Report On Examination NEIGHBORHOOD HEALTH PLAN OF RHODE ISLAND. Providence, Rhode Island. as of. December 31, 2009

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1 Report On Examination of NEIGHBORHOOD HEALTH PLAN OF RHODE ISLAND Providence, Rhode Island as of December 31, 2009 State of Rhode Island Department of Business Regulation Insurance Division

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3 STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS OFFICE OF THE HEALTH INSURANCE COMMISSIONER 1511 PONTIAC AVENUE, BLDG.69-1 CRANSTON, RI FINAL ORDER (OHIC ) Report on Examination of Neighborhood Health Plan of Rhode Island The attached Report of Examination as of December 31, 2009, of the condition and affairs of Neighborhood Health Planr of Rhode Island was recently completed by duly qualified examiners, pursuant to the provisions of the Rhode Island General Laws. Due consideration has been given to the comments of the examiners regarding the operation of the Corporation and its financial condition, as reflected in the report. WHEREFORE: It is hereby orderd that the said Report be, and it is hereby, adopted and filed and made an official record of this Office, and the above Order is hereby approved this day of December, Christopher F. Koller Health Insurance Commissioner

4 TABLE OF CONTENTS Page Salutation Scope of Examination Company History 2 Management and Control Purposes and Powers 3 Members 4 Board of Directors 5 Officers 7 Committees 8 Corporate Governance 9 Corporate Records 12 Conflict of Interest 13 Information Systems Controls 14 Fidelity Bond and Other Insurance 15 Officer and Employee Welfare and Pension Plans 15 Territory and Plan of Operation 16 Statutory Reserves 16 Reinsurance 17 Financial Statements 20 Comparative Statement of Assets, Liabilities, Capital and Surplus 21 Statement of Revenue and Expenses 22 Reconciliation of Capital and Surplus 23 Assets 24 Bonds 24 Common Stocks 24 Short-term Investments 24 Amounts Recoverable from Reinsurers 28 Health Care and Other Receivables 28 Liabilities 29 Claims Unpaid 29 Accrued Medical Incentive Pool and Bonus Amounts 29 Unpaid Claims Adjustment Expenses 29 Premium Deficiency Reserve 29

5 TABLE OF CONTENTS (cont.) Page Capital and Surplus 32 Summary of Recommendations 33 Conclusion 35

6 October 14, 2010 Honorable Christopher F. Koller Health Insurance Commissioner State of Rhode Island Cranston, Rhode Island Dear Commissioner Koller: Pursuant to your instructions, and in accordance with the provisions of Sections and of the General Laws of the State of Rhode Island, an examination has been made as of December 31, 2009, of the financial condition and affairs of NEIGHBORHOOD HEALTH PLAN OF RHODE ISLAND hereinafter referred to as the "Corporation," "Neighborhood", or the "Plan". The examination was conducted at the main administrative office of the Corporation, located at 299 Promenade Street, Providence, Rhode Island. SCOPE OF EXAMINATION The Corporation was last examined as of December 31, 2005 by the Insurance Division of the Department of Business Regulation of the State of Rhode Island. The current examination, also performed by the Insurance Division of the State of Rhode Island, in compliance with Rhode Island General Laws, covered the intervening four-year period ended December 31, 2009.

7 This examination consisted of a verification and evaluation on a test basis, of assets and liabilities, as reported by the Corporation in its 2009 Annual Statement. Verification procedures were also applied to cash receipts and disbursements, policy and claim transactions, and other matters as deemed appropriate during the period intervening since the last examination. Transactions subsequent to December 31, 2009 were reviewed where deemed necessary. The Corporation instructed their independent accounting firm to make available for review, all work papers concerning procedures followed, tests performed, information obtained, and conclusions reached pertinent to the firm's statutory audit of the Corporation's financial statements for the year ended December 31, The work papers of the independent accounting firm were reviewed in order to ascertain the extent to which procedures were employed to determine compliance with statutory guidelines. To the extent possible, these work papers and analyses were utilized to supplement the examination process. The work papers of the independent accounting firm for the year ended December 31, 2009 were not yet available for review as the examination was in process prior to the completion of the year ended December 31, 2009 audit. COMPANY HISTORY The Corporation, under the name of Neighborhood Health Plan of Rhode Island, Inc., was incorporated as a Delaware business corporation and commenced business on December 9, Subsequently, the Department of Health of the State of Rhode Island licensed the Corporation to transact business. The Corporation, in accordance with the provisions of Rhode Island General Laws 27-41, applied for and received licensing with the Insurance Division of the Department of Business Regulation on December , and began operations on December 10, On December 31, 1996, a new Rhode Island corporation was formed under the name of NHPRI, Inc. On the same day, a Certificate of Merger was filed with the Secretary of State of Delaware 2

