Federal Register / Vol. 72, No. 84 / Wednesday, May 2, 2007 / Notices 24341 

1 Hill Physicians only has one class of stock. Each 

shareholder Provider may hold only one share of 

Hill Physicians’ stock. 

FIRST FAIR ACT RELEASE FY 2006—Continued 

National Labor Relations Board (IG) ........................................................ Mr. Emil George, (202) 273–1966, http://www.nlrb.gov/about—us/public—notices/ federal—activities—inventory—reform—act.aspx 

National Science Foundation ................................................................... Mr. Joseph Burt, (703) 292–8108, http://www.nsf.gov/publications 

Occupational Safety and Health Review Commission ............................. Mr. Richard Loeb, (202) 606–5376, http://www.oshrc.gov 

Office of Federal Housing Enterprise Oversight ...................................... Ms. Jill Weide, (202) 414–3813, http://www.ofheo.gov 

Peace Corps ............................................................................................. Mr. Alfred Miller Jr., (202) 692–1126, http://www.peacecorps.gov/ 

index.cfm?shell=pchq.policies.docs 

Railroad Retirement Board ....................................................................... Mr. Henry Valiulis, (312) 751–4990, http://www.rrb.gov 

Securities and Exchange Commission ..................................................... Mr. Jeffrey Risinger, (202) 551–7446, http://www.sec.gov 

Selective Service System ......................................................................... Mr. Calvin Montgomery, (703) 605–4038, http://www.sss.gov 

Small Business Administration ................................................................. Mr. Richard Brechbiel, (202) 205–6784, http://www.sba.gov/A76 

Social Security Administration .................................................................. Mr. Dennis Wilhite, (410) 965–7401, http://www.socialsecurity.gov/fair/ 

FAIRact.htm 

U.S. Agency for International Development ............................................. Ms. Deborah Lewis, (202) 712–0936, http://www.usaid.gov/business/ 

regulations/fair/ 

U.S. Agency for International Development (IG) ..................................... Mr. Robert Ross, (202) 712–1331, http://www.usaid.gov/oig/public/ 

public1.htm 

[FR Doc. E7–8329 Filed 5–1–07; 8:45 am] 

BILLING CODE 3110–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Investment Company Act Release No. 

27804; 812–13255] 

Hill Physicians Medical Group, Inc.; 

Notice of Application 

April 26, 2007. 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTIONS: Notice of application for an 

order under section 3(b)(2), or, 

alternatively, under section 6(c) of the 

Investment Company Act of 1940 (the 

‘‘Act’’). 

APPLICANT: Hill Physicians Medical 

Group, Inc. (‘‘Hill Physicians’’). 

Summary of Application: Applicant 

seeks an order under section 3(b)(2) of 

the Act declaring it to be primarily 

engaged in a business other than that of 

investing, reinvesting, owning, holding 

or trading in securities or, alternatively, 

under section 6(c) of the Act granting it 

an exemption from all provisions of the 

Act and the rules and regulations 

thereunder. Applicant is in the business 

of providing or arranging to provide 

physician services in Northern 

California to individual enrollee 

members of various health plans, 

including health maintenance 

organizations (‘‘HMOs’’) and other third 

party payors (collectively, ‘‘Health 

Plans’’). 

DATES: Filing Dates: The application was 

filed on January 18, 2006, and amended 

on January 29, 2007. 

HEARING OR NOTIFICATION OF HEARING: An 

order granting the requested relief will 

be issued unless the Commission orders 

a hearing. Interested persons may 

request a hearing by writing to the 

Commission’s Secretary and serving 

applicant with a copy of the request, 

personally or by mail. Hearing requests 

should be received by the Commission 

by 5:30 p.m. on May 21, 2007, and 

should be accompanied by proof of 

service on applicant, in the form of an 

affidavit or, for lawyers, a certificate of 

service. Hearing requests should state 

the nature of the writer’s interest, the 

reason for the request, and the issues 

contested. Persons who wish to be 

notified of a hearing may request 

notification by writing to the 

Commission’s Secretary. 

