# COMAR Title 31 — Maryland Insurance Administration

## Subtitle 12 — Health Maintenance Organizations; Entities That Act as Health Insurers

### Chapter 06 — Managed Care Organizations — Financial Compliance Requirements

**Authority:** Health-General Article, §§15-102.3, 15-102.4(d), and 15-102.6; Insurance Article, §§2-109 and 4-311(b)(2);Annotated Code of Maryland Ch. 331, §3, Acts of 2000

**Administrative History:** Effective date:

**Administrative History:** Regulations .01—.06 adopted as an emergency provision effective November 8, 1996 (23:25 Md. R. 1730); adopted permanently effective February 10, 1997 (24:3 Md. R. 186)

**Administrative History:** Chapter recodified from COMAR 09.31.24 to COMAR 31.12.06 effective September 7, 1998 (25:18 Md. R. 1439)

**Administrative History:** Regulation .02-1 adopted effective August 20, 2001 (28:16 Md. R. 1484)

**Administrative History:** Regulation .03 amended effective May 24, 2004 (31:10 Md. R. 796)

#### Regulation .01 Definitions.

*COMAR 31.12.06.01*

A. All terms defined in Health-General Article, Title 15, Subtitle 1, Annotated Code of Maryland, which are used in this chapter have the same meaning as in that statute unless the terms are defined differently in this chapter. In this chapter, the following terms have the meanings indicated.

B. Terms Defined.

  (1) “Administration” means the Maryland Insurance Administration.

  (2) “Applicant” means an organization applying to become a managed care organization.

  (3) “Commissioner” means the Maryland Insurance Commissioner.

  (4) “Contract” means the contractual agreement for the provision of health care services on a prepaid, capitated basis entered into between a managed care organization and the Maryland Department of Health to provide health care benefits only to medical assistance program recipients.

  (5) “Department” means the Maryland Department of Health.

  (6) “Leasehold estate improvements” means capital improvements made to properties leased for 20 or more years and depreciated over the remaining life of the lease.

  (7) “Managed care organization (MCO)” means a managed care organization as defined in Health-General Article, §15-101(e)(2), Annotated Code of Maryland.

  (8) “NAIC” means the National Association of Insurance Commissioners.

  (9) “Secretary” means the Secretary of Health.

#### Regulation .02 Financial Requirements.

*COMAR 31.12.06.02*

A. An applicant or MCO may not engage in business as an MCO unless determined by the Insurance Commissioner to be in compliance with the financial requirements of Health-General Article, §15-102.4, Annotated Code of Maryland.

B. Upon request, the MCO shall submit to the Administration the following documents:

  (1) A copy of the articles of incorporation of the applicant or MCO and any amendments to it, certified by the Maryland Department of Assessments and Taxation;

  (2) A copy of the applicant's or MCO's current bylaws, if any, certified by the appropriate officer of the applicant or MCO;

  (3) A list of the names, addresses, and official capacity with the applicant or MCO of the individuals who are to be responsible for the conduct of the applicant's or MCO's affairs, including the members of the governing body, the officers, and directors;

  (4) A resume of the qualifications of the administrator, the medical director, officers, and other individuals associated with the applicant or MCO as requested by the Commissioner and the Department;

  (5) A statement generally describing the:

    (a) Applicant or MCO and its corporate structure;

    (b) Applicant's or MCO's operations;

    (c) Location of the facilities at which health care services will be regularly available to enrollees;

    (d) Number of physicians and personnel engaged or contracted with to provide health care services;

  (6) A statement describing with reasonable certainty the geographic area or areas to be served by the applicant or MCO;

  (7) A financial statement audited by an independent certified public accountant of the financial condition of the applicant or MCO, including:

    (a) Assets, liabilities, and minimum tangible net equity;

    (b) A prospective budget and expected cash flow analysis of the applicant or MCO for the first 24 months of its anticipated operation demonstrating its financial viability based on reasonable assumptions; and

    (c) Other financial information the Commissioner requires for adequate financial evaluation;

  (8) A power of attorney duly executed by the applicant or MCO appointing the Commissioner and the Commissioner's authorized deputies as the true and lawful attorney of the MCO in and for the State upon whom may be served all lawful process in any action, proceeding, or cause of action arising in this State against the MCO regarding the solvency and financial condition of the MCO; and

  (9) A certificate of compliance evidencing employee coverage under Labor and Employment Article, §9-105, Annotated Code of Maryland.

C. The list under §B(3) of this regulation shall include a full disclosure to the Commissioner of the extent and nature of any contracts or arrangements between any person listed in §B(3) of this regulation and the applicant or MCO, including any possible conflicts of interest. The applicant or MCO shall continually update the information required under §B(3)(a) of this regulation and make it available to the Commissioner at the Commissioner's request.