8 to combine the Delaware based Neighborhood Health Plan of Rhode Island, Inc. with the Rhode Island based NHPRI, Inc. Subsequent to the merger, the Rhode Island corporation remained as the surviving entity and pursuant to the Agreement and Plan of Merger between the merged corporation and the surviving corporation; the name of the surviving corporation was changed to -Neighborhood Health Plan of Rhode Island, Inc." The previous Delaware Company applied for a Certificate of Withdrawal from the Secretary of the State of Delaware, which was approved. Effective January 1, 2001, Neighborhood Health Plan of Rhode Island, Inc. organized a nonstock, not-for-profit organization, and contributed all of its assets and liabilities to the new notfor-profit organization. Concurrently, the preferred and common shareholders of Neighborhood Health Plan of Rhode Island, Inc. exchanged their shares of stock for member interests in the new not-for-profit organization. MANAGEMENT AND CONTROL Purposes and Powers The Corporation's By-laws state that the Corporation shall have the power, either directly or indirectly, either alone or in conjunction or cooperation with others, to do any and all lawful acts and things and to engage in any and all lawful activities in accordance with the provisions of these By-laws which may be necessary, useful, suitable, desirable or proper for the furtherance, accomplishment, fostering or attainment of any or all of the purposes for which the Corporation is organized, and to aid or assist other organizations whose activities are such as to further accomplish, foster, or attain any of the Corporation's purposes. Notwithstanding anything herein to the contrary, the Corporation shall not engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more purposes exempt from taxation under the Internal Revenue Code (Code).

9 The By-laws also stipulate that the Corporation shall be organized and operated as a non-profit corporation under Rhode Island law and under Section 501(a) of the Code, as amended, or any corresponding provision of any future United States Internal Revenue Law. No part of the net earnings of the Corporation shall inure to the benefit of its Members (except that reasonable compensation may be paid to the Members for services rendered to and for the Corporation). In the event of the liquidation, dissolution, termination or winding up of the Corporation, whether voluntary, involuntary or by operation of law, the property or assets of the Corporation remaining after providing for the payment of its debts and obligations shall be distributed to those of its Members which are then engaged in the direct provision of health care to patients and are organizations described in Section 501(c)(3) of the Code pursuant to a resolution of the Board of Directors of the Corporation, or, failing such resolution, the order of a court of competent jurisdiction in the State of Rhode Island, specifying the methodology for such distribution. Members Article II, Section 1 of the By-laws specify the initial Members of the Corporation and notwithstanding this provision, only entities which meet the following criteria may become or remain Members of the Corporation: (a) A Member must be exempt from taxation under the Internal Revenue Code as an organization described in Section 501(c)(3) of the Code; (b) Any Member other than Rhode Island Foundation (RIF) must be a member in good standing of the Rhode Island Health Center Association, a Rhode Island non-profit corporation exempt from taxation under the Code as an organization described in Section 501(c)(3) of the Code; and (c) Any Member other than RIF must have in effect with the Corporation a "Participating Provider Agreement" pursuant to which the Member agrees to provide health care services for the Corporation's enrollees in exchange for payment by the Corporation. 4

10 Members shall have the responsibilities ascribed to members under the Rhode Island Non-Profit Corporation Act, including without limitation the right to amend the Corporation's By-laws, approve amendments to the Corporation's Articles of Incorporation, and approve the merger, consolidation, dissolution and/or sale of all or substantially all of the Corporation's assets. Membership status in the Corporation is not transferable to any other person or entity. If two or more Members "affiliate," only one of the entities may remain a Member. At any time, the Members may admit as an additional Member, any entity meeting all of the criteria for membership set forth above. Each Member shall be entitled to one vote. All decisions must be made by a majority of the Members present at a meeting at which a quorum is present and voting. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if all of the Members consent to the action in writing and their written consents are tiled with the records of the Corporation. Board of Directors The By-laws provide that all of the affairs of the Corporation shall be managed by a Board of no more than fifteen (15) Directors. The Board shall be comprised of seven (7) persons who are either employed by or on the Board of a member and appointed by the Rhode Island Health Center Association (Association); three (3) of whom must be the Association directors appointed by the Association members whose health centers have the three (3) highest number of Neighborhood enrollees as measured as of each December 1, (these Directors serve ex officio with vote) and four (4) of whom are Association directors nominated by the Association Nominating Committee. Other Directors include five (5) persons nominated by the Corporation's Nominating Committee; the President 'of Rhode Island Foundation, or his or her designee from Rhode Island Foundation senior management or board; the Executive Director of 5

11 the Association (ex officio with vote); and the President of the Corporation, (ex officio with vote). Regular meetings of the Board shall be held in Providence, Rhode Island, or at such other place, either within or without the State of Rhode Island, as the Directors or the Chair may determine. The Secretary or other officer of the Corporation shall give notice of meetings to each Director in writing, at least three (3) days before the meeting. Notices of such meetings may be waived in writing by the Director entitled to notice, whether or not she or he is present. The Chair shall preside over and conduct Board meetings. The membership of the Board, together with their principal business or professional affiliation was as follows at December 31, 2009: Peter Bancroft President and CEO WellOne Primary Medical and Dental Care Doris De Los Santos Office of Program Performance and Evaluation Rhode Island Housing Resources Commission Brenda Dowlatshahi Assoc. Executive Director Tr-Town Community Action Agency Jane Hayward Executive Director Rhode Island Health Center Association William Hochstrasser-Walsh Executive Director Family Health Services James Hooley Retired CEO NHPMA Raymond J. Lavoie, Jr. Executive Director Blackstone Community Health Center Darrell A. Lee President BCOG Planning Associates 6

