Senate Commerce Committee Statement to Senate, No. 3218 — State of New Jersey (December 14, 2020)

Summary

A Senate Commerce Committee statement to the Senate on Senate Bill No. 3218, State of New Jersey, dated December 14, 2020, reporting the bill favorably with committee amendments. As amended, the bill provides for the reorganization of a health service corporation into a mutual holding company system, with insurance written only through a reorganized insurer and other insurance subsidiaries. Tax exemptions continue only while the company stays in the New Jersey Individual Health Coverage Program and Small Employer Health Benefits Program. The commissioner must review the plan, with three public hearings, and approve it unless it is contrary to law, detrimental to safety or soundness, or not in policyholders' interests. The amendments extend employment protections to 36 months from 24 months and the limit on extending assessment years to 25 years from 20 years.

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SENATE COMMERCE COMMITTEE

STATEMENT TO

SENATE, No.
3218

with
committee amendments

STATE
OF NEW JERSEY

DATED: DECEMBER
14, 2020

The
Senate Commerce Committee reports favorably and with committee amendments
Senate Bill No. 3218.

As amended, this bill provides for the reorganization
of a health service corporation.

The bill provides that a mutual holding company
organized pursuant to the bill may not be established as a company organized
for pecuniary profit and retains the designation as a charitable and benevolent
institution pursuant to current law. A mutual holding company established
pursuant to the bill retains the health service corporation’s mission while
supplementing that mission to promote innovation and delivery of diversified
services.

The bill provides that mission of the mutual holding
company is to:

(1) provide affordable and accessible health
insurance to its members;

(2) promote the integration of the health care system
to meet the needs of its members; and

(3) promote innovation and delivery of solutions and
diversified services for its members.

Other than as otherwise provided, the bill provides
that all property, assets, rights, liabilities, interest and relations of
whatever kind of the health service corporation, and its subsidiaries, will be
that of the mutual holding company system. The mutual holding company is no
longer considered a health service corporation. Notwithstanding anything to
the contrary, the provisions of current law that exempt health service
corporations from taxes other than taxes on real estate and equipment and taxes
on premiums continue to apply to a mutual holding company if the mutual holding
company continues to participate in the New Jersey Individual Health Coverage
Program and the New Jersey Small Employer Health Benefits Program. If the
mutual holding company does not continue to participate in the New Jersey
Individual Health Coverage Program and the New Jersey Small Employer Health
Benefits Program, then the mutual holding company shall no longer be exempt
from those taxes.

Under the bill, certain health insurance duties and
obligations pursuant to current law continue and remain in the succeeding
reorganized insurer.

The mutual holding company is excluded from certain
insurance operations and reporting, investment limits, and risk-bearing
provisions of the health service corporation law, because the mutual holding
company is not a risk-bearer.

The bill provides that the reorganized insurer shall
engage in risk-bearing activities, reporting, investments, financial
transactions, including the issuance of dividends or distributions, and
insurance trade practices consistent with laws governing stock insurance
companies organized under Title 17B of the New Jersey Statutes to transact
health insurance. The bill also provides that certain provisions of the health
service corporation law do not apply to the reorganized insurer or any
insurance company or risk-bearing entity within the mutual holding company
system.

The bill provides that the insurance premium rate tax
cap law provided pursuant to current law shall apply to the companies within
the mutual holding company system that have an insurance premium tax liability,
and the exclusion from the tax cap applicable to a health service corporation
shall not apply to the mutual holding company or any entity within the mutual
holding company system, including the reorganized insurer, that has an
insurance premium tax liability.

The bill provides that a mutual holding company system
may pursue businesses, assets, or operations through one or more of its
insurance subsidiaries and non-insurance subsidiaries without a limit on
aggregate revenues from nonconforming affiliates or those pursuits being
considered a material change in form. The subsidiaries of the mutual holding
company, including the reorganized insurer, may make dividends or distributions
to the mutual holding company, any subsidiaries thereof, or both, and not be considered
a material change in form. Dividends and distributions from domestic insurers,
including the reorganized insurer, within the mutual holding company system are
subject only to certain applicable provisions of current law.

