FINANCIAL & OPERATIONAL OVERSIGHT MONITORING ACTIVITIES FOR HMOs/PLHSOs

I. Authority of the Commissioner of Insurance

The Commissioner may make an examination of the affairs of any health maintenance organization as often as is reasonably necessary for the protection of the interests of the people of this state. This authority of investigatory powers was extended in 1999 to include affiliates or affiliates of the parent companies of health maintenance organizations (HMOs) and Prepaid Limited Health Service Organizations (PLHSOs). The Commissioner must determine if the HMO/PLHSO meets minimum net worth and restricted deposit requirements set forth in the Tennessee Code Annotated for HMOs and PLHSOs.

Capital Requirements for Health Maintenance Organizations and Prepaid Limited Health Service Organizations

T.C.A.§ 56-32-212 and 56-51-136 define the minimum net worth and required deposits for HMOs and PLHSOs, respectively. Net worth means the excess of total admitted assets over total admitted liabilities. 

A. Minimum Net Worth Requirement:

• HMOs and PLHSOs must maintain a minimum net worth of one million five hundred thousand ($1,500,000) or an amount totaling 4% of the first one hundred fifty million dollars ($150,000,000) of annual premium revenue as reported on the most recent annual statement filed with the commissioner and one and one-half percent (1.5%) of the annual premium revenue in excess of one hundred fifty million dollars ($150,000,000). "Premium revenue" or "premiums," as used here includes, but is not limited to, any and all payments made by the state to any entity providing health care services pursuant to any federal waiver received by the state that waives any or all of the provisions of the federal Social Security Act (Title XIX), and regulations promulgated pursuant thereto, or pursuant to any other federal law as adopted by amendment to the required Title XIX state plan.

B. Restricted Deposit:

• HMOs and PLHSOs must maintain a deposit with the Commissioner or, at the discretion of the Commissioner, with any organization or trustee acceptable to the Commissioner through which a custodial or controlled account is utilized. The initial deposit is nine hundred thousand ($900,000) plus one hundred thousand dollars ($100,000) for each ten million dollars ($10,000,000) or fraction thereof of annual premium revenue in excess of twenty million dollars ($20,000,000) and fifty thousand ($50,000) for each ten million dollars ($10,000,000) or fraction thereof in excess of one hundred million dollars ($100,000,000). Contracts between the TennCare Bureau and the Health Maintenance Organizations have required a higher restricted deposit equal to the calculations as discussed in the Minimum Net Worth Requirements.

 

Each HMO/PLHSO is required to submit quarterly and annual financial statements as prescribed by the National Association of Insurance Commissioners (NAIC). The reports are reviewed to determine if the HMO/PLHSO is in compliance with its net worth requirement and statutory deposit requirements. Any discrepancies in net worth and statutory deposits are immediately communicated to the entity as well as the TennCare Bureau and corrective action is required.

The NAIC quarterly and annual statements are filed on a statutory basis of accounting. Examiners apply the principles, concepts, and objectives while reviewing the annual and quarterly statements filed by the HMOs/PLHSOs.

A. Statutory Accounting Principles (SAP)

In simplest terms, SAP refers to the accounting principles or practices prescribed or permitted by an insurer’s domiciliary state. Statutory accounting practices are interspersed in the insurance laws, regulations, and administrative rulings of each state, the Accounting Practices and Procedures manuals, the Annual Statement Instructions, the NAIC Financial Condition Examiners Handbook, the NAIC Purpose and Procedures of the Securities Valuation Office manual, and the NAIC committee, task force, and working group minutes. In addition, there are many statutory practices widely accepted by both insurers and regulators which have never been codified.

SAP is conservative in some respects but not unreasonably conservative over the span of economic cycles, or in recognition of the primary statutory responsibility to regulate for financial solvency. SAP attempts to determine at the financial statement date an insurer’s ability to satisfy its obligations to its policyholders and creditors.

B. Comparison of GAAP and SAP

The objectives of GAAP (generally accepted accounting principles) reporting differ from the objectives of SAP. GAAP is designed to meet the varying needs of the different users of financial statements. SAP is designed to address the concerns of regulators, who are the primary users of statutory financial statements. As a result, GAAP stresses measurement of emerging earnings of a business from period to period, (i.e., matching revenue to expenses), while SAP stresses measurement of ability to pay claims in the future. This difference is illustrated by the fact that statutory policy reserves are intentionally established on a conservative basis emphasizing the long-term nature of the liabilities. Under GAAP, the experience expected by each company, with provision for the risk of adverse deviation, is used to determine the reserves it will establish for its policies. GAAP reserves may be more or less than the statutory policy reserves.