12 Maria Montanaro Mark Reynolds Pablo Rodriguez, M.D. Dennis Roy M. Lamin San Merrill Thomas President/CEO Thundermist Health Center President & Chief Executive Officer Neighborhood Health Plan of Rhode Island CEO Women's Care CEO East Bay Community Action Program President The San Consulting Group, Inc. CEO Providence Community Health Center Officers The By-laws provide that the principal officers of the Corporation shall be Chair, Vice Chair, President, Secretary and Treasurer. The Board may appoint Vice Presidents and such other officers as they may from time to time authorize, which additional officers shall have the powers and duties assigned by the Board. To the extent permitted by law and the By-laws, any two or more offices may be held by the same person. The By-laws provide that each officer other than the President (who serves at the will of the Board) shall be elected by the Board for a term of two (2) years, or until a respective successor is duly elected and qualified, or until such officer's earlier death, removal or resignation. All principal officers, except the President, may serve a maximum of two (2) consecutive two (2) year terms in the same office. The By-laws state that the principal officers shall have the powers and perform the duties commonly incident to their respective offices, including the power and duties listed in the Bylaws. Officers shall have such additional powers and duties as the Directors may designate from

13 time to time. A principal officer may delegate such of his or her powers as he/she deems advisable, except those powers which by law, the Articles of Incorporation, or the By-laws may not be so delegated, to such persons as the Board or the principal officer may designate from time to time. The officers elected or approved by the Board of Directors and serving at December 31,2009, were as follows: Raymond J. Lavoie, Jr. Maria Montanaro Mark Reynolds Merrill Thomas Brenda Dowlatshahi T. Clark Phillip, Jr. Leon McTyeire Johnston, M.D. Nancy Coburn Chair Vice Chair President & Chief Executive Officer Treasurer Secretary Chief Financial Officer Chief Medical Officer Chief Operating Officer Committees The By-laws stipulate that the following standing committees of the Board of Directors shall be established: Executive Committee Finance Committee Nominating Committee Planning Committee In addition to the standing committees, the Board of Directors may designate such other committees as the Board deems appropriate, each of which shall consist of at least two (2) or more Directors. The Chair or President shall appoint the chair of each committee and the Nominating Committee shall appoint its members, except that: (i) the Treasurer of the corporation shall be the Chair of the Finance Committee, ex officio; (ii) the Executive Committee will be composed of the Chair, Vice Chair, President, Secretary, Treasurer and the

14 Chair of the Nominating Committee, and; (iii) the Nominating Committee shall be appointed by the Board. Non-Board committee members may be appointed and shall have the right to vote on committee matters in the case of advisory committees that do not have the authority to bind the Board or the Corporation. Each committee shall have and may exercise all of the authority delegated to it by the Board in the resolution that established the committee. At December 31, 2009, the following committees in addition to the standing committees of the Board were established: Clinical Affairs Committee Audit Committee Organizational Development and Human Resources Committee Investment Committee Corporate Governance As part of examination procedures performed, we reviewed and considered the overall corporate governance structure of the Corporation. We noted the following as a result of our review: For the period under examination, we requested minutes of the Board of Directors, Executive Committee, Finance Committee, Investment Committee, Audit Committee, and the Organizational Development and Human Resources Committee. It was noted that not all minutes received were signed. Recommendation #1 It is recommended that all Board of Directors and various committee minutes be signed when finalized. In connection with a transaction dating back to the prior exam period, we requested the 2005 Executive Committee minutes. The Corporation stated that all 2005 minutes had been sent to an offsite storage facility. Those minutes were subsequently requested from the offsite storage 9

15 facility. When reviewing the storage box containing the 2005 minutes, it was noted that only the Executive Committee minutes were in the storage box. No other minutes were in the box. Recommendation #2 It is recommended that the Corporation maintain all of its minutes on the premises and not send them to an offsite storage facility. When reviewing minutes maintained at the Corporation, it was noted that the minute books were haphazardly stuffed into a metal cabinet in a common area. Also, minutes of committees were located throughout the Corporation and all minutes could not be located. Recommendation #3 It is recommended that the Corporation maintain all of its minutes in a fire proof safe in a secure location. Recommendation #4 It is recommended that the Corporation maintain a complete record of all meeting minutes. After reading all of the minutes that were provided to us, the following was noted: There were missing minutes, minutes not signed, and minutes not dated. Some minutes were dated where the date did not match when the meeting was held. Also, the prior meeting minutes were not approved in many of the meetings. Recommendation #5 It is recommended that the Board of Directors and all Committee meeting members approve the prior meeting minutes ensuring that all dates are correct and no known errors are within the minutes before they are signed. 10

16 The Corporation's by-laws were reviewed for compliance and the following was noted: Article IV, Directors, Section lc. Composition, states that the Board shall be comprised of The President of the Rhode Island Foundation ("RIF"), or his or her designee from RIF senior management or Board. Article VI, Committees, Section 5, Nominating Committee states that the nominating committee shall be composed of at least one designee of RIF and such other persons as the Board shall determine. In reviewing Board of Directors attendance sheet, it was noted that the RIF seat on the Board was not filled. The RIF was contacted and stated to the examiners that in fact they did not currently have anyone on the Board of NHPRI. Recommendation #6 It is recommended that the Corporation nominate and appoint to the Board of Directors and Nominating Committee the President of the Rhode Island Foundation, or his or her designee from RIF senior management or its Board, so as to be in compliance with Neighborhood's bylaws, specifically Article IV, Section lc and Article VI, Section 5. For the period under examination, the Corporation's Audit Committee Charter was reviewed to determine compliance. Based upon that review, it was determined that the Audit Committee did not comply with its own Charter as follows: There was no recommendation to the full Board appointing the external auditors to audit the financial statements. The Audit Committee did not "obtain annually from the external auditor a written communication delineating all their relationships and professional services as required by the Independence Standards Board". Also, there was no evidence that members of the Audit Committee completed a bi-annual self-assessment and reviewed results with the Finance Committee, and then reported to the Board of Directors.