The bill provides that a health service corporation
may reorganize to create a mutual holding company system pursuant to a plan of
reorganization at the same time it applies to transition to a mutual insurer.
Thereafter, the succeeding mutual holding company system shall be operated in a
manner consistent with the provisions of the bill.

The bill requires the mutual holding company system to
consist of a mutual holding company and one or more controlled nonprofit or
for-profit subsidiaries, including the reorganized insurer, and to be operated
for the benefit of its members.

The bill provides that the mutual holding company and
each of its non-insurance subsidiaries, other than the reorganized insurer and
any insurance company subsidiaries, shall not be:

(1) an insurer and therefore shall not be subject to
any of the provisions of current law applicable to stock or mutual insurers, or
to any laws concerning the writing of insurance, including rules and
regulations adopted thereunder, including with respect to governance, stock or
other voting or equity interest, the writing of insurance, any investment
limitations directly applicable to risk-bearing entities engaged in the writing
of insurance, or any capital or surplus requirements;

(2) authorized to transact the business of insurance;
or

(3) qualified as an insurer.

The bill provides that the writing of insurance is
permitted only through the reorganized insurer and other insurance company
subsidiaries or investments of the mutual holding company. Nothing in the bill
alters the oversight of the commissioner with respect to the mutual holding
company and its non-insurance subsidiaries provided for under applicable laws
and rules of this State relating to insurance holding company systems.

The bill requires a mutual holding company to be a
nonprofit entity incorporated under, and to conduct its business pursuant to,
the provisions of Title 15A of the New Jersey Statutes, except that in
situations in which the provisions of that title are inconsistent with the
provisions of the bill, the provisions of the bill shall govern.

The bill provides that, at the effective time, members
shall receive membership interests of the mutual holding company, and
thereafter 100 percent of the membership interests of the mutual holding company
shall continue to be held by members, in each case, in the manner set forth in
the articles of incorporation and bylaws of the mutual holding company.

The bill requires the shares of the capital stock of
the reorganized insurer to be:

(1) issued to the mutual holding company or one or
more intermediate holding companies that are wholly-owned by the mutual holding
company; and

(2) at all times owned by the mutual holding company
or one or more intermediate holding companies that are wholly-owned by the
mutual holding company.

The subsidiaries of a mutual holding company system
may be formed by any of the following means:

(1) the formation of one or more subsidiaries;

(2) amendment or restatement of the articles of
incorporation and bylaws of one or more companies;

(3) transfer of assets and liabilities among two or
more companies;

(4) issuance, acquisition or transfer of capital
stock of one or more companies; or

(5) merger or consolidation of two or more companies.

The bill provides that the mutual holding company is
to ensure that any ownership interest in a subsidiary is held by the mutual
holding company and any profits generated by that interest are returned to the
mutual holding company.

The bill provides that a health service corporation
may submit an application to the commissioner to form a mutual holding company system.
Upon submission of an application to the commissioner, a health service
corporation shall immediately thereafter provide a copy of the application to
the Attorney General. Prior to submission of the application, the board of
directors of the health service corporation shall adopt a resolution proposing
to transition to a mutual insurer and form a mutual holding company system, at
a meeting of the board by a two-thirds affirmative vote of the total number of
directors of the health service corporation. A copy of the minutes of the
meeting at which that resolution is adopted shall be filed with the
commissioner. The resolution shall include a plan to transition to a mutual
insurer and form a mutual holding company system, including proposed articles
of incorporation and bylaws for the mutual holding company and proposed
articles of incorporation, certificates of formation, restatements of, or
amendments to, existing articles of incorporation or bylaws, and plans of
merger or consolidation, with respect to each entity to be formed, converted or
otherwise subject or party to the transition transactions pursuant to the plan
of mutualization and reorganization.

