Chapter 567

2004 -- S 3102 SUBSTITUTE A AS AMENDED

Enacted 07/09/04

A N A C T

RELATING TO INSURANCE -- NONPROFIT HOSPITAL SERVICE CORPORATIONS --

THE RI HEALTHCARE REFORM ACT OF 2004 -- NONPROFIT INSURERS' MISSION

AND GOVERNANCE

Introduced By: Senators Roberts, Perry, Connors, Tassoni, and Gibbs

Date Introduced: May 11, 2004

It is enacted by the General Assembly as follows:

SECTION 1. Section 27-19-3 of the General Laws in Chapter 27-19 entitled "Nonprofit

Hospital Service Corporations" is hereby repealed.

~~27-19-3. Qualifications of directors. --~~ ~~(a) A majority of the directors of each nonprofit~~

~~hospital service corporation organized prior to January 1, 1964, must at all times be composed of~~

~~persons no one of whom is a hospital trustee, director, administrator, or employee.~~

~~(b) The directors of any nonprofit hospital service corporation formed after January 1,~~

~~1964 shall consist of an equal number of representatives of the public, trustees, or directors of~~

~~eligible hospitals and subscribers.~~

SECTION 2. Title 27 of the General Laws entitled "Insurance" is hereby amended by

adding thereto the following chapter:

CHAPTER 19.2

NONPROFIT HOSPITAL AND MEDICAL SERVICE CORPORATIONS

27-19.2-1. Legislative findings. -- The general assembly finds and declares that it is in

the best interests of the residents of Rhode Island: (1) to strengthen and reform the governance

structure of nonprofit hospital service and/or medical service corporations; (2) to ensure a diverse,

independent and publicly accountable board of directors; (3) to prohibit certain activities which

may allow self-interest to compromise undivided loyalty to the public interest mission for which

such corporations were established; and (4) to require adoption of principles and procedures to

keep such corporations aligned with their public interest mission.

27-19.2-2. Definitions. – (a) "Affiliate" means an entity controlled by, controlling, or in

common control with, a nonprofit hospital service corporation.

(b) "Health insurer" means an insurer defined in Rhode Island general laws section 27-

20.6-1(1).

27-19.2-3. Mission statement contents. -- (a) All nonprofit hospital and/or medical

service corporations and any affiliate or subsidiary of such corporation shall on or before

December 31, 2004 have a declared and published mission statement identifying the purposes of

said nonprofit as including:

(1) to provide affordable and accessible health insurance to insureds, including those

persons insured by an affiliate or subsidiary of said plan;

(2) to assist and support public and private health care initiatives for individuals without

health care insurance;

(3) to promote integration, efficiency and coherence of a statewide health care system

that meets the needs of all Rhode Island residents;

(4) to contribute through its operations, procedures and investments to the improvement

of medical and prevention services delivered in Rhode Island; and

(5) to provide affordable and accessible health insurance to a comprehensive range of

consumers, including business owners, employees and unemployed individuals.

27-19.2-4. Board of directors. – Duties and functions of the board of directors. -- (a)

The board of a nonprofit hospital and/or medical service corporation and its individual members

are fiduciaries and shall act at all times:

(1) in utmost good faith;

(2) in a manner reasonably believed to be in the best interest of fulfilling the corporation's

mission or the mission of affiliates or subsidiaries;

(3) in a manner reflecting undivided loyalty to the furtherance of the corporation’s

charitable mission;

(4) at the highest standard of fiduciary care and prudence; and

(5) in accordance with a conflict of interest policy adopted by the board of directors that

will be consistent with guidelines recommended and published by the U.S. Internal Revenue

Service for nonprofit entities.

(b) The proper and principal functions of the board shall include:

(1) ensuring that the corporation effectively carries out the charitable mission for which it

was incorporated under section 27-19-2 of this title;

(2) selecting corporate management and evaluating its performance in light of the

corporation’s charitable purpose;

(3) recognizing that in the event of a conversion as defined in section 27-66-4(3), the

reserves and assets with which they are entrusted are charitable assets, and treating them with

according stewardship;

(4) establishing a system of board governance including an annual evaluation of board

performance measured against the charitable purpose of the corporation ; and

(5) holding an annual public meeting with proper notice open to providers and

subscribers at which comments shall be heard from the floor.

27-19.2-5. Composition of the board of directors. -- (a) (1) Notwithstanding any public

law, rule or regulation to the contrary, six (6) positions on the board of directors of a nonprofit

hospital and/or medical service corporation, shall be filled by public appointment for a maximum

of three (3) three (3) year terms. Public appointment of two (2) of the directors shall be made by

the Governor, two (2) shall be made by the Speaker of the House, and two (2) shall be made by

the President of the Senate. Neither government employees nor elected officials shall serve as

public members of the board of directors. Each appointing authority shall make one such

appointment on or after July 1, 2004, and the remaining will be made on or after July 1, 2005.

Once appointed, public members may only be removed in accordance with the bylaws of the

nonprofit hospital and/or medical service corporation. When sufficient public appointments have

been made, vacancies shall thereafter be filled for a maximum of three (3) three (3) year terms as

the board of directors may determine, and consistent with subsection (2) hereof, except that seats

filled by public appointment pursuant to this subsection shall always remain subject to such

public appointment, upon the resignation, removal, incapacity or retirement of the incumbent

public appointee. Public appointees shall not constitute a majority of the board.

