Mr. William A. Harrison                      Opinion No.   WW-1475
Commissioner of Insurance
International Life Building                  Re:   Whether, under the facts
Austin 14, Texas                                   stated, Prepaid Prescription
                                                   Plan, Inc. would be engaging
                                                   in the business of insurance
                                                   in furnishing the prescrip-
                                                   tion service required by its
                                                   service agreements and
                                                   pharmacy contracts. and
Dear Mr.    Harrison:                              related questions.

                    You have asked our opinion as to whether or not the business
proposed to be conducted by Prepaid Prescription Plan, Inc. is an insurance
business.      fin this 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.

                .In your request you outline the facts to be considered as
                                  .
follows:~

        “The Prepaid Prescription Plan, Inc., is a domestic corpora-
        tion chartered August 4, 1959, under the Texas Business Carpor-
        ation. Act.  The Purpose Clause of its Articles of Incorporation
        provides as follows:
                 “‘ARTICLE   THREE: The purposes for which the corpora-
                                      tion is organized are:

                To establish, maintain and operate a prepaid preecrip-
                tion plan or plans whereby prescriptions, either oral
                or written by duly licensed physicians, may be dis-
                pensed 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 who are 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 ser-
                 vice to its subscribers. ’
I     c




Mr.   William A. Harrison,    page 2 (WW-1475)




          “Membership for a subscriber and/or his dependents is
          available on a group plan or a pay-direct plan upon making
          application for enrollment on an application form furnished
          by the company, payment of service fees, and upon accept-
          ance of such application by the company and the issuance of
          Service Agreement.     Membership for a pharmacy in ~theplan
          may be obtained by submitting application on a form furnished
          by the company, payment of membership 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
          of these instruments.

          “The Prepaid Prescription Plan, Inc., is a stock company with
          the stockholders being the owners of the corporation and entitled
          to receive profits upon their investment in the stock.

          “For and,in the consideration of the payment of the monthly
          service fee provided for in the Service- Agreement a subscriber,
          af;ter obtaining a legal prescription from a ,licensed physician,
          may have ~theprescription filled by any Member Pharmacy and
          pay one-third or one-half of the prescription selling price
          according to the Service Agreement.      Prescriptions, may be
          obtained from other than a Member Pharmacy only under cer-
          tain conditions as set out in the Service Agreement after
          securing, approval of the pharmaceutical director of the com-
          pap% 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 upon a schedule
          of prices as provided for in the Pharmacy Contract.      The
          “prescription selling price” upon which the subscriber’s one-
          third or one-half is computed may be different from the
          price upon which the company’s two-third or one-half is
          computed.

          “The Prepaid Prescription Plan, Inc., acts as an agent, for
          the subscriber and for the member pharmacist but specifically
          assumes no liability 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: “‘An undertaking by one party to protect .the
other party from loss arising from named risks, for the consideration
    ..




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




and upon the terms and, under the conditions recited” citing C.ouch’s
Cyclopedias of Insurance Law, Vol. I,. page, 2,, As stated in National
Auto Service Corporation V. State, 55 S.W.2d 209. ,(Civ.App.   193):
error diem.) : "Whether or not a 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 though it contain declar-
ations to the contrary. . . I’ We have concluded that under the facts
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 that the benefit to the holder of the service
agreement is the obtaining of prescription drugs at a. reduced rate, the
difference between the amount paid by the subscriber to the 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. of which prescriptions
would entail an expenditure by the subscriber.       In the event of serious
illness to the 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 (by virtue of the
contract between it and the subscriber and between it and the member
pharmacy) in consideration of the monthly payment of $1.50 or $1.60
(depending on whether 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
upon which the payment rests is the filling by the pharmacy of a
prescription written by a doctor and submitted to the pharmacy by a
subscriber to the’Plan. It will be noted that the pharmacy takes no
risk.   It is completely reimbursed, partly by the subscriber and
partly by the cqrporation -- in some respects analogous to deductible
hospitalisation policies.    On the other hand the corporation, organized
for profit,   is gambling. that its cost for prescriptions filled


