          THE     ATTORNEY    GENERAL
                     ow TEXAS

                    April 15, 1988



Hr. Edwin J. Smith, Jr.       Opinion No. JM-895
Chairman
State Board of Insurance      Re: Requirements of House Bill
1110 San Jacinto Blvd.        No. 677 of the 70th Legisla-
Austin, Texas   78701         ture, the Texas      Continuing
                              Care Facility   Disclosure   and
                              Rehabilitation Act    (RQ-1227)

Dear Mr. Smith:

       You ask several questions      concerning    the Texas
Continuing Care Facility Disclosure       and Rehabilitation
Act, which was adopted by House Bill No. 677 of the 70th
Legislature and codified as article 8876, V.T.C.S.           It
applies to contracts for continuing care entered       into on
or after September 1, 1987.     V.T.C.S. art. 8876, 523. The
statute authorizes      the State Board of       Insurance   to
regulate continuing care providers.      V.T.C.S. art. 8876,
53.      A continuing   care retirement   community   provides
housing, board, care, and health related services to
elderly people who do not want to maintain their own homes
but do not need nursing home care.            Texas House of
Representatives,     Committee  on Human Services,     Interim
ReDOrt    to the 70th Texas Leaislature, "Continuing       Care
Communities,*' 119,      124.   It   generally   consists    of
residential     facilities and a health care center and
requires a substantial entrance     fee in addition   to other
monthly fees in return for an assurance of a continuing
living arrangement     throughout  retirement.    House Human
Services Committee, Bill Analysis, H.B. No. 677, 70th Leg.
 (1987).    Because of the considerable      investment which
continuing care centers require from the elderly, House
Bill No. 677 was written to protect the consumer from loss
of his investment through fraud or mismanagement.      Id.

     The statute defines "continuing care" as follows:

       [T]he furnishing, to an individual who is not
       related by consanguinity   or affinity to the
       person furnishing the care, of board and
       lodging,   together   with    personal    care
       services, and    nursing services,     medical



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Mr. Edwin J. Smith, Jr. - Page 2     (JM-895)




       services, or other health-related   services,
       regardless of whether   or not the services
       and the lodging are provided    at the same
       location, under an agreement   that requires
       the payment of an entrance fee and that     is
       effective either for the life of the indivi-
       dual or for a period of more than one year.

V.T.C.S. art. 8876, 52 (2).    The article authorizes     the
State Board of Insurance to regulate continuing         care
providers   and to adopt rules and take other action
necessary to administer and enforce the act.        V.T.C.S.
art. 8876, 53. Continuing care providers    are required to
receive a certificate     of authority   from    the board.
V.T.C.S.   art. 8876,    54.   Providers  must    deliver   a
disclosure   statement to prospective     residents   before
entering into a contract to provide continuing care and
must also establish an entrance fee escrow account. Id.
§a.  The commissioner   of insurance may place a provider
under supervision   if it is bankrupt     or otherwise     is
financially unable to meet its obligations    for continuing
care. Id. 511.     There are provisions  for rehabilitation
or liquidation.   Section 13 gives to

       [e]ach resident receiving care in a portion
       of a facility licensed to provide nursing
       home care, personal    care, or    custodial
       care . . . all statutory rights provided  to
       nursing home, personal care, or custodial
       care residents.

The substantive requirements may be enforced by civil and
criminal penalties  and by equitable    proceedings.  Id.
4515-18.

     You first ask about the applicability of the certi-
ficate of authority requirement. This provision states as
follows:

          Sec. 4. (a) After September 1, 1987, no
       provider shall offer to the public a con-
       tract for continuing  care, or construct   or
       acquire a facility for the purpose         of
       providing continuing care, without obtaining
       a certificate of authority from the board.               ?

          (b) The commissioner    shall promulgate
       rules and regulations    setting  forth the
       information to be submitted by an applicant
       for a certificate of authority.



