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Notes

42 C.F.R. §§ 422.380–422.390

6 sections in range

§422.380. Solvency standards.

42 C.F.R. § 422.380

General rule. A PSO or the legal entity of which the PSO is a component that has been granted a waiver under § 422.370 must have a fiscally sound operation that meets the requirements of §§ 422.382 through 422.390.
Notes, amendments, and revision history

Amendments

[63 FR 25377, May 7, 1998]

Authority

Authority: 42 U.S.C. 1302, 1306, 1395w-21 through 1395w-28, and 1395hh.

Source

Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.

Amendments

[63 FR 25377, May 7, 1998]

§422.382. Minimum net worth amount.

42 C.F.R. § 422.382

(a)
At the time an organization applies to contract with CMS as a PSO under this part, the organization must have a minimum net worth amount, as determined under paragraph (c) of this section, of:
(1)
At least $1,500,000, except as provided in paragraph (a)(2) of this section.
(2)
No less than $1,000,000 based on evidence from the organization's financial plan (under § 422.384) demonstrating to CMS's satisfaction that the organization has available to it an administrative infrastructure that CMS considers appropriate to reduce, control or eliminate start-up administrative costs.
(b)
After the effective date of a PSO's MA contract, a PSO must maintain a minimum net worth amount equal to the greater of—
(1)
One million dollars;
(2)
Two percent of annual premium revenues as reported on the most recent annual financial statement filed with CMS for up to and including the first $150,000,000 of annual premiums and 1 percent of annual premium revenues on premiums in excess of $150,000,000;
(3)
An amount equal to the sum of three months of uncovered health care expenditures as reported on the most recent financial statement filed with CMS; or
(4)
Using the most recent financial statement filed with CMS, an amount equal to the sum of—
(i)
Eight percent of annual health care expenditures paid on a non-capitated basis to non-affiliated providers; and
(ii)
Four percent of annual health care expenditures paid on a capitated basis to non-affiliated providers plus annual health care expenditures paid on a non-capitated basis to affiliated providers.
(iii)
Annual health care expenditures that are paid on a capitated basis to affiliated providers are not included in the calculation of the net worth requirement (regardless of downstream arrangements from the affiliated provider) under paragraphs (a) and (b)(4) of this section.
(c)
Calculation of the minimum net worth amount—
(1)
Cash requirement.
(i)
At the time of application, the organization must maintain at least $750,000 of the minimum net worth amount in cash or cash equivalents.
(ii)
After the effective date of a PSO's MA contract, a PSO must maintain the greater of $750,000 or 40 percent of the minimum net worth amount in cash or cash equivalents.
(2)
Intangible assets. An organization may include intangible assets, the value of which is based on Generally Accepted Accounting Principles (GAAP), in the minimum net worth amount calculation subject to the following limitations—
(i)
At the time of application.
(A)
Up to 20 percent of the minimum net worth amount, provided at least $1,000,000 of the minimum net worth amount is met through cash or cash equivalents; or
(B)
Up to 10 percent of the minimum net worth amount, if less than $1,000,000 of the minimum net worth amount is met through cash or cash equivalents, or if CMS has used its discretion under paragraph (a)(2) of this section.
(ii)
From the effective date of the contract.
(A)
Up to 20 percent of the minimum net worth amount if the greater of $1,000,000 or 67 percent of the minimum net worth amount is met by cash or cash equivalents; or
(B)
Up to ten percent of the minimum net worth amount if the greater of $1,000,000 or 67 percent of the minimum net worth amount is not met by cash or cash equivalents.
(3)
Health care delivery assets. Subject to the other provisions of this section, a PSO may apply 100 percent of the GAAP depreciated value of health care delivery assets (HCDAs) to satisfy the minimum net worth amount.
(4)
Other assets. A PSO may apply other assets not used in the delivery of health care provided that those assets are valued according to statutory accounting practices (SAP) as defined by the State.
(5)
Subordinated debts and subordinated liabilities. Fully subordinated debt and subordinated liabilities are excluded from the minimum net worth amount calculation.
(6)
Deferred acquisition costs. Deferred acquisition costs are excluded from the calculation of the minimum net worth amount.
Notes, amendments, and revision history

Amendments

[63 FR 25377, May 7, 1998, as amended at 64 FR 71678, Dec. 22, 1999]

Authority

Authority: 42 U.S.C. 1302, 1306, 1395w-21 through 1395w-28, and 1395hh.

