                       February 12. 1987



Mr. Clayton T. Garrison              Opinion No.   JM-631
Executive Director
Employees Retirement System          Re:   Authority of the Employees
   of Texas                          Retirexent System and the State
P. 0. Box 13207                      Board of Insurance in regard to
Austin, Texas   78711                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 pro-
visions 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 con-
          tract 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.



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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 Main-
tenance 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 consti-
                 tute 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 con-
          genital 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
    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
    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 en-
           titled 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 applic-
           able retirement system to deduct required contri-
           butions 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 Retire-
           ment 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 par-
    ticipating 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 depend-
    ent 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 con-
    tinuation 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 depend-
ent moves out of an RMO's service area is that, except for emergency
services, an RMO only provides health services in a limited geograph-
ical 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 Retlre-
         ment 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
