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TDI Adopts NEW THIRD-PARTY ADMINISTRATOR RULES
By Kevin McGillicuddy / J.T. Parker & Associates, L.L.C.

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The Texas Department of Insurance has now adopted new rules relating to third-party administrators. The new rules will be effective on June 25, 2009. Click on the link for a copy of the new rules: Text to New TDI Rules. Along with the adoption of these new rules, the TDI repealed the prior chapter of the Texas Administrative Code that contained the old TPA rules.

Due to the adoption of HB 472 by the Texas Legislature in 2007, certain persons “adjusting or settling” workers’ compensation claims, for the first time, are required to obtain a certificate of authority (essentially a license) as an “administrator.” This requirement is found in Chapter 4151 of the Texas Insurance Code. You view Chapter 4151 of the Insurance Code at the following link:

http://www.statutes.legis.state.tx.us/SOTWDocs/IN/htm/IN.4151.htm

Until the adoption of the rules, we have been uncertain (and still are to some extent) how broadly the TDI would interpret the meaning of “administrator.” This is important for many reasons, including the fact that §4151.1041 of the Insurance Code requires an insurer to determine whether a person to whom the insurer refers a claim or loss for administration holds a certificate of authority to act as an administrator.

The definition of “administrator” in the statute and rules is very broad and probably includes many persons and entities that in the past have played a role in the adjusting of claims without any requirement to hold an adjuster’s license. It appears that under the statute and rules that have now been adopted, the TDI will expect a wide assortment of entities to obtain a certificate of authority as a third-party administrator. Examples might be pharmacy benefit managers, utilization review agents, case managers, medical bill auditing companies, private investigators who investigate claims, certified workers’ compensation healthcare networks that “adjust or settle” claims, and so forth. We are certain that many such entities are not aware of the requirement that they hold a certificate of authority, and many insurers have not been aware of that requirement either. However, to the extent that any activity by these entities or persons might be considered by the TDI to amount to the “adjusting” or “settling” claims, it is likely that these rules will be applied by the TDI so as to require a certificate of authority, and all that comes along with that requirement, as we will discuss below.

These rules are of concern to anyone who may refer a claim or a portion of a claim to a third party, including referrals by an administrator to a subcontractor. Clearly they are of concern as well to third-party administrators themselves. Because the full scope of these rules and their applicability to individuals and companies will be determined over time, and because the rules themselves are not always clear, reference must also be made to the preamble to the adoption of the rule found in the Texas Register (June 19, 2009 edition) in order to determine what the TDI has stated regarding the meaning and applicability of its rules. The preamble and order adopting the rules runs on for 50 pages in the Texas Register, so our comments that follow are also unfortunately (but necessarily) long. The preamble can be found at:

http://www.sos.state.tx.us/texreg/pdf/currview/0619adop.pdf (the preamble runs from page 24 through 73 of that document)

or

http://www.sos.state.tx.us/texreg/sos/adopted/28.INSURANCE.html#406 (Word version).

Because of the complexity of the issues, and the uncertainty about how many of the provisions in the rules will be interpreted and applied by the TDI, the discussion below is only an overview and is intended primarily to alert all who are involved in the handling of workers’ compensation claims regarding some of the issues that will need to be considered when claims or unbundled assignments on claims are made to third parties. However, to assist you with evaluating any given situation with respect to the requirements relative to administrators, we will provide fairly extensive extracts of the comments that different persons made to the TDI regarding the proposed rules, as well as the TDI’s responses to those commentators. Since we are providing these extracts selectively, we recommend that you review the TDI’s preamble in its entirety. If you have any doubts about whether you must obtain a certificate of authority, or whether those with whom you contract are required to hold a certificate of authority, we recommend that you obtain an opinion from an attorney familiar with these requirements.

The newly adopted rules are as follows:

§7.1601 – Scope – This rule states in part that these rules apply “…to a person acting as or holding itself out as an administrator in any capacity, regardless of whether the person holds another authorization under the Insurance Code or the Labor Code.” (we will underline portions of the statute and rules here and elsewhere for emphasis) In addition, this rule states in subsection (c) that a person acting as or holding itself out as an administrator must meet the requirements of the Insurance Code Chapter 4151 and this subchapter in addition to any other requirements applicable to that person under the Insurance Code Chapters 1272 or 1305 [the Certified Workers’ Compensation Healthcare Network chapter] or the Labor Code Chapters 407 or 407A [the certified self-insurer and group self-insurance Chapters of the Labor Code] and any rules adopted thereunder.

§7.1602 - Definitions. - The definition of “administrator” in this rule closely with §4151.001(1) of the Insurance Code, which provides:

(1) "Administrator" means a person who, in connection with annuities or life benefits, health benefits, accident benefits, pharmacy benefits, or workers' compensation benefits, collects premiums or contributions from or adjusts or settles claims for residents of this state. The term includes a delegated entity under Chapter 1272 and a workers' compensation health care network authorized under Chapter 1305 that administers a workers' compensation claim for an insurer, including an insurer that establishes or contracts with the network to provide health care services. The term does not include a person described by Section 4151.002.

