MARYLAND HEALTHCARE PROVIDERS INSURANCE EXCHANGE LIMITED SCOPE EXAMINATION RATE STABILIZATION SUBSIDY YEAR 2006

Transcription

1 MARYLAND HEALTHCARE PROVIDERS INSURANCE EXCHANGE LIMITED SCOPE EXAMINATION RATE STABILIZATION SUBSIDY YEAR 2006 NAIC NUMBER 12570

2 TABLE OF CONTENTS Executive Summary... 1 Conclusion... 2 Salutation... 3 Background... 3 Scope of Examination... 5 Finding and Recommendation Summary of Subsidy Year 2006 Requests Notes to the Summary of Subsidy Year 2006 Requests Conclusion Signatures Page

3 EXECUTIVE SUMMARY Chapter 1, Laws of Maryland, 2005 created the Maryland Health Care Provider Rate Stabilization Fund (hereinafter referred to as RSF). According to the aforementioned law, the RSF s revenues are allocated to two accounts: the Rate Stabilization Account and the Medical Assistance Program Account. The Rate Stabilization Account (RSA) provides subsidies to medical professional liability insurers who wish to participate on behalf of their policyholders who are eligible health care providers. Section (i) requires the Insurance Commissioner or the Insurance Commissioner's designee to conduct an annual audit to verify the information submitted by a medical professional liability insurer applying for reimbursement from the Rate Stabilization Account. In accordance with this law, we performed a limited scope examination of the Maryland Healthcare Providers Insurance Exchange, a reciprocal insurance exchange (hereinafter called the Company ) to verify the information submitted by the Company with its subsidy year 2006 requests for reimbursement from the Rate Stabilization Account. Our examination disclosed the following: Segregation of Duties Proper internal control procedures require a segregation of responsibilities in regard to the billing and cash receipt functions. Our examination disclosed that the same two employees perform the functions of billing, receiving cash payments, depositing the funds, verifying the bank deposit and entering the payment into the computer system. As a result, errors and irregularities could occur and go undetected. We recommend that the Company improve internal controls by developing and implementing procedures to provide for segregation of responsibilities in regard to the billing and cash receipt functions. 1

4 CONCLUSION As a result of our examination, we concluded that the Company s 2006 subsidy requests submitted to the Administration totaling $1,280,960 were accurate and reliable. 2

5 Baltimore, Maryland June 11, 2009 Honorable Ralph S. Tyler Insurance Commissioner Maryland Insurance Administration 200 St. Paul Place, Suite 2700 Baltimore, Maryland Dear Sir: In compliance with your instructions and in accordance with Section (i) of the Insurance Article of the Annotated Code of Maryland, we have conducted a limited scope examination of certain activities of: MARYLAND HEALTHCARE PROVIDERS INSURANCE EXCHANGE (hereinafter called the Company), at its Maryland Regional Office located at McCormick Road, Suite 205, Hunt Valley, Maryland 21031, and the following Report on Examination is submitted. Fund Background: BACKGROUND Chapter 1, Laws of Maryland 2005 (Senate Bill 836) created the Maryland Health Care Provider Rate Stabilization Fund (the Fund hereafter). The Fund consists primarily of premium tax revenue collected from health maintenance organizations and managed care organizations. The purposes of the Fund are to: (1) retain health care providers in the State by allowing medical liability professional insurers to collect rates that are less than the rates approved under of the Insurance Article; (2) increase fee-for-service rates paid by the Maryland Medical Assistance Program to health care providers identified under of the Insurance Article; (3) pay managed care organization health care providers identified under of the Insurance Article consistent with fee-for-service health care provider rates; and (4) increase capitation payments to managed care organizations participating in the Maryland Medical Assistance Program consistent with (b)(18) of the Health- General Article. The Fund s revenues are allocated to the Rate Stabilization Account and the Medical Assistance Program Account. In any period that an allocation is made to the Rate Stabilization Account, up to $350,000 is allocated annually to the Administration to provide for the costs incurred to administer the Fund. 3