D. Insurance—General Liability and Medical Malpractice.

  (1) With the application, an applicant or MCO shall submit evidence of insurance for general liability and medical malpractice insurance.

  (2) The minimum limits of coverage shall be $1 million for any one loss and $3 million in the aggregate.

  (3) Evidence of renewal of coverage for the current year shall be submitted with the annual report.

E. Financial Requirements. In order to qualify for a determination of financial compliance, the applicant or MCO shall, at the time of making its initial application, demonstrate to the satisfaction of the Commissioner that the applicant or MCO has on hand sufficient liquid funds or a reasonably adequate cash flow to meet all organizational and administrative expenses incurred or expected to be incurred before commencing operations.

F. Determination of Financial Condition.

  (1) In a determination of the financial condition of an applicant or MCO, only the following shall be considered as admitted assets for both applicants and, on an ongoing basis, for MCOs:

    (a) Cash, in the possession of the applicant or MCO or in transit under its control, and the balance of any deposit of the applicant or MCO in a solvent Maryland bank or trust company;

    (b) Amounts due and payable to the applicant or MCO under contracts with the Department, net of any Department withholds, on the date the amounts become due and payable, but not more than 90 days past due;

    (c) Medical, surgical, and dental equipment, net of depreciation, and net of any liens, encumbrances, pledges, or judgments, that is used directly to provide health care benefits to medical assistance beneficiaries;

    (d) Prepaid charges on health care contracts with hospitals, or other health care institutions when approved by the Commissioner, including premiums prepaid for malpractice or general liability insurance;

    (e) Pharmaceutical and medical supply inventories;

    (f) Cost of land and depreciated cost of buildings owned and occupied by the applicant or MCO and used by it to directly provide health care, in excess of any encumbrances on it in an amount not greater than 20 percent of total admitted assets as reported by the applicant or MCO for:

      (i) An existing MCO as reported in its annual statement as of December 31 preceding the date of acquisition, or

      (ii) An applicant MCO as reported in the certified audited financial statement submitted as part of the application;

    (g) Leasehold estate improvements not exceeding 20 percent of total admitted assets as reported by the applicant or MCO for:

      (i) An existing MCO as reported in its annual statement as of December 31 preceding the date of acquisition to the extent that the initial cost is amortized over the useful life of the improvements but not beyond the termination of the lease, or

      (ii) An applicant MCO as reported in the certified audited financial statement submitted as part of the application;

    (h) Electronic, mechanical, and computer hardware, and any operating system software, used for data processing and accounting purposes, which is free and clear of any liens, encumbrances, pledges, or judgments, the cost of which shall be depreciated in full over a period not to exceed 5 calendar years;

    (i) Other assets, not inconsistent with the provisions of §§H and I of this regulation, deemed by the Commissioner available for the provision of health care, at values to be determined by the Commissioner.

  (2) Investments and securities owned and held by the applicant or MCO, must be held free and clear of any liens, encumbrances, pledges or judgments, and the income due or accrued thereon. No investment shall be made or engaged in by any domestic applicant or MCO unless the same have been authorized or ratified by the board of directors or by a committee thereof charged with the duty of supervising investments. All investments of the applicant or MCO may be held in a custodial account pursuant to the requirements of COMAR 31.04.09, Annotated Code of Maryland.

G. Assets Not Admitted.

  (1) The following may not be considered as admitted assets in the determination of the financial condition of an applicant or MCO:

    (a) Good will, trade names, and other like intangible assets;

    (b) Advances to officers, whether secured or not, and advances to employees, agents, and other persons on personal security only;

    (c) The amount, if any, by which the aggregate book value of the investments as carried in the ledger assets of the applicant or MCO exceeds the aggregate value as reported in the applicant or MCO's annual statement;

    (d) Office or administrative furniture and fixtures, leasehold improvements other than leasehold estate improvements which qualify under §F(1)(g) of this regulation, vehicles, and maintenance equipment;

    (e) Amount estimated as receivable under coordination of benefits and subrogation provisions; and

    (f) Any other amounts receivable in excess of 90 days past due.

  (2) All assets not allowed and all other assets of doubtful value or character included in any statement by an applicant or MCO to the Commissioner, or in any examiner's report to the Commissioner, shall also be reported to the extent of the value disallowed, as deductions from the gross assets of the applicant or MCO.

H. Liabilities Chargeable Against Assets. In any determination of the financial condition of an applicant or MCO, liabilities to be charged against its assets shall include but not be limited to:

  (1) The estimated amount necessary to pay for all accrued benefits to enrollees and all claims, both reported or unreported, incurred on or before the date of the statement, together with estimated costs of adjusting or settling disputed claims;

  (2) The pro rata amount of premium charges paid by or on behalf of enrollees for any period of coverage beyond the date of the statement; and

  (3) Any other liabilities, including but not limited to federal income taxes, payroll taxes, expenses, and other obligations due or accrued at the date of the statement.

