February 12. 1987

Mr. ClaytonT. Garrison ExecutiveDirector EmployeesRetirement System of Texas P. 0. Box 13207 Austin,Texas 78711 OpinionNo. JM-631

Re: Authority of theEmployees Retirexent System and the State Board of Insurance in regard to healthmaintenanceorganizations

DearMr. Garrison:

You ask several questions about the authority of the Employees Retirement System of Texas (ERS) to contractwith health maintenance organizations (NMOS)

. Specifically,you ask about the authorityof au RMO and theERS to enter intoa contractthat containsprovisions that would require the 8MO to contravene rules promulgated by the State Board of Insurance to regulateBMOs. Beforewe addressyour specific questions,we will set out background inforxation about the ERS and state and federalregulationofRMOs.

In 1975 the legislaturepassed theTexas EmployeesUniform Group Insurance Benefits Act, which provides for health benefits covarage for all stateaxployees. Ins. Code art. 3.50-2.The board of trustees of the ERS Is authorized to administer and implement the act and to promulgate all rules aecessary to carry out the purposes and provisions of the act. Id. 54. In 1977 the legislatureamended the act by adding section 5(e). which gives theERS authority to contractwith mos:

The tiustee is authorized to select and contract for servicesperformedby healthmaintenance organizations which are approved by the federal goverumeut or the State of Texas to offer health
care servicesto eligibleemployeesand annuitants in a specific area of the state. Eligible employees and annuitants may participate in a selectad health maintenance organization in lieu of participation in the health Insurancebenefits in the EmployeesUniforx Group InsuranceProgram, and the employer contributions provided by Subsection (a), Section 15 of thisAct for health
care coverage shall be paid to the selected healthmaintenance organizations on behalf of the participants.

Acts 1977,65thLeg., ch. 785, 55,at 1997.

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Amos operate in Texas pursuant to the Health Maintenance Organization Act. Ins. Code arts. 20A.01 through 20A.35. The State Board of Insurance (SBI) is authorized to promulgate rules necessary to carry out theprovisions of the Health MaintenanceAct. Ins. Code art. 20A.22. No HMO may operate in Texas without a certificate of authority issued by the commissioner of insurauce. Ins. Code arts. 20A.03. 20A.05. An applicant for a certificate of authority must submit, among other things, a copy of its basic organizational document,a copy of the form of any group contract tobe issued,and a copy of the evidence of coverage to be provided to enrollees. Ins. Code art. 20A.04. See also Ins. Code art. 2OA.09 (requirements for evidance of coverage). The commissioner may suspend or revoke a certificate of authority issued to an HMO if the EM0 is operating In contravention of its basic organizational documents or if the SMO Issues evidence of coverage that does not complyvith article 20A.09. Ins. Code art. 20A.20(a)(l). (2). See also art. 20A.20(a)(3) through (10) (other reasons for suspension or revocation of certificate of authority).

IlMOsare also subject to federal regulation. See Health Maintenance Organization Act of 1973. 42 U.S.C. 45300exough 300e-17. As part of that legislation. Congress specifically preempted certain types of state laws affectingIlMDs:

In the case of any entity--
(1) which cannot do business as a health maintenance organizationin a State inwhich it proposes to furnish basic and supplemental health services because that State by law, regulation,or otherwlse -

(A) requires as a condition to doing business in that State that a medical societyapprove the furnishingof services by the entity,
(B) requires that physicians constitute all or a percentage of its governing body.
(C) requires that all physicians or a percentage of physicians In the locale participateor be permitted toparticipate in **the** provision of services for the entity,or
(D) requires that the **entity** meet requirements for insurers of health care services doing business in that State respecting initial capitalization and

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establishment of financial reserves against insolvency,and
(2) for which a grant, contract, loan. or loan guarantee was made under this subchapter
or which is a qualified health maintenance organization for purposes of section 300e-9 of this title (relating to employees’ health benefitsplans),

such requirements shall not apply to that~entity
so as to prevent it from operating as a health maintenance organization in accordance **with** section300eof this title.

