-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JGV2teyuKJ/81kHb4egHSDuyREwEmMNKVUJi+fw6t6r6s/ITKADKtjc5JHKJG582 UdrPghpGCx7mZ8M+nYaAjg== 0000950144-02-008658.txt : 20020814 0000950144-02-008658.hdr.sgml : 20020814 20020814123925 ACCESSION NUMBER: 0000950144-02-008658 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIPLE-S MANAGEMENT CORP CENTRAL INDEX KEY: 0001171662 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 660555678 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-49762 FILM NUMBER: 02733303 BUSINESS ADDRESS: STREET 1: 1441 F.D. ROOSEVELT AVE. CITY: SAN JUAN STATE: A1 ZIP: 00920 BUSINESS PHONE: 7877494949 10-Q 1 g77580e10vq.txt TRIPLE-S MANAGEMENT CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_________ TO______________ COMMISSION FILE NUMBER: 0-49762 ----------------------------------------------- TRIPLE-S MANAGEMENT CORPORATION (Exact name of registrant as specified in its charter) PUERTO RICO 66-0555678 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1441 F.D. ROOSEVELT AVENUE SAN JUAN, PUERTO RICO 00920 (Address of principal executive offices) (Zip code) (787) 749-4949 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 1 ------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. TITLE OF EACH CLASS OUTSTANDING AT JUNE 30, 2002 ------------------- ---------------------------- Common Stock, $40.00 par value 9,611 ================================================================================ TRIPLE-S MANAGEMENT CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31 2001 3 Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001 4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the three months and six months ended June 30, 2002 and 2001 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 6 and 2001 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 44 PART II - OTHER INFORMATION Item 1. Legal Proceedings 43 Item 4. Submissions of Matters to a Vote of Security Holders 43 Item 5. Other Information 45 Item 6. Exhibits and Reports on Form 8-K 46 SIGNATURES 47
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Dollar amounts in thousands)
(UNAUDITED) JUNE 30, DECEMBER 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Investments and cash: Securities held for trading, at fair value: Fixed maturities $ 36,329 38,107 Equity securities 45,814 50,743 Securities available for sale, at fair value: Fixed maturities 311,154 286,505 Equity securities 40,301 37,829 Securities held to maturity, at amortized cost: Fixed maturities 2,388 3,779 Cash and cash equivalents 80,026 80,970 - ------------------------------------------------------------------------------------------------------------------------- Total investments and cash 516,012 497,933 - ------------------------------------------------------------------------------------------------------------------------- Premiums and other receivables, net 93,230 74,872 Deferred policy acquisition costs 11,480 9,550 Property and equipment, net 37,744 39,090 Other assets 31,602 34,613 - ------------------------------------------------------------------------------------------------------------------------- Total assets $ 690,068 656,058 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Claim liabilities: Claims processed and incomplete, and future policy benefits $ 123,076 114,599 Unreported losses 107,584 103,240 Unpaid loss-adjustment expenses 12,825 11,601 - ------------------------------------------------------------------------------------------------------------------------- Total claim liabilities 243,485 229,440 - ------------------------------------------------------------------------------------------------------------------------- Unearned premiums 61,241 58,306 Individual retirement annuities 14,186 17,426 Liability to Federal Employees Health Benefits Program 7,781 12,130 Accounts payable and accrued liabilities 102,667 97,078 Loans payable to bank 53,717 55,650 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 483,077 470,030 - ------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, $40 par value. Authorized 12,500 shares; issued and outstanding 9,611 and 9,714 at June 30, 2002 and December 31, 2001, respectively 384 389 Additional paid-in capital 150,406 150,405 Operating reserve 29,968 14,250 Accumulated other comprehensive income - net unrealized gain on securities available for sale 26,233 20,984 - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 206,991 186,028 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 690,068 656,058 - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 3 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) For the three months and six months ended June 30, 2002 and 2001 (Dollar amounts in thousands)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2002 2001 2002 2001 --------- --------- --------- --------- REVENUES: Premiums earned, net $ 308,478 275,902 618,320 554,366 Amounts attributable to self-funded arrangements 37,427 33,034 72,265 66,337 Less amounts attributable to claims under self-funded arrangements (36,379) (30,821) (68,837) (63,008) --------- --------- --------- --------- 309,526 278,115 621,748 557,695 Net investment income 6,359 6,362 12,349 12,560 Net realized investment gains (losses) 6 1,571 (150) 2,380 Net unrealized investment gain (loss) on trading securities (5,662) (838) (5,377) (3,124) Other income, net 211 4,484 424 4,532 --------- --------- --------- --------- Total revenue 310,440 289,694 628,994 574,043 --------- --------- --------- --------- BENEFITS AND EXPENSES: Claims incurred 260,878 249,420 532,651 493,555 Operating expenses, net of reimbursement for services 38,642 32,967 77,353 66,943 Interest expense 872 1,435 1,991 3,047 --------- --------- --------- --------- Total benefits and expenses 300,392 283,822 611,995 563,545 --------- --------- --------- --------- Income before taxes 10,048 5,872 16,999 10,498 --------- --------- --------- --------- INCOME TAX EXPENSE: Current 318 203 517 491 Deferred 463 114 764 286 --------- --------- --------- --------- Total income taxes 781 317 1,281 777 --------- --------- --------- --------- Net income $ 9,267 5,555 15,718 9,721 --------- --------- --------- --------- Basic net income per share as if the Company operated as a for-profit organization $ 0.79 0.40 1.37 0.73 --------- --------- --------- --------- Basic net income per share as if Triple-S, Inc. operated as a not-for-profit organization $ 0.30 0.27 0.59 0.54 --------- --------- --------- ---------
See accompanying notes to unaudited consolidated financial statements. 4 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income (Unaudited) For the three months and six months ended June 30, 2002 and 2001 (Dollar amounts in thousands)
2002 2001 - ----------------------------------------------------------------------------------------------------------- BALANCE AT APRIL 1 $ 189,547 170,679 Stock redemption (1) -- Comprehensive income: Net income 9,267 5,555 Net unrealized change in investment securities 8,178 902 - ----------------------------------------------------------------------------------------------------------- Total comprehensive income 17,445 6,457 - ----------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30 $ 206,991 177,136 - ----------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1 $ 186,028 159,693 Stock redemption (4) 1 Comprehensive income: Net income 15,718 9,721 Net unrealized change in investment securities 5,249 7,721 - ----------------------------------------------------------------------------------------------------------- Total comprehensive income 20,967 17,442 - ----------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30 $ 206,991 177,136 - -----------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 5 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30, 2002 and 2001 (Dollar amounts in thousands)
SIX MONTHS ENDED JUNE 30, 2002 2001 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Premiums collected $ 600,770 538,515 Cash paid to suppliers and employees (72,893) (63,821) Claims losses and benefits paid (518,601) (495,396) Interest received 11,331 13,396 Proceeds from trading securities sold or matured: Fixed securities sold 76,122 12,609 Equity securities 9,609 11,148 Acquisitions of investments in trading portfolio: Fixed maturities (74,557) (14,979) Equity securities (10,137) (13,187) Interest paid (1,320) (2,285) Expense reimbursement from Medicare 5,982 6,017 Contingency reserve funds from FEHBP -- 4,226 --------- -------- Net cash provided by (used in) operating activities 26,306 (3,757) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments sold or matured: Securities available for sale: Fixed maturities sold 15,597 626 Fixed maturities matured 57,392 54,877 Equity securities 2,642 3,104 Securities held to maturity: Fixed maturities matured 1,433 -- Acquisitions of investments: Securities available for sale: Fixed maturities (96,264) (70,733) Capital expenditures (3,250) (2,851) Proceeds from sale of property and equipment 922 339 --------- -------- Net cash used in investing activities (21,528) (14,638) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in outstanding checks in excess of bank balances (151) 7,491 Payments of long term debt (1,933) (1,183) Redemption of common stocks (4) 1 Proceeds from individual retirement annuities 791 1,254 Surrenders of individual retirement annuities (4,425) (2,153) --------- -------- Net cash provided by (used in) financing activities (5,722) 5,410 --------- -------- Net decrease in cash and cash equivalents (944) (12,985) Cash and cash equivalents at beginning of the period 80,970 33,566 --------- -------- Cash and cash equivalents at end of the period $ 80,026 20,581 --------- --------
See accompanying notes to unaudited consolidated financial statements. 6 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) (1) BASIS OF PRESENTATION The accompanying consolidated interim financial statements prepared by Triple-S Management Corporation and its subsidiaries (the "Corporation") are unaudited, except for the balance sheet information as of December 31, 2001, which is derived from the Corporation's audited consolidated financial statements, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, the consolidated interim financial statements do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation's Form 10-A for the year ended December 31, 2001. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such consolidated interim financial statements have been included. The results of operations for the six months ended June 30, 2002 are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform to the current period presentation. (2) SEGMENT INFORMATION The following tables summarize the operations by major operating segment for the three months and six months ended June 30, 2002 and 2001: 7 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- THREE MONTHS ENDED JUNE 30, 2002 Premiums earned, net $ 167,296 123,079 14,364 3,845 -- 308,584 Amounts attributable to self-funded arrangements 37,321 -- -- -- -- 37,321 Less: Amounts attributable to claims under self-funded arrangements (36,379) -- -- -- -- (36,379) Intersegment premiums earned/service revenues 684 -- -- -- 12,691 13,375 ---------- ---------- ---------- ---------- ---------- ---------- 168,922 123,079 14,364 3,845 12,691 322,901 Net investment income 2,759 1,297 1,656 571 -- 6,283 Realized gain (loss) on sale of securities 113 (170) 71 (8) -- 6 Unrealized loss on trading securities (4,442) (387) (833) -- -- (5,662) Other 62 (8) 30 29 -- 113 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 167,414 123,811 15,288 4,437 12,691 323,641 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ 8,612 (1,097) 936 1,249 354 10,054 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 6,898 (555) 1,411 1,523 207 9,484 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 137,558 113,711 8,287 1,322 -- 260,878 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 22,752 10,465 5,141 1,274 12,337 51,969 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 1,739 -- 117 14 -- 1,870 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 206 190 -- 173 -- 569 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 449 145 147 741 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 8 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- THREE MONTHS ENDED JUNE 30, 2001 Premiums earned, net $ 151,403 109,026 12,050 3,266 -- 275,745 Amounts attributable to self-funded arrangements 33,191 -- -- -- -- 33,191 Less: Amounts attributable to claims under self-funded arrangements (30,821) -- -- -- -- (30,821) Intersegment premiums earned/service revenues 212 -- -- -- 2,261 2,473 ---------- ---------- ---------- ---------- ---------- ---------- 153,985 109,026 12,050 3,266 2,261 280,588 Net investment income 2,650 1,156 1,842 620 -- 6,268 Realized gain (loss) on sale of securities 1,654 (50) (33) -- -- 1,571 Unrealized gain (loss)on trading securities (1,200) (23) 385 -- -- (838) Other 4,327 (13) 46 9 -- 4,369 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 161,416 110,096 14,290 3,895 2,261 291,958 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ (4,875) (25) (328) 752 103 (4,373) ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 2,155 692 1,687 1,052 79 5,665 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 138,393 101,501 8,052 1,474 -- 249,420 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 20,467 7,550 4,326 1,040 2,158 35,541 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 985 -- 109 15 -- 1,109 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 400 354 -- 239 -- 993 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 225 90 24 339 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 9 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- SIX MONTHS ENDED JUNE 30, 2002 Premiums earned, net $ 332,294 247,526 30,452 7,658 -- 617,930 Amounts attributable to self-funded arrangements 72,655 -- -- -- -- 72,655 Less: Amounts attributable to claims under self-funded arrangements (68,837) -- -- -- -- (68,837) Intersegment premiums earned/service revenues 1,352 -- -- -- 24,165 25,517 ---------- ---------- ---------- ---------- ---------- ---------- 337,464 247,526 30,452 7,658 24,165 647,265 Net investment income 5,317 2,485 3,234 1,161 -- 12,197 Realized gain (loss) on sale of securities (61) (167) 16 62 -- (150) Unrealized loss on trading securities (4,056) (653) (668) -- -- (5,377) Other 97 (22) 100 53 -- 228 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 338,761 249,169 33,134 8,934 24,165 654,163 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ 9,547 (1,633) 1,097 1,602 770 11,383 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 10,425 (407) 3,143 2,287 475 15,923 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 283,362 229,695 16,088 3,506 -- 532,651 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 44,555 19,464 13,267 2,550 23,395 103,231 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 2,830 -- 240 27 -- 3,097 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 419 417 -- 395 -- 1,231 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 636 196 295 1,127 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 10 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited)
OPERATING SEGMENT --------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE and LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- SIX MONTHS ENDED JUNE 30, 2001 Premiums earned, net $ 303,449 217,604 27,058 5,941 -- 554,052 Amounts attributable to self-funded arrangements 66,651 -- -- -- -- 66,651 Less: Amounts attributable to claims under self-funded arrangements (63,008) -- -- -- -- (63,008) Intersegment premiums earned/service revenues 423 -- -- -- 4,560 4,983 ---------- ---------- ---------- ---------- ---------- ---------- 307,515 217,604 27,058 5,941 4,560 562,678 Net investment income 5,197 2,281 3,648 1,242 -- 12,368 Realized gain on sale of securities 2,217 90 38 30 -- 2,375 Unrealized loss on trading securities (2,372) (307) (445) -- -- (3,124) Other 4,245 (41) 115 17 -- 4,336 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues $ 316,802 219,627 30,414 7,230 4,560 578,633 ---------- ---------- ---------- ---------- ---------- ---------- Underwriting income (loss) $ (6,389) 1,011 396 1,064 357 (3,561) ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 2,036 2,330 3,302 1,733 252 9,653 ---------- ---------- ---------- ---------- ---------- ---------- Claims incurred $ 273,157 201,695 15,880 2,823 -- 493,555 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses $ 40,747 14,898 10,782 2,054 4,203 72,684 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense, included in operating expenses $ 2,016 -- 217 29 -- 2,262 ---------- ---------- ---------- ---------- ---------- ---------- Interest expense $ 863 703 -- 482 -- 2,048 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes $ -- -- 450 138 105 693 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 11 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) Balance Sheet Items
OPERATING SEGMENT -------------------------------------------------------------------------- HEALTH HEALTH PROPERTY INSURANCE INSURANCE AND LIFE AND COMMERCIAL REFORM CASUALTY DISABILITY PROGRAM PROGRAM INSURANCE INSURANCE OTHER * TOTAL ---------- ---------- ---------- ---------- ---------- ---------- AS OF JUNE 30, 2002 Segment assets $ 318,087 102,555 187,817 51,081 941 660,481 ---------- ---------- ---------- ---------- ---------- ---------- Significant noncash item - net change in unrealized gain on securities available for sale $ 3,721 376 447 422 -- 4,966 ---------- ---------- ---------- ---------- ---------- ---------- AS OF DECEMBER 31, 2001 Segment assets $ 287,893 105,319 179,184 50,410 515 623,321 ---------- ---------- ---------- ---------- ---------- ---------- Significant noncash item - net change in unrealized gain on securities available for sale $ 1,036 1,368 1,091 990 -- 4,485 ---------- ---------- ---------- ---------- ---------- ----------
* Includes segments which are not required to be reported separately. These segments include the data processing services organization as well as the third party administrator of the health insurance services. 12 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 -------- -------- -------- -------- TOTAL REVENUES Total revenues for reportable segments $310,950 289,697 629,998 574,073 Total revenues for other segments 12,691 2,261 24,165 4,560 -------- -------- -------- -------- 323,641 291,958 654,163 578,633 Elimination of intersegment earned premiums (684) (212) (1,352) (423) Elimination of intersegment service revenues (12,691) (2,261) (24,165) (4,560) Unallocated amount - revenues from external sources 174 209 348 393 -------- -------- -------- -------- (13,201) (2,264) (25,169) (4,590) -------- -------- -------- -------- Consolidated total revenues $310,440 289,694 628,994 574,043 -------- -------- -------- -------- PROFIT AND LOSS UNDERWRITING INCOME Underwriting income (loss) for reportable segments $ 9,700 (4,476) 10,613 (3,918) Underwriting income for other segments 354 103 770 357 -------- -------- -------- -------- 10,054 (4,373) 11,383 (3,561) Elimination of TSM charge - rent expense 1,546 1,546 3,092 3,092 TSM general and administrative expenses (1,594) (1,445) (2,731) (2,334) -------- -------- -------- -------- (48) 101 361 758 -------- -------- -------- -------- Consolidated underwriting income (loss) $ 10,006 (4,272) 11,744 (2,803) -------- -------- -------- -------- NET INCOME (LOSS) Net income for reportable segments $ 9,277 5,586 15,448 9,401 Net income for other segments 207 79 475 252 -------- -------- -------- -------- 9,484 5,665 15,923 9,653 -------- -------- -------- -------- Elimination of TSM charges: Rent expense 1,546 1,546 3,092 3,092 Interest expense 206 400 419 863 -------- -------- -------- -------- 1,752 1,946 3,511 3,955 -------- -------- -------- -------- Unallocated amounts related to TSM: General and administrative expenses (1,594) (1,445) (2,731) (2,334) Interest expense (509) (842) (1,179) (1,862) Other revenues (expenses) from external sources 134 231 194 309 -------- -------- -------- -------- (1,969) (2,056) (3,716) (3,887) -------- -------- -------- -------- Consolidated net income (loss) $ 9,267 5,555 15,718 9,721 -------- -------- -------- --------
13 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS OTHER SIGNIFICANT ITEMS
THREE MONTHS ENDED JUNE 30, 2002 - ------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS - ------------------------------------------------------------------------------------------------------------- Claims incurred $ 260,878 - 260,878 Operating expenses 51,969 (13,327) 38,642 Depreciation expense 1,870 291 2,161 Interest expense 569 303 872 Income taxes 741 40 781
THREE MONTHS ENDED JUNE 30, 2001 - ------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS* TOTALS - ------------------------------------------------------------------------------------------------------------- Claims incurred $ 249,420 - 249,420 Operating expenses 35,541 (2,574) 32,967 Depreciation expense 1,109 336 1,445 Interest expense 993 442 1,435 Income taxes 339 (22) 317
* Adjustments represent TSM operations and the elimination of intersegment charges. 14 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 - ----------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS - ------------------------------------------------------------------------------------------------------------ Claims incurred $ 532,651 - 532,651 Operating expenses 103,231 (25,878) 77,353 Depreciation expense 3,097 576 3,673 Interest expense 1,231 760 1,991 Income taxes 1,127 154 1,281
SIX MONTHS ENDED JUNE 30, 2001 - ------------------------------------------------------------------------------------------------------------ SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS - ------------------------------------------------------------------------------------------------------------ Claims incurred $ 493,555 - 493,555 Operating expenses 72,684 (5,741) 66,943 Depreciation expense 2,262 672 2,934 Interest expense 2,048 999 3,047 Income taxes 693 84 777
* Adjustments represent TSM operations and the elimination of intersegment charges. 15 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) RECONCILIATION OF REPORTABLE SEGMENT TOTALS WITH FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31, 2002 2001 - ---------------------------------------------------------------------------------------------------- ASSETS Total assets for reportable segments $ 659,540 622,806 Total assets for other segments 941 515 - --------------------------------------------------------------------------------------------------- 660,481 623,321 - --------------------------------------------------------------------------------------------------- Elimination entries - intersegment receivables (8,835) (5,677) - --------------------------------------------------------------------------------------------------- Unallocated amounts: Parent cash, cash equivalents and investments 8,681 7,909 Parent net property and equipment 29,498 30,018 Parent other assets 243 487 - --------------------------------------------------------------------------------------------------- 38,422 38,414 - --------------------------------------------------------------------------------------------------- Consolidated assets $ 690,068 656,058 - ---------------------------------------------------------------------------------------------------
OTHER SIGNIFICANT ITEMS
AS OF JUNE 30, 2002 - ---------------------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS - ---------------------------------------------------------------------------------------------------------------------------- Significant noncash item - net change in unrealized gain on securities available for sale $ 4,966 253 5,249 AS OF DECEMBER 31, 2001 - --------------------------------------------------------------------------------------------------------------------------------- SEGMENT CONSOLIDATED TOTALS ADJUSTMENTS * TOTALS - --------------------------------------------------------------------------------------------------------------------------------- Significant noncash item - net change in unrealized gain on securities available for sale $ 4,485 139 4,624
* Adjustments represent TSM operations and the elimination of intersegment charges. 16 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) (3) PREMIUMS AND OTHER RECEIVABLES Premiums and other receivables as of June 30, 2002 and December 31, 2001 were as follows:
(UNAUDITED) JUNE 30 DECEMBER 31, (dollar amounts in thousands) 2002 2001 - --------------------------------------------------------------------------------------------- Premiums $ 50,825 40,373 Self-funded group receivables 13,385 11,241 FEHBP 10,983 5,379 Accrued interest 4,912 4,833 Reinsurance recoverable on paid losses 14,735 13,371 Other 10,978 11,353 - --------------------------------------------------------------------------------------------- 105,818 86,550 Less allowance for doubtful receivables 12,588 11,678 - --------------------------------------------------------------------------------------------- Total premiums and other receivables $ 93,230 74,872 - ---------------------------------------------------------------------------------------------
(4) CLAIM LIABILITIES The activity in the total claim liabilities for the three months ended June 30, 2002 and 2001 is as follows:
(UNAUDITED) THREE MONTHS ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------- Claim liabilities at beginning of the period $ 251,700 184,895 Reinsurance recoverable on claim liabilities (11,749) (10,087) - ---------------------------------------------------------------------------------------------------- Net claim liabilities at beginning of the period 239,951 174,808 - ---------------------------------------------------------------------------------------------------- Incurred claims and loss adjustment expenses: Current period insured events 258,309 248,597 Prior period insured events 2,569 823 - ---------------------------------------------------------------------------------------------------- Total 260,878 249,420 - ---------------------------------------------------------------------------------------------------- Payments of losses and loss adjustment expenses: Current period insured events 248,766 230,619 Prior period insured events 19,928 20,434 - ---------------------------------------------------------------------------------------------------- Total 268,694 251,053 - ---------------------------------------------------------------------------------------------------- Net claim liabilities at end of the period 232,135 173,175 Reinsurance recoverable on claim liabilities 11,350 10,256 - ---------------------------------------------------------------------------------------------------- Claim liabilities at end of the period $ 243,485 183,431 - ----------------------------------------------------------------------------------------------------
17 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) The activity in the total claim liabilities for the six months ended June 30, 2002 and 2001 is as follows:
(UNAUDITED) SIX MONTHS ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 - -------------------------------------------------------------------------------------------------- Claim liabilities at beginning of the period $ 229,440 183,231 Reinsurance recoverable on claim liabilities (10,062) (7,636) - ----------------------------------------------------------------------------------------------- Net claim liabilities at beginning of the period 219,378 175,595 - ----------------------------------------------------------------------------------------------- Incurred claims and loss adjustment expenses: Current period insured events 536,325 496,364 Prior period insured events (3,674) (2,809) - ----------------------------------------------------------------------------------------------- Total 532,651 493,555 - ----------------------------------------------------------------------------------------------- Payments of losses and loss adjustment expenses: Current period insured events 403,151 367,855 Prior period insured events 116,743 128,120 - ----------------------------------------------------------------------------------------------- Total 519,894 495,975 - ----------------------------------------------------------------------------------------------- Net claim liabilities at end of the period 232,135 173,175 Reinsurance recoverable on claim liabilities 11,350 10,256 - ----------------------------------------------------------------------------------------------- Claim liabilities at end of the period $ 243,485 183,431 - -----------------------------------------------------------------------------------------------
(5) NET INCOME (LOSS) AVAILABLE TO STOCKHOLDERS AND NET INCOME (LOSS) PER SHARE The Corporation presents only basic earnings per share, which amount consists of the net income (loss) that could be available to common stockholders divided by the weighted-average number of common shares outstanding for the period. The Corporation is a for-profit organization that operates as a not-for-profit organization by virtue of a resolution approved by a majority of the stockholders of the Corporation. As a result, the Corporation does not declare or distribute dividends. This resolution could be amended anytime by the affirmative vote of a majority of the stockholders and thus, dividends could be available for distribution subject to the applicable obligations and responsibilities under the General Corporation Law of Puerto Rico or any contract to which the Corporation is a party. 18 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) In the event that the stockholders of the Corporation decide to operate the Corporation as a for-profit organization and the Board of Directors of the Corporation decides to declare and distribute dividends, the amount of net income (loss) that could be available for distribution would exclude Triple-S, Inc.'s ("TSI") net income, due to TSI's tax-exempt status. TSI's tax-exempt status was obtained through an income tax ruling issued by the Treasury Department of Puerto Rico and reaffirmed through a letter dated July 3, 2001. For purposes of computing the basic earnings per share presented in the consolidated statement of operations, the Corporation considers the operations of TSI as if TSI operated without the income tax exemption. Under this scenario, in order to determine the net income (loss) that could be available to stockholders, the Corporation estimates the Puerto Rico income taxes that would have otherwise resulted from TSI's operations and deducts such amount from the results of operations of each period. TSI's estimate of Puerto Rico income taxes, computed for such purposes, was determined as for an other than life insurance entity, as such term is defined in the Puerto Rico Internal Revenue Code of 1994, as amended. The effective tax rate used was 39% for the three months and six months ended June 30, 2002 and 2001. The following tables set forth the net income that could be available to stockholders if TSI operated without the tax exemption for the three months and six months ended June 30, 2002 and 2001 (dollar amounts in thousands). THREE MONTHS ENDED MARCH 30, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 - ------------------------------------------------------------------------------ Net income for the period $ 9,267 5,555 Less tax effect on TSI operations 1,617 1,620 - ------------------------------------------------------------------------------ Net income available to stockholders $ 7,650 3,935 - ------------------------------------------------------------------------------ (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 - ---------------------------------------------------------------------------- Net income for the period $ 15,718 9,721 Less tax effect on TSI operations 2,493 2,488 - ---------------------------------------------------------------------------- Net income available to stockholders $ 13,225 7,233 - ---------------------------------------------------------------------------- 19 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) The following tables set forth the computation of basic earnings per share for the three months and six months ended June 30, 2002 and 2001 (dollar amounts in thousands, except for outstanding shares). THREE MONTHS ENDED MARCH 31, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 - ----------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 7,650 3,935 - ---------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,626 9,886 - ---------------------------------------------------------------------------- Basic net income per share $ 0.79 0.40 - ---------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 - ------------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 13,225 7,233 - ------------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,650 9,886 - ------------------------------------------------------------------------------- Basic net income per share $ 1.37 0.73 - ------------------------------------------------------------------------------- Should the Corporation decide to preserve the tax exemption granted to TSI, then dividends cannot be declared or distributed from the earnings and profits generated from TSI's operations. The following tables set forth the resulting net income that would otherwise be available for distribution after excluding the net result of operations of TSI for the three months and six months ended June 30, 2002 and 2001 (dollar amounts in thousands). 20 TRIPLE-S MANAGEMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Dollar amounts in thousands) (Unaudited) THREE MONTHS ENDED MARCH 31, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 - ------------------------------------------------------------------------------- Net income for the period $ 9,267 5,555 Less TSI operations 6,343 2,842 - ------------------------------------------------------------------------------- Net income available to stockholders $ 2,924 2,713 - ------------------------------------------------------------------------------- (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 - ---------------------------------------------------------------------------- Net income for the period $ 15,718 9,721 Less TSI operations 10,018 4,365 - ---------------------------------------------------------------------------- Net income available to stockholders $ 5,700 5,356 - ---------------------------------------------------------------------------- The following tables set forth the computation of basic net income per share for the three months and six months June 30, 2002 and 2001 if the Corporation excludes TSI's results of operations (dollar amounts in thousands, except for outstanding shares):
THREE MONTHS ENDED MARCH 31, (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2002 2001 - ---------------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 2,924 2,713 - ---------------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,626 9,886 - ---------------------------------------------------------------------------------- Basic net income per share $ 0.30 0.27 - ----------------------------------------------------------------------------------
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 2001 - --------------------------------------------------------------------------------- Numerator for basic earnings per share: Net income available to stockholders $ 5,700 5,356 - --------------------------------------------------------------------------------- Denominator for basic earnings per share: Weighted average of outstanding common shares 9,650 9,886 - --------------------------------------------------------------------------------- Basic net income per share $ 0.59 0.54 - ---------------------------------------------------------------------------------
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q is intended to update the reader on matters affecting the financial condition and results of operations of Triple-S Management Corporation ("TSM") and its subsidiaries (the "Corporation") for the period from January 1, 2002 to June 30, 2002. Therefore, the following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-A filed with the United States Securities and Exchange Commission as of and for the year ended December 31, 2001. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This form and other publicly available documents may include statements that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including, among other things: statements concerning the financial condition, results of operations and business of the Corporation. These statements are not historical, but instead represent the Corporation's belief regarding future events, any of which, by their nature, are inherently uncertain and outside of the Corporation's control. These statements may address, among other things, financial results, strategy for growth, and market position. It is possible that the Corporation's actual results and financial condition may differ, possibly materially, from the anticipated results and financial conditions indicated in these forward-looking statements. The factors that could cause actual results to differ from those in the forward-looking statements are discussed throughout this form. The Corporation is not under any obligation to update or alter any forward-looking statement (and expressly disclaims any such obligations), whether as a result of new information, future events or otherwise. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, but are not limited to, rising healthcare costs, business conditions and competition in the different insurance segments, government action and other regulatory issues. STRUCTURE OF THE ORGANIZATION TSM is incorporated under the laws of the Commonwealth of Puerto Rico. It is the holding company of several entities, through which it offers a wide range of insurance products and services. These products and services are offered through the following TSM's subsidiaries: o TSI, a health insurance company serving two major segments: the Commercial Program and the Commonwealth of Puerto Rico Healthcare Reform Program (the "Healthcare Reform") of the Commonwealth of Puerto Rico. 22 o Seguros Triple-S, Inc. ("STS"), a property and casualty insurance company. o Seguros de Vida Triple-S, Inc. ("SVTS"), a life and disability insurance and annuity products company. In addition to the insurance subsidiaries mentioned above, TSM has the following subsidiaries: Interactive Systems, Inc. ("ISI") and Triple-C, Inc. ("TCI"). ISI provides data processing services to Triple-S Management Corporation and its subsidiaries. Effective October 1, 2001, TCI was activated and commenced operations as part of a strategic positioning in the health industry to take advantage of new market opportunities. It is currently engaged as the third-party administrator in the administration of the Healthcare Reform business. The Healthcare Reform business was administered through a division of TSI until September 30, 2001. It also provides healthcare advisory services and other health-related services to TSI. TSM is organized as a for-profit organization that operates as a not-for-profit organization by virtue of a resolution approved by a majority of the stockholders of the Corporation. As a result, TSM does not declare or distribute dividends. This resolution could be amended anytime by the affirmative vote of a majority of the stockholders and thus, dividends could be available for distribution, subject to the applicable obligations and responsibilities under the General Corporations Law of Puerto Rico or any contract to which the Corporation is a party. In the event the stockholders of the Corporation decide to operate the Corporation as a for-profit organization and the Board of Directors of the Corporation decides to declare and distribute dividends, the amount of net income (loss) that could be available for distribution would exclude TSI's net income due, to TSI's tax exempt status. TSI's tax-exempt status was obtained through an income tax ruling issued by the Treasury Department of Puerto Rico and reaffirmed through a letter dated July 3, 2001. As a result of the above conditions, the portion of the consolidated net income (loss) disclosed in the consolidated financial statements and in this Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form, corresponding to the Health Insurance - Commercial and the Health Insurance - Healthcare Reform segments, is not available for distribution to shareholders. RECENT DEVELOPMENTS In 1994, the Commonwealth of Puerto Rico (the "Commonwealth") privatized the delivery of services to the medically indigent population in Puerto Rico, by contracting with private health insurance companies instead of providing health services directly to such population. The Commonwealth originally divided the Island into ten geographical areas. Each geographical area was awarded to a health insurer doing business in Puerto Rico through a competitive process requesting proposals from the industry. Prior to June 30, 2002, TSI's Healthcare Reform segment provided coverage to beneficiaries in the following geographical areas: North, Northwest, Metro-North and Southwest (awarded to TSI effective October 1, 2001). These four areas had a total enrollment of 23 approximately 753,000 beneficiaries, which represented approximately 40.4% of the total eligible beneficiaries of the population. All Healthcare Reform contracts expired on June 30, 2002. After the expiration of these contracts, the Commonwealth redistributed the geographical areas, merging two of the existing areas with the remaining ones, thus reducing geographical areas to eight. As a result of the reorganization of the geographical areas, the Northwest area (previously administered by TSI) was merged into the West area. In addition, and as a result of the same reorganization, six new municipalities were merged into areas administered by TSI. TSI participated in the bidding process and submitted proposals to renew each of the existing contracts and also to serve additional geographical areas. Commencing on July 1, 2002, TSI was awarded three of the eight geographical areas: North, Metro-North and Southwest. The three areas granted to TSI are expected to have a total enrollment of 688,000 qualified members, which represent approximately 39.2% of the total eligible beneficiaries. The expected enrollment is approximately 5.7% less than the average enrollment as of June 30, 2002. The decrease in enrollment was not significant and premium rates were increased by approximately 6.3%. All Healthcare Reform contracts were negotiated for a term of three years; premium rates, however, are negotiated annually. As of July 1, 2002, three local insurance companies are participating in the Healthcare Reform: TSI, Humana and Medical Card Systems. Effective January 2002, the Office of the Commissioner of Insurance of Puerto Rico suspended filing requirements of premium rates for certain classes, subdivisions or combinations of insurance in order to promote the economic activity in the insurance industry in Puerto Rico. The classes, subdivisions or combinations of insurance covered by this deregulation are related to commercial property and liability risks. Smart Solutions Insurance Agency, a wholly-owned subsidiary of SVTS, began operations effective July 2002. This insurance agency was created to distribute the individual insurance products that are to be offered by the life and disability insurance segment. ADOPTION OF ACCOUNTING STANDARD Effective January 1, 2002, the Corporation adopted the Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The adoption of this standard did not have a material impact on the Corporation's financial position or results of operations. GENERAL INFORMATION Substantially all of the revenues of the Corporation are generated from premiums earned and investment income. Claims incurred include the payment of benefits and losses, mostly to physicians, hospitals and other service providers, and to policyholders. A 24 portion of the claims incurred for each period consists of a management and actuarial estimate of claims incurred but not reported to the segment during the period. Each segment's results of operations depend largely on their ability to accurately predict and effectively manage these claims. Administrative expenses comprise general, selling, commissions, depreciation and payroll and payroll related expenses. The Corporation (on a consolidated basis and for each reportable segment), along with most insurance entities, uses the loss ratio, the expense ratio and the combined ratio as measures of performance. The loss ratio is the claims incurred divided by the premiums earned, net and fee revenue. The expense ratio is the operating expenses divided by the premiums earned, net and fee revenue. The combined ratio is the sum of the loss ratio and the expense ratio. These ratios are relative measurements that describe, for every $100 of premiums earned, net and fee revenue, the costs of claims and operating expenses. The combined ratio represents the total cost per $100 of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting loss. 25 CONSOLIDATED OPERATING RESULTS The analysis in this section provides an overall view of the consolidated statements of operations and key financial information. Further details of the results of operations of each reportable segment are included in the analysis of operating results for the respective segments.