The bill provides that, in addition to including
information required pursuant to current law for the plan of mutualization,
with respect to the formation of a mutual holding company system for purposes
of this provision, the plan shall include:

(1) A description of the structure of the mutual
holding company system consistent with the requirements set forth in the bill;

(2) A description of the qualifications for members’
membership in, and the rights of members of, the mutual holding company
consistent with the requirements set forth in the bill;

(3) A description of the transactions, and parties to
those transactions, that will affect the mutualization and reorganization,
including, but not limited to, transfer and assumption of policies, contracts,
assets and liabilities, formation of entities, and the amendment or restatement
of certificates of incorporation or bylaws. The plan of reorganization may
provide for the transfer of assets of a health service corporation and its
subsidiaries to the mutual holding company or one or more subsidiaries of the
mutual holding company in connection with the formation of the mutual holding
company system;

(4) The identity of those persons who shall serve as
directors and officers of the mutual holding company, its intermediate holding
companies, if any, and its subsidiaries, including the reorganized insurer, as
of the effective time of the mutualization and reorganization. The plan shall
specify the members of the board of directors of the health service corporation
who shall serve as initial directors of the mutual holding company;

(5) Information sufficient to demonstrate that the
financial condition of the reorganized insurer and the insurance company
subsidiaries of the reorganized insurer will meet solvency requirements pursuant
to applicable laws and rules of this State relating to insurance companies
after giving effect to the mutualization and reorganization;

(6) A certification that, following the mutualization
and reorganization, policies shall remain in full force and effect under
policies transferred to and assumed by insurance company subsidiaries of the
mutual holding company;

(7) A certification that, following the mutualization
and reorganization, the material terms and conditions of subordinated surplus
notes and other contractual obligations, with certain exceptions, of the health
service corporation and its subsidiaries shall, subject to the rights of the
health service corporation and its subsidiaries under applicable law, and to
the extent those obligations are not otherwise satisfied or terminated in
accordance with their terms, remain in effect upon the transfer of those
obligations to, and assumption of those obligations by, the reorganized
insurer or one or more other subsidiaries of the mutual holding company; and

(8) A certification that, following the mutualization
and reorganization, the mutual holding company shall comply with the employment
requirements as provided in the bill.

The bill provides that, upon the affirmative vote of
the board of directors complying with the requirements of the bill, the plan to
form a mutual holding company system shall be filed with the commissioner for
approval. Upon filing the plan to form a mutual holding company system, the
obligations pursuant to current law shall be suspended during the pendency of
the commissioner’s review process. If the commissioner approves the plan to
form a mutual holding company, certain obligations arising pursuant to current
law shall be deemed satisfied by the initial assessment required by the bill.

The bill requires the commissioner to review the plan
to mutualize and reorganize in accordance with the requirements of current law
and the bill, including requirements for three public hearings.

The bill requires the commissioner to approve a plan
of mutualization and reorganization unless the commissioner finds the plan:

(1) is contrary to law;

(2) would be detrimental to the safety or soundness
of the proposed reorganized insurer and insurance company subsidiaries of the
proposed mutual holding company; or

(3) does not benefit the interests of the
policyholders of the health service corporation or treats them inequitably.

The bill provides that the commissioner may engage the
services of experts and consultants to advise on any matters related to the
application, and if a written study or other expert report is prepared, it is
to be made available to the applicant within a reasonable period of time prior
to the initial public hearing. Pursuant to the bill, the commissioner may also
engage the services of a consultant to conduct a health impact study of the
effects of the reorganization on the health of the policy holders of the health
service corporation, and the general public. The engagement shall not be
subject to Chapter 32 of Title 52 of the Revised Statutes and all costs related
to such engagement for the examination and deliberations of the application
shall be paid by the health service corporation that makes the filing, both for
services prior to the effective time and for services after the effective time.
At the expiration of 30 days after the final public hearing, the commissioner
shall approve or disapprove the plan of mutualization and reorganization and
shall set forth the decision in writing and shall state the reasons therefor.
The commissioner shall inform the health service corporation of the specific
reasons for the disapproval of any plan of mutualization and reorganization and
provide a cure period of no shorter than 90 days to cure any deficiencies. Any
disapproval shall be subject to judicial review as a final decision of a State
administrative agency.

The bill provides that a plan of mutualization and
reorganization may be amended, terminated, or approved. A plan of
mutualization and reorganization adopted by the board of directors of the
applicant may be:

(1) Amended by the board of directors of the
applicant in response to the comments or recommendations of the commissioner at
any time; or

(2) Terminated by the board of directors of the
applicant at any time. An applicant that has terminated a plan to form a
mutual holding company system shall be deemed to have also terminated the
application to transition to a mutual insurer.

