25 for each hundred dollars of liability for medical, surgical and hospital benefits incurred by the association. Subscribing memberships have been segregated into three groups. For one group this assessment is limited to $10 monthly; for another group the assessment is limited to $12.50; and for a third the assessment is $17 per month. In practice the monthly assessment equals the maximum allowable amount. In return for these payments subscribing members are entitled to have the association pay directly to the purveyors of service, according to a published schedule of benefits, not more than $500 medical and surgical expenses and $1,500 hospital expenses each year. Subscribing members were enlisted primarily through contacts with labor union business agents in Orange, San Bernardino and Riverside Counties. Commissions were paid to members who recruited new subscribers and by January 1965 approximately 1,500 subscribing members had been enrolled. At the conclusion of the trial there were 326 subscribing members in San Bernardino County, 293 in Los Angeles, 200 in Riverside, 117 in Ventura, 90 in San Diego, 26 in Orange, and 11 in Santa Barbara--a total of 1,063.
The management of CMA attempted to assemble a group of member physicians. This effort was not markedly successful but agreements were entered into with the San Bernardino Foundation for Medical Care and the Riverside Foundation for Medical Care. The foundations are organizations sponsored by the medical societies of those counties for the purpose of providing low cost medical and surgical coverage on a prepaid basis. The agreement with the San Bernardino Foundation had been terminated before the trial ended. Thereafter, CMA had two kinds of arrangements with physicians:
1. Perhaps 38 physicians signed a contract under which the physician providing services undertakes to look only to CMA for compensation and not to hold the subscribing member liable for scheduled services up to the amounts provided for in CMA's service contract. The physician reserved the right to charge the patient an amount exceeding the scheduled fee and to seek recovery from the patient rather than from CMA. A few physicians (perhaps 7) had entered into a similar agreement to render specified medical services to subscribing members. The court found that these seven physicians did not agree to look exclusively to CMA for payment.
2. Under the continuing agreement with the Riverside Foundation for Medical Care, CMA agrees to pay benefits meeting standards which have been set by the foundation. These standards are more generous in some particulars than CMA's basic schedule. In return, physicians affiliated with the foundation agree to limit their charges to 'usual, customary and reasonable' fees approved by the foundation.
No physician other than the 38 mentioned in subparagraph one above had agreed to look to any particular fund for payment for services rendered to subscribing members of CMA. Although subscribing members are encouraged to use the services of physicians with whom contractual relationships have been established, CMA in practice pays according to its schedule any physician who provides services where a physician under contract with CMA is not readily available. The physicians under contract to not include, in areas reasonably accessible to all the subscribing members, the various medical and surgical specialities to which the members would normally resort for treatment of all the ailments and disabilities which might entitle a member to benefits under the service agreement. Thus it is necessarily contemplated that CMA will continue to meet the charges incurred by subscribers treated by physicians not connected in any way with CMA.
The plan provides for specified hospital benefits. But no hospital has agreed to look solely to any particular fund for payment.
The trial court found '[t]he functioning * * * of the Association has been carried on honestly * * * the Association, since its organization, has been financially able to make all payments promised under its plan and its business policies have been conducted with the intention of carrying out the purposes for which it was formed and its efforts have been made in good faith to serve its members and their dependents and to provide service not otherwise available on a monthly prepayment basis to workmen who have no access to any employe-sponsored or union-sponsored payroll deduction plan. * * * [T]he salaries paid by the Association for officers and employees are not in excess of the rates paid in business generally for The trial court concluded that CMA is not engaged in the insurance business and is therefore not required to submit to supervision by the Insurance Commissioner. On appeal the commissioner contends that CMA is an insurance business similar to that presented in Maloney v. American I. M. & H. Association, supra, 119 Cal.App.2d 319, 259 P.2d 503.
In the CPS case, the Supreme Court indicated that an element necessary to bring a business within the jurisdiction of the Insurance Commissioner is that the business bear the risk of loss. (28 Cal.2d at 804, 172 P.2d 4.) That risk must in the words of Insurance Code section 22 depend upon 'a contingent or unknown event.' The onset of a future illness is such an event; where CMA undertakes to pay physicians and hospitals specified costs incurred as the result of services made necessary because a health risk fell upon a member, the risk has been shifted and the relationship is one of indemnitor and indemnitee. For example, the service contract provides for hospital benefits up to $1,500 in a year. Assume that a member's illness requires him to be hospitalized. There is no contractual relationship between CMA and any hospital, but we may assume that when the member is admitted he shows his CMA service contract to the management of the hospital. A statement is in due course rendered to CMA representing charges for which the patient is personally liable. If the statement is paid, CMA has discharged its obligation as an insurer as promised in the service contract. If, on the other hand, CMA is unable to pay because of defalcation, bad management, or an untoward loss experience, the subscriber has been deprived of an indemnity for which he has at least partially paid in advance through his annual membership fee. His previous periodic payments of assessments have also been induced by the expectation that protection would be extended when the occasion arose. The same risk prevails when a subscriber incurs a fee liability to a physician with whom CMA does not have a contract.