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    Mr. Edwin J. Sm,ith, Jr. - Page 3    (JM-895)




               (c) The commissioner, upon receipt of an
           application for a certificate of authority,
           shall conduct a hearing on the application
           in accordance     with    the   Administrative
           Procedure and Texas Register Act       (Article
           6252-13a, Vernon's Texas Civil Statutes).
           The commissioner shall grant the application
           if he finds that the applicant or the facil-
           ity is financially     sound: that the comp-
           etence, experience,    and integrity of the
           applicant,   its board of directors,        its
           officers or its management    is such that it
           would be in the interest of the public to
           issue a certificate    of authority; and that
           the applicant is capable of complying      with
           the provisions   of this Act.     The commis-
           sioner may limit issuance of certificates of
           authority  to incorporated     entities.    The
           commissioner shall issue an order approving
           or disapproving the application within      180
           days of filing.

              (d) No certificate   of authority   issued
P          by the commissioner shall be transferred   to
           a third party except upon approval by the
           commissioner.

             .(e) No holder of      a     certificate   of
           authority shall enter into    a contract with a
           third party for management     of the facility
           unless the commissioner is    notified of such
           contract.

              (f) If a provider:    (1) draws upon its
           entrance fee escrow in an amount greater
           than provided for in Section 8 of this Act:
           (2) draws upon its reserve fund escrow in an
           amount greater than provided for in Section
           9 of this Act; or (3) engages in a wilful
           and intentional violation   of this Act, the
           commissioner, after notice and hearing, may
           suspend or revoke the provider's certificate
           of authority,   in addition to any other
           remedies provided for in this Act.

              (g) The commissioner shall issue a cer-
           tificate of authority to any facility which
           is occupied by one or more residents     on
           September  1, 1987, which    is under con-
P          struction on September 1, 1987, or which,



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Mr. Edwin J. Smith, Jr. - Page 4      U-M-895)




       prior to September   1, 1987,   had incurred
       substantial financial obligations related to
       the development    of a     facility.   Such
       certificates shall be subject to revocation
       or suspension   as provided    for in   this
       section.

V.T.C.S. art. 8876.

     Section 4(a) of article 8876,   V.T.C.S., requires   a
provider to obtain a certificate of authority if he offers
a contract for continuing care or constructs or acquires a
facility   for that purpose after September       1, 1987.
Section  4(c) establishes    procedures  and    substantive
requirements   governing  issuance   of certificates     of
authority by the insurance commissioner.     Section  4(g),
however, states that "the commissioner      shall issue a
certificate of authority" (emphasis added) to any facility
which is occupied, under construction, or is the subject
of substantial financial obligations by September 1, 1987.

     You ask whether a facility described  in section 4(g)
is required to meet the criteria of section       4(c) or
whether instead the commissioner must issue a certificate
of authority to such a facility without considering those
criteria.

       Section 4(g) provides an exception from the criteria
in section    4(c) for the three categories of continuing
care facilities it describes.    In each category there has
been considerable investment    in a facility prior to the
effective date of article 8876. V.T.C.S.     art. 8876, §23.
As shown by the use of the mandatory Btshalll* in section
4 (9) I these facilities  are entitled to receive a certi-
ficate of authority from the commissioner    without meeting
the substantive requirements set out in section 4(c).

     Your next question involves the relationship between
section 4(g) of article 8876, V.T.C.S., and section 20,
the transition provision.  Section 20 provides as follows:

          Sec. 20.  (a) A provider who operates   a
       continuing care facility that is in exis-
       tence on the effective date of this Act must
       comply with the     disclosure  and   escrow
       requirements  imposed under this Act      as
       provided by this section.

          (b) A provider subject to Subsection (a)
       of this section must file annual revised



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    Mr. Edwin J. Smith, Jr. - Page 5   W-895)




           disclosure  statements with the board as
           provided by Section 7 of this Act beginning
P          with a statement that covers the provider's
           most recent fiscal year that begins on or
           after September 1, 1987.

              (c) A provider subject to Subsection (a)
           of this section must comply with the escrow
           requirements imposed under Sections 8 and 9
           of this Act not later than September      1,
           1990. If the commissioner determines that a
           provider subject to Subsection (a) of this
           section is unable to comply with        this
           section after making a good faith effort to
           do so, the commissioner may extend the time
           for compliance  for a reasonable period   of
           time.

               (d) Failure to comply with the reguire-
           ments of this section constitutes a criminal
           offense under Section 18 of this Act.