Section 4151.002 of the Insurance Code does list a number of exceptions to the definition of “administrator” that is found in §4151.001. Subsections (12), (13) and (14) of that section contain the exceptions that are most likely to apply in workers’ compensation cases. These subsection provide that a person is not an administrator if the person is:

(12) a person who adjusts or settles claims in the normal course of the person's practice or employment as a licensed attorney and who does not collect any premium or charge in connection with annuities or with life, health, accident, pharmacy, or workers' compensation benefits;
(13) an adjuster licensed under Subtitle C by the department who is engaged in the performance of the individual's powers and duties as an adjuster in the scope of the individual's license;
(14) a person who provides technical, advisory, utilization review, precertification, or consulting services to an insurer, plan, or plan sponsor but does not make any management or discretionary decisions on behalf of the insurer, plan, or plan sponsor;

In the preamble to its adoption of the TPA rules, the TDI states that the exception in (12) means that law firms (and individual attorneys engaged in the practice of law) are not required to obtain a certificate of authority. However, elsewhere in the preamble, the TDI states:

Therefore, under §4151.001(1) and §4151.002(12), if an individual attorney adjusts or settles claims in the course of his/her practice and collects any premium or charge in connection with annuities or with life, health, accident, pharmacy, or workers' compensation benefits, the individual attorney is not eligible for the exemption under the Insurance Code §4151.002(12). Law firms are clearly not required to obtain a certificate of authority as an "administrator" under the Insurance Code Chapter 4151 to engage in the practice of law. As previously stated, §4151.001(1) defines "administrator" in pertinent part to mean "a person who, in connection with annuities or life benefits, health benefits, accident benefits, pharmacy benefits, or workers' compensation benefits, collects premiums or contributions from or adjusts or settles claims for residents of this state. The term does not include a person described by Section 4151.002." Section 4151.051(a) provides that "an individual, corporation, organization, trust, partnership, or other legal entity may not act as or hold itself out as an administrator unless the entity is covered by and is engaging in business under a certificate of authority issued under" Chapter 4151 of the Insurance Code. Therefore, under the provisions of §4151.001(1) and §4151.051(a), any law firm whose activities go beyond the practice of law by virtue of acting as or holding itself out as an administrator as defined in the Insurance Code §4151.001(1), must hold an administrator certificate of authority and comply with the requirements in these rules and Chapter 4151, unless otherwise exempt under the Insurance Code or Labor Code. (this and other quotes from the preamble have been edited for brevity)

While on the one hand the TDI seems to be saying that lawyers and law firms are not required to obtain a certificate of authority, and is stating that it is not attempting to regulate the practice of law, on the other hand, to the extent that lawyers and law firms “act as” administrators (presumably by adjusting or settling claims), the TDI is stating that they would be required to hold a certificate of authority. This circular reasoning does not answer whether attorneys attending BRCs or CCHs are “adjusting or settling” claims, although a good argument can be (and will be) made that these attorneys are practicing law and not “adjusting or settling” claims. How could anything be less clear? This reminds us of the comment made by President Truman one time that what this world needs is more one-handed lawyers.

As to individual adjusters, subsection (13) relieves individual adjusters from obtaining a certificate of authority, but the firms that employ adjusters handling workers’ compensation claims must obtain a certificate of authority if those firms either act as administrators or hold themselves out as administrators. The same response of the TDI applies to those exempted by subsection (14). Several commentators on the proposed rules asked for clarification of what persons and entities would be covered by the definition of “administrator” and these exemptions. Because this is a key concept, we summarize an extensive discussion of these questions and the TDI’s response with respect to these entities as follows:

