New Law Changes Massachusetts’ HMO Statute

On November 26, 2003, the governor of Massachusetts signed into law Chapter 141 of the Acts of 2003, which makes substantial changes to the Massachusetts HMO statute—Chapter 176G of the Massachusetts General Laws. The new law became effective January 1, 2004. The principal changes are summarized below. (The section numbers used below refer to sections of Chapter 176G which codify the new law.)

Under the new law, the annual financial report of an HMO must be maintained and prepared in accordance with statutory accounting practices and procedures and filed within 60 days of the close of the fiscal year. The previous deadline was 120 days. The report must include financial statements, using the latest forms approved by the National Association of Insurance Commissioners. Section 10 has also been amended to increase the interval between mandatory examinations by the Division of Insurance of the affairs of an HMO from two years to five years.

HMOs are no longer required to submit an annual license renewal application. Instead, HMOs must annually notify the Commissioner of the Division of Insurance (the Commissioner) of any material change to the information on file with the Division of Insurance.

This section clarifies and defines the Commissioner’s authority to place an HMO under administrative supervision, to institute rehabilitation proceedings or to liquidate the HMO.

This section establishes minimum net worth standards for HMOs. Under the new law, the initial adjusted net worth of an HMO must be at least $1.5 million. The law also establishes ongoing minimum net worth standards for HMOs, which are generally a function of the size and nature of an HMO’s obligations. These ongoing minimum net worth standards will be phased in through 2010. The Commissioner has the discretion to require an HMO to maintain capital and surplus levels in excess of the statutory minimums. For purposes of calculating adjusted net worth, Section 25 also clarifies the standards under which debt will be considered fully subordinated.

This section requires HMOs to maintain a deposit of not less than $1 million a trustee acceptable to the Commissioner "to protect the interests of policyholders, enrolled members, and the general public." M.G.L. c. 176G, § 26(a). The Commissioner has the discretion to adjust the size of the deposit. Half of the required amount must be on deposit by July 1, 2004, with the remainder on deposit by July 1, 2005. The deposit will be treated as an admitted asset of the HMO for purposes of determining the HMO’s net worth.

This section prohibits a person from "enter[ing] into an agreement to merge with or otherwise to acquire control of a domestic health maintenance organization" without the approval of the Commissioner. M.G.L. c. 176G, § 27(a). To secure the Commissioner’s approval, the party acquiring control of the HMO must submit a comprehensive statement concerning the proposed transaction. The information required to be in the statement is set forth in M.G.L. c. 176G, § 27(b). The new law also requires a public hearing, with discovery rights for "any … person whose interest may be affected" by the transaction, prior to the Commissioner approving or disapproving the transaction. M.G.L. c. 176G, § 27(d). The Commissioner may exempt a transaction from these requirements as: "(1) not having been made or entered into for the purpose, and not having the effect, of changing or influencing the control of a domestic health maintenance organization, or (2) otherwise not comprehended within the purposes of this section." M.G.L. c. 176G, § 27(e). This is in addition to the Attorney General’s process under M.G.L. c.180, §8A(d) for a nonprofit HMO selling or otherwise disposing of substantial assets or operations.

This section defines a "health maintenance organization holding company system" ("HMO System") as a system consisting of two or more affiliates,¹ at least one of which is an HMO. M.G.L. c. 176G, §1 (definition of "Health maintenance organization holding company system"). This section creates a regulatory framework that is analogous to the "insurance company holding system" provisions of Chapter 175, § 206.

HMOs that are part of an HMO System are required to register with the Commissioner and are subject to additional filing and reporting requirements. M.G.L. c. 176G, § 28(a). The Commissioner has the discretion to exempt an HMO from these requirements. M.G.L. c. 176G, § 28(i). The section also establishes substantive standards, such as the requirement for fair and reasonable terms, that govern all transactions within an HMO System to which an HMO is a party. M.G.L. c. 176G, § 28(l). The law also prohibits certain intra-HMO System transactions unless prior notice has been given to the Commissioner and the Commissioner does not disapprove the transaction. M.G.L. c. 176G, § 28(m). Transactions subject to this requirement include: (1) "sales, purchases, exchanges, loans or extensions of credit, guarantees, or investments [that] exceed 3 per cent of the [HMO’s] admitted assets or 25 per cent of [its] net worth;" (2) reinsurance agreements; (3) "all management agreements, services contracts" and certain "cost-sharing arrangements;" and (4) and any transaction the Commissioner may specify by regulation. M.G.L. c. 176G, § 28(m).