Source

Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.

Amendments

[63 FR 25377, May 7, 1998, as amended at 64 FR 71678, Dec. 22, 1999]

§422.384. Financial plan requirement.

42 C.F.R. § 422.384

(a)
General rule. At the time of application, an organization must submit a financial plan acceptable to CMS.
(b)
Content of plan. A financial plan must include—
(1)
A detailed marketing plan;
(2)
Statements of revenue and expense on an accrual basis;
(3)
Cash-flow statements;
(4)
Balance sheets;
(5)
Detailed justifications and assumptions in support of the financial plan including, where appropriate, certification of reserves and actuarial liabilities by a qualified actuary; and
(6)
If applicable, statements of the availability of financial resources to meet projected losses.
(c)
Period covered by the plan. A financial plan must—
(1)
Cover the first 12 months after the estimated effective date of a PSO's MA contract; or
(2)
If the PSO is projecting losses, cover 12 months beyond the end of the period for which losses are projected.
(d)
Funding for projected losses. Except for the use of guarantees, LOC, and other means as provided in § 422.384(e), (f) and (g), an organization must have the resources for meeting projected losses on its balance sheet in cash or a form that is convertible to cash in a timely manner, in accordance with the PSO's financial plan.
(e)
Guarantees and projected losses. Guarantees will be an acceptable resource to fund projected losses, provided that a PSO—
(1)
Meets CMS's requirements for guarantors and guarantee documents as specified in § 422.390; and
(2)
Obtains from the guarantor cash or cash equivalents to fund the projected losses timely, as follows—
(i)
Prior to the effective date of a PSO's MA contract, the amount of the projected losses for the first two quarters;
(ii)
During the first quarter and prior to the beginning of the second quarter of a PSO's MA contract, the amount of projected losses through the end of the third quarter; and
(iii)
During the second quarter and prior to the beginning of the third quarter of a PSO's MA contract, the amount of projected losses through the end of the fourth quarter.
(3)
If the guarantor complies with the requirements in paragraph (e)(2) of this section, the PSO, in the third quarter, may notify CMS of its intent to reduce the period of advance funding of projected losses. CMS will notify the PSO within 60 days of receiving the PSO's request if the requested reduction in the period of advance funding will not be accepted.
(4)
If the guarantee requirements in paragraph (e)(2) of this section are not met, CMS may take appropriate action, such as requiring funding of projected losses through means other than a guarantee. CMS retains discretion to require other methods or timing of funding, considering factors such as the financial condition of the guarantor and the accuracy of the financial plan.
(f)
Letters of credit. Letters of credit are an acceptable resource to fund projected losses, provided they are irrevocable, unconditional, and satisfactory to CMS. They must be capable of being promptly paid upon presentation of a sight draft under the letters of credt without further reference to any other agreement, document, or entity.
(g)
Other means. If satisfactory to CMS, and for periods beginning one year after the effective date of a PSO's MA contract, a PSO may use the following to fund projected losses—
(1)
Lines of credit from regulated financial institutions;
(2)
Legally binding agreements for capital contributions; or
(3)
Legally binding agreements of a similar quality and reliability as permitted in paragraphs (g)(1) and (2) of this section.
(h)
Application of guarantees, Letters of credit or other means of funding projected losses. Notwithstanding any other provision of this section, a PSO may use guarantees, letters of credit and, beginning one year after the effective date of a PSO's MA contract, other means of funding projected losses, but only in a combination or sequence that CMS considers appropriate.
Notes, amendments, and revision history

Amendments

[63 FR 25378, May 7, 1998, as amended at 63 FR 35098, June 26, 1998; 64 FR 71678, Dec. 22, 1999]

Authority

Authority: 42 U.S.C. 1302, 1306, 1395w-21 through 1395w-28, and 1395hh.