Comment: Various commenters object to the proposed rules because they may result in dual regulation for individuals and entities, request that the Department remove all unnecessary duplication of existing statutory or regulatory requirements under the Insurance Code or the Labor Code for administrators, and contend that without a definition of "administrator" that clarifies what it means to "adjust" or settle" a claim, the range of "persons" that will be required under these rules to obtain a certificate of authority is extremely broad and request clarification on whether independent adjusting firms or other ancillary service providers are "administrators" under Chapter 4151. One commenter then lists examples of 19 individuals or entities that contract with, or whose services are used by, self-insurance groups, insurers, and third party administrators. These 19 individuals and entities are:
(1) attorneys and law firms who provide legal advice and representation in the dispute resolution proceedings managed and conducted by the Division of Workers' Compensation (DWC) and for issues related with the DWC's and the Department's enforcement process;
(2) utilization review agents (URA) that handle both prospective and retrospective utilization review, the URA is certified by the Department pursuant to the workers' compensation utilization review rules, Rules 19.2001 - 19.2021;
(3) utilization review agents that review medical bills that must be paid by the self-insurance group or a third-party administrator (TPA); the self-insurance group's TPA and TPAs for insurers that have the ultimate decision-making authority as to whether or not to pay medical bills;
(4) case management companies and/or individual case managers that provide consultative and technical services that includes assisting with the case management of different aspects of a claim, e.g. return-to-work, coordination of work status assessment, coordination of appropriate treatment for an injured employee, job site analysis, ergonomic assessments, occupational case management, assessment of maximum medical improvement status, vocational rehabilitation, and management of catastrophic injury cases;
(5) actuarial firms that provide consultative services that includes providing statements of actuarial opinion, account audit support, rate-making actuarial services, underwriting audit services, and other actuarial services;
(6) EDI trading partner/agents who provide electronic data interchange technical services, software and/or submit claims payment and medical bill payment data to the DWC;
(7) safety consultants who provide consultation to self-insured groups (SIG), SIG TPAs and TPAs of insurers for the purpose of improving workplace safety and loss control;
(8) peer review doctors who provide prospective, concurrent, and retrospective utilization review services for the purpose of ascertaining the appropriateness of future, on-going, or past healthcare and to address other medical issues related to a specific claim;
(9) eBill agents who provide technical services to self-insurance groups for the payment of medical bills electronically transmitted for payment under the provisions of DWC rules 28 TAC §133.500 and §133.50;
(10) certified workers' compensation health care networks contracted with by self-insurance groups as provided for by Chapter 1305 of the Insurance Code and the Department's Chapter 10 Certified Workers' Compensation Healthcare Network Rules;
(11) DWC-appointed designated doctors requested by the TPA for the purpose of obtaining a recommendation about an injured employee's medical condition, to resolve a dispute about an injured employee's work-related injury or occupational illness, or to resolve a dispute regarding the work status and/or impairment rating of an injured employee; the designated doctor process is regulated by the DWC's Chapter 126 rules;
(12) required medical examiners (doctors) selected by the TPA for the purpose of obtaining an opinion on the appropriateness of the health care received by employees; required medical examiners are regulated by the DWC's Chapter 126 rules;
(13) private investigators or private investigation firms to obtain special investigation unit services associated with the investigation of suspected insurance fraud or to obtain surveillance of injured employees who are suspected of having filed fraudulent claims or exaggerated the extent of the injury and disability;
(14) independent adjusters who are licensed adjusters not on the staff of an insurance carrier or self-insured and do not adjust or settle a claim but rather investigate accident sites and obtain statements from injured employees, employers, accident witnesses, treating doctors, and perform related services, e.g. attending a DWC benefit review conference, contested case hearing, and submitting medical dispute resolution responses to the Division of Workers Compensation, and so forth as provided for by §4151.002(13) of the Insurance Code;
(15) workers' compensation Austin representatives required by §156.1 of the Labor Code who act, by law, as the insurer's or self-insured group's representative to the DWC and agent for receiving notices, decisions, and orders from the DWC;
(16) accident reconstruction experts who provide a technical service that assists in the investigation of a claim by an insurer, self-insurance group or a third-party administrator;
(17) home modification contractors who provide a technical service to insurers, self-insurance group or a third-party administrator and complete modification construction projects that allows disabled injured employees to have better access to their workplaces, work stations, and homes;
(18) medical set aside vendors who provide a technical service that provides for Medicare set-aside for the workers' compensation insurers, self-insurance groups, and third-party administrators; and
(19) independent claims auditing firms that provide technical and consultative services to insurers, self-insured groups, and third-party administrators and audit their respective claims for compliance and accuracy of payment of claims.

Another commenter stated that while reasonable people may disagree on the merits of the arguments about whether so-called "independent adjusting firms" or other ancillary service providers should be considered "administrators" under Chapter 4151, the proposed rules and Chapter 4151 are not clear on whether the following entities or persons are "administrators" under Chapter 4151:

(i) private investigation companies that perform investigations in workers' compensation claims;
(ii) independent adjusters, and the firms they work for, that perform limited assignments on behalf of insurers, such as taking a statement of a witness, claimant, or employer, obtaining medical records from a doctor or hospital, preparing and filing compensability disputes or requests for designated doctor appointments, etc.;
(iii) Austin representatives designated by insurance carriers pursuant to the Labor Code §406.011 and §156.1 of this title that pick up and transmit mail between the DWC and their clients, request record checks and obtain records on prior claims from the DWC, review or propose dispute language to their clients, consult with their clients on whether a claim is compensable, or attend hearings on behalf of clients. The commenter further inquires at what point does the activities of Austin representatives cross the line and become "adjusting" or "settling" claims as those terms are used in the Insurance Code §4151.001.