The Insurance Commissioner is charged with the duty of protecting the public against these hazards. Of course, it is not significant that the management of CMA has thus far been able to meet all claims presented under its present system without supervision by the commissioner. Where jurisdiction exists it is to be exercised as a preventive and protective measure, in advance of any loss.
The commissioner tacitly concedes that CMA is not carrying on an insurance business as to transactions involving the 38-odd physicians who have signed agreements binding them to look only to CMA's funds for payment and not to hold a subscriber member liable for fees. This implied concession is in accord with the principles of the CPS case. Although CMA has attempted to encourage subscriber members to go to member physicians, the court found that CMA will in practice pay the claim of any physician whether or not he has signed the agreement releasing the patients' personal liability or is a member of the Riverside County Foundation. Moreover, although Riverside County Foundation members agree not to charge fees in excess of the 'usual, customary and reasonable' approved by the foundation, they do not forswear the right to recover from the patient in the event that CMA does not pay. We conclude that CMA is an insurer with respect to services rendered by physicians CMA claims exemption from the jurisdiction to the commissioner as a 'health care service plan' under provisions of the Knox-Mills Plan Act. (Gov.Code, §§ 12530 to 12539.) The Act emerged from studies conducted between 1961 and 1965 by the Assembly Interim Committee on Finance and Insurance; the legislation recites that background material is found in the reports of the committee. (1965 Cal.Stats., ch. 880, § 2.) These reports (15 Assembly Interim Committee Reports on Finance and Insurance (1961-1963) No. 26, pp. 23-36) analyze several commonly used devices for the financing of health care and point out that no state agency is empowered to exercise protective supervision over health care service plans which under California Physicians' Service v. Garrison are exempt from regulation by the Insurance Commissioner. Certain abuses were related, and both reports recommended that health care service plans should be required to register and submit to some basic degree of surveillance. The Knox-Mills Plan Act accordingly provides that 'health care service plans' must register with the Attorney General and submit contract forms, copies of advertising, and other pertinent information. (Gov.Code, §§ 12537, 12538.) The use of misleading advertising and deceptive membership contracts is prohibited by Government Code section 12532 and the Attorney General is given powers of enforcement. (Gov.Code, § 12533.)
As could be expected from the origins of the statute, health care service plans are so defined as to exclude any plan 'operated by an insurer * * * while such plan is so operated within the scope of the current certificate of authority issued by the Insurance Commissioner, * * *' (Gov.Code, § 12530, subd. (a)) Respondents, having voluntarily registered with the Attorney General, attempt to draw from the foregoing language an inference that they have thereby secured exemption from regulation by the Insurance Commissioner. But the definition just quoted provides that the relationship of exemption runs in the other direction: it is submission to the jurisdiction of the Insurance Commissioner that exempts an insurer from registration under the Knox-Mills Plan Act. The purpose of the Knox-Mills Plan Act was to close a gap in the statutory scheme of protection to the public, not to abrogate protection already afforded by the Insurance Code. (15 Assembly Interim Committee Reports on Finance and Insurance, No. 26, p. 35.)
One final point requires attention. In California Physicians' Service v. Garrison, supra, 28 Cal.2d at 809, 172 P.2d at 16, Mr. Justice Edmonds declared: 'Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, 'service' rather than 'indemnity' is its principal object and purpose.' This language raises a question whether the trial court in the present case should somehow have weighed those aspects of respondents' operations which are insurance under the statutory definition against those which do not offer indemnity, and determine whether the Insurance Commissioner has jurisdiction according to the heavier side of the scale. But the statute provides for no such process and the attempt would lead the court immediately into impractical abstractions. Therefore, we conclude that if a health care plan has economically significant aspects of indemnity it cannot be marketed except under the jurisdiction which the Legislature has vested in the Insurance Commissioner for the purpose of protecting the public.
The judgment is reversed with directions to enter judgment for the plaintiff.
DEVINE, P. J., and MOLINARI, J., concur.
Presiding Justice of the Court of Appeal, First Appellate District, Division One, sitting under assignment by the Chairman of the Judicial Council.