Chapter 176

2005 -- S 0774

Enacted 07/06/05

A N A C T

RELATING TO INSURANCE

Introduced By: Senator David E. Bates

Date Introduced: February 17, 2005

It is enacted by the General Assembly as follows:

     SECTION 1. Sections 27-41-13, 27-41-18 and 27-41-21 of the General Laws in Chapter

27-41 entitled "Health Maintenance Organizations" are hereby amended to read as follows:

27-41-13. Protection against insolvency. -- (a) Unless otherwise provided, each health

maintenance organization shall deposit with the general treasurer of the state of Rhode Island

securities having a market value at all times of at least the amount set forth in this section, which

are to be held for the benefit and protection of all the enrollees of the health maintenance

organization.

      (b) (1) The amount for an organization that is applying for initial licensure shall be the

greater of:

      (i) Five percent (5%) of its estimated expenditures for health care services for its first

year of operation;

      (ii) Twice its estimated average monthly uncovered expenditures for its first year of

operation; or

      (iii) One hundred thousand dollars ($100,000);

      (2) At the beginning of each succeeding year, unless not applicable, that organization

shall deposit with the general treasurer securities in an amount equal to four percent (4%) of its

estimated annual uncovered expenditures for that year.

      (c) (1) An organization that is licensed as a health maintenance organization on May 17,

1983, shall make a deposit equal to the larger of:

      (i) One percent (1%) of the preceding twelve (12) months of uncovered expenditures; or

      (ii) One hundred thousand dollars ($100,000), within six (6) months of May 17, 1983;

      (2) On the first day of the organization's first fiscal year beginning six (6) months or

more after May 17, 1983, the organization shall make an additional deposit equal to two percent

(2%) of its estimated annual uncovered expenditures. In the second fiscal year, if applicable, the

additional deposit shall be equal to three percent (3%) of its estimated annual uncovered

expenditures for that year, and in the third fiscal year and subsequent years, if applicable, the

additional deposit shall be equal to four percent (4%) of its estimated annual uncovered

expenditures for each year. Each year's estimate, after the first year of operation, shall reasonably

reflect the prior year's operating experience and delivery arrangements.

      (d) The director may waive any of the deposit requirements as set forth in subsections (b)

and (c) of this section whenever satisfied that the organization has sufficient net worth and an

adequate history of generating net income to assure its financial viability for the next year, or its

performance and obligations are guaranteed by an organization with sufficient net worth and an

adequate history of generating net income, or the assets of the organization or its contracts with

insurers, hospital or medical service corporations, governments, or other organizations are

sufficient to reasonably assure the performance of its obligations.

      (e) (1) When an organization has achieved a net worth not including land, buildings, and

equipment of at least one million dollars ($1,000,000), or has achieved a net worth including plan

related land, buildings, and equipment of at least five million dollars ($5,000,000), the annual

deposit requirement shall not apply;

      (2) The annual deposit requirement shall not apply to an organization if the total amount

of the deposit of securities is equal to twelve percent (12%) of the HMO's estimated annual

uncovered expenditures for the next calendar year, or the capital and surplus requirements for the

formation and admittance of an accident and health insurer in this state, whichever is less;

      (3) If the organization has a guaranteeing organization which has been in operation for at

least five (5) years and has a net worth not including land, buildings, and equipment of at least

one million dollars ($1,000,000), or which has been in operation for at least ten (10) years and has

a net worth including plan related land, buildings, and equipment of at least five million dollars

($5,000,000), the annual deposit requirement shall not apply; provided, that if the guaranteeing

organization is sponsoring more than the one organization, the net worth requirement shall be

increased by a multiple equal to the number of organizations. This requirement to maintain a

deposit in excess of the deposit required of an accident and health insurer shall not apply during

any time that the guaranteeing organization maintains a net worth at least equal to the capital and

surplus requirements for an accident and health insurer.

      (f) All income from the deposit with the general treasurer shall belong to the depositing

organization and shall be paid to it as it becomes available. A health maintenance organization

that has made a securities deposit with the general treasurer may, at its option, withdraw the

securities deposit or any part of the deposit, first having deposited, in lieu of it, a deposit of

securities of equal amount and value to that withdrawn.

      (g) In any year in which an annual deposit is not required of an organization, at its

request, the director shall lower its required deposit by one hundred thousand dollars ($100,000)

for each two hundred fifty thousand dollars ($250,000) of net worth not including land, buildings,

and equipment, if it, or a guaranteeing organization on its behalf and not for another organization,

has in excess of one million dollars ($1,000,000) or in excess of five million dollars ($5,000,000)

of net worth, including only health maintenance organization related land, buildings, and

equipment contributing to the delivery of health care services; provided, that the reductions never

bring the required deposit below one hundred thousand dollars ($100,000). If the net worth of an

organization or guaranteeing organization no longer supports a reduction of its required deposit,

the organization shall immediately redeposit one hundred thousand dollars ($100,000) for each

two hundred fifty thousand dollars ($250,000) of reduction, provided that its total deposit does

not exceed the maximum required under this section.