Agency Response: The Department disagrees with all of the commenter's recommended changes for the following reasons. The Department disagrees that the proposed rules as adopted will subject persons to dual regulation and dual reporting requirements for performing the functions authorized under a single statutory authorization, or result in a regulatory scheme that is unfair, unreasonable, overly burdensome, or inappropriate for implementing the Insurance Code Chapter 4151. This includes the 22 individuals and entities inquired about by two commenters, who, because of the definition of "administrator" in the Insurance Code §4151.001(1) and the statutory exemptions specified in the Insurance Code §4151.002 and §4151.0021, may or may not be subject to the rules and Chapter 4151 of the Insurance Code. The Department believes that these rules clearly, fairly, reasonably, and appropriately implement and augment the Insurance Code Chapter 4151. The rules, which are consistent with the regulatory scheme under Chapter 4151, treat or classify entities and individuals who act as or hold themselves out as administrators in accordance with the Insurance Code Chapter 4151. Thus, by its plain language, the Insurance Code §4151.051(a) requires not only persons that act as administrators to obtain certificates of authority but also persons that hold themselves out as administrators. It is clear from this plain language that the intent is not to regulate as administrators only those persons that actually adjust or settle claims or only those administrators who are responsible for the day-to-day overall management authority over money and claims, but also those persons that hold themselves out as administrators, as contemplated under §4151.051(a). These rules cannot provide that only a person that is responsible for the day-to-day overall management authority over money and claims is required to obtain a certificate of authority.

Thus, in order to determine whether a person is an administrator as defined in adopted §7.1602(1) or as that term is used in the adopted rules, including §7.1601 and §7.1603, it is necessary to evaluate the functions or services that the person is performing or providing, or offering to perform or provide and whether the person is specifically exempted from any of the requirements of the Insurance Code Chapter 4151. Whether a particular person qualifies as an "administrator" or meets an exemption under Chapter 4151 and the adopted rules is a case-by-case, fact-specific determination. Therefore, each of the individuals and entities that the two commenters inquired about would be subject to this case-by-case, fact-specific determination to ascertain whether each of these persons qualifies as an "administrator" and is therefore, subject to regulation under Chapter 4151 and these rules. Thus, if a person is performing any act that is the act of an administrator under Chapter 4151 of the Insurance Code or under these rules or is holding itself out as an administrator under §4151.051(a) and does not meet an exemption in §4151.002 or §4151.0021, the person is an administrator for purposes of Chapter 4151 and these rules.

Unfortunately (what follows in this paragraph is our commentary), while the TDI believes the rules are clear, the TDI’s response that a case-by-case and fact-specific determination will need to be made with respect to whether a person or firm is acting as or holding itself out as an administrator seems to hinge on whether that person or firm is engaged in the “adjusting or settling” of workers’ compensation claims, since that is part of the definition of “administrator.” The TDI rejected similar comments that the proposed language in the rules is so vague and confusing that an insurer or other regulated person does not know if the proposed rules apply to them or what is expected of them. The TDI’s response is that “a person who is trying to determine whether they are required to comply with the rules must read, in addition to the definition of "administrator" in §7.1602(1), the statutory definition of "administrator" in the Insurance Code §4151.001(1) and the definitions of the terms "administrator contractor" and "administrator subcontractor" in §7.1602(3) and (4). The person must also read §4151.002 or §4151.0021 of the Insurance Code to determine if they meet one of the exemptions. In addition, the person must read the entirety of the rules to determine any exemptions or exceptions to the rule requirements.” This is unfortunately a circular argument – if a person is an administrator or acting as one, then a certificate of authority is required. The rules really do not clarify the issues of concern.

Exemption for Pharmacy Benefit Managers?

Comment: One commenter stated an exemption for a pharmacy benefit manager (PBM) may exist under the Insurance Code §4151.002(14) because most, if not all, PBMs perform some kind of clinical review (either in house or contract) and some have clinical pharmacists on board to coordinate this type of service. According to the commenter, (i) PBMs provide technical, advisory, and consulting services as well, but do not make any decisions on behalf of the insurer or third party administrator; (ii) a PBM could be defined as a processing agent under the Insurance Code §4151.0021 and the Labor Code §413.0111; and (iii) PBMs do not collect premiums or contributions, nor do they adjust or settle any claims in the state of Texas (or any state).

Agency Response: While the Department agrees that certain PBMs may meet the exemption under the Insurance Code §4151.002(14) or the exemption under the Insurance Code §4151.0021 for certain workers' compensation processing agents, the Department does not agree that all PBMs will meet one of these exemptions. PBMs may perform a variety of functions that at times may include (i) contracting with a network of pharmacies; (ii) establishing payment levels for provider pharmacies; (iii) negotiating rebate arrangements; (iv) developing and managing formularies, preferred drug lists, and prior authorization programs; (v) maintaining patient compliance programs; (vi) performing drug utilization review; and (vii) operating disease management programs and mail order services. The Insurance Code §4151.151 specifically provides that the term "pharmacy benefit manager" means a person, other than a pharmacy or pharmacist, who acts as an administrator in connection with pharmacy benefits. Therefore, a person that meets the definition of a "pharmacy benefit manager" in the Insurance Code §4151.151 is considered an "administrator" for purposes of Chapter 4151 and these rules and is subject to regulation under Chapter 4151 and these rules. This includes the requirement to obtain a certificate of authority to act as administrator under the Insurance Code Chapter 4151.