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED EARNED PREMIUMS, NET AND FEE REVENUE: Health Insurance - Commercial Program $ 168,238 153,773 336,112 307,092 Health Insurance - Healthcare Reform 123,079 109,026 247,526 217,604 Property and casualty 14,364 12,050 30,452 27,058 Life and disability 3,845 3,266 7,658 5,941 - --------------------------------------------------------------------------------------------------------------------- 309,526 278,115 621,748 557,695 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED CLAIMS INCURRED $ 260,878 249,420 532,651 493,555 CONSOLIDATED OPERATING EXPENSES 38,642 32,967 77,353 66,943 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATING COSTS $ 299,520 282,387 610,004 560,498 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED LOSS RATIO 84.3% 89.7% 85.7% 88.5% CONSOLIDATED EXPENSE RATIO 12.5% 11.9% 12.4% 12.0% - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED COMBINED RATIO 96.8% 101.5% 98.1% 100.5% - --------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 6,359 6,362 12,349 12,560 REALIZED GAIN (LOSS) ON SALE OF SECURITIES 6 1,571 (150) 2,380 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (5,662) (838) (5,377) (3,124) - --------------------------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 703 7,095 6,822 11,816 - --------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE: Current $ 318 203 517 491 Deferred 463 114 764 286 - --------------------------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED INCOME TAX EXPENSE $ 781 317 1,281 777 - --------------------------------------------------------------------------------------------------------------------- Consolidated net income (loss) per segment: Health Insurance - Commercial Program $ 6,898 2,155 10,425 2,036 Health Insurance - Healthcare Reform (555) 692 (407) 2,330 Property and casualty 1,411 1,687 3,143 3,302 Life and disability 1,523 1,052 2,287 1,733 Other (10) (31) 270 320 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED NET INCOME $ 9,267 5,555 15,718 9,721 - ---------------------------------------------------------------------------------------------------------------------
26 Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Consolidated earned premiums, net and fee revenue for the three months ended June 30, 2002 increased by $31.4 million or 11.3% when compared to the consolidated earned premiums, net and fee revenue for the same period of last year. This increase is mostly due to a combined increase of $28.5 million in the earned premiums, net and fee revenue of the Health Insurance - Commercial Program and Health Insurance - Healthcare Reform segments. o The earned premiums, net and fee revenue corresponding to the Health Insurance - Commercial segment increased by $14.5 million or 9.4% during this period. This increase in premiums for this segment is attributed to the combined effect of increased premium rates and a net increase in total enrollment. o The earned premiums corresponding to the Health Insurance - Healthcare Reform segment increased by $14.0 million or 12.9% during this period. This increase is the result of increases in membership during the period and a decrease in premium rates due to the exclusion of mental health and substance abuse benefits from the coverage of the Healthcare Reform insurance policy effective October 1, 2001. o The earned premiums of the remaining segments increased by $2.9 million or 18.9% during this period. Consolidated claims incurred for the three months ended June 30, 2002 reflect an increase of $11.5 million, or 4.6%, when compared to the claims incurred for the three months ended June 30, 2001. The increase in the consolidated claims incurred is directly related to the Corporation's increased volume of business. The consolidated loss ratio reflects a decrease of 5.4 percentage points during this period. The decrease in the loss ratio is the result of management's ability to adjust its pricing strategy to cope with the increase in claims costs and the implementation of several measures for cost containment. The consolidated expense ratio for the three months ended June 30, 2002 has remained similar to the consolidated expense ratio for the same period of the prior year, reflecting an increase of 0.6 percentage points. The consolidated realized gain on sale of securities of $6 thousand for the three months ended June 30, 2002 is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available-for-sale securities. During the three months ended June 30, 2001, the Corporation had a consolidated realized gain of $1.6 million, which was mainly due to the sale of common stocks of Popular Inc. that generated a realized gain of approximately $1.3 million. The consolidated unrealized loss on trading securities of $5.7 million and $838 thousand for the three months ended June 30, 2002 and 2001, respectively, was the result of investments held by the Health Insurance - Commercial Program, Health Insurance - Healthcare Reform and the Property and Casualty Insurance segments. This unrealized 27 loss is mostly attributed to unrealized losses in the portfolios held by such segments in equity holdings that replicate the performance of the Standard & Poors 500 Index (S&P 500 Index). The Corporation experienced higher consolidated unrealized loss during the three months ended June 30, 2002 than during the three months ended June 30, 2001. This is due to the fact that the S&P 500 Index had a better performance during the second quarter of 2001 than during the second quarter of 2002. The S&P 500 Index experienced a decrease of 13.7% at the end of the second quarter of 2002, while it experienced an increase of 5.5% during at the end of the second quarter of 2001. Total consolidated income tax expense for the three months ended June 30, 2002 increased by $464 thousand when compared to consolidated income tax expense for the same period of last year. This increase is mostly due to the following: o Increase in the deferred income tax expense of $349 thousand during this period. This increase is mostly due to the increase in the deferred income tax expense of the Property and Casualty Insurance segment of $330 thousand during this period. The increase in the deferred income tax expense in the Property and Casualty Insurance segment is due to the increase in the segment's deferred policy acquisition costs and the contributions to the catastrophe loss reserve trust fund. o Increase in the current income tax expense of $115 thousand during this period. This increase is mostly due to better results of operations of the Corporation's taxable entities and to the fact that in the year 2002, the Corporation has a new subsidiary, TCI, which is a taxable entity. Total income tax expense for TCI for the three months ended June 30, 2002 amounts to $70 thousand. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Consolidated earned premiums, net and fee revenue for the six months ended June 30, 2002 increased by $64.1 million, or 11.5%, when compared to the consolidated earned premiums, net and fee revenue for the same period of last year. This increase is mostly due to a combined increase of $59.0 million in the earned premiums, net and fee revenue of the Health Insurance - Commercial Program and Health Insurance - Healthcare Reform segments. o The earned premiums, net and fee revenue corresponding to the Health Insurance - Commercial segment increased by $29.0 million or 9.5% during this period. This increase in premiums for this segment is attributed to the combined effect of increased premium rates and a net increase in total enrollment. o The earned premiums corresponding to the Health Insurance - Healthcare Reform segment increased by $30.0 million or 13.8% during this period. This increase is the net result of increases in membership during the period and a decrease in premium rates due to the exclusion of mental health and substance 28 abuse benefits from the coverage of the Healthcare Reform insurance policy effective October 1, 2001. o The earned premiums of the remaining segments increased by $5.1 million or 24.2% during this period. Consolidated claims incurred for the six months ended June 30, 2002 reflect an increase of $39.1 million, or 7.9%, when compared to the claims incurred for the six months ended June 30, 2001. The increase in the consolidated claims incurred is directly related to the Corporation's increased volume of business. The consolidated loss ratio reflects a decrease of 2.8 percentage points during this period. The decrease in the loss ratio is the result of management's ability to adjust its pricing strategy to cope with the increase in claims costs and the implementation of several measures for cost containment. The consolidated expense ratio for the six months ended June 30, 2002 has remained similar to the consolidated expense ratio for the same period of the prior year, reflecting an increase of only 0.4 percentage points. The consolidated realized loss on sale of securities of $150 thousand for the six months ended June 30, 2002 is the result of the sound and timely management of the investment portfolio in accordance with corporate investment policies, and from the normal portfolio turnover of the trading and available-for-sale securities. During the six months ended June 30, 2001, the Corporation had a consolidated realized gain of $2.3 million, which was mainly due to the sale of common stocks of Popular Inc. that generated a realized gain of approximately $1.3 million and also to the normal portfolio turnover of the trading and available-for-sale securities. The consolidated unrealized loss on trading securities of $5.4 million and $3.1 million for the six months ended June 30, 2002 and 2001, respectively, was the result of investments held by the Health Insurance - Commercial Program, Health Insurance - Healthcare Reform and the Property and Casualty Insurance segments. This unrealized loss is mostly attributed to losses in the portfolios held by such segments in equity holdings that replicate the performance of the Standard & Poors 500 Index (S&P 500 Index). The Corporation experienced higher consolidated unrealized loss during the six months ended June 30, 2002 than during the six months ended June 30, 2001. This is due to the fact that the S&P 500 Index had a better performance during the first six months of 2001 than during the first six months of 2002. The S&P 500 Index experienced a decrease of 13.8% during the first six months of 2002, while it experienced a decrease of 7.3% during the first six months of 2001. Total consolidated income tax expense for the six months ended June 30, 2002 increased by $504 thousand when compared to consolidated tax expense for the same period of last year. This increase is mostly due to an increase in the deferred income tax expense of $478 thousand during this period. The increase in the deferred income tax expense is mostly due to the increase in the deferred income tax expense of the Property and Casualty Insurance segment of $336 thousand during this period. The increase in the deferred income tax expense of the Property and Casualty Insurance segment is due to the 29 increase in the segment's deferred policy acquisition costs and the contributions to the catastrophe loss reserve trust fund. HEALTH INSURANCE - COMMERCIAL PROGRAM OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------- ENROLLMENT: Corporate accounts 313,037 320,647 313,037 320,647 Self-funded employers 125,098 121,144 125,098 121,144 Individual accounts 84,058 76,786 84,058 76,786 Federal employees 55,677 55,847 55,677 55,847 Local government employees 43,445 41,141 43,445 41,141 - ---------------------------------------------------------------------------------------------------------- TOTAL ENROLLMENT 621,315 615,565 621,315 615,565 - ---------------------------------------------------------------------------------------------------------- Earned premiums $ 167,980 151,615 333,646 303,872 Amounts attributable to self-funded arrangements 37,321 33,190 72,655 66,650 Less: Amounts attributable to claims under self-funded arrangements (36,379) (30,821) (68,837) (63,008) - ---------------------------------------------------------------------------------------------------------- EARNED PREMIUMS AND FEE REVENUE $ 168,922 153,984 337,464 307,514 - ---------------------------------------------------------------------------------------------------------- CLAIMS INCURRED $ 137,558 138,393 283,362 273,158 OPERATING EXPENSES 22,752 20,467 44,555 40,747 - ---------------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING COSTS $ 160,310 158,860 327,917 313,905 - ---------------------------------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ 8,612 (4,876) 9,547 (6,391) - ---------------------------------------------------------------------------------------------------------- LOSS RATIO 81.4% 89.9% 84.0% 88.8% EXPENSE RATIO 13.5% 13.3% 13.2% 13.3% - ---------------------------------------------------------------------------------------------------------- COMBINED RATIO 94.9% 103.2% 97.2% 102.1% - ---------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,759 2,650 5,317 5,197 REALIZED GAIN (LOSS) ON SALE OF SECURITIES 113 1,635 (61) 2,217 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (4,442) (1,200) (4,056) (2,372) - ---------------------------------------------------------------------------------------------------------- TOTAL NET INVESTMENT INCOME $ (1,570) 3,085 1,200 5,042 - ---------------------------------------------------------------------------------------------------------- NET INCOME $ 6,898 2,155 10,425 2,036 - ----------------------------------------------------------------------------------------------------------
30 Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Earned premiums and fee revenue for the three months ended June 30, 2002 reflect an increase of $14.9 million, or 9.7%, when compared to the three months ended June 30, 2001. This increase is the result of the following: o Since the last semester of 1999, this segment monitors premium rates, particularly in the rated Corporate Accounts business. Increases in premium rates account for approximately 84.0% of the increase experienced in earned premiums and fee revenue for the period. o Total enrollment as of June 30, 2002 increased by 5,750 members, or 0.9%, when compared to the enrollment as of the same date of last year. The increase in enrollment is mostly reflected in the Individual Accounts, Self-funded Employers and Local Government Employees membership, which membership increased by 7,272, or 9.5%, 3,954, or 3.3% and 2,304, or 5.6%, during this period, respectively. The enrollment of the Corporate Accounts groups decreased by 7,610 members, or 2.4%, during this period. The net increase in enrollment as of June 30, 2002 compared to the enrollment as of June 30, 2001 represents approximately 16.0% of the increase experienced in the earned premiums and fee revenue for the period. Claims incurred during the three months ended June 30, 2002 decreased by $835 thousand or 0.6% when compared to the same period in 2001. This decrease is due to a decrease in the loss ratio of 8.5 percentage points during this period. The improvement in the loss ratio is the result of better premium pricing and claims costs containment measures established by the segment throughout the years. As a result of these cost containment initiatives, cost and utilization trends have remained at levels consistent with pricing and margin objectives. During the three months ended June 30, 2002, the utilization trends of the segment were lower than expected, fact that has a direct impact in the loss ratio. The operating expenses for the three months ended June 30, 2002 reflect an increase of $2.3 million, or 11.2%, when compared to the three months ended June 30, 2001. This increase is due to the increase in the costs incurred in the acquisition of new business, such as marketing and commission expenses, and in payroll and payroll related expenses. The expense ratio for the three months ended June 30, 2002 increased only 0.2 percentage points compared to the three months ended June 30, 2001. 31 Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Earned premiums and fee revenues for the six months ended June 30, 2002 reflect an increase of $29.9 million, or 9.7%, when compared to the six months ended June 30, 2001. This increase is the result of the following: o Since the last semester of 1999, this segment monitors premium rates, particularly in the rated Corporate Accounts business. Increases in premium rates account for approximately 75.0% of the increase experienced in earned premiums and fee revenue for the period. o Total enrollment as of June 30, 2002 increased by 5,750 members, or 0.9%, when compared to the enrollment as of the same date of last year. The increase in enrollment is mostly reflected in the Individual Accounts, Self-funded Employers and Local Government Employees membership, which membership increased by 7,272, or 9.5%, 3,954, or 3.3% and 2,304, or 5.6%, during this period, respectively. The enrollment of the Corporate Accounts groups decreased by 7,610 members, or 2.4%, during this period. The net increase in enrollment as of June 30, 2002 when compared to the enrollment as of June 30, 2001 represents approximately 25.0% of the increase experienced in the earned premiums and fee revenue for the period. Claims incurred during the six months ended June 30, 2002 increased by $10.2 million, or 3.7%, when compared to the same period in 2001. This increase is due to the increase in membership, together with a decrease in the loss ratio of 4.8 percentage points during this period. The improvement in the loss ratio is the result of better premium pricing and claims costs containment measures established by the segment throughout the years. As a result of these cost containment initiatives, cost and utilization trends have remained at levels consistent with pricing and margin objectives. In addition, the implementation of pharmacy costs containment programs have maintained pharmacy costs trends at single digit numbers during the six months ended June 30, 2002. The operating expenses for the six months ended June 30, 2002 reflect an increase of $3.8 million, or 9.3%, when compared to the six months ended June 30, 2001. This increase is due to the increase in the costs incurred in the acquisition of new business, such as marketing and commission expenses, and in payroll and payroll related expenses. The expense ratio for the six months ended June 30, 2002 decreased only 0.1 percentage points compared to the six months ended June 30, 2001. 32 HEALTH INSURANCE - HEALTHCARE REFORM PROGRAM OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------- AVERAGE ENROLLMENT: North area 251,251 274,681 254,069 269,153 Northwest area 156,046 166,597 156,335 164,265 Metro-north area 167,529 177,851 168,458 177,381 Southwest area 150,355 - 150,836 - - ------------------------------------------------------------------------------------------------------- 725,181 619,129 729,698 610,799 - ------------------------------------------------------------------------------------------------------- EARNED PREMIUMS $ 123,079 109,026 247,526 217,604 - ------------------------------------------------------------------------------------------------------- CLAIMS INCURRED $ 113,711 101,501 229,695 201,695 OPERATING EXPENSES 10,465 7,550 19,464 14,898 - ------------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING COSTS $ 124,176 109,051 249,159 216,593 - ------------------------------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ (1,097) (25) (1,633) 1,011 - ------------------------------------------------------------------------------------------------------- LOSS RATIO 92.4% 93.1% 92.8% 92.7% EXPENSE RATIO 8.5% 6.9% 7.9% 6.8% - ------------------------------------------------------------------------------------------------------- COMBINED RATIO 100.9% 100.0% 100.7% 99.5% - ------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 1,297 1,156 2,485 2,281 REALIZED GAIN (LOSS) ON SALE OF SECURITIES (170) (32) (167) 90 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (387) (23) (653) (307) - ------------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 740 1,101 1,665 2,064 - ------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (555) 692 (407) 2,330 - -------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Earned premiums of the Healthcare Reform segment for the three months ended June 30, 2002 increased by $14.0 million, or 12.9%, when compared to the same period of last year. This increase is the result of the following o The average enrollment for this segment increased by 106,052 insureds when comparing the average enrollment for the three months ended June 30, 2002 to the three months ended June 30, 2001. This increase is due to the fact that this segment acquired a new area, the Southwest area, effective October 1, 2001, and therefore also acquired the earned premiums for this area. o Effective October 1, 2001, the Commonwealth excluded mental health and substance abuse benefits from the coverage offered in the policy. Behavioral healthcare and mental healthcare companies now offer these benefits to the Healthcare Reform's qualified membership. The exclusion of these benefits decreased earned premiums by approximately $9.0 million during the three months ended June 30, 2002. Claims incurred during the three months ended June 30, 2002 reflect an increase of $12.2 million, or 12.0%, when compared to the three months ended June 30, 2001. This 33 increase is due to the increase in membership, together with the effect of the exclusion of mental health and substance abuse benefits from the coverage of the policy. During the three months ended June 30, 2002, the loss ratio experienced a decrease of 0.7 percentage points. Operating expenses for the three months ended June 30, 2002, increased by $2.9 million, or 38.6%, when compared to the three months ended June 30, 2001. This increase is due to the segment's increased volume of business from the acquisition of the Southwest area effective October 1, 2001. The expense ratio increased by 1.6 percentage points when compared to the three months ended June 30, 2001. The increase in the expense ratio is due to the fact that during this period the segment began the enrollment process of the new municipalities acquired effective July 1, 2002 (refer to the Recent Developments section). Therefore, the segment has incurred in expenses related to the enrollment process while earned premiums will not be received until July 2002. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Earned premiums of the Healthcare Reform segment for the six months ended June 30, 2002 increased by $29.9 million, or 13.8%, when compared to the same period of last year. This increase is the result of the following: o The average enrollment for this segment increased by 118,899 insureds when comparing the average enrollment for the six months ended June 30, 2002 to the six months ended June 30, 2001. This increase is due to the fact that this segment acquired a new area, the Southwest area, effective October 1, 2001, and therefore also acquired the earned premiums for this area. o Effective October 1, 2001, the Commonwealth excluded mental health and substance abuse benefits from the coverage offered in the policy. Behavioral healthcare and mental healthcare companies now offer these benefits to the Healthcare Reform's qualified membership. The exclusion of these benefits decreased earned premiums by approximately $18.0 million during the six months ended June 30, 2002. Claims incurred during the six months ended June 30, 2002 reflect an increase of $28.0 million, or 13.9%, when compared to the six months ended June 30, 2001. This increase is due to the increase in membership, together with the effect of the exclusion of mental health and substance abuse benefits from the coverage of the policy. During the six months ended June 30, 2002, the loss ratio experienced an increase of 0.1 percentage points. The increase in the loss ratio is the result of higher utilization trends during the period. Operating expenses for the six months ended June 30, 2002, increased by $4.6 million, or 30.6%, when compared to the six months ended June 30, 2001. This increase is due to the segment's increased volume of business from the acquisition of the Southwest area effective October 1, 2001. The expense ratio increased by 1.1 percentage points when compared to the six months ended June 30, 2001. The increase in the expense ratio is 34 due to the fact that during this period the segment began the enrollment process of the new municipalities acquired effective July 1, 2002 (refer to the Recent Developments section). Therefore, the segment has incurred in expenses related to the enrollment process while earned premiums will not be received until July 2002. PROPERTY AND CASUALTY INSURANCE OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- PREMIUMS WRITTEN: Commercial multiperil $ 11,075 9,993 23,484 19,361 Dwelling 4,409 4,386 8,365 8,756 Auto physical damage 3,778 2,884 8,019 6,307 Commercial auto liability 2,253 2,058 4,961 4,226 Medical malpractice 1,123 970 2,087 1,726 All other 3,235 2,672 5,581 5,633 - -------------------------------------------------------------------------------------------------- Total premiums written 25,873 22,963 52,497 46,009 - -------------------------------------------------------------------------------------------------- Premiums ceded (11,560) (13,502) (16,519) (19,528) Change in unearned premiums 51 2,589 (5,526) 577 - -------------------------------------------------------------------------------------------------- NET PREMIUMS EARNED $ 14,364 12,050 30,452 27,058 - -------------------------------------------------------------------------------------------------- CLAIMS INCURRED $ 8,287 8,052 16,088 15,880 OPERATING EXPENSES 5,141 4,326 13,267 10,782 - -------------------------------------------------------------------------------------------------- TOTAL UNDERWRITING COSTS $ 13,428 12,378 29,355 26,662 - -------------------------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ 936 (328) 1,097 396 - -------------------------------------------------------------------------------------------------- LOSS RATIO 57.7% 66.8% 52.8% 58.7% EXPENSE RATIO 35.8% 35.9% 43.6% 39.8% - -------------------------------------------------------------------------------------------------- COMBINED RATIO 93.5% 102.7% 96.4% 98.5% - -------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 1,656 1,842 3,234 3,648 REALIZED GAIN (LOSS) ON SALE OF SECURITIES 71 (33) 16 38 UNREALIZED GAIN (LOSS) ON TRADING SECURITIES (833) 385 (668) (445) - -------------------------------------------------------------------------------------------------- TOTAL CONSOLIDATED NET INVESTMENT INCOME $ 894 2,194 2,582 3,241 - -------------------------------------------------------------------------------------------------- NET INCOME $ 1,411 1,687 3,143 3,302 - --------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Total premiums written for the three months ended June 30, 2002 increased by $2.9 million, or 12.7%, when compared to the three months ended June 30, 2001. This increase is reflected in the premiums written for the following lines of business: o The premiums written for the commercial multiperil line experienced an increase in premiums of $1.1 million, or 10.8%, during this period. This 35 increase is due to increases in premium rates as a result of the deregulation of the commercial lines. In addition, premium rates for this line were also increased in order to take into consideration the sharp increases in reinsurance costs, particularly in catastrophe related perils. o The premiums written for the auto physical damage line increased by $894 thousand, or 31.0%, during this period. This increase is concentrated in the commercial business and is also attributed to the deregulation of premium rates, mostly as a result of the elimination of credits or discounts in the commercial accounts. Approximately 60.0% of the increase in total premiums written is due to an increase in premium rates. The remaining 40.0% is attributed to an increase in the volume of business. Premiums ceded to reinsurers during the three months ended June 30, 2002 decreased by $1.9 million, or 14.4%, when compared to the same period for the prior year. This reduction is the result of the following: o The property and casualty segment has increased its risk retention of the commercial property portfolio. The increased retention, which decreases the amounts of premiums ceded to reinsurers, retains more premiums of this profitable line. o Catastrophe reinsurance increased by over 40% during this period. This increase is due to recent worldwide catastrophes. The property and casualty loss ratio experienced a decrease of 9.1 percentage points during the three months ended June 30, 2002 as compared to the same period of the prior year. This decrease is mostly the result of favorable underwriting results of the multiperil line of business (resulting from increases in premium rates as a consequence of deregulation) and increased retention of the segment's profitable lines of business. In addition, the segment's medical malpractice line of business experienced an improvement in its loss ratio as a result of premium rate increases of approximately 60% (which were effective during April 2001) and strict adherence to underwriting practices and reinsurance constraints. The operating expenses for the three months ended June 30, 2002 increased by $815 thousand, or 18.8%, when compared to the operating expenses for the three months ended June 30, 2001. The expense ratio, however, decreased by 0.1 percentage points during this period. The increase in operating expenses is the result of the decrease in reinsurance commission income from the proportional reinsurance treaties and the effect of the reinsurance portfolio transfer, together with an increase in the deferred acquisition costs, which reduce commission expense. 