(h) (1) Before issuing any certificate of authority, the director shall require that the health

maintenance organization have an initial net worth of one million five hundred thousand dollars

($1,500,000) and shall after this maintain the minimum net worth required under subdivision (2)

of this subsection.

(2) Except as provided in subdivisions (3) and (4) of this subsection, every health

maintenance organization must:

(i) Maintain a minimum net worth equal to the greater of:

(A) One million dollars ($1,000,000); or

(B) Two percent (2%) of annual premium revenues as reported on the most recent annual

financial statement filed with the director on the first one hundred fifty million dollars

($150,000,000) of premium and one percent (1%) of annual premium of the premium in excess of

one hundred fifty million dollars ($150,000,000).

(ii) Maintain total adjusted capital at the amount of authorized control level risk based

capital as determined under the risk based capital formula in accordance with the managed care

organizations risk based capital instructions adopted by the National Association of Insurance

Commissioners.

(3) A health maintenance organization licensed before July 1, 1999 must maintain a

minimum net worth and total adjusted capital of:

(i) Seventy-five percent (75%) of the amount required by subdivision (2) of this

subsection by January 1, 2002;

(ii) One hundred percent (100%) of the amount required by subdivision (2) of this

subsection by January 1, 2003.

(4) The director may waive any of the net worth and/or total adjusted capital

requirements as set forth in this subsection whenever satisfied that the health maintenance

organization has sufficient net worth and/or total adjusted capital and an adequate history of

generating net income to assure its financial viability for the next year, or its performance and

obligations are guaranteed by an organization with sufficient net worth and an adequate history of

generating net income, or the assets of the health maintenance organization or its contracts with

insurers, hospital or medical service corporations, governments, or other organizations are

sufficient to reasonably assure the performance of its obligations; provided, that in no event shall

the net worth requirement be less than one hundred thousand dollars ($100,000).

(5) (i) In determining net worth, no debt is considered fully subordinated unless the

subordination clause is in a form acceptable to the director. Any interest obligation relating to the

repayment of any subordinated debt must be similarly subordinated.

(ii) The interest expenses relating to the repayment of any fully subordinated debt are

considered covered expenses.

(iii) Any debt incurred by a note meeting the requirements of this section, and acceptable

to the director, are not considered a liability and are recorded as equity.

(i) (h) Each health maintenance organization shall maintain written contracts or other

arrangements satisfactory to the director with providers of services, insurers, hospital or medical

service corporations, governments, or other organizations to satisfy the director that in the event

of insolvency enrollees will not be liable for charges for covered health services received before

the time of insolvency and those contracts and other arrangements shall assure that:

      (1) Benefits, including professional services, for all enrollees who are confined at the

time of insolvency in hospitals, skilled nursing facilities, intermediate care facilities, or home

health agencies receiving services covered by the health maintenance organization shall continue

to be paid without interruption until the earlier of discharge or ninety (90) days, or in the

alternative, for federally qualified health maintenance organizations which are licensed pursuant

to this chapter, confinement coverage shall be provided which meets federal standards for

federally qualified health maintenance organization plans;

      (2) All enrollees will be covered without interruption by the lesser of their current

coverage or a fully qualified program as defined in section 42-62-10, or its equivalent as

approved by the director, for a period of thirty (30) days following the insolvency, unless

enrollees are afforded an opportunity to enroll in another insurance plan as defined in subdivision

(3) of this subsection without waiting periods or exclusions or limitations based on health status;

and

      (3) Enrollees and enrolled groups will be afforded the opportunity within thirty (30) days

to purchase other health insurance equivalent to the lesser of their current coverage or a fully

qualified program as defined in section 42-62-10 on a group basis if they are enrolled in the

health maintenance organization on a group basis and on a direct pay basis otherwise, with full

credit for all prepaid premiums without waiting periods or exclusions or limitations based on

health status. In the event that a contract providing for coverage commensurate with the lesser of

current coverage or a fully qualified program as defined in section 42-62-10 is not reasonably

available, the health maintenance organization shall maintain the best insolvency conversion

insurance reasonably available in the market place. The director, upon application of the health

maintenance organization, must be satisfied before approving any alternate coverage that that

alternate coverage reasonably protects enrollees and is in the public interest. The term "insurance"

as used in this section means an insurance policy or a contract of insurance with an entity

acceptable to the director other than the health maintenance organization, which other entity is

available to cover the enrollees of the health maintenance organization in the event of its

insolvency. If insolvency conversion protection commensurate with the lesser of current coverage

or a fully qualified program as defined in section 42-62-10 becomes available, the lesser shall be

obtained by the health maintenance organization within a reasonable time.