Whether any person, including a PBM is an "administrator," as defined in the Insurance Code §4151.001(1) and §7.1602(1), or meets an exemption described in §4151.002 or §4151.0021 is based entirely on the particular facts and circumstances and the various functions or services being performed or offered to be performed by the PBM. The Department determines whether a PBM is an "administrator" as defined in the Insurance Code §4151.001(1) and §7.1602(1) or meets an exemption under §4151.002 or §4151.0021 in the same manner that it makes this determination for any other person. The determination is based upon a case-by-case analysis of the particular facts and circumstances, including the contractual and employment relationship and the actual services and functions being performed or offered to be performed. To the extent any person, including a PBM, collects premiums or contributions, or adjusts or settles claims, or offers to provide these administrative services, for residents of this state in connection with annuities or life, health, accident, pharmacy, or workers' compensation benefits and does not meet an exemption under the Insurance Code §4151.002 or §4151.0021, the person is an administrator under Chapter 4151 and these rules.

Therefore, carriers and administrators should review carefully what actions PBMs take on their behalf. Keep in mind that the TDI’s understanding of what it means to “adjust” or “settle” claims is not necessarily limited by what it has historically considered to be “adjusting” or “settling” claims as regulated by Chapter 4101 of the Insurance Code (the Adjuster’s Licensing Act) as discussed immediately below.

Requested Definitions for the Terms "adjust" and "settle"

Comment: Three commenters recommend that the proposed rules define the terms "adjust," "adjusts," "adjusting," and/or "settle." One of these commenters specifically recommends including in the rules a definition of the terms "adjusts" and "adjusting" to state "the investigation, management, supervision of the handling of or settling of losses on behalf of an insurer, administrator, plan, plan administrator or plan sponsor." This commenter states that the rules need to clarify the terms "adjusting" and "adjust" in order to restrict the scope of the rules to individuals and entities that actually collect premiums or adjust or settle claims and to exclude "down stream" contractors (vendors) of insurers and sub-contractors (vendors) of third-party administrators that do not have the ultimate decision-making authority when handling aspects of insurance claims, e.g., legal representation, utilization review, peer review, case management of workers' compensation medical benefits, etc. The other two commenters note that neither the Insurance Code 4151 nor the proposed rules define the terms "adjust" or "settle" or "adjusts" or "settles." One of these commenters states that the terms "adjust" or "settle" are key to understanding the intended scope of the rule. The other commenter states that adjusters are frequently asked to performed limited assignments on behalf of insurers. The commenter contends that if their activities can be considered to be "adjusting" or settling," then the commenter assumes that these persons must be licensed as "administrators," but that the rules are not clear on that point.

Agency Response: The Department does not agree that it is necessary to define these terms and believes that to do so could result in unnecessary ambiguity. The rules in §§7.1601 - 7.1605, 7.1607, 7.1609, 7.1611, and 7.1613 - 7.1617 clearly and appropriately incorporate the terms "adjusting" and "settling" as used in the Insurance Code Chapter 4151, including in the definition of the term "administrator" in §4151.001(1). The Insurance Code Chapters 4101 and 4102 regulate adjusters and adjusting and prescribe the requirements applicable to obtaining an adjuster's license. The Department declines to adopt a more narrow definition of "adjusting," "adjust," "adjusts," or "settle" than may be contemplated by these chapters. Any definition of these terms in these adopted rules may have an unanticipated effect upon the application of the term "adjust," "adjusts," "settles," or "adjuster" in these chapters or in the interpretation of the term "claims adjuster" in other Code provisions or Department rules. The Department has had experience applying the statutory terms in the Insurance Code Chapter 4151 prior to the enactment of HB 472 in the context of life, health and annuities business, and has encountered no problems applying them. Department experience demonstrates that whether or not an activity falls within the meaning of the statutory terms "adjusts" or "settles" claims necessitates a fact-specific, case-by-case determination. Therefore, the Department disagrees that the rules must define these terms in order to determine the proper scope of the applicability of the rules.

Unfortunately, while the TDI says that it will not adopt a more narrow definition of “adjust” or “settle” than it has historically used in connection with the Adjuster’s Licensing Act (Chapter 4101 of the Insurance Code), it may in fact end up interpreting what it means to “adjust” or “settle” claims more broadly than the way those terms have been used. This is the crux of the problem with these rules. They may apply to a much more broad range of entities than anyone suspects.

Requested Definitions for the Terms "discretionary decision" and "management decision"

Comment: One commenter requests that the terms "management decision" and "discretionary decision" [this refers to the exception in §4151.002(14)] be defined in the rules to provide that the decisions must be final, ultimate decisions on an aspect of how the claim is to be handled and adjusted. The commenter further recommends that the definitions provide that administrator contractors and vendors who do not make final, ultimate decisions or are limited by contract or a master services agreement shall be deemed as not possessing the authority to make management and discretionary decisions for the purpose of the application of the rules. Another commenter states that it is a "fine point" whether certain activities described in its comment involve "management or discretionary decisions" on behalf of the insurer and that the rules do not provide effective guidance. The commenter questions how may one act as a utilization review agent, or handle precertification requests, or audit medical bills, or assist carriers by setting up independent medical examinations or peer reviews without making any discretionary decisions as implied by the Insurance Code §4151.002(14). The commenter further states that it is unclear if certain activities of private investigation companies involve "discretionary decisions" and therefore, would not be exempted under the Insurance Code §4151.002(14). This includes private investigation companies who are hired to perform investigations in workers' compensation claims, such as taking statements, and who sometimes are given authority to make discretionary decisions for carriers and third-party administrators. Additionally, the commenter contends that arguably the following activities involve "discretionary decisions" and thus would not be exempted under the Insurance Code §4151.002(14): (i) attendance by a carrier's "representative" (a term which includes attorneys and adjusters) at a benefit review conference on behalf of a carrier; (ii) independent adjusters who perform investigations, which may involve discretionary decision-making; and (iii) adjusters who propose language to resolve disputed issues concerning workers' compensation benefits or who decide whether to file a dispute on behalf of a carrier.

