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SUBCHAPTER I. Financial Requirements

28 TAC §11.803

The Texas Department of Insurance proposes amendments to §11.803 concerning investments, loans, and other assets of health maintenance organizations (HMOs). The proposed amendments are necessary to update and clarify certain provisions as well as bring the section into harmony with proposed §7.18 which is published elsewhere in this issue of the Texas Register. The department proposes the adoption of general statutory accounting practices to be followed by all insurers and HMOs doing business in the State of Texas in §7.18 by adopting the Accounting Practices and Procedures Manual published by the National Association of Insurance Commissioners. The intent of the proposed amendments to §11.803 is to conform the accounting for investments, loans, and other assets of HMOs to proposed §7.18. The proposal inserts "at all times" in the initial sentence of §11.803 to clarify that an HMO must comply with the section at all times. The proposed amendment to paragraph (2)(E) reflects a change in a referenced section number as a result of an earlier amendment to the Chapter. The proposed amendment to paragraph (2)(H) changes "assets" to "worth" to provide consistency. The proposed amendment to paragraph (2)(J) changes "individuals" to "persons" to clarify that an HMO may make loans to business corporations as well as proprietorships and partnerships. Paragraph (2)(K) is proposed to be amended to delete "without limit" to eliminate the conflict with other language in the paragraph which establishes a limit. The proposed amendments to paragraphs (2)(F), (I), (L) and (M), (3)(C) and (D), and (4) and new paragraph (3)(F) are for consistency with proposed §7.18. The proposed amendment to paragraph 2(F) designates the Securities Valuation Office of the National Association of Insurance Commissioners for the rating of corporate obligations to conform to proposed §7.18. The proposed amendment to subparagraph (I) improves clarity and conforms the language to proposed §7.18. Proposed paragraph (2)(L) is amended to make the language consistent with §7.18. Paragraph (2)(M) is proposed to be amended by deleting "the value of which real estate and improvements shall be depreciated cost or market value, whichever is less." The investments in improved, income-producing real estate authorized under paragraph (2)(M) will be governed by proposed §7.18. The proposed amendment to paragraph (3)(C) provides for the transition of the authorized investments to be consistent with proposed §7.18. Paragraph (3)(D) is proposed to be amended to conform with proposed §7.18. A new paragraph (3)(F) is proposed concerning claim overpayments. Paragraph (4) is amended to replace "liquidating" with "fair."

The department will consider the proposed amendments to §11.803 in a public hearing under Docket No. 2465, scheduled for 10:00 a.m. on November 7, 2000 in Room 100 of the William P. Hobby Jr. State Office Building, 333 Guadalupe Street in Austin, Texas.

Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, has determined that for each year of the first five years the proposed amendments will be in effect, there will be no fiscal implications for state and local governments as a result of enforcing or administering the section as amended. There will be no measurable effect on local employment or the local economy as a result of the proposal.

Ms. Patterson has determined that for each year of the first five years the proposed amendments to the section are in effect, the public benefit anticipated as a result of the amended section will be the safe and sound investment of an HMO's funds. There is no probable economic cost to persons required to comply with the section as amended. There is no adverse economic effect on HMOs that are small or micro businesses as a result of the proposed amendments. The department finds it is not feasible to waive the proposed section for small or micro businesses since HMOs that are small or micro businesses should have the same investment authority as the largest HMOs in order to compete fairly with them.

To be considered, all comments must be in writing and received no later than 5:00 p.m. on November 13, 2000 by Lynda H. Nesenholtz, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments should be simultaneously submitted to Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104.

The amendments to the section are proposed 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.

Insurance Code Article 20A.22 is affected by this proposal.

§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) (No change.)

(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)-(D) (No change.)

(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 [ §11.1201]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 [ §11.1201]of this title [ (relating to Definitions)];

(iii)-(v) (No change.)

(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 [ has an investment grade rating according to Standard and Poors or Moody's];

(G) (No change.)

(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 [ assets] 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 [ if any part of the value of buildings is included in the value of the real estate: ]

[ (I) each such building is insured against loss] by a company authorized to do business in Texas or in the state in which the real estate is located ; and

[ (II) ] the insurance policy must be [ is] made payable to the HMO [ and is] 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 [ individuals] 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, [ without limit,] 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 [ by way of security for loans previously contracted or for moneys due]; 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 [ , the value of which real estate and improvements shall be depreciated cost or market value, whichever is less] ;

(N) (No change.)

(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)-(B) (No change.)

(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 [ equipment, vehicles, furniture, office equipment, and other labor saving devices used both directly and indirectly for the provision of medical services and the administration of the HMO, provided a detailed inventory is maintained with each item marked by an identifying number and a proof of cost is maintained, the items being required to be valued at depreciated costs, depreciation being based on a method permitted in accordance with generally accepted accounting principles];

(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) (No change.)

(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 [ liquidating] value.

(5)-(6) (No change.)



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