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Subchapter A. General Provisions

28 TAC §11.2

Subchapter I. Financial Requirements

28 TAC §11.809

The Texas Department of Insurance proposes amendments to §11.2 concerning definitions and §11.809 concerning financial requirements for health maintenance organizations (HMOs) and certain insurers. Beginning with the year 2002, certain insurers are eligible to file the Health Annual Statement adopted under §7.65 of this title (relating to Requirements for Filing the 2002 Quarterly and 2002 Annual Statements, Other Reporting Forms, and Electronic Data Filings with the NAIC). An HMO or insurer (health insurer) that files the Health Annual Statement must file the Health Risk-Based Capital Report (RBC Report). The existing section only applies to HMOs. The proposed amendments reflect this change. Insurance Code Articles 2.20, 3.02 and 20A.13C, authorize the commissioner of insurance to adopt rules requiring insurers and HMOs operating in this state to maintain a specified net worth based on the risks inherent in its method of operation. This is referred to as risk-based capital. Risk-based capital is a method of measuring the minimum amount of capital appropriate for a managed care organization such as a health insurer to support its overall business operations in consideration of its size and risk profile. A health insurer's risk-based capital is calculated by applying factors to various asset, premium and reserve items. The factor is higher for those items with greater underlying risk and lower for less risky items. The department uses the formula in the National Association of Insurance Commissioners Managed Care Organization Risk-Based Capital Report (RBC Report) to measure the adequacy of an HMO's capital by comparing its total adjusted capital to its risk-based capital determined by the RBC Report. The department proposes to amend §11.2 to recognize a change in the name of the RBC Report. The proposed amendment to §11.809 updates the adoption by reference of the RBC Report and deletes the phase-in period since it has expired. The proposed amendment will recognize the change in the name of the RBC Report to National Association of Insurance Commissioners Health Risk-Based Capital Report in addition to proposing the adoption of the 2002 version of the RBC Report. Note that the section uses the term "capital" instead of the term "net worth" which is used in the statute. In accounting parlance the words are synonymous, so the section uses the term "capital" to be consistent with the terminology in the report. A copy of the RBC Report is available for inspection in the Financial Division of the Texas Department of Insurance, William P. Hobby Jr. State Office Building, 333 Guadalupe, Austin, Texas.

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

Ms. Patterson also has determined that for the each year of the first five years the amended section is in effect, the public benefit anticipated as a result of the adoption of the proposal will be greater protection to the public from the risk of insolvency of a health insurer. The risk-based capital formula provides the department an important tool in evaluating the financial condition of a health insurer. The section is required by Insurance Code Articles 2.20, 3.02 and 20A.13C; therefore, the cost of compliance is attributable to statute as well as the section. Health insurers operating in Texas that meet the risk-based capital requirements will only incur the cost of completing the RBC Report proposed to be adopted by this section. Those health insurers that do not have total adjusted capital equal to or greater than the risk-based capital which will be required by this section will also incur the cost of increasing their capital to the amount required by the proposed section. The cost of completion of the RBC Report will vary from health insurer to health insurer. The cost of acquiring the risk-based capital software and report will be approximately $350. The labor cost to transfer the information from a health insurer records to the report will vary depending on the size of the health insurer and its investments. Assuming a health insurer's records are maintained on a computer, the department estimates a health insurer can transfer the information from its records to the risk-based formula in 8-16 hours. If a health insurer uses special software to prepare its annual report, and if that software can be linked to the risk-based capital formula, the department estimates that the information can be transferred and the formula completed in 4 hours or less. The department's estimations are based on discussions with industry representatives who are responsible for maintaining accounting records. Based on the department's experience, a health insurer would utilize an employee who is familiar with the accounting records of the health insurer and accounting practices in general and who is compensated from $17-$30 an hour. On the basis of cost per hour of labor, there is no anticipated difference in the cost of completing the formula between micro, small and large health insurers. After the completion of the formula, it should be reviewed by an officer of the health insurer responsible for the preparation of the financial reports of the health insurer. The department estimates that this review should take approximately four hours. In small health insurers such officers are compensated at approximately $40 per hour, while such officers at large health insurers are compensated at approximately $100 per hour. Therefore, based on the department's experience, the cost of compliance for small health insurers would be less than the cost of compliance for large health insurers in reviewing the risk-based capital formula. The department does not believe it is legal or feasible to waive the requirements of the section for small or micro-businesses since the purpose of the statute and the section is to assure financial solvency of all health insurers in order to protect enrollees.

