OFFICE OF MANAGED CARE
DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Financial Standards and Reporting
Joint Proposed Amendments: N.J.A.C. 8:38-11.1 and 11.6
Authorized by: Karen L. Suter, Commissioner, Department of Banking and Insurance and Christine Grant, Commissioner, Department of Health and Senior Services
Authority: N.J.S.A. 26:2J-1 et seq.
Proposal Number: PRN 2001 - 20
Submit written comments by February 15, 2001 to:
Fax Number: (609) 292-0896
The agencies’ proposal follows:
Effective June 21, 1999, the Department of Banking and Insurance ("DOBI") and the Department of Health and Senior Services ("DHSS") (collectively "the Departments") adopted amendments to N.J.A.C. 8:38-2.3 and 11 regarding financial standards and reporting requirements for health maintenance organizations ("HMO"), which provided for additional regulatory oversight of HMOs and strengthening of current reporting and financial requirements, thereby providing additional safeguards to help ensure that HMOs will not become in a hazardous financial condition and will be in a position to fulfill obligations to enrollees and providers with which they have contracted. Upon further review, the Departments have determined that it is appropriate to amend N.J.A.C. 8:38-11.6 to strengthen further and clarify the existing financial reporting requirements. The proposed amendments are summarized below.
N.J.A.C. 8:38-11.6(a) is proposed to be amended to require expressly that annual reports filed by HMOs be completed in accordance with the Accounting Practices and Procedures Manual adopted by the National Association of Insurance Commissioners ("NAIC"). Currently, the rules require that HMOs complete financial statements on a statutory basis, as prescribed by the NAIC annual statement instructions. However, the rules do not specify a method of accounting. The NAIC Accounting Practices and Procedures Manual, which is utilized by insurers in completing annual statements, and which also applies to HMOs, will provide uniform standards and methods of accounting for use by regulators and HMOs. This will ensure that financial reports are submitted in a uniform and consistent manner, which, in turn, will enable the Departments to evaluate an HMO’s financial condition in a consistent and uniform manner, consistent with the national standard adopted by the NAIC. For these same reasons, N.J.A.C. 8:38-11.6(d) also is proposed to be amended to require that quarterly reports be completed in accordance with the NAIC Accounting Practices and Procedures Manual.
In addition, N.J.A.C. 8:38-11.6(b) is proposed to be amended to specify the particular requirements regarding audited financial statements currently required to be submitted pursuant to that section. The proposed amendments set forth the detail that the audited financial report must contain, and also include the specific requirements for the independent public accountant preparing the report. These standards reflect the existing requirements regarding audited financial reports required to be filed by insurers pursuant to N.J.A.C. 11:2-26, which, in turn, are based on a model rule adopted by the NAIC. In addition, the rule is proposed to be amended to provide that statements filed by a financial guarantor for the HMO must be completed on a statutory accounting procedures basis, rather than a generally accepted accounting principles ("GAAP") basis. However, the rules continue to provide that where the financial guarantor is not an insurer or an HMO, annual audited financial statements shall be submitted on a GAAP basis.
Finally, N.J.A.C. 8:38-11.6(g) is proposed to be amended to delete the existing requirements regarding "admitted assets" and "non-admitted assets" because these standards are set forth in the NAIC Accounting Practices and Procedures Manual. Thus, inclusion of these requirements in these rules is unnecessary. In addition, the subsection is proposed to be amended to provide that periodic interim payments from Medicaid managed care organizations to financially distressed hospitals, as approved by the Division of Medical Assistance and Health Services of the Department of Human Services, shall be considered admitted assets of the HMO. The Departments believe that this provision is appropriate in that under the NAIC Accounting Practices and Procedures Manual, advances to providers would not be considered an admitted asset, unless such advance were to a related party. In addition, even where the advances are made to providers who are related parties, the advance would not be considered an admitted asset unless it were for capitation advances, and it has been advanced for less than 30 days. The Department of Human Services’ periodic interim payments allow certain financially distressed hospitals 60 days of advances. Accordingly, the Departments believe that it is appropriate to reflect this current practice in these rules, and consider these advances admitted assets, provided the amounts advanced are settled within 90 days. This determination reflects the time frame that outstanding payments may be considered admitted assets under the Accounting Practices and Procedures Manual in other contexts.
The Departments are also proposing to delete several requirements as no longer necessary. First, N.J.A.C. 8:38-11.6(d) is amended to provide that quarterly statements need only be provided for the first three calendar quarters. The final quarterly report is unnecessary and redundant with the annual report. The Departments also propose to delete N.J.A.C. 8:38-11.6(d)2, since this provision relates only to quarterly reports filed prior to 1996. The Departments are also proposing to delete references to sections in N.J.A.C. 8:38-11.6(d)3 and (f) to avoid potential future inconsistencies with such designation in the New Jersey specific report required to be filed pursuant to N.J.A.C. 8:38-11.6(c).