6 Monies allocated to the Rate Stabilization Account are to be used to accomplish purpose (1) above by paying authorized medical professional liability insurance premium subsidies ( State subsidies ) to medical professional liability insurers who wish to participate in the Fund ( Participating Insurers ) on behalf of policyholders who are eligible health care providers. State subsidies are available only to licensed physicians and certified midwives. State subsidies are not available to corporate entities through which they practice or to other health care providers. Monies allocated to the Medical Assistance Program Account are to be used to accomplish purposes (2), (3) and (4) above by: increasing fee-for-service rates paid by the Maryland Medical Assistance Program to certain health care providers; paying certain managed care organization health care providers consistent with fee-for-service health care provider rates; and increasing capitation payments to managed care organizations participating in the Maryland Medical Assistance Program. The Fund replaced the Maryland Medical Professional Liability Insurance Rate Stabilization Fund that had been created by Chapter 5, Laws of Maryland 2004 (Special Session). Maryland Insurance Administration Bulletin 05-7, dated May 19, 2005, established procedures for obtaining reimbursements from the Maryland Health Care Rate Stabilization Fund Rate Stabilization Account (RSA). Specifically, this bulletin reiterated that the subsidies are for licensed physicians and certified nurse midwives, and clarified that the subsidies are not available to corporate entities through which they practice or to other health care providers. In addition, this bulletin provided instructions for calculating the amount of the Subsidy Year 2005 subsidy and the timing and type of information needed for the RSA reimbursement request form. Furthermore, this bulletin provided insight regarding the information needed to be maintained for the audit of their reimbursement requests. Maryland Insurance Administration Bulletin 05-8, dated May 20, 2005, provided information regarding the subsidy year 2005 funding allocation methodology for the RSA and clarified those policies subject to subsidy year 2005 subsidies, and potential reductions in subsidies if funds allocated to the RSA are insufficient. Company Background: The Company received a certificate of authority from the Maryland Insurance Administration on April 27, 2006 and issued its first policy with an effective date of July 1, The Exchange is a reciprocal insurance exchange that provides medical malpractice insurance in Maryland. Maryland Healthcare Providers Insurance Services Company, LLC (MD-AIF) is the Attorney-in-Fact for the policyholders of the Exchange pursuant to the Attorney-in-Fact agreement. 4

7 MD-AIF is wholly owned by American Healthcare Providers Insurance Services Company, LLC (American). A majority membership interest in American is owned by Wescott Holding Company, LLC ( Wescott ). Wescott is wholly owned by Duane Morris LLP, who provides legal services to the Exchange. Effective November 1, 2008, Healthcare Providers Insurance Exchange (HPIX) and Maryland Healthcare Providers Insurance Exchange (the Company) completed the combination of the businesses of the Company with the business of HPIX. As result of this transaction, HPIX assumed 100% of the rights, duties, obligations, assets, liabilities and surplus of the Company. HPIX is domiciled in Pennsylvania. The Company is now dissolved, effective the date of the merger. The Company wrote approximately 2.29% of the total medical professional liability insurance written in the State of Maryland during calendar year 2007, and received and disbursed approximately 9.65% of the subsidy year 2006 subsidy from the RSA. The Company submitted requests for RSA subsidy year 2006 subsidies as of August 1, 2006, November 1, 2006, March 1, 2007, May 15, 2007, October 1, 2007, and May 15, As of May 01, 2009, the cumulative RSA subsidy year 2006 subsidy requested and received by the Company totaled $1,280,960. Subsequent to our examination but prior to issuance of this report, the Company submitted a request to the Administration, dated March 27, 2009, requesting $40,809 unbilled subsidy relating to policyholders 4 th quarter installments. Therefore, the cumulative 2006 subsidy request increased from $1,240,151 to $1,280,960. RSA subsidy year 2006 is now complete for the Company. Section (i) of the Insurance Article of the Annotated Code of Maryland requires the Insurance Commissioner or the commissioner s designee to conduct an annual audit to verify the information submitted by a medical professional liability insurer applying for reimbursement from the RSA. Accordingly, this limited-scope examination of the Company s requests for reimbursement from the RSA for subsidy year 2006 was ordered to be conducted. SCOPE OF EXAMINATION This examination, covering the Company s RSA requests for subsidies and the related disbursements to the Company for subsidy year 2006, was conducted by examiners of the Maryland Insurance Administration. Limited-scope examinations consist of reviews of specific aspects of a company s operations or financial statements and the performance of specific procedures with respect to those aspects. By definition, limited-scope examinations are less comprehensive than fullscope examinations. Due to the limited scope of our examination, this Report is not intended to communicate all matters of importance for understanding of the Company. No full scope examination of the Company was previously performed as the Company issued its first policy with an effective date of July 1, The Company s 2006 subsidy 5

8 year included new business written with a policy effective date from May 15, 2006 through May 15, Since this was the Company s first year writing medical malpractice insurance business, no renewal business was written. Our examination was conducted in accordance with examination policies and standards established by the Maryland Insurance Administration and, accordingly, included such tests of the accounting records and such other examination procedures, as we considered necessary in the circumstances. In conducting our examination, we focused our examination on the completeness and accuracy of the RSA subsidy year 2006 subsidy requests submitted by the Company, and verification that the subsidy funds received by the Company were properly disbursed to the eligible Maryland health care providers. Specific procedures performed were as follows: Review of Procedures over Premiums: We reviewed procedures over the premium cycle to gain an understanding over the underwriting, policy issuance and recordation process (including procedures regarding initial premium, premium adjustments, cancellations, and endorsements.) We also obtained a general understanding of the premium rating system. For example, we inquired as to the various key rating components such as the impact of loss history, methodology of payment (e.g., installments), and other rating components resulting in discounts or surcharges on the premium charged to policyholders. Finally, we determined how the Company allocates premiums and claims to jurisdictions. For example, if a physician is licensed in multiple states and has multiple practice locations or hospital privileges, we determined how the company allocates and reports premiums and claims to particular jurisdictions. We utilized, to the extent possible, the work performed by the Company s independent auditors during their 2007 audit. No findings or recommendations were noted as the result of this procedure. Review of Procedures Concerning the RSF Subsidy Requests: We determined if the Company had developed any written internal policies and procedures concerning the RSF program. We determined if the Company's internal policies and procedures are consistent with Sections through of the Insurance Article of the Annotated Code of Maryland, and related Maryland Insurance Administration bulletins. Specifically, we reviewed the Company's procedures for determining which policyholders qualify for the subsidy; the Company s procedures for determining whether an eligible policyholder elected to receive the subsidy; the Company s methodology for capturing pertinent data; the Company s procedures for determining the portion of the premium eligible for subsidy, and the Company s process for calculating, receiving, recording and distributing the subsidy. No findings or recommendations were noted as the result of this procedure. 6

9 Review Independent Certified Public Accountant (CPA) and Internal Auditor Reports: This was the Company s first year in operation and the Company has since been combined with Healthcare Providers Insurance Exchange domiciled in Pennsylvania. The Company has no Internal Audit Department. We requested and reviewed the Company s independent CPA reports and workpapers regarding the work they performed related to the Company s premium cycle. No findings or recommendations were noted as the result of this procedure. Test of Calendar Year 2006 and 2007 Premium Data Files: The examiners obtained a data file containing all premium related activity (e.g., cancellations, endorsements, etc) occurring during calendar years 2006 and 2007 respectively as part of our subsidy year 2006 limited scope examination. The CPAs performed various tests to ensure the accuracy, completeness and proper cut-off of the aforementioned 2007 Premium Data Files and to ensure that the Company s premium controls were adequate. We obtained a premium data file of all Maryland premiums for calendar years 2006 and 2007 ( Maryland Premium File ). No findings or recommendations were noted as the result of this procedure. A separate file was obtained with subsidy information as noted under the heading Requests from Rate Stabilization Account below. Reconciled Maryland Premium Data File to 2006 and 2007 Annual Statements: We reconciled Maryland premiums written from the Maryland Premium File referred to in the previous step to the Company s 2006 and 2007 Annual Statement Schedule T. No findings or recommendations were noted as the result of this procedure. Requests from Rate Stabilization Account (RSA): We obtained and reviewed all of the Company s requests for RSA subsidy year 2006 subsidies. In addition, we obtained a revised cumulative subsidy data file ( Subsidy File ) containing all policies included in the requests with the policy number, health care provider s specialty and territory, and the subsidy amount. Using the Subsidy File, we performed the following: 1. We requested a reconciliation from the Company of the Subsidy File to the Premium Data File obtained above under the heading Test of Calendar Year 2006 and 2007 Premium Data Files. No findings or recommendations were noted as the result of this procedure. 2. We agreed the total number of eligible policyholders (201) and the total state subsidy ($1,280,960) on the Company's subsidy request forms to the Subsidy File. In addition, we agreed the total state subsidy by territory on the Company s cumulative subsidy year 2006 reimbursement request to the 7

10 Company s Subsidy File for all three of the Company s territories. We also selected 2 specialties within one territory and agreed the total subsidy by territory and specialty on the Company s cumulative subsidy request form to the Company s Subsidy File. Finally, we verified the mathematical accuracy of the Company's calculation of cumulative subsidy based on the information contained in the Subsidy File. Test of Subsidies: We scanned the Subsidy File obtained in the previous step and obtained additional information as deemed necessary to search for the improper inclusion of health care providers or portion s of premium that are ineligible for subsidy (e.g., ancillary services). Using the Subsidy File, we also selected a judgmental sample of the highest 30 subsidies for testing. The Company provided us with a policy file for each health care provider in our sample which included a copy of the physician s policy application, underwriting forms, and a spreadsheet calculating the amount of subsidy for the health care provider including all of the rating components that went into the subsidy calculation for our sampled items (e.g., secondary jurisdiction surcharge, scheduled debit or credit, etc.), and we performed the following: 1. Agreed each subsidy in our sample to the policy application file and verified that the policyholder was an eligible health care provider subject to subsidy. 2. Verified the geographical territory and provider classification were correct by agreeing the territory and specialty to an application filed by the health care provider or additional policyholder submissions documenting their geographical territory and type of specialty. 3. Verified that the rates used in the calculation of subsidy (both the base rates and discounts or surcharges) agreed to rates contained in the rate filings approved by the Maryland Insurance Administration and represented premiums subject to subsidy under Title 19 of the Insurance Article of the Annotated Code of Maryland. 4. Verified that the rates used in the calculation of subsidy (both the base rates and discounts or surcharges) were actually billed to the policyholder. 5. Reviewed the claims history file to determine if surcharges or discounts applied for loss experience were calculated accurately. In this regard, surcharges or a loss of a discount for poor loss experience are required to be excluded from the subsidy calculation by Title 19 of the Insurance Article of the Annotated Code of Maryland. 8

11 6. Determined if the premiums represented premiums written in Maryland. 7. Determined if cancellations and/or rating changes during the policy period were processed and recorded correctly in the subsidy calculation. 8. Verified the Company accurately calculated the subsidy amount. 9. Determined if the subsidy was requested in the correct quarter. Our examination disclosed that the 30 subsidies selected for testing included health care providers that were in a group policy with other health care providers and that their subsidy calculations were performed on the same spreadsheet. We limited our review to the health care providers included in our sample. No findings or recommendations were noted as the result of this procedure. Verified Funds Disbursed Properly and Timely: Using the judgmental sample of 30 health care providers referred to above under the caption Test of Subsidies, we determined that the Company provided health care providers with a rate reduction of their subsidy calculation prior to billing which complies with Insurance Article (g) of the Annotated Code of Maryland requiring subsidy funds disbursed in a timely manner to policyholders. No findings or recommendations were noted as a result of this procedure. Policyholders Electing Not To Receive State Subsidies: The Company did not have any policyholders electing not to receive subsidy as submitted with the Company's RSA subsidy request forms. No findings or recommendations were noted as a result of this procedure. Summary of Subsidy Year 2006 Subsidy Requests: Based on the results of our examination, we summarized the information contained in the Company s cumulative subsidy requests, our examination adjustments, and final amounts per examination. We did not recommend any examination adjustments as a result of our examination. Presented on Pages 11 and 12 of this Report is a summary of the number of health care providers reported and the calculation of related subsidy requested and received by the Company for Subsidy Year Verified Reasonableness of 2007 Subsidy Projection: We verified the accuracy of the information submitted to the Maryland Insurance Administration for the 2007 subsidy year projections used to calculate subsequent year subsidy factors. Specifically, we compared the actual Maryland medical professional liability insurance premium from the 2006 subsidy year currently being examined to the amount reported in the Company s 2007 subsidy year projections. We determined the 9

12 reasonableness of the 2007 subsidy projection. Our review disclosed that the information the Company reported was reasonable based on the information the Company had at the time. No findings or recommendations were noted as a result of this procedure. FINDING AND RECOMMENDATION Segregation of Duties: During 2007, the Company wrote direct Maryland premiums totaling $7,394,250. Most of the Company s premium receipts were initially received by mail in the Hunt Valley office and then were entered into the on-line Wachovia system to immediately transfer funds. Large groups could wire transfer premiums into the Company account. Our examination disclosed that the Company had two underwriters assigned to their Hunt Valley office. These same two employees performed all functions regarding underwriting, billing, the receipt and deposit of cash and the recording of premium receipts. Proper internal control procedures require a segregation of responsibilities in regard to the billing and cash receipt functions. Our examination disclosed that the Company did not have adequate internal controls over their cash receipt and billing processes. The person opening mail and depositing cash should not maintain the cash receipt records. The person that prepares billings and makes adjustments within the premium system should not handle cash receipts. As a result of the above conditions, errors and irregularities could occur and go undetected. We recommend that the Company develop procedures to improve internal controls over cash receipts by segregating the functions of receiving and depositing funds from the functions of entering payments to the computer system and verifying the bank deposit. 10

13 SUMMARY OF SUBSIDY YEAR 2006 SUBSIDY REQUEST Cumulative Subsidy Filings as of 05/01/09 Examination Adjustments Amount per Examination Number of healthcare providers Aggregate premium charged by the insurer at the 2006 approved rates (exclusive of 2006 surcharges or loss of a discount due to loss experience) (NOTE 1) $5,133,288 $0 $5,133,288 Aggregate premium determined by insurer by applying the 2005 rates to the 2006 rating factors for those policyholders for whom subsidies are being requested exclusive of 2006 surcharges or loss of a discount due to loss experience, multiplied by (NOTE 1) $5,123,937 $0 $5,123,937 Gross State Subsidy reimbursement amount (NOTE 1) $1,280,960 $0 $1,280,960 Subsidy (NOTE 1) $1,280,960 $0 $1,280,960 Note: The Notes to the Summary of Subsidy Year 2006 Policyholders and Subsidy Requested are an integral part of this Summary. 11

14 NOTES TO SUMMARY OF SUBSIDY YEAR 2006 SUBSIDY REQUESTS 1. The Company reported Aggregate premiums charged by the insurer at the 2006 approved rates excluding surcharges or loss of discount due to loss experience totaling $5,133,288 on its 2006 subsidy RSA Reimbursement Forms requesting subsidy. The Company reported Aggregate premiums determined by the insured by applying the Medical Mutual Liability Society of Maryland s (MMLSM) 2005 approved rates using the Company s 2006 rating factors for the policyholder (hereinafter referred to as the 2005 Comparable Rated Premium) totaling $5,123,937 on its RSA Reimbursement Forms. In this regard, the Company utilized the MMLSM s 2005 approved rates through December, 2006, and thereafter utilized the Company s approved 2006 rates to apply the 25% subsidy calculation. The 2006 Company rates were approximately the same as 2005 MMLSM rates. 12

15 CONCLUSION As a result of our examination, we concluded that the Company s 2006 subsidy requests submitted to the Administration totaling $1,280,960 were accurate and reliable. 13

16 SIGNATURES Respectfully submitted, Ronald Dow, CPA Examiner In-Charge Maryland Insurance Administration Under the supervision of, David Palmer, CFE Chief Examiner Maryland Insurance Administration 14

17 MARTIN O MALLEY Governor ANTHONY G. BROWN Lt. Governor RALPH S. TYLER Commissioner ELIZABETH SAMMIS KAREN STAKEM HORNIG Deputy Commissioner LESTER C. SCHOTT Associate Commissioner Examination & Auditing 525 St. Paul Place, Baltimore, Maryland Direct Dial: Fax: dpalmer@mdinsurance.state.md.us TTY: October 9, 2009 Thomas S. Gaudiosi Chief Executive Officer Maryland Healthcare Providers Insurance Exchange 30 South 17 th Street, 11 th Floor Philadelphia, PA Dear Mr. Gaudiosi: Enclosed is a draft copy of the Report on Examination of the affairs and financial condition of the Maryland Healthcare Providers Insurance Exchange, as of Subsidy Year 2006, dated June 11, Please call our attention to any errors or omissions. Unless a written request for a Hearing with respect to the Report (in accordance with the provisions of Sections and 2-210, Insurance Article of the Annotated Code of Maryland) is received on or before November 10, 2009, the Report will become final, and will be filed as a public document within this Administration. The Report on Examination contains a section entitled Comments and Recommendations that discloses certain areas requiring action. Please submit a statement covering the corrective measures which will be taken. If the Company s position on any of these points is contrary to the Examiner s findings, an explanation should be submitted covering each contested comment and/or recommendation. All of your comments concerning these matters must be in writing and shall be furnished to this Administration within thirty (30) days from the date of this letter (November 10, 2009). In addition to the hard copy mailed to the Administration, also please send our response electronically in Microsoft Word format to pgiles@mdinsurance.state.md.us.

18 The Report on Examination should be called to the attention of your Board of Directors at its next meeting. Each Director should review the Report and acknowledge such review over his signature. Documentation of such review should be maintained for future verification. If you have any questions or if you would like to discuss these recommendations, please do not hesitate to call me at Sincerely, Original Signature on File David A. Palmer, CFE Chief Examiner

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21 MARTIN O MALLEY Governor ANTHONY G. BROWN Lt. Governor RALPH S. TYLER Commissioner BETH SAMMIS KAREN STAKEM HORNIG Deputy Commissioner LESTER C. SCHOTT Associate Commissioner Examination and Auditing October 27, 2009 Thomas S. Gaudiosi Chief Executive Officer Maryland Healthcare Providers Insurance Exchange 30 South 17 th Street, 11 th Floor Philadelphia, PA Dear Mr. Gaudiosi: 200 St. Paul Place, Suite 2700, Baltimore, Maryland Direct Dial: Fax: dpalmer@mdinsurance.state.md.us TTY: We are in receipt of a letter, dated October 20, 2009, from Brian S. Schleider, Chief Financial Officer, which addresses the corrective action taken by Maryland Healthcare Providers Insurance Exchange, to comply with the recommendations made in the Report on Examination for Subsidy Year 2006, dated June 11, The response adequately addresses the recommendation made in the Report. During our next examination of the Company, we will review the implementation of the corrective actions taken regarding the recommendation contained in our Report. As the October 20, 2009 letter did not request a hearing, pursuant to of the Insurance Article, Annotated Code of Maryland, the Report is Final and is attached for your records. Sincerely, Original Signature on File David A. Palmer, CFE Chief Examiner