I. Deposit of Securities. Every MCO to be considered in compliance with financial requirements shall deposit and maintain in trust with the State Treasurer, for the protection of its enrollees or its enrollees and creditors, cash or government securities of the type described in Insurance Article, §5-701(b), Annotated Code of Maryland, in the market value amount of $100,000.

J. Valuation of Investments.

  (1) All obligations having a fixed term and rate shall be:

    (a) If purchased at par, at the par value;

    (b) If purchased above or below par, on the basis of the purchased price adjusted so as to bring the value to par at maturity and so as to yield in the meantime the effective rate of interest at which the purchase was made.

  (2) Common, preferred, or guaranteed stocks shall be valued at market value. Market value may be from the original broker-dealer transaction advice and one of the following:

    (a) A nationally recognized rating agency such as Moody's Investor Service, Standard and Poor's Corporation, or any other similar organization approved by the Maryland Insurance Administration at the request of the MCO;

    (b) A nationally recognized publication such as the Wall Street Journal or Barron's; or

    (c) Written documentation from a registered broker-dealer or investment adviser.

  (3) The written documentation substantiating the values reported by the MCO in the annual and/or quarterly statements shall be maintained by the MCO and readily available for review by the Insurance Administration at financial examinations.

#### Regulation .02-1 Risk-Based Capital Requirements.

*COMAR 31.12.06.02-1*

A. Health Insurer. In this regulation, the term “health insurer” has the meaning stated in Insurance Article, §4-301(g), Annotated Code of Maryland.

B. Requirements Applicable to MCOs. Unless exempted by the Insurance Commissioner, beginning with the Annual Statement filed for the year ending December 31, 2001, an MCO shall comply with the risk-based capital requirements of Insurance Article, Title 4, Subtitle 3, Annotated Code of Maryland, in the same manner as a health insurer.

#### Regulation .03 Application of Maryland Insurance Acquisitions Disclosure and Control Act.

*COMAR 31.12.06.03*

A. Exemption. If the Commissioner determines that this regulation or a part of this regulation is not intended to apply to a managed care organization or affiliate, the Commissioner may exempt the managed care organization or affiliate from this regulation or the part of this regulation.

B. In this regulation, the following terms have the meanings indicated:

  (1) “Holding company” means a person that directly or indirectly controls a managed care organization, or controls a person that controls a managed care organization.

  (2) “Holding company system” means two or more affiliates, at least one of which is a managed care organization.

C. Subject to this regulation, the provisions of Insurance Article, Title 7, Annotated Code of Maryland apply to managed care organizations.

D. Change of Ownership.

  (1) An MCO shall notify the Commissioner within 10 days of any transfer of ownership or of more than an aggregate of 10 percent of the stock or ownership interest in the MCO to a purchaser occurring during any 12-month period.

  (2) An MCO shall comply with the procedures required by Insurance Article, Title 7, Annotated Code of Maryland, before the purchaser may:

    (a) Make a tender for, or a request or invitation for tenders of, or enter into an agreement to exchange securities for, or acquire in the open market or otherwise, any voting security of a domestic MCO or enter into any other such agreement if, after the consummation thereof, that purchaser would, directly or indirectly, or by conversion, or by exercise of any right to acquire, be in control of the domestic MCO; or

    (b) Enter into an agreement to merge or consolidate with, or otherwise to acquire control of, a domestic MCO.

  (3) Before approval of any transfer of ownership, stock, or ownership interest in an MCO, the Commissioner shall consult with the Secretary.

E. Registration Statements.

  (1) Each managed care organization that is a member of a holding company system shall file a registration statement with the Commissioner on or before:

    (a) July 31, 2004; and

    (b) May 1 of each year after 2004.

  (2) The registration statement shall be in a form similar to that required under Insurance Article, §7-603, Annotated Code of Maryland, containing the following current information:

    (a) The corporate and capital structure, general financial condition, ownership, and management of the managed care organization and of any person controlling the managed care organization;

    (b) The identity and relationship of each member of the holding company system;

    (c) Any pledge of the managed care organization's stock, including stock of a subsidiary or controlling affiliate, for a loan made to any member of the holding company system;

    (d) The following agreements in force, and transactions currently outstanding or that have occurred during the previous calendar year between the managed care organization and the managed care organization's affiliates:

      (i) Loans, other investments, purchases, sales, and exchanges of securities of the affiliates by the managed care organization or of the managed care organization by its affiliates;

      (ii) Purchases, sales, and exchanges of assets;

      (iii) Transactions not in the ordinary course of business;

      (iv) Except for managed care contracts entered into in the ordinary course of the managed care organization's business, guarantees or undertakings for the benefit of an affiliate that result in an actual contingent exposure to liability of the managed care organization's assets;

      (v) Management agreements, service contracts, and cost-sharing arrangements;

      (vi) Reinsurance agreements;

      (vii) Dividends and other distributions to shareholders; and

      (viii) Consolidated tax allocation agreements;

    (e) Any other matters about transactions between the managed care organization and its affiliates that the registration statement form requires; and

    (f) A summary outlining all items in the current registration statement that represent changes from the prior registration statement.

