Market Conduct Examination
Harvard Pilgrim Health Care Inc.

93 Worcester Street
Wellesley, MA 02481-3609

NAIC Company Code #96911
NAIC Exam Tracking System #ME008-M7

Examination Period:
4/01/02 thru 6/30/02

TABLE OF CONTENTS

SCOPE OF EXAMINATION
HISTORY AND PROFILE
METHODOLOGY
STANDARDS
APPLICATION OF TESTS
COMMENTS & RECOMMENDATIONS

I hereby certify that the attached targeted market conduct report of examination dated March 19, 2004 shows the condition and affairs of Harvard Pilgrim Health Care, Inc. of Portland, Maine for the period of April 1, 2002 through June 30, 2002 and has been filed in the Bureau of Insurance as a public document.

This report has been reviewed. _______________________ Eric A. Cioppa Deputy Superintendent

This ______ day of __________, 2005

March 19, 2004

Honorable Alessandro A. Iuppa
Superintendent of Insurance
State of Maine
Bureau of Insurance
34 State House Station
Augusta, Maine 04333

Dear Sir:

Pursuant to the provisions of Title 24-A M.R.S.A. § 221 and in conformity with your instructions, a targeted market conduct examination has been made of:

Harvard Pilgrim Health Care, Inc.

hereinafter referred to as the “Company” or as “HPHC”. Harvard Pilgrim is organized and incorporated under the laws of the Commonwealth of Massachusetts. Harvard Pilgrim is licensed in the State of Maine as a foreign HMO under license #HMF39507, first issued in May 1994. This examination reviewed only the operations of Harvard Pilgrim as they impact residents and policyholders residing in the State of Maine or claimants involved in losses in or related to Maine claims. The on-site phase of the examination was conducted at the offices of Harvard Pilgrim servicing Maine located at:

48 Free Street
Portland, Maine 04101

The following report is respectfully submitted.

SCOPE OF EXAMINATION

Prompt payment of claims has become a national issue. Many states are conducting or have conducted market conduct examinations regarding the issue of prompt payment of claims. On the state level, the Maine Bureau of Insurance (hereinafter the “Bureau”) has received inquiries from the provider and legislative communities of the payment practices of the insurance industry. Based on the national spotlight coupled with concern at the state level, the Superintendent has decided that targeted market conduct examinations regarding the prompt payment of claims will be performed on all managed-care organizations operating in the State of Maine over the course of 2002 and 2003.

This examination includes paid and denied claims during the 2^nd quarter 2002 (April 1, 2002 through June 30, 2002). This examination period will be utilized consistently for all managed-care organizations being examined in this cycle. This was a targeted examination limited in scope to the examination of prompt payment issues as outlined in 24-A M.R.S.A. § 2436 (1) (2) and (3) and the documentation standards outlined in 24-A M.R.S.A. § 3408.

The examination was performed in accordance with examination standards and guidelines as set forth in the National Association of Insurance Commissioners (NAIC) Market Conduct Examiners Handbook (hereinafter the “Handbook”) and the rules and regulations prescribed by the State of Maine through tests developed by the Bureau. Sampling was used in accordance with Handbook standards.

Readers of this report must recognize that due to the targeted focus of the examination, only matters pertaining to prompt payment of claims have been reviewed in the course of this examination. However, failure to comment on specific products, procedure or files does not constitute approval thereof by the Maine Bureau of Insurance.

HISTORY AND PROFILE

HPHC and its affiliate, Harvard Pilgrim Health Care of New England, Inc., operate as not-for-profit health insurance plans providing comprehensive health insurance, access to health care and other related services in Massachusetts, Maine and New Hampshire to group, individual, and Medicare Advantage (Massachusetts and New Hampshire only) members through contracts with physicians, established primary care and multi-specialty physician groups, hospitals and other health care providers.

