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Slide 1: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Program Financial Reporting Texas Department of Insurance Jeff Hunt, CPA Company Licensing and Registration Financial Program Texas Department of Insurance Phone – 512-305-7293 Fax – 512-350-3550 Jeff.hunt@tdi.state.tx.us 1
Slide 2: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Topics of Discussion Clarification of financial regulatory expectations beneficial to both Workers’ Compensation Networks (WCN’s) and the Texas Department of Insurance (TDI) • Clarification of Certification Requirement • Annual Filing Requirements • TDI Expectations Texas Department of Insurance 2
Slide 3: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Clarification of Certification Requirement Getting off on the right foot! • What organization is getting certified? • What if the organization is already licensed by TDI? • What if the organization is not already licensed by TDI? Texas Department of Insurance 3
Slide 4: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Clarification of Certification Requirement “Everything should be made as simple as possible, but not one bit simpler.” Al bert Einstei n What organization is getting certified? • What type of organization is requesting a WCN Certification? Texas Department of Insurance •Corporation •Limited Liability Company •Regulated entity • Submit charter documents to verify: Articles of Incorporation/By-laws 4
Slide 5: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Clarification continued What if the organization is already licensed by TDI? • Only need to file a management contract • TPAs and MGAs are expected to file a full WCN certification application Texas Department of Insurance 5
Slide 6: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Clarification continued What if the organization is not already licensed by TDI as a risk bearing entity? Submit the following complete exhibits: • Organizational Documents – charter docs, organization chart, internal organization chart • Management Contract (if applicable) • GAAP Financial Statement – balance sheet, income statement, statement of cash flows, statement reflecting the sources and uses of all funds • Service of Process Form • Physical Location of Books and Records • Business Plan and Projections • Financial Authorization Form 6 Texas Department of Insurance
Slide 7: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Annual Filing Requirements “To change and to change for the better are two different things.” German proverb After certification • § 1305.201, NETWORK FINANCIAL REQUIREMENTS • § 1305.155, COMPLIANCE REQUIREMENTS Texas Department of Insurance 7
Slide 8: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Annual Filing Requirements, continued § 1305.201. NETWORK FINANCIAL REQUIREMENTS • On a calendar year basis, the WCN shall prepare financial statements in accordance with GAAP: 1) 2) 3) 4) 5) a balance sheet an income statement a cash flow statement a statement of equity; and a supplemental description of the network's basic organizational structure, general business relationships, and management Texas Department of Insurance 8
Slide 9: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Annual Filing Requirements, continued § 1305.201. NETWORK FINANCIAL REQUIREMENTS (Continued): • On or before April 1st of each year, each WCN shall provide the network's financial statement to:    1) Each carrier with which the network contracts to facilitate carrier and network compliance under Insurance Code §1305.154(c) and §1305.155 and Texas Administrative Code §10.41; and 2) TDI, by sending the financial statement to the HMO Division, Mail Code 103-6A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 787149104 9 Texas Department of Insurance
Slide 10: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Annual Filing Requirements, continued § 1305.155. COMPLIANCE REQUIREMENTS: • A network shall file with the department as soon as practicable but not later than 30 days prior to implementation, a written request for approval and must receive department approval before implementation of changes to the following: 1) Management contracts and information regarding fidelity bonds as described in Insurance Code §1305.102 Texas Department of Insurance       10
Slide 11: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Annual Filing Requirements, continued § 1305.155. COMPLIANCE REQUIREMENTS (continued): 2) The physical location of the network's books and records 3) Material modification of network configuration; and 4) Expansion, elimination, or reduction of an existing service area, or addition of a new service area Texas Department of Insurance 11
Slide 12: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting Annual Filing Requirements, continued § 1305.155. COMPLIANCE REQUIREMENTS (continued): • A network shall file with the department any information other than the information mentioned that amends, supplements, or replaces the items required under §10.22 of this subchapter ( the application for certification documents) • The information must be filed no later than 30 days after implementation of any change Texas Department of Insurance 12
Slide 13: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations – What are we looking for? Understanding the TDI’s expectations and regulatory duties: • What does the Department expect in a business plan? • What does the Department expect to see in a management agreement? • What does the Department expect in an annual financial report? Texas Department of Insurance 13
Slide 14: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations “In the business world, the rearview mirror is always clearer than the windshield.” W arren Buffett Business Plans • Narrative description of intended operations in this state, as indicated by the service arrangements listed in Section IV of the application Texas Department of Insurance 14