Source

Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.

Amendments

[63 FR 25378, May 7, 1998, as amended at 63 FR 35098, June 26, 1998; 64 FR 71678, Dec. 22, 1999]

§422.386. Liquidity.

42 C.F.R. § 422.386

(a)
A PSO must have sufficient cash flow to meet its financial obligations as they become due and payable.
(b)
To determine whether the PSO meets the requirement in paragraph (a) of this section, CMS will examine the following—
(1)
The PSO's timeliness in meeting current obligations;
(2)
The extent to which the PSO's current ratio of assets to liabilities is maintained at 1— 1 including whether there is a declining trend in the current ratio over time; and
(3)
The availability of outside financial resources to the PSO.
(c)
If CMS determines that a PSO fails to meet the requirement in paragraph (b)(1) of this section, CMS will require the PSO to initiate corrective action and pay all overdue obligations.
(d)
If CMS determines that a PSO fails to meet the requirement of paragraph (b)(2) of this section, CMS may require the PSO to initiate corrective action to—
(1)
Change the distribution of its assets;
(2)
Reduce its liabilities; or
(3)
Make alternative arrangements to secure additional funding to restore the PSO's current ratio to 1— 1.
(e)
If CMS determines that there has been a change in the availability of outside financial resources as required by paragraph (b)(3) of this section, CMS requires the PSO to obtain funding from alternative financial resources.
Notes, amendments, and revision history

Amendments

[63 FR 25378, May 7, 1998, as amended at 64 FR 71678, Dec. 22, 1999]

Authority

Authority: 42 U.S.C. 1302, 1306, 1395w-21 through 1395w-28, and 1395hh.

Source

Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.

Amendments

[63 FR 25378, May 7, 1998, as amended at 64 FR 71678, Dec. 22, 1999]

§422.388. Deposits.

42 C.F.R. § 422.388

(a)
Insolvency deposit.
(1)
At the time of application, an organization must deposit $100,000 in cash or securities (or any combination thereof) into an account in a manner that is acceptable to CMS.
(2)
The deposit must be restricted to use in the event of insolvency to help assure continuation of services or pay costs associated with receivership or liquidation.
(3)
At the time of the PSO's application for an MA contract and, thereafter, upon CMS's request, a PSO must provide CMS with proof of the insolvency deposit, such proof to be in a form that CMS considers appropriate.
(b)
Uncovered expenditures deposit.
(1)
If at any time uncovered expenditures exceed 10 percent of a PSO's total health care expenditures, then the PSO must place an uncovered expenditures deposit into an account with any organization or trustee that is acceptable to CMS.
(2)
The deposit must at all times have a fair market value of an amount that is 120 percent of the PSO's outstanding liability for uncovered expenditures for enrollees, including incurred, but not reported claims.
(3)
The deposit must be calculated as of the first day of each month required and maintained for the remainder of each month required.
(4)
If a PSO is not otherwise required to file a quarterly report, it must file a report within 45 days of the end of the calendar quarter with information sufficient to demonstrate compliance with this section.
(5)
The deposit required under this section is restricted and in trust for CMS's use to protect the interests of the PSO's Medicare enrollees and to pay the costs associated with administering the insolvency. It may be used only as provided under this section.
(c)
A PSO may use the deposits required under paragraphs (a) and (b) of this section to satisfy the PSO's minimum net worth amount required under § 422.382(a) and (b).
(d)
All income from the deposits or trust accounts required under paragraphs (a) and (b) of this section, are considered assets of the PSO. Upon CMS's approval, the income from the deposits may be withdrawn.
(e)
On prior written approval from CMS, a PSO that has made a deposit under paragraphs (a) or (b) of this section, may withdraw that deposit or any part thereof if—
(1)
A substitute deposit of cash or securities of equal amount and value is made;
(2)
The fair market value exceeds the amount of the required deposit; or
(3)
The required deposit under paragraphs (a) or (b) of this section is reduced or eliminated.
Notes, amendments, and revision history

Amendments

[63 FR 25379, May 7, 1998]

Authority

Authority: 42 U.S.C. 1302, 1306, 1395w-21 through 1395w-28, and 1395hh.