(j) (i) All insurance contracts, and other arrangements to satisfy the conditions in this

section, shall be evidenced by copies of the insurance contracts and arrangements and by a

certificate from the insurers and other parties to the contracts or arrangements submitted to the

director, which certificate must contain provisions requiring the insurer, and all other parties to

the contracts, to notify the director and the health maintenance organization ninety (90) days in

advance of any revocation or cancellation or of any significant change in status giving the reason

of the action. All insurance contracts shall remain in full force and effect for at least ninety (90)

days following written notice by registered mail of cancellation by either party to the director.

Each health maintenance organization must present the director with evidence of premium

payment in a form and manner acceptable to the director for each premium payment for any

insurance arrangement certifying that all premiums are prepaid ninety (90) days in advance and

subsequently the health maintenance organization must follow up within a time period acceptable

to the director with other evidence of premium payment satisfactory to the director.

27-41-18. Rehabilitation, liquidation, or conservation of health maintenance

organization. -- (a) Any rehabilitation, liquidation, or conservation of a health maintenance

organization shall be deemed to be the rehabilitation, liquidation, or conservation of an insurance

company and shall be conducted under the supervision of the director of business regulation

pursuant to chapters 14.1, 14.2, and 14.3 of this title. The director of business regulation may

apply for an order from the superior court directing the director to rehabilitate, liquidate, or

conserve a health maintenance organization upon any one or more of the grounds included in

chapter 27-14.3 of title 27 or upon any one or more of the following grounds:

      (1) That the health maintenance organization is insolvent;

      (2) That the health maintenance organization is in an unsound financial condition;

      (3) That the health maintenance organization's business policies are unsound or

improper;

      (4) That the health maintenance organization's condition or management is such as to

render its further transaction of business hazardous to the public or its enrollees;

      (5) That the health maintenance organization's funds, net cash, or contingent assets are

deficient; or

      (6) That the health maintenance organization is conducting its business fraudulently or

refuses or neglects to comply with the laws of this state.

      (b) A claim by a health care provider who agrees not to assert that claim against any

enrollee of the health maintenance organization for an uncovered expenditure has priority over

other providers of services.

(c) For purposes of determining the priority of distribution of general assets, claims of

enrollees and enrollees' beneficiaries shall have the same priority as established in chapter 27-

14.3 of this title for policyholders and beneficiaries of insureds of insurance companies. If an

enrollee is liable to a provider for services provided pursuant to and covered by the health benefit

plan, that liability shall have the status of an enrollee claim for distribution of general assets. A

provider who is obligated by statute or agreement to hold enrollees harmless from liability for

services provided pursuant to and covered by a health benefit plan shall have a priority of

distribution of the general assets immediately following that of enrollees and enrollees'

beneficiaries as described herein, and immediately preceding the priority of distribution for

priority Class 7 described in section 27-14.3-46.

27-41-21. Penalties and enforcement. -- (a) The director of business regulation may, in

lieu of the suspension or revocation of a license under section 27-41-17, levy an administrative

penalty in an amount not less than five hundred dollars ($500) nor more than fifty thousand

dollars ($50,000), if reasonable notice in writing is given of the intent to levy the penalty and the

health maintenance organization has a reasonable time in which to remedy the defect in its

operations which gave rise to the penalty citation. The director of business regulation may

augment this penalty by an amount equal to the sum that the director calculates to be the damages

suffered by enrollees or other members of the public.

      (b) Any person who violates this chapter shall be guilty of a misdemeanor and may be

punished by a fine not to exceed five hundred dollars ($500) or by imprisonment for a period not

exceeding one year, or both.

      (c) (1) If the director of business regulation or the director of health shall for any reason

have cause to believe that any violation of this chapter has occurred or is threatened, the director

of business regulation or the director of health may give notice to the health maintenance

organization and to their representatives, or other persons who appear to be involved in the

suspected violation, to arrange a conference with the alleged violators or their authorized

representatives for the purpose of attempting to ascertain the facts relating to the suspected

violation, and, in the event it appears that any violation has occurred or is threatened, to arrive at

an adequate and effective means of correcting or preventing the violation;

      (2) Proceedings under this subsection shall be governed by chapter 35 of title 42.

      (d) (1) The director of business regulation may issue an order directing a health

maintenance organization or a representative of a health maintenance organization to cease and

desist from engaging in any act or practice in violation of the provisions of this chapter;

      (2) Within thirty (30) days after service of the order to cease and desist, the respondent

may request a hearing on the question of whether acts or practices in violation of this chapter

have occurred. Those hearings shall be conducted pursuant to sections 42-35-9 -- 42-35-13, and

judicial review shall be available as provided by sections 42-35-15 and 42-35-16.