Another HPHC affiliate, HPHC Company, Inc. underwrites accident and health risks related to out-of-network coverage for HPHC members as well as group health insurance through its PPO indemnity and Medicare indemnity products.

HPHC was placed in temporary receivership for purposes of rehabilitation in January of 2000. On May 24, 2000, a Plan of Rehabilitation was approved by The Supreme Judicial Court for Suffolk County and, on June 21, 2000, the temporary receivership was dismissed. As part of the court order, HPHC will remain subject to administrative supervision of the Insurance Commissioner of The Commonwealth of Massachusetts for so long as the payment approval conditions by the Commissioner for principal and interest on the Massachusetts Health and Educational Facilities Authority Revenue Bonds Issue 1998 Series A are in effect. To date, all sources report that HPHC has met all principal and interest payments associated with the bonds in a timely manner. It is acknowledged that this targeted examination has no bearing or association with the receivership or rehabilitation process that HPHC has undergone.

In 2002, Harvard Pilgrim reported almost $1.4 billion in premiums with 0.35% being generated in Maine.

METHODOLOGY

This examination is based on the Standards and Tests for a Market Conduct Examination of a health insurance company as found in Chapter XVII of the Handbook, specifically as it relates to claims payment practices. The standards were tested through detailed review of a random sample of claims files that were processed during the 2^nd quarter of 2002 using sampling methodology described in the Handbook.

Standards were evaluated using tests designed to adequately measure how the examinee met the standard and legal requirements of 24-A M.R.S.A. § 2436. Each test applied is described and the result of testing is provided in the “STANDARDS” section of the report. The standard, its statutory authority under Maine law, and its source in the Handbook are stated and contained within a bold border.

Some unacceptable or non-complying practices may not have been discovered in the course of this examination. Failure to identify or criticize specific Company practices does not constitute acceptance by the Maine Bureau of Insurance of such practices. This report should not be construed to endorse or discredit any insurance company or insurance product. This report is prepared for a particular audience and for a particular use. The materials contained in it are not necessarily suitable for any other purposes. Statutory cites and regulation references are as of the period under examination unless otherwise noted.

Note: A preliminary sample of claims was tested and found to be outside the chronological timeframe (scope) of this examination and; consequently, the results are not reflected within the tables of this report as a percentage of accuracy nor was there any extrapolation to the entire claim population. However, certain deficiencies with HPHC business practices were identified and are reflected in the Comment and Recommendation section.

STANDARDS/p>

The specific Handbook standards and tests developed by the examiners are outlined in this section.

Standard L-3 Claims are settled in a timely manner as required by statues, rules and regulations. NAIC Market Conduct Examiners Handbook – Chapter XVII, § L, Standard 3; and 24-A M.R.S.A. § 2436

Standard L-4 The Company responds to claim correspondence in a timely manner. NAIC Market Conduct Examiners Handbook – Chapter XVII, § L, Standard 4; and 24-A M.R.S.A. § 2436

Standard L-5 Claim files are adequately documented. NAIC Market Conduct Examiners Handbook – Chapter XVII, § L, Standard 5; and 24-A M.R.S.A. § 2436 & § 3408 (1)

This examination was designed to determine the compliance of the Company with 24-A M.R.S.A. § 2436 (1), (2) and (3) by applying specific tests to the sampled items based on Standards L-3, L-4 and L-5 of the Handbook. The results of the testing reflect compliance or non-compliance with the standards and statute.

TEST 1: Standard L-3 establishes a general framework for the timely settlement of claims. The corresponding Maine statute, 24-A M.R.S.A. § 2436 (1), states in part:

“A claim for payment of benefits under a policy or certificate of insurance delivered or issued for delivery in this State is payable within 30 days after proof of loss is received by the insurer and ascertainment of the loss is made either by written agreement between the insurer and the insured or beneficiary or by filing with the insured or beneficiary of an award by arbitrators as provided for in the policy. For purposes of this section, “insured” or “beneficiary”; includes a person to whom benefits have been assigned. A claim that is neither disputed nor paid within 30 days is overdue.”