         You ask whether the entire act as well as the rules
    adopted by the State      Board of Insurance   apply to
    facilities described   by section 4(g), or only those
    delayed requirements listed in section 20.

         Section 20 applies to continuing care facilities that
    are in existence  and are being operated on September     1,
    1987, the effective date of the act. House Bill No. 677
    as introduced did not include the requirement that con-
    tinuing care facilities obtain a certificate    of authority
    from the State Board of Insurance.     Bill Analysis,   H.B.
    No. 677, m.       Thus, the bill as introduced did not
    include any provision  like subsection   4(g) that allowed
    certain facilities to receive a certificate     of authority
    without making the showing required by section 4(c). The
    provision enacted as section 20 of article 8876, V.T.C.S.,
    provided the only exception in the original bill        from
    compliance with the act's requirements    on its effective
    date. Section    4 was added as part of the Committee
    Substitute to House Bill No. 677, sunra. Section 4(g)
    excepts the facilities     it describes    only    from the
    substantive requirements  of section 4(c); it does not
    authorize  those   facilities   to meet     the    statutory
    requirements on the delayed basis outlined in section 20.

         Section 4(g) expressly states that certificates    of
    authority given under its provisions "shall be subject to
    revocation or suspension as provided for in this section."




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Mr. Edwin J. Smith, Jr. - Page 6      (JM-895)




V.T.C.S. art. 8876, 54(g). Subsection 4(f) provides for
suspension or revocation of a certificate of authority as
follows:

           (f) If a provider:    (1) draws upon  its
       entrance fee escrow in an amount greater
       than provided for in Section 8 of this Act:
       (2) draws upon its reserve fund escrow     in
       an amount greater than provided       for  in
       Section 9 of this Act: or (3) enaaaes in
       wilful and intentional violation      of thiz
       A&     the commissioner,    after notice and
       hearing, may suspend or revoke the pro-
       vider's    certificate   of    authority,  '
       addition to any other remedies provided   f:z
       in this Act.   (Emphasis added.)

V.T.C.S. art. 8876, 54(f). This provision makes clear the
legislature's  intent that subsection    4(g) not exempt
facilities from provisions   of the act other than that
describing the criteria for a certificate of authority.

     You have not submitted any rules to us, and we can
consider the application  of rules to section 4(g) faci-
lities only in general terms. Ordinarily,      your rules
applicable to other continuing care facilities  would also
apply to section 4(g) facilities, except  for rules imple-
menting section 4(c).

      Your third question recognizes that some facilities
will be covered by both the exception in section 4(g) and
the exception in section 20. If a facility is occupied by
one or more residents on September 1, 1987, it will be "in
existence on the effective date" of the act and thus will
be entitled to a certificate   of authority under section
4(g) and will also have the benefit      of the transition
provision:    section 20.   You ask whether      a facility
described in section 20 includes only a facility occupied
by one or more residents   on September   1, 1987,  or also
includes a facility which     is under     construction   on
September 1, 1987 and one which, prior to September        1,
1987,   had incurred substantial     financial   obligations
related to the development of the facility.

     Section 20(a) applies to "[a] provider who operates a
continuing care facility that is in existence      on the
effective date of this Act. . . .*I A "continuing     care
facility" is "a place in which a person undertakes      to
provide continuing care to an individual.**  V.T.C.S. art.
8876, 552(2), (4). U'Operate'*is defined as "to perform a



                            p. 4402
,

    Mr. Edwin J. Smith, Jr. - Page 7       (JM-895)




    function." Webster's   Ninth New Collegiate    Dictionary.
    Section 20(a) applies to a facility where a person       is
    already providing continuing care as of September 1, 1987.
    If the facility is merely under construction, or if the
    provider has done no more than incur substantial financial
    obligations  toward construction    of a facility,     the
    facility cannot be used to provide continuing  care and is
    not even in existence.   Section 20(a) does not apply to
    the latter two categories of "facility."

