2005 -- S 0774

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LC01834

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STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2005

____________

A N A C T

RELATING TO INSURANCE

     Introduced By: Senator David E. Bates

     Date Introduced: February 17, 2005

     Referred To: Senate Financial, Technology, Regulatory

It is enacted by the General Assembly as follows:

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

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

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

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

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

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

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organization.

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

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greater of:

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

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year of operation;

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

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operation; or

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

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

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

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estimated annual uncovered expenditures for that year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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sufficient to reasonably assure the performance of its obligations.

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

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

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

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deposit requirement shall not apply;

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

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

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

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

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

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

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

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

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

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

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

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

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

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surplus requirements for an accident and health insurer.

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

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

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

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

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securities of equal amount and value to that withdrawn.

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

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

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

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

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

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

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

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

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

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

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

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not exceed the maximum required under this section.

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

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

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

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of this subsection.

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

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maintenance organization must:

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

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

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

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

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

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

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

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

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

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Commissioners.

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

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minimum net worth and total adjusted capital of:

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

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subsection by January 1, 2002;

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

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subsection by January 1, 2003.

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

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

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

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

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

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

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

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

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

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

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

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repayment of any subordinated debt must be similarly subordinated.

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

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considered covered expenses.

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

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

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

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

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

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

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

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

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

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

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

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

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

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federally qualified health maintenance organization plans;

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

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

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

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

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

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and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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obtained by the health maintenance organization within a reasonable time.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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      (1) That the health maintenance organization is insolvent;

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

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

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improper;

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

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

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

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deficient; or

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

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

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

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

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other providers of services.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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suffered by enrollees or other members of the public.

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

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

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exceeding one year, or both.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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will not be hazardous to its enrollees or the public.

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

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

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

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

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

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

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

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

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

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

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Commissioners Health Annual Statements Bank.

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

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

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

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chapter 27-4.7.

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

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director's discretion.

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

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

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

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

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

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

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

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

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

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

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     (b) Surplus notes.

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

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

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repayment of any subordinated debt must be similarly subordinated.

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

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considered covered expenses.

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

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

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

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

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organizations.

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

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

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

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

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

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

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

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or other method acceptable to the director;

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

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     (3) Reduce expenses by specified methods;

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

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

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     (6) Initiate administrative supervision proceedings against the health maintenance

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organization in accordance with chapter 27-14.1; or

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

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

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

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violation of this act.

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

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

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

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financial condition of any health maintenance organization.

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

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

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

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     SECTION 3. This act shall take effect upon passage.

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LC01834

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N A C T

RELATING TO INSURANCE

***

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     This act would change the amount of net worth required of a health maintenance

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organization in order to establish certificate of authority. The act would also set out distribution of

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assets upon rehabilitative liquidation.

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     This act would take effect upon passage.

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LC01834

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