17 Recommendation #7 It is recommended that the members of the Audit Committee comply with the specific requirements of the Audit Committee Charter. CORPORATE RECORDS The Corporation filed its original Articles of Incorporation on December 9, 1993 with the Office of the Secretary of State in the State of Delaware, and also filed Articles of Merger on December with the Office of the Rhode Island Secretary of State, to properly record both the merger with NHPRI, Inc. and the name change of the Corporation from NHPRI, Inc. to Neighborhood Health Plan of Rhode Island, Inc. On September , the Corporation filed Articles of Incorporation with the Office of the Secretary of State in the State of Rhode Island to incorporate the not-for-profit entity. The Corporation also filed Articles of Merger or Consolidation with the Office of the Secretary of State in the State of Rhode Island on December 21, 2000 merging Neighborhood Health Plan of Rhode Island, Inc. into NHPRI, Inc. with the surviving company's name being Neighborhood Health Plan of Rhode Island, Inc. On May the Corporation also filed Articles of Amendment to its Articles of Incorporation with the Office of the Secretary of State in the State of Rhode Island to amend Article IV, Section B be in its entirety as follows: Except as otherwise provided by law, the Corporation may at any time dissolve by the affirmative vote of two-thirds of the total number of members of the Corporation. Upon dissolution, the Board of Directors shall, after paying or making provision for the payment of all of the liabilities of the Corporation, distribute all of the assets of the Corporation to those of its Members which are then engaged in the direct provision of health care to patients, and are organizations described in Section 501(c)(3) of the Code, pursuant to a resolution of the Board of Directors of the Corporation or failing such resolution, 12

18 the order of a court of competent jurisdiction in the State of Rhode Island, specifying the methodology for such distribution. The Articles of Incorporation state that the Corporation is constituted to provide and arrange for the provision of human and health care services, to be and qualify to act and engage as a health maintenance organization as defined in the Rhode Island Health Maintenance Organization Act of 1983, as amended, and to engage in any other lawful act or activity for which corporations may be organized under the Rhode Island Corporation Act. The Corporation's Certificate of Authority to operate as a licensed health maintenance organization within the State of Rhode Island was issued by the Rhode Island Department of Business Regulation. CONFLICT OF INTEREST During the period covered by this examination, the Corporation had in place a formal Code of Conduct developed by the Organizational Development and Human Resources Department (ODHR). The Code of Conduct is intended to provide employees with: An understanding of Neighborhood's mission, vision and values, Increased awareness concerning Neighborhood conforming to the highest ethical standards and strict compliance with the laws, and The tools required to assist Neighborhood to fulfill its mission, to conform to its standards and to comply with all applicable laws. Each employee is required to read the Code of Conduct, sign two copies of the -Acknowledgment- form, submit one copy to the ODHR Human Resource Specialist and retain the 2nd copy. The "Acknowledgment" is required to be renewed on an annual basis. Neighborhood has also instituted a formal Policy and Procedure (Policy) relating to conflicts of interest, which applies to all employees. The purpose of the Policy is to ensure the integrity of 13

19 decisions made on behalf of the organization as business decisions made by every employee of Neighborhood must be free of personal bias, interest or gain. The Policy addresses what activities each employee can and cannot engage in. Article X of the By-laws addresses conflicts of interest for directors and officers. Article X requires the disclosure of any actual or possible conflicts of interest. Violations of this provision will result in immediate disciplinary and corrective action. A review of signed conflict of interest statements did not reveal any apparent conflicts of interest. INFORMATION SYSTEMS CONTROLS In conjunction with the statutory examination of the Corporation, the Insurance Division conducted a limited general control review of the information technology environment surrounding the Corporation's financially significant information systems. The review was performed in accordance with standards established by the National Association of Insurance Commissioners ("NAIC") and included procedures to obtain reasonable assurance that: 1. The Company's responses to the NAIC's -Evaluation of Controls in Information Systems Questionnaire" ("Exhibit C") presents fairly, in all material respects, the aspects of policies and procedures that may be relevant to its internal control structure; 2. The control structure policies and procedures were suitably designed to achieve the control objectives implicit in Exhibit C; and 3. Such policies and procedures have been in operation from January 1, 2009 to December 31,

20 FIDELITY BOND AND OTHER INSURANCE The Corporation is insured by an insurance company blanket bond with a limit of $1,000,000, which is above the minimum amount of fidelity insurance suggested by the National Association of Insurance Commissioners ("NAIC"). The Corporation also had in place insurance policies that included commercial umbrella, fiduciary liability, workers compensation, commercial property and liability, managed care errors and omissions, directors and officers and liability, employment practice liability, privacy and security liability, and hired and non-hired auto liability. Management has determined the adequacy of coverage for all insurable assets of the Corporation. OFFICER AND EMPLOYEE WELFARE AND PENSION PLANS All employees are retained by Neighborhood Health Plan of Rhode Island on an at-will basis, with the exception of the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Medical Officer, all of whom are under contract for varying periods of time as established in their individual contracts. Neighborhood Health Plan of Rhode Island provides its employees with an array of benefits, including paid holidays, paid time off, medical and dental coverage, short-term and long-term disability insurance, and group life insurance. Neighborhood provides health insurance choices by contracting with one health insurer and allowing each employee to choose the level of health benefits that are best suited for them. The Corporation also contributes a pre-specified match to eligible employees in the Plan sponsored 401(k) plan. The Corporation also promotes tax-saving initiatives by sponsoring a Section 125 Plan, a pretax dependent care and medical expense program.