ADDRESSES: Secretary, Securities and 

Exchange Commission, 100 F Street, NE, 

Washington, DC 20549–1090. 

Applicant, c/o Paul A. Stewart, Esq., 

Foley and Lardner LLP, One Maritime 

Plaza, 6th Floor, San Francisco, CA 

94111. 

FOR FURTHER INFORMATION CONTACT: Jean 

E. Minarick, Senior Counsel, at (202) 

551–6811, or Janet M. Grossnickle, 

Branch Chief, at (202) 551–6821 

(Division of Investment Management, 

Office of Investment Company 

Regulation). 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained for a fee at the 

Commission’s Public Reference Branch, 

100 F Street, NE, Washington, DC, 

20549–0102 (tel. 202–551–5850). 

Applicant’s Representations 

1. Formed in 1983, Hill Physicians is 

a physician’s independent practice 

association organized as a California forprofit private professional medical 

corporation. Applicant represents that 

its shares can only be held by medical 

Providers (as defined below) and that 

the shares confer procedural rights to 

the Providers that hold them, not 

economic rights.1 There is no trading 

market for Hill Physicians’ stock. The 

non-transferable shares may only be 

sold to and redeemed by Hill Physicians 

at a price not to exceed the original 

issuance price of the share. Applicant 

further states that no dividends have 

ever been paid on its shares and none 

are expected to be paid. 

2. Hill Physicians provides or 

arranges to provide physician services 

through California licensed practicing 

physicians (‘‘Providers’’) to members of 

Health Plans in northern California. 

Applicant states that these services are 

provided pursuant to a written contract 

with each Health Plan. Under each 

contract, Hill Physicians is obligated to 

provide the covered physician services 

that individual enrollee members of a 

Health Plan may later need. Hill 

Physicians is paid by the Health Plans 

on a fixed fee or ‘‘capitated’’ basis, 

meaning that Hill Physicians is paid 

monthly in advance a flat per member 

fee for each Health Plan member 

assigned to Hill Physicians. The 

capitation rates are set in advance, 

typically for two-year periods, and the 

payment covers all physician and 

certain ancillary services that any or all 

of the Health Plan members may need. 

The Providers, each of whom has signed 

substantially identical independent 

contractor agreements with Hill 

Physicians, provide the services at their 

individual offices. The Providers then 

send bills for payment to Hill 

Physicians, rather than the Health Plans. 

Hill Physicians pays the Providers 

mostly on a fee for service, not 

capitated, basis, as and when Provider 

bills are submitted to it. 

3. This payment structure means that 

Hill Physicians bears the economic risk 

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24342 Federal Register / Vol. 72, No. 84 / Wednesday, May 2, 2007 / Notices 

2 Tonopah Mining Company of Nevada, 26 SEC 

426, 427 (1947). 

3 PacifiCare of Arizona, Inc. et al., Investment 

Company Act Rel. Nos. 26643 (Oct. 25, 2004) 

(notice) and 26679 (Nov. 22, 2004) (order). 

that its payments to Providers for 

medical services will exceed the fixed 

amounts it receives from the Health 

Plans. Applicant states that it maintains 

a substantial amount of invested 

reserves, including investment 

securities, to manage this risk. 

Applicant further states that the 

accumulation of cash and investments is 

an inherent part of its business structure 

because of the regularity of the 

capitation payments it receives and the 

delayed and uncertain amount of the 

payments it makes to Providers. 

Applicant also represents that it 

maintains its investment portfolio to 

meet California regulatory requirements. 

4. Applicant states that it is registered 

with, and subject to regulatory oversight 

by, the Medical Board of California. 

Applicant states that it is a ‘‘risk bearing 

organization’’ within the meaning of the 

California Health and Safety Code and 

it is subject to regulation of its solvency 

by California’s Department of Managed 

Healthcare. Applicant also states that it 

is required by law, regulation and 

governmental policy to maintain 

positive levels of working capital and 

tangible net equity. 