36 Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Total premiums written for the six months ended June 30, 2002 increased by $6.5 million, or 14.1%, when compared to the six months ended June 30, 2001. This increase is reflected in the premiums written for the following lines of business: o The premiums written for the commercial multiperil line experienced an increase in premiums of $4.1 million, or 21.3%, during this period. This increase is due to increases in premium rates as a result of the deregulation of the commercial lines. In addition, premium rates for this line were also increased in order to take into consideration the sharp increases in reinsurance costs, particularly in catastrophe related perils. o The premiums written for the auto physical damage line increased by $1.7 thousand, or 27.1%, during this period. This increase is concentrated in the commercial business and is also attributed to the deregulation of premium rates, mostly as a result of the elimination of credits or discounts in the commercial accounts. Approximately 70.0% of the increase in total premiums written is due to an increase in premium rates. The remaining 30.0% is attributed to an increase in the volume of business. Premiums ceded to reinsurers during the six months ended June 30, 2002 decreased by $3.0 million, or 15.4%, when compared to the same period for the prior year. This reduction is the result of the following situations: o During the reinsurance contracts renewal process, STS cancelled a commercial quota share treaty. This cancellation propitiated a reinsurance portfolio transfer that resulted in the re-acquisition of the business previously ceded, and accordingly, a reduction in premiums ceded. o The property and casualty segment has increased its risk retention of the commercial property portfolio. The increased retention, which decreases the amounts of premiums ceded to reinsurers, retains more premiums of this profitable line. o Catastrophe reinsurance increased by over 40% during this period. This increase is due to recent worldwide catastrophes. The property and casualty loss ratio experienced a decrease of 5.9 percentage points during the six months ended June 30, 2002 as compared to the same period of the prior year. This decrease is mostly the result of favorable underwriting results of the multiperil (resulting from increases in premium rates as a consequence of deregulation) and auto physical damage lines of business. In addition, the segment's medical malpractice line of business experienced an improvement in its loss ratio as a result of premium rate increases of approximately 60% (which were effective during April 2001) and strict adherence to underwriting practices and reinsurance constraints. 37 The operating expenses for the six months ended June 30, 2002 increased by $2.5 million, or 23.0%, when compared to the operating expenses for the six months ended June 30, 2001. The expense ratio increased by 3.8 percentage points during this period. The increase in operating expenses and the expense ratio is the result of decreasing reinsurance commission income from the proportional reinsurance treaties and the effect of the reinsurance portfolio transfer during the beginning of 2002. LIFE AND DISABILITY INSURANCE OPERATING RESULTS
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (dollar amounts in thousands) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------ NET EARNED PREMIUMS AND COMMISSION INCOME: Earned premiums $ 5,366 4,245 10,243 8,105 Earned premiums ceded (1,660) (1,199) (2,895) (2,465) - ------------------------------------------------------------------------------------------------ Net earned premiums 3,706 3,046 7,348 5,640 - ------------------------------------------------------------------------------------------------ Commission income on reinsurance 139 220 310 301 - ------------------------------------------------------------------------------------------------ TOTAL $ 3,845 3,266 7,658 5,941 - ------------------------------------------------------------------------------------------------ CLAIMS INCURRED $ 1,322 1,474 3,506 2,823 OPERATING EXPENSES 1,274 1,040 2,550 2,054 - ------------------------------------------------------------------------------------------------ TOTAL UNDERWRITING COSTS $ 2,596 2,514 6,056 4,877 - ------------------------------------------------------------------------------------------------ UNDERWRITING INCOME $ 1,249 752 1,602 1,064 - ------------------------------------------------------------------------------------------------ LOSS RATIO 34.4% 45.1% 45.8% 47.5% EXPENSE RATIO 33.1% 31.8% 33.3% 34.6% - ------------------------------------------------------------------------------------------------ COMBINED RATIO 67.5% 77.0% 79.1% 82.1% - ------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME $ 571 620 1,161 1,242 REALIZED GAIN (LOSS) ON SALE OF SECURITIES (8) - 62 30 - ------------------------------------------------------------------------------------------------ TOTAL NET INVESTMENT INCOME $ 563 620 1,223 1,272 - ------------------------------------------------------------------------------------------------ NET INCOME $ 1,523 1,052 2,287 1,733 - ------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Earned premiums for the three months ended June 30, 2002 increased by $1.1 million, or 26.4%, when compared to the three months ended June 30, 2001. This increase is mostly due to the segment's increased volume of business during this period. Total certificates in force in the group life and group disability business as of June 30, 2002 increased by 37,632 certificates, or 13.0%, when compared to the same period for last year. Premiums ceded to reinsurers during the three months ended June 30, 2002 reflect an increase of $461 thousand, or 38.4%, when compared to the same period of the prior year. The ratio of earned premiums ceded to earned premiums was 30.9% and 28.2% for the three months period ended June 30, 2002 and 2001, respectively. The increase of 2.7 percentage points in the earned premiums ceded to earned premiums ratio from one period to another is due to a change in the mix of business subscribed by the segment and 38 each business reinsurance policy. During this period in 2002, the segment subscribed more disability policies than in 2001. The disability insurance business has a higher cession percentage than the life insurance business. Claims incurred for the three months ended June 30, 2002 decreased by $152 thousand, or 10.3%, when compared to the three months ended June 30, 2001. The segment's loss ratio reflects a decrease of 10.7 percentage points during the same period. This decrease is due to the following: o During the three months ended June 30, 2002 and 2001, the segment recorded a release of incurred but not reported claims reserve of approximately $880 thousand and $225 thousand, respectively. This adjustment is the result of a better than expected development of this reserve. o In addition, during the year 2002, the segment has subscribed more disability policies than during 2001. The disability insurance business has a higher loss ratio than the life insurance business thus, contributing to the segment's increased loss ratio. The segment's expense ratio for the three months ended June 30, 2002 reflects an increase of 1.3 percentage points when compared to the same period of 2001. The increase of the expense ratio is mostly the result of an increase in the commission expense, payroll and payroll related expenses. The increase of these expenses is due to the increase in the volume of business noted during this period. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Earned premiums for the six months ended June 30, 2002 increased by $2.1 million, or 26.4%, when compared to the six months ended June 30, 2001. This increase is mostly due to the segment's increased volume of business during this period. Total certificates in force in the group life and group disability business as of June 30, 2002 increased by 42,094 certificates, or 15.0%, when compared to the same period for last year. Premiums ceded to reinsurers during the six months ended June 30, 2002 reflect an increase of $430 thousand, or 17.4%, when compared to the same period of the prior year. The ratio of earned premiums ceded to earned premiums was 28.3% and 30.4% for the six-month period ended June 30, 2002 and 2001, respectively. The decrease of 2.1 percentage points in the earned premiums ceded to earned premiums ratio from one period to another is due to the following: o During this period, there was a change in the estimated amount of disability premiums ceded to reinsurers. Effective January 2002, the segment estimated that approximately 61% of the premiums earned on the disability business qualified for reinsurance. In previous periods, the disability business reinsurance amount was estimated to be 75% of the disability premiums earned. The effect of this change in ceding percentage represents a decrease of approximately $101 thousand during this period. 39 o During the six months ended June 30, 2002, the segment subscribed more disability policies than during the same period of 2001. The disability insurance business has a higher cession percentage than the life insurance business. Claims incurred for the six months ended June 30, 2002 increased by $683 thousand, or 24.2%, when compared to the six months ended June 30, 2001. The segment's loss ratio reflects a decrease of 1.7 percentage points during the same period. This decrease is mostly attributed to the effect of the following: o During the six months ended June 30, 2002 and 2001 the segment recorded a release of the incurred but not reported claims reserve of approximately $880 thousand and $350 thousand, respectively. This adjustment is the result of a better than expected development of this reserve. o In addition, during the year 2002, the segment has subscribed more disability policies than during 2001. The disability insurance business has a higher loss ratio than the life insurance business, which contributes to the segment's increased loss ratio. The segment's expense ratio for the six months ended June 30, 2002 reflects a decrease of 1.3 percentage points when compared to the same period of 2001. This decrease in the expense ratio is mostly the result of cost containment measures in place, mitigated by an increase in the commission expense, payroll and payroll related expenses. The increase of these expenses is due to the increase in the volume of business noted during this period. LIQUIDITY AND CAPITAL RESOURCES Cash Flows The Corporation maintains good liquidity measures due to the quality of its assets, the predictability of its liabilities, and the duration of its contracts. The liquidity of the Corporation is primarily derived from the operating cash flows of its insurance subsidiaries. As of June 30, 2002 and December 31, 2001, the Corporation's cash and cash equivalents amounted to $80.0 million and $81.0 million, respectively. The sources of funds considered in meeting the objectives of the Corporation's operations include: cash provided from operations, maturities and sales of securities classified within the trading and available-for-sale portfolios, securities sold under repurchase agreements, and issuance of long and short-term debt. Management believes that the Corporation's net cash flows from operations are expected to sustain the operations for the next year and thereafter, as long as the operations continue showing positive results. The Corporation is continually monitoring premium rates and claims incurred to ascertain the sustainability of its net cash flows from 40 operations. In addition the Corporation has the ability to increase premium rates throughout the year in the policies' renewal process that is performed on a monthly basis. Cash Flows from Operations Most of the cash flows from operating activities are generated from the insurance subsidiaries. The basic components of the cash flows from operations are premium collections, claims payments less reinsurance premiums, and payment of operating expenses. Net cash flows provided by (used in) operating activities amounted to $26.3 million and $(3.7) million for the six months ended June 30, 2002 and 2001, respectively, an increase of $30.0 million. This increase in cash flows provided by operating activities is mainly attributed to the net effect of the following: increase in collections of premiums of $62.3 million, increase of $23.2 million in the amount of claims losses and benefits paid, and an increase of $9.1 million in the amount of cash paid to suppliers and employees. The increase in premium collections and in the amount of claims losses and benefits paid is mostly the result of the increased volume of business and increased premium rates of the operating segments. The amount of cash paid to suppliers and employees increased as a result of additional expenses generated from the acquisition of new business. This excess liquidity is available, among other things, to invest in high quality and diversified fixed income securities and, to a lesser degree, to invest in marketable equity securities. Cash Flows from Investing Activities The basic components of the cash flows from investing activities are derived from acquisitions and proceeds from investments in the available-for-sale and held-to-maturity portfolios and capital expenditures. The Corporation monitors the duration of its investment portfolio and executes the purchases and sales of these investments with the objective of having adequate funds available to satisfy its maturing liabilities. Net cash flows used in investing activities amounted to $21.5 million and $14.6 million for the six months ended June 30, 2002 and 2001, respectively. The cash flows used in investing activities during these periods are attributed to the investment of the excess cash generated from the operations. Total acquisition of investments exceeded the proceeds from investments sold or matured by $19.2 million and $12.1 million during the six months ended June 30, 2002 and 2001, respectively. 41 Cash Flows from Financing Activities Net cash flows (used in) provided by financing activities amounted to $(5.7) million and $5.4 million for the six months ended June 30, 2002 and 2001, respectively. The decrease of $11.1 million during this period is mainly due to the combined effect of the following: o The change in outstanding checks in excess of bank balances reflects a decrease $7.6 million during the six months ended June 30, 2002 compared to the six months ended June 30, 2001. The amount of checks in excess of bank balances represents a timing difference between the issuance of checks and the cash balance in the bank account at one point in time. o An increase in the amount of surrenders of individual retirement annuities of $2.3 million from the six months ended June 30, 2001 to the six months ended June 30, 2002. In addition, the amount of proceeds from deposits of individual retirement annuities decreased by $463 thousand during the same period. This fluctuation in the individual retirement accounts is attributed to the aggressive competition in the market for this product in Puerto Rico. o The payments of long-term debt increased from $1.2 million for the six months ended June 30, 2001 to $1.9 million for the six months ended June 30, 2002, an increase of $700 thousand. This increase is due to the scheduled principal payments of one of the credit agreements, whose repayment schedule was restructured effective August 31, 2001. Financing and Financing Capacity The Corporation has significant short-term liquidity supporting its businesses. It also has available short-term borrowings from time to time to address timing differences between cash receipts and disbursements. These short-term borrowings are mostly in the form of securities sold under repurchase agreements. As of June 30, 2002, the Corporation had $49 million in available credit under these agreements, although there is no balance due as of that date. In addition, the Corporation has two credit agreements with a commercial bank, FirstBank Puerto Rico. These credit agreements bear interest rates determined by the London Interbank Offered Rate (LIBOR) plus a margin specified by the commercial bank at the time of the agreement. As of June 30, 2002, the two credit agreements have an outstanding balance of $35.5 million and $18.2 million and an average annual interest rate of 4.8% and 3.3%, respectively. These credit agreements contain several restrictive covenants, including, but not limited to, restrictions to incur in additional indebtedness and the granting of certain liens, limitations on acquisitions and limitations on changes in control. As of June 30, 2002, management believes the Corporation is in compliance with these covenants. Further details regarding these credit agreements are incorporated by reference in Item 2. Financial Information of the Corporation's Form 10-A filed as of December 31, 2001. 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation is exposed to certain market risks that are inherent in the Corporation's financial instruments, which arise from transactions entered into in the normal course of business. The Corporation does not enter into derivative financial instrument transactions to manage or reduce market risk or for speculative purposes, but is subject to market risk on certain of its financial instruments. The Corporation has exposure to market risk mostly in its investment activities. For purposes of this disclosure, "market risk" is defined as the risk of loss resulting from changes in interest rates and equity prices. No material changes have occurred in the Corporation's exposure to financial market risks since December 31, 2001. A discussion of the Corporation's market risk as of December 31, 2001 is incorporated by reference in Item 2 of the Corporation's Form 10/A. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 24, 2002, Octavio Jordan, Agripino Lugo, Ramon Vidal and others filed a suit against TSM, TSI, STS, TCI and others in the Court of First Instance, San Juan Part, alleging, among other things, violations of some provisions of the Insurance Code, anti-monopolistic practices, unfair business practices, and damages in the amount of $12 million dollars. TSM, TSI, STS and TCI have answered the complaint and TSM and TSI filed counterclaims against the plaintiffs in the case. The plaintiffs have filed a motion to dismiss the counterclaims filed by TSM and TSI. This motion is still pending. This case is still in the preliminary stages of litigation. After a review of the complaint, it appears that many of the allegations brought by the plaintiffs have been resolved in favor of TSM and TSI in previous cases brought by the same plaintiffs in the U.S. District Court for the District of Puerto Rico and by most of the plaintiffs in the local courts. As of June 30, 2002, the Corporation was defendant in various lawsuits arising in the ordinary course of business. In the opinion of management and legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial condition and results of operations of the Corporation. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS TSM held its 2002 annual meeting of shareholders on April 28, 2002 (the "Meeting") where new members to TSM's Board of Directors were elected. The candidates for election at the meeting were Dr. Wilmer Rodriguez-Silva, Dr. Arturo Cordova-Lopez, Dr. Wilfredo Lopez-Hernandez, Dr. Manuel A. Marcial-Seoane and Ms. Adamina Soto-Martinez, CPA. Dr. Wilmer Rodriguez-Silva received 4,268 votes in favor, Dr. Arturo Cordova-Lopez received 4,316 votes in favor, Dr. Wilfredo Lopez-Hernandez received 43 4,292 votes in favor, Dr. Manuel A. Marcial-Seoane received 4,306 votes in favor and Ms. Adamina Soto-Martinez, CPA, received 4,403 votes in favor. All candidates were elected. In addition the members of the Board of Directors, appointed as of May 1, 2002, Mr. Ramon Ruiz-Comas, CPA, President and Chief Executive Officer (CEO) of the Corporation, to fill the vacancy left by Mr. Miguel Vazquez-Deynes, the former President and CEO of the Corporation, who retired on April 30, 2002. As a result of these events, as of May 1, 2002 the members of the Board of Directors were as follows: Dr. Fernando J. Ysern-Borras, Chairman of the Board Dr. Wilmer Rodriguez-Silva, Vice-Chairman of the Board Dr. Jesus Sanchez-Colon, Secretary of the Board Dr. Arturo Cordova-Lopez, Assistant Secretary of the Board Mr. Vicente J. Leon-Irizarry, CPA, Treasurer of the Board Ms. Sonia Gomez de Torres, CPA, Assistant Treasurer of the Board Mr. Ramon Ruiz-Comas, CPA, President and Chief Executive Officer Dr. Fernando L. Longo Dr. Wilfredo Lopez-Hernandez Dr. Valeriano Alicea-Cruz Dr. Porfirio E. Diaz-Torres Mr. Jose Arturo Alvarez-Gallardo Mr. Jose Davison-Lampon, Esq. Mr. Juan Jose Leon-Soto, Esq. Mr. Mario S. Belaval Mr. Hector Ledesma Mr. Manuel Suarez-Mendez, P.E. Dr. Manuel A. Marcial-Seoane Ms. Adamina Soto-Martinez, CPA In addition to the election of directors, five resolutions were presented to the shareholders for their approval. Summaries of said resolutions and the voting results are as follows: Resolution 1 - Resolution to ratify the shareholders interest in continuing TSI's tax treatment as a not-for-profit entity, pursuant to the tax ruling issued by the Secretary of the Treasury of Puerto Rico. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 3,844 votes in favor, 345 votes against and 75 abstentions. This Resolution received the required votes and it was approved. Resolution 2 - Resolution to amend Article 8 of the Articles of Incorporation of the Corporation and Article 4-2 of Chapter 4 of the By-Laws of the Corporation in order to allow shareholders to transfer their shares to their spouses or heirs when they are physicians or dentists, without exceeding the established limit of twenty-one (21) shares 44 per shareholder. The adoption of this resolution required the affirmative vote of a two third majority of the common stock issued and outstanding. This Resolution received 3,863 votes in favor, 402 votes against and 90 abstentions. This Resolution did not receive the required votes and it was not approved. Resolution 3 - Resolution to amend Section C of Article 8-11 of Chapter 8 of the By-Laws of the Corporation in order to allow the Chairman of the Finance Committee to be a member of the Audit Committee and to expand the powers of the Audit Committee. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 4,118 votes in favor, 143 votes against and 64 abstentions. The Resolution received the required votes and it was approved. Resolution 4 - Resolution to amend Section F of Article 8-11 of Chapter 8 of the By-Laws of the Corporation in order to clarify that the President of the Corporation cannot be a member of the Audit Committee. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 4,161 votes in favor, 107 votes against and 65 abstentions. The Resolution received the required votes and it was approved. Resolution 5 - Resolution to analyze the medical malpractice insurance situation in Puerto Rico and inform the results of this analysis to the shareholders and TSI's participants at least every six months and to present a report of this situation in the next annual meeting of shareholders. The adoption of this resolution required the affirmative vote of the majority of the common stock issued and outstanding present at the Meeting. This Resolution received 4,211 votes in favor, 66 votes against and 63 abstentions. The Resolution received the required votes and it was approved. ITEM 5. OTHER INFORMATION Shareholders' proposals intended to be presented at the 2003 Annual Meeting of Shareholders must be received by the Corporation's Secretary, at its principal executive offices, located at the sixth floor of 1441 F.D. Roosevelt Avenue, San Juan, Puerto Rico, 00920, or by mail at the PO Box 363628, San Juan, Puerto Rico, 00936-3628, not later than November 27, 2002 for inclusion in the Corporation's Proxy Statement and Form of Proxy relating to the 2003 Annual Meeting of Shareholders. 45 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 3(i) Articles of incorporation of TSM Exhibit 3 (ii) By-laws of TSM Exhibit 10.1 Puerto Rico Health Insurance Contract for the Metro-North Region Exhibit 10.2 Puerto Rico Health Insurance Contract for the North Region Exhibit 10.3 Puerto Rico Health Insurance Contract for the South-West Region Exhibit 10.4 Employment Contract with Mr. Ramon Ruiz Comas, CPA Exhibit 10.5 Employment Contract with Ms. Socorro Rivas, CPA Exhibit 11 Statement re computation of per share earnings; an exhibit describing the computation of the earnings per share for the three months and six months ended June 30, 2002 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Form 10-Q. Exhibit 12 Statements re computation of ratios; an exhibit describing the computation of the loss ratio, expense ratio and combined ratio for the three months and six months ended June 30, 2002 has been omitted as the detail necessary to determine the computation of earnings per share can be clearly determined from the material contained in Part I of this Form 10-Q.