         You next ask whether the commissioner,           in imple-
    menting section 4(g), has discretion to determine whether
    the financial obligations related to the development of a
    facility incurred prior to September        1, 1987, are "sub-
    stantial." V.T.C.S. art. 8876, 54(g).         Whether financial
    obligations incurred are "substantial" is a fact question,
    which must be answered       in relevant       cases before a
    certificate can be issued.     Section  4(b)   of article 8876,
    V.T.C.S., authorizes the commissioner to "promulgate rules
    and regulations     setting   forth the information       to be
    submitted by an applicant for a certificate of authority."
    He is to conduct a hearing on the applications submitted.
    V.T.C.S. art. 8876.     The commissioner     has access to the
-   information and the procedural        framework   for deciding
    whether an applicant    for a certificate of authority       has
    incurred substantial     financial obligations       toward the
    development of a facility. This determination is not a
    matter for the commissioner's      unfettered discretion     but
    must be made in accordance with             the Administrative
    Procedure  and Texas Register Act,           article   6252-13a,
    V.T.C.S.  V.T.C.S.    art. 8876,   54 (c) :  see also   V.T.C.S.
    art. 6252-13a, §§3(2), (13).

         You finally ask several questions about the defini-
    tions of "entrance   fee" and "continuing  care" in the
    statute. Section 2 provides as follows:

              (2)   'Continuing care' means the fur-
           nishing, to an individual who is not related
           by consanguinity or affinity to the person
           furnishing the care, of board and lodging,
           together with personal care services,     and
           nursing services, medical services, or other
           health-related    services,   regardless   of
           whether or not the services and the lodging
           are provided at the same location, under an
           aareement that recuires the navment of an
           entrance fee and that is effective     either
           for the life of the indiv~idual or for a
           period of more than one year.




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Mr.   Edwin J. Smith, Jr. - Page 8   (*SgS)


                                                             -,



            (3) 'Entrance fee' means an initial or
        deferred  transfer   of money,         other
        property valued at an amount in z&ess     of
        three months' rent, made, or promised to be
        made as full or partial consideration    for
        acceptance by a provider    of a specified
        individual as a resident    in a facility.
        (Emphasis added.)

V.T.C.S. art. 8876, 52.

       You ask:

            Does the use of an agreement that is of
         less than one years' duration, including  a
         month-to-month   contract,  but  which   is
         guaranteed   renewable   by  the  resident,
         subject a facility to regulation under the
         act?

Any renewal provision must be evaluated according   to its
language and its function in the context     of the whole
contract.  For example, a renewal provision which provides
for automatic renewal every month in the absence of notice   ?
by the resident or one which provides for renewal   on the
receipt of each rent check could in effect be a contract
for the life of the resident.    The significance of such
provisions should be determined on a case by case basis by
the commissioner or the board in the exercise of their
enforcement powers under the statute. See V.T.C.S. art.
8876, 5516, 17.

       You next ask:

            Does the charging of an upfront       fee
         greater than the amount of three months'
         rent, but which is called an 'initial fee,'
         'deposit,' or 'application fee' and is fully
         or partially refundable, subject a facility
         to regulation under the act?

If the fee fits the definition found in section 2(3), it
is an entrance fee, even though the provider calls it
something else. The fact that a fee is refundable   does
not remove it from the definition    of "entrance  fee."
Article 8876, V.T.C.S., contemplates that some providers
might charge an entrance fee that is fully or partly
refundable.  Section 6(g)(4) requires that a disclosure
statement set out




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    Mr. Edwin J. Smith, Jr. - Page 9    (JM-895)


P



           the conditions, if any, under which all or
           part of the entrance fee is refundable    on
-          cancellation of the contract by the provider
           or by the resident, or in the event of the
           death of the resident. . . .

    V.T.C.S. art. 8876, 56(g)(4).

         You next ask:

              Does the charging of an entrance fee less
           than the amount of three months' rent with
           an additional lump sum fee payable annually,
           the aggregate of which would be greater than
           three months'  rent, subject a facility to
           regulation under the act?

         An entrance   fee includes an "initial or deferred
    transfer" of money or other property  as consideration for
    acceptance of a specified individual as a resident in a
    facility.   If the additional lump sum fee is part of the
    consideration for accepting the individual as a resident,
    it is an "entrance     fee" even though   its payment   is
    deferred.

         You next ask:

              Does the act impose any duty on the State
           Board of Insurance or the commissioner    to
           review a facility's arrangements    for the
           purpose of determining applicability of the
           act to that facility?