TEST 1: Based on 24-A M.R.S.A. § 2436 subsection (1), a claim must be paid/denied within 30 days after proof of loss is received and ascertainment of the loss is made by the insurer, otherwise it is considered overdue.

TEST 2: In addition to the standards outlined in Test 1, Title 24-A M.R.S.A. § 2436 (1) outlines the standards to apply when additional information is needed by the Company in order to process an undisputed claim as contemplated in Standard L-4. The subsection continues as follows:

“If, during the 30 days, the insurer, in writing, notifies the insured or beneficiary that reasonable additional information is required, the undisputed claim is not overdue until 30 days following receipt by the insurer of the additional required information;”

The standards of documentation outlined in Standard L-5 are further solidified by 24-A M.R.S.A. § 2436 (2) which states:

“An insurer may dispute a claim by furnishing to the insured or beneficiary, or a representative of the insured or beneficiary, a written statement that the claim is disputed with a statement of the grounds upon which it is disputed. The statement must be based upon a reasonable investigation of the claim and must include sufficient detail to permit the insured or beneficiary to understand and respond to the insurer's position.”

TEST 2: Based on 24-A M.R.S.A. § 2436 (1) and (2), a claim file must contain adequate documentation of the claims process including written notification to the claimant of reasonable additional or disputed information is required by law.

TEST 3: If the Company fails to pay an undisputed claim within the 30-day timeframe required by law, there is a late payment interest penalty assessed. This is a further testing requirement of Standard L-3. The application of the interest penalty is addressed in 24-A M.R.S.A. § 2436 (3) which states:

“If an insurer fails to pay an undisputed claim or any undisputed part of the claim when due, the amount of the overdue claim or part of the claim bears interest at the rate of 1 1/2% per month after the due date.”

TEST 3: Title 24-A M.R.S.A § 2436 (3) requires an insurer to pay an interest penalty to the claimant if the insurer fails to pay undisputed claims within 30 days of proof of loss.

APPLICATION OF TESTS

This section outlines the application of the tests to the random sample of 50 items selected from the population of paid and denied claim items received during the 2^nd quarter 2002. The results of applying the criteria outlined in the tests are as follows:

TABLE 1:

Test #	Type	Sampled	N/A	Pass	Fail	% Pass	% Fail
TEST 1 Paid/Denied < 30 days	Paid/ Denied Items	50	0	49	1	98	2
TEST 2 Adequate Documentation	Paid/ Denied Items	50	0	50	0	100	0
TEST 3 Interest on Claims > 30 days	Paid Items	50	13	37	0	100	0

The 13 N/A items in Test 3 were denied claims.

As with many health carriers, Harvard Pilgrim contracts out the administration of their mental health care contract provisions to ValueOptions, Inc. As this area tends to be problematic within the industry, a sample of these claims was reviewed even though the population is a very small portion of the total Harvard Pilgrim claims. A random sample of 50 items was selected from the ValueOptions, Inc. population where payment was not made within 30 days after proof of loss. Results are shown in Table 2.

TABLE 2:

Test #	Type	Sampled	N/A	Pass	Fail	% Pass	% Fail
TEST 2 Adequate Documentation	Paid Items	50	0	18	32	36	64
TEST 3 Interest on Claims > 30 days	Paid Items	50	0	38	12	76	24

In discussion with representatives of ValueOptions, Inc., various corrective measures were described as having been implemented subsequent to the examination period.

COMMENTS & RECOMMENDATIONS

1. Comment: During the course of this examination, it was noted that HPHC treats multiple services submitted on the same claim form/service date as an entire claim - wherein if one or more services are flagged as disputable, the entire claim is considered disputable and requires manual intervention. Once additional information is received, the claim is finalized. This practice sometimes results in undisputable lines being delayed beyond the allowable 30 days before payment, and penalty interest is not being paid.
   