Finally, the Departments are proposing to amend to N.J.A.C. 8:38-11.1(d) to clarify that "Commissioner" refers to the Commissioner of Banking and Insurance.
The proposed amendments thus further clarify existing financial requirements, and will provide standards and guidance to HMOs and the Departments for purposes of completing and reviewing financial statements currently required to be filed, and eliminate information found no longer necessary or which is redundant.
The proposed amendments set forth standards with respect to existing financial reports required to be filed by HMOs to provide for uniformity, both in the data submitted and method of accounting the information submitted, and in the Departments’ review of such information. This, in turn, will further enhance the ability of the Departments to monitor and evaluate an HMOs’ financial condition in a consistent and uniform manner, thereby benefiting HMOs, enrollees, providers and the public generally. The proposed amendments also eliminate the filing of information that is redundant or no longer deemed to be necessary.
HMOs will be required to submit financial statements in accordance with the standards set forth in the proposed amendments. The Departments, however, do not believe that any undue costs should be imposed by these proposed amendments. The standards of accounting, for independent public accountants and audited financial statements, are based on requirements adopted by the NAIC for similar reports required to be filed by insurers, reflect the national standard for such reports, and, in fact, are required to be filed by HMOs in other states. Moreover, the proposed amendments eliminate the filing of certain information by HMOs found to be not necessary or redundant.
DHSS and DOBI will continue to incur costs of reviewing reports required to be filed pursuant to the rules.
Federal Standards Statement
Certain aspects of an HMO’s business are regulated by the Federal government, to the extent that the HMO elects to become Federally-qualified. However, these proposed amendments do not attempt to regulate any area of HMO operation currently regulated by the Federal government, and so are not inconsistent with or more stringent than any Federal statutes or rules. Thus, no Federal standards analysis is necessary.
The Department does not anticipate that any jobs will be generated or lost as a result of these proposed amendments. However, the need for additional certified public accountants or accounting firms meeting the qualifications under these proposed amendments may be increased.
The Departments invite commenters to submit any data or studies concerning the jobs impact of these proposed amendments together with their comments on other aspects of the proposal.
Agriculture Industry Impact
The Department does not expect any agriculture industry impact from these proposed amendments.
Regulatory Flexibility Analysis
The proposed amendments may apply to some HMOs that constitute "small businesses" as defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. To the extent the amendments apply to such small businesses, they will be HMOs authorized to transact business in this State. Such HMOs will be required to submit financial statements in accordance with the standards set forth in the proposed amendments. The proposed amendments do not provide different reporting requirements based on business size. First, the Department does not believe that any undue burden should be imposed by the proposed amendments. As set forth in the Economic Impact above, the standards of accounting, for independent public accountants and audited financial statements, are based on requirements adopted by the NAIC for similar reports required to be filed by insurers, reflect the national standard for such reports, and in fact are required to be filed by HMOs in other states. Moreover, the proposed amendments provide additional guidance with respect to the filing of reports currently required to be filed. These reports currently must be filed by HMOs regardless of business size. The purpose of these proposed changes is to ensure that all financial reports are submitted in a uniform and consistent manner to enable the Department to evaluate an HMO’s financial condition in a uniform manner, consistent with the national standard adopted by the NAIC. Providing any differentiation in compliance requirements essentially would thwart the purpose of the proposed amendments. For these reasons, no differentiation in compliance requirements is provided based on business size.
Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):
8:38-11.1 Minimum net worth
(a) - (c) (No change.)
(d) Every HMO shall submit a capital and surplus (minimum net worth) guarantee on a form established and available from the Department of Banking and Insurance, executed by an affiliate or parent of the HMO that is not in an unsafe or unsound financial condition, consistent with N.J.A.C. 11:2-27, Determination of Insurers in a Hazardous Financial Condition, incorporated herein by reference, except that an HMO that has no such parent or affiliate available to execute a capital and surplus guarantee shall demonstrate to the satisfaction of the Commissioner of Banking and Insurance that other additional financial resources are available to the HMO to maintain the HMO's minimum net worth requirement. All guarantors shall satisfy the following requirements:
1. - 2. (No change.)
3. All guarantors shall meet the following requirements:
i. - iii. (No change.)
iv. If the guarantor fails to meet any of the requirements in (d)3i through iii above, a letter of credit or other form of financial security acceptable to the Commissioner of Banking and Insurance shall be required.
(e) - (j) (No change.)
