June 2019

Hawaii Legislature Passes New TPA Law

Hawaii is expected to adopt legislation in the coming weeks that will impose licensing and other regulatory requirements on third party administrators (TPAs). Currently, Hawaii is one of only a handful of states that do not license or regulate TPAs. Hawaii legislators passed Senate Bill 1212 out of a conference committee on April 30, 2019 and it was sent to Hawaii Governor David Ige for his signature on May 6, 2019. It is anticipated that Senate Bill 1212 will become law before the end of June.

Once it becomes law, Senate Bill 1212 will require TPAs doing business in Hawaii to be licensed and regulated. The bill is based on the Registration and Regulation of Third Party Administrators
Guideline adopted by the National Association of Insurance Commissioners (NAIC).

Items of interest regarding Senate Bill 1212 include, without limitation, the following:

• The terms “Administrator” and  “Third Party Administrator”
are defined as “a person who collects charges or premiums
from, or who adjusts or settles claims on, residents of this
State in connection with self-insurance, stop-loss or life
insurance coverage, accident and health or sickness
insurance coverage.”

• Applicants for TPA licenses will be required to provide
annual financial statements for the two most recent years
that prove the applicant has a positive net worth. The bill
is silent regarding whether the financial statements must
be audited by an independent Certified Public Accountant (CPA).

• If an administrator employs or has contracted individuals
to sell, solicit or negotiate insurance business, the
employees or contracted individuals must first be licensed
as producers. Similarly, an administrator who intends to
directly solicit insurance contracts or otherwise act as a
producer must first be licensed as an insurance producer.

• In order to obtain a TPA license, TPA applicants must file a
surety bond in the amount of at least $100,000 with the
Insurance Division. A surety bond must remain in force to
maintain licensure as a TPA.

• Senate Bill 1212 is expected to take effect January 1,

National Association of Insurance Commissioners Considering Adoption of Pharmacy Benefit Manager Model Law

The Chair of the National Association of Insurance Commissioners (“NAIC”) Regulatory Framework (B) Task Force recently announced that the Pharmacy Benefit Manager Regulatory Issues (B) Subgroup’s (“PBM Subgroup”) will consider developing a new NAIC PBM Model Law during 2019. The proposed model will establish a licensing or registration process for pharmacy benefit managers (“PBMs”).  Oregon has agreed to chair the PBM Subgroup for 2019, and Maryland has agreed to be vice chair.

The PBM Model Law is intended to address issues and concerns states have encountered in their markets with PBMs and the lack of clear regulatory authority for some state regulators to address them. Currently, PBMs are not licensed or registered in some states, while other state insurance departments either license PBMs as PBMs or as TPAs. However, in certain states, PBMs are registered with state pharmacy boards.

The PBM Subgroup also may consider including within the PBM Model Law provisions on PBM prescription drug pricing and cost transparency.
In addition to the PBM Subgroup’s interest in developing a PBM Model Act, in December 2018, the National Conference of Insurance Legislators (“NCOIL”) approved the Pharmacy Benefits Manager Licensure and Regulation Model Act (“NCOIL PBM Model Act”), which is intended to give state insurance regulators increased jurisdiction over the activities of PBMs.

Kansas Regulatory Action: A Reminder That Insurers Must Maintain Oversight of Third Party Administrators

The Kansas Insurance Department (“Department”) recently took regulatory action against an insurer which allegedly violated Kansas insurance laws. Specifically, the Department initiated a Market Conduct inquiry of accident and health policies sold by the insurer to Kansas residents in 2016. The Department’s Market Conduct inquiry focused on the insurer’s business practices for oversight of third party administrators, as well as health insurance that was sold by the insurer via an association.

As a result of its Market Conduct investigation, the Department determined the insurer utilized an unlicensed TPA to provide enrollment, billing, and policy fulfillment services. The upshot is that insurers should exercise due diligence when selecting their business partners to ensure those partners hold the proper licenses to perform services for the insurer. Note that a number of states have TPA laws that expressly prohibit an insurer from doing business with an unlicensed TPA.

The Department’s investigation also found that Kansas residents had to join an association to purchase insurance because there was no method to join the association without first purchasing insurance. Therefore, the Department concluded the association was maintained only for insurance purposes in violation of K.S.A. 40-2209(f)(5). Additionally, the investigation found that Kansas insureds were not informed of the costs of association membership or actual premium amounts during verification calls.

The Department cited numerous violations of Kansas laws, including association group laws, the unfair deceptive acts or practices prohibition on misrepresentations in insurance applications, requirements to provide an outline of coverage listing premiums, and advertising requirements relating to group membership. To settle the alleged violations of law as a result of the Department’s Market Conduct investigation, the insurer recently entered a Consent Agreement and Final Order with the Department, which ordered the insurer to pay a $30,000 monetary penalty.

Oregon Regulatory Action a Reminder That Insurers Cannot Outsource Their Regulatory Responsibilities

The Oregon Department of Consumer and Business Services (“Oregon Department”) recently announced it had entered into an Order to Cease and Desist, Final Order Assessing Civil Penalty and Consent to Entry of Order (“Order”) with an insurer in which the insurer will pay a $60,000 civil penalty for alleged violations of the Oregon Insurance Code.

The regulatory action against the insurer was the result of the Oregon Department’s investigation that found that beginning in June 2017, the insurer made a procedural change whereby it increased the premium rates of its customers’ Medicare supplement insurance policies on each policyholder’s next premium due date, rather than on the policy’s annual anniversary. Prior to implementing this procedural change, the insurer relied on its third party administrator to research and identify any states in which the procedural change would violate state insurance law. However, the list of such states that was provided by the third party administrator to the insurer mistakenly excluded Oregon.

As a result of the procedural change, the insurer increased the premium rates of 804 Medicare supplement policies in Oregon more than once in a 12-month period, in violation of Oregon Administrative Rules 836-052-0151(3)(b).

This regulatory action by the Oregon Department is a reminder that insurers cannot  outsource their regulatory and compliance responsibilities and may be held strictly liable for alleged violations of insurance laws committed by their TPA business partners.

For More Information on our TPA Team

Polsinelli’s TPA team provides TPA licensing services, TPA regulatory and compliance services, drafting and negotiating of administrative services agreements, and a number of other TPA services.  Our TPA team includes attorneys who were former in-house counsel for TPAs, as well as attorneys who were formerly insurance regulators.

By leveraging its extensive experience representing TPAs, our TPA team helps clients avoid the learning curve and related cost implications that can be experienced by working with companies or attorneys less familiar with the regulatory and compliance needs of TPAs.  
For questions regarding this information, please contact one of the authors, a member of Polsinelli’s Third Party Administrators practice, or your Polsinelli attorney.

View the full alert here.