Applicant’s Legal Analysis 

1. Section 3(a)(1)(A) of the Act defines 

the term ‘‘investment company’’ to 

include an issuer that is or holds itself 

out as being engaged primarily, or 

proposes to engage primarily, in the 

business of investing, reinvesting or 

trading in securities. Section 3(a)(1)(C) 

of the Act further defines an investment 

company as an issuer that is engaged or 

proposes to engage in the business of 

investing, reinvesting, owning, holding 

or trading in securities, and owns or 

proposes to acquire investment 

securities having a value in excess of 40 

percent of the value of the issuer’s total 

assets (exclusive of Government 

securities and cash items) on an 

unconsolidated basis. Applicant states 

that it has not held itself out as being 

engaged primarily in the business of 

investing, reinvesting or trading in 

securities within the meaning of section 

3(a)(1)(A) of the Act. Applicant states 

that it would fall within the definition 

of investment company under section 

3(a)(1)(C) of the Act because more than 

40 percent of its total assets consist of 

investment securities as defined in 

section 3(a)(2) of the Act. 

2. Rule 3a–1 under the Act provides 

an exemption from the definition of 

investment company if no more than 45 

percent of a company’s total assets 

consist of, and not more than 45 percent 

of its net income over the last four 

quarters is derived from, securities other 

than Government securities and 

securities of majority-owned 

subsidiaries and companies primarily 

controlled by it. Applicant states that it 

has not been able to rely on rule 3a-1 

because its securities comprise a large 

percentage of its total assets. 

3. Section 3(b)(2) of the Act provides 

that, notwithstanding section 3(a)(1)(C), 

the Commission may issue an order 

declaring an issuer to be primarily 

engaged in a business other than that of 

investing, reinvesting, owning, holding 

or trading in securities directly, through 

majority-owned subsidiaries, or 

controlled companies conducting 

similar types of businesses. Applicant 

requests an order under section 3(b)(2) 

of the Act declaring that it is primarily 

engaged in a business other than that of 

investing, reinvesting, owning, holding 

or trading in securities, and therefore is 

not an investment company as defined 

in the Act. In determining whether an 

issuer is ‘‘primarily engaged’’ in a noninvestment company business under 

section 3(b)(2), the Commission 

considers the following factors: (a) The 

company’s historical development, (b) 

its public representations of policy, (c) 

the activities of its officers and 

directors, (d) the nature of its present 

assets (the ‘‘Asset Factor’’), and (e) the 

sources of its present income (the 

‘‘Income Factor’’).2

4. Recently, the Commission set forth 

its belief that it is appropriate for HMOs 

to determine whether they are primarily 

engaged in a non-investment business 

for purposes of section 3(b)(2) without 

considering the Asset Factor provided 

that they met certain conditions.3

Generally, the Commission indicated 

that the Asset Factor need not be 

considered by an HMO that (a) provides 

or arranges for the provision of health 

care services to subscribers or enrollees 

of the HMO; (b) is licensed under the 

laws of a state as a health care service 

plan, a health care service contractor, a 

health maintenance organization or a 

similar health plan company, and is 

subject to supervision by the insurance 

commissioner or a similar official; (c) 

allocates, manages and uses its 

investment securities in a manner 

consistent with its business as an HMO 

and in accordance with an investment 

policy adopted by its board of directors; 

and (d) bears a substantial amount of the 

risk that covered health care costs of the 

subscribers or enrollees of its health 

care products will differ from the 

prepaid or periodic charges paid by or 

on behalf of such persons 

(‘‘underwriting risk’’). In connection 

with the Income Factor, the Commission 

also clarified that an HMO may consider 

the sources of its present revenues so 

long as it derives substantially all of its 

total revenues from health care 

operations. 