Source

Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.

Amendments

[63 FR 25379, May 7, 1998]

§422.390. Guarantees.

42 C.F.R. § 422.390

(a)
General policy. A PSO, or the legal entity of which the PSO is a component, may apply to CMS to use the financial resources of a guarantor for the purpose of meeting the requirements in § 422.384. CMS has the discretion to approve or deny approval of the use of a guarantor.
(b)
Request to use a guarantor. To apply to use the financial resources of a guarantor, a PSO must submit to CMS—
(1)
Documentation that the guarantor meets the requirements for a guarantor under paragraph (c) of this section; and
(2)
The guarantor's independently audited financial statements for the current year-to-date and for the two most recent fiscal years. The financial statements must include the guarantor's balance sheets, profit and loss statements, and cash flow statements.
(c)
Requirements for guarantor. To serve as a guarantor, an organization must meet the following requirements:
(1)
Be a legal entity authorized to conduct business within a State of the United States.
(2)
Not be under Federal or State bankruptcy or rehabilitation proceedings.
(3)
Have a net worth (not including other guarantees, intangibles and restricted reserves) equal to three times the amount of the PSO guarantee.
(4)
If the guarantor is regulated by a State insurance commissioner, or other State official with authority for risk-bearing entities, it must meet the net worth requirement in § 422.390(c)(3) with all guarantees and all investments in and loans to organizations covered by guarantees excluded from its assets.
(5)
If the guarantor is not regulated by a State insurance commissioner, or other similar State official it must meet the net worth requirement in § 422.390(c)(3) with all guarantees and all investments in and loans to organizations covered by a guarantee and to related parties (subsidiaries and affiliates) excluded from its assets.
(d)
Guarantee document. If the guarantee request is approved, a PSO must submit to CMS a written guarantee document signed by an appropriate authority of the guarantor. The guarantee document must—
(1)
State the financial obligation covered by the guarantee;
(2)
Agree to—
(i)
Unconditionally fulfill the financial obligation covered by the guarantee; and
(ii)
Not subordinate the guarantee to any other claim on the resources of the guarantor;
(3)
Declare that the guarantor must act on a timely basis, in any case not more than 5 business days, to satisfy the financial obligation covered by the guarantee; and
(4)
Meet other conditions as CMS may establish from time to time.
(e)
Reporting requirement. A PSO must submit to CMS the current internal financial statements and annual audited financial statements of the guarantor according to the schedule, manner, and form that CMS requests.
(f)
Modification, substitution, and termination of a guarantee. A PSO cannot modify, substitute or terminate a guarantee unless the PSO—
(1)
Requests CMS's approval at least 90 days before the proposed effective date of the modification, substitution, or termination;
(2)
Demonstrates to CMS's satisfaction that the modification, substitution, or termination will not result in insolvency of the PSO; and
(3)
Demonstrates how the PSO will meet the requirements of this section.
(g)
Nullification. If at any time the guarantor or the guarantee ceases to meet the requirements of this section, CMS will notify the PSO that it ceases to recognize the guarantee document. In the event of this nullification, a PSO must—
(1)
Meet the applicable requirements of this section within 15 business days; and
(2)
If required by CMS, meet a portion of the applicable requirements in less than the time period granted in paragraph (g)(1) of this section.
Notes, amendments, and revision history

Amendments

[63 FR 25379, May 7, 1998]

Authority

Authority: 42 U.S.C. 1302, 1306, 1395w-21 through 1395w-28, and 1395hh.

Source

Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.

Amendments

[63 FR 25379, May 7, 1998]