Section 25: Net worth of health maintenance organization
Section 25. (a) The commissioner shall require upon issuance of an initial license under this chapter that a health maintenance organization shall have an initial adjusted net worth of $1,500,000.
(b) Except as provided by subsection (c) or (d), the commissioner shall require that the adjusted net worth of a health maintenance organization be maintained subsequent to initial licensure in an amount equal to the greater of the following amounts:
(1) $1,000,000; or
(2) 2 per cent of annual premium revenues as reported on the most recent annual financial statement filed with the commissioner on the first $150,000,000 of premium and 1 per cent of annual premium on the premium in excess of $150,000,000; or
(3) An amount equal to the sum of 3 months uncovered health care expenditures as reported on the most recent financial statement filed with the commissioner; or
(4) An amount equal to the sum of:
(i) 8 per cent of annual health care expenditures except those paid on a capitated basis or managed hospital payment basis as reported on the most recent financial statement filed with the commissioner; and
(ii) 4 per cent of annual hospital expenditures paid on a managed hospital payment basis as reported on the most recent financial statement filed with the commissioner.
(c) A health maintenance organization licensed before January 1, 2004 must maintain a minimum adjusted net worth of:
(1) 10 per cent of the amount required by subsection (b) by December 31, 2004;
(2) 25 per cent of the amount required by subsection (b) by December 31, 2005;
(3) 40 per cent of the amount required by subsection (b) by December 31, 2006;
(4) 55 per cent of the amount required by subsection (b) by December 31, 2007;
(5) 70 per cent of the amount required by subsection (b) by December 31, 2008;
(6) 85 per cent of the amount required by subsection (b) by December 31, 2009; and
(7) 100 per cent of the amount required by subsection (b) by December 31, 2010.
(d) In determining adjusted net worth, no debt shall be considered fully subordinated unless the subordination clause is in a form acceptable to the commissioner, which shall at a minimum meet the following requirements:
(1) The effective date, amount, interest and parties involved in such debt are clearly set forth;
(2) The principal sum and any interest accrued thereon are subject to and subordinate to all other liabilities of the health maintenance organization, and upon dissolution or liquidation, no payment of any kind shall be made until all other liabilities of the health maintenance organization have been paid;
(3) The instrument states that the parties agree that the health maintenance organization must obtain written approval from the commissioner prior to any payment of interest or repayment of principal; and
(4) The debt is deemed fully subordinated by the commissioner in his discretion.
(e) Any debt incurred by a note meeting the requirements of subsection (d) shall not be considered a liability and shall be recorded as equity.
(f) The commissioner may adopt rules, regulations and guidelines, from time to time, requiring any health maintenance organization incorporated, licensed, approved or authorized to engage in business pursuant to this chapter to possess and constantly maintain capital and surplus levels in excess of the statutory levels required by this chapter based upon any of the following factors:
(1) the nature and type of health maintenance contracts that a health maintenance organization provides, arranges for or otherwise participates in, the nature and type of such contracts in effect in the overall health maintenance organization market in the commonwealth, and the capability of the health maintenance organization to provide protection against loss of prepaid fees or other revenues or unavailability of covered health services or from other financial impairment of its obligations to its members;
(2) the volume of contract premiums or fees relative to health maintenance contracts that a health maintenance organization provides, arranges for or otherwise participates in;
(3) the composition, quality, duration or liquidity of a health maintenance organization's investment portfolio;
(4) fluctuations in the market value of securities or other assets a health maintenance organization holds;
(5) the adequacy of a health maintenance organization's reserves; or
(6) the size of a health maintenance organization's asset valuation reserves and interest maintenance reserves.
The rules, regulations or guidelines adopted under this section shall be designed to assure the financial solvency of health maintenance organizations for the protection of policyholders, enrolled members, shareholders and the general public. The commissioner may establish, by rule, regulation or guideline, a procedure that shall require a health maintenance organization to increase its capital and surplus amounts over a specified period of time until the required statutory minimums established by this chapter, or higher levels as ordered by the commissioner, are met.