42 U.S.C. 5300e-10(a). The federal act also preempts any state regulationthat interfereswith the effectiveoperationof the federal plan. RealthCare Plan ofNew Jerse ,,Inc.v. Schweiker.553 F.Supp. 440, 445 (D.N.J.1982),ied, 464 U.S. 815 (1983). Bv uoholdina the state laws reuulatinnHMOs thatwere in question in Reaith Car: Plan of New Je;sey, however, the court Implicitlyheld that congresshadnot occupiedthe entire field ofRMO regulationand that states could regulateRMOs. For purposes of this opinion,we will assume thatstate lawsBud regulationsgoverningBhOs
are valid and have not been preempted. See also 42 U.S.C. 5300e-9 (stateswhich receive certain federal fundsmust offer HMO option to certainemployees).

Your first question iswhether the SBI may refuse to approve an agreement entered into between an AM0 and the ERS if the agreement states that the rules of the ERS takeprecedence over any conflicting provision contained in theHMO’s basic evidenceof coveragedocument. When theERS is contractingwith anBMO,you argue, theERS’ authority to make rules to carry out the provisions of the Texas Employees Uniform Group Insurance Act is paramount to the SBI’s authority to make rules to carry out the Eealth Maintenance OrganizationAct. As support for your position you cite the rule that, In the case of a conflict between two laws, a specific provision controls over a general provision. This interpretation of the ERS’ rule-making authority is too broad. There is no need to invoke the rule that specific statutes take precedence over general statutes here because the two laws in questionarenot in conflict.

1. You raise the preemption issue in your third question by arguing that article 3.51-6, 93B. of the Insurance Code has been preempted by a recent federal law. In our discussion of your third question, we point out that neither article 3.51-6, §3B. nor the recent federal lawapplies toyour question.

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The SBI has authority to make rules regulating RMOs. Ins. Code art. 20A.22. The BRS, in contrast,merely haa authority to contract with BKOs. Ins. Code art. 3.50-2, 05(e). It is a novel suggestion that thepower to contract with an BMO gives the ERS power to authorize actions by an BMO that are prohibited by a valid SBI rule applicable to all BMOa. See 2 Tex. hr. 3d Administrative Law $11 (1979) (administrativeage= may not exercise a power conferred on another agency). We know of **no** authority for the proposition that a state agency's authority to contractwith an entity allows the state agency to regulate that entity or to override the rules of another stateagency that is authorized to regulate thatentity.
Furthermore, section 5(e) of article 3.50-2 gives the ERS authority to **contract** with RMOs that "are approved by the federal government **or the**  State of Texas" to offer services In a certain area of the state. We think that languagemakes clear that the legislature did **not** intend to give the ERS power to regulate EMOs or to excuse BMOs **contracting** with theERS from complyingwith SBI rules applicable to all RMOs. Rather, the ERS has authority to contract for the servicesof BMOa that operatepursuant to applicable stateand federal regulations. In otherwords, theERSmust take **an** BMO as It finds it. Cf. art. 3.50-2, 55(a) (SBIprovides ERS list of insurance carriers eligible to bid on the coverages desired by ERS). Therefore, we conclude that it is within the authority of the SBI to refuse to approve a contract between the RR'Sand an BMO that states that ERS rules takeprecedence over conflictingSBI rules.

Your next question is a more specificversion of your first one. You askwhether an HMO contractingwith the ERS is exempt from a rule promulgated by the SBI regarding "third generation coverage." 28 T.A.C. 111.506(10) (1984). Before we address your question we will explain thebackground of the rule in question.

In 1973 the legislatureenacted the **following** provision:

No individual policy or group policy of accident and sickness insurance. including policies issued by companies subject to Chapter 20,Texas InsuranceCode, as amended,deliveredor issued for delivery to any person in this state which provides for accident and sickness coverage of additional newborn children **or maternity**  benefits, may be issued **in** this state if It contains any provisions excluding or limiting initial coverage of a newborn infant for a period of time, or **limitations** or exclusions for congenitaldefects of a newborn child.