5. Applicant submits that it satisfies 

the criteria for the issuance of an order 

under section 3(b)(2) because the facts 

show that Hill Physicians is primarily 

engaged in providing physician and 

related health care services, and not in 

the business of investing, reinvesting, 

owning, holding or trading in securities. 

a. Historical Development 

Applicant states that it was formed in 

1983 as an independent practice 

association for the express purpose of 

providing or arranging to provide 

physician services and that all of its 

activities since formation have been 

devoted to this purpose. Applicant also 

states that it intends to continue to be 

primarily engaged in the business of 

providing physician and related health 

care services. 

b. Public Representations of Policy 

Applicant states that all of the annual 

reports, internet postings, press releases 

and written communications it has 

issued have related to its business of 

providing physician services. Applicant 

also states that it has never held itself 

out as an investment company within 

the meaning of the Act and has never 

made any public representations that 

would indicate that it is in any business 

other than providing or arranging to 

provide physician services. Applicant 

represents that it has not issued any 

press release, advertising, promotional 

piece or other communication 

concerning its holdings of investment 

securities or its capital investment 

policies, or concerning any potential for 

profit or appreciation in value relating 

to its own shares. 

c. Activities of Officers and Directors 

Applicant represents that neither the 

directors nor the officers of Hill 

Physicians devote any significant part of 

their time to Hill Physicians’ investment 

process. Applicant states that the 

members of its board of directors 

(‘‘Board’’) are all practicing physicians 

and were part of its physician network 

prior to serving on the Board. Applicant 

states that all of its directors and officers 

devote substantially all of their time 

spent on Hill Physicians matters on its 

business of providing or arranging to 

provide physician services. Applicant 

estimates that the Board and its 

executive committee spends 

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Federal Register / Vol. 72, No. 84 / Wednesday, May 2, 2007 / Notices 24343 

4 Hill Physicians itself has no employees. Its 

management team and substantially all 

management services it requires are provided by a 

management company, PriMed Management 

Consulting Services, Inc. (‘‘PriMed’’). PriMed is 

compensated on the basis of cost plus incentives 

related to revenue growth, operating results and 

administrative efficiency and its compensation is 

not affected by the performance or value of Hill 

Physicians’ investment securities. PriMed is owned 

by Hill Physicians, Catholic Healthcare West and 

the individuals who serve as Hill Physicians’ chief 

executive officer and chief operating officer. 

5 Section 6(c) provides, in relevant part, that the 

Commission may issue a conditional or 

unconditional exemption from any provisions of 

the Act or rule thereunder if the exemption is 

‘‘necessary or appropriate in the public interest’’ 

and is ‘‘consistent with the protection of investors 

and the purposes fairly intended by the policy and 

provisions of [the Act].’’ 

approximately 20% of its time on each 

of strategy, operations, membership and 

quality improvement, 15% of its time on 

education, technology and all other 

topics and 5% of its time on finance, 

including less than 1% on investment 

matters. The Board’s involvement with 

respect to the investment portfolio 

consists of adopting an investment 

policy and reviewing periodic reports 

from its unaffiliated investment adviser 

and broker. Only three out of 

approximately 420 employees devote a 

de minimis amount of time to 

supporting Hill Physicians’ investment 

process.4

d. Nature of Assets 

Applicant states that it owns no fixed 

assets and has a relatively small asset 

base because it is a service organization 

whose workforce consists solely of 

independent contractor physicians 

working out of their own offices. 

Further, Applicant maintains a 

substantial amount of liquid assets, 

including investment securities, to: (a) 

Manage the risk that the aggregate 

capitated payments it receives from 

Health Plans will not adequately cover 

the actual amounts paid to Providers for 

services rendered; (b) ensure its ability 

to make timely payments during months 

when Hill Physicians’ payment 

obligations to Providers for their 

services significantly exceed its month 

capitation revenue; (c) meet the 

statutory or regulatory requirements 

with respect to its cash-to-claims ratio, 

working capital and tangible net equity; 

and (d) cover its payment obligations to 

Providers and its operating expenses. 

