The New York City Tax Appeals Tribunal, reversing an Administrative Law Judge decision, has held that health maintenance organizations are not “insurance corporations” for general corporation tax purposes, and therefore can be included in the combined returns of their parent holding company. Matter of Aetna, Inc., TAT(E)12-3(GC) and TAT(E) 12-4(GC) (N.Y.C. Tax App. Trib., June 3, 2016). The decision addresses the question of what it means to be “doing an insurance business” for New York City tax purposes.

Background. Insurance corporations are not subject to the New York City general corporation tax (“GCT”). Although prior to July 1, 1974, an insurance corporation was subject to the former City insurance corporation tax (“insurance tax”), effective July 1, 1974, the insurance tax was repealed. The GCT enabling legislation, however, retained an exemption from tax for corporations that were taxable under the repealed insurance tax. Since that time, the Department of Finance has taken the position that an insurance corporation that would have been subject to the former insurance tax is exempt from the GCT. This case involved whether an HMO was an insurance corporation that was “doing an insurance business” in New York, an issue that (somewhat surprisingly) has never previously been addressed for City tax purposes. If it was doing an insurance business, then the HMO could not be included in a combined GCT return. 

Facts. Aetna, Inc. is a holding company headquartered in Hartford, Connecticut that, during the years in issue (2005 and 2006), owned multiple HMO subsidiaries. There are several HMO “models.” Under the “IPA” model, physicians form an organization that represents their interests in negotiating with the HMO regarding fee reimbursement and other matters. IPA physicians generally provide their medical services to the HMO members, although they can also see other patients. Under the “group” model, the HMO contracts with a physician group practice, which sometimes treats only the HMO members. 

HMOs make extensive use of primary care physicians, typically general practitioners, to deliver healthcare services and to act as “gatekeepers” in making referrals to specialists. HMOs compensate physicians either based on a pre-arranged fee schedule (for specialists) or based on a fixed amount each month for each patient the physician sees (for general practitioners). In contrast, an indemnity insurer does not contract with physicians and typically pays physicians (or insureds) only 70-80% of the “usual and customary charge” in a geographic area. 

Aetna initially filed combined GCT returns that included the HMO subsidiaries. It later filed refund claims, alleging that its HMO subsidiaries were conducting an insurance business and, therefore, should not have been included in its combined returns. The Department of Finance denied the refund claims, and the case proceeded to hearing.

ALJ determination. After a hearing, an ALJ concluded that the HMOs were doing an insurance business in New York and, therefore, could not be included in a combined GCT return for the years in issue. She acknowledged that HMOs have been distinguished from traditional insurers under federal tax law but concluded that a regulatory decision, Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002), represented a significant change. In that case, the U.S. Supreme Court held that the HMO was an insurer and was, therefore, subject to Illinois insurance regulation, which was not preempted by ERISA. The Department appealed the ALJ decision.

Tribunal Decision. The City Tribunal has now reversed that decision, holding that the HMOs were not “doing an insurance business” within the meaning of the GCT enabling legislation. Therefore, the Tribunal held that the HMOs must be included in their parent holding company’s combined GCT returns and that the Department properly denied Aetna’s resulting refund claims.

In the absence of a definition of the phrase “doing an insurance business in this state”—the operative phrase for being exempt from the GCT—the City Tribunal looked principally to New York State law, specifically Insurance Law § 1101 (“doing an insurance business”) and § 1102(a) (licensing requirement for insurers that “do an insurance business in this state”). The Tribunal noted that those provisions do not apply to HMOs, which are subject to regulation under a different New York statute, Public Health Law Article 44. 

The City Tribunal cited several provisions in the Insurance Law that distinguish “insurers” from HMOs and concluded that the ALJ erred in relying on authorities beyond that law and from other states in interpreting the phrase “doing an insurance business.” According to the Tribunal, the ALJ erred in not adequately considering that Insurance Law § 1109(a) generally excluded HMOs from the reach of the Insurance Law. 

The City Tribunal also disagreed with the ALJ’s reliance on two opinions of counsel issued by the New York State Insurance Department, one from 1991 and the other from 2004, questioning their legal underpinning as well as their legal effect. With regard to the impact of the U.S. Supreme Court decision in Rush Prudential, the Tribunal found it irrelevant in interpreting the intent of the New York State Legislature as to whether HMOs were doing an insurance business. On the other hand, the Tribunal gave “significant weight” to an Advisory Opinion issued by the Department of Taxation and Finance (Petition of KPMG Peat Marwick, Advisory Opinion, TSB-A-93(4)C (N.Y.S. Dep’t of Taxation & Fin., Jan. 12, 1993)), which concluded that a business conducted by an HMO in compliance with Article 44 of the State Public Health Law was not considered an insurance business. 

Finally, the City Tribunal faulted the ALJ for dismissing the significance of amendments to the State Tax Law in 2009 in which HMOs were explicitly redefined as taxable “insurance corporations.” The Department had argued that, if HMOs were truly “doing an insurance business” in New York prior to 2009, there would have been no need to specifically refer to them in the 2009 amendments. According to the Tribunal, it was notable that, following those amendments, neither the Insurance Law nor the Public Health Law was amended to eliminate the exclusion of HMOs from the scope of the Insurance Law. 

Additional Insights

It is unusual to read a decision directly interpreting the scope of a New York legislative enactment that took place more than 40 years ago. The City Tribunal’s decision, which is subject to appeal by Aetna, represents a significant departure from the ALJ’s analysis in interpreting the phrase “doing an insurance business.” The underpinning of the Tribunal’s conclusion is principally that HMOs are distinguished from insurers under the State Insurance Law and Public Health Law, making it unnecessary to look elsewhere in determining whether HMOs are “doing an insurance business.” Somewhat surprisingly, the Tribunal does not discuss at all the federal income tax treatment of HMOs—particularly whether they are treated as “insurance corporations” for tax purposes—suggesting that it did not consider such tax treatment significant in interpreting whether they were doing an insurance business.