         We understand your question to relate to financial
    and contractual arrangements of continuing care providers,
    and not to the physical premises      of continuing   care
    facilities.  The statute imposes the following duty on the
    State Board of Insurance:

              Sec. 3. The State Board of Insurance
           shall regulate continuing care providers   as
           provided by this Act.   The board may adopt
           rules and take other action as necessary   to
           administer and enforce this Act.    (Emphasis
           added.)

    V.T.C.S. art. 8876, 53. The board has a mandatory duty to
    enforce this statute to protect consumers from the loss of
    investment that might occur through   fraud or mismanage-
    ment. We cannot tell you, as a matter of law, how to




                              p. 4405
Mr. Edwin J. Smith, Jr. - Page 10      (a895)




exercise your powers and carry out your duties under
article 8876, V.T.C.S.  That is a matter for the board's
discretion.  We note, however, that the board has been
given power to make rules and regulations,     as well as
considerable  authority  to require the     submission  of
information necessary to carry out its responsibilities.
See. e.a., V.T.C.S.  art. 8876, 54(c) (information to be
submitted by an applicant for a certificate of authority):
555-7 (recording requirements); 516 (conduct of investiga-
tions, subpoena power). See also V.T.C.S. art. 8876, 5511,
17 (power to act on investigation prompted by complaint).

     We also point out that some provisions state how
particular powers shall be exercised.    For example,  the
commissioner shall conduct a hearing on an application for
a certificate of authority in accordance with the Adminis-
trative Procedure and Texas Register Act, and shall grant
the certificate on certain fact findings.    V.T.C.S. art.
8876, 54(c). In addition, with respect to the requirement
that providers  file a disclosure   statement and revised
disclosure statements with the State Board of Insurance,

       [t]he commissioner  shall review the dis-
       closure statement for completeness but shall
       not be required to review the disclosure
       statement for accuracy.

V.T.C.S. art. 8876, 57(c).

     Your last question is as follows:

          The definitions  of 'continuing care' and
       'entrance fee' state     five elements   that
       describe the type of facilities to be regu-
       lated under the Act. These five elements  are
       as follows:

             (1)   furnishing board:

             (2)   furnishing lodging:

              (3) furnishing personal care services,
          and either nursing services, medical   ser-
          vices, QE other health-related services:

             (4) an agreement that is       effective
          either for the life of an individual x for
          a period of more than one year: &




                             p. 4406
,
c,
      Mr. Edwin J. Smith, Jr. - Page 11    M-895)
,




                   (5) requirements   of an entrance    fee
                (money or property  of value  in excess of
                three months' rent) in the agreement.

             Must a facility meet all five requirements    in
             order to be subject to this act?

      Your question   essentially  tracks the    definitions   of
      "continuing care" and "entrance fee" that are set out in
      the statute.   See V.T.C.S. art. 8876, §2(2), (3).       We
      therefore answer your question in the affirmative:      the
      five elements you set out must be present for a facility
      to be a continuing   care facility subject to regulation
      under the statute.     Whether those five elements      are
      present in a given facility must be decided in the context
      of all relevant facts and circumstances.  Of course, it is
      the substance  of the agreement, not the form, that is
      determined, and subterfuges will not avoid the statute.

                             SUMMARY

                 A continuing care facility described   in
            section 4(g) of article 8876, V.T.C.S.,     1s
/c-         entitled to receive a certificate of authority
            without meeting the criteria found in section
            4(c) of that statute. Except for the section
            4(c) criteria,   the entire statute becomes
            applicable on its effective date to section
            4(g) facilities.   If a facility is merely
            under construction on September 1, 1987, or if
            the provider has done no more than incur sub-
            stantial  financial obligations   toward con-
            struction  of a    facility, the    transition
            provision found in section 20 is not applic-
            able to it. The commissioner has authority to
            make the fact findings necessary to implement
            section 4(g) of article 8876, V.T.C.S.




                                          JIM     MATTOX
                                          Attorney General of Texas

      MARY KELLER
      First Assistant Attorney General

      LOU MCCREARY
-     Executive Assistant Attorney General



                                 p. 4407
Mr. Edwin J. Smith, Jr. - Page 12 UM-895)




JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Susan L. Garrison
.Assistant Attorney General




                          p. 4408