Agency Response: The Department does not believe that it is necessary to define the terms "discretionary decision" or "management decision" and that to do so could result in unnecessary ambiguity or have an unanticipated effect upon the application of the term "administrator" in Chapter 4151 or the adopted rules. The Insurance Code Chapter 4151 uses the terms "management or discretionary decisions" in the exemption to the term "administrator" enumerated in §4151.002(14). Any person determined to make any management or discretionary decisions on behalf of an insurer, HMO, group, plan, or plan sponsor regarding the settlement or adjustment of claims for or collection of premiums or contributions from residents of this state in connection with annuities or life benefits, health benefits, accident benefits, pharmacy benefits, or workers' compensation benefits does not meet the exemption in §4151.002(14), and is an administrator for purposes of regulation under Chapter 4151 and these rules--unless the person meets another exemption in §4151.002 or the exemption in §4151.0021. Whether any person, including those persons mentioned by one of the commenters, is delegated management or discretionary authority or makes management or discretionary decisions regarding the settlement or adjustment of claims for or collection of premiums or contributions on behalf of an insurer, plan, or plan sponsor is determined on a case-by-case, fact-specific basis.

With regard to workers' compensation benefits, the Department is aware that many parties are involved in processing these types of benefits and anticipates that the Department's fact-specific determination will reflect that a relatively large number of these persons meet the statutory exemption in §4151.002(14). Nevertheless, the Department also believes that it is possible that certain persons who act as utilization review agents, handle precertification requests, audit medical bills, perform investigations, or assists carriers by setting up independent medical examinations or peer reviews may also perform the functions of an administrator under Chapter 4151 by making management or discretionary decisions on behalf of the insurer, plan, or plan sponsor, while engaged in the process of adjusting or settling claims, collecting premiums or contributions, or offering to perform these functions or services.

The Department agrees that independent adjusters who perform investigations and who make discretionary decisions and adjusters who propose language to resolve disputed issues concerning workers' compensation benefits or who decide whether to file a dispute on behalf of a carrier are not exempt under §4151.002(14). However, §4151.002(13) contains an exemption from Chapter 4151 regulation for individual adjusters "engaged in the performance of an individual's powers and duties as an adjuster in the scope of the individual's license." Moreover, §4101.001 of the Insurance Code defines an adjuster as an individual whose functions include, but are not limited to, investigating, adjusting and supervising the handling of workers' compensation claims, including performing these functions on behalf of an administrator. Thus, although the Department's fact-specific determination may yield a different result, the Department anticipates that many individual adjusters will be exempt from Chapter 4151 regulation under §4151.002(13). Those individual adjusters that function within the scope of their license as an adjuster are not subject to the certificate of authority and other requirements of Chapter 4151.

Section 4151.1041(b) requires a carrier to ascertain from the Commissioner whether the person performing the administration holds a certificate of authority under Chapter 4151 before referring a claim or loss for administration.

These TDI responses seem to confirm to us that while individual adjusters, employees of utilization review agents, etc., are exempt from the requirement to obtain a certificate of authority, the firms that employ them are not. Note also that the response says that “many individual adjusters” (not all????) will be exempt. This leave open the question of whether individual adjusters acting as sole proprietors and who perform investigations or otherwise adjust or settle claims must obtain a certificate of authority. Since private investigation firms sometimes perform investigations on behalf of carriers, it appears to us that they must obtain a certificate of authority if investigation is considered part of the “adjusting or settling” of claims. Since, in the context of the duty of good faith and fair dealing, performing an investigation is required before a claim is denied, it appears to us that many activities undertaken by private investigation firms or individual independent adjusters would be considered part of the adjusting or settling of claims and would require a certificate of authority.

Elsewhere in the TDI’s responses to comments, the TDI states that “if an individual, corporation, organization, trust, partnership, or other legal entity is holding itself out as an administrator contractor or administrator subcontractor as defined in §7.1602(3) and (4), this legal entity also is required to hold a certificate of authority under the Insurance Code Chapter 4151 and §7.1603(a).” Therefore, if a sole proprietor (an adjuster, for example) is acting as an administrator by adjusting or settling claims, then it appears to us that such a person is required to obtain a certificate of authority.

§7.1603 - Certificate of Authority Required.