Slide 15: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued Business Plans, continued • The income statement projections should provide detail of revenue and expense components of each service arrangement listed in Section IV of the application • Please describe the methods of compensation by which any contracted insurance carrier/s shall reimburse the WCN applicant for contracted services to be provided by applicant. Any capitation arrangement or any other method by which risk would be transferred from any carrier to applicant is prohibited Texas Department of Insurance 15
Slide 16: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued “Good management is the art of making problems so interesting and their solutions so constructive that everyone wants to get to work and deal with them.” P aul Hawken Management Agreements • Management services include management control and decision-making, and contracting on behalf of the network under a delegation of management authority, power of attorney or other arrangement • A network may not enter into a contract with another entity Texas Department of Insurance for management services, or modify a previously approved management contract, unless the proposed contract or modification is filed and approved 16
Slide 17: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued “A verbal contract isn't worth the paper it's written on.” Samuel Goldwyn, Management Agreements, continued The contract must state that: 1) The contract may not be canceled without cause without at least 90 days' prior written notice 2) Notice of any cancellation must be sent simultaneously to the commissioner by certified mail; and 3) The network is responsible for ensuring that all functions delegated by the contract are performed in accordance with applicable statutes and rules, subject to the carrier's oversight and monitoring of the network's performance Texas Department of Insurance 17
Slide 18: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued Management Agreements, continued 1) The proposed contractor must provide information (Biographical affidavit and digital fingerprints for directors/officers/controlling persons) so that TDI can determine competence, and trustworthiness of the contractor. None of the fore-mentioned should be convicted of a felony involving moral turpitude or breach of fiduciary duty 1) The management agreement should be considered an “arms length transaction”. The contractor should be free of interests that create a conflict in its ability to provide services in the best interest of employers, employees, creditors, or the public 18 Texas Department of Insurance
Slide 19: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued Annual Financial Reports April 1st Annual Statement filing: • Send to TDI the same report that was sent to the contracting carrier/s • Full GAAP compliant financial statements. Full disclosure of the Financial situation of the entity reporting Texas Department of Insurance • Concern is an WCN with a negative equity balance and inability to meet its ongoing operational obligations 19
Slide 20: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued GAAP Statements April 1st Annual Statement filing: 1) A balance sheet: Assets – liabilities = equity, Assets include categories of current assets (those which will be consumed or convert to cash within a year), non-current assets ( those which will not be consumed or convert to cash within a year) 1) Liabilities include current liabilities (obligations that will be satisfied through the use of current assets), Long term liabilities (those obligations that will not be satisfied by the consumption of current assets) 1) Equity reflects net assets: retained earnings, funds paid in 20 Texas Department of Insurance
Slide 21: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued GAAP Statements, continued April 1st Annual Statement filing, continued 1) An income statement; – range from complex (income from operations, discontinued operations, extraordinary items, etc.) to single step (revenues - expenses = NI) 1) A cash flow statement; Starts with the net income number and backs out cash impacted operating results, investing activities, and financing activities to reflect net increase/decrease in cash (very reflective of an WCN’s ability to meet its ongoing obligations).    Texas Department of Insurance 21
Slide 22: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI Expectations, continued April 1st Annual Statement filing, continued 1) A statement of equity; reflects changes in net assets- Has the WCN grown from increases in net income, comprehensive income? Or has it decreased from losses? 1) A supplemental description of the network's basic organizational structure, general business relationships, and management; notes to the financial statements. This final consideration of material operating items ultimately wraps up loose ends to comply with “full disclosure”. Texas Department of Insurance 22
Slide 23: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting • Communication is key to a successful regulatory environment, with Texas Insurance Code Ch. 1305 and the Texas Administrative Code Ch. 10 being the core language. • The intention of this presentation is to assist the Industry in understanding statute/guidelines, our procedural expectations, and the importance of full disclosure. In conjunction, TDI must be accessible to the industry, and cognitive of how it functions as to sufficiently support the public we both serve. 23 Texas Department of Insurance
Slide 24: LIFE, HEALTH & LICENSING 2007 Workers’ Compensation Health Care Network Workshop Financial Reporting TDI’s Web Page http://www.tdi.state.tx.us Texas Department of Insurance 24