[Federal Register Volume 72, Number 84 (Wednesday, May 2, 2007)]
[Notices]
[Pages 24341-24343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-8353]


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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'').

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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 for-profit 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.
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    \1\ Hill Physicians only has one class of stock. Each 
shareholder Provider may hold only one share of Hill Physicians' 
stock.
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    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

[[Page 24342]]

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 non-investment 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\
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    \2\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    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.
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    \3\ PacifiCare of Arizona, Inc. et al., Investment Company Act 
Rel. Nos. 26643 (Oct. 25, 2004) (notice) and 26679 (Nov. 22, 2004) 
(order).
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    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

[[Page 24343]]

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\
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    \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.
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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.
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    \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].''

    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