This is more of the same. The rule requires a person acting as or holding itself out as an administrator to hold a certificate of authority under the Insurance Code Chapter 4151, unless that person meets an exemption under the Insurance Code §§4151.002, 4151.0021, or 4151.004. In addition, this rule requires an administrator contractor and an administrator subcontractor to hold a certificate of authority under the Insurance Code Chapter 4151. Those terms are defined in §7.1602 as follows:

(3) Administrator contractor—An administrator as defined in the Insurance Code §4151.001(1) who contracts or enters into an agreement with an administrator subcontractor for the performance of all or a portion of the administrative services the administrator contractor previously agreed to perform on behalf of an insurer, HMO, plan sponsor, or group. The term does not include a person described by the Insurance Code §4151.002 or §4151.0021.
(4) Administrator subcontractor—An administrator as defined in the Insurance Code §4151.001(1) who contracts or enters into an agreement with an administrator contractor for the performance of all or a portion of the administrative services the administrator contractor previously agreed to perform on behalf of an insurer, HMO, plan sponsor, or group. The term does not include a person described by the Insurance Code §4151.002 or §4151.0021.

In effect, this makes it clear that not only administrators, but also those with whom they contract, must hold a certificate of authority. In addition, before a matter is referred out to a contractor or subcontractor, as required by Section 4151.1041(b), a carrier must ascertain from the Commissioner whether the person performing the administration holds a certificate of authority under Chapter 4151 before referring a claim or loss for administration. Presumably, any third-party administrator that subcontracts out a portion of its work should also determine whether its subcontractor holds a certificate of authority.

§7.1604 - Application for Certificate of Authority.
§7.1605 - Notification Requirements.
§7.1606 - Requirements Related to Ownership Interest and Change of Control.
§7.1607 - Facts and Circumstances Affecting Issuance of Certificate of Authority.
§7.1609 - Annual Report.
§7.1610 - Financial Statements Under the Education Code.

We will not discuss these new rules other than to state that they describe how administrators must go about obtaining their certificates of authority and detail matters that must be reported to the TDI when changes occur with respect to ownership and control of the administrator, as well as annual reporting and provision of financial statements to the TDI.

§7.1608 - Fidelity Bond.

This rule requires administrators to obtain and maintain a fidelity bond as provided by §4151.055 of the Insurance Code.

§7.1611 - Operational Review and On-Site Audit.

This rule outlines the auditing requirements that insurers must follow with respect to their administrators. The requirements are fairly extensively stated, so we will not repeat them here. However, it does appear that the audit requirement is limited to administrators who handle benefits in Texas on behalf of the insurer for more than 100 certificate holders, injured employees, plan participants, or policyholders. Administrators who receive only a few assignments from an insurer, therefore, appear to be exempt from this audit requirement. Insurers will want to consider the fact that the results of the audits they perform, and the corrective action plans that they will be required to develop, may be discoverable in any bad faith litigation that is filed against the carrier and / or the TPA or its adjusters.

§7.1612 - Fiduciary Bank Accounts.

This rule sets out certain requirements relative to bank accounts. Based on the TDI’s responses to comments, it appears that the TDI will apply this rule only to accounts used to hold premiums, and not to accounts that an administrator controls that are used only to pay claims. The TDI states in part, “If an administrator does not collect or receive premiums, the definition of the term "Fiduciary bank account" and rule provisions relating to fiduciary bank accounts do not apply. However, while not expressly required by these rules, the Department believes that it is a prudent business practice for insurers… to set up accounts for the payment of claims that include appropriate safe-guards and controls, such as those required in §7.1612 for establishing fiduciary bank accounts…Sections 7.1611(d) and (e) and 7.1613(d) address the monitoring and oversight of administrators with regard to claims adjustment or claims settlement. Section 7.1611(d) and (e) prescribe the minimum information that an insurer should review during the required review or on-site audit….”

§7.1613 - Written Agreements Between Administrators and Insurers.

Notably, insurers will be required to have written contracts with their administrators. Specific requirements of these contracts are found in this rule. Fortunately, the TDI has given carriers and their administrators until September 1, 2009 to formalize any agreements in writing. For our clients, this is a heads-up that we will be getting in touch with you over the coming weeks in order to begin the process of putting our handling arrangements in an appropriate written format. These contracts will also need to comply with Texas Labor Code §§4151.253 and / or 4151.254.

§7.1614 - Prohibited Acts.

This rule prohibits an administrator from engaging in certain acts, and this rule includes the following language:

(b) An administrator may be subject to other prohibitions under the Insurance Code, the Labor Code, and rules adopted thereunder that are not specified in subsection (a) of this section.

In response to comments, the TDI addressed PPO reductions and the fairly common practice of paying auditors a percentage of savings that result from PPO contracts. The commenter asked if this was covered by subsection (b) of the rule. The TDI responded that ”Section 7.1614(b) includes the prohibition in the Insurance Code §4151.117(b). Section 4151.117(b) prohibits an insurer or plan sponsor from permitting or providing compensation or another thing of value to an administrator that is based on the savings accruing to the insurer or plan sponsor because of adverse determinations regarding claims for benefits, reductions of or limitations on benefits, or other analogous actions inconsistent with Chapter 4151, that are made or taken by the administrator.” Therefore, carriers should immediately review any agreements that provide for compensation based on any amount of reduction of benefits and arrive at a different method of compensating their administrators or auditors, assuming that those auditors will be considered “administrators” under the rules.