      (e) In the case of any violation of the provisions of this chapter, if the director of

business regulation elects not to issue a cease and desist order, or in the event of noncompliance

with a cease and desist order issued pursuant to subsection (d) of this section, the director of

business regulation may institute a proceeding to obtain injunctive relief, or seeking other

appropriate relief, in the superior court for the county of Providence.

(f) Notwithstanding any other provisions of this act, if a health maintenance organization

fails to comply with the net worth, risk based capital or any other requirement of this title related

to the solvency of the health maintenance organization, the director is authorized to take

appropriate action to assure that the continued operation of the health maintenance organization

will not be hazardous to its enrollees or the public.

     SECTION 2. Chapter 27-41 of the General Laws entitled "Health Maintenance

Organizations" is hereby amended by adding thereto the following sections:

27-41-13.1. Initial net worth and capital requirements. – (a) Before the director issues

a certificate of authority in accordance with section 27-41-4 of this act, an applicant seeking to

establish or operate a health maintenance organization shall have the greater of:

(1) The amount of capital required for a health organization under chapter 27-4.7;

(2) An initial net worth of three million dollars ($3,000,000); or

(3) At the commissioner's discretion, an amount greater than required under subparagraph

(1) or (2), as indicated by a business plan and a projected risk-based capital calculation after the

first full year of operation based on the most current National Association of Insurance

Commissioners Health Annual Statements Bank.

27-41-13.2. Ongoing net worth and capital requirements. – (a) A health maintenance

organization shall maintain minimum net worth equal to the greater of two million five hundred

thousand dollars ($2,500,000) or the amount necessary to maintain capital required pursuant to

chapter 27-4.7.

(b) The amount in subsection 27-41-13.2(a) may be adjusted annually for inflation at the

director's discretion.

27-41-13.3. Waiver, surplus notes, and risk based capital requirements. – (a) The

director may waive any of the net worth and/or total adjusted capital requirements as set forth in

sections 27-41-13.1 or 27-41-13.2 whenever satisfied that the health maintenance organization

has sufficient net worth and/or total adjusted capital and an adequate history of generating net

income to assure its financial viability for the next year, or its performance and obligations are

guaranteed by an organization with sufficient net worth and an adequate history of generating net

income, or the assets of the health maintenance organization or its contracts with insurers,

hospital or medical service corporations, governments, or other organizations are sufficient to

reasonably assure the performance of its obligations; provided, however, that in no event shall the

net worth requirement be less than two million five hundred thousand dollars ($2,500,000).

(b) Surplus notes.

(1) In determining net worth, no debt is considered fully subordinated unless the

subordination clause is in a form acceptable to the director. Any interest obligation relating to the

repayment of any subordinated debt must be similarly subordinated.

(2) The interest expenses relating to the repayment of any fully subordinated debt are

considered covered expenses.

(3) Any debt incurred by a note meeting the requirements of this section, and otherwise

acceptable to the director, are not considered a liability and are recorded as equity.

(c) In addition to the net worth and capital requirements of sections 27-41-13.1 through

27-41-13.3, all requirements of chapter 4.7 of title 27 shall apply to health maintenance

organizations.

27-41-18.1. Summary orders and supervision. – (a) Whenever the director determines

that the financial condition of a health maintenance organization is such that its continued

operation must be hazardous to its enrollees, creditors, or the general public, or that it has violated

any provision of this act, the director may, after notice and hearing, order the health maintenance

organization to take action reasonably necessary to rectify the condition or violation, including,

but not limited to, one or more of the following:

(1) Reduce the total amount of present and potential liability for benefits by reinsurance

or other method acceptable to the director;

(2) Reduce the volume of new business being accepted;

(3) Reduce expenses by specified methods;

(4) Suspend or limit the writing of new business for a period of time;

(5) Increase the health maintenance organization's capital and surplus by contribution;

(6) Initiate administrative supervision proceedings against the health maintenance

organization in accordance with chapter 27-14.1; or

(7) Take other steps the director may deem appropriate under the circumstances.

(b) For purpose of this section, the violation by a health maintenance organization of any

law of this state to which the health maintenance organization is subject shall be deemed a

violation of this act.

(c) The director is authorized to adopt regulations to set uniform standards and criteria for

early warning that the continued operation of any health maintenance organization might be

hazardous to its enrollees, creditors, or the general public and to set standards for evaluating the

financial condition of any health maintenance organization.

(d) The remedies and measures available to the director under this section shall be in

addition to, and not in lieu of, the remedies and measures available to the director under the

provisions of chapters 14.1, 14.2 and 14.3 of title 27.

     SECTION 3. This act shall take effect upon passage.     

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LC01834

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