The bill provides that an approved plan of
mutualization and reorganization is effective at the effective time specified
in the plan of reorganization, or such other time subsequently requested by the
applicant and agreed to by the commissioner.

The bill provides that a mutual holding company system
is considered an insurance holding company system and subject to the current
law governing insurance holding company systems, with certain exceptions. In
addition, the bill provides that the commissioner possesses supervisory powers
with respect to the insurance holding company system which shall include the
authority to monitor the mutual holding company systems financial health,
enterprise risk, and exam its operations pursuant to P.L. 1970, c.22
(C.17:27A-1 et seq.).

The bill allows a mutual
holding company or a non-insurance subsidiary to make any lawful investments
including directly or indirectly acquiring or otherwise holding the stock or
other ownership interests of any nonprofit or for-profit entities. Insurance
company subsidiaries and the reorganized insurer may make investments,
including investments in non-insurance entities subject to investment and asset
limitations pursuant to applicable laws and rules relating to insurance
companies.

The bill requires the
mutual holding company and its non-insurance and insurance company subsidiaries
to continue to operate a diverse supplier program that promotes and invests in
the utilization of minority-owned and women-owned businesses in the procurement
of goods and services, including professional services.

The bill provides that
the application submitted pursuant to the bill be a public record, except for
certain confidential documents which shall not be public records. The
commissioner is to provide the public with prompt and reasonable access to
public records relating to the proposed reorganization of the health service
corporation.

Neither the adoption nor the implementation of a plan
of mutualization and reorganization pursuant to the bill is deemed to give rise
to any obligation by or on behalf of any entity in the mutual holding company
system or any predecessor entity to make any distribution or payment to any
member or policyholder, or to any other person, fund, or entity of any nature
whatsoever, in connection with the ownership, control, benefits, policies,
purpose, or nature of any entity in the mutual holding company system, any
predecessor entity or otherwise.

Under the bill, membership in a mutual holding company
is to be determined in accordance with the mutual holding company’s articles of
incorporation and bylaws and may be based upon:

(1) the amount of health insurance policies in force
with the reorganized insurer;

(2) the amount of the health insurance premiums paid
to the reorganized insurer; or

(3) other reasonable factors.

A mutual holding company may also consider the amount
of premiums paid to, or policies in force under, affiliated insurance companies
operating under the same brand licensee program as the reorganized insurer and
permit entities holding administrative services agreements with the mutual
holding company to be members of the mutual holding company. The mutual
holding company may provide in its bylaws the basis for the number of votes
those entities will have as members of the mutual holding company.

A mutual holding company formed pursuant to the bill may
not convert to a for-profit stock holding company. The provisions of current
law providing for conversion of a health service corporation to a domestic
stock insurer do not apply to a mutual holding company formed pursuant to the
bill.

The bill provides that members of a mutual holding
company shall be entitled to vote for the election of directors of the mutual
holding company in accordance with the mutual holding company’s bylaws.
Directors of the mutual holding company shall be elected from nominees selected
by the nominating and governance committee of the board of directors of the
mutual holding company, or a comparably authorized committee, except for public
directors serving in accordance with the provisions of the bill.

The bill prohibits a member of a mutual holding
company from transferring membership or any right arising therefrom.

Upon any voluntary dissolution of a mutual holding
company in accordance with current law, the mutual holding company shall adopt
a plan of dissolution. The plan shall provide for distribution of any assets
of the mutual holding company remaining after the discharge of all liabilities
and obligations.

The bill requires a mutual holding company to file
with the commissioner an annual statement pursuant to applicable laws of this
State.

Following approval of a transition pursuant to the
bill, and the establishment of a mutual holding company, the mutual holding
company, or any affiliates benefiting from the establishment of a mutual
holding company, shall pay an initial assessment to the State Treasury in the
amount of $600,000,000 by June 1, 2022 if the effective time precedes June 1,
2022. If the effective time is later than June 1, 2022, the initial assessment
shall be due by June 1 of the calendar year following the effective time. The
initial assessment shall be a one-time, nonrecurring State business tax on the
mutual holding company and its affiliates.