All other exhibits for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Management represents that Exhibits 3(i), 3(ii), 10.4 and 10.5 are fair and accurate translations of the original documents that are in Spanish. (b) Reports on Form 8-K: On May 3, 2002, the Corporation filed a Current Report on Form 8-K, which indicated the new members elected to the Board of Directors during the Annual Stockholders' Meeting held on April 28, 2002. This Current Report also indicated the standing members of the Board of Directors and the designation, effective May 1, 2002, of Mr. Ramon Ruiz Comas, CPA as the new president and Chief Executive Officer of the Corporation. 46 SIGNATURES Pursuant to the requirements of the United States Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRIPLE-S MANAGEMENT CORPORATION Registrant Date: August 14, 2002 By: /s/ Ramon M. Ruiz-Comas -------------------------- Ramon M. Ruiz-Comas President and Chief Executive Officer Date: August 14, 2002 By: /s/ Juan J. Roman ----------------------------------- Juan J. Roman Vice President of Finance and Chief Financial Officer 47 EX-3.(I) 3 g77580exv3wxiy.txt ARTICLES OF INCORPORATION EXHIBIT 3(i) ARTICLES OF INCORPORATION OF Triple-S Management Corporation FIRST: The name of this corporation is TRIPLE-S MANAGEMENT CORPORATION. SECOND: The physical address of the designated office of the Corporation is 1141 F.D. Roosevelt Avenue, Caparra, Puerto Rico. THIRD: The name of the Corporation's registered agent will be the Corporation itself, Triple-S Management Corporation. FOURTH: The nature of the business and the object and purposes proposed to be transacted, promoted and carried on for pecuniary profit, in the same manner as done by any natural person in any part of the world, is as follows: A. The Corporation shall be the stock holding company for the entities engaged in the business of insurance, businesses related to insurance, and other types of business firms and other activities. B. The Corporation will hold the following powers: 1. Acquire through purchase, barter or in any other way real or personal property of any kind, necessary or convenient in achieving the purposes of the Corporation, to the extent permitted by law. 2. Possess as owner, undersign, purchase or in another way acquire or sell, transfer, pledge, exchange, or in any other way dispose of the total or any part of the capital stock, bonds, or any other obligations issued or created by any person, association, society, firm, syndicate, - -1- corporation, government or governmental subdivision, public or gubernatorial authorities, or other entities, and, while the owner of the same, exercise all rights, powers, and privileges of an owner. 3. Formulate, promote or undertake, or participate in the organization, operation, reorganization, consolidation, fusion or liquidation of corporations, associations, firms or other business units, foreign or domestic; and subscribe, acquire, invest in, have or make use of its securities or obligations. 4. Issue capital stock of any nature or class, in any amount; issue capital stock, bonds or other obligations of any nature or class in exchange for cash, real or personal property, for personal services rendered to the Corporation, or in exchange for leases, franchises, rights, privileges, other stocks, bonds and obligations from any other corporation, person or firm or for any other property which this Corporation is authorized to possess. 5. Acquire the surplus value, rights, property and assets, tangible or intangible, of any person, firm, association, or corporation assuming its obligations, paying for the same, be it in cash, in stocks, in bonds, or by assuming the total or a part of the obligations of the cessor; retain or in any way make use of the total or any part of the property acquired in this way, manage in any legal way the total or any part of any business acquired in this way and exercise all the powers necessary and convenient in and for the management of said business. - -2- 6. Lend funds, offer advanced payments and extend credit to any other corporation, firm, association or person, under the guarantees deemed convenient by the Board of Directors, and, to the extent permitted by law, guarantee the payment and conformance of any other corporation, firm, association or person of any financial or contractual obligation, or the payment of dividends by any other corporation. 7. Incur in monetary loans for any corporate purpose, and without limits to the amount, liberate, make, accept, endorse, guarantee, execute, and issue promissory notes, drafts, letters of exchange, bonds, and other negotiable and transferable evidence of debt, be they guaranteed by mortgage, security, or in another way, and guarantee payment of any of the same through securities, mortgage or another method of guarantee over the whole or part of the corporation's property, to the extent permitted by law. 8. Purchase or in another way acquire, have, barter, reissue, sell and transfer the capital stock to the extent permitted by law. Subject to: the exceptions stated here and conditioned by its funds or property not being used to purchase its own stock when said purchase could result in diminishing its capital, and subject also to the condition that the capital stock it possesses will not have the right to vote or to receive dividends. 9. To have one or more offices in or outside the Commonwealth of Puerto Rico. - -3- 10. To do all the activities required or proper in order to qualify and engage in business according to the laws of any state in the United States of America, its territories, districts or possessions, or any foreign country. 11. To do any other act or thing and undertake any other business which is incidental to, convenient, expedient, necessary or legal in fulfilling any and all purposes and objectives specified here, with no restrictions as to place or amount; and to do any and all things provided here with the same reach and extension as could be done by natural persons within the law. The clauses above shall be interpreted as powers, objectives and purposes, and the statements expressed in each clause will not be limited by reference or inference because of the contents of any other clause, unless stated to the contrary here, and the same shall be considered separate objects. FIFTH: The Corporation's authorized capital will be FIVE HUNDRED THOUSAND DOLLARS ($500,000) divided in TWELVE THOUSAND FIVE HUNDRED (12,500) common stocks with a FORTY DOLLAR ($40) par value. SIXTH: Only physicians and dentists may be shareholders in the Corporation. No person may own more than 21 voting shares, nor 5% or more of the Corporation's voting shares issued and in circulation. However, organizations such as hospitals, laboratories, and the College of Dental Surgeons of Puerto Rico, who had originally acquired shares of Triple-S, Inc., can convert them into shares of this Corporation. These - -4- are: College of Dental Surgeons of Puerto Rico, Bella Vista Hospital, Menonite Hospital, and the Central Urological Society. SEVENTH: At every Assembly, each shareholder shall be entitled to one (1) vote per share of capital stock registered in his/her name in the books of the Corporation. Accumulated votes as discussed in the Puerto Rico General Corporations Law or any other law, regulation or provision are expressly prohibited. EIGHTH: The Corporation will have the right of first refusal in the event of a sale, donation or other transfer or cession of the shares of the Corporation. Any shareholder who wishes to sell, donate, or in any other way transfer or cede his shares, must first offer his/her shares to the Corporation in writing. The Corporation may then purchase said shares from the shareholder for the same price he/she paid for them. However, in the event that said shares were donated or inherited through a will, or in any other way, to a person who is 1) a descendant of the stockholder and 2) a physician or a dentist, then said person has the right to hold up to a maximum 21 shares. NINTH: The Board of Directors of the Corporation may not authorize the sale of any shares from its subsidiary, Triple-S, Inc., without prior approval of three fourths (3/4) of the members of the Board of Directors of a resolution to that effect. If said resolution is approved, it will be submitted to the shareholders in the Corporation for their consideration during a Special Assembly convened for this purpose. The resolution to recommend the sale of Triple-S, Inc. shares must be approved by a vote in favor from two thirds (2/3) of the Corporation's voting shares issued in the special assembly. Share of Triple-S, Inc. may not be sold unless these requirements have been met. TENTH: The names and addresses of each of the Incorporators are as follows: - -5- 1. Dr. Crispulo Rivera-Ofray 2. Dr. Angel W. Hernandez-Colon 3. Dr. Carlos Montalvo 4. Dr. Francisco Somoza 5. Ms. Carole Acosta 6. Jose Juan Teruel-Vicens, CPA 7. Juan M. Diaz-Morales, Eng. 8. Dr. Jaime Velasco 9. Mr. Miguel A. Vazquez-Deynes 10. Dr. Luis R. Ruiz-Rivera 11. Dr. Belisario Matta 12. Esteban Rodriguez-Maduro, Esq. 13. Sonia Gomez de Torres, CPA 14. Juan Jose Leon-Soto, Esq. 15. Isidro J. Ferrer, Eng. 16. Dr. Gerardo Martorell 17. Dr. Emigdio Buonomo 18. Mr. Augusto Amato 19. Vacant* * There currently exists a vacancy due to the recent death of one of its directors. The Incorporators' physical and postal address is as follows: 1441 F.D. Roosevelt Ave., San Juan, Puerto Rico 00920 Box 363628, San Juan, Puerto Rico 00936-3628 - -6- ELEVENTH: A. The powers in this Corporation are to be exercised by the 19 members of the Board of Directors. B. The Board of Directors is divided into three groups, plus the President of the Corporation. The first is made up of five (5) directors, the second group is composed of six (6) directors, and the third group is made up of seven (7) directors. The terms of the groups will be placed at intervals, therefore, the term of the first group of directors will end in the Shareholder's Annual Assembly in the year 2005; the term of the second group of directors will end in the Shareholder's Annual Assembly in the year 2006 and the term of the third group of directors will end in the Shareholder's Annual Assembly in the year 2007. C. The term each group member, subsequently elected at the Shareholder's Annual Assemblies, will occupy at his elected hold office will be three (3) years. Every director will continue with his duties until his successor is duly elected and in possession of his office. No Director, except the Corporation's President, while fulfilling his duties, may be elected for more than three (3) terms or serve for more than nine (9) years. The President of the Corporation, who is also a member of the Board of Directors, is excluded from the before mentioned groups. d. In order to achieve uniformity in the composition of the number of directors for each group, as stated herein, in April 2001 a director will be elected for one year's term only, from April 2001 to April 2002. With the - -7- sole purpose of following the group intervals, the requirement of three (3) terms or nine (9) years may be obviated in order for a person to serve this single one-year term. In the case of the first members of the Board of Directors, the time computation will take into account the period in which the director fulfilled his duties in Triple-S, Inc. until the fusion with Triple-S Health. D. The first Board of Directors is composed of the following individuals, who will occupy their offices until the date stated here: 1. Dr. Crispulo Rivera-Ofray Chairman 2. Dr. Angel W. Hernandez-Colon Vice-Chairman 3. Dr. Carlos Montalvo Secretary 4. Dr. Francisco Somoza Assistant-Secretary 5. Ms. Carole Acosta Treasurer 6. Jose Juan Teruel-Vicens, CPA Assistant-Treasurer 7. Juan M. Diaz-Morales, Eng. 8. Dr. Jaime Velasco 9. Mr. Miguel A. Vazquez-Deynes - -8- 10. Dr. Luis R. Ruiz-Rivera 11. Dr. Belisario Matta 12. Atty. Esteban Rodriguez-Maduro 13. Sonia Gomez de Torres, CPA 14. Juan Jose Leon Soto, Esq. 15. Isidro J. Ferrer, Eng. 16. Dr. Gerardo Martorell 17. Dr. Emigdio Buonomo 18. Mr. Augusto Amato 19. Vacant* * There is currently a vacant spot due to the recent death of a director. TWELFTH: The Corporation will exist in perpetuity. THIRTEENTH: A. To amend these Articles of Incorporation, an affirmative vote of no less than 2/3 of the voting shares issued and in circulation, except that in Article FIFTH, which establishes the authorized capital of the Corporation, may be amended through an affirmative vote by a majority of the Corporation's voting shares issued and in circulation, and the Articles SIXTH, SEVENTH AND ELEVENTH, Item "B", can only be amended through an affirmative vote of - -9- three fourths (3/4) of the Corporation's voting shares issued and in circulation. Despite what is stated in Chapter 9 (Sales of Assets; Dissolution) and Chapter 10 (Fusion or Consolidation) of the General Corporations Law of 1995, as amended, the approval of the transactions provided for therein shall be done through an affirmative vote of two thirds (2/3) of the Corporation's voting shares issued and in circulation. Registered: October 9, 1996 Reviewed: December 7, 1998 - -10- EX-3.(II) 4 g77580exv3wxiiy.txt BY-LAWS EXHIBIT 3(ii) TRIPLE-S MANAGEMENT CORPORATION BY-LAWS CHAPTER 1 1-1 The Shareholders of Triple-S Management Corporation (hereinafter referred to the "Corporation") adopt these corporate bylaws which will regulate the Corporation's proceedings and will rule the administration of its business. 1-2 The Bylaws approved herein shall be submitted to the shareholders, who may adopt, amend or repeal them. CHAPTER 2. - BOARD OF DIRECTORS AND OFFICERS The Board of Directors is made up of nineteen members. CHAPTER 3. - CAPITAL IN STOCKS 3-1 The Corporation may issue up to twelve thousand five hundred (12,500) shares of common stock with a par value of FORTY DOLLARS ($40). 3-2 The Corporation will use a circular seal measuring 1- 7/8 in diameter with the name Triple-S Management Corporation around its circumference. CHAPTER 4. - ON THE STOCKS The Incorporators declare and agree, and so establish in these Bylaws, that the following provisions are established with the purpose of creating, defining, limiting and managing the shareholder's rights and privileges: 4-1 SALE OF STOCKS A. No person may own more than 21 voting shares, nor 5% or more of the Corporation's voting shares issued and in circulation. B. The sale of shares shall be limited exclusively to physicians and dentists. However, organizations such as hospitals, laboratories, and the College of Dental Surgeons of Puerto Rico, who had originally acquired shares of Triple-S, Inc., may continue as stockholders of Triple-S Management Corporation. In addition, the members of the Board of Directors who represent the community may own shares as long as they remain on the Board. C. The members of the Board of Directors who represent the community, as long as they remain on the Board, will receive a share, free of charge, in order to qualify as a Director of the Corporation. Said community representatives shall return the qualifying share to the Corporation when they terminate their duties as Directors of the Corporation. 4-2 The Corporation will have the right of first refusal in the event of a sale, donation or other transfer or cession of the shares of the Corporation. Any shareholder who wishes to sell, donate, or in any other way transfer or cede his shares, must first offer the same in writing to the Corporation. The Corporation shall then purchase said shares from the shareholder for the same price he/she paid for them. However, in the event that the shares were donated or inherited through a will, or in any other way, to a person who is 1) a descendant of the shareholder and 2) a physician or a dentist, then said person shall have the right to hold up to a maximum 21 shares. 4-3 STOCKHOLDER LISTING The Secretary of the Corporation shall keep, or ensure the keeping of, a complete and exact register, in alphabetical order, of all the shareholders, including their address and, the number of votes each Shareholder holds, in the offices of the Corporation. Said register shall be readily available and may be photocopied during working hours, and shall be available for inspection by any Shareholder, particularly, ten (10) days before a Shareholders' Assembly, and when any other voting shareholder assembly is being held. The Corporation's register will be the only acceptable evidence to determine the shareholders who have the right to inspect the Corporation's Shareholders Register, Corporate books, and to vote in person or by proxy during any meeting or voting shareholders' assembly. CHAPTER 5. - ASSEMBLIES 5-1 The Ordinary Annual Assembly of the shareholders of Triple-S Management Corporation will be held at the Corporation's main office or in any other place in Puerto Rico which is determined by the Board of Directors from time to time, in the place designated in the Notice, at 9:00 AM, on the last Sunday in April of each year. The Assembly will be held to fill any vacancies in the Board of Directors, receive and consider reports from officials regarding the business, and resolve any other matters that are properly submitted for consideration. However, neither the Articles of Incorporation nor the By-laws may be amended unless the voting Shareholders have been previously notified that among the matters that are being considered are amendments to the Articles of Incorporation and By-laws. 5-2 EXTRAORDINARY ASSEMBLIES The Chairman of the Board of Directors, a majority of the Board of Directors, or Shareholders who hold 25% of the registered voting shares can call special shareholders' meetings to be held at the place and time established by the notice, and for the purposes expressed therein. The meetings (special shareholders' assemblies) should be notified no less than twenty (20) days or more than sixty (60) days beforehand. The special meetings must be notified in the same manner as ordinary assemblies. 5-3 NOTICE OF MEETINGS The notices for every annual meeting of the Shareholders shall be given to each Shareholder entitled to vote, by delivering the same personally, or by mailing such notice to him, at his address as it appears on the records of the Corporation during a period of no less than twenty (20) and no more than sixty (60) days prior to the meeting. Along with this notice, all voting Shareholders will receive copies of the Corporation's and its subsidiary's consolidated financial statements. The notice shall designate the place and the date the meeting will be held, and will announce the matter or matters to be considered during the Assembly. 5-4 NOTICE-SUBSTITUTE If the directors and officers of the Corporation should refrain from calling and celebrating, at its designated time, an Ordinary Annual Assembly, five shareholders may call for and celebrate said Assembly as required by these By-laws. In case a necessary official did not attend said Assembly, one of the voting shareholders present may be elected to substitute, provisionally, said official. Decisions made at the Assembly will be valid, as if made at an Ordinary Annual Assembly, and will be registered in the corporate books of the Corporation. 5-5 QUORUM Notice to attend ordinary and special meetings will be received by all shareholders whose names appear in the Corporate register, twenty (20) days prior to the meeting date. At the annual ordinary of extraordinary meetings, the presence of a majority of the voting shares outstanding, in person or by proxy, shall be necessary to constitute a quorum; and it is provided that if at the appointed time there is no quorum, the assembly will wait a half hour, after which one third (1/3) of the voting shares outstanding will constitute quorum in that meeting. If quorum is not reached, a new Assembly shall be scheduled thirty (30) days hence, where one third (1/3) of the voting shares outstanding will constitute quorum in that meeting. If quorum is not reached pursuant to the regulation, as many new Assemblies as necessary may be scheduled, with the same third (1/3) requirement. CHAPTER 6. - VOTING RIGHTS 6-1 Each shareholder shall, at every Assembly, be entitled to one (1) vote per share of capital stock registered in his name in the books of the Corporation. The vote may be in person or, if absent, by proxy or by certified mail. No vote sent by mail or by proxy will be valid unless issued with the shareholder's signature or his authorized representative's signature (through a power of attorney), and it is received before the Assembly begins. No proxy will be valid after its expiration date. 6-2 ACCUMULATED VOTE- PROHIBITION Accumulated votes as discussed in the Puerto Rico General Corporations Law or any other law, regulation or provision are expressly prohibited. 6-3 Any agent designated by a registered shareholder must be a participating shareholder, a physician or a dentist. CHAPTER 7.-ELECTIONS 7-1 BOARD OF DIRECTORS- ELECTIONS A. The election of members to the Board of Directors will take place by ballot during the duly notified shareholders Annual Ordinary Assembly. The members elected each year will be those necessary to complete the nineteen (19) Directors. The directors will be elected by a majority of votes of the shares issued and outstanding with rights to vote for directors and who are represented in person or by proxy in the Assembly. B. The Board of Directors is divided into three groups, plus the President of the Corporation. The first is made up of five (5) directors, the second group is composed of six (6) directors, and the third group is made up of seven (7) directors. The terms of the groups will be placed at intervals, therefore, the term of the first group of directors will end in the Shareholder's Annual Assembly in the year 2005; the term of the second group of directors will end in the Shareholder's Annual Assembly in the year 2006 and the term of the third group of directors will end in the Shareholder's Annual Assembly in the year 2007. C. The term each group member, subsequently elected at the Shareholder's Annual Assemblies, will occupy at his elected hold office will be three (3) years. Every director will continue with his duties until his successor is duly elected and in possession of his office. No Director, except the Corporation's President, while fulfilling his duties, may be elected for more than three (3) terms or serve for more than nine (9) years. The President of the Corporation, who is also a member of the Board of Directors, is excluded from the before mentioned groups. In order to achieve uniformity in the composition of the number of directors for each group, as stated herein, in April 2001 a director will be elected for one year's term only, from April 2001 to April 2002. With the sole purpose of following the group intervals, the requirement of three (3) terms or nine (9) years may be obviated in order for a person to serve this single one-year term. In the case of the first members of the Board of Directors, the time computation will take into account the period in which the director fulfilled his duties in Triple-S, Inc. until the fusion with Triple-S Health. 7-2 DIRECTOR'S REQUIREMENTS In order to be a Director in the Corporation, every person must at least meet the following requirements: A. Never have declared fraudulent bankruptcy, voluntary or involuntary, nor granted a fraudulent general cession in benefit of creditors. B. Should never have been convicted of a moral deprivation crime. C. Should not be a director or officer of a bank, a savings and loans association, an institution engaged in the business of receiving deposits and lending money in Puerto Rico or any entity or corporation in which any of the institutions referred to herein have a direct or indirect substantial economic interest or the relationship of owner, subsidiary or affiliate or any entity or corporation which owns, directly or indirectly, substantial economic interest in any of the said institutions, except that the person can fulfill his duties as director or officer of a financial holding company or a depository institution with whom an insurance company affiliated to the Corporation has a relationship, directly or indirectly, as owner, subsidiary or affiliate. D. In the case of directors who are physicians or dentists, they should be active participants in Triple-S, Inc., and have been so for at least two (2) years prior to their nomination as directors in the Corporation. CHAPTER 8. - DIRECTORS 8-1 BOARD OF DIRECTORS - POWERS The Board of Directors will be composed of nineteen (19) members elected by the Assembly, or by the Board of Directors in case of vacancies, and will exercise the Corporation's powers and the management of its business in accordance with the General Corporations Law, the Articles of Incorporation and the By-laws of the Corporation, as well as the guidelines issued by the shareholders of the Corporation. The power of the Directors to manage the Corporation's affairs may only be exercised when they act as a Board, duly constituted, as a committee of the Board or by express delegation from the Board. In order to function as a Director, it is required that you are a shareholder of the Corporation. The decisions taken by a majority of the Directors present after quorum is constituted in the meeting of the Board duly constituted will be received as actions of the Board of Directors and will be complied with in the same manner as if they were taken by all of the directors of the Board. Of the nineteen (19) members of the Board of Directors, ten (10) must be representatives of the community and/or subscriptors and not medical doctors or dentists. The Board must celebrate at least one annual ordinary meeting before the Annual Shareholders' Assembly and any ordinary and extraordinary meetings the Board determines to be necessary. The Board will meet the last Wednesday of the month, unless special circumstances force the President to change the day, and the Secretary will notify the Directors in writing the date of said meetings. The Chairman of the Board of Directors may convene extraordinary meetings of the Board to be held at the place, date and time established in the notice to the meeting and for the purposes expressed therein. In addition, the Chairman will have the obligation to convene the Board of Directors when requested by five (5) members of the Board of Directors, ten (10) days after such request is made. Quorum will constitute a majority of the total number of directors. 8-2 VACANCIES IN THE BOARD - PROCEDURE TO FILL THE VACANCIES The vacancies of the Board due to resignation, death, disability which impedes the execution of their functions, or destitution of any director before the expiration of their term, will be filled by the vote of the majority of the Directors present in a Board meeting, convened for these purposes, after the quorum is constituted. The person elected to fill the vacancy will serve the rest of the term of the person who is being substituted and may be reelected for two (2) additional successive terms. 8-3 ACTS OF THE BOARD OF DIRECTORS - REFERENDUM Except for a provision stating the contrary in the Articles of Incorporation or the General Corporations Law, any action or agreement required or permitted to be taken in any meeting of the Board of Directors or any of its committees, may be executed without the need of a meeting if all of the members of the Board of Directors or the Committee, as the case may be, approve of it in writing and said written approval or approvals are submitted and incorporated in the minutes of the meetings of the Board of Directors or the Committee. 8-4 OFFICIALS The officials will be a Chairman, a Vice Chairman, a Treasurer, a Sub Treasurer, and Secretary and a Sub Secretary. The Board of Directors will elect these officials, which will meet the requirements, will have the powers and duties and will serve during the terms established herein. 8-5 THE CHAIRMAN The Chairman of the Board of Directors will preside over the shareholders' assemblies, the meeting of the Board of Directors and will assume all of the duties and faculties conferred by the Board of Directors. Among his/her functions are the following: A. Represent the Corporation in the name of the Board of Directors in those official acts which he/she will have to attend and will maintain the relationships with the shareholders of the Corporation and the governmental authorities as part of his/her duties. B. Preside over the Executive Committee of the Board of Directors. C. Name the Chairman of the Committees of the Board of Directors, except the Chairman of the Finance Committee, which will be presided by the Treasurer of the Board of Directors because of the nature of his duties. D. Name the members to the Committees of the Board of Directors. E. Will be a member of all the committees of the Board of Directors. F. Will be a member of the Board of Directors of the subsidiary corporations to this Corporation. G. Recommend to the Board of Directors for their consideration, the creation of committees which are not expressly recognized by the By-laws and Regulations, according to the needs of the Corporation. H. Inform to the Board of Directors about his/her official affairs in virtue of his/her duties. I. Assume all other duties and faculties that from time to time are conferred by the Board of Directors. J. The Chairman may convene any extraordinary meetings of the Board of Directors that he/she may deem necessary. 8-6 THE VICE CHAIRMAN In the absence of the Chairman, or if the Chairman is unable to act as such, the Vice Chairman will assume the duties and faculties of the Chairman. 8-7 THE SECRETARY The Secretary will take an oath to loyally carry out the duties of his office and will make sure that the minute books of the Corporation are duly maintained and will note or cause to be noted the actions of the Board of Directors and the Shareholders Assemblies and the voting therein. He/she will issue the necessary certificates and will be responsible for the corporate seal. He/she will be responsible for making sure that the registry of all of the shareholders and the Articles of Incorporation, the By-Laws and the certified Regulations are safely kept at the principal offices of the Corporation. In addition, he/she will certify the official acts of the Board of Directors. 8-8 THE ASSISTANT SECRETARY The Assistant Secretary will assume, in the absence or if the Secretary is unable to perform his/her duties, all of the duties and faculties conferred upon the Secretary. 8-9 THE TREASURER The Treasurer will make sure that the securities and the money of the Corporation is duly received and guarded, and that the disbursements are only made according to duly approved and certified resolutions of the Board of Directors. He/she will make sure that the investment policies of the Corporation observe the security, liquidity and yield criteria, in that order. He/she will preside over the Finance Committee of the Board. In addition, the Treasurer will make sure that the accounting books and registers are located in the principal offices of the Corporation. The Corporation's accounting will follow general accepted accounting principles. 8-10 THE ASSISTANT TREASURER The Assistant Treasurer will assume, in the absence or if the Treasurer is unable to perform his/her duties, all of the duties and faculties conferred upon the Treasurer. 8-11 COMMITTEES - NAMING OF ITS MEMBERS The Chairman of the Board of Directors will name a President and the members of the following permanent committees: A. Executive Committee The following members of the Board of Directors will be members of this Committee: 1. Chairman of the Board of Directors 2. Vice Chairman 3. Secretary 4. Treasurer In addition, the Chairman of the Board of Directors will name three (3) members of the Board of Directors to this Committee. All of its members will have the right to a voice and a vote. The decisions of the Committee will be by a majority of the members present at each meeting. This Committee will meet not less that once every three months and/or by a petition from the Chairman, on the day and time determined by the Chairman. The duties of the Committee will be: 1. Review, evaluate and pass judgment over every plan, project or proposal which proposes any changes or affects the policies and rules established for the Corporation and that are in force and effect at a determined time. 2. Review and approve the budget for the Corporation's operational expenses, including any proposed changed to the already approved and effective budget. 3. Review and approve the salaries, compensation plans, including bonuses and other incentives, of the officials and principal employees of the Corporation. 4. Review and approve, subject to the ratification of the Board of Directors, any significant contract, loan or other financial transaction or other transaction of importance to the Corporation. 5. Those functions and powers that are not established herein will be exercised by the Board of Directors as a whole, provided, however, that the Board of Directors may, through a resolution duly adopted, delegate said power to the Executive Committee in order to take action over a determined issue in a determined moment of time. 6. Not withstanding item (5) above, the faculties of destitution or election of officials, amending the Certificate of Incorporation, approving mergers or consolidations, make recommendations to the shareholders regarding the sale, lease or exchange of all or a substantial part of the property or assets of the Corporation, approve resolutions that recommend the liquidation or the revocation of the same, amending the by-laws or authorize the issuance of capital stock, or create additional subsidiaries, cannot be delegated ever to the Executive Committee. 7. All of the decisions taken by the Executive Committee will be presented to the Board of Directors as a whole in order to be ratified, modified or rejected, in the next Board meeting. B. Finance Committee The Treasurer of the Board of Directors will head this Committee. The Chairman of the Board of Directors will name at least four (4) members of the Board of Directors to this Committee, who will meet no less than once every two months. The decisions taken by this Committee will be by a majority of the members present at each meeting. The duties of this Committee will be: 1. Inspect all of the financial activities of the Corporation. 2. Guide the Board of Directors in all that is related to the finances of the Corporation. 3. Study all recommended changes to the economic structure of the Corporation. 4. Evaluate financial procedures of the Corporation. C. Audit Committee The president of the Board of Directors will name the President of this Committee, who will not be the treasurer or the assistant treasurer of the corporation and at least six (6) additional members of the Board of Directors, and who will meet no less than once every three months, and as many times as necessary. The decisions of this Committee will be by a majority of the members present at each meeting. The duties of this Committee will be: 1. Review and make sure that the corporation and its subsidiaries have an adequate internal controls structure to safeguard the assets, generate reliable financial information y assure compliance with applicable laws and regulations. 2. Review the activities performed by the Internal Auditing Office of the Corporation. 3. Select, for the final determination of the Board of Directors, the external auditing firm of the Corporation. 4. Review the results of the audits performed by the regulatory agencies. 5. Review consolidated financial reports of the Corporation to be issued or filed with regulatory agencies. 6. Review and judge the annual report prepared by the external auditors. D. Resolutions and Regulations Committee The Chairman of the Board of Directors will name the President of this Committee and at least four (4) additional members of the Board of Directors, who will meet at least once a year, and as many times as necessary. The decisions of this Committee will be by a majority of the members present at each meeting. The duties of this Committee will be: 1. Review the Articles and By-laws of the Corporation and propose and prepare those resolutions to amend the Articles and By-laws or any other resolution related with other institutional issue. 2. Evaluate and judge all resolutions that are presented by the shareholders at the shareholders assemblies. 3. Follow the status of all resolutions approved by the shareholders at the Shareholders Assemblies. E. Nominations Committee The Chairman of the Board of Directors will name the President of this Committee and at least four (4) additional members of the Board of Directors, who will meet at least once a year, and as many times as necessary. The decisions of this Committee will be by a majority of the members present at each meeting. The duties of this Committee will be: 1. Recommend to the Board of Directors any ideal candidate that can fill any vacancy in the Board of Directors. 