Art. 3.70-2, subdiv. (E). The SBI has interpreted that provision to
mean that an insurance policy that provides maternity benefits for dependents must provide coverage for children of dependents. You refer to this type of coverage as “third generation coverage.” We

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**will assume.**  for the purposes of this opinion, that the SBI has properly interpreted article 3.70-2(E). See Texas Health Facilities CoumlissionV. El Paso Medical Surgical Associates, 573 S.W.2d 291, 295 (Tex. Civ. App. - Tyler 1978, writ ref'd n.r.e.1 (courts give deference to siatutory- interpretation of agency administering statute); see generally Letter Advisory No. 39 (1973) (discussing constitutionality of bill which became article 3.70-2(E) of the InsuranceCode).

Article 3.70-2(E) itselfdoes not apply toRMOs. Ins. Code art. 20A.26(a) (provisions of insurance law and provisions of group hospital service corporation laws BOt applicable to RMOs except as provided in AM0 Act). Bowever, the SBI has promulgated a rule providing that no evidence of coverage issued by an HMO may contain any provision excludingor limiting coverage for a newborn child. 28 T.A.C. 511.506(10)(C) (1984). The SBI has interpreted its rule as requiring third generation coverage. As authority for its rule, the SBI cites article 20A.O9(a)(3)(A),which states that no evidence of coverage may contain provisions that are unjust, unfair, or unequitable.

You argue that a contract between the ERS and an HMO need not provide for thirdgenerationcoverage for severalreasons. **First, you**  **argue** that because the legislature exempted lD4Os from article 3.70-2(E), the SBI rule imposing the same **restriction on**  RMOs conflictswith state law. We disagree. This is not a case inwhich article 3.70-2(E) is singledout and specificallymade inapplicableto Elms. Rather, article 3.70-2(E) is a member of the general category of insurance laws,which are inapplicableas a class to SMOs. **IBS.** Code art. 20A.26(a). We think that the purpose of making that broad category of laws inapplicable to RMOs is to make clear that EMOs operate differently from traditionalhealth insuranceplans and that RKOs are subject to a separateregulatoryschemespecificallytailored to HNOS. We do not think that the purpose of making that broad category of laws inapplicable to RMOs was to preclude the SBI from adopting a rule applicable to HMOs that happens to have the same requirementsas a statuteapplicableto insurancecompanies.

You also argue that the rule requiring third generationcoverage cannot be applied to an RMO contractingwith the ERS because of the way "dependent" is defined for purposes of article 3.50-2. The act defines "dependent"as follows:

'Dependent' shall mean the spouse of an employee or retired employee and an unmarried child under 25 years of age, iBChdiBg; (A) **an** adopted child and (B) a stepchild, foster child,
or other child who Is **in** a regular parent-child relationshipand (C)any such child.regardlessof age, who lives with or whose care is provided by
an employee or annuitant on a regular basis if such child is mentally retarded or physically

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incapacitatedto such an extent as tobe dependent upon the employee or retired employae for care or support.as the trustee shalldetermine.

Ins. Code art. 3.50-2, 53(a)(8). You argue that the ERS cannot enter into a contract that provides for third generation coverage because the ERS would be violating the terms of article 3.50-2 if it did so. You conclude from that premise that the specific definition of vdependent" in article 3.50-2 takesprecedence over the SBI's general power to make rules governing BMOs. We disagree. We think that the provisions of article 3.50-2 canbe read In harmony with the SBI rule in question.

Section 19 of article 3.50-2 requires the ERS to make coverage available for dependentsof state employees:

(a) Any employee or annuitant shall be entitled to secure for his dependents any uniform group coveragesprovided for employees under this **Act, as**  shall be determined by the trustee. Payments required of the employee **in** excess of employer contributions shall be deducted from the monthly pay of tha employeeor fromhis retirement benefits in such manner and form as the trustee shalldetermine.
(b) A surviving spouse of an **employee or**  **a** retiree who is entitled to monthly benefits paid by a retirement system -d in this Act may. following the death of the employee or retiree, elect to retain the spouse's authorized coverages and also retain authorized coverages for any dependent of the spouse, at the group rate for employees, provided such coverage was previously securedby the employee or retiree for the spouse or dependent, and the spouse directs the applicable retirement system to deduct required contributions from the monthly benefits paid the surviving spouseby the retirement system.
(c) The surviving spouse of an employee or a retireewho designated or selected a time certain aBB"it,'Option, upon expiration of the annuity option may retain authorized coveragesby advance payment of COBtributiOBS to the Employees Retirement System of Texas under rules and regulations adoptedby the trustee. Accordingly, the ERS must make coverage available for dependents as that term is defined Insection 3(8). Section 19. however, does not prohibit coverage of the child of a dependent. Section 19 sets out a minimum requirement for available coverage, not a maximum.