§7.1615 - Transfer of Books and Records.

This rule is intended to provide for an orderly transfer of books and records from one administrator to a successor administrator. While most agreements with TPAs already provide for this, because the definition of “administrator” is so broad, this requirement should be reviewed with respect to any party that may considered to be acting as an “administrator” for a carrier.

§7.1616 - Hazardous or Injurious Operating Conditions.

The definition operating conditions that may be considered “hazardous or injurious” is very broad and will give the TDI a lot of leeway in applying §4151.301 of the Insurance Code. In response to comments that this rule is too broad, the TDI replied that “§7.1616(a) does not provide an exhaustive list of all possible factors or conditions relating to the financial condition or business operations or conduct of an applicant or administrator that may indicate that an applicant or administrator is operating or conducting business in a potentially hazardous or injurious condition.” Therefore, insurers and their administrators should be aware that the TDI’s oversight may not be limited even to the laundry list of conditions listed in the rule.

§7.1617 - Examinations.

This rule very briefly states the conditions under which the TDI may perform an examination of an administrator and references Insurance Code §4151.206(a)(2) relative to the costs of such examinations. The authority to conduct an examination is found in §4151.201 et seq. of the Insurance Code.

§7.1602(6). Definition of "Claim"

This is something of a separate concern and so we address this issue apart from the other definitions. As you will see from the following comments and responses, the definition of “claim” is very broad. This is important primarily with respect to the annual report that administrators will be required to file with the TDI by June 30 of each year, since they must provide the number of “claims” made during an annual reporting period.

Comment: Two commenters objected to the definition of "Claim" in proposed §7.1602(6) because it is unclear or overly broad for purposes of workers' compensation insurance. One commenter requests that the proposed definition be revised to read: "A demand for payment, services, or benefits under a plan. For the purposes of workers' compensation insurance, a claim is established when a loss occurs on a specific date of injury. A separate workers' compensation claim shall not be deemed to have occurred or been established when a claims action occurs within a claim established for a specific date of injury." The other commenter similarly recommends that there should be only one "claim" for workers' compensation purposes and should be limited to a report of an injury to an insurance carrier under the Labor Code §409.021. This second commenter recommends the definition be revised to state: "A demand for payment, services, or benefits under a plan. A claim for workers' compensation purposes is a report of injury under §409.021 of the Labor Code." The commenters' reason for the requested changes is that the proposed definition does not take into account that in the Texas workers' compensation system, a claim is established when a loss occurs on a specific date known as the "date of injury," and not for each claim transaction that occurs during the "life" of a workers' compensation claim. The commenters contend that the definition in proposed §7.1602(6) would result in every actionable development in a workers' compensation claim being considered a "claim." According to the commenters, these actionable developments include every medical bill and income benefit, every attorney fee order, every decision and order of the DWC, and even billings submitted by the DWC to carriers for performing audits.

Agency Response: The Department disagrees and declines to make the recommended changes. The Department understands that the written notice of injury to a carrier under Labor Code §409.021(a) begins the process of payment of benefits under the Texas Workers' Compensation Act. However, one of the purposes of the definition of "Claim" in §7.1602(6) is to make it absolutely clear that each demand for payment, service, or benefit under a plan to provide workers' compensation benefits is considered a claim for purposes of these rules. The definition of "Claim" in §7.1602(6) is necessary to clarify that a person adjusting or settling any of the individual components involved in determining or paying workers' compensation benefits, including, but not limited to, a medical benefit, a temporary income benefit, a supplemental income benefit, a death benefit, a burial benefit, or the compensability of the injury, is within the ambit of the definition of "Administrator" in the Insurance Code §4151.001(1). While the filing of single written notice of injury triggers the process of payment of benefits under the Texas Workers' Compensation Act, the subsequent adjusting or settling functions can involve multiple and periodic demands for payment, service, or benefit, and multiple and periodic payments of medical benefits, income benefits, etc.

Therefore, we believe that the TDI is telling us that for the purpose of reporting the number of “claims” received in a given year, administrators will need to separately count each payment or demand for payment, including periodic income or death benefit payments.

As the foregoing will illustrate, the TDI’s rules make it clear that the TDI intends to exercise very broad authority with respect to the operations of insurers and their TPAs. This is something entirely new to workers’ compensation insurers and parties with whom they contract various functions, so all who may be affected by these rules should take notice.

These rules will be included in the 2009 J.T. Parker & Associates WC Act & Rules manual, which will be distributed as part of our course materials at our 2009 Insurance Claim Seminars in Dallas and Austin to be held in the Fall of 2009. In the meantime, feel free to contact us if you have any questions about these new or amended rules.

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