21 TERRITORY AND PLAN OF OPERATION Neighborhood is licensed only in the State of Rhode.Island. The Corporation is a network model HMO with headquarters in Providence, Rhode Island, and serves members in Bristol, Kent, Newport. Providence and Washington counties in Rhode Island. Neighborhood contracts for the provision of comprehensive health care services to its membership with participating provider groups, thirteen of which are founding non-profit Community Health Centers, hospitals and other specialty health care providers. Neighborhood provides comprehensive healthcare services on a prepaid basis principally to Medicaid recipients and certain other eligible persons under the State of Rhode Island's managed care program, Rite Care. Neighborhood is one of three companies presently under contract to serve the Rite Care population. The Rite Care Program is the State's prepaid medical insurance program which currently provides coverage to families and undocumented children of households earning up to 185% of the Federal Poverty Level, to children under 19 years of age of households earning up to 250% of the Federal Poverty Level, and to pregnant women earning up to 350% of the Federal Poverty Level. The Rhode Island Department for Children, Youth, and Families and the Department of Human Services have contracted with Neighborhood to provide health care services to children in substitute care. STATUTORY RESERVES Rhode Island General Laws and (c) (2) require the following ongoing financial requirements: (a) A health maintenance organization shall maintain minimum net worth equal to the greater of two million five hundred thousand dollars ($2,500,000) or the amount necessary to maintain capital required pursuant to ("Rhode Island Risk-Based Capital (RBC) for Health Organizations Act"). 16

22 (b) The amount in subsection (a) may be adjusted annually for inflation at the director's discretion. (c) Pursuant to (c)(2), the insurance commissioner may waive any of net worth and/or total adjusted capital requirements if 85% or greater of the health organization's members are participants in Rite Care program administered by the State of Rhode Island, and the health organization has contracts with insurers, hospital or medical service corporations, governments, or other organizations that are sufficient to reasonably assure the performance of its obligations, provided, that in no event shall the net worth or total adjusted capital requirement be less than one hundred thousand dollars ($100,000). At December 31, 2009 the Corporation was found to be in compliance with the statutory net worth and total adjusted capital requirements of the above-referenced law. REINSURANCE On a yearly basis the Corporation enters into a reinsurance agreement with an independent reinsurer, to limit its losses on individual claims. Under the terms of an Excess of Loss Reinsurance Agreement effective April 1, 2009, the reinsurer provides coverage for inpatient hospital expenses incurred by covered persons. Covered persons include members who are covered under the Corporation's policies issued for Rite Care, Sub Care, Children with Special Healthcare Needs. and Rhody Health Partners. Under the terms of the reinsurance agreement, the reinsurer will reimburse Neighborhood for 90% of eligible hospital and other inpatient hospital expenses, in excess of a $250,000 deductible, limited to a maximum of $2,000,000 per covered person per contract period. The reinsurance agreement contains an endorsement that provides for the continuation of coverage in the event of insolvency of Neighborhood while the agreement is in force. Under the 17

23 terms of the endorsement, the reinsurer is obligated to reimburse expenses incurred by covered persons based upon the terms and conditions of the policies of coverage without limitation of the reinsurance agreement. The continuation of coverage endorsement creates a liability to the reinsurer for payment of benefits that would have been paid or provided by the Corporation for claims incurred by covered persons after the date of insolvency. In no event shall the reinsurer's liability under this endorsement be greater than the Corporation's obligation under the policies of coverage between the Corporation and its covered persons, including the obligation of participating providers. The aggregate maximum liability to the reinsurer pursuant to this insolvency provision is $5,000,000. A review of the reinsurance agreement in effect at December 31, 2009 revealed that it contained the proper provisions as required under Rhode Island General Laws and which state the following, respectively: Reinsurance is payable by the assuming company on the basis of the liability of the ceding company under the contract or contracts reinsured without diminution because of the insolvency of the ceding company. Payments by the assuming company shall be made directly to the ceding company or to its liquidator, receiver, or statutory successor, except where the contract specifically provides another payee of such reinsurance in the event of the insolvency of the ceding company, or where the assuming company, with the consent of the direct insured or insureds, has assumed the policy obligations. In addition to the reinsurance agreement, the Rite Care contract includes stop-loss provisions for certain services, including the services identified in section 1.40 "Stop-Loss" of the RIte Care contract. Certain neonatal services are carved out of the Rite Care contract and in exchange for a 18

24 reduction in premium to the plan, the State assumes the medical costs for certain neonatal services. 19