C. Some other differences between SAP and GAAP include the following: back to top

• GAAP recognizes certain assets which, for statutory purposes, have been either not admitted or immediately expensed. Policy acquisition costs are expensed as incurred under SAP since the funds so expended are no longer available to pay future liabilities. Insurance company financial statements prepared in accordance with GAAP defer costs incurred in the acquisition of new business and amortize them over the premium recognition period.
• Deferred income taxes have, historically, not been recognized under SAP.
• The methods of accounting for certain aspects of reinsurance under GAAP vary from SAP, e.g. credit for reinsurance in unauthorized companies.

D. Purpose of Statement of Concepts for Statutory Accounting Principles

This document states the fundamental concepts on which statutory financial accounting and reporting standards are based. These concepts provide a framework to guide the National Association of Insurance Commissioners ("NAIC") in the continued development and maintenance of statutory accounting principles ("SAP" or "statutory basis") and, as such, these concepts and principles constitute an accounting basis for the preparation and issuance of statutory financial statements by insurance companies in the absence of state statues and/or regulations.

The NAIC and state insurance departments are primarily concerned with the statutory accounting principles that differ from GAAP reflective of the varying objectives of regulation. Recodification of areas where SAP and GAAP are parallel is an inefficient use of limited resources.

E. Objectives of Statutory Financial Reporting

The primary responsibility of each state insurance department is to regulate insurance companies in accordance with state laws with an emphasis on solvency for the protection of policyholders The ultimate objective of solvency regulation is to ensure that policyholder, contract holder and other legal obligations are met when they come due and that companies maintain capital and surplus at all times and in such forms as required by statute to provide adequate margin of safety. The cornerstone of solvency measurement is financial reporting. Therefore, the regulator’s ability to effectively determine relative financial condition using financial statements is of paramount importance to the protection of policyholders. An accounting model based on the concepts of conservatism, consistency and recognition is essential to useful statutory financial reporting.

Statutory reporting applies to all insurers authorized to do business in the United States and its territories and requires sufficient information to meet the statutory objectives. However, statutory reporting as contained in this guide is not intended to preempt state legislative and regulatory authority. The SAP financial statements include the balance sheet and related summary of operations, changes in capital and surplus, and cash flow statements. Management supplements the financial statements with sufficient disclosure (e.g. notes to financial statements, management’s discussion and analysis, and supplementary schedules and exhibits) to assist financial statement users in evaluating the information provided.

Financial reporting by insurance enterprises requires the use of substantial judgment and estimates by management. Such estimates may vary from the actual amounts for numerous reasons. To the extent that factors or events result in adverse variation form management’s accounting estimates, the ability to meet policyholder obligations may be lessened. In order to provide a margin of protection for policyholders, the concept of conservatism should be followed when developing estimates as well as establishing accounting principles for statutory reporting.

Assets having economic value other that those which can be used to fulfill policyholder obligations, or those assets which are unavailable due to encumbrances or other third party interest should not be recognized on the balance sheet and are, therefore, considered nonadmitted.

If an asset meets one of these criteria, the asset shall be reported as a nonadmitted asset and charged against surplus unless otherwise specifically addressed within the Codification. The asset shall be depreciated or amortized against net income as the estimated economic benefit expires. In accordance with the reporting entity’s capitalization policy, immaterial amounts of furniture, fixtures, equipment, or supplies, can be expensed when purchased.

F. Additional Procedures Applied by TDCI Examiners During Desk Review

TennCare revenues reported are reconciled with payment information from the TennCare Bureau. This division also reviews the statements for completeness, accuracy and reasonableness using the division’s established guidelines for desk reviews of the NAIC statements. Material discrepancies are communicated to the HMO/PLHSOs and the TennCare Bureau if necessary. The HMO/PLHSO is asked to resolve the discrepancies with either an explanation or with a revision to the statements.

In addition, this department has required that Physician Health Organizations (PHOs) that have entered into risk passing agreements with the TennCare HMOs submit quarterly and annual NAIC financial statements. The same review procedures are applied as with the HMO/PLHSOs with the exception of the net worth and deposit requirements; however, this division ensures that the appropriate PHO risk reserve is established by the HMO as required by statute.

This division has developed a market conduct examination program to focus on claims processing. The objective of the program is to allow examiners to conduct field work more quickly and to produce timely reports which identify claims processing deficiencies, inefficiencies or system weaknesses of the HMOs/PLHSOs. The examinations verify the HMO’s/PLHSO's compliance with the claims processing requirements prescribed in the TennCare Contract and T.C.A. § 56-32-226(b) (discussed below). The following is a brief outline of the objectives of the market conduct examination of the claims processing systems:

• Determine if the HMO\PLHSO is complying with the claims processing efficiency requirements of T.C.A. § 56-32-226(b).
• Test for adjudication accuracy to determine if claims selected were properly paid, denied, or rejected.
• Test copayments to determine whether out-of-pocket payments are accurately calculated.
• Test pended claims for claims are over 60 days old from date of receipt and determine if the amount of pended claims represents a potential unrecorded material liability.
• Determine if the HMO\PLHSO has the capability to process claims submitted electronically.
• Review preparation of claims payment accuracy reports.

