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SUBCHAPTER I. Financial Requirements 28 TAC §11.803

The Commissioner of Insurance adopts amendments to §11.803 concerning investments, loans, and other assets of health maintenance organizations (HMOs). The amendments are adopted without changes to the text as proposed in the October 13, 2000 issue of the Texas Register (25 TexReg 10292) and will not be republished.

The proposed amendments are necessary to update and clarify certain provisions as well as bring the section into harmony with the adoption of §7.18 which is published elsewhere in this issue of the Texas Register.

Section 7.18 adopts the Accounting Practices and Procedures Manual published by the National Association of Insurance Commissioners to provide general statutory accounting practices to be followed by all insurers and HMOs doing business in the State of Texas. The intent of the adopted amendments to §11.803 is to conform the accounting for investments, loans, and other assets of HMOs to accounting practices adopted in §7.18.

No comments were received.

The amendments to the section are adopted under the Insurance Code Article 20A.22 and §36.001. Article 20A.22(b) authorizes the commissioner of insurance to adopt rules to prescribe authorized investments for HMOs for all investments for which provision is not otherwise made in Insurance Code, Chapter 20A. Section 36.001 provides the commissioner of insurance may adopt rules to execute the duties and functions of the Texas Department of Insurance only as authorized by statute.

§11.803. Investments, Loans, and Other Assets. The admitted assets of domestic and foreign HMOs must at all times comply with the provisions of this section.

(1) Investment of minimum net worth. An HMO must maintain assets in an amount equivalent to its required minimum net worth in accordance with Insurance Code Article 20A.13A(d). Demand deposits, savings deposits or time deposits, of the type that are federally insured in solvent banks and savings and loan associations and branches thereof, which are organized under the laws of the United States of America or under the laws of any state of the United States of America may not exceed the greater of:

(A) the amount of federal deposit insurance coverage pertaining to such deposit; or

(B) 10% of the issuing financial institution's net worth, provided that such net worth is in excess of $25 million;

(2) Investments to support uncovered liabilities. An HMO may invest its funds in excess of minimum net worth in an amount at least equal to uncovered liabilities only in the following:

(A) any investments allowed in paragraph (1) of this section;

(B) direct general obligations of any state of the United States of America for the payment of money, or obligations for the payment of money, to the extent guaranteed or insured as to the payment of principal and interest by any state of the United States of America, provided:

(i) such state has the power to levy taxes for the prompt payment of the principal and interest of such obligations; and

(ii) such state shall not be in default in the payment of principal or interest on any of its direct, guaranteed, or insured general obligations at the date of such investment;

(C) bonds, interest-bearing warrants, or other obligations issued by authority of law by any county, city, town, school district, or other municipality or political subdivision which is now or hereafter may be construed or organized under the laws of any state in the United States of America and which is authorized to issue such bonds, warrants, or other obligations under the constitution and laws of the state in which it is situated, provided:

(i) legal provision has been made by a tax to meet said obligations or a special revenue or income to meet the principal and interest payments as they accrue upon such obligations has been appropriated, pledged, or otherwise provided; and

(ii) such county, city, town, school district, or other municipality or political subdivision shall not be in default in the payment of principal or interest on any of its obligations at the date of such investment;

(D) bonds, interest-bearing warrants, or other obligations issued by authority of law by any educational institution which is now or hereafter may be construed or organized under the laws of any state in the United States, and which is authorized to issue such bonds and warrants under the constitution and laws of the state in which it is situated, provided:

(i) legal provision has been made by a tax to meet said obligations or a special revenue or income to meet the principal and interest payments as they accrue upon such obligations shall have been appropriated, pledged, or otherwise provided; and

(ii) such educational institution shall not be in default in the payment of principal or interest on any of its obligations at the date of such investment;

(E) investments issued by insurers or HMOs subject to the following conditions:

(i) an HMO may not make an investment under this subparagraph in any other HMO or insurer unless such other HMO or insurer is duly licensed to do business in its domestic state and at the time of such investment is in compliance with the minimum capital and surplus requirements then applicable under the provisions of that state's statutes and regulations; provided, however, an HMO may make an investment pursuant to this paragraph in another HMO which has not yet received its certificate of authority to conduct the business of an HMO in its domestic state or which does not yet possess the minimum capital and surplus required by its domestic state if such investment will be sufficient to give the investing HMO at least 50% control in such other HMO, as the term "control" is defined in §11.2 of this title (relating to Definitions);

(ii) an HMO may not invest, except as provided in subparagraphs (F) and (G) of this paragraph, in any other HMO or insurer unless such investment with subsequent investments shall result within 180 days of the first investment in the investing HMO having control in such other HMO or insurer, as the term "control" is defined in §11.2 of this title;