25 FINANCIAL STATEMENTS The financial condition of the Corporation and the results of its operations are presented in the following financial statements and exhibits: Comparative Statement of Assets, Liabilities and Capital and Surplus December 31, 2009 and December 31, 2005 Statement of Revenue and Expenses Year ended December 31, 2009 Reconciliation of Capital and Surplus December 31, 2005 to December 31,

26 NEIGHBORHOOD HEALTH PLAN OF RHODE ISLAND COMPARATIVE STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AND SURPLUS DECEMBER AND DECEMBER 31, 2005 ASSETS December 31, December 31, Bonds $32,184,023 $20,993,074 Common stocks 1,904,530 0 Cash ($5,238,418); cash equivalents $11,397,753, and short-term investments $57,769,032 63,928,367 31,156,829 Investment income due and accrued 252, ,543 Uncollected premiums and agents' balances in course of collection 2,061,074 1,417,733 Amounts recoverable from reinsurers 1,168, ,374 Amounts receivable relating to uninsured plans 134,969 2,497,770 Electronic data processing equipment and software 146,057 84,816 Health care and other amounts receivable 4,813,317 0 Other receivable 33,625 10,523 Claims deposited with contracted facility 0 37,964 Total Assets $106,626,568 $56,705,626 LIABILITIES, CAPITAL AND SURPLUS December 31, December 31, Claims unpaid $35,912,787 $16,617,236 Accrued medical incentive pool and bonus amounts 4,508, ,340 Unpaid claims adjustment expenses 906, ,651 Premium deficiency reserve 11,100,000 0 Premiums received in advance 27,613,318 17,388,810 General expenses due and accrued 3,161,066 1,543,684 Amounts withheld or retained for the account of others 1,017,647 0 Payable for securities 1,611,430 0 Liability for amounts held under uninsured plans 1,323,162 Unearned grant liability 0 72,138 Total Liabilities 87,154,612 36,517,859 Surplus notes 1,500,000 1,500,000 Unassigned funds (surplus) 17,971,956 18,687,767 Total Capital and Surplus $19,471,956 $20,187,767 Total Liabilities, Capital and Surplus $106,626,568 $56,705,626 21

27 NEIGHBORHOOD HEALTH PLAN OF RHODE ISLAND STATEMENT OF REVENUE AND EXPENSES YEAR ENDED DECEMBER 31, 2009 Revenues: Net premium income $335,230,189 Department of Human Services (DI-IS) incentive income 1,099,282 Other program revenue 336,150 Grant revenue 24,087 Total revenues 336,689,708 Hospital and Medical: Hospital/medical benefits $131,381,228 Other professional services 62,150,814 Outside referrals 47,428,507 Emergency room and out-of-area 26,382,661 Prescription drugs 47,573,707 Stop loss/risk share recoveries from DHS (6,470,000) Incentive pool, withhold adjustments and bonus amounts 5,981,259 Subtotal 314,428,176 Less: Net reinsurance recoveries 3,096,854 Total hospital and medical 311,331,322 Claims adjustment expenses (including cost contain $6,258,798) 8,844,106 General administrative expenses 25,453,722 Increase in premium deficiency reserve 11,100,000 Total underwriting deductions 356,729,150 Net underwriting gain or (loss) (20,039,442) Net investment income earned 1,033,346 Net realized capital gains (losses) 116,179 Net investment gains (losses) 1,149,525 Net gain or (loss) from agents' or premium balances charged off (180,218) Miscellaneous income 566 Subtotal (179,652) Net Income (loss) ($19,069,569) 22

28 NEIGHBORHOOD HEALTH PLAN OF RHODE ISLAND RECONCILIATION OF CAPITAL AND SURPLUS DECEMBER 31, 2005 TO DECEMBER 31, 2009 Capital and Surplus. December 31, 2005 $20,187,767 Gains and Losses to Capital and Surplus Net income or (loss) ($572,113) Change in unrealized capital gains or (losses) 1,690 Change in nonadmitted assets (145,388) Net change in capital and surplus (715,811) Capital and Surplus. December 31, 2009 $19,471,956 23

29 ASSETS Bonds $ Common Stocks $ Short-Term Investments $ The above amounts are the same amounts reported by the Corporation in its 2009 Annual Statement. All of the bonds and short-term investments in the Corporation's portfolio at December 31, 2009, were rated "1 - by the NA IC Securities Valuation Office (SVO). A rating of -1" is assigned to those bonds exhibiting the -highest- credit quality. Common stocks consist of one money market mutual fund held at a bank included on an approved list as determined by the NAIC Securities Valuation Office (SVO). The book/adjusted carrying value of bonds, common stocks, and short-term investments owned at December 31, 2009, represents 29.7%, 1.8%, and 53.3% of the Corporation's total admitted assets, respectively. The book/adjusted carrying value, fair value, actual cost and par value for the bond and short-term investment portfolio at December 31, 2009 are as follows: Category Book/Adjusted Fair Value Actual Cost Par Value Carrying Value Bonds $32, $32,463,642 $32,278,441 $31,769,273 Common Stocks 1,904,530 1,904,530 1,904,530 1,904,530 Short-Term Investments 57, , ,770,336 57, Total Skl _ $ Wil M, As of September 2005, the Corporation entered into a custodial agreement with RBS Citizens, N.A. When a copy of the agreement was requested, the Corporation could not provide the examiners with a signed copy. Instead, the Corporation had to contact RBS Citizens, N.A. to obtain a signed copy of the agreement. 24