Comments on the proposal must be received in writing no later than 5:00 p.m. on December 9, 2002. All comments should be submitted in writing to Gene C. Jarmon, Acting 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 submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104.

The amendments are proposed under Insurance Code Articles 2.20, 3.02, 20A.13C, 20A.22, 21.21 and Insurance Code, §36.001. Articles 2.20 and 3.02 authorize the commissioner to adopt rules to require an insurer to maintain capital and surplus levels in excess of statutory levels to assure financial solvency of insurers. Article 20A.13C authorizes the commissioner to adopt rules to establish guidelines requiring an HMO to maintain a specified net worth based on the risks inherent in its method of operation. Article 20A.22 authorizes the commissioner to adopt reasonable regulations necessary and proper to carry out Insurance Code, Chapter 20A. Article 21.21 authorizes the commissioner to adopt rules concerning unfair methods of competition. Section 36.001(a) (formerly Article 1.03A) provides the commissioner with the authority to adopt rules for the conduct and execution of the powers and duties of the department only as authorized by a statute.

The following provisions of the Insurance Code are affected by this section: §36.004, (formerly Article 1.27), Articles 2,20, 3.02, 20A.13C and 20A.22.

§11.2. Definitions.

(a) (No change.)

(b) The following words and terms, when used in this chapter, shall have the following meanings unless the context clearly indicates otherwise.

(1) - (52) (No change.)

(53) RBC Report - Health Risk-Based Capital Report including Overview and Instructions for Companies published by the NAIC and adopted by reference in §11.809 of this title (relating to Risk-Based Capital for HMOs and Insurers Filing the NAIC Health Blank)

(54)-(57) (No change.)

§11.809. Risk-Based Capital for HMOs and Insurers Filing the NAIC Health Blank.

(a) Health Maintenance Organizations [ Scope and Purpose]. This section applies to all domestic and foreign HMOs subject to the provisions of the Insurance Code, Chapter 20A. [ The purpose of Insurance Code, Article 20A.13C and this section is to require a minimum level of capital appropriate to the underwriting, financial, investment risks and other business and relevant risks assumed by an HMO.]

(b) Health insurers. Insurers that file the NAIC Health Blank with the department under §7.65 of this title (relating to Requirements for Filing the 2002 Quarterly and 2002 Annual Statements, Other Reporting Forms, and Electronic Data Filings with the NAIC) are required to file the RBC Report adopted by reference in this section. [ Phase In of Risk-Based Capital. The risk-based capital requirements of this section are phased in as follows:]

[ (1) As of 12-31-99, HMOs are only required to file the RBC Report for informational purposes;]

[ (2) As of 12-31-2000, HMOs must have 50% of the authorized control level risk based capital in the RBC Report; and]

[ (3) As of 12-31-2001, and thereafter HMOs must have 70% of the authorized control level risk based capital in the RBC Report.]

(c) Adoption of RBC formula by reference and filing requirements. The commissioner adopts by reference the 2002 NAIC Health Risk-Based Capital Report including Overview and Instructions for Companies [ 1999 NAIC Managed Care Organizations Risk-Based Capital Report including Overview and Instructions for Companies] which includes the RBC formula and the required diskettes. All HMOs and health insurers subject to this section are required to file the diskettes with the NAIC in accordance with and by the due date specified in the RBC instructions. The printed RBC Report should be available to the department on request.

(d)- (g) (No change.)



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