(iii) in no event may an HMO invest more than 50% of its net worth in excess of minimum net worth in any one other HMO or insurer;

(iv) in no event may the total investments made by an HMO in all other HMOs or insurers pursuant to this subparagraph exceed 75% of the investing HMO's net worth in excess of minimum net worth;

(v) the restrictions of clauses (iii) and (iv) of this subparagraph shall not apply if the HMO is purchasing 100% of the stock of another HMO for the purpose of merger, which is anticipated to take place no later than three months from the purchase date, unless said period is extended by the commissioner, and the resulting assets of the surviving HMO meet the requirements set forth in this subchapter within three months after said merger, unless said period of time is extended by the commissioner;

(F) bonds, debentures, bills of exchange, commercial notes, or any other bills and obligations of any corporation incorporated under the laws of any state of the United States of America or of the United States of America, which issuing corporation is designated highest quality (NAIC designation 1) or high quality (NAIC designation 2) in the NAIC Valuation of Securities Manual;

(G) equity interests, including common stocks issued by any business entity created under the laws of the United States of America or of any state of the United States, provided:

(i) the business entity is solvent, with a net worth of at least $1 million;

(ii) if the business entity is a dividend paying business entity, no cumulative dividends are in arrears;

(iii) an HMO shall not be permitted to invest in a partnership, as a general partner, except through a wholly owned subsidiary;

(iv) the restrictions of clauses (i) and (ii) of this subparagraph shall not apply if the business entity of which the HMO wishes to purchase the equity interest is, or is to be, a contracted provider of services;

(H) shares of mutual funds doing business under the Investment Company Act of 1940 (15 U.S.C. §80a-1, et seq.) and shares in real estate investment trusts as defined in the Internal Revenue Code of 1986 (26 U.S.C. §856), provided that such mutual funds and real estate investment trusts be solvent with at least $1 million of net worth as of the date of its latest annual, or more recent, certified audited financial statement;

(I) mortgage loans by an HMO that are secured by valid first liens on improved real estate, provided that:

(i) there is a title insurance policy or attorney's opinion evidencing that the borrower owns the real estate;

(ii) there is an appraisal of the real estate and its improvements and the loan does not exceed 75% of such appraised value;

(iii) there is an executed note evidencing the loan;

(iv) there is a recorded deed of trust;

(v) the value of such improvements is adequately insured by a company authorized to do business in Texas or in the state in which the real estate is located; and the insurance policy must be made payable to the HMO in an amount equal to at least 50% of the value of such building, provided that such insurance coverage need not exceed the outstanding balance owed to the HMO when the outstanding balance falls below 50% of the value of such building;

(vi) the commissioner has the right to obtain an independent appraisal, at the HMO's expense, of real estate securing any loan;

(J) loans to persons secured by collateral, specified in paragraph (1) of this section and subparagraphs (A)-(D) of this paragraph, but the amount loaned may not exceed the value of the securities held as collateral;

(K) loans, whether secured or unsecured , that are not in default, to medical and other health care providers under contract with the HMO for the provision of health care services, but in no event shall the value of any such loan or loans made under this subparagraph exceed the maker's ability to repay the loan or loans; the maker's ability to repay the loan or loans shall be determined by allowing only assets that an HMO may hold to be considered toward determining any excess of assets over all liabilities of the maker;

(L) real estate acquired in satisfaction of debt; all such real property not qualifying under any other provisions of this section shall be sold and disposed of within five years after the HMO has acquired title to same unless the time for disposal is extended by the commissioner;

(M) investments in improved, income-producing real estate;

(N) additional investments which are not otherwise specified by this section, provided:

(i) the amount of any one such investment shall not exceed 10% of the net worth in excess of the minimum net worth of the HMO; and

(ii) the total amount of investments authorized by this paragraph shall not exceed the HMO's net worth in excess of its minimum net worth.

(3) Other assets. An HMO may have assets beyond those required to be held for its minimum net worth and uncovered liabilities which are either necessary for its operations or invested as permitted by this section. Assets an HMO may find necessary in its operations include, but are not limited to, the following:

(A) uncollected premiums or subscriptions with an adequate provision for uncollectable premiums or subscriptions;

(B) advances of capitation or other fees expected to be paid for the next month to medical and other health care service providers under contract with the HMO; provided that no termination of the contract may take place prior to the end of the period for which advances were paid;

(C) The following assets may be admitted provided a detailed inventory is maintained with each item marked by any identifying number and the proof of cost maintained:

(i) Furniture, labor-saving devices, machines and all other office equipment used in the administration of the HMO may be admitted as an asset and for such property acquired after December 31, 2000, amortized in full over a period not to exceed five years. All such property acquired prior to January 1, 2001, may be admitted and shall be amortized in full over a period not to exceed ten years.