30 Recommendation #8 It is recommended that the Corporation have on its premises all agreements entered into with third parties. In reviewing investment transactions for the period under examination, it was noted that they are not being approved by the Investment Committee. Recommendation #9 It is recommended that all investment transaction be approved by the Investment Committee on a periodic basis. In accordance with Section 1 Part III.F (Custodial or Safekeeping Agreements) of the NAIC Financial Condition Examiners Handbook (Handbook), securities held under a safekeeping agreement should contain satisfactory safeguards and controls, including but not limited to those provisions set forth in Section 1 Part III.F. The Corporation's response to the 2009 Annual Statement, General Interrogatory #26 stated that the custodial agreements complied with the requirements of the Handbook. However, a review of the custodial agreement in effect at December 31, 2009 for RBS Citizens, N.A. revealed that the agreement did not include certain safeguards and controls, including, but not limited to the provisions below, as required in the Handbook: The custodian is obligated to indemnify the insurance company for any insurance company's loss of securities in the custodian's custody, except that, unless domiciliary state law, regulation or administrative action otherwise require a stricter standard, the custodian shall not be so obligated to the extent that such loss was caused by other than the negligence or dishonesty of the custodian; In the event of a loss of the securities for which the custodian is obligated to indemnify the insurance company, the securities shall be promptly replaced or the value of the securities and the value of any loss of rights or privileges resulting from said loss of securities shall be promptly replaced; 25

31 The custodian shall provide, upon written request from a regulator or an authorized officer of the insurance company, the appropriate affidavits, with respect to the insurance company's securities held by the custodian; The custodian shall secure and maintain insurance protection in an adequate amount; In the event that the custodian gains entry in a clearing corporation through an agent, there should be a written agreement between the custodian and the agent that the agent shall be subject to the same liability for loss as the custodian. If the agent is governed by laws that differ from the regulation of the custodian, the Commissioner of Insurance of the state of domicile may accept a standard of liability applicable to the agent that is different from the standard liability; and If the custodial agreement has been terminated or if 100% of the account assets in any one custody account have been withdrawn, the custodian shall provide written notification, within three business days of termination or withdrawal, to the insurer's domiciliary commissioner. Recommendation #10 It is recommended that the Corporation amend its custodial agreement to include all of the safeguards and controls set forth in Section 1 Part III.F of the NAIC Financial Condition Examiners Handbook. Another requirement of Section 1 Part III.F of the NAIC Financial Condition Examiners Handbook states that custodial agreements shall be authorized by a resolution on behalf of the board of directors or an authorized committee of the insurance company. In reviewing the Board of Directors minutes, there was no resolution signed authorizing RBS Citizens, N.A. as its custodian. Recommendation #11 It is recommended that the Corporation's Board of Directors sign a resolution authorizing RBS Citizens, N.A. as it custodian in accordance with Section 1 Part III.F of the NAIC Financial Condition Examiners Handbook. 26

32 As part of examination procedures performed, Board of Director's minutes were reviewed related to the Corporation's Investment Policy. On July 22, 2008, the Investment Committee approved the Investment Policy, and then presented the policy to the Board of Directors. At the September 2008 Board meeting, the Finance Committee presented a motion to approve the investment policy, subject to amending the socially responsible section of the investment policy. However, the investment policy with the change to that section was never approved by the Board of Directors. Recommendation #12 It is recommended that Board of Directors approve the Corporation's Investment Policy, and any changes made to the Investment Policy. The Board of Directors' 2009 minutes were reviewed to determine if the Corporation's Investment Guidelines were approved. There was no approval by the Board of Directors or Finance Committee. The Investment Guidelines were provided to the Corporation's investment advisor, Dwight, in April Recommendation #13 It is recommended that Board of Directors approve the Corporation's Investment Guidelines, and any subsequent changes made to those Investment Guidelines. During the period of examination, an Investment Consulting Advisory Agreement was entered into between the Board of Directors of Neighborhood Health Plan of Rhode Island and Meketa Investment Group, Inc. The agreement was signed by the CFO of Neighborhood at that time, who was not a Board member. The agreement should have been between Meketa Investment Group, Inc. and Neighborhood Health Plan of Rhode Island. 27

33 1 Recommendation #14 It is recommended that the Investment Consulting Advisory Agreement be amended replacing as a named party to the agreement, the Board of Directors of Neighborhood Health Plan of Rhode Island, with Neighborhood Health Plan of Rhode Island and that the agreement be signed by an authorized individual of Neighborhood's management. Amounts Recoverable from Reinsurers S The above amount is $100,090 greater than the same amount reported by the Corporation in its 2009 Annual Statement. The adjustment was made to record the amount reinsurance recoverable as of December 31, 2009 related to pharmacy and durable medical equipment (DME) claims. Health Care and Other Amounts Receivable $ The above amount is $1,815,000 less than the same amount reported by the Corporation in its 2009 Annual Statement. The adjustment was made to reduce the corresponding amount of risk share balance due from the State of Rhode Island as a result of a decrease of $2,073,000 in IBNR reserves. 28