(2) Future vacancies not filled by public appointment pursuant to subsection (1) hereof

shall be filled by an open and public process of recruitment and appointment, to be determined by

the board and within its discretion, but to include public solicitation of candidates.

(3) At the end of their term, directors shall continue to serve until their successors are

appointed and qualified. Nothing herein prevents the reappointment of a board member presently

serving.

(4) Public appointees may not:

(i) be a licensee of or otherwise be subject to regulation by the department of health; (ii)

be employed by or have a financial interest in: (A) a nonprofit hospital and/or medical service

plan or its affiliates or subsidiaries; or (B) a person regulated under this article; or (iii) within

three (3) years before appointment, have been employed by, had a financial interest in or have

received compensation from: (A) a nonprofit hospital and/or medical service plan or its affiliates

or subsidiaries; or (B) a person regulated under this article.

(b) An officer or employee of a nonprofit hospital and/or medical service plan or any of

its affiliates or subsidiaries may not be appointed or elected to the board.

members

27-19.2-6. Actions requiring supermajority board approval. -- (a) Neither a nonprofit

hospital service corporation, nor an affiliate (as defined in Rhode Island general laws section 42-

14.5-1) that is an insurer (as defined in Rhode Island general laws section 27-20.6-1(1)), may take

any of the following actions without the prior approval of at least two-thirds percent (66.67%) of

the corporations entire board of directors: (1) authorize a conversion as defined in section 27-66-

4(3); (2) withdraw a health insurance product previously offered in the individual market; or (3)

result in the withdrawal from a geographic region.

27-19.2-7. Compensation of board members ~~forbidden~~. -- (a) Pending appointment

and confirmation of the health insurance commissioner, no compensation shall be paid to the

board members by a nonprofit hospital or medical services corporation, excluding reimbursement

for ordinary and necessary expenses. After such confirmation, the board must file application

with the health insurance commissioner for approval of any proposed board compensation.

Childcare, parking, transportation and other reasonable expenses for board members attending

meetings shall be compensable.

(b) On or before March 1, 2005, and annually thereafter, a corporation subject to this

paragraph shall report to the health insurance commissioner the ordinary and necessary expenses

paid to each board member in the preceding calendar year.

27-19.2-8. Compensation of officers and executives. -- (a) There shall be a standing

compensation committee of the board that shall develop proposed guidelines, for approval by the

board, for compensation, including salary, bonuses, perquisites, and severance agreements, of all

officers and executives that is reasonable.

(b) On or before December 31, 2004, the board shall file its proposed guidelines for

executive compensation with the health insurance commissioner.

arrange for the extension of credit or renew an extension of credit in the form of a personal loan

to or for any director or officer, nor shall such corporation allow for or arrange any payments or

obligations in violation of section 27-66-7.1 of the general laws.

27-19.2-9. Code of ethics. – Each nonprofit hospital and/or medical services corporation

shall adopt a code of ethics for its officers and directors which shall include, but is not limited to:

a policy protecting the corporation and the public from conflicts of interest and abuse of position;

a policy protecting the confidentiality of individuals' private information the corporation may

obtain; procedures for contracts with government agencies; policies on political contributions by

board members (with particular attention to offices involved in the appointment process or

regulatory oversight); policies for board education, including education in governance and

fiduciary duty; and whistleblower protection and document retention policies. Said code of ethics

policy shall be filed with the attorney general and the health insurance commissioner. No policy

shall be deemed adequate without providing for appropriate distribution, compliance and

enforcement of the policy.

27-19.2-10. Nonprofit hospital and/or medical service corporations:

Responsibilities. -- (a) In accordance with their nonprofit hospital and/or medical service

corporation mission, nonprofit insurers shall be required to:

(1) Offer products in the small group;

(2) Offer products in the individual market, with at least one 30-day open enrollment

period every twelve (12) months;

(3) Employ pricing strategies that enhance the affordability of health care coverage; and

(4) Protect the financial condition of the nonprofit hospital and/or medical service plan.

27-19.2-11. Application to subsidiary entities. -- The terms of this act shall apply to

any insurer or health maintenance organization, or other entity involved in delivering health

insurance, whether or not organized as a nonprofit corporation, that is owned or controlled by a

nonprofit hospital and/or medical service plan, unless specifically exempted by law.

SECTION 3. Chapter 27-66 of the General Laws entitled "The Health Insurance

Conversions Act" is hereby amended by adding thereto the following section:

27-66-7.1. Certain financial incentives prohibited. -- It being generally contrary to the

public interest to lose local control of a nonprofit health insurer providing the majority of private

health insurance coverage within the state, and such payments as are herein forbidden providing

inducements to do so for personal gain, no officer, director or senior management employee of a

nonprofit hospital and/or medical service corporation or of any subsidiary of such corporation

shall solicit, accept, receive or maintain claim of right to any financial incentive, including any

pecuniary reward, based in whole or in part on the contingency of, or as a result of, the

completion of a conversion. For purposes of this section, pecuniary award shall include, but is

not limited to, bonuses, cash payouts, deferred payments, stock options and enhanced retirement

packages. Nothing in this section shall be deemed to prohibit the employment of such an officer,

director or employee by a successor corporation or entity following the completion of a

conversion, nor to prohibit reasonable severance payments where no conversion is involved.

SECTION 4. This act shall take effect upon passage.

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LC03368/SUB A/2

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