(ii) Furniture, medical equipment and vehicles used in connection with the direct provision of health care services may be admitted as an asset and for such property acquired after December 31, 2000, amortized in full over a period not to exceed five years. All such property acquired prior to January 1, 2001, may be admitted and shall be amortized in full over a period not to exceed ten years.

(iii) Electronic machines, constituting a data processing system or systems and operating systems software used directly for the provision of medical services and the administration of the HMO may be admitted as an asset and for such property acquired after December 31, 2000, amortized as provided by the March 2000 version of the Accounting Practices and Procedures Manual. All such property acquired prior to January 1, 2001 may be admitted and shall be amortized in full over a period not to exceed ten years;

(D) inventories of necessary pharmaceutical and surgical supplies used directly in the treatment of medical conditions, it being the duty of the HMO to sufficiently prove the value of such inventories; and

(E) real estate and leasehold estates, including buildings and improvements, and leasehold improvements on rented space, for the accommodation of the HMO's current or expected business operations used in the provision or support of health care services, including space for rent to any health care provider under contract with the HMO which property shall be used in the provision of health care services to members of the HMO by that provider.

(F) Claims overpayments, with the right of offset supported by a contractual agreement, that are specifically identifiable payments, may be admitted to the extent a liability to that provider exists.

(4) Valuation. Except where elsewhere specifically provided, investments, loans and assets are valued in accordance with the Purposes and Procedures of the Securities Valuation Office of the National Association of Insurance Commissioners as it applies to entities not required to maintain an asset valuation reserve. If no such standard applies, then the valuation shall be their fair value.

(5) Evidence of ownership. A domestic HMO may own certificated and uncertificated securities, as evidenced by book entry of banks and securities brokerage limited as follows:

(A) banks must be members of the Federal Deposit Insurance Corporation.

(B) securities brokerage firms are incorporated securities brokers and dealers that:

(i) are subject to the regulations of the Securities and Exchange Commission of the United States of America;

(ii) are members of the Securities Investor Protection Corporation; and

(iii) have a tangible net worth of not less than $100 million.

(C) securities held by a bank or securities brokerage firm must be held in accordance with a custodial agreement entered into between the bank or securities brokerage firm and the HMO.

(D) Amounts invested in uncertificated securities through a securities brokerage firm may not exceed that amount of insurance protection provided by the Securities Investor Protection Corporation except that additional amounts may be invested whenever a securities brokerage firm has in effect additional coverage through an excess securities bond issued by an insurance company licensed in Texas and having a statutory net worth of at least 30 times the face amount of the excess securities bond, but in no event having a statutory net worth of less than $100 million according to its last filed annual statement, and then the limit on the amount that may be invested in uncertificated securities through one securities brokerage firm shall be extended to the total amount covered by the Securities Investor Protection Corporation and the excess securities bond, combined. The HMO shall be responsible for maintaining in its files a copy of the excess securities bond with a letter or copy of a letter furnished by its securities brokerage firm from the insurance company verifying the date through which premium is paid that the excess securities bond is in effect. The letter shall also reflect the excess bond number, face amount, company, and address of insuring company and the name and title of the individual signing the letter. Whenever the date is exceeded, the HMO shall be responsible for obtaining a similar letter updating the information. Certificated and uncertificated securities may be evidenced by transaction records such as receipts, invoices, and statements issued by banks and securities brokerage firms evidencing that the records of the bank or securities brokerage firm reflect the HMO's or its nominee's ownership of said securities. In addition, certificated securities shall be maintained in the possession of the HMO as its nominee, subject to obtaining any required approval under the Insurance Code Article 1.28, if located outside the State of Texas, and registered securities shall be in the name of the HMO or its nominee. An HMO may designate a depository where certificated securities are to be held, provided access to said securities is under the control of officers and employees of the HMO or its nominee as designated by the HMO's board of directors. Certificated securities purchased in transit from the vendor need not be in the HMO's or nominee's possession within a period of 45 days from the purchase date. Certificated securities in transit for the purpose of sale within 45 days of shipping date also are exempted from the requirement that they be in the possession of the HMO or its nominee.

(6) Sale of investment. Section 7.4 of this title (relating to Admissible Assets) shall apply to investments not specifically allowed under this subchapter. The commissioner may require any investment to be sold which would otherwise be authorized under the provisions of this section if the commissioner finds that such investment would cause the investing HMO to operate in a condition which is hazardous to its enrollees, creditors, or the general public.



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