Following the initial assessment, the mutual holding
company, or any affiliates benefiting from the establishment of a mutual
holding company, shall pay a limited duration business tax by June 1 of each
calendar year beginning with the calendar year following the initial
assessment, and for a period of seventeen years. The total assessment,
including both the initial and annual assessments, shall not exceed
$1,250,000,000. The annual assessments represent a limited duration state
business tax on the mutual holding company and its affiliates business payable
by the mutual holding company or any affiliates benefiting from the
establishment of a mutual holding company, and shall be based on the following
schedule with earned premiums defined consistent with 45 CFR 158.130:

(1) For annual assessment 1, 20 percent of the
reorganized insurer’s earned premiums for the calendar year preceding that
assessment, with the assessment not to exceed $100,000,000.

(2) For annual assessments 2 through 11, 5 percent of
the reorganized insurer’s earned premiums for the calendar year preceding a
given year’s assessment, with each year’s assessment not to exceed $25,000,000.

(3) For annual assessments 12 through 17, 10 percent
of the reorganized insurer’s earned premiums for the calendar year preceding a
given year’s assessment, with each year’s assessment not to exceed $50,000,000.

The bill provides that the mutual holding company
shall not pay any portion of the annual assessment for a given calendar year if
the mutual holding company’s system-wide health risk-based capital authorized
control level would fall below 550 percent based on the standards for risk
based capital for health organizations as adopted by the National Association
of Insurance Commissioners following the payment as applied against the prior
calendar year’s risk based capital, or if in the opinion of any nationally
recognized statistical rating organization, the group credit rating of the
mutual holding company would not be considered investment grade. The
commissioner is to determine that the mutual holding company’s system-wide
health risk-based capital authorized control level would fall below 550 percent
before payments are to be deferred pursuant to the bill. Neither the insurance
company subsidiaries nor the reorganized insurer are to make dividends or distributions
to the mutual holding company or any subsidiaries thereof until such time as
the annual assessment deferred pursuant to the bill is satisfied.

If the mutual holding company does not pay the annual
assessment for a given calendar year, the annual assessment that was not paid
shall be deferred to the subsequent calendar year, which shall be the deferral
date for the deferred annual assessment, with all subsequent annual assessments
also deferred by another calendar year so that no two annual assessments are
due in the same calendar year. If an annual assessment is deferred, that
annual assessment shall not be required by law to be paid until the deferral
date.

Notwithstanding the provisions of the bill to the
contrary, the assessment years shall not be extended beyond, and the payment
obligation shall cease to exist after, the date that is 25 years from the
effective time.

The bill provides that the board of the mutual holding
company shall be constituted of 22 directors as follows:

(1) 13 directors shall be elected, as provided in the
bylaws, one of whom shall be the chair;

(2) 5 directors shall be public directors appointed
by the Governor with the advice and consent of the Senate;

(3) 2 directors shall be public directors appointed
by the Senate President; and

(4) 2 directors shall be public directors appointed
by the Speaker of the General Assembly.

Upon the effective time of the conversion to a mutual
holding company system, the term of office of the public directors of the
reorganized insurer shall not immediately expire but rather be temporarily
continued with each such director continuing in holdover status until such time
as the appointing authority reappoints or renames such director or appoints or
names another director. The initial board of directors of the mutual holding
company shall be:

(1) the elected directors of the reorganized insurer
supplemented by additional elected directors nominated and elected by the
mutual holding company’s board after the effective time for a total number of
elected directors specified in the bill;

(2) 5 public directors appointed by the Governor with
the advice and consent of the Senate;

(3) 2 public directors named by the Senate President;
and

(4) 2 public directors named by the Speaker of the
General Assembly.

The bill provides that each elected director shall
have a term of three years with up to two successive three-year terms following
the initial term for up to a total of three successive terms, and as provided
for in the bylaws, with such other term and term limits specifically applying
to the individual directors. The chief executive officer or president of the
mutual holding company shall be an elected director at all times and shall not
be subject to any term limit or election. Each director shall meet the
statutory and regulatory qualifications for the mutual holding company system’s
businesses and be free from conflicts of interest that would prohibit the
person from materially executing the person’s duties as a director. Each public
director shall have a term of three years with up to two successive three-year
terms following the initial term, for a total of up to three successive terms.
Upon the effective time, the terms of office of the public directors of the
reorganized insurer shall continue until their respective successors are
appointed and qualified. No period during which a public director holds over
shall be deemed to be an extension of the public director’s term of office for
the purpose of determining the date on which a successor’s term expires.