2. Establish and periodically review the qualities that any candidate to be named to the Board of Directors should have. 3. Recommend to the Board of Directors ideal candidates to occupy the positions of President of the Corporation and the Director of the Internal Audit Office, when said positions are vacant. F. General for all Committees 1. All committees will keep records of their meetings. A copy of these will be sent to all of the members of the Board of Directors through the secretary of the Board of Directors. 2. The President of each committee may organize extraordinary meetings, according to the each particular circumstance. The President of each Committee will notify in writing with no less than five (5) days before the ordinary meetings. 3. The President of the Board of Directors may, from time to time, solicit the advice of any of the committees of the Board, as needed. 4. The President of the Corporation will be a member of every Committee, except the auditing committee. G. The Board of Directors or its Chairman may create any other Committee which they deem necessary for the proper operation of the Corporation's business. 8-12 DISBURSEMENTS The Corporation will not make any disbursement of $25 or more without evidencing such disbursement with a voucher correctly describing the reason for the payment and backed by an endorsed check or receipt signed by the person receiving the payment, or in the name of the same person if the payment is for services or as a refund. The voucher must describe the services performed and detail the expenses by classification. 8-13 INTERESTS OF THE DIRECTORS None of the members of the Board of Directors will accept, nor will benefit from any fee, broker's fee or commission, donation or other emolument in relation to any investment, loan, deposit, purchase, sale, exchange, service or other similar transaction of the Corporation; nor will it have any financial interest in said transactions in any capacity, except in representation and for the benefit of the Corporation and under the previous authority of the Board of Directors. However, travel and representation expenses or expenses incurred as a result of the attendance to the Board of Directors or Committee meetings may be paid to the Directors; as well as for those professional services performed as a medical doctor or dentist to the insurers of Triple-S, Inc., or any other health subsidiary in its capacity as a participating provider of the health insurance plan or plans. No ex-director may be part of the Administration of the Corporation or its Subsidiaries nor perform any type of professional services in its capacity as a private citizen or as part of any business, until after three (3) years after the end of his/her term as a member of the Board of Directors. 8-14 CAUSES FOR REMOVAL OF DIRECTORS AND EXECUTIVE OFFICERS NAMED TO THE BOARD OF DIRECTORS The following will be considered just cause for the removal of officers: 1. Act with gross negligence in the performance of his/her duties. 2. Receive or give a bribe. 3. Convicted of a felony or grave misdemeanor which involves depravation by a competent court. 4. Act immorally or improperly. 5. Have personal interests incompatible with the interests of the Corporation. 6. Embezzle or fraudulently or negligently use or dispose of funds of the Corporation. 7. Improperly use his/her position for personal benefit. 8. To be absent without any justification for three (3) consecutive ordinary meetings of the Board properly notified or be absent from six (6) ordinary meetings during the period of one year with or without justification. 9. Provide confidential or sensitive information of the Corporation without the proper authorization or when it damages the interests of the business. 10. Lose the Board's confidence when a minimum of three fourths of the total number of directors which comprise the Board concur in voting for the removal of a director. 11. Violate in a consistent manner the Articles of Incorporation or the By-Laws and Regulations of the Corporation, as well as the General Corporations Law of Puerto Rico and/or the agreements approved in the Shareholders Assembly or by the Board of Directors. CHAPTER 9. - AMENDMENTS 9-1 AMENDMENTS Amendments may be made to the By-Laws when the following requirements are complied with and when the proposed amendments have been previously submitted to the Board of Directors and have been included in the proxy statement for the Assembly. A. Through a resolution approved by the majority of those shares of the Corporation issued and in circulation with the right to vote which are present at a meeting validly constituted, provided, however, that Articles 4-1, item "A:, 6-2 and 7-1, item "B" only may only be amended by the affirmative vote of three fourths (3/4) of the shares of the Corporation issued and in circulation with the right to vote which are present at a meeting validly constituted. B. The approved amendments will be certified by the Chairman and the Secretary, in triplicate, with the seal of the Corporation. C. The amendments to the By-laws approved by the shareholders at a meeting or by referendum will be distributed to the shareholders. CHAPTER 10. - ADMINISTRATION 10-1 NAMING OF THE PRESIDENT OF THE CORPORATION AND HIS/HER FACULTIES The Board of Directors will name a President to the Corporation who will be in charge of the general administration, superintendence, and management of the business of the Corporation, subject to the orders and regulations of the Board of Directors, who will fix his salary. The President of the Corporation will assume all other duties and responsibilities that are imposed upon him/her at the Shareholders Assemblies or by the Board of Directors. 10-2 ADMINISTRATION The Board will have the faculty to name any other officers that they deem convenient and necessary. 10-3 BONDS the President of the Corporation, as well as any officer or employee that collects, receives, manages or is responsible for or guard funds or securities of the Corporation, will have to give a fidelity bond in the amount set forth by the Board of Directors. 10-4 BUDGET FOR EXPENSES The President of the Corporation will prepare each calendar year the budget for the administrative expenses of the Corporation, which will be submitted to the Board of Directors on or before November 15 for their consideration. The Board of Directors will approve the budget on or before December 31, and it will become effective the 1st of January of the next calendar year. In the event that the budget is not approved by the stated date, the corporate operations will continue based on the budget for the previous year until the Board approves a new budget for the administrative expenses of the Corporation. The budget will be available for inspection by the Shareholders at the principal offices of the Corporation, after January 15 of the corresponding year. By-Laws effective on April 14, 1998 Revised: December 7, 1998, April 25, 1999, April 30, 2000, April 29, 2001, April 28, 2002. EX-10.1 5 g77580exv10w1.txt CONTRACT FOR METRO-NORTH REGION EXHIBIT 10.1 HEALTH INSURANCE CONTRACT METRO NORTH HEALTH REGION Between THE PUERTO RICO HEALTH INSURANCE ADMINISTRATION and TRIPLE S, INC. July 1, 2002 CONTRACT This Agreement entered into this 13th day of June, 2002 at San Juan, Puerto Rico, by and between PUERTO RICO HEALTH INSURANCE ADMINISTRATION, a public instrumentality of the Commonwealth of Puerto Rico, organized under Law 72 approved on September 7, 1993, hereinafter referred to as the "ADMINISTRATION", represented by its Executive Director, ORLANDO GONZALEZ RIVERA, and TRIPLE S, INC., a domestic corporation duly organized and doing business under the laws of the Commonwealth of Puerto Rico, with employer social security number 66-0229064, hereinafter referred to as the "INSURER", represented by its President, SOCORRO RIVAS WITNESSETH In consideration of the mutual covenants and agreements hereinafter set forth, the parties, their personal representatives and successors, agree as follows: FIRST: The ADMINISTRATION has the responsibility to seek, negotiate, and contract with public and private insurers, health care insurance programs that eventually will be capable of providing all citizens that reside in the island of Puerto Rico access to quality health care services, regardless of their economic condition and capacity to pay. SECOND: Law 72 of September 7, 1993 dictates the express policy that empowers the ADMINISTRATION to seek, negotiate and contract health insurance programs that will allow its beneficiaries access to quality health services, in particular the medically indigent and the public employees of the Central Government and pensioners. THIRD: The ADMINISTRATION published a Request For Proposals for the METRO NORTH Health Area/Region, seeking to provide health insurance coverage to all eligible beneficiaries in said health Area/Region, by contracting with private insurers. FOURTH: Pursuant to the terms of the aforementioned Request For Proposals, published on April, 2002 different private health insurers submitted to the ADMINISTRATION proposals to underwrite the health insurance for the Health Area/Region. FIFTH: The proposals submitted by the proposing insurers were thoroughly evaluated by a Evaluation Committee, as well as an Administrative Evaluation Committee within the ADMINISTRATION, as a result of which, a recommendation was presented to the Board of Directors of the ADMINISTRATION. SIXTH: The Board of Directors of the ADMINISTRATION, after a careful and complete analysis of all technical and administrative elements of the proposals, decided to award the INSURER the contract to underwrite and administer the health insurance for the METRO NORTH Health Area/Region, composed of Bayamon, Catano, 1 COMERIO, COROZAL, DORADO, GUAYNABO, NARANJITO, TOA ALTA, TOA BAJA AND VEGA ALTA. SEVENTH: The benefits to be provided under the plan offered by the INSURER are divided in three types of coverage: 1) the Basic Coverage that includes preventive, medical, hospital, surgical, diagnostic tests, clinical laboratory tests, x-rays, emergency room, ambulance, maternity and prescription drug services; 2) Dental Coverage based on the free choice of participating dentists from INSURER's network, and 3) the Special Coverage that includes benefits for catastrophic conditions, expensive procedures and specialized diagnostic tests. Benefits shall be provided by the INSURER in strict compliance with Law Number 72 of September 7, 1993, as amended, which is made part of this contract, the terms and conditions contained in Addenda I, II, III, and IV of this contract, and subject to the following: TERMS AND CONDITIONS ARTICLE I DEFINITIONS ACCESS: Adequate availability of all necessary health care services included in the plan being contracted to fulfill the needs of the beneficiaries of the program. ADMINISTRATION: Puerto Rico Health Insurance Administration. ADVANCE DIRECTIVES: A written instruction such as a living will or durable power of attorney for health care, recognized under the laws of the Commonwealth of Puerto Rico (whether statutory or as recognized by the courts of the Commonwealth), relating to the provision of health care when the individual is incapacitated. ANCILLARY SERVICES (Ancillary Charges): Supplemental services, including laboratory, radiology, physical therapy, and inhalation therapy, which are provided in conjunction with medical or hospital care. ASSMCA - Mental Health and Substance Abuse Administration: Spanish acronym for the Puerto Rico Mental Health and Substance Abuse Administration, the state agency that has been delegated the responsibility for the planning, establishment of mental and substance abuse policies and procedures, the coordination, development and monitoring of all mental health and substance abuse services rendered to beneficiaries under the Puerto Rico Health Insurance Program. BENEFICIARY: Any person that under Law 72 of September 7, 1993 is determined eligible to receive services, is reported as such to the INSURER by the ADMINISTRATION, and is enrolled in the plan. 2 CAPITATION: That portion of the premium paid to the INSURER which is disbursed to the HCO in payment for all the benefits provided under the Basic Coverage to the beneficiaries who have selected said HCO, as hereinafter defined. CO-INSURANCE: Percentage based participation of the beneficiary on each loss or portion of the cost of receiving a service. CONTRACT: The present contractual relationship between the ADMINISTRATION and the INSURER, and to which, 1) Law 72 of September 7, 1993, 2) the Request For Proposal, 3) the INSURER's Proposal documents, 4) the representations and assurances provided at the clarification meeting and 5) all other certifications issued by the INSURER following said clarification meeting, are herein incorporated by reference. All of the five (5) preceding set of documents are integral parts of this contract. CONTRACT TERM: The contract term is for three consecutive twelve (12) month periods after the effective date of this contract. The contract may be terminated at the conclusion of each twelve month period pursuant to Article XXVIII (3) (4). CMS: Acronym for the Centers for Medicare and Medicaid Services. DEDUCTIBLE: A fixed amount that the beneficiary has to pay to the provider as part of the cost of receiving a health care service, as provided in Addendum I of this contract. ELECTIVE SURGERY: A surgical procedure that, even though medically necessary and prescribed by a physician, does not need to be performed immediately because no imminent risk to life, permanent damage of a vital organ or permanent impairment is present, and which therefore can be scheduled. EMERGENCY MEDICAL CONDITION: (Prudent Layperson Standard) a medical condition presenting symptoms of sufficient severity that a person with average knowledge of health and medicine would reasonably expect the absence of immediate medical attention to result in (i) placing their health or the health of an unborn child in immediate jeopardy, (ii) serious impairment of bodily functions, or (iii) serious dysfunction of any bodily organ or part. ENCOUNTER: A contact between a patient and health professional during which a service is provided. An encounter form records selected identifying, diagnostic and related information describing an encounter. FAMILY CONTRACT: The benefits provided to the following eligible beneficiaries; 1) principal subscriber; and 2) his or her spouse (legally married or common law); and 3) his or her children (legally, adopted, foster or step children) under 21 years old that depend on the principal subscriber for subsistence; and 4) individuals under 21 years of age who have no children and live in common law with one of the eligible children in the same household; and 5) his or her dependents, of any age, who are blind or permanently disabled and live in the same household. Female beneficiaries (except 3 spouse) covered under family contract who become pregnant shall constitute a separate subscriber under an individual contract as of the first day of the month the pregnancy is diagnosed and reported to the INSURER. HEALTH CARE ORGANIZATION / HCO: A health care entity supported by a network of providers and which is based on a managed care system and accessed through a primary care physician (PCP). Said entity has contracted with the insurer to provide, in adequate facilities, the benefits provided for within the Basic Coverage or the Basic and Special Coverage of the health insurance contract. For the purpose of this contract the HCO will be identified by its descriptive name such as Primary Care Center, Physician Hospital Organization (PHO), Independent Practice Association (IPA), Primary Provider Group (PPG), or any other model. The INSURER is responsible for the availability of all necessary providers to cover both the basic and the special coverage. HEALTH AREA/REGION: The Metro North Health Area/Region as defined by the ADMINISTRATION, composed of Bayamon, Catano, Comerio, Corozal, Dorado, Guaynabo, Naranjito, Toa Alta, Toa Baja and Vega Alta. HIPAA: The Health Insurance Portability and Accountability Act is federal legislation (Public law 104-191) approved by Congress in August 21, 1996 regulating the continuity and portability of health plans, mandating the adoption and implementation of administrative simplification standards to prevent, fraud, abuse, improve health plan overall operations and guarantee the privacy and confidentiality of individually identifiable health information. INDIVIDUAL CONTRACT: The benefits provided to eligible subscribers that are: 1) children, adolescents and unmarried single adults without minor dependents; or 2) married adults whose spouse and/or dependents are not eligible for coverage under this program; or 3) Female beneficiaries (except spouse) covered under family contract who become pregnant as of the first day of the month the pregnancy is diagnosed and reported to the INSURER. INDIVIDUAL PRACTICE ASSOCIATION (IPA): A managed care delivery model in which the INSURER contracts with a physician organization which, in turn, contracts with individual physicians. The IPA physicians practice in their own offices and continue to see their fee-for-service patients. This type of system combines prepayment with the traditional means of delivering health care, a physician office/private practice. For the purpose of this contract, an IPA will be considered a Health Care Organization (HCO). INSURER: TRIPLE S, is a private entity which meets the definition of a managed care organization (MCO), previously known as a state defined HMO, has a comprehensive risk contract primarily for the purpose of providing health care services, making the services it provides accessible (in terms of timeliness, amount, duration and scope) as those services are to other non-Medicaid recipients within the Area/Region served by the entity and meets the solvency standards under the law as a state licensed risk-bearing entity. 4 MANAGED BEHAVIORAL HEALTH ORGANIZATION (MBHO): An entity constituted by Mental Health Participating Providers and organized with the purpose of negotiating contracts to provide mental health and substance abuse services. MEDICARE: Federal health insurance program for people 65 or older, people of any age with permanent kidney failure, and certain disabled people according to Title XVIII of the Social Security Act. Medicare has two parts: Part A and Part B. Part A is the hospital insurance that includes inpatient hospital care and certain follow up care. Part B is medical insurance that includes doctor services and many other medical services and items. A Medicare recipient is a person who has either Part A or Part A and B insurance. MEDICARE BENEFICIARY: Any person who is a Medicare recipient of Part A or Part A and B and complies with the definition of beneficiary established in this article. MEDICALLY NECESSARY SERVICES: Shall mean services or supplies provided by an institution, physician, or other providers that are required to identify or treat a beneficiary's illness, disease, or injury and which are: a. Consistent with the symptoms or diagnosis and treatment of the enrollee's illness, disease, or injury; and b. Appropriate with regard to standards of good medical practice; and c. Not solely for the convenience of an enrollee, physician, institution or other provider; and d. The most appropriate supply or level of services which can safely be provided to the enrollee. When applied to the care of an inpatient, it further means that services for the enrollee's medical symptoms or condition require that the services cannot be safely provided to the enrollee as an outpatient; and e. When applied to enrollees under 21 years of age, services shall be provided in accordance with EPSDT requirements including federal regulations as described in 42 CFR Part 441, Subpart B, and the Omnibus Budget Reconciliation Act of 1989. MENTAL HEALTH FACILITIES: Any premises (a) owned, leased, used or operated directly or indirectly by or for the Managed Behavioral Health Organization (MBHO) or its affiliates for purposes related to this Agreement; or (b) maintained by a subcontractor or provider to provide mental health services on behalf of the Managed Behavioral Health Organization. MENTAL HEALTH CARVE-OUT: Specified psychiatric, behavioral, and substance abuse services covered under the Puerto Rico Health Insurance Plan provided through a contract with a separate entity. 5 NON-PARTICIPATING PROVIDER: All health care service providers that do not have a contract in effect with the INSURER. Said provider is barred from providing services under this contract. PARTICIPATING PHYSICIAN: A doctor of medicine that is legally authorized to practice medicine and surgery within the Commonwealth of Puerto Rico and has a contract in effect with the INSURER. PARTICIPATING PROVIDER: All health care service providers that have a contract in effect with the INSURER. PBM: Acronym for Pharmacy Benefits Manager. PERSON WITH AN OWNERSHIP OR CONTROL INTEREST: A person or corporation that: owns, directly or indirectly five percent (5%) or more of the insurer's capital or stock or receives five percent (5%) or more of its profits; has an interest in any mortgage, deed of trust, note, or other obligations secured in whole or in part by the insurer or by its property or assets, and that interest is equal to or exceeds five percent (5%) of the total property and assets of the insurer; or is an officer or director of the INSURER. PHARMACY BENEFITS MANAGER: The private entity contracted by the ADMINISTRATION under the Health Reform Program to function as their pharmaceutical benefit manager responsible, for claims processing, drug utilization review, disease management, formulary control and beneficiary/customer information services for pharmaceutical benefits provided by the basic, special and mental health coverage of the Health Reform Program. PHYSICIAN INCENTIVE PLAN: Any compensation arrangements between INSURER and physician or physician groups that may directly or indirectly have the effect of reducing or limiting services furnished to Medicaid recipients enrolled with the insurer. PRE-AUTHORIZATION: A written or electronic approval by the INSURER to the beneficiary granting authorization for a benefit to be provided under the Special Coverage of the program. The beneficiary is responsible for obtaining the pre-authorization for coverage in order to receive covered benefits that require it. Failure to obtain pre-authorization precludes coverage. Notwithstanding the aforementioned, the INSURER has the option of not requiring pre-authorization for all services received within a particular HCO. PREMIUM: The monthly amount that the ADMINISTRATION agrees to pay to the INSURER as a result of having assumed the financial risk for providing the benefits to the beneficiaries covered. Method of payment is referred to hereunder as per member per month (PMPM). 6 PRIMARY CARE PHYSICIAN (PCP): A doctor of medicine legally authorized to practice medicine and surgery within the Commonwealth of Puerto Rico, who initially evaluates and provides treatment to beneficiaries. He/she is responsible for determining the services required by the beneficiaries, provides continuity of care, and refers the beneficiaries to specialized services if deemed medically necessary. Primary physicians will be considered those professionals accepted as such in the local and federal jurisdictions. The following are considered primary care physicians: Pediatricians, Obstetrician/Gynecologist, Family Physicians, Internists and General Practitioners. Each female beneficiary with a pregnancy factor has to select an obstetrician-gynecologist as her primary care physician. Once the pregnant woman completes her maternity care period, she will be allowed to continue with her primary care physician. PROVIDER: An individual or entity that is authorized under the laws of the Commonwealth of Puerto Rico to provide health care services. PRICO: Acronym for the Puerto Rico Insurance Commissioner's Office, the state agency responsible for regulating, monitoring, and licensing insurance business in Puerto Rico. SECOND MEDICAL OPINION: A consultation with a peer requested by the beneficiary, the HCO, a Participating Physician or the INSURER to assess the appropriateness of a previous recommendation for surgery or medical treatment. SECONDARY or SPECIALTY PHYSICIAN: A physician such as a dermatologist, urologist or cardiologist, who provides professional services on a referral from a Primary Care Provider SUBSCRIBER: The beneficiary covered under the individual coverage of the plan or the principal beneficiary who grants eligibility to all those beneficiaries included under the family coverage. SUPPORT PARTICIPATING PROVIDERS: Health care service providers who are needed to complement and provide support services to the Primary Care Physicians and who have a contract with the INSURER to provide said services. A referral from the Gatekeeper is necessary. The following will be considered support participating providers, among others: Pharmacies, Hospitals, Health Related Professionals, Clinical Laboratories, Radiological Facilities, Podiatrists, Optometrists, and all those participating providers that may be needed to provide services under the basic and special coverage considering the specific health problems of the Area/Region. SUPPORT PARTICIPATING PHYSICIANS: Doctors of Medicine legally authorized to practice medicine and surgery within Puerto Rico who are needed to complement and provide support services to the Primary Care Physicians and who have a contract with the INSURER to provide said services. A referral from the PCP is necessary. 7 QUALITY IMPROVEMENT (QI): The ongoing process of responding to data gathered through quality monitoring efforts, in such a way as to improve the quality of health care delivered to individuals. This process necessarily involves follow-up studies of the measures taken to effect change in order to demonstrate that the desired change has occurred. UTILIZATION MANAGEMENT (UM): The process of evaluating necessity, appropriateness and efficiency of healthcare services through the revision of information about hospital, service or procedure from patients and/or providers to determine whether it meets established guidelines and criteria approved by the INSURER. ORGANIZATION AND ADMINISTRATION INSURER must maintain the organizational and administrative capacity and capabilities to carry out all duties and responsibilities under this contract. INSURER must maintain assigned staff with the capacity and capability to provide all services to all Beneficiaries under this contract. INSURER must maintain an administrative office in the service area (local office). The local office must comply with the American with Disabilities Act (ADA) requirements for public buildings. INSURER must provide training and development programs to all assigned staff to ensure they know and understand the service requirements under this contract including the reporting requirements, the policies and procedures, cultural and linguistic requirements and the scope of services to be provided. The training and development plan must be submitted to THE ADMINISTRATION. INSURER must notify THE ADMINISTRATION immediately no later than 30 days after the effective date of this contract of any changes in its organizational chart as previously submitted to THE ADMINISTRATION. INSURER must notify THE ADMINISTRATION immediately (within fifteen (15) working days) of any change in regional or office managers. This information must be updated whenever there is a significant change in organizational structure or personnel. ARTICLE II ELIGIBILITY AND ENROLLMENT 1. Eligibility shall be determined according to Article VI, Section 5 of Law 72 of September 7, 1993 and the federal laws and regulations governing eligibility requirements for the Medicaid Program. 2. The INSURER shall provide coverage for all the eligible beneficiaries as provided in the prior section. 8 3. The INSURER shall inform beneficiaries, who are also Medicare recipients with Part A or Part A and B, at the time of enrollment that if they choose to become beneficiaries under the contracted health insurance, the benefits provided under said contract will be accessed exclusively through the primary care physician. In this situation: a) bad debt reimbursement, as a result of non-payment of deductibles and/or coinsurance, for covered Part A services and Part B services provided in hospital setting, other than physician services; b) payment for covered Part A services; c) payment for Part B outpatient services provided in a hospital setting; and d) all covered Part B services, will continue to be recognized as a covered reimbursable Medicare Program cost. Medicare beneficiaries with either Part A or Part A and B can choose to access their Part A or Part B services from the Medicare's providers list except that in this case the INSURER will not cover the payment of any benefits provided through this contract. 4. The INSURER represents that neither the capitated amount paid to each HCO nor the fee for service amount paid to all providers includes payment for services covered under the Medicare Federal Program. The primary care physicians, the participating providers or any other physician contracted on a salary basis cannot receive duplicate payments for those beneficiaries that have Medicare Part A or Part B coverage. The INSURER further represents that it will audit and review its billing data to avoid duplicate payment with the Medicare Program. The INSURER shall report its findings to the ADMINISTRATION on a quarterly basis. The ADMINISTRATION will audit and review Medicare billing data for Part A or Part B payment for beneficiaries eligible to said Federal Program. 5. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service through the amount paid to the HCO, when services are accessed through the primary care physician. 6. The INSURER guarantees to maintain adequate services for the Health Area/Region for the prompt enrollment of all eligible beneficiaries on a daily basis and in the order of their application. The INSURER shall maintain sufficient facilities within the Area/Region as needed. The subscriber shall be responsible for visiting the designated facility in order to complete all requirements towards enrollment. The INSURER shall enroll the beneficiary(ies) and issue the official identification card(s) on the same day that the subscriber completes the enrollment requirements. Initial orientation and enrollment will be conducted 9 pursuant to the Instructions to Insurers for Implementation of Orientation and Subscription Process contained in Addendum II. 7. The INSURER shall be responsible to provide the subscriber with specific information allowing for the prompt and reliable enrollment of all eligible individuals. The ADMINISTRATION shall notify the INSURER on a daily basis of all beneficiaries who have become eligible, as well as those who have ceased to be eligible. The INSURER shall guarantee the maintenance, functionality, and reliability of all necessary systems to allow enrollment or disenrollment of subscribers. 8. The beneficiary becomes eligible for enrollment as of the date specified in the ADMINISTRATION's notification to the INSURER. 9. The beneficiary ceases to be eligible as of the disenrollment date specified in the ADMINISTRATION's notification to the INSURER. If the ADMINISTRATION notifies the INSURER that the beneficiary ceased to be eligible on or before the last working day of the month in which eligibility ceases, the disenrollment will be effective on the first day of the following month. Disenrollment will be effected exclusively by a notification issued by the ADMINISTRATION. 10. If, following disenrollment, a beneficiary's contract is reinstated and the beneficiary is re-enrolled on the same month of disenrollment, the contract will be reinstated as of the date of re-enrollment. 11. The INSURER agrees to maintain active enrollment for those beneficiaries reported eligible by the ADMINISTRATION. Notification of eligible persons will be made through electronic transmissions or machine readable media. The ADMINISTRATION will forward this data to the INSURER in the format agreed to by both parties in accordance with the Daily Update/Carrier Eligibility File Format as required in the RFP. 12. Coverage under the plan shall begin the day that the enrollment process has been completed. The INSURER will guarantee that it will be ready to notify the ADMINISTRATION of all newly enrolled beneficiaries through electronic or magnetic media on a daily basis upon the Administration's request. This notification will include all new beneficiaries as of the day before the notification is issued and will be sent to the ADMINISTRATION no later than the following working day after the enrollment process has been completed. Premiums shall be paid on a pro-rata basis as of the date that the enrollment process was completed and the official identification card has been issued, to the end of the month, as specified in the INSURER's notification to the ADMINISTRATION. Premium payments, if applicable, for newborn of beneficiaries will accrue as of the date of birth of the child in the event that the enrollment process of said new beneficiary is completed. Premium payments shall be paid retroactively to the INSURER upon enrollment of the newborn. The INSURER will be required to pay 10 the providers for the services rendered to an unenrolled newborn during ninety (90) days from the date of birth. The INSURER, PCP or HCO will provide orientation to the beneficiary as soon as, a baby is born to go to the INSURER's office with the necessary documentation to receive a manual certification from the INSURER for the newborn. The INSURER, PCP or HCO will make every effort to make the beneficiary go to the Department of Health Medicaid Office to register the newborn within the ninety (90) days of his/her date of birth. It should be emphasized to the beneficiary that failure to register the newborn within that period will cause the newborn to loose coverage. After the 90 days period, the INSURER will not be paid premiums if the newborn is not enrolled. In the case in which a newborn dies before being registered at the Medicaid Office, the INSURER must provide ASES with proof of the birth and of the death of the newborn. ASES will then pay premiums for the period from the birth of the newborn until his death. In the case in which the family unit ceases to be eligible before the newborn is registered at the Medicaid Office, the INSURER must provide ASES with proof of the birth of the newborn. ASES will then pay premiums from the date of birth of the newborn until the termination of eligibility of the family. 13. In case that an individual has been certified as eligible by the Department of Health but has not completed the enrollment process, and he/she or his/her dependents need emergency services, the ADMINISTRATION shall verify the eligibility status of the individual. If the individual is eligible as a beneficiary, emergency services will be provided as if the individual is a beneficiary and arrangements for the issuance of the identification card will be made immediately after the notification of eligibility is made by the ADMINISTRATION to the INSURER. The premium in this instance will be paid to the INSURER on a prorata basis from the moment the emergency services needed are provided or the identification card is issued, whichever is first. For the purpose of this situation, the enrollment process is the process that commences at the time that the ADMINISTRATION gives notice to the INSURER of the beneficiaries eligibility status, and results in a letter to said beneficiary establishing the date and location for the completion of the enrollment documents and selection of the HCO. Said process ends when the beneficiary has selected an HCO from those available in the Health Area/Region and has received an identification card. Nothing provided in this section is intended to affect a provider's obligation to screen and stabilize an individual arriving at its facilities for emergency treatment as defined by EMTALA and the applicable Commonwealth laws. 11 14. Coverage shall end effective on the date of disenrollment. Premiums will be paid until the effective date of disenrollment. In the event of disenrollment while the beneficiary is an inpatient of a hospital on the last day of the month of coverage, and continues to be an inpatient of a hospital during the month following his disenrollment, the ADMINISTRATION will cover the payment of the premium for that following month. If the beneficiary remains hospitalized in subsequent months, the conversion clause will apply for the months after the one being paid by the ADMINISTRATION it being the INSURER's responsibility to assure that premiums are paid. Disenrollment will be effected exclusively by a notification issued by the ADMINISTRATION. 