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PA Bulletin, Doc. No. 02-1859


Proper Reporting of Uncovered Medical Liabilities and Expenses (Uncovered Claims); Notice No. 2002-10

[32 Pa.B. 5237]

   The Insurance Department (Department) has reviewed how Commonwealth health maintenance organizations (HMO) report covered versus uncovered claims in financial statements filed with the Department. This notice is being issued to emphasize the importance of proper reporting of liabilities and expenses for uncovered claims and to highlight certain reporting and regulatory requirements relating to those liabilities and expenses.

   Generally, covered claims are liabilities and expenses associated with services provided within an HMO's provider network and uncovered claims are liabilities and expenses for care provided by nonparticipating or out-of-network providers. For example, an uncovered claim can occur when a subscriber requires emergency care for an injury suffered when on vacation outside of this Common-wealth. Proper reporting of covered versus uncovered claims is particularly significant for the following reasons:

   1.  Amounts reported as uncovered claims are used to determine whether an HMO is in compliance with minimum net worth requirements. Specifically, HMOs are required to have minimum net worth equal to the greater of $1 million11 or 3 months uncovered health care expenditures for Commonwealth enrollees as reported in the HMO's most recent financial statement filed with the Department. See 31 Pa. Code §§ 301.121 and 301.202 (relating to protections against insolvency; and financial requirements--point-of-service products).

   2.  Subscribers may be held responsible for payment of services provided by nonparticipating or out-of-network providers (uncovered claims) if an HMO becomes insolvent. Only participating or network providers are required to enter into ''hold harmless'' agreements whereby the providers agree not to bill or hold subscribers responsible if the HMO does not pay for contracted services. See 31 Pa. Code § 301.122 (relating to hold harmless).

   Additionally, section 11 of the Health Maintenance Organization Act (40 P. S. § 1561) requires HMOs to prepare and file financial statements as prescribed by the Department. The Department requires HMOs to adhere to the financial statement instructions and accounting practices and procedures adopted by the National Association of Insurance Commissioners (NAIC). The NAIC's Health Annual Statement Instructions define liabilities for uncovered claims as follows:

   Include: The liabilities for the costs to the reporting entity for health care services that are the obligation of the reporting entity, for which an enrollee may also be liable in the event of the reporting entity's insolvency and for which no alternative arrangements have been made that are acceptable to the commissioner (director). These costs will vary in type and amount, depending on the arrangements of the reporting entity. They may include out-of-area services, referral services and hospital services.

   Exclude: Services when a provider has agreed not to bill the enrollee even though the provider is not paid by the reporting entity. Services that are guaranteed, insured or assumed by a person or organization other than the reported entity.

   Therefore, chief financial officers and other persons determining how to calculate and report uncovered claims in compliance with financial statement reporting and regulatory requirements should note the following:

   1.  Claims for which the HMO is liable for payment of services under the terms of a subscriber's ''policy'' must be further identified as covered or uncovered based on the provider used, not the service performed.

   2.  The method of calculating uncovered claims should be based on the insurer's own paid claims files, which should be segregated or identified as covered or uncovered.

   3.  Guarantees used to exclude claims from being reported as uncovered are subject to specific financial statement reporting requirements. In addition, HMOs that are members of insurance holding company systems are required to comply with statutory reporting and prior approval requirements in the use of guarantees. See 40 P. S. §§ 991.1404 and 991.1405.

   Once a determination has been made regarding the reporting of uncovered claims, this information should be communicated to the Department in two ways:

   1.  The uncovered columns in the balance sheet and income statement should reflect the liability and expense for uncovered claims using management's best estimate in accordance with Statement of Statutory Accounting Principles No. 55 in the NAIC's Accounting Practices and Procedures Manual.

   2.  The narrative response to the annual statement general interrogatory relating to arrangements to protect subscribers and their dependents against the risk of insolvency (Part 2, No. 5) should state whether or not the HMO has reported liabilities and expenses as uncovered claims and then go on to explain the basis for reporting or not reporting uncovered claims.

   Questions concerning this notice and the proper reporting of uncovered claims should be directed to Kaushik K. Patel, Chief, Financial Analysis Division, Bureau of Company Licensing and Financial Analysis, Office of Regulation of Companies, Insurance Department, 1345 Strawberry Square, Harrisburg, PA 17120, (717) 787-5890, fax: (717) 787-8557, e-mail:

Insurance Commissioner

[Pa.B. Doc. No. 02-1859. Filed for public inspection October 18, 2002, 9:00 a.m.]


1 HMOs offering point-of-service products are subject to higher minimum dollar amount net worth requirements.

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