In addition, this division has developed an examination program focusing on contractual and financial compliance. Contractual compliance issues include enrollee appeals, provider appeals, marketing, Behavioral Health coordination, subcontractors, subrogation, insolvency protection and insurance, and Title VI. Financial steps of the program examine balance sheet and income statement reporting for accuracy and admittance according to statutory accounting principles. The market conduct examination of claims processing is incorporated in the contractual and financial compliance program. Contractual issues addressed in the examination program include the following:

• Provider appeals
• Provider contracts
• Marketing
• Coordination with PLHSO or the HMO
• Subcontractors
• Subrogation
• Insolvency protection (reinsurance) and insurance
• Ownership and financial disclosure
• Title VI information
• Conflict of Interest
• Applicable laws, regulations and contractual requirements

Financial issues addressed in the examination program include the following:

• Annual/quarterly statements are reconciled to the trial balance and general ledger of the organization.
• The annual statement is reconciled to the audited financial statements.
• Asset reporting on the annual statement is analyzed to determine if the assets are correctly reported as "admitted" or "non-admitted".
• Cash, cash equivalents, short and long term investments, premiums receivables, health care receivables and other assets are verified and tested.
• The methods used to calculate the incurred but not reported (IBNR) claims are reviewed. The accuracy of IBNR methods is reviewed based on subsequent payments against established reserves.
• Premium revenues are reconciled to payments by TennCare.
• Capitation payments are selected and tested for accuracy.
• The allocation of health care expenses are examined for proper classification on the NAIC annual/quarterly statements.
• Each HMO/PLHSO is required to complete an internal control questionnaire prior to the examination fieldwork to assist the examiners in identifying potential internal control weaknesses in the company’s operations.
• Administrative expense allocations are verified. Management fees must be allocated to administrative categories such as compensation, marketing, etc., based on actual expenses of the management company.

IV. Examination Schedule - back to top

The TennCare Division schedules routine on-site financial and claims processing examinations.

All HMOs and PLHSOs are required to submit quarterly and annual premium tax returns. A copy of each return and estimated payment is forwarded to this division for review. The TennCare premiums reported on the returns are compared to payment information received from the TennCare Bureau. If the premiums do not agree with the information received from the TennCare Bureau, this division determines if adequate payment was made to avoid the assessment of penalties and interest. Any material discrepancies and the required corrective action are communicated in writing to the HMO/PLHSO.

The HMOs are required by statute and PLHSOs are required by contract to make certain submissions to this Department for review and approval prior to the company making material modifications to its operations. These material modifications include, but are not limited to, changes in service area, provider networks, subcontracts, provider contracts and member benefits. These submissions are reviewed to ensure, among other things, that they are complete and that the proposed modifications are acceptable under the law/contract (e.g., risk passing arrangements), members are not adversely affected, and required approvals have been obtained from the TennCare Bureau. This department has 30 days to disapprove the material modification requests or the material modifications are deemed approved. The determination of approval/disapproval of the material modification request is communicated in writing to the HMO/PLHSO. If the request is disapproved, the reasons for the disapproval are set forth in detail.

This legislation requires HMOs and PLHSOs to adjudicate claims promptly and to provide dispute resolution for denied or partially denied claims through an independent review process. All HMOs and PLHSOs were required to submit their independent review procedures to this department. This division reviews the HMOs’ and PLHSOs’ procedures on behalf of the Commissioner to determine whether the documentation submitted is satisfactory evidence that the independent review procedures were implemented on or after October 1, 1999, and that such procedures are in accordance with T.C.A. § 56-32-226(b).

The statute requires HMOs and PLHSOs to ensure that ninety percent (90%) of claims for payment for services delivered to a TennCare enrollee (for which no further written information or substantiation is required in order to make payment) are processed, and if appropriate paid within thirty (30) calendar days of the receipt of such claims. The health maintenance organization shall process, and if appropriate pay, within sixty (60) calendar days ninety-nine point five percent (99.5%) of all provider claims for services delivered to an enrollee in the TennCare program. If a provider agreement requires the health maintenance organization to pay a provider a capitated payment each month, such payment shall be made by the time specified in the contract between the provider and the health maintenance organization. If the contract between the provider and health maintenance organization doe not specify a payment schedule, payment shall be made by the tenth day of each calendar month. Disputed capitated provider payments are subject to independent review.

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