February 12. 1987 

Mr. Clayton T. Garrison 

Executive Director 

Employees Retirement System 

of Texas 

P. 0. Box 13207 

Austin, Texas 78711 

Opinion No. JM-631 

Re: Authority of the Employees 

Retirexent System and the State 

Board of Insurance in regard to 

health maintenance organizations 

Dear Mr. Garrison: 

You ask several questions about the authority of the Employees 

Retirement System of Texas (ERS) to contract with health maintenance 

organizations (NMOS) . Specifically, you ask about the authority of au 

RMO and the ERS to enter into a contract that contains provisions that 

would require the 8MO to contravene rules promulgated by the State 

Board of Insurance to regulate BMOs. Before we address your specific 

questions, we will set out background inforxation about the ERS and 

state and federal regulation of RMOs. 

In 1975 the legislature passed the Texas Employees Uniform Group 

Insurance Benefits Act, which provides for health benefits covarage 

for all state axployees. 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 legislature amended the act 

by adding section 5(e). which gives the ERS authority to contract with 

mos: 

The tiustee is authorized to select and contract for services performed by health maintenance 

organizations which are approved by the federal 

goverumeut or the State of Texas to offer health 

care services to eligible employees and 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 Insurance benefits 

in the Employees Uniforx Group Insurance Program, 

and the employer contributions provided by 

Subsection (a), Section 15 of this Act for health 

care coverage shall be paid to the selected 

health maintenance organizations on behalf of the 

participants. 

Acts 1977, 65th Leg., ch. 785, 55, at 1997. 

P. 2852 
or. Clayton T. Garrison - Page 2 (JM-631) 

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 the provisions of the Health Maintenance Act. 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 to be 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 comply vith 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). 

IlMOs are also subject to federal regulation. See Health Maintenance Organization Act of 1973. 42 U.S.C. 45300e xough 300e-17. 

As part of that legislation. Congress specifically preempted certain 

types of state laws affecting IlMDs: 

In the case of any entity -- 

(1) which cannot do business as a health 

maintenance organization in a State in which 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 

society approve the furnishing of 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 

participate or be permitted to participate 

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 

p. 2853 
Mr. Clayton T. Garrison - Page 3 (JM-631) 

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 

benefits plans), 

such requirements shall not apply to that~ entity 

so as to prevent it from operating as a health 

maintenance organization in accordance with 

section 300e of this title. 

42 U.S.C. 5300e-10(a). The federal act also preempts any state 

regulation that interferes with the effective operation of the federal 

plan. Realth Care Plan of New Jerse , ,Inc. v. Schweiker. 553 F.Supp. 

440, 445 (D.N.J.1982),ied, 464 U.S. 

815 (1983). Bv uoholdina the state laws reuulatinn HMOs that were in 

question in Reaith Car: Plan of New Je;sey, however, the court 

Implicitly held that congress had not occupied the entire field of RMO 

regulation and that states could regulate RMOs. For purposes of this 

opinion, we will assume that state laws Bud regulations governing BhOs 

are valid and have not been preempted. See also 42 U.S.C. 5300e-9 

(states which receive certain federal funds must offer HMO option to 

certain employees). 

Your first question is whether 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 take precedence over any conflicting 

provision contained in the HMO’s basic evidence of coverage document. 

When the ERS is contracting with an BMO, you argue, the ERS’ 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 Organization Act. 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 question are not 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 law applies to your question. 

p. 2854 
Mr. Clayton T. Garrison - Page 4 (JM-631) 

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 the power 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) (administrative age= may not exercise a power conferred on 

another agency). We know of no authority for the proposition that a 

state agency's authority to contract with an entity allows the state 

agency to regulate that entity or to override the rules of another 

state agency that is authorized to regulate that entity. 

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 language makes clear that the legislature 

did not intend to give the ERS power to regulate EMOs or to excuse 

BMOs contracting with the ERS from complying with SBI rules applicable 

to all RMOs. Rather, the ERS has authority to contract for the 

services of BMOa that operate pursuant to applicable state and federal 

regulations. In other words, the ERS must take an BMO as It finds it. 

Cf. art. 3.50-2, 55(a) (SBI provides 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'S and an BMO that states that ERS 

rules take precedence over conflicting SBI rules. 

Your next question is a more specific version of your first one. 

You ask whether an HMO contracting with 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 the background of the rule in question. 

In 1973 the legislature enacted the following provision: 

No individual policy or group policy of 

accident and sickness insurance. including 

policies issued by companies subject to Chapter 

20, Texas Insurance Code, as amended, delivered or 

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 congenital defects 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 

p. 2855 
. 

