August 29, 1977

Mr. Gene Paul Kean 
Minnehaha County State's Attorney 
Minnehaha County Courthouse 
Sioux Falls, South Dakota 57102

Official Opinion No. 77-76

Municipalities do not have authority to provide health insurance coverage for employees by self-insuring

Dear Mr. Kean:

You have requested an opinion from this office based upon the following facts:

FACTS: 

At the present time, the City of Sioux Falls carries a group health insurance policy on its employees.  Under the arrangement as it exists at the present time, the employees pay the premiums to the City Finance Director, who in turn forwards them to the insurance carrier.  In return, the employees receive general coverage according to the terms of the insurance contract. This normal type of group insurance policy has a listed schedule of benefits, such as hospitalization, medical coverage, and so forth. 
    
Recently, mostly due to the tremendous rise in medical costs, the city has undertaken to re-evaluate its group policy on health insurance as it presently exists.  It has sought several alternative methods for aiding its employees, and has adopted a program which is called Excess Risk Insurance. 
    
According to the terms of the proposed Excess Risk Insurance plan, the city shall charge its employees a fee for the health insurance coverage.  The fees are placed into a fund with the Financial Director of the city.  From the fund the city pays for the initial medical expenses of each individual employee up to a certain limit, and also pays for the insurance premiums to the insurance carrier.  The insurance carrier and the city will negotiate an individual limit as well as an aggregate limit for all city employees, and anything in excess of this individual or aggregate limit will then be paid by the carrier.  The city, however, will be responsible for all medical costs and expenses up to these negotiated limits. 
    
As an example, the city and the insurance carrier would negotiate that all individual claims would be paid by the city up to a figure of $5,000.  In addition, all the total claims of all of the employees of the city for a single year would be aggregated and the city would be bound to pay all medical costs not to exceed $150,000.  The insurance carrier then would pay in each individual case all excess costs over $5,000, and in the case of all employees working for the city, any medical expenses or costs in excess of $150,000. 
    
In addition to this, the city and the insurance carrier can also enter into a negotiated figure as to the administrative services which need to be performed by the city in order to have adequate record keeping for the system of Excess Risk Insurance.  If the city desires to have its staff maintain the figures and the bookkeeping, then there would be no administrative costs or services paid to the insurance carrier.  However, if the insurance carrier is required to perform the administrative services, there would be a fee which would be attached to that.

Based on the above facts, you ask the following questions:

QUESTIONS: 

1.  Does the City of Sioux Falls have authority to self-insure all or a portion of the employees' benefits? 
    
2.  Does the City of Sioux Falls have the authority to enter into a contract(s) of aggregate excess risk insurance, individual excess risk insurance, or both? 
    
3.  Does the City of Sioux Falls have the authority to pay the premium for aggregate excess risk insurance, individual excess risk insurance, or both? 
    
4.  Is the issuance of individual and/or aggregate excess risk insurance policy(ies) and subsequent renewal thereof subject to a competitive bidding statute? 
    
5.  Does the City of Sioux Falls have the authority to fund a portion or all, as the case may be, of the employees' benefits? 
    
6.  Does the City of Sioux Falls have the authority to establish a payroll deduction facility, if the employees pay a portion or all of the costs of their benefits? 
    
7.  Is the execution of an administrative service contract with the insurance carrier subject to a competitive bidding statute? 
    
8.  If competitive bidding is needed, what are the requirements of such competitive bidding with respect to placing this contract out for bid in the future?

IN RE QUESTIONS NO. 1 THROUGH 3:

In response to your first question, it is my opinion that the answer is no.   SDCL 58-6-10 appears to me to prohibit any state and local government self- insurance plan, such as you have contemplated.  SDCL 58-6-10 provides: 
    
Except for instrumentalities of the United States government, no insurer, the voting control or ownership of which is held in whole or substantial part by any government or governmental agency, or which is operated for or by any such government or agency, shall by authorized to transact insurance in this state.  Membership in a mutual insurer, or subscribership in a reciprocal insurer, or ownership of stock of an insurer by the alien property custodian or similar official of the United States, or supervision of an insurer by public insurance supervisory authority shall not be deemed to be an ownership, control, or operation of the insurer for the purposes of this section.

It is my opinion that the above-described plan would involve the City of Sioux Falls in transacting insurance prohibited by SDCL 58-6-10.  SDCL 58-1-2(1) defines “insurance” as being a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies.  In the present factual situation it is my view that there would be present an insurance arrangement whereby the pooled city-administered fund would agree to pay certain health benefits to city employees upon certain determinable contingencies.  It further appears that SDCL 58-6-10 directly prevents state and local governments from engaging in insurance plans of this sort.  This may well have the effect of forcing such governmental units to purchase insurance with private insurance carriers at higher cost, but the provisions of the law cannot be ignored.

Apart from the above consideration, there also is the issue of whether or not a municipality has authority to engage in a self insurance plan such as that which you propose.

The rule is well established in South Dakota that units of local government have only those powers delegated to them by the State Legislature or constitution or necessarily implied from those specifically granted powers. City of Sioux Falls v. Kirby, 6 S.D. 62, 60 N.W 156 (1894); Robbins v. Rapid City, 71 S.D. 171, 23 N.W.2d 144 (1946); City of Watertown v. Meseberg, 82 S.D. 250, 144 N.W.2d 42 (1966).  I am not aware of any such authorization for a city to operate a plan such as that which you propose.

Clearly, the city can purchase insurance (SDCL 9-14-30 to 9-14-36), but I do not believe it is authorized to operate the self insurance mutual aid portion of the plan proposed.  If the city wishes to engage in this sort of plan, I believe that not only will the prohibitions in SDCL 58-6-10 have to be removed, but enabling legislation will also be necessary.

IN RE QUESTION NO. 4:

In regard to your fourth question concerning competitive bidding, I do not find any requirement in SDCL 5-18 which mandates competitive bids for the purchase of insurance.  Accordingly, the answer is no.  See 1953-54 AGR at 99.

IN RE QUESTIONS NO. 5 THROUGH 8:

In view of the above responses to your first four questions, I do not feel it is necessary at this time to further address your final four questions.

Respectfully submitted,

William J. Janklow
Attorney General

WJJ:DOC:jo