The bill provides that there shall be a transitional
period of 18 months following the effective time before elected directors of
the mutual holding company are subject to election by its members. The first
election shall occur at the first annual meeting following the transitional
period, and in accordance with the mutual holding company’s bylaws.

The bill provides that, to the extent practicable, the
mutual holding company is to make best efforts to reflect the racial, ethnic,
and gender diversity of the communities that it serves throughout the
organization, including the board of directors and executive leadership, to
achieve its mission.

Upon the formation of a mutual holding company, the
total number of full-time employees that were employed within a mutual holding
company system shall be maintained for a transition period of 36 months
following that formation based on the full-time employee count of the health
service corporation as of September 30, 2019, with certain exceptions.

The employment requirements of the bill do not
supersede the terms of any collective bargaining agreement or require a mutual
holding company system to replace headcount lost due to various causes.

As amended and reported, this bill is identical to
Assembly Bill No. 5119, as amended and reported by the Assembly Financial
Institutions and Insurance Committee on December 14, 2020.

COMMITTEE AMENDMENTS:

The committee amended the bill to:

(1) provide that the provisions of current law that
exempt health service corporations from taxes other than taxes on real estate
and equipment and taxes on premiums continue to apply to a mutual holding
company if the mutual holding company continues to participate in the New
Jersey Individual Health Coverage Program or the New Jersey Small Employer
Health Benefits Program;

(2) clarify that the provisions of the Insurance
Holding Company System Act (C.17:27A-1 et seq.) apply to the reorganized
insurer;

(3) add the merger or consolidation of two or more
companies to the means by which the subsidiaries of a mutual holding company
system may be formed;

(4) require the mutual holding company to ensure that
any ownership interest in a subsidiary be held by the mutual holding company
and any profits generated by that interest be returned to the mutual holding
company;

(5) provide that, upon submission of an application
to the commissioner, a health service corporation must provide a copy of the
application to the Attorney General;

(6) provide that the commissioner is to hold three
public hearings on the plan to form a mutual holding company within 90 days
after the commissioner determines that the filing is complete, with notice
provided by publication in a manner satisfactory to the commissioner;

(7) provide that the commissioner is to approve of a
plan of mutualization and organization unless the commissioner finds the plan,
among certain other requirements, does not benefit the interests of the
policyholders of the health service corporation or treats them inequitably;

(8) permit the commissioner to engage the services of
a consultant to conduct a health impact study of the effects of the
reorganization on the health of the policy holders of the health service
corporation and the general public;

(9) provide that if a written study or other expert
report is prepared, it shall be made available to the health service
corporation applying for reorganization, within a reasonable period of time
prior to the initial public hearing;

(10) provide that commissioner shall possess
supervisory powers with respect to the insurance holding company system which
shall include the authority to monitor the mutual holding company systems
financial health, enterprise risk, and exam its operations pursuant to P.L. 1970,
c.22 (C.17:27A-1 et seq.);

(11) require the mutual holding company and its
non-insurance and insurance company subsidiaries to continue to operate a
diverse supplier program that promotes and invests in the utilization of
minority-owned and women-owned businesses in the procurement of goods and
services, including professional services;

(12) provide that the application submitted pursuant
to the bill be a public record, except for certain confidential documents;

(13) provide that the commissioner is to determine
that the mutual holding company’s system-wide health risk-based capital
authorized control level would fall below 550 percent before the deferment of
the annual assessment for a given calendar year;

(14) extend the date beyond which the assessment
years may not be extended to 25 years from the effective time from 20 years
from the effective time;

(15) provide that, to the extent practicable, the
mutual holding company is to make best efforts to reflect the racial, ethnic,
and gender diversity of the communities that it serves throughout the
organization, including the board of directors and executive leadership, to
achieve its mission;

(16) make certain changes for federal tax filing
purposes;

(17) extend certain employment protection provisions
for a period of 36 months following the formation of the mutual holding company
from 24 months following the formation of the mutual holding company; and

(18) make certain changes concerning the appointment
of public directors.

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