Health Organizations Now Subject to Risk-Based Capital Requirements in Determining Capital Surplus

Insurance Law Alert

New Jersey has expanded application of capital and surplus requirements for certain health care entities. P.L. 2014, c. 81, enacted December 26, 2014, amends N.J.S.A. 17:48-1 et seq., 17:48A-1 et seq., 17:48C-1 et seq., 17:48D-1 et seq., 17:48E-1 et seq., 17:48F-1 et seq., and 17:48H-1 et seq., to authorize the Commissioner, New Jersey Department of Banking and Insurance (the “Commissioner”), to increase the amount of capital and surplus required of a hospital service corporation, medical service corporation, dental service corporation, dental plan organization, health service corporation, prepaid prescription services organization, and licensed organized delivery system, respectively (collectively referred to as health organizations). In the alternative, the Commissioner may subsequently revise or re-determine that increase, using appropriate methods and procedures established by rules and regulations adopted by the Commissioner, in order to provide adequate protection against risks affecting the health organization’s financial condition, based on various factors regarding the health organization’s risks, i.e., Risk Based Capital (“RBC”) requirements.

RBC standards are already imposed on New Jersey insurers. Additionally, HMOs are currently required to comply with N.J.A.C. 11:2-39 and to file annual RBC reports. To maintain consistency with the application of these standards to the national standards adopted by the National Association of Insurance Commissioner’s (“NAIC”), the Department will propose to apply the new rules to HMOs and to delete references to HMOs in the existing N.J.A.C. 11:2-39. Until that time, HMOs must continue to comply with the provisions of N.J.A.C. 11:2-39.

Adoption of the RBC requirements for health organizations is a requirement for a state insurance department to maintain NAIC accreditation. The Department has imposed RBC standards on health organizations by Order No. A15-102, reflecting the requirements established by the NAIC until it has the opportunity to propose and adopt regulations. See, Order #A15-102, IN THE MATTER OF THE APPLICATION OF RISK BASED CAPITAL TO HEALTH ORGANIZATIONS LICENSED IN THIS STATE PURSUANT TO P.L. 2014, c. 81 (the “Order”).

The specific RBC and reporting requirements are set forth in an appendix to the regulations (the “Appendix”). Both the Order and the Appendix are linked to this Alert. In summary, the Order and Appendix confirm the Commissioner’s authority to increase capital and surplus requirements for health organizations based upon the organization’s business risks. Moreover, a domestic health organization shall prepare and submit to the Commissioner, on or after March 1, 2015, but no later than June 1, 2015, a report of its RBC levels as of the end of the calendar year ended the preceding December 31, in a form and containing such information as is required by the NAIC RBC instructions. There are significant exceptions to application of the RBC and reporting requirements health organizations licensed in New Jersey as they apply only to a domestic health organization that:

  • Writes direct business only in this State;
  • Assumes no reinsurance in excess of five percent of direct premium written; and
  • Writes direct annual premiums for comprehensive medical business of $2 million or less; or
  • To a limited health service organization that covers less than 2,000 lives.

 

For further information regarding the RBC and reporting requirements addressed in the Order and Appendix, please refer to the attached link or contact Cynthia Borrelli.