- Authority of the Commissioner
- Annual and Quarterly
NAIC Statement Review
- Examination Schedule
- Premium Tax Returns
- Material Modifications to Certificates
- T.C.A. § 56-32-126(b)
I. Authority of the Commissioner
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
56-32-112 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
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.
and Quarterly NAIC Statement Review
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.
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
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:
- 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
- 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
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
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. § 56-32-126(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. § 56-32-126(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
- Coordination with PLHSO or the HMO
- 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
- Asset reporting on the annual statement is analyzed
to determine if the assets are correctly reported as "admitted"
- Cash, cash equivalents, short and long term investments,
premiums receivables, health care receivables and other assets are verified
- 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
- 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.
The TennCare Division schedules routine on-site financial
and claims processing examinations.
V. Premium Tax Returns
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.
VI. Material Modifications to Certificates
of Authority (HMOs and PLHSOs)
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.
VII. T.C.A. § 56-32-126(b)
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. § 56-32-126(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.