   Title 24-A § 2436 (3) states in part: "If an insurer fails to pay an undisputed claim or any undisputed part of the claim when due, the amount of the overdue claim or part of the claim bears interest at the rate of 1 1/2% per month after the due date.”
   
   Recommendation: The standard operating procedure of the Company is to not make penalty interest payments for the undisputed portion of a claim. The Company must take the necessary steps to comply with Title 24-A § 2436 (3)
   
   
2. Comment: During the course of this examination, it was noted that Harvard Pilgrim had a number of risk-based provider contracts in place in Maine. On occasions, claims were filed under these contracts for retroactive transactions which lead to retroactive reversal and re-entry of transactions. For the Retro Reversal process, both the adjustment that was initiated to the original claim and the entry of the new claim were systematically coordinated to occur at the same time within Amisys (Harvard’s claim system). The anticipated result was the new claim would pay/deny accordingly and the original claim would finalize with a retraction of previous dollars paid. Since both transactions should finalize in the same check/EOP cycle, the original claim would, in essence, offset the dollars for the new claim. It was demonstrated during this audit, however, that these claims did not always process as anticipated. This resulted in a variety of outcomes. The most egregious of which was some providers ultimately ended up not being paid. It should be noted that the total population identified as being exposed to the problem was 1250 Maine claims with a total of 24 claims, or 2%, as having undesirable conclusions. Note: HPHC has stated that currently there are no active risk-based provider contracts in Maine.
   
   Recommendation: Action is being taken by Harvard Pilgrim to pay any of the effected providers the appropriate claims amounts and any penalty interest due. It is recommended that Harvard Pilgrim’s Information Services unit develop protocols to adequately monitor implementation of new software and subsequent testing to ensure proper performance. Such protocols should be coordinated with their internal audit department.
   
   
3. Comment: During the course of the examination, review of both Harvard Pilgrim and ValueOption, Inc. files revealed the occasional occurrence of a negative balance for a provider’s account. Typically, as subsequent claims are processed for that provider, the amounts are applied to the negative balance until the negative amount is eliminated. In the case of ValueOptions, Inc., “Negative balances are "open" transactions on the finance system and they are not assigned a paid date until the negative balance is resolved”. The fact that a particular provider may have a negative balance on their account should not be reflected in the claim processing system. This is an accounting transaction; keeping a claim “open” and not assigning a paid date until the negative balance is resolved does not truly reflect the process time of a given claim.
   
   Recommendation: Both Harvard Pilgrim and ValueOptions, Inc. should insure that their systems accurately record dates associated with the claims process.
   
   
4. Comment: As shown in Table 2, the review of claims processed by ValueOptions, Inc. on behalf of Harvard Pilgrim demonstrated a failure rate of 64% for adequate file documentation and 24% failure rate for paying penalty interest payments.
   
   Recommendation: Communications with ValueOption, Inc. personnel indicated that corrective measures had been implemented to address both of these categories. It is recommended that ValueOption, Inc. continue to implement and monitor corrective steps. Harvard Pilgrim should design and implement monitoring procedures for sub-contractors to ensure statutory compliance for which it is ultimately responsible.
   

STATE OF MAINE
COUNTY OF KENNEBEC, SS

Van E. Sullivan, being duly sworn according to law, deposes and says that in accordance with the authority vested in him by Alessandro A. Iuppa, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, he has made a targeted market conduct examination on the condition and affairs of

Harvard Pilgrim Health Care, Inc.

of Portland, Maine for the period of April 1, 2002 through June 30, 2002, and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief.

The following examiners from the Bureau of Insurance assisted:

Paul C. Greenier
Carolee B. Nichols, AIRC

_____________________________________
Van E. Sullivan, Supervisor
Market Conduct Division

Subscribed and sworn to before me

This ____ day of _______________, 2005

_________________________________ Notary Public

My commission expires:

 

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