15. In the event that a female beneficiary, included as a dependent in a family group, other than as the spouse, becomes pregnant, that beneficiary will be transferred to a new family and become the head of household of the new family. The effective date of the new family will be the date of the first diagnosis of the pregnancy. Such beneficiary has the right to all the services under maternity coverage. At the time of being diagnosed as pregnant, the physicians, the HCO and/or the INSURER are required to provide orientation to the beneficiary towards certifying with the Department of Health Medicaid Office and to present herself at the INSURER to have a membership card issued. 16. The INSURER shall not in any way discriminate nor terminate coverage of any beneficiary(ies) for reasons due to adverse change in recipient's health, or based on expectations that an enrollee will require high cost care, or need of health services, or any reason whatsoever, except for non-payment of premiums or fraudulent use of benefits or participation of fraudulent acts, after prior notification and consultation with the ADMINISTRATION. 17. The INSURER agrees to maintain an Enrollment Data Base which: a) includes each subscriber and all beneficiaries; b) contains for each subscriber and beneficiary the information technically defined in the (Carrier Billing File/Carrier Eligibility File) formats contained in RFP. 18. The INSURER will secure on the date of enrollment a signed statement from the subscriber authorizing the Federal Government, the INSURER, the ADMINISTRATION and/or their designees to review the medical record of the subscriber and other beneficiaries, in order to determine quality, appropriateness, timeliness and cost of services performed under this contract. The terms, content and specifications of said authorization shall be consistent with the standards set forth in 45CFR 164.508 et seq., part of the regulations of the Health Insurance Portability and Accountability Act (HIPAA). 12 19. All individually identified information of services related to beneficiaries which is obtained by the INSURER shall be confidential and shall be used or disclosed by the INSURER, the HCO and/or its participating providers only for purposes directly connected with performance of all obligations contained in this contract. Medical records and management information data concerning any beneficiary enrolled pursuant to this contract shall be confidential and shall be disclosed within the INSURER's organization or to other persons, as authorized by the ADMINISTRATION, only as necessary to provide medical care and quality, peer or grievance review of such medical care under the terms of this contract and in coordination with the mental health carve-out contract subscribed by ASSMCA and the ADMINISTRATION. The confidentiality provisions herein contained shall survive the termination of this contract and shall bind the INSURER, its HCO's and the INSURER's participating providers as long as they maintain any individually identifiable information relating to beneficiaries as provided in the implementation of the HIPAA regulation schedule to be set forth by the Federal Government, 45 CFR 164.102 et seq. Any request for information which is made by third parties not related to this contract will be forwarded to the ADMINISTRATION for consideration, review and decision as to the pertinence of the request and the authorization for disclosure. Nothing in this section shall limit or affect the ADMINISTRATION's, the INSURER and/or providers obligations regarding protected individually identifiable health information as provided in 45 CFR 164.102 et seq. (HIPAA) regulations. Disclosure of individually identifiable health information to any business associate as defined in 45 CFR 164.504(e) of the HIPAA regulations by the INSURER shall entail the legal obligations set forth therein. 20. The INSURER agrees to notify the ADMINISTRATION immediately of any change in the place of residence of the subscriber, insofar as the subscriber makes the change known to the INSURER. Address changes will be forwarded through electronic and/or machine-readable media as referred in paragraph sixteen. 21. The INSURER agrees to implement a program whereby eligible beneficiaries are properly advised of the date of termination of their eligibility so as to assure that they complete the recertification process prior to said date. Said program should provide for an initial notice of the termination date at least ninety (90) days prior to the effective date of the eligibility termination. 22. The INSURER hereby commits to comply with the electronic transactions, security and privacy requirements of the HIPAA regulations as provided in 45 CFR 160 and 142 et seq. within the implementation dates set forth therein or by subsequent regulations schedule. 13 23. DISENROLLMENT The INSURER has a limited right to request a beneficiary be disenrolled from INSURER without the beneficiary's consent. THE ADMINISTRATION must approve any INSURER request for disenrolling a beneficiary for cause. Disenrollment of a beneficiary may be permitted under the following circumstances: (a) Beneficiary misuses or loans his/her membership card to another person to obtain services. (b) Beneficiary is disruptive, unruly, threatening or uncooperative to the extent that beneficiary's membership seriously impairs INSURER's or provider's ability to provide services to beneficiaries or to obtain new beneficiaries, and beneficiary's behavior is not caused by a physical or other mental health condition. The INSURER must take reasonable measures to improve a beneficiary's behavior prior to requesting disenrollment and must notify beneficiary of its intent to disenroll. Reasonable measure may include providing education and counseling regarding the offensive acts or behavior. INSURER must notify the beneficiary of the INSURER's decision to disenroll after reasonable measures have failed to remedy the problem. If the beneficiary disagrees with the decision to disenroll the beneficiary from INSURER, the beneficiary must be notified of the availability of the Complaints and Grievances Procedure and the ADMINISTRATION's fair hearing process, as provided by Law 72 of September 7, 1993, as amended.. ARTICLE III RIGHT TO CHOOSE 1. Each principal subscriber shall have the right to select an HCO from those available in the health Area/Region which at no time will be less than two (2) HCO's at each municipality, one of which has to be a privatized or non-privatized government or municipal facility if available, and subject to compliance with INSURER's requirements for HCO's. The selection of the HCO and primary care physician will be made by the beneficiaries at the INSURER's local or regional offices. The right of beneficiaries to transfer or change from an HCO shall be made at any time without cause during the first 90 days following the date of the 14 beneficiary's initial enrollment or the date of enrollment notice is sent, whichever is later, and at most once every twelve (12) months thereafter. The following examples are considered causes for disenrollment: (1) the beneficiary moves out of the area of service of the HCO and is not within a reasonable distance from the area of the service of the HCO; (2) the HCO does not cover the service because of moral and religious objections; (3) the beneficiary needs related services to be performed at the same time; not all related services are available within the network; and the beneficiary's primary care provider or another provider determines that receipt of services separately would subject the beneficiary to unnecessary risk; and, (4) other reasons, including but not limited to, poor quality of care, lack of access to services and lack of access to experienced providers dealing with the beneficiary's health care needs. The beneficiary shall receive proper written notification at least 60 days prior to the end of each 12 month enrollment period from the INSURER. 2. Each HCO will have available at least one of each specialist considered a primary care physician and shall meet the specification of the ratio specified in Article VI, and will have a sufficient number of primary care physicians to provide health care services to all beneficiaries according to the ratio specified in Article VI. Furthermore, the INSURER will provide to each HCO a network with a sufficient number of participating providers to render all services included under the basic, special and dental coverage to beneficiaries pursuant to the ratio specified in Article VI. 3. The beneficiary shall have the right to choose his or her primary care physician from those available within the HCO selected by the principal subscriber. Said right also encompasses the change of the selected primary physician at any time by making the proper administrative arrangements within the HCO in conformity with the HCO's established policy. The selected primary care physician or the substitute on-duty primary care physician within the HCO must be available on a 24 hour basis for emergencies and/or telephone consultations. Each HCO must have available all of the primary care physicians (family physicians, internists, general practitioners, pediatricians and obstetrician-gynecologist) subject to waivers in case of unavailability of a specific provider. 4. A primary care physician can only act as such in only one (1) municipality within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 5. A primary care physician can only act as such in only one (1) HCO within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 15 6. Each female beneficiary may select (i) primary care physician, or (ii) primary care physician and obstetrician-gynecologist as her primary care physician. If the female is pregnant, the obstetrician-gynecologist automatically will become the primary care physician; if one is not previously selected, she will then have to choose an obstetrician-gynecologist as her primary care physician. Once the pregnant woman completes her maternity care period, she will be allowed to continue with her original primary care physician. 7. Any subscriber may change the selected HCO subject to the provisions of Section I, above. If the request for a change of HCO is filed with the INSURER on or before the fifth day of a month, the change of HCO will become effective on the first day of the following month. If the change is filed after the fifth day of the month, the change of HCO will be effective on the first day of the second succeeding month. Selection guidelines are contemplated in Article VI, paragraph 3 of this contract. 8. The beneficiary shall have the right to choose the provider to be referred to from those participating providers within the HCO's network that are under contract with the INSURER's for benefits covered under the Basic and Special Coverage. 9. Dental services will be provided through the INSURER's network of dentists for the health insurance services contracted. Each subscriber will have the right to select a dentist within the INSURER's network to receive dental services. The accepted dentist/beneficiary ratio is one (1) dentist for each one thousand three hundred fifty (1,350) beneficiaries. 10. In the event that HCO's under 330 Projects of the Rural Health Initiative have contracts with specialists, support participating providers, or support participating physicians, either on a fee-for-service basis or on a salary basis, the INSURER will be responsible for gathering and reporting all required data including the payment of services described in Article VII, Section five (5), Article XV, sections four (4) and eight (8), and the Claim File Layout formats as required in the RFP. 11. The INSURER will provide to each principal subscriber a complete list of all participating physicians and participating providers, with addresses and specialties or health related services offered, in order to allow the beneficiary to choose among them. 12. The beneficiary shall also have the right to choose the pharmacy according to applicable PBM guidelines established by the ADMINISTRATION and any other participating providers among those contracted by the ADMINISTRATION for basic and/or special coverage services, said guidelines to become effective sixty (60) days after notice to INSURER. The ADMINISTRATION will determine the acceptable pharmacy/beneficiary ratio in order to assure access to the pharmacy benefits. The right to choose requires the availability of sufficient number of pharmacies in each municipality of residence of the beneficiaries. 16 13. The INSURER will develop and effectively disseminate an education and orientation program in order to insure that all eligible beneficiaries are aware of their rights under this contract, including their right to choose physicians and providers. The ADMINISTRATION reserves the right to make changes, modifications and recommendations to said program in coordination and agreement with the INSURER. This program shall be subject to approval by the ADMINISTRATION prior to its implementation and in compliance with the marketing guidelines and prohibitions established in Article IX. 14. Notwithstanding the foregoing, the ADMINISTRATION shall preserve the right in coordination with INSURER, to expand, limit or otherwise amend the provision of services as provided for herein and/or to negotiate in coordination with the INSURER, cost saving and efficiency improvement measures. In those cases in which the ADMINISTRATION acts on its own, changes to the provision of services shall be notified to the INSURER no later than 30 days prior to implementation. Said modifications will take place after consultation and cost negotiation with the INSURER and prior approval by CMS. ARTICLE IV SECONDARY PAYOR 1. The INSURER shall be a secondary payor to any other party liable in any claim for services to a beneficiary, including but not limited to: the INSURER itself, Medicare, other insurers or managed care organizations, health maintenance organizations, non-profit INSURER's operating under law 152 approved May 9, 1942 as amended, "Asociacion de Maestros de Puerto Rico", medical plans sponsored by employee organizations, labor unions, and any other entity that results liable for the benefits claimed against the INSURER for coverage to beneficiaries. 2. It shall be the responsibility of the INSURER to ascertain that the aforementioned provisions of Law 72 of September 7, 1993 are enforced and that the INSURER acts as secondary payor to any other medical insurance. 3. The ADMINISTRATION and the INSURER will cooperate in the exchange of third parties health insurance benefits information. To this effect the INSURER will comply fully with the "Carta Normativa Numero N-E-5-95-98" issued by the Office of the Insurance Commissioner of Puerto Rico and the HIPAA regulations provisions cited elsewhere in this contract. 4. The INSURER will make the most diligent best efforts to determine if beneficiaries have third party coverage and will attempt to utilize such coverage when applicable. 17 The INSURER will be permitted to retain 100% of the collections from subrogation. The plan's experience will be credited with the amount collected from said primary payor, once payment is made and the INSURER recovers payments according to the corresponding transaction process established. If the provider detect that a beneficiary have other health plan coverage not identified in the beneficiary card, the provider will bill the primary payor and will provide the information to the INSURER. 5. The INSURER must report quarterly to the ADMINISTRATION the amounts collected from third parties for health services provided. Said reports must provide a detailed description of the beneficiary's name, contract number, third party payor name and address, date of service, diagnosis and provider's name and address and identification number. 6. The INSURER must report quarterly to the ADMINISTRATION the amounts collected from third parties for health services provided according with standard format to be adopted by the ADMINISTRATION. Said reports must provide a detailed description of the beneficiary's name, contract number, third party payor name and address, date of service, diagnosis and provider's name and address and identification number. 7. The INSURER shall develop specific procedures for the exchange of information, collections and reporting of other primary payor sources and is required to verify its own eligibility files for information on whether or not the beneficiary has private health insurance within the INSURER. 8. The INSURER must implement and execute an effective and diligent mechanism in order to assure the collection from primary payors of all benefits covered under this contract. Said program, mechanisms and method of implementation shall be reported to the ADMINISTRATION as of the first date of the effectiveness of this contract. 9. Failure of the INSURER to comply with this Article may, at the discretion of the ADMINISTRATION, be cause for the application of the provisions under Article XXXIII. ARTICLE V EMERGENCIES 1. In cases of emergency or immediate need of medical care within the Commonwealth of Puerto Rico, the INSURER will be responsible for the payment of emergency service provided to beneficiaries when the emergency or 18 immediate need of medical care occurs within its network or outside of its network or the geographical Area/Region of the selected HCO's emergency care facility. Such services must be paid by the INSURER regardless of whether the entity that furnishes the service has contracted with the INSURER and no prior authorization shall be required by the INSURER for the provision of emergency services. The INSURER will assume the payment of the medical screening examinations or other medically necessary emergency services, whether or not the patients meets the prudent layperson standard, in the event that the beneficiary's PCP or any INSURER representative or provider instructs them to seek emergency care within or out of its network area/region. Such services shall consist of whatever is necessary to stabilize the patient's condition, unless the expected medical benefits of a transfer outweigh the risk of not undertaking the transfer, and the transfer conforms with all applicable requirements. The stabilization services includes all treatment that may be necessary to assure within reasonable medical probability, that no material deterioration of the patients condition is likely to result from or occur during discharge of the patient or transfer of patient to another facility. In the event of a disagreement with the provider concerning whether a patient is stable enough in order to be discharged or transferred or whether the medical benefits outweigh the risk, the judgement of the attending physician caring for the enrollee will prevail and oblige the INSURER. Such services shall be provided in such a manner as to allow the subscriber to be stable for discharge or transfer as defined by EMTALA, in order to safely return the subscriber to the corresponding HCO, or to an appropriate participating provider for continuation of treatment. 2. Since emergency care is of utmost concern to the ADMINISTRATION, the INSURER shall require that adequate ambulance transportation and emergency medical care are available. Each municipality shall have access to an emergency care system composed of ground, air and maritime ambulance transportation as necessary, and emergency medical care. 3. Ambulance transportation and emergency care will be subject to periodic reviews by applicable governmental agencies to ensure the highest quality of services. 4. All participating providers shall provide immediate emergency care services to beneficiaries when requested. 5. Emergency care services as well as ambulance transportation services shall exist in each municipality comprising the health area/region, 24 hours a day, and 365 days yearly, operated by an HCO, or by other participating providers. 6. The INSURER and each HCO is required to provide access to emergency care and ambulance transportation services within their own facilities, through their contracted, participating providers or through contract with third parties that 19 guarantee said emergency care and ambulance transportation twenty four (24) hours a day, seven (7) days a week. 7. The INSURER will assure that each HCO makes the necessary arrangements to have readily available ambulance services in good mechanical condition and properly equipped, in order to assure a prompt and effective ambulance transportation service. 8. The INSURER or the HCO will establish Urgent Care Centers within the Health Area/Region. These include physician offices and clinics with extended hours. These Urgent Care Centers may complement emergency care services but at no time will they substitute the requirement to have emergency care services and ambulance transportation available at each municipality 24 hours a day, 7 days a week and 365 days yearly. 9. The INSURER will provide beneficiaries access to a 24-hour-a-day toll-free hotline with licensed qualified professionals to help beneficiaries with questions about particular medical conditions and to guide them to appropriate facilities (emergency rooms, urgent care centers, among others). Notwithstanding, the aforementioned statement, the beneficiary will have the right to choose to attend an emergency room if he believes his condition is an emergency medical condition, as defined in this contract, without prior need of authorization or certification. ARTICLE VI ACCESS TO BENEFITS 1. The INSURER will contract all available private providers that meet its credentialing process and agree to its contractual terms, in order to assure sufficient participating providers, to satisfy the demand of covered services by the beneficiaries enrolled in the program. Considering the expected mix between private patients and beneficiaries the accepted physician/beneficiary ratio will be 1:1,700 for primary care physicians; 1:2,200 for specialists and 1:1,600 for all physicians. In the event that the HCO's provides services only to beneficiaries under this contract, the physician/beneficiary ratio will be the same to that applicable when there is a mix between private patients and beneficiaries. The INSURER will assure compliance with said physician/beneficiary ratio. 2. The INSURER shall be responsible to contract all the necessary health care services and participating providers to insure that all the benefits covered under the Basic, Dental and Special Coverage of the plan are rendered, through the INSURER's participating providers with the timeliness, amount, duration and scope as those services are rendered to non-Medicaid recipients within the area/region served. 20 3. Every subscriber shall be able to select from at least two (2) HCO's with sufficient enrollment capacity in his or her municipality, one of which will be a privatized government facility, if available and subject to compliance with INSURER's requirements for HCO's. Each subscriber shall also be able to choose the HCO outside his or her municipality of domicile as provided for in Article III, paragraph 1 of this contract. 4. A primary care physician can only act as such in only one (1) municipality within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 5. Contracts between the INSURER and HCO's and between the INSURER and its participating providers shall be independent contracts specifically designed to cover all terms and conditions contained in this contract. Coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. 6. HCO enrollment shall be conditioned on the availability of adequate health care services. It shall be the INSURER's responsibility to maintain a constant assessment of the enrollment capacity of each HCO. Adequate health care services will be those determined acceptable under the ADMINISTRATION's Compliance Evaluation Program as outlined in Article XVII of this contract. 7. That INSURER shall be responsible for communicating to its participating providers the public policy that prohibits provider inquiries with the purpose of determining if the beneficiary is subject to the benefits provided under Law 72 of September 7, 1993. 8. The INSURER is responsible for the implementation, development and maintenance of an adequate system for referrals of health services under this contract. The referral system must be approved by the ADMINISTRATION and must be audited periodically by the INSURER and the ADMINISTRATION. In no way the INSURER, the HCO's or any participating provider or health organization will submit for approval, specialists referrals to any internal or external committee or will interfere, prohibit, or restrict any health care professional's advice within their scope of practice. 9. All referral systems must comply with timeframes established in paragraph (23). If the system developed by the INSURER is by electronic means, it must be installed at all primary care offices. It is unacceptable to force the beneficiary to move to another facility to obtain referrals. 10. The INSURER assures the ADMINISTRATION that no HCO'S or participating providers will impose limit quotas or restrain services to subcontracted providers 21 for the services medically needed (e.g. laboratory, pharmacies, or other services). 11. The INSURER shall expedite access to benefits of beneficiaries diagnosed with conditions under the Special Coverage. The identification of these beneficiaries will allow rapid access of the medical services covered under our Special Coverage. 12. Any denial, unreasonable delay or rationing of services to the beneficiaries is expressly prohibited. The INSURER shall require strict compliance with this prohibition by its participating providers or any other entity related to the rendering of medical care services to the beneficiaries. Any action in violation of this prohibition shall be subject to the provisions of Article VI, Section 6 of Law 72 of September 7, 1993. Furthermore, the INSURER shall be responsible for posting information at every HCO, addressed to the beneficiaries, stating the policy that prohibits denying, unreasonably delaying or rationing services by participating providers or any other entity related to the rendering of medical care services to the beneficiaries, and providing information on procedures for filing a grievance on the subject. The INSURER shall notify the HCO's and participating providers that they must comply with the policy that prohibits the denial, the unreasonable delay or the rationing of services by participating providers or any other entity rendering medical services to beneficiaries, and further that they must provide information on procedures for filing a grievance. The INSURER shall comply with the performance measures established and scheduled by the ADMINISTRATION. 13. The INSURER will ensure that HCO's and participating providers have a mix of patients distributed between private and eligible beneficiaries so as to avoid any possibility of discrimination by reason of medical indigence, whenever feasible. 14. No participating provider, or its agents, may deny a beneficiary access to medically necessary health care services, except for the reasons specified in Article VI, section 6 of Law 72 of September 7, 1993. 15. The INSURER is responsible for having an adequate number of participating physicians and providers to supply all the benefits offered in the Basic, Dental and the Special Coverage of the contracted health insurance. The benefits under the Basic, Special and Dental coverage will be provided to the beneficiaries at the location of the participating providers. 16. The INSURER is responsible to have available all participating providers needed in order to render all the medically necessary services required to provide the beneficiaries with the benefits included in the Basic, Dental and Special Coverage of the contracted health insurance as specified in Addendum I of this contract. 22 17. The INSURER agrees to require compliance by all participating physicians and providers with all provisions contained in this contract. 18. The INSURER has a continuous legal responsibility toward the ADMINISTRATION to assure that all activities under this contract are carried out INSURER will use its best efforts to prevent unauthorized actions by HCO's or participating providers. INSURER will take appropriate measures to ensure that all activities under this Contract are carried out. Failure to properly discharge the obligation to assure, by all means necessary and appropriate, full compliance with said activities, shall result in the termination of this contract as provided in Article XXXIII hereof. 19. Pursuant to the Health Reform Concept of 1993, the INSURER shall contract as participating providers those Commonwealth owned facilities that have been privatized in the Health Area/Region by virtue of Laws 103 of July 12, 1985, and 190 of September 5, 1996, the 330 and 339 Projects of the Rural Health Initiatives, those State owned facilities not privatized, as well as the privatized or non privatized municipally owned facilities in the different areas/regions and regions which will complement access to covered medical services, subject to its credentialing requirements and contractual terms. 20. The INSURER assures the ADMINISTRATION that physician and providers of services under this contract will provide the full range of medical counseling that is appropriate for beneficiary's condition. In no way the INSURER or any of its contractors may interfere, prohibit, or restrict any health care professional's advice within their scope of practice, regardless of whether a care or treatment is covered under the contract. 21. The INSURER assures the ADMINISTRATION that its Physician Incentive Plan does not in any way compensate directly or indirectly physicians, individual physicians, group of physicians or subcontractors as an inducement to reduce or limit medically necessary services furnished to individual enrollees and that it meets or exceeds the stop-loss protection and enrollee survey and disclosure requirements under the Social Security Act. The INSURER shall ensure that at the intermediate level all physician providers groups are afforded with adequate stop-loss protection within the required thresholds under the Medicaid Program regulations. 22. The INSURER assures that it will provide an adequate stop-loss insurance set at no more than ten thousand ($10,000) dollars to protect physicians from loss and comply with to the risk thresholds established under sections 42 CFR 422.208. In the event, INSURER places physicians at substantial risk it shall conduct enrollee/disenrollee surveys not later than one year after the effective date of the contract and at least annually thereafter. 23 23. Timeframes for Access Requirements. INSURER must have sufficient network of providers and must establish procedures to ensure beneficiaries have access to routine, urgent, and emergency services; telephone appointments; advice and Beneficiaries service lines. These services must be accessible to beneficiaries within the following timeframes: - Urgent Care within 24 hours of request; - Routine care within 2 weeks of request; - Physical/Wellness Exams for adults must be provided within 8 to 10 weeks of the request; - Referrals: Appointments of referrals must be delivered and notified to beneficiaries within five (5) days from the date prescribed by the provider. The services required must be delivered or rendered within a reasonable period as medically needed by the beneficiary, in a time frame which may not exceed thirty (30) days from the time of the appointment, except in cases where the particular nature of specialist services require additional waiting time because of unavailability of a specialty service. 24. INSURER must establish policies and procedures to ensure access to EPSDT Checkups be provided within ninety (90) days of new enrollment, except that newborn beneficiaries should be seen within two (2) weeks of enrollment, and that in all cases, and for all beneficiaries such policies and procedures be consistent with the American Academy of Pediatrics and EPSDT periodicity schedule which is based on the American Academy of Pediatrics schedule and the guidelines established by the ADMINISTRATION. The INSURER must advise the beneficiary of his right to have a checkup. ARTICLE VII CONTRACTS WITH HCO'S AND ALL PARTICIPATING PROVIDERS 1. All services necessary to provide beneficiaries the benefits of the Basic, Special and Dental Coverage shall be contracted in writing with all participating providers. The INSURER will ensure that all provisions and requirements contained in this contract are properly included in the contracts with the HCO's and with all participating providers and that they are carried out by said HCO's and participating providers. Such provisions and requirements made part of these contracts will be properly notified to the ADMINISTRATION. Coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. 24 2. The INSURER may not discriminate with respect to participation, reimbursement or indemnification as to any provider who is acting within the scope of the provider's license or certification under applicable Commonwealth Law. 3. The INSURER agrees to draft, execute and enforce a specific contract between the INSURER and the HCO and between the INSURER and its participating providers that will include all applicable provisions contained in this contract. The INSURER will insure that said applicable provisions are properly complied with by the HCO's and its network of participating providers. To this effect, the Insurer also agrees to certify or attest that none of his contractors, subcontractors or providers of services: (1) consults, employs or procures services from any individual that has been debarred or suspended from any federal agency; or (2) has a director, partner or employee with a beneficial ownership of more than a 5% on their organization's equity who has been debarred or suspended by any federal agency, or (3) procures self-referral of services to any provider in which it may have directly or indirectly any economic or proprietary interest. The INSURER will certify and attest that it has provided all HCO's, complete written instructions describing procedures to be used for the compliance with all duties and obligations arising under this contract. These instructions will include the following information: provider selection by beneficiaries, covered services, reporting requirements, record-keeping requirements, grievance procedures, deductibles and co-payment amounts, confidentiality, and prohibitions against denial or rationing of services. Copy of these instructions will be submitted to the ADMINISTRATION, who reserves the right to request modifications or amendments to said instructions following consultation with the INSURER. 4. The INSURER agrees to incorporate in its contracts with HCO's and in those between the INSURER and its participating providers, the following provisions, among others, contained in this contract: a. A payment time schedule to pay the HCO's for services rendered and for payment for services rendered by the participating providers to the HCO's, the schedules will not exceed the time limitation standards required by the Administration under this contract to assure prompt payments of sums due to providers. b. A warranty by the HCO insuring that the method and system used to pay for the services rendered by the HCO's network of participating providers are reasonable and that the negotiated terms do not jeopardize or infringe upon the quality of the services provided. c. A procedure that establishes how the HCO's network of participating providers can recover from the INSURER monies owed for services rendered and not paid by the HCO, after the HCO's participating provider has demanded payment from the HCO. 25 d. That payments received for services rendered under the health insurance plan shall constitute full and complete payment except for: (i) the deductibles contained in Addendum I of this contract, and (ii) that the benefits or services rendered are not covered. The INSURER will insure compliance with Article XVIII, paragraphs (6) and (7) of this contract. e. A release clause authorizing access by the ADMINISTRATION to the participating providers' Medicare billing data for beneficiaries covered by this contract who are also Part A and Part A and B Medicare beneficiaries, provided that such access is authorized by CMS and other related statutory or regulatory provisions thereof. Access by the ADMINISTRATION shall be at all times subject to all HIPAA regulations requirements mentioned elsewhere in this contract. f. That INSURER will cover the payment of Medicare Part B deductibles and co-insurance for services received by a beneficiary under Medicare Part B, accessed through the HCO's primary care provider, with primary care physician's authorization, their network of participating providers and the participating providers of the INSURER for the basic and/or special coverage. g. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics and other institutional care providers, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service. h. That the only Part A deductible and co-insurance, and Part B deductible and co-insurance for outpatient services provided in a hospital clinic and other institutional care providers, other that physician services, will be the one billed to Medicare as bad debt. No other amount will be charged to these beneficiaries. The INSURER will neither cover the payment of Medicare Part A deductibles and co-insurance for services received by a beneficiary under Medicare Part A nor the Part B deductible and co-insurance for services provided in hospital clinics, other than physician services. The INSURER will cover the deductibles and co-insurances of all Part B services including Part B deductibles and co-insurance for physician services provided in an outpatient basis to hospital clinics. i. That coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. j. The INSURER will establish directives for allowing providers to write prescriptions for psychotropic drugs in accordance with the applicable agreement with the ADMINISTRATION's Pharmacy Benefit Manager (PBM). The ADMINISTRATION's terms and conditions for pharmacy benefit management have been agreed by the parties and will be complied and implemented according to Addendum XIV, to the Request for Proposal and the Benefits Coverage included herein. 26 k. All performance, timeframes, administrative standards and requirements as established under this contract. 5. The INSURER agrees to provide to the ADMINISTRATION a detailed description of the payment methodology used to pay for services rendered by the HCO's, HCO's network of providers (primary care physicians and other providers), and other participating providers. Said description of the payment methodology will also address the methodology used by the HCO's in the distribution within their own group of the capitation payments, fee for services or other basis for payment of services to providers servicing said HCO's. The INSURER will submit to the ADMINISTRATION a monthly report detailing all payments made to the HCO, HCO's network of participating providers and to the INSURER's participating providers classified by specialty. 6. The INSURER represents that neither the premium or the capitated payments or capitated payments with a fee-for-service component for services, made to HCO's, to HCO's network of participating providers, as well as to the INSURER's participating providers, include payment of services covered under the Medicare Federal Program. 7. As part of the terms and conditions contained in the contracts with participating providers, the INSURER will include in those with privatized government facilities (to include those under management contract, that have been sold or are under lease), a provision that will authorize the INSURER upon the written request of the Department of Health, to withhold a determined amount from the monthly payments to said participating providers for services rendered under this contract. Said amount will be determined by the Department of Health on the basis of the payments contractually agreed to between the Department of Health of the Commonwealth of Puerto Rico and said participating providers on account of the management fee, sale price or lease fee, as well as 50% of the employees' payroll which the participating providers are required to reimburse the Department of Health. The INSURER will remit said withheld amounts directly to the Department of Health. 8. The INSURER shall provide all reasonable means necessary to ensure that the contracting practices between its participating HCO and providers are in compliance with federal anti-fraud provisions and particularly, in conformity with the limitations and prohibitions of the False Claims Act, the Anti-kickback statute and regulations and Stark II Law and regulations prohibiting self-referral to designated medical services by participating medical providers. 9. To the extent feasible within INSURER'S existing claims processing systems, INSURER should have a single or central address to which providers must submit claims. If a central processing center is not possible within INSURER's existing claims processing system, INSURER must provide each network 27 provider a complete list of all entities to whom the providers must submit claims for processing and/or adjudication. The list must include the name of the entity, the address to which claims must be sent, explanation for determination of the correct claims payer based on services rendered, and a phone number the provider may call to make claims inquiries. INSURER must notify providers in writing of any changes in the claims filing list at least 30 days prior to effective date of change. If INSURER is unable to provide 30 days notice, providers must be given a 30-day extension on their claims filing deadline to ensure claims are routed to correct processing center. 10. The Administration and the Department of Health Medicaid Fraud Control Unit must be allowed to conduct private interviews of providers and the providers' employees, contractors, and patients. Requests for information must be complied with, in the form and language requested. Providers and their employees and contractors must cooperate fully in making themselves available in person for interviews, consultation, grand jury proceedings, pre-trial conference, hearings, trial and in any other process, including investigations. 11. PROVIDER MANUAL AND PROVIDER TRAINING INSURER must prepare and issue a Provider Manual(s), including any necessary specialty manuals to the providers in the INSURER network and to newly contracted providers in the INSURER network within five (5) working days from inclusion of the provider into the network. The Provider Manual must contain sections relating to special requirements. INSURER must provide training to all network providers and their staff regarding the requirements of THE ADMINISTRATION/INSURER contract and special needs of beneficiaries under this contract. INSURER training for all providers must be completed no later than 30 days after placing a newly contracted provider on active status. INSURER must provide on-going training to new and existing providers as required by INSURER or THE ADMINISTRATION to comply with this contract. INSURER must maintain and make available upon request enrollment or attendance rosters dated and signed by each attendee or other written evidence of training of each network provider and their staff. 12. PROVIDER QUALIFICATIONS - GENERAL The providers in INSURER network must meet the following qualifications: FQHC A Federally Qualified Health Center is an entity that provides 28 outpatient health services pursuant to 42 U.S.C. 201 et seq. and meets the standards and regulations established by the federal law and is an eligible provider enrolled in the Medicaid Program. Physician An individual who is licensed to practice medicine as an M.D. or a D.O. in Puerto Rico either as a primary care provider or in the area of specialization under which they will provide medical services under contract with INSURER; who is a provider enrolled in the Medicaid program; and who has a valid Drug Enforcement Agency registration number and a Puerto Rico Controlled Substance Certificate, if either is required in their practice. Hospital An institution licensed as a general or special hospital by the Puerto Rico Health Department under Chapter 241 of the Health and Safety Code and Private Psychiatric Hospitals under Chapter 577 of the Health and Safety Code (or is a provider which is a component part of a State or local government entity which does not require a license under the laws of the Commonwealth of Puerto Rico), which is enrolled as a provider in the Puerto Rico Medicaid Program. Non-Physician An individual holding a license issued by the applicable Practitioner licensing agency of the Commonwealth of Puerto Rico who is Provider enrolled in the Puerto Rico Medicaid Program or an individual properly trained to provide health support services who practices under the direct supervision of an appropriately licensed professional. Clinical An entity having a current certificate issued under Laboratory the Federal Clinical Laboratory Improvement Act (CLIA) and has a license issued by the Commonwealth's licensing agency the Puerto Rico Department of Health. Rural Health A health facility that has been determined by the Secretary Clinic (RHC) to meet the requirements of section 1861(aa)(2) of the Act and part 491; of this chapter; and has filed an agreement with the Secretary to provide RHC services under Medicare and pursuant to 42 CFR 405.2402. Local Health A local health department established pursuant to Department Health and Safety Code, Title 2, Local Public Health Reorganization Act ss. 121.031ff. Non-Hospital A provider of health care services which is licensed and Facility credentialed to provide services, and enrolled in our program. Provider School Based Clinics located at school campuses that provide on-site Health Clinic primary and preventive care to children and adolescents. (SBHC) 29 ARTICLE VIII SUBSCRIPTION PROCESS AND IDENTIFICATION CARDS 1. The INSURER agrees to comply and implement in full all instructions and guidelines contained in the Administration's Instructions to Insurers for Implementation of Orientation and Subscription Process. (Addendum II) 2. The INSURER shall issue to each beneficiary a card of durable plastic material that provides proper identification to access the benefits covered under this contract. 3. This card shall be similar to those the INSURER issues to the rest of their subscribers and shall not contain information that may identify the cardholder as medically indigent. 4. The INSURER shall be responsible to assure delivery of the cards at a location accessible to the beneficiaries in each municipality. 5. The INSURER shall deliver the card on the same day that the beneficiary completes the enrollment process. 6. The identification cards shall contain the following information: a) Name of Beneficiary b) INSURER's Group Number c) Subscriber's Social Security Number d) Relationship of beneficiary with subscriber (if applicable) e) HCO name and number f) Issue Date g) Type of Contract (individual or family) h) Coverage effective date i) Other Insurance code j) Medicare Part A and/or Part A and B deductible code. 7. The INSURER will replace lost, stolen, mutilated cards and will have the right to charge in beneficiaries one dollar ($1.00) for each card replaced. This charge will not be applicable to Medicaid Beneficiaries, which are categorized within the established indigence level 0 (0%-50%). 8. The INSURER will replace free of charge the identification card whenever a change of HCO is made. 30 9. Identification cards are the property of the INSURER and they shall be returned by the beneficiary upon losing eligibility to the plan or when a change of HCO is made. 10. The INSURER shall be responsible for notifying each beneficiary that the identification card is for the personal identification of the beneficiary to whom it has been issued, and that lending, transferring or in any other way consenting to the use of the card by any other person constitutes a fraudulent act. 11. Identification Card contents and layout are subject to the prior approval of the ADMINISTRATION to be in accordance with Law 72 of September 7, 1993. 12. INSURER will comply with all changes requested by the ADMINISTRATION resulting from the implementation of the "Smart Card". Monetary implications as a result of such changes, will be negotiated with the INSURER. ARTICLE IX SUMMARY PLAN DESCRIPTION BOOKLET AND ORIENTATION PROGRAMS MARKETING PROVISIONS 1. The INSURER shall be responsible for the preparation, printing and distribution, at its own cost, of booklets, in the Spanish language, that describe the plan and the benefits covered therein. The Insurer agrees to submit before the effective date of the contract a translated copy of the beneficiaries' booklet in the English language by the proper revision of federal authorities. These booklets will be delivered to each subscriber upon enrollment, along with the required identification card(s). 2. The booklets shall serve as guarantee of the benefits to be provided and shall contain the following information: a) Schedule of benefits covered, all services and items that are available and that are covered either directly or through methods of referral and/or prior authorization, a written description of how and where the services that have been available through the plan services may be obtained. b) Benefit's exclusions and limitations. For benefits that enrollees are entitled to but are not available through the MCO, a written description on how and where to obtain benefits; description of procedures for requesting disenrollments/changes. c) Beneficiary's rights and responsibilities, in accordance with specific rights and requirements to be afforded in accordance with Medicaid Program regulations as amended, the Puerto Rico Patient Bill of Rights Law 194 of 31 August 25, 2000, the Puerto Rico Mental Health Code, of October 2, 2000, as amended and implemented by their regulations, and Law 11 creating the Office of Patients Solicitor General of April 11, 2001. d) Instructions on how to access benefits, including a list of (1) available HCO's and its participating providers, PCP or Specialists (its locations and qualifications), (2) providers from which to obtain benefits under the Special Coverage. Said list can be provided in a separate booklet. e) Official grievances and appeal filing procedures. f) In the event a Physician Incentive Plan affects the use of referral services and/or places physicians at substantial risk, the INSURER shall provide the following information upon beneficiaries' requests: the type of incentive arrangements, whether stop-loss insurance is provided and the survey results of any enrollee/disenrollee surveys that will have to be conducted by INSURER. g) Unless otherwise specified, subscription materials must be written at the 4th-6th grade reading comprehension level. h) Explanations of instances under which a beneficiary's disenrollment may be requested without his/her consent by a provider. i) Explanations of right of beneficiary to transfer from HCO at any time for cause and to transfer or change within first ninety (90) days of the date of enrollment or the later date of receipt of notice of enrollment, and at least every (12) months thereafter without cause. 3. The booklets shall be approved by the ADMINISTRATION prior to printing, distribution, and dissemination in compliance with provisions of Article IX. 4. The INSURER shall also be responsible for the preparation, printing and distribution, at its own cost, of an Informative Bulletin, in the Spanish language, that describes the plan, services and benefits covered therein as well as the managed care concept. This Informative Bulletin will be distributed among the HCO's, HCO's network of participating providers and the INSURER's participating providers. 5. The INSURER shall be responsible to conduct and assure the participation of all providers under this contract to diverse seminars to be held throughout the Health Area/Region in order to properly orient and familiarize said providers with all aspects and requirements related to the Preventive Medicine Program, Benefits and Coverage under this contract, and the Managed Care concept. Said seminars will be organized, scheduled, conducted and offered at the expense of the INSURER. The curriculum for said seminars will be coordinated with and approved by the ADMINISTRATION Healthcare Coordinators. 6. All participating providers are mandated required to receive yearly during the contract term at least fifteen (15) hours of orientation, education and familiarization with different aspects related to this contract on/or before the 32 expiration of the first four and a half (4 1/2) months of the contract term. Failure to comply with this requirement will be sufficient grounds to exclude from the Health Insurance Program the participating provider. If, at the expiration of the first four and half (4 1/2 months) of the contract term, the participating provider has not fully complied with this requirement, it will be excluded as participating provider for subsequent periods of the contract or the contract term. At the discretion of the ADMINISTRATION, and for good cause the excluded provider may be authorized to be contracted as a participating provider if it subsequently complies with the requirement. 7. The ADMINISTRATION will monitor and evaluate all marketing activities by the INSURER, its contractor, sub-contractors or any provider of services under this contract. 8. Any marketing material addressed to enrollees can not contain false or misleading information. All oral, written or audiovisual information addressed to enrollees should be accurate and sufficient for beneficiaries to make an informed consent decision as to whether or not to enroll and will have to be pre-approved by the ADMINISTRATION. 9. The INSURER, contractor or subcontractor or any providers of services must distribute the material to its entire service area/region. In the event the INSURER or any of its contractors develop new and revised materials they shall submit them to the ADMINISTRATION for prior approval. 10. The ADMINISTRATION will appoint an Advisory Committee, with representation of at least: a board certified physician, a beneficiary of a consumer advocate organization that includes Medicaid recipients a health related professional related with the medical needs of low-income population and a Director of a Welfare Department that does not head a Medicaid agency. 11. The Advisory Committee will assist the ADMINISTRATION in the evaluation and the review of any marketing or informational material addressed to assist Medicaid recipients in the provision of health services under this contract. All the marketing activities and the information which shall be allowed will be limited to the following: a) Clear description of health care benefits coverage and exclusions to enrollees; b) Explain how, when, where benefits are available to enrollees; c) Explain how to access emergency, family-planning services, and services that do or do not require referrals and authorizations; d) Explain any benefits enrollees are entitled to, that are not available through the INSURER and how to obtain them; e) Enrollees rights and responsibilities; 33 f) Grievance and appeal procedures. 12. The INSURER, its agents, any contractor or sub-contractor party under this contract shall not engage in cold call marketing that is, unsolicited personal contact with potential enrollees for the purpose of influencing them to enroll with any of its contractors. Also telephone, door-to-door or telemarketing for the same purposes is hereby prohibited. 13. Neither the INSURER, its contractor, subcontractor or any provider may put into effect a plan under which compensation, reward, gift or opportunity are offered to enrollees as an inducement to enroll other than to offer health care benefits. The INSURER its contractor, subcontractor or provider is prohibited from influencing an individual enrollment with the sale of any other insurance. 14. In the event of a final determination reached by the ADMINISTRATION that the INSURER, its agents, any of its contractor or subcontractors, has failed to comply with any of the provisions set forth on this article, the ADMINISTRATION in compliance with due process guarantees and remedies available under its regulations; Law 72 of September 7, 1993; the Social Security and Balance Budget Act, will proceed to enforce the compliance of these provisions by pursuing within its empowered authority the sanctions established in Article XXXVI. ARTICLE X GRIEVANCE PROCEDURE 1. The INSURER represents that it has established an effective procedure that assures the filing, receipt, and prompt handling and resolution of all grievances and complaints made by the beneficiaries and the participating providers. The INSURER will prepare a grievance form that must be approved by the ADMINISTRATION. The approved grievance form shall be made available to all beneficiaries, HCO's, HCO's network of participating providers and the INSURER's participating providers. The parties will make whatever adjustments are necessary to reconcile their grievance procedure with provisions of Law 194 of August 25, 2000 (known as "Patient Bill of Rights") or those contained in Law 11 of April 11, 2001 (known as "Law Creating the Office of Patient's Solicitor General") as implemented by regulations. 2. Any written or telephone communication from a beneficiary or participating provider, which expresses dissatisfaction with an action or decision arising under the health insurance contracted, shall be promptly and properly handled and resolved through a routine complaint procedure to be implemented by the INSURER, after prior approval from the ADMINISTRATION. The INSURER 34 shall be responsible for documenting in writing all aspects and details of said complaints. 3. The routine complaint procedure which must be implemented by the INSURER must provide for (i) the availability of complaint forms to document oral complaints; (ii) for the proper handling of the complaints; and (iii) for the disposition by notice to the complainant of the action taken. This notice shall advise the complainant of the INSURER's official Grievance Procedure. The INSURER will submit to the ADMINISTRATION, on a monthly basis a written report detailing all grievances and routine complaints received, solved and pending solution and/or copies of the complaint forms with the notation of the action taken. All grievance files and complaint forms must be made available to the ADMINISTRATION for auditing. All grievance documents and related information shall be considered as containing individually identifiable health information, and shall be treated in accordance with the HIPAA regulations cited elsewhere. 4. The Grievance Procedure shall assure the participation of persons with authority to require corrective action. 5. The INSURER's Grievance Procedure shall contain all the necessary provisions that assure the affected parties right to due process of law. In the event that changes are made to the existing Grievance Procedure, a copy of the proposed changes will be made available to the ADMINISTRATION for approval prior to its implementation. A copy of the INSURER's Grievance Procedure is attached hereto as Addendum III and incorporated as part of this contract. The INSURER acknowledges that the arbitration process contemplated in the Grievance Procedure shall not be applicable to disputes between the ADMINISTRATION and the INSURER. 6. Pursuant to Law 72 of September 7, 1993, any decision issued by the INSURER is subject to appeal before the ADMINISTRATION. Such appeal shall be regulated by the ADMINISTRATION's regulations and the Uniform Administrative Procedure Act, Law 170 of August 12, 1988, as amended and as applicable, provided however, that subscribers' grievances shall be expeditiously solved and that INSURER shall therefore fully cooperate with the prompt solutions of any such grievance. 7. The decision issued by the ADMINISTRATION is subject to review before the Circuit Court of Appeals of the San Juan Panel of the Commonwealth of Puerto Rico. 8. INSURER must have written policies and procedures for receiving, tracking, reviewing, and reporting and resolving of beneficiaries complaints. The procedures must be reviewed and approved in writing by THE ADMINISTRATION. Any changes or modifications to the procedures must be 35 submitted to THE ADMINISTRATION for approval thirty (30) days prior to the effective date of the amendment. 9. INSURER must designate an officer of INSURER who has primary responsibility for ensuring that complaints are resolved in compliance with written policy and within the time required. An "officer" of INSURER means a president, vice president, secretary, treasurer, or chairperson of the Board of Directors of a corporation, the sole proprietor, the managing general partner of a partnership, or a person having similar executive authority in the organization. 10. INSURER must have a routine process to detect patterns of complaints and disenrollments and involve management and supervisory staff to develop policy and procedural improvements to address the complaints. INSURER must cooperate with the ADMINISTRATION in beneficiaries' complaints relating to enrollment and disenrollment. INSURER's complaints procedures must be provided to beneficiaries in writing and in alternative communication formats. A written description of INSURER's complaints procedures must be in appropriate languages and easy for beneficiaries to understand. INSURER must include a written description in the beneficiaries Handbook. INSURER must maintain at least one local and one toll-free telephone number for making complaints. 11. INSURER's process must require that every complaint received in person, by telephone or in writing, is recorded in a written record and is logged with the following details: date; identification of the individual filing the complaint; identification of the individual recording the complaint; nature of the complaint; disposition of the complaint; corrective action required; and date resolved. 12. The INSURER Grievance Procedures must comply with the reasonable standards and timeframes for prompt resolution of grievances to be established under the Puerto Rico Patients Bill of Rights Act, Law 194 approved October 2, 2000 and the Mental Health Code, Law 408, approved in August 25, 2000. The State established standards, shall comply with Medicaid Regulations to ensure that in the case of standard resolution of grievances, the standard time frames for prompt resolution, do not exceed 30 days after an insurer receives grievances. And in the case of grievances concerning the particular enrollees' health condition, which requires expedited resolution, they shall, be resolved, within a time frame that shall not exceed, 72 hours after a grievance is received. ARTICLE XI HEALTH CARE ORGANIZATIONS 1. All Health Care Organizations (HCO's) shall have a sufficient number of primary care physicians as specified in Article VI to attend to the medical needs of the beneficiaries. All specialties specified in this section have to be available at each HCO. The following are considered primary care physicians (PCP): 36 a) General Practitioners b) Internists c) Family Physicians d) Pediatricians e) Obstetricians and Gynecologists 2. The INSURER shall have available and under contract a sufficient number of the following types of support participating providers to render services to all beneficiaries: a) Optometrists b) Podiatrists c) Clinical laboratories- (The INSURER shall insure that all laboratory testing sites providing services under this contract have either a clinical laboratory improvement amendment (CLIA) certificate with the registration and (CLIA) identification number or a waiver certification). d) Radiological facilities e) Health Related Professionals f) Hospitals g) Pharmacies h) All those participating providers that may be needed to provide services under the basic, special and dental coverage considering the specific health problems of an area/region. The INSURER may not discriminate with respect to participation, reimbursement or indemnification as to any provider who is acting within the scope of the provider's license or certification under applicable state law. 3. The INSURER shall enter into adequate arrangements to provide its beneficiaries with the services provided for under the dental and pharmacy coverage, as contractually agreed to between the dentists and pharmacies and the INSURER. These arrangements will provide for an adequate number of dentists and pharmacies that guarantee the right to choose of the beneficiaries. 4. The INSURER shall have available and under contract a sufficient number of the following types of support participating physicians to provide services to all beneficiaries: 37 a) Ophthalmologists b) Radiologists c) All those physicians that may be necessary and are available considering the morbidity and mortality rates of the specific health area/region, and those needed to provide all the benefits contained in the Basic Coverage of the plan. 5. Considering the expected mix between private patients and beneficiaries the accepted physician/beneficiary ratio will be 1:1,700 for primary care physicians; 1:2,200 for specialists and 1:1,600 for all physicians. In the event that the HCO's provides services only to beneficiaries under this contract, the physician/beneficiary ratio will be the same to that applicable when there is a mix between private patients and beneficiaries. The INSURER will assure compliance with said physician/beneficiary ratio. 6. The INSURER shall not have, directly or indirectly, any conflict of interest through economic participation in any HCO, participating provider, its subsidiaries, or affiliates. 7. The INSURER shall enforce upon each HCO strict quality assurance and utilization review programs as described in this contract, the Request for Proposals, the INSURER's proposal and its Operations Manual. 8. The INSURER shall contract and have available all the participating providers required to provide to the beneficiaries, in a prompt and efficient manner, the benefits included in the Basic, Special and Dental Coverage as specified in Addendum I of this contract. 9. The INSURER agrees to enforce and assure compliance by the HCO's with all provisions contained in this contract. 10. The INSURER will prepare, and provide to all HCO's, complete written instructions describing procedures to be used for the compliance with all duties and obligations arising under this contract. These instructions will cover at least the following topics: provider selection by beneficiaries, covered services, instructions and coordination of access to mental health services through the mental carve-out contractors, reporting requirements, record keeping requirements, grievance procedures, deductibles and co-payment amounts, confidentiality, and the prohibition against denial or rationing of services. A copy of these instructions will be submitted to the ADMINISTRATION, who reserves the right to request modifications or amendments to said instructions following consultation with the INSURER. 38 ARTICLE XII GUARANTEE OF PAYMENT 1. The INSURER expressly guarantees payment for all medically necessary services rendered to beneficiaries by any and all participating providers. 2. The insolvency, liquidation, bankruptcy or breach of contract of an HCO, or of a contracted participating provider does not release the INSURER from its obligation and guarantee to pay for all services rendered as authorized under this health insurance contract. The nature of INSURER's obligations to guarantee payment to all HCO's, providers or subcontractors for services rendered under this health insurance contract is solidary, subject to complying with whatever established claim proceedings require. As such, the INSURER will respond directly to the ADMINISTRATION as principal obligor to comply in its entirety with all the contract terms. 3. In accordance with the payments rights guaranteed under paragraph (4) and (5), the provider shall claim direct payments due by a HCO/Contractor, to the INSURER. The INSURER shall deduct any amount payable directly to a provider from the capitation payments owed to an HCO or other contractor. In case the INSURER owes money to the HCO's or any provider, following due process, the Administration may retain the amounts owed to the providers. 4. The INSURER agrees to pay all monies due to the HCO's and/or participating providers according to the agreed payment schedule in the contracts with said parties. The INSURER represents as of the date of this contract that payment to HCO's, HCO's network of participating providers and INSURER's participating providers will be made no later than thirty (30) days or as provided by legislation from the date that a full, complete and ready to process claim is received at the INSURER, when received within sixty (60) days of date of service. The INSURER expressly commits to implement all internal systems necessary to promptly pay its HCO's and providers all full, complete and ready to process claims within the term provided in this section, and to avoid unjustifiable delay in payment by submitting said claims to audits and evaluation of contested claims; said practice is expressly prohibited, and may result in the remedies set forth at Article XXXVI or termination as provided in Article XXXIII. A complete and ready to process claim (clean claim) is a claim received by the INSURER for adjudication, and which requires no further information, adjustment, or alteration by the provider of the services in order to be processed and paid by the INSURER. 39 5. In the event that, following the receipt of the claim, the same is totally or partially contested by the INSURER or HCO, the participating provider shall be notified in writing within thirty (30) days that the claim is contested with the contested portion identified and provided the reasons thereof. Upon receipt of a new or supplemented claim, the INSURER or the HCO, shall pay or deny the contested claim or portion of the contested claim within thirty (30) days. Upon expiration of any of the aforementioned periods of time, the overdue payments shall bear interest at the prevailing rate for personal loans as determined by the Financial Board of the Office of the Commissioner of Financial Institutions. 6. Checks for capitated payments to HCO's, HCO's network of participating providers and INSURER's participating providers are to be regularly issued by the INSURER on the 15th day of each month. The INSURER further represents that it has contracted with the HCO the payment of the corresponding capitation no later than the last day of the month to which said capitation corresponds. 7. The INSURER agrees and warrants that it will be the central payor for all valid claims that will be generated throughout their contracted participating provider network for the health insurance contract for the Health Region/Area. 8. All payments distribution within the capitated services will be made by the INSURER accordingly within sound actuarial methods and in compliance with the ADMINISTRATION's commitments and efforts to assure a more uniform and equitable distribution of risk among providers throughout all the island health regions. In the event that participating providers in their arrangements with the HCO's consent to the disbursement of the payment checks directly to the HCO's, the INSURER will assure and require the HCO's to provide on a monthly basis a schedule of the amount of the payments made to said participating providers. In any event, the INSURER will provide the ADMINISTRATION with a detailed monthly report listing by providers the monthly payment distribution. The claims for services rendered will be generated and forwarded by the participating providers directly to the INSURER. The claims submitted by the participating providers will comply with the requirements contained in Article XV, Sections four (4) and eight (8). 9. The INSURER agrees and warrants that the method and system used to pay for the services rendered to and by the HCO's and all participating providers is reasonable and that the amount paid does not jeopardize or infringe upon the quality of the services provided. 10. The guarantee of payment contained in this article will be reinforced through the establishment of different alternatives in order to insure that HCO's, HCO's participating providers and INSURER's participating providers are paid in full for contracted services in accordance with established budgets. Said alternatives will be submitted to the ADMINISTRATION for approval prior to its implementation. 