Mr. Clayton T. Garrison.- Page 5 (JM-631) 

will assume. for the purposes of this opinion, that the SBI has 

properly interpreted article 3.70-2(E). See Texas Health Facilities 

Coumlission V. 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 

Insurance Code). 

Article 3.70-2(E) itself does not apply to RMOs. 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 excluding or 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 third generation coverage for several reasons. First, you 

argue that because the legislature exempted lD4Os from article 

3.70-2(E), the SBI rule imposing the same restriction on RMOs 

conflicts with state law. We disagree. This is not a case in which 

article 3.70-2(E) is singled out and specifically made inapplicable to 

Elms. Rather, article 3.70-2(E) is a member of the general category 

of insurance laws, which are inapplicable as 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 traditional health insurance plans and that 

RKOs are subject to a separate regulatory scheme specifically tailored 

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 

requirements as a statute applicable to insurance companies. 

You also argue that the rule requiring third generation coverage 

cannot be applied to an RMO contracting with 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 

relationship and (C) any such child. regardless of 

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 

p. 2856 
Mr. Clayton T. Garrison - Page 6 (JU-631) 

incapacitated to such an extent as to be dependent 

upon the employee or retired employae for care or 

support. as the trustee shall determine. 

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 takes precedence over the SBI's general 

power to make rules governing BMOs. We disagree. We think that the 

provisions of article 3.50-2 can be read In harmony with the SBI rule 

in question. 

Section 19 of article 3.50-2 requires the ERS to make coverage 

available for dependents of state employees: 

(a) Any employee or annuitant shall be entitled to secure for his dependents any uniform 

group coverages provided 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 employee or from his retirement 

benefits in such manner and form as the trustee 

shall determine. 

(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 

secured by 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 spouse by the retirement system. 

(c) The surviving spouse of an employee or a 

retiree who designated or selected a time certain 

aBB"it,' Option, upon expiration of the annuity 

option may retain authorized coverages by advance 

payment of COBtributiOBS to the Employees Retirement System of Texas under rules and regulations 

adopted by 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. 

p.'2857 
. 

Mr. Clayton T. Garrison - Page 7 (JM-631) 

Furthermore, article 3.50-2, section 4A. gives the trustees of the ERS 

authority to adopt standards for determining eligibility for participating in the state plan. We think that provision gives the 

trustees of the ERS some discretion in determining who 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 

limitations applicable to the entities with which the ERS contracts. 

Therefore, we do not think that the ERS is prohibited from entering 

into a contract that provides for third generation coverage.' 

Your third question is whether a contract between the ERS and an 

HMO can require termination of coverage of a dependent if the dependent moves out of the service area of an HMO. Your brief contains much 

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's eligibility ceases because of the severance of the family 

relationship or the retirement or death of a member of the group. Id. 

Your brief also discusses section 10003 of the Consolidated Cami= 

Budget Reconciliation Act 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 (triggered by severance of family 

relationshipor retirement or death of a group member): Pub. L. No. 

99-272, 02203, 100 Stat. 232 (1986) (triggered by a dependent child 

ceasing to be a dependent and other events not applicable here). But 

neither of those statutes is triggered simply because a dependent 

moves away from the area in which the group member 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 under his group plan for his dependents as defined in 

article 3.50-2, section 3(8) (defining "dependent"). There is no 

requirement in the act that the dependent live with the group member.' 

2. We emphasize that we are not taking a position on whether the 

SBI has correctly interpreted article 3.70-2(E) or on whether the 

SBI's rule regarding BMOs that requires third generation coverage 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 incapacitated to be a "dependent" for purposes 

of the act. 

p. 2858 
Mr. Clayton T. Garrison - Page 8 (JM-631) 

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 service area of an HMO, coverage by 

an RMO would be inconvenient for someone who 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 the dependent does not live in the service area of the HMO. 

SUMMARY 

The board of trustees of the Employees Retlrement System has no authority to regulate HMOs. The 

board may not authorize RMOs contracting with the 

ERS to violate State Board of Insurance rules 

applicable to all RMOs. 

A state employee enrolled in an 8MO is entitled 

to coverage for a dependent even if the dependent 

does not live in the service area of the RMO. 

-J-h 

MATTOX 

Attorney General of Texas 

JACK EIGRTOWER 

First Assistant Attorney General 

MARY KELLER 

Executive Assistant Attorney General 

RICK GILPIN 

Chairman, OP~B~OB Committee 

Prepared by Sarah Woelk 

Assistant Attorney General 

p, 2859