  (3) Each affiliate in a holding company system shall give a managed care organization subject to registration under this section that is in the same holding company system complete and accurate information if that information is reasonably necessary to enable the managed care organization to comply with this regulation.

  (4) The Commissioner may allow or require affiliated managed care organizations subject to registration under this section to file a consolidated registration statement.

F. Agreements in Force.

  (1) As part of its initial registration statement, each managed care organization shall report each agreement in force as of December 31, 2002, pertaining to the transactions specified in §E(2)(d) of this regulation, between the managed care organization and any other member of its holding company system.

  (2) Each agreement in force reported under §E(2)(d) of this regulation and otherwise subject to prior approval of the Commissioner, shall be deemed approved as of the date the initial registration is filed with the Commissioner.

  (3) Notwithstanding §F(2) of this regulation, the Commissioner retains the right to request the managed care organization to submit any of the reported agreements in force to the Commissioner for review.

G. A transaction specified in Insurance Article, §7-703(e), Annotated Code of Maryland, between a managed care organization and another member of the same insurance holding company system is subject to the requirements of Insurance Article, §7-703(b)—(d), Annotated Code of Maryland, if the projected annual amount of the transaction equals or exceeds the lesser of 3 percent of the managed care organization's admitted assets, or 25 percent of its surplus as regards policyholders as of the December 31 immediately preceding the transaction.

H. Agreements Between MCOs and Health Care Providers.

  (1) Except as provided in §H(2) of this regulation, the provisions of Insurance Article, §7-703, Annotated Code of Maryland, do not apply to agreements entered into between a managed care organization and a provider of health care services that is a member of the same holding company system, if the rates paid to the provider are regulated by the Health Services Cost Review Commission.

  (2) The Commissioner may require the managed care organization to submit an agreement under this section to the Commissioner for review.

#### Regulation .04 Annual and Interim Financial Reports.

*COMAR 31.12.06.04*

A. On or before March 1 of each year, each MCO operating under a contract with the Department shall file, in duplicate, a report that includes a consolidated financial statement.

B. The Commissioner may require interim statements of the MCOs, on such points as the Commissioner deems necessary and proper at any time during the period between the filing of annual statements.

C. The report shall:

  (1) Cover the MCO and all of its affiliates and subsidiaries;

  (2) Consist of the financial statements of the MCO, and all of its affiliates and subsidiaries, prepared in accordance with statutory accounting principles on a form approved by the Commissioner and certified by an independent certified public accountant as to the financial condition, transactions, and affairs of the MCO and its affiliates and subsidiaries for the immediately preceding calendar year;

  (3) Provide a list of the total compensation from the MCO, including all cash and deferred compensation stock, and stock options in addition to salary, of each member of the board of directors of the MCO, and each senior officer of the MCO, or any subsidiary of the MCO, as designated by the Commissioner;

  (4) Contain loss ratios for medical assistance business as required under Insurance Article, §15-605, Annotated Code of Maryland;

  (5) Be on the form adopted by the Commissioner;

  (6) Be supplemented with a description of any changes in the information submitted with the last previous annual report or with the MCO's original application for financial compliance; and

  (7) Provide any other information or documents necessary to assure compliance with Health-General Article, Title 15, Subtitle 1, Annotated Code of Maryland.

#### Regulation .05 Financial Examination.

*COMAR 31.12.06.05*

A. The Commissioner may make an examination of the operation of a managed care organization as often as the Commissioner deems necessary for the protection of the interest of the people of Maryland, but the examinations may not be less frequent than once every 5 years.

B. The expense of examinations shall be assessed against the MCO being examined in accordance with Health-General Article, §19-718, Annotated Code of Maryland.

#### Regulation .06 Rehabilitation or Liquidation of an MCO.

*COMAR 31.12.06.06*

Any rehabilitation or liquidation of an MCO shall be:

A. Deemed to be the rehabilitation or liquidation of a health maintenance organization; and

B. Subject to the requirements of Health-General Article, §19-706.1, Annotated Code of Maryland.