8:38-11.6 Financial reporting requirements
(a) Every HMO shall submit, no later than March 1, an annual report for the immediately preceding calendar year, completed [on a SAP basis,] as prescribed by the NAIC Annual Statement Instructions [manual including all supplemental schedules] for Health Maintenance Organizations, and completed on a SAP basis, in accordance with the NAIC Accounting Practices and Procedures Manual, effective January 1, 2001, incorporated herein by reference, as amended and supplemented (NAIC, 2301 McGee Street, Kansas City, MO 64108).
1. – 2. (No change.)
(b) Every HMO shall submit, no later than June 1, audited annual financial [statements] reports for the immediately preceding calendar year for the HMO and any company that is a financial guarantor for the HMO, completed on a [GAAP] SAP basis; except that any financial guarantor that is not an insurer or HMO shall submit audited annual financial reports as set forth herein on a GAAP basis.
[1. The annual GAAP balance sheet assets for the HMO (only) shall agree with Column 1 of Schedule F-1, Analysis of Assets of the HMOs annual SAP report (using the NAIC blank format).
2. Every difference between the annual SAP and GAAP reports shall be explained on a supplementary schedule submitted at the time the annual GAAP report is submitted.] 1. The annual audited financial report shall include:
i. A report of an independent certified public accountant;
ii. A balance sheet reporting admitted assets, liabilities, capital and surplus;
iii. A statement of operations;
iv. A statement of cash flows;
v. A statement of changes in capital and surplus; and
vi. Notes to financial statements in accordance with the NAIC Annual Statement Instructions.
[3.] 2. The annual [GAAP] report shall be certified by an independent public accountant. The Commissioner of Banking and Insurance shall not recognize any person or firm as a qualified independent public accountant unless they are in good standing with the American Institute of Certified Public Accountants, and in all states in which the accountant is licensed to practice. Except as otherwise provided in this paragraph, an independent certified public accountant shall be recognized as qualified as long as he or she conforms to the standards of his or her profession, as contained in the Code of Professional Ethics of the American Institute of Certified Public Accountants and Rules and Regulations, Code of Ethics and Rules of Professional Conduct of the New Jersey Board of Public Accountancy or similar code.
i. No partner or other person responsible for rendering a report may act in that capacity for more than seven consecutive years. Following any period of service such person shall be disqualified from acting in that or a similar capacity for the same company for a period of two years. An HMO may make application to the Commissioner of Banking and Insurance for relief from the above rotation requirement on the basis of unusual circumstances. The Commissioner of Banking and Insurance may consider the following factors in determining if the relief should be granted:
(1) The number of partners, expertise of the partners or the number of HMO clients in the currently registered firm; and
(2) The premium volume of the HMO;
ii. The Commissioner of Banking and Insurance shall not recognize as a qualified independent certified public accountant, nor accept any annual audited financial report, prepared in whole or in part by, any natural person who:
(1) Has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. §§ 1961 through 1968, or any dishonest conduct or practices under Federal or state law, or similar conduct under any foreign law;
(2) Has been found to have violated the insurance laws of this State with respect to any previous reports submitted under this subchapter; or
(3) Has demonstrated a pattern or practice of failing to detect or disclose material information in previous reports filed under the provisions of this subchapter.
iii. Whenever it appears that the certified public accountant or accounting firm retained by the HMO to conduct the annual audit is not a qualified independent certified public accountant as provided under these rules, the Department of Banking and Insurance shall notify the HMO that it does not recognize the certified public accountant or accounting firm as qualified, and the Department of Banking and Insurance shall not accept any audited financial report prepared by that accountant or accounting firm. However, upon receipt of such notice from the Department of Banking and Insurance, the HMO may, within 20 days, request an administrative review on the issue of the qualifications of the independent certified public accountant or accounting firm retained by the HMO.
[4.] 3. Any internal control letter prepared by the independent public accountant shall also be submitted with the annual [GAAP] report.
4. Each HMO required by this subchapter to file an annual audited financial report shall, within 60 days after becoming subject to such requirement, register with the Commissioner of Banking and Insurance in writing the name and address of the independent certified public accountant or accounting firm retained to conduct the annual audit. HMOs not retaining an independent certified public accountant on (the effective date of this amendment shall register the name and address of their retained certified public accountant not less than six months before the date when the audited financial report is to be filed.
5. The HMO shall also obtain a letter from the accountant, and file a copy with the Commissioner of Banking and Insurance, stating that the accountant is aware of the provisions of the HMO statutes, regulations, and administrative rules of this State that relate to accounting and financial matters. The accountant shall also certify that he or she will express his or her opinion on the financial statements in the terms of their conformity to the statutory accounting practices prescribed or otherwise permitted by the Department of Banking and Insurance and specify such exceptions as he or she may believe appropriate.