40 11. Inasmuch as the INSURER will be the central payor for all payments for valid claims for services rendered by the HCO's, HCO's network of participating providers and INSURER's participating providers the INSURER agrees to incorporate in the contracts with the HCO's, and to require the HCO's to incorporate in their arrangements with their participating providers a provision whereby the INSURER is authorized to adjudicate and determine the validity of any claim or dispute between the HCO and its participating providers regarding a controversy surrounding the validity of the claims of services submitted by said participating provider. Said provision will assure that the payment to the HCO's network of participating providers for a valid claim for services is not improperly withheld and that in no event payment in this situation is made more than sixty (60) days from the date that the claim or dispute is received by the INSURER. It will be the INSURER's responsibility to verify the terms of the arrangements between the HCO and its network of participating providers, the rendering of the services, the reasonableness of the claim and that payment has not been made. 12. The guarantee of payment and the representations as to the payment schedule to HCO's and participating providers will be enforceable and not set aside or altered in the event that the INSURER is notified of the expiration of the term of this contract or of its termination. 13. The INSURER agrees to provide the ADMINISTRATION, on a monthly basis, and through electronic or magnetic media format, a detailed report containing all payments made to HCO's, to HCO's network of participating providers, and to the INSURER's participating providers during the month immediately preceding the report. Said report will also include a list of all claims received on account of those payments during the preceding month by the INSURER from the HCO's, the HCO's network of participating providers as well as a detail as to all claims received but not paid by reason of accounting or administrative objections. The INSURER further agrees to make available to the ADMINISTRATION for auditing purposes any and all records or financial data related to claims submitted but not paid by reason of accounting or administrative objections. The intention of this clause is for the ADMINISTRATION to be able to determine on a monthly basis the amount of money paid to each participating provider, the amount billed by and not paid to each participating provider and the reasons for non-payment in order to keep track of the regularity of payments of the Insurer and the HCO's and their compliance with this contract. 14. The INSURER also agrees to provide to HCO's, on a monthly basis, and through electronic or machine readable media format, a detailed report classified by beneficiaries, by providers, by diagnosis, by procedure, by date of service and by its real cost of all payments made by the INSURER which entails a deduction from the gross monthly payment to said HCO's. Copy of said report will be made available to the ADMINISTRATION each month. 41 15. Each HCO must report each encounter to the INSURER on a monthly basis classified by each participating provider within the HCO, as well as the real cost of the services of each encounter of service. The INSURER must submit to the ADMINISTRATION the distribution of the capitation within each HCO as established on the Actuarial Reports formats required in the RFP. 16. The INSURER will abide with the ADMINISTRATION efforts to implement cost reduction measures and future implementation of payment methods based on fee schedules or diagnosis related group that may be established. In no way a beneficiary will be discriminated nor will health services be rationed based on diagnosis or illness or an expectation that the beneficiary may require high cost care. ARTICLE XIII UTILIZATION REVIEW AND QUALITY ASSURANCE 1. The INSURER will establish a Quality of Care Program with the following guidelines: a) PHYSICIAN-CREDENTIALING: The INSURER shall follow strict provider screening procedures before contracting. In order to assure quality health services for the medically indigent, the INSURER will follow stringent physician selection and credentialing process for this plan as per the INSURER's Proposal. The ADMINISTRATION may review participating providers' credentials at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all accepted and non-accepted providers. b) PROVIDER CONTRACTING: The INSURER will assure that all hospitals facilities, doctors, dentists, and all health care providers are appropriately licensed and in good standing with all their governing bodies and accrediting agencies and meet all practice requirements established by law, the Department of Health, the ADMINISTRATION and other governing agencies, as described in the INSURER's Proposal. The ADMINISTRATION may review participating provider credentials at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all accepted and non-accepted providers. c) INSPECTION OF ALL FACILITIES: The INSURER will insure that all providers' physical facilities are safe, sanitary and follow sound operating procedures, as described in the INSURER's Proposal and that all laboratory testing site providing services under this contract have their duly CLIA certification along with their identification number or waiver certificate. The ADMINISTRATION may review participating provider 42 facilities at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all inspections done. d) MEDICAL RECORD REVIEW: The INSURER will establish a program to monitor the appropriateness of care being provided, the adequacy and consistency of record keeping, and completeness of records, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Medical Record Review Program. The ADMINISTRATION may review and/or audit Program records and reports at any time. e) CLINICAL DATABASE SYSTEM: The HCO's will provide the INSURER with statistical records of utilization of medical services by beneficiaries, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Clinical Database System. The ADMINISTRATION may review and/or audit the Clinical Database System records and reports at any time. f) RETROSPECTIVE REVIEW: The INSURER will establish a Retrospective review Program that will address quality and utilization problems that may arise, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Retrospective Review Program. The ADMINISTRATION may review and/or audit the program findings at any time. g) OUTCOME REVIEW: The INSURER will establish an Outcome Review Program to assess the quality of inpatient and ambulatory care management provided by the primary health care providers, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Outcome Review Program. The ADMINISTRATION may review and/or audit the program findings at any time. h) QUALITY OF CARE COMMITTEE: The INSURER will establish a Quality of Care Committee to insure provider's compliance with the INSURER's quality of care program, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Quality of Care Committee. The ADMINISTRATION may review and/or audit the program findings and reports at any time. 2. The INSURER will establish cost containment and utilization review programs as follows: 43 a) HOSPITAL ADMISSION AND STAY REVIEW: The INSURER will establish programs to reduce unnecessary hospital use and to review hospital admissions through the following programs, as described in the INSURER's Proposal: (1) CONCURRENT REVIEW: The INSURER will establish a program to review hospital admissions to guarantee adequacy and duration of stay. (2) RETROSPECTIVE REVIEW: The INSURER will establish a program to determine medical necessity and service adequacy after the service has been rendered or paid to providers or physicians. (3) PROSPECTIVE REVIEW: The INSURER will establish a program to determine appropriate lengths of stay at the hospital prior to admission for elective or non-emergency hospitalizations. b) UTILIZATION REVIEW PROGRAM: The INSURER will establish a program to identify patterns of medical practice and their effect in the care being provided, as described in the INSURER's Proposal, and through the following: (1) PRE-PAYMENT REVIEW: The INSURER will establish a program to prevent inappropriate billing of services prior to claims payment and to evaluate questionable practices, problematic coding, inappropriate level of care, excessive tests and services. (2) POST PAYMENT REVIEW: The INSURER will establish a program to review service claims for purposes of creating a provider profiling system. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings under the Utilization Review Programs. The ADMINISTRATION may review and/or audit the programs' findings and reports at any time. c) SECOND SURGICAL OPINION: The INSURER will establish a program to allow beneficiaries to obtain a second surgical opinion for elective surgical procedures on a voluntary basis, as described in the INSURER's Proposal. d) INDIVIDUAL CASE MANAGEMENT PROGRAM: The INSURER will establish a program to identify and manage cases that involve high health care costs, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all 44 findings in the Individual Case Management Program. The ADMINISTRATION may review and/or audit the program findings and reports at any time. e) FRAUD AND ABUSE: The INSURER will establish a program to assure reasonable levels of utilization and quality of care, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Fraud and Abuse Program. The Fraud and Abuse Reports must include: (1) the number of complaints of fraud and abuse made to the Commonwealth that warrant a preliminary investigation, and, (2) for each case of suspected fraud and abuse warranting a full investigation, the INSURER must report the following information: (i) the provider's name and number; (ii) the source of the complaint; (iii) the type of provider; (iv) the nature of the complaint; (v) the approximate range of dollars involved, (vi) the legal and administrative disposition or status of the case. f) COORDINATION OF BENEFITS PROGRAM: The INSURER will establish a program to identify beneficiaries with other insurance in order to coordinate health insurance benefits from other carriers, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Coordination of Benefits Program. The ADMINISTRATION may review and/or audit the program findings and reports at any time. 3. DENTAL SERVICES UTILIZATION REVIEW PROGRAM: The INSURER agrees to maintain a program to determine that the services provided to beneficiaries are in accordance to established quality parameters by the dental community as provided for in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION quarterly of all findings of said review program. The ADMINISTRATION may review and/or audit the program findings at any time. 4. EPSDT AND MIGRANT SERVICES PROGRAM: The INSURER will implement a program that addresses EPSDT screening and Migrant services indicators for preventive diagnostic tests according to age in all areas/regions and shall notify the ADMINISTRATION on a monthly basis all findings of said program. INSURER assures the compliance with Section 1905(r) of the Social Security Act and the applicable protocols adopted by the Department of Health for the implementation of these Programs. 45 5. The INSURER shall continue to submit the ADMINISTRATION on a monthly basis a report that includes all services rendered by diagnosis and procedures identified by all specialties, by place of service including those under dental coverage, and procedures in laboratories and X-rays. It will be reported beginning with the most common diagnosis and procedures until reaching the least common. 6. All services rendered shall be identified by Current Procedure Terminology, International Classification of Diseases, Clinical Modifications Diagnostic Statistic Manual and American Dental Association's Current Dental Terminology, as applicable. 7. The ADMINISTRATION and the INSURER will agree on the required format in order to comply with the reporting requirements in this section and which will be accomplished through electronic or magnetic media. 8. All the required programs, processes and reports heretofore referred to, will also be an obligation on the part of the INSURER's participating providers, HCO's and HCO's participating providers. The INSURER will assure compliance therewith on the part of said INSURER's participating providers, HCO's and HCO's participating providers. 9. The ADMINISTRATION reserves the right to require the INSURER to implement additional specific cost and utilization controls, subject to prior consultation and cost negotiation with the INSURER if necessary. ARTICLE XIV COMPLIANCE AND AGREEMENT FOR INSPECTION OF RECORDS 1. Since funds from the Commonwealth Plan under Title XIX and Title XXI of the Social Security Act Medical Assistance Programs (Medicaid) and SCHIPS as well as from Title V of the Social Security Act and Mental Health Block Grants are used to finance this project in part the INSURER shall agree to comply with the requirements and conditions of the Centers for Medicare and Medicaid Services (CMS), the Comptroller General of the United States, the Comptroller of Puerto Rico and this ADMINISTRATION, as to the maintenance of records related to this contract and audit rights thereof, as well as all other legal obligations attendant thereto, including, but not limited to, non-discrimination, coverage benefit eligibility as provided by the Puerto Rico State Plan and Law 72 of 1993, anti-fraud and anti-kickback laws, and those terms and provisions of the SSA as applicable. All disclosure obligations and access requirements set forth in this Article or any other Article shall be subject at all times and to the extent 46 mandated by law and regulation, to the HIPAA regulations described elsewhere in this agreement. 2. The INSURER shall require from the HCO's and all participating providers that they maintain an appropriate record system for services rendered to beneficiaries, including separate medical files and records for each beneficiary as is necessary to record all clinical information pertaining to said beneficiaries, including notations of personal contacts, primary care visits, diagnostic studies and all other services. The INSURER shall also maintain records to document fiscal activities and expenditures relating to compliance under this agreement. The INSURER and all participating providers shall preserve, and retain in readily accessible form, the records mentioned herein during the term of this contract and for the period of six (6) years thereafter. 3. At all times during the term of this contract and for a period of six (6) years thereafter, the INSURER and all participating providers will provide the ADMINISTRATION, CMS, the Comptroller of Puerto Rico, the Comptroller General of the United States of America and/or their authorized representatives, access to all records relating to the INSURER's compliance under this contract for the purpose of examination, audit or copying of such records. The audits of such records include examination and review of the sources and applications of funds under this contract. The INSURER shall also furnish access to and permit inspection and audit by the ADMINISTRATION, CMS, the Comptroller of Puerto Rico, the Comptroller General of the United States of America and/or their authorized representatives to any financial records relating to the capacity of the INSURER or its HCO's, if relevant, to bear the risk of potential financial losses. 4. The INSURER shall ensure that the HCO's and all participating providers and their subcontractors furnish to the Peer Review Organization (PRO) or to the ADMINISTRATION on-site access to, or copies of patient care records as needed to evaluate quality of care. 5. The ADMINISTRATION and CMS shall have the right to inspect, evaluate, copy and audit any pertinent books, documents, papers and records of the INSURER related to this contract and those of any HCO or participating provider in order to evaluate the services performed, determination of amounts payable, reconciliation of benefits, liabilities and compliance with this contract. 6. The INSURER shall provide for the review of services (including both in-patient and out-patient services) covered by the plan for the purpose of determining whether such services meet professional recognized standards of health care, including whether appropriate services have not been provided or have been provided in inappropriate settings. It shall also provide for review, by random sampling, by the ADMINISTRATION, of written complaints, and the results thereof, filed by beneficiaries or their representatives as to the quality of services provided. 47 7. The INSURER agrees that the ADMINISTRATION and CMS may conduct inspections and evaluations, at all reasonable times, through on-site audits, systems tests, assessments, performance review and regular reports to assure the quality, appropriateness, timeliness and cost of services furnished to the beneficiaries. 8. The ADMINISTRATION and CMS shall have the right to inspect all of the INSURER's financial records related to this contract that may be necessary to assure that the ADMINISTRATION pays no more than its fair share of general overhead costs as contracted. The ADMINISTRATION and CMS shall have the right to inspect all the HCO's' financial records related to this contract. 9. The INSURER agrees that the ADMINISTRATION may evaluate, through inspection or other means, the facilities of the INSURER's participating providers, HCO's and its participating providers. All facilities shall comply with the applicable licensing and certification requirements as established by regulations of the Department of Health of Puerto Rico. It shall be the INSURER's responsibility to take all necessary measures to ascertain that all facilities contracting with INSURER comply with the required licensing and certification regulations of the Puerto Rico Health Department, and to terminate the contract of any facility not in compliance with said provisions. Failure to adequately monitor the licensing and certification of the facilities may result in the termination of this contract as provided in Article XXXIII. 10. The INSURER agrees and also will require all HCO's and participating providers to agree that the ADMINISTRATION's right to inspect, evaluate, copy and audit, will survive the termination of this contract for a period of six (6) years from said termination date unless: a) The ADMINISTRATION determines there is a special need to retain a particular record or group of records for a longer period and notifies the INSURER at least thirty (30) days before the normal disposition date; b) There has been a termination, dispute, fraud, or similar fault by the INSURER, in which case the retention may be extended to three (3) years from the date of any resulting final settlement; or c) The ADMINISTRATION determines that there is a reasonable possibility of fraud, in which case it may reopen a final settlement at any time; d) There has been an audit intervention by CMS, the office of the Comptroller of Puerto Rico, the Comptroller General of the United States or the ADMINISTRATION, in which case the retention may be extended until the conclusion of the audit and publication of the final report. 11. The INSURER agrees to require all HCO's and participating providers to permit the ADMINISTRATION to review and audit all aspects related to quality, 48 appropriateness, timeliness and cost of services rendered, and to demonstrate that the services for which payment was made were actually provided. ARTICLE XV INFORMATION SYSTEMS AND REPORTING REQUIREMENTS 1. The INSURER agrees to comply with the reporting and information systems requirements as provided for in the Request for Proposals and the Proposal submitted by the INSURER. Accordingly the INSURER must submit to the ADMINISTRATION a detailed Systems Requirements Inventory Report which details the following: a) Plan's compliance with each information system requirement; b) Action plan of INSURER's response to the requirements; c) Actual date that each system requirement will be completely operational, not to exceed the effective date of coverage under this contract. 2. The INSURER agrees to submit to the ADMINISTRATION the System Inventory Report for final approval not later than the date of the signing of this contract. 3. All Management Information Systems Requirements included in the Request for Proposal and those included in the INSURER's Proposal must commence implementation as of the date of the signing of this contract and shall be fully operational as of the first day of coverage under this contract. Material noncompliance with this requirement shall be enough reason to cancel the contract herein, with prior written notification by the ADMINISTRATION to the INSURER according to the time set in Article XXXIII. 4. The INSURER shall be responsible for the data collection and other statistics of all services provided including, but not limited, to encounter and real cost of each one, claims services and any other pertinent data from all HCO's, participating providers or any other entity which provide services to beneficiaries under the program, said data to be classified by provider, by beneficiary, by diagnosis, by procedure and by the date the service is rendered. The data collected must then be forwarded to the ADMINISTRATION on a monthly basis in an electronic or on machine readable media format. The data fields and specific data elements required to be transmitted are contained in the RFP's Claim File Layout format. The ADMINISTRATION reserves the right to modify, expand or delete the requirements contained therein or issue new requirements, subject to consultation with the INSURER and cost negotiation, if necessary. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 49 5. The INSURER agrees that all required data and information needs to be collected and reported through electronic or machine readable media commencing with the effective date of coverage of this contract. 6. The information systems of all HCO's shall be compatible with the systems in use by the INSURER. 7. The INSURER shall supply the HCO's and, upon request, all participating providers with eligibility information on a daily basis. Said information shall be secured through on-line access with the INSURER. 8. The INSURER agrees to submit to the ADMINISTRATION in such form and detail as indicated in the Claim File Layout format and any other formats the ADMINISTRATION requires in the RFP, the following information: a) Within fifteen (15) days of the end of each month: 1) Data pertaining to health insurance claims, and encounters for all services provided to beneficiaries. 2) Enrollment data b) Within twenty-five (25) days of the end of each month: 1) Statistical data on providers, medical services and any other services; 2) Any and all data and information as required in the Request for Proposals and in the Proposal submitted; 3) Any other reports or data that the ADMINISTRATION may require after consultation with the INSURER and cost negotiation, if necessary. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 9. The INSURER agrees to provide to the ADMINISTRATION, on a regular basis as needed, any and all data, information, reports, and documentation that will permit Governmental Agencies, to compile statistical data to substantiate the need for, and the appropriate use of federal funds for federally financed health programs. 10. The INSURER agrees to report to the ADMINISTRATION on a daily basis all information pertaining to enrollment, disenrollment, and other subscriber or beneficiary transactions as required by the ADMINISTRATION. All records shall be transmitted: 1) through approved ADMINISTRATION systems contractor; or 2) over data transmission lines directly to the ADMINISTRATION; or 3) on machine readable media. All machine readable media or electronic transmissions shall be consistent with the relevant ADMINISTRATION's record layouts and specifications. 50 11. The INSURER will submit to the ADMINISTRATION on a monthly basis reports and data generated electronically that allows the ADMINISTRATION: a. Evaluation of the effectiveness of the delivery of services by providers and the adequacy of these services. b. Monitoring and evaluation of the efficiency and propriety of the services that are being received by the beneficiaries and their dependents. c. Comparison of experience with that of other providers. d. Comparison of the utilization of health care and the cost tendencies within the community and the group that renders service. e. Demonstration of how the quality of care is being improved for the insured and their dependents. f. Comparison of the administrative measures taken by the INSURER with reference points to be able to evaluate the progress towards constant improvement. g. Compliance with the information requirements and reports of the Federal Programs such as: Title II of the Health Insurance Portability and Accountability Act; Title IV-B Part 1 and 2, Title IV-E, Title V, Title XIX, and Title XXI of the Social Security Act; the applicable state laws as (the Child Abuse Act, "Ley de Maltrato de Menores" Public Law 75 of May 28, 1980; the Protection and Assistance to Victims and Witness Act, "Ley de Proteccion y Asistencia a Victimas de Delitos y Testigos", Public Law 77 of July 9, 1986), and any other information requirements which in the future are mandated by federal and state programs. h. Evaluation of each service provided with separate identification by beneficiary, by provider, by diagnosis, by diagnostic code, by procedure code and by date and place of service. The provider must be identified by his/her provider's identification number or his/her social security account number. 12. The INSURER will provide the ADMINISTRATION with a uniform system for data collection. 13. The INSURER'S Information Systems must provide a continuous flow of information to measure the quality of services rendered to the beneficiaries and their dependents. The purpose of these systems must be to help the ADMINISTRATION and the INSURER in the process of achieving continuous improvement in the quality of services rendered to beneficiaries and their dependents within a cost effective system. 14. The INSURER will prepare the necessary reports requested herein for the administration of the health insurance contract. Daily reports are due by the end of the following business day. Weekly reports are due on the first business day of the following week. Monthly reports are due twenty-five (25) days after the 51 end of each month. Quarterly reports are due thirty (30) days after the end of each quarter. 15. The INSURER must inform the Administration on a monthly basis all cancellation and disenrollment of providers. 16. The INSURER must provide the ADMINISTRATION on a monthly basis an updated version of its Providers Directory. 17. The INSURER will coordinate the enrollment of beneficiaries. 18. The INSURER will assure adequate and efficient functioning for the term of the contract that includes an insurance against economic loss due to system failure or data loss. 19. As an additional measure to guarantee quality and adequacy of the medical health services, the INSURER will conduct periodical statistics analysis of the medical services rendered to the beneficiaries and will compare them with the primary physician practice profile of their regular health insurance plan. Quarterly reports as to the analysis and comparison statistics will be submitted to the ADMINISTRATION. 20. In order to insure that all subscriber encounters are registered and recorded, the INSURER will conduct audits of statistical samples and unannounced personal audits of the HCO's and participating provider's facilities to assure that the medical records reconcile with the encounter reported, and corrective measures will be taken in case of any violation of the INSURER's regulations regarding the registration and reporting of encounters. The INSURER will provide quarterly reports to the ADMINISTRATION covering all the findings and corrective measures, if any, taken regarding any violation of said regulations. 21. The INSURER, as a minimum must guarantee the following: a. The security and integrity of the information and communication systems through: 1. Regular Backups on a daily basis 2. Controlled Access to the physical plant 3. Control logical access to information systems 4. Verification of the accuracy of the data and information b. The continuity of services through: 1. Regular maintenance of the systems, programs and equipment 2. A staff of duly trained personnel 3. An established and proven system of Disaster Recovery 4. Cost Effective systems. 52 c. Identification of the beneficiary via the use of plastic cards. d. Automated system of communication with statistics of the management of calls (Occurrence of busy lines, etc.) e. A comprehensive health insurance claim processing system to handle receiving, processing and payment of claims and encounters. f. Analysis/Control of utilization (The INSURER must provide said analysis to the ADMINISTRATION on a monthly basis in the format outlined by the ADMINISTRATION): 1. by patient/family 2. by region, area/region town, (zip code) 3. by provider (provider's identification number or social security account numbers) 4. by diagnosis 5. by procedure or service 6. by date of service g. Financial and Actuarial reports h. System of Control for claims payment that includes payment history. i. Computerized pharmacy system that permits its integration to the payment procedures to the providers. j. Outcome Analysis k. Electronic creation of data files related to mortality, morbidity, and vital statistics. l. Integration to central systems 1. Procedures and communications protocol compatibility; 2. Ability to transmit reports, and or files via electronic means. m. Electronic Handling of: 1. The process of Admission to hospitals and ambulatory services 2. Verification of eligibility and subscription to the plan. 3. Verification of benefits 4. Verification of Financial information (Deductibles, Co-payments, etc.) 5. Verification of individual demographic data 6. Coordination of Benefits. n. Computerized applications for general accounting. o. As to HCO's and all Participating Providers the information system shall provide for: 1. On line access to service history for each beneficiary. 2. Register of diagnosis and procedures for each service rendered. 3. Complete demography on line, including the aspect of coverage and financial responsibility of the patient. 4. Individual and family transactions 53 5. Annotations on line (General notes such as allergies, reminders or other clinical aspects (free form) 6. Analysis of activity by: a. department b. provider c. diagnosis d. procedures e. age f. sex g. origin h. others, as mutually agreed upon. 7. Diagnosis history by patient with multiple codes per service. 8. AD Hoc Reports 9. Referrals Control 10. Electronic Billing 11. Pharmacy system 12. Dental system 13. Ability to handle requirements of the Medicare programs such as RBRVS (Relative Base Relative Value System). 14. Ability to collect data as to the quarter in which the pregnant female beneficiary commences her ob-gyn treatment. The format for the collection of this data shall be approved by the ADMINISTRATION prior to its implementation. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 22. The INSURER agrees to report all procedure and diagnostic information using the current versions of Current Procedural Terminology, International Classification of Diseases, Clinical Modification, Diagnostic Statistic Manual and American Dental Association's Current Dental Terminology, respectively. This does not prevent the adoption by INSURER of the ANSI X-12 electronic transactions for standards set forth in the HIPAA regulations; which shall be implemented on or before October 2002, unless modified by DHHS. 23. Non compliance with any of the Information Systems and Reporting Requirements; with any requirements related to the electronic standards transactions to be implemented within the schedule set forth by the HIPAA regulations, or with other requirements contained herein, shall be subject to the provisions of Articles XXXIII and XXXVI of this contract, as well as to Article IV, Section 2(n) of Law 72 of September 7, 1993, which provides the right of the 54 ADMINISTRATION to enforce compliance through the Circuit Court of Appeals of Puerto Rico, Part of San Juan. 24. The INSURER shall provide the ADMINISTRATION with one or more telephone numbers of dial-in data lines, and a minimum of three user's ID's and passwords that will allow the ADMINISTRATION's authorized personnel access to the INSURER's on-line computer applications. Such access will allow the ADMINISTRATION use of the same systems and access to the same information as used by the INSURER and enable the inquiry on beneficiaries, providers, and statistics files related to this contract. 25. As per the INSURER's proposal, INSURER shall provide to each HCO's, HCO's network of participating providers and INSURER's participating providers in the Health Area/Region, as well as to those outside of the area/region who provide services to beneficiaries from within the area/region, the necessary hardware and software to maintain on-line communication with the INSURER's Information System to document all encounters and services rendered to beneficiaries. Said hardware and software will be provided at a reasonable cost for the implementation and servicing. 26. The INSURER agrees to submit to the ADMINISTRATION reports as to the data and information gathered through the use of the Health Plan Employer Data and Information Set (HEDIS) and the work plan required in the RFP formats, as per Article XVII, Section VII. 27. The INSURER must disclose to the ADMINISTRATION the following information on provider incentive plans in sufficient detail to determine whether their incentive plan complies with the regulatory requirements set forth on 42 CFR 434.70(a) and 422.10: a) Whether services not furnished by the physician or physician group are covered by the incentive plan. If only the services furnished by the physician or physician group are covered by the incentive plan, disclosure of other aspects of the plan need not be made. b) The type of incentive arrangement (i.e., withhold, bonus, capitation). c) A determination on the percent of payment under the contract that is based on the use of referral services. If the incentive plan involves a withholding or bonus, the percent of the withholding of bonus. If the calculated amount is 25% or less, disclosure of the remaining elements in this list is not required and there is no substantial risk. d) Proof that the physician or physician group has adequate stop-loss protection, including the amount and type of stop-loss protection. e) The panel size and, if patients are pooled, the method used. f) In the case of those prepaid plans that are required to conduct beneficiary surveys, the survey's results. 55 The information items (a) through (e) above, must be disclosed to the ADMINISTRATION: (1) prior to approval of its initial contracts or agreements, upon the contract or agreements anniversary or renewal effective date or upon request by the Administration or CMS. The disclosure item (f) is due 3 months after the end of the contract year or upon request by CMS. If the contract with the INSURER is an initial Medicaid contract, but the INSURER has operated previously in the commercial or Medicare markets, information on physician incentive plans for the year preceding the initial contract period must be disclosed. If the contract is an initial contract with INSURER, but the INSURER has not operated previously in the commercial or Medicare markets, the INSURER should provide assurance that the provider agreements that they sign will meet CMS and Commonwealth requirements (i.e. there is no Physician Incentive Plan (PIP); there is a PIP but no Substantial Financial Risk (SFR); there is a PIP and SFR so stop-loss and survey requirements will be met). For contracts being renewed or extended, the INSURER must provide PIP disclosure information for the prior contracting period's contracts. The INSURER must update PIP disclosures annually and must disclose to administration whether PIP arrangements have changed from the previous year. Where arrangements have not changed, a written assurance that there has not been a change is sufficient. This also applies when INSURER analyze the PIP arrangements in their direct and downstream contracts to determine which disclosure items are due from their contractors. INSURER is expected to maintain the current written assurances and the prior periods' documentation so that the materials are available during on-site reviews. 28. INSURER TELEPHONE ACCESS REQUIREMENTS INSURER must have adequately-staffed telephone lines available. Telephone personnel must receive customer service telephone training. INSURER must ensure that telephone staffing is adequate to fulfill the standards of promptness and quality listed below: 1. 80% of all telephone calls must be answered within an average of 30 seconds; 2. The lost (abandonment) rate must not exceed 5%; 3. INSURER cannot impose maximum call duration limits but