Accordingly, Hill Physicians’ cash, 

investment securities and accounts 

receivable comprised 83.2% of its total 

assets as of September 30, 2006, and it 

owned investment securities on that 

date representing approximately 65.9% 

of its total assets excluding Government 

securities and cash items. Applicant 

does not invest or trade in securities for 

speculative purposes. 

e. Sources of Income 

Applicant states that 49% of its total 

income for the four fiscal quarters ended 

September 30, 2006 combined was 

derived from investment securities. 

Applicant states that this percentage is 

much higher than historical levels 

because of a non-recurring investment 

gain transaction and the realization of 

accumulated gains when a new 

investment advisor adjusted the 

portfolio, selling most of the marketable 

securities. Hill Physicians anticipates 

that approximately 35% of its net 

income after taxes will be derived from 

investment securities in the future as it 

retains earnings for the purpose of 

providing operating capital and 

accumulates resources to strengthen 

infrastructure, e.g., implementing 

electronic medical records and practice 

management systems in Providers’ 

offices. 

Applicant believes, however, that its 

sources of revenue are more 

representative of its activity as an 

operating company than its sources of 

income. Applicant states that income 

generation is not integral to its business 

because it, as an independent medical 

practice association, essentially acts as a 

‘‘cooperative’’ for the benefit of the 

Providers. Applicant asserts that 

independent practice associations try to 

maximize the revenues they receive and 

fairly distribute them to the 

participating medical service providers. 

If Hill Physicians chooses not to retain 

earnings (and in years when it sustained 

operating losses), earnings from 

investment securities could represent all 

of its total income. Applicant states that 

revenues from the provision of 

physicians’ services have always 

represented over 99 percent of its gross 

revenue, while revenues from 

investments constituted the remaining 

less than one percent. Applicant does 

not expect that the percentage of its total 

revenue derived from investment 

securities would ever represent other 

than an insignificant part of its total 

revenues. 

6. As discussed more fully in the 

application, Applicant believes that it 

shares with HMOs the characteristics 

necessary to permit a determination of 

its primary business without regard to 

the nature of its assets. Hill Physicians 

provides or arranges to provide health 

care services to enrollees of Health 

Plans in return for capitation payments. 

While not licensed under state law as a 

health care service plan, health care 

service contractor, HMO or similar 

health plan company, Hill Physicians is 

subject to similar regulation by the 

California agency that regulates Health 

Plans and by the Medical Board of 

California. Hill Physicians allocates, 

manages and uses its investment 

securities in a manner consistent with 

its business of providing or arranging to 

provide physician services to members 

of Health Plans, and its Board has 

approved its investment policies. 

Applicant further argues that it meets 

the last condition because it bears the 

entire underwriting risk for payments to 

Providers, none of which is transferred 

to, or shared with, a third party under 

any contracts or other arrangements. 

Accordingly, Applicant submits that its 

primary business for purposes of section 

3(b)(2) of the Act should be determined 

without considering the nature of its 

assets. 

7. Applicant asserts that its sources of 

revenues, its historical development, its 

public representations of policy and the 

activities of its officers and directors, as 

discussed in the application, 

demonstrate that it is engaged primarily 

in a health care, and not in an 

investment, business, and thus satisfies 

the criteria for issuing an order under 

section 3(b)(2) of the Act. 

8. In the alternative to exemptive 

relief under section 3(b)(2), Hill 

Physicians requests an order under 

section 6(c) of the Act exempting it from 

all provisions of the Act.5 Applicant 

states that it has no public shareholders 

since it is privately held by its 

shareholder physicians and there is no 

trading market in its nontransferable 

shares. Applicant further states that 

there is no financial gain incentive 

associated with ownership of its shares. 

Furthermore, applicant believes that it 

is not the type of company the Act was 

designed to regulate and that 

compliance with the Act would be 

unnecessary, expensive and 

incompatible with its primary business 

of delivering health care. Consequently, 

Hill Physicians submits that the 

requested exemption is necessary and 

appropriate in the public interest, is 

consistent with the protection of 

investors, and is consistent with the 

purposes of the Act. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–8353 Filed 5–1–07; 8:45 am] 

BILLING CODE 8010–01–P 

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