HMO solvency protected by insurance company holding act

May 1, 2007

At present, most states have made HMOs subject to their insurance holding company acts. Insurance holding company acts are comprehensive bodies of law that govern the relationships and activities within insurance holding company structures. These laws indirectly regulate the activities of entities that are affiliated with insurance companies and HMOs, which would not otherwise be subject to regulation.

At present, most states have made HMOs subject to their insurance holding company acts. Insurance holding company acts are comprehensive bodies of law that govern the relationships and activities within insurance holding company structures. These laws indirectly regulate the activities of entities that are affiliated with insurance companies and HMOs, which would not otherwise be subject to regulation.

Every HMO that is part of a holding company structure must file a registration statement with the insurance department of its home state. The confidential registration statement describes all of the affiliated relationships between the HMO and its affiliated entities. All transactions between affiliates must be described and a considerable amount of information must be provided with respect to the ultimate controlling person, including financial statements. The registration statement must be filed annually, and it must be updated during the year to the extent there are material changes to the previously filed statement.

EXTRAORDINARY CIRCUMSTANCES

Dividends declared by an HMO that exceed the greater of 10% of surplus or the company's net gain from operations for the prior year are deemed to be "extraordinary." Such extraordinary dividends must be reviewed and approved by insurance regulators. The regulators' review provides assurance that the company's assets are not being drained to the detriment of its insured members for the benefit of shareholders. A determination is made as to whether the company will continue to have adequate capitalization to support its business.

Under the holding company act, acquisition of an HMO is subject to the approval of the insurance department in the company's home state. Pursuant to this authority, insurance regulators have the power to review and evaluate the business plans, financing and other matters involved in the purchase. This authority is triggered by any transaction in which 10% or more of the stock of the HMO (or its holding company) is being sold.

In order to obtain approval from the applicable insurance regulator, the prospective buyer must file what is often referred to as a "Form A" application. The applicant must disclose the identity of the buyer, financial information about the buyer and its owners, the source of financing for the acquisition, biographical information on the officers and directors of the buyer. The prospective buyer must disclose the terms of the purchase and file a copy of the purchase contract and related agreements.

Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP in the firm's Austin, Texas, office.