6. In addition to the requirements in (b)4 and 5 above, if the accountant for the immediately preceding filed audited financial report is dismissed or resigns, the HMO shall, within five business days, notify the Department of Banking and Insurance of this event. The HMO shall also furnish the Commissioner of Banking and Insurance with a separate letter within 10 business days of the above notification stating whether in the 24 months preceding such event there were any disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure; which disagreements, if not resolved to the satisfaction of the former accountant, would have caused him or her to make reference to the subject matter of the disagreement in connection with his or her opinion. The disagreements required to be reported in response to this paragraph include both those resolved to the former accountant’s satisfaction and those not resolved to the former accountant’s satisfaction. Disagreements contemplated by this paragraph are those that occur at the decision-making level (that is, between personnel of the HMO responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering its report). The HMO shall also request in writing that such former accountant furnish a letter addressed to the HMO stating whether the accountant agrees with the statements contained in the HMO’s letter and, if not, stating the reasons for which he or she does not agree; and the HMO shall furnish such responsive letter from the former accountant to the Commissioner of Banking and Insurance together with its own.
(c) Every HMO shall submit, no later than March 1 annually, the New Jersey--Specific Annual Supplement, available from either the Department of Banking and Insurance or the Department of Health and Senior Services, for the preceding calendar year[, completed in accordance with SAP].
(d) Every HMO shall submit quarterly reports no later than 45 days following the close of each of the first three calendar quarters (that is, May 15, August 15, and November 15 [and February 15], respectively), completed [in accordance with SAP,] as prescribed by the NAIC Annual Statement Instructions for Health Maintenance Organizations, and completed on a SAP basis, in accordance with the NAIC Accounting Practices and Procedures Manual.
1. HMOs shall submit the quarterly report [for the first quarter of calendar year 1996 (reported May 15, 1996) and thereafter] using the NAIC blank for HMOs in effect at the time of the quarter reported.
[2. Prior to the first quarterly report for calendar year 1996, HMOs shall submit quarterly SAP reports providing all of the information required in the NAIC blank, but may elect to use either the format acceptable to the Department of Banking and Insurance (the 1987 version of the NAIC blank) or the format for the NAIC blank in effect at the time of the quarter reported.]
[3.] 2. The quarterly reports shall also include [Section E(iv),] "Membership by County," [Section M,] and "Analysis of Minimum Net Worth Requirements" of the New Jersey-Specific Annual Supplement, and any other data requested of a particular HMO by the Commissioner or the Commissioner of Banking and Insurance, attached to the last page of the quarterly report.
Recodify existing 4. and 5. as 3. and 4. (No change in text.)
(e) (No change.)
(f) With respect to completion of the New Jersey--Specific Annual Supplement, if an HMO's actual net worth calculated in [Section M] "Analysis of Minimum Net Worth Requirements" of the New Jersey--Specific Annual Supplement for the reporting period is less than 125 percent of the required minimum net worth for the HMO as required pursuant to N.J.A.C. 8:38-11.1, the HMO shall include with its then-current report a detailed plan of action demonstrating how the minimum net worth shall be maintained, specifying marketing and financial projections.
1. – 3. (No change.)
(g) With respect to completing the annual and quarterly SAP reports, [the HMO shall segregate assets into categories of "Admitted Assets" and "Non-Admitted Assets."
1. Non-admitted assets shall not be recognized by the Department of Banking and Insurance, and, thus, shall be excluded by the HMO in determining the HMO's minimum statutory net worth, solvency, deposits and reserves.
2. The following are examples of non-admitted assets that shall be excluded: deposits in suspended depositories; notes receivable not fully secured by collateral; cash advanced to or in the hands of officers or agents; loans or personal security (endorsed or not) that are not secured by collateral; travel advances; net book value of equipment or furniture (except certain electronic data processing or medical equipment, or other similar items approved by the Department of Banking and Insurance); prepaid expenses; any checks that cannot be deposited (post-dated, insufficiency of funds, etc.); premiums and accounts receivable more than 90 days due; and investments with questionable statutory or unverifiable values.
3. Notwithstanding (g)2 above, leaseholds shall be considered as admitted assets for staff or group model HMOs.] periodic interim payments (PIP) from Medicaid managed care organizations to financially distressed hospitals as approved by the Division of Medical Assistance of the Department of Human Services shall be considered admitted assets, provided the amounts advanced are settled within 90 days.
(h) – (i) (No change.)
(j) Every HMO shall submit [two] three copies each of its reports to:
Chief Insurance Examiner
Office of Financial Examinations
N.J. Department of Banking and Insurance
[Life and Health Division
Managed Care Bureau]
20 West State Street
PO Box 325
Trenton, NJ 08625-0325; and two copies each to:
N.J. Department of Health and Senior Services
Office of Managed Care
John Fitch Plaza
PO Box 360
Trenton, NJ 08625-0360
(k) (No change.)