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

                 We can find no cases in this or others jurisdictions passing
upon arrangements exactly the same as that &rein involved.          It resembles
in some respects and is presumably based upon medical plans previously
passed upon by the courts of certain other jurisdictions,     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. Fish-
bath v. Universal Service Agency, 151;Pac. 768, (Wash. Sup. 1915),
which was an action by the insurance commissioner of the States of Wash-
ington to 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,
and a shoe dealer, the dealers contracting to sell their products at a
fixed rate or a fixed discount and the doctor contracting to render medi-
cal 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 the agreement.     The products purchased from
the dealers were paid for by the individuals purchasing~ same and the
doctor’s~ compensation was a fixed amount out of each membership fee
and did not vary with the treatments rendered.     The agency assumed         I
no liability for breach of the contract by the doctor or ,the dealers.
The court held that the agency was not in the insurance business be-
cause it was insuring.against no peril.   It can be seen,that the arrange-
ment is not the same as that passed upon in this opinion, for the
agency obviously assumed no risk that the payments it was called upon
to make would exceed the amount which it was taking in from the contract
hold8re.

                There are also in existence a group of op,inions dealing
with group medical plans which are epitomized by the opinions in California
Physicians’ Service v. Garrison, 172 Pp. .2d 4, (Cal. Sup. 1946), 167 A.L.R.
306, and Jordan v. Croup Health Association,      107 F.2d 239 , U. S. Court
of Appeals. (1939).   In both, the formation of the particular type of
corporation involved’was authorized by statute, both were non-profit
and both encompassed group,service only. In the 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 on a unit basis, i.e.,    a pro rata distri-
bution of the dues collected for that month, depending upon the amount
of service which they rendered.     In the Jordan case, the doctors were
paid a fixed annual compensation.     Inboms        the business was held
 Mr.   William A. Harrison,   page 5 (WW-1475)




_ not to be insurance in nature. As pointed out in the Jerdan opinion, the
  corporation assumed no risk and acted only as an agent. If any risk
  was assumed it was assumed by the doctor.      There was no possibility in
  either case that the cost to the 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 the amount of which varied with the number of
 individual contract holders but not with the amount of service rendered.
 The court held on the authority of the Fishback case that this ws not
 an insurance business.    Of interest to the question before us is the fact
 that the state contended that the amount of compensation to be paid to the
 doctor depended upon and would vary with the amount of services rendered
 regardless of the amount of dues taken in. The court clearly pointed
 out that it had been stipulated that the compensation was fixed and that the
 amount of the 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 with which 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 though the particular type of corporation was
 specifically authorized by’statute.   In that case ~the.amount to be paid to
 the hospital by the 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 of his contract, requires payment in money which
         is definitely measured by the extent of service rendered to
         the subscriber by the hospital to which he elects to go. It
         is payable upon a contingency, namely, that it is certified
         by his attending physician that the subscriber requires
         hospitalization. . . The contract, in probability, is not to
         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 by the subscriber is a charge based upon an
r     .   .




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




              actuarial determination of the probable risk incurred In
              issuing the contract, although that w’aich is ‘provided the
              subscriber upon the 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
              of that service to the subscriber on behalf of the plaintiff
              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 of group 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 of prepayment--to   insure the potential
patient against the unpredictable occurrence of sickness. ” Likewise,
in 52 Harvard Law Review.809 appears the following: “And while
the distinction between contracts for services and contracts of in-
surane is. sometimes shadowy, it seems clear; that in the case of
cooperative health associations,   indemnification against medical cost
rather than the unique services of the physician is the principal object
of the relationship. I’

               These principles seem even more applicable to a corporation
for profit oft the type with which we are here concerned.   We, therefore,
conclude that the plan of operation intended to be followed by Prepaid
Prescription Plan, Inc. , would involve the doing of an insurance busi-
ness in this state.

               This opinion conflicts in no way with the holding in Opinion
No. 0-4986-A.    The facts which were at that time before this office
and, which are revealed in the opinion itself, show that the health ser-
vice was of the cooperative type, squarely within the holding of the
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 trxxly yours.

                                              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