34 LIABILITIES Claims Unpaid $ Accrued Medical Incentive Pool and Bonus Amounts $ Unpaid Claims Adjustment Expenses $906,649 Premium Deficiency Reserve $ The liability for claims unpaid reported above is $2,073,000 less than the amount reported by Neighborhood in its 2009 Annual Statement. The adjustment was made to decrease the IBNR portion of the overall claims unpaid liability as a result of a December 31, 2009 year-end analysis performed by the Corporation's independent auditors. The premium deficiency reserve reported above is $300,000 less than the amount reported by Neighborhood in its 2009 Annual Statement. The adjustment was made to record the effect of interest discounting to future cash flows, which the Corporation did not take into consideration in its December 31, 2009 analysis. The two remaining liabilities as reported above were the same as reported by the Corporation in its 2009 Annual Statement. Deloitte Consulting LLP ("Deloittel, consulting actuaries for the Rhode Island Insurance Division, has reviewed these reserves. Deloitte's review of claims unpaid was primarily based on the reserve analysis and development documentation provided by Neighborhood and its opining actuary. The analysis conducted focused on the Corporation's reserves by type of coverage. Neighborhood calculates reserves on an overall basis (incurred but not paid) using paid claim history. This approach is also known as the completion factor methodology, where past claim payment patterns, by dates of service, are examined to determine degrees of completeness. 29

35 Based on Deloitte's review of the documentation provided by Neighborhood and its opining actuary, it was concluded that the claims unpaid, accrued medical incentive pool and bonus amounts, unpaid claims adjustment expenses, and the premium deficiency reserve reported by the Corporation in the 2009 Annual Statement are reasonable, and were determined using reasonable actuarial methods and assumptions. In assisting Deloitte with the reserve analysis, the examiners performed various procedures to verify the integrity of NEIPRI's loss data. A combination of subjective and statistical sampling techniques was used in testing the loss data. While sampling techniques do not give complete assurance that all errors and irregularities will be detected, there were no material errors or irregularities detected by the examiners while testing the loss data. As part of procedures performed, we tested the Corporation's compliance with Rhode Island General Law (a), Health Maintenance Organizations, Prompt Processing of Claims, which states "A health care entity or health plan operating in the state shall pay all complete claims for covered services submitted to the health care entity or health plan by a health care provider or by a policyholder within forty (40) calendar days following the date of receipt of a complete written claim or within thirty (30) calendar days following the date of receipt of a complete electronic claim. Each plan shall establish a written standard defining what constitutes a complete claim and shall distribute this standard to all participating providers." For purposes of this section, the following definitions apply: "Health care provider" is defined as an individual clinician, either in practice independently or in a group, who provides health care services, and is referred to as a non-institutional provider. 30

36 "Substantial compliance" means that the health care entity or health plan is processing and paying ninety-five (95%) or more of all claims within the time frame provided for in this section. As a result of examination procedures performed, it was noted that the Corporation is not paying paper-based professional-medical claims within forty (40) calendar days following the date of receipt of a complete written claim. The evidence obtained was weekly check runs (which indicated interest payments to vendors), and analysis of the paid claims data by the examination team. In calendar year 2009, the Company made payments amounting to $65,793,600 on its professional-medical claims. Of this total, $3,176,215 were paper-based claims that were not paid within the forty (40) day limit. The Corporation indicated that interest was paid on these claims, but it could not easily quantify the total amount of interest paid for each vendor for the year. Recommendation #15 It is recommended that the Corporation implement controls to ensure that paper-based claims are settled in accordance with Rhode Island General Law (a), specifically, that they must be paid within forty (40) days of receipt. It is also recommended that summary and detail reports be kept to determine the amount of interest paid on each claim by each vendor. 31

37 CAPITAL AND SURPLUS Total Capital and Surplus $ The total capital and surplus as shown above is $658,090 higher than the amount reported by Neighborhood in its 2009 Annual Statement. This is the result of examination adjustments as detailed below: Reinsurance Recoverable $ 100,090 Health Care Receivable (1,815,000) Claims unpaid 2,073,000 Premium Deficiency Reserve 300,000 Total examination adjustments $ Capital and surplus balances as of December are as follows: Surplus notes $ 1,500,000 Unassigned funds (surplus) 17,313,866 Total Capital and Surplus $18,

38 SUMMARY OF RECOMMENDATIONS No. Recommendation Page No. 1 It is recommended that all Board of Directors and various committee minutes be signed when finalized. 9 2 It is recommended that the Corporation maintain all of its minutes on the premises and not send them to an offsite storage facility. 3 It is recommended that the Corporation maintain all of its minutes in a fire proof safe in a secure location. 4 It is recommended that the Corporation maintain a complete record of all meeting minutes. 5 It is recommended that the Board of Directors and all Committee meeting members approve the prior meeting minutes ensuring that all dates are correct and no known errors are within the minutes before they are signed. 6 It is recommended that the Corporation nominate and appoint to the Board of Directors and Nominating Committee the President of the Rhode Island Foundation, or his or her designee from RIF senior management or its Board, so as to be in compliance with Neighborhood's by-laws. specifically Article IV, Section lc and Article VI, Section 5. 7 It is recommended that the members of the Audit Committee comply with the specific requirements of the Audit Committee Charter. 8 It is recommended that the Corporation have on its premises all agreements entered into with third parties. 9 It is recommended that all investment transaction be approved by the Investment Committee on a periodic basis. 10 It is recommended that the Corporation amend its custodial agreement to include all of the safeguards and controls set forth in Section 1 Part 111.F of the NAIC Financial Condition Examiners Handbook