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Furthermore,article 3.50-2,section 4A. gives the trusteesof theERS authority to adopt standards for determining eligibility for participating in the state plan. We think that provision gives the trusteesof the ERS **some**discretion **in** determiningwho is eligible to participate in that plan. That discretion is limited both by the specific requirements of article 3.50-2, section 19, and by the limitationsapplicable to the entitieswith which the ERS contracts. Therefore, we do not think that the ERS is prohibited from entering intoa contractthatprovides for third generationcoverage.'

Your third question iswhether a contractbetween the ERS and an HMO can require terminationof coverageof a dependent if the dependentmoves out of the servicearea of anHMO. Your brief containsmuch discussion of article 3.51-6, S3B,V.T.C.S., which provides for continuation coverage under a group contract issued by an BMO if a dependent'seligibilityceasesbecause of the severanceof the family relationshipor theretirementor deathof a memberof the group. Id. Your brief also discusses section 10003 of the Consolidated Cami= Budget ReconciliationAct of 1985, Pub. L. No. 99-272. 100 Stat. 82 (19861, which also requires continuation coverage under certain circumstances. Each of those statutes is triggered by certain specified "qualified events." For example, the statutes regarding continuation coverage would apply if a dependent ceased to be a dependent. See art. 3.51-6, 13B (triggeredby severance of family relationshipor retirement or death of a group member): Pub. L. No. 99-272, 02203, 100 Stat. 232 (1986) (triggeredby a dependent child ceasing to be a dependent and other eventsnot applicablehere). But neither of those statutes is triggered simply because a dependent
moves away from thearea inwhich the groupmember lives.

Section 19 of article 3.50-2, rather than statutes dealing with continuation coverage, supplies the answer to your question. That section provides that a state employee is entitled to be able to
secure **coverage** underhis groupplan for his dependentsas defined in article 3.50-2, section 3(8) (defining "dependent"). There is no requirementin the act that thedependent livewith the groupmember.'

2. We emphasize thatwe are not takingaposition **on** whether the SBI has correctly interpreted article 3.70-2(E) or on whether the SBI'srule regardingBMOs thatrequiresthirdgenerationcoverage is a valid rule. We say only that the SBI is authorized to treat BMO contracts with the ERS in the same manner as it treats other HMO contracts. Also, we think the legislature should be made aware of these issues so that it **can** clarify them.

3. If a child is over 25, he must live at home and be mentally retarded or physically incapacitatedto be a "dependent" for purposes of theact.

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The basis for your argument that coverage should cease when a dependent moves out of an RMO's service area is that, except for emergency services, an RMO only provides health services in a limited geographical area. Because of the limited servicearea of anHMO, coverage by
an RMO would be inconvenient for someonewho lived outside the HMO's service area, and state employees should consider that a factor when choosing a health plan. The fact that an RMO has a limited service area, however, does not change the fact that a state employee is entitled to coverage for his dependents. If the state employee is enrolled in an HMO, he is still entitled to coverage for a dependent,
even if thedependentdoesnot live in the servicearea of theHMO.

SUMMARY

The board of trustees of the Employees Retlrement System has no authority to regulateHMOs. The board may not authorize RMOs contracting with the ERS to violate State Board of Insurance rules applicable to allRMOs.

A state employeeenrolled in an 8MO is entitled to coverage for a dependent even if the dependent doesnot live in the servicearea of theRMO.



# -J-h

MATTOX AttorneyGeneral ofTexas

JACK EIGRTOWER FirstAssistantAttorneyGeneral

MARY KELLER ExecutiveAssistantAttorney General

RICK GILPIN Chairman, OP~B~OB Committee
Preparedby SarahWoelk AssistantAttorneyGeneral

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