44TH LEGISLATURE - STATE OF NEW MEXICO - FIRST SESSION, 1999

RELATING TO HEALTH; ENACTING THE NONPROFIT HEALTH PLAN CONVERSION ACT; AMENDING AND ENACTING SECTIONS OF THE NMSA 1978.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

Section 1. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] SHORT TITLE.--Sections 1 through 12 of this act may be cited as the "Nonprofit Health Plan Conversion Act"."

Section 2. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] FINDINGS AND PURPOSE.--

A. The legislature finds that substantial changes in health care and in market conditions are affecting nonprofit health plans and health care providers and are providing an impetus for many nonprofit health care entities to convert to for-profit status or enter into arrangements whereby control of the nonprofit is entirely or partly transferred to the for-profit sector.

B. The legislature further finds that nonprofit corporations hold their assets in trust for charitable purposes and that the organizations benefit from considerable public subsidies in the form of tax exemptions and receipt of tax-deductible donations. The public interest in nonprofit assets must be protected in the course of transactions in which control of these entities is transferred to the for-profit sector.

C. The purposes of the Nonprofit Health Plan Conversion Act are to regulate such transactions by setting out the procedures to be followed when a nonprofit health plan purposes to convert to for-profit status, to ensure that charitable assets remain in the public realm and continue to serve the public interest, rather than inuring to private benefit, and to ensure that New Mexico charitable assets are not lost to the people of New Mexico through transactions involving New Mexico nonprofit health care plans and entities outside of New Mexico."

Section 3. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] DEFINITIONS.--As used in the Nonprofit Health Plan Conversion Act:

A. "applicant" means a New Mexico nonprofit health care plan that seeks to convert to a corporation organized for pecuniary profit;

B. "charitable assets" means the net value of the nonprofit care plan, after payment of legal obligations of the plan;

C. "convert" means within a five-year period to transfer in one or more transactions the legal or equitable ownership of or direct or indirect control of an aggregate of twenty percent or more of the assets, operations or business of a nonprofit health care plan or a mutual corporation holding assets in a charitable trust to a person other than a nonprofit corporation;

D. "mutual corporation holding assets in charitable trust" means a mutual corporation that has converted from a nonprofit health care plan and that has not yet discharged its obligations by distributing the charitable assets to a successor charitable organization;

E. "new corporation" means the for-profit entity resulting from the conversion; and

F. "nonprofit health care plan" means a health care plan created pursuant to the Nonprofit Health Care Plan Law."

Section 4. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] PROCESS FOR CONVERSION.--

A. No nonprofit health care plan may convert without first applying for and receiving the approval of the superintendent. The application filed with the superintendent shall include a plan of conversion containing all information required by this section and any other information the superintendent deems necessary. No filing is complete until the superintendent has acknowledged receipt of a completed application.

B. A plan of conversion submitted to the superintendent by an applicant shall comply with Sections 59A-37-4 and 59A-37-5 NMSA 1978, to the extent relevant to nonprofit health care plans, and shall include the following information or documents and any other information or documents required by the superintendent:

(1) the business rationale for the conversion;

(2) the proposed articles of incorporation and bylaws of the new corporation;

(3) a description of the proposed transaction, including the schedule, terms and any conditions, other than approval of the application by the superintendent, to be fulfilled by a proposed date upon which the transaction would occur;

(4) a description of any changes in the applicant's mode of operations after conversion;

(5) a statement describing the manner in which the plan of conversion:

(a) provides for the protection of all existing rights of the corporation's policyholders, subscribers and enrollees to medical or hospital services and payment of claims for reimbursement for those services; and

(b) ensure continuity of care for subscribers and enrollees;

(6) a statement that all liabilities and obligations in existence prior to the conversions continue to exist and attach to the new corporation;

(7) documentation showing that the applicant, acting by its board of directors, has approved the plan of conversion;

(8) documentation of a comparative premium rate analysis of the applicant's major plans and product offerings, comparing actual premium rates for the three-year period prior to the filing of the plan of conversion and projected premium rates for the three-year period following any proposed conversion. Any such rate analysis shall address the projected impact, if any, of the proposed conversion upon the cost to subscribers as well as the projected impact, if any, of the proposed conversion upon the new corporation's underwriting profit, investment income and loss and claim reserves, including the effect, if any, of adverse market or risk selection upon such reserves;

(9) the current or proposed articles of incorporation and bylaws of each charitable organization that will receive the charitable assets. The application shall describe how the public, health care consumers and consumer advocates were involved in developing the articles and bylaws and the mission, structure and governance of any new charitable organization created to receive the charitable assets, or in selecting any existing charitable organization to receive those assets;

(10) any proposed agreements between the charitable organization receiving the charitable assets and the applicant or the new corporation, including any agreement relating to the voting or registration for sale of any capital stock to be issued by the new corporation to the charitable organization; and

(11) a description of plans or proposals to liquidate the applicant, sell its assets or consolidate or merge it with any other person, or to make other material changes in its business or corporate structure or management.

C. In reviewing an application filed pursuant to this section, the superintendent shall examine and determine that:

(1) the financial condition of any party will not jeopardize the financial stability of the insurer or prejudice the interests of policyholders, subscribers or enrollees;

(2) the plan of conversion has been adopted by a majority vote of the board of directors of the applicant;

(3) the governing body of the applicant exercised due diligence in deciding to dispose of the assets of the applicant in selecting the acquiring entity and in negotiating the terms and conditions of the acquisition;

(4) the plan of conversion is not prejudicial to the rights of policyholders, subscribers or enrollees of the new corporation;

(5) the plan of conversion adequately protects the existing rights of the applicant's policyholders, subscribers and enrollees to medical or hospital services and to payment of claims for reimbursement for those services and ensures continuity of care for subscribers and enrollees;

(6) the applicant has complied with all material requirements of the Insurance Code and disciplinary action is not pending against it;

(7) the competence, experience and integrity of those persons who would control the operation of the new corporation has been demonstrated;

(8) the applicant is receiving full fair market value for its assets, and the value of those assets has not been manipulated by the actions of any party in a manner that causes the fair market value of the assets to decrease. Fair market value shall be determined at the time of conversion, as if the applicant had voting stock outstanding and one hundred percent of its stock were freely transferable and available for purchase without restrictions. Consideration shall be given to market value, investment or earning value, net asset value and a control premium, if any;

(9) the new corporation, after conversion, will be able to satisfy the requirements for the issuance of a certificate of authority to write the line of insurance for which it is currently authorized or for which it has applied;

(10) the conversion will not have an adverse effect on competition in insurance in the state;

(11) if the applicant or any other party to the conversion has any plans or proposals to liquidate the new corporation, sell its assets or consolidate or merge it with any other entity, or to make any other material change in its business or corporate structure or management, that any such plans or proposals will have no detrimental impacts on policyholders, subscribers or enrollees of the new corporation or on the public interest;

(12) there has been no breach of fiduciary duty and that the conversion will not create a conflict of interest or result in private inurement to any officer, director, board member, executive or expert employed or retained by the parties, or any other person;

(13) the new corporation, upon conversion, will meet the applicable standards and conditions of the Insurance Code, including applicable minimum capital and surplus requirements;

(14) the plan of conversion is in the public interest. The superintendent shall find that the plan of conversion is in the public interest only if it provides a benefit for the people of New Mexico equal to the value of the corporation at the time of conversion, in accordance with the criteria set out in this subsection. In determining whether the plan of conversion is in the public interest, the superintendent may also consider other factors, including those relating to the accessibility and affordability of health care insurance; and

(15) the attorney general has given approval pursuant to Section 5 of the Nonprofit Health Plan Conversion Act."

Section 5. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] ATTORNEY GENERAL'S REVIEW.--

A. Before the superintendent approves a plan of conversion, the attorney general, on behalf of the public and charitable interests in this state, must approve the determination of the applicant's fair market value, the articles of incorporation and bylaws of the charitable organizations that will receive the charitable assets and any proposed stock agreements, voting trusts, voting agreements, stock divestiture agreement or similar agreements relating to the organization's potential ownership interest in stock of the new corporation. To approve a conversion, the attorney general fund must find that the requirements set out in Section 8 of the Nonprofit Health Plan Conversion Act have been met.

B. The attorney general shall present his findings to the superintendent in writing and shall state whether the application satisfactorily meets the criteria set forth in the Nonprofit Health Plan Conversion Act.

C. Nothing in the Nonprofit Health Plan Conversion Act limits the power of the attorney general to seek a declaratory judgement or to take other legal action to protect or enforce the rights of the public in a nonprofit organization."

Section 6. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] PUBLIC NOTICE, RECORDS AND HEARING--SUPERINTENDENT'S DECISION.--

A. Within seven business days after an application is filed with the superintendent, the applicant shall publish notice of the proposed conversion in a form approved by the superintendent in one or more newspapers of general circulation in the area where the nonprofit applicant conducts business. The notice shall be published once a week for three consecutive weeks. Within the same time period, the superintendent shall mail notice to all persons who have requested in writing notice of the filing of applications made pursuant to the Nonprofit Health Plan Conversion Act. A material change in the terms or conditions of the proposed conversion is considered a new filing for purposes of this section.

B. The application and all supporting or supplemental materials filed with the superintendent shall be public records and shall be made available for inspection and copying at the office of the insurance division and the office of the applicant. Charges for copies provided by the insurance division or the applicant must be based upon actual costs not to exceed the prevailing community market rates for photocopying, or fifty cents ($.50) per page, whichever is less.

C. The superintendent shall hold at least one public hearing on the proposed conversion. The number and location of public hearings held shall be based on the size of the population and geographic area served by the nonprofit health care plan. At least twenty-one days prior to each public hearing, the superintendent shall provide written notice of the time and place of the hearing through publication in one or more newspapers of general circulation in the affected communities. The notice shall be published once per week for three consecutive weeks. In addition, the superintendent shall mail notice of the hearing to those persons referred to in Subsection A of this section. The superintendent has the discretion to hold additional hearings. The superintendent shall notify the attorney general promptly of the scheduled hearing dates. At the hearing:

(1) a person may file written comments or exhibits or may appear and make a statement; and

(2) the superintendent may subpoena additional information or witnesses, require and administer oaths and require sworn statements at any time prior to making a decision on an application.

D. Within ninety days of the receipt of a completed application the superintendent shall notify the applicant in writing of the decision to approve, approve with conditions or disapprove the plan of conversion. The superintendent may extend this period for an additional ninety days if necessary."

Section 7. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] CONSULTATION AND EXPERT ASSISTANCE--RULEMAKING AUTHORITY.--

A. In considering whether to approve a conversion, both the superintendent and the attorney general may contract with, consult and receive advice from any state or federal agency on those terms and conditions they deem appropriate.

B. The superintendent and the attorney general may retain any experts or consultants reasonably necessary to assist in their review of the proposed conversion. The superintendent and the attorney general may each require the applicant, the new corporation and any other parties to the transaction to enter into an agreement, on terms established by the superintendent or the attorney general, respectively, to pay for any costs incurred in retaining the assistance, and the responsible parties shall, upon request, promptly pay those costs.

C. The superintendent and the attorney general are entitled to reimbursement for reasonable costs incurred in providing notice, holding public hearings and providing records to the public pursuant to the Nonprofit Health Plan Conversion Act. The superintendent and the attorney general may each require the applicant, the new corporation and any other parties to the transaction to enter into an agreement, on terms established by the superintendent or the attorney general, to pay for any costs, and the responsible parties shall, upon request, promptly pay all those costs.

D. The superintendent and the attorney general may adopt rules to implement the provisions of the Nonprofit Health Plan Conversion Act."

Section 8. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] PRESERVATION OF CHARITABLE ASSETS.--

A. The charitable assets of a converted plan shall be irrevocably dedicated to charitable health purposes.

B. The charitable assets of a converted plan shall be distributed to one or more existing or new tax-exempt charitable organizations operating pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986. In either instance, whether or not the charitable organization is classified as a private foundation pursuant to Section 509 of the Internal Revenue Code of 1986, the charitable organization shall be subject to the restrictions and limitations that apply to private foundations found in Sections 4941 through 4945 of that code.

C. With the approval of the attorney general, all or a portion of the amount conveyed to the charitable organization receiving the charitable assets may consist of stock in the new corporation.

D. Any agreements between the charitable organization receiving the charitable assets and the applicant or new corporation, including any agreements relating to the voting or registration for sale of any capital stock to be issued by the new corporation to the charitable organization, shall be on terms that are fair to the charitable organization and provide that organization with sufficient flexibility to manage its investment.

E. A charitable organization receiving charitable assets as the result of a conversion is subject to the following requirements:

(1) its directors, officers and staff shall be and remain independent of the new corporation and its affiliates;

(2) the charitable mission and grantmaking functions of the charitable organization shall be dedicated to serving the health needs of the people of New Mexico, particularly with regard to the medically uninsured and underserved populations, and shall focus on improving health, including improving access to services, enhancing quality of care and addressing prevention and health promotion;

(3) it shall establish formal mechanisms to avoid conflicts of interest and to prohibit grants benefiting the board of directors or management of the applicant or of the new corporation;

(4) it shall provide the attorney general with an annual report of its grantmaking and other charitable activities related to its use of the charitable assets received. The annual report shall be made available to the public at both the attorney general's office and the office of the charitable organization;

(5) it shall maintain a community advisory committee to offer broad public input to the charitable organization concerning its operations and activities;

(6) no part of its net earnings shall inure to the benefit of any private shareholder or individual; and

(7) its governing board shall be representative of the community and its structure and operations shall provide mechanisms for ongoing public consultation and participation.

F. No director, officer or employee of the applicant or new corporation may receive:

(1) any fee, commission, compensation or other valuable consideration for aiding, promoting or assisting in the conversion of the nonprofit health care plan, other than compensation paid to the director, officer or employee of the corporation in the ordinary course of business; or

(2) any distribution of the assets, surplus, capital or capital stock of the new corporation as part of a conversion."

Section 9. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] MUTUALIZATION PROHIBITED--RECOVERY OF CHARITABLE ASSETS FROM MUTUAL CORPORATION HOLDING ASSETS IN CHARITABLE TRUST.--

A. A nonprofit health care plan is prohibited from becoming a mutual corporation.

B. A mutual corporation holding assets in a charitable trust retains a charitable trust obligation to preserve its assets for charitable purposes. This obligation shall be paid by the mutual corporation at the time the mutual corporation converts into a corporation organized for pecuniary profit or generates sufficient funds to fulfill its charitable trust obligation. The basis for the valuation of the trust obligation shall be the fair market value of the nonprofit health care plan on the date the plan became a mutual corporation, augmented by any increase in value of the mutual corporation attributable to the use of the charitable assets or to the mutual corporation's prior status as a nonprofit health care plan, consistent with Section 4 of the Nonprofit Health Plan Conversion Act.

C. If a mutual corporation holding assets in charitable trust enters into an agreement or transaction to demutualize, it shall submit an asset distribution plan to fulfill its charitable obligations, consistent with the requirements of Section 4 of the Nonprofit Health Plan Conversion Act. The superintendent shall comply with the hearing procedures set out in Subsection C of Section 6 of that act. No agreement or transaction to demutualize shall occur unless the superintendent approves the plan as fair and equitable to the public and complies with the provisions of that act."

Section 10. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] TRANSACTIONS INVOLVING FOREIGN NONPROFIT ENTITIES.--

A. The provisions of this section apply only when a nonprofit health care plan proposes to convert to a foreign for-profit entity.

B. Charitable assets involved in a conversion described in Subsection A of this section shall be identified as of the time the nonprofit health care plan enters into the conversion. In the event the nonprofit health care plan or any successor in interest converts to a foreign corporation organized for pecuniary profit at any future time, the health care plan or successor shall comply with the provisions of the Nonprofit Health Plan Conversion Act, and the charitable assets, augmented by any increase in value attributable to the use of such assets, shall be distributed to one or more nonprofit organizations as provided in that act.

C. The superintendent and the attorney general shall retain jurisdiction over the nonprofit health care plan or any successor for the purposes of enforcing compliance with the Nonprofit Health Plan Conversion Act or with any conditions imposed or commitments undertaken pursuant to Subsection E of this section.

D. A nonprofit health care plan shall not enter into a conversion described in Subsection A of this section without first giving notice to and receiving approval from the superintendent. The notice shall be in the form prescribed by the superintendent and shall, at a minimum, comply with Sections 59A-37-4 and 59A-37-5 NMSA 1978 to the extent relevant to nonprofit health care plans, and shall include the following information:

(1) the parties to the proposed transaction, with a statement of the charitable purposes of each party;

(2) the information set forth in Paragraphs (1) through (8) and (11) of Subsection B of Section 4 of the Nonprofit Health Plan Conversion Act; and

(3) such other information as the superintendent may require.

E. As a condition of approval of the proposed conversion, the superintendent shall:

(1) require each party to the proposed conversion to stipulate that:

(a) it is a charitable and benevolent nonprofit institution;

(b) it is entrusted with New Mexico charitable assets and undertakes to protect and preserve those assets for the benefit of the people of New Mexico;

(c) in the event of a future conversion of the nonprofit health care plan or any successor to a corporation organized for pecuniary profit or mutual company, such assets will be disposed of in accordance with the provisions of the Nonprofit Health Plan Conversion Act;

(d) in the event of dissolution, the New Mexico charitable assets will be protected and assets will be properly apportioned among states having a claim to any portion of the assets of the parties to the transaction or of any successor entity; and

(e) the articles of incorporation of the parties to the transaction and of any successor entity shall incorporate the stipulations set forth in Subparagraphs (a) through (d) of this paragraph;

(2) require that the nonprofit health care plan or any successor give notice to the superintendent prior to dissolution or conversion, or whenever a change is made in the entity's articles of incorporation or bylaws;

(3) require a process for reporting the data necessary to identify the charitable assets of the New Mexico nonprofit health care plan at the time of the transaction, ensure that New Mexico charitable assets can be identified and their value determined at the time of any future conversion of the assets and account for revenues received by the parties or any successor following the transaction, to document charitable assets accrued on behalf of the residents of the state of domicile of each party involved in the conversion. The superintendent may require that a valuation be made to determine the full fair market value of the assets of the nonprofit health care plan at the time of the conversion;

(4) impose sufficient safeguards to protect the charitable assets of the nonprofit health care plan, including appropriate provision for review and oversight by the superintendent of future actions of the parties or any successor that could affect New Mexico charitable assets;

(5) require that the boards of directions or trustees of the parties to the conversion be structured so as to minimize interlocking directors; and

(6) require that any agreements relating to employment of executives or board members of the nonprofit health care plan with any other party to the transaction or any successor in interest be subject to review and approval by the superintendent.

F. Prior to issuing his decision, the superintendent shall seek the advice of the attorney general, who shall act on behalf of the public and charitable interests in the state. The attorney general shall review the materials submitted by the nonprofit health care plan and shall advise the superintendent in writing as to the advisability of approving the proposed conversion and as to any conditions that should be imposed on the conversion."

Section 11. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] JUDICIAL REVIEW.--A person aggrieved by a final decision of the superintendent pursuant to the Nonprofit Health Plan Conversion Act may petition the district court for Santa Fe county for judicial review within sixty days after receipt of the final decision and order. An appeal from a final decision and order of the superintendent pursuant to this section shall be conducted pursuant to the procedures of Section 59A-4-20 NMSA 1978."

Section 12. A new section of the New Mexico Insurance Code is enacted to read:

"[NEW MATERIAL] CONVERSION IN VIOLATION OF ACT VOID.--A conversion entered into in violation of the Nonprofit Health Plan Conversion Act is void."

Section 13. Section 59A-47-4 NMSA 1978 (being Laws 1984, Chapter 127, Section 879.2) is amended to read:

"59A-47-4. ORGANIZATION--[PROFIT OR] FOREIGN CORPORATIONS PROHIBITED.--

A. A corporation may be organized under the laws of this state [which] that provide for the organization of nonprofit corporations, as a nonprofit corporation organized for making health care expense payments on a service benefit basis or an indemnity basis, or both, for subscribers under contract with such corporation.

B. The articles of incorporation of each health care plan shall have endorsed thereon or annexed thereto the consent of the superintendent prior to filing. The amendment of the articles of incorporation of any health care plan shall have endorsed thereon or annexed thereto the consent of the superintendent prior to filing.

C. The directors of a health care plan shall be chosen in accordance with the bylaws of the corporation, subject to the following:

(1) at least twenty-five percent [(25%)] of the directors shall be members of the general public; and

(2) the balance of the directors shall be either representatives of purveyors or members of the general public.

[D. No health care plan shall be converted into a corporation organized for pecuniary profit; and any such plan shall be maintained and operated primarily for the benefit of its subscribers.]

D. In the event that a health care plan converts into a corporation organized for pecuniary profit, it must proceed according to the provisions of the Nonprofit Health Plan Conversion Act.

E. No health care plan shall furnish or contract to furnish health care expense payments in this state unless organized [under] pursuant to the laws of this state as above provided and so authorized to operate [under] pursuant to the provisions of [this article] Chapter 59A, Article 47 NMSA 1978. No foreign health care plan may be authorized to conduct business in this state."

Section 14. EFFECTIVE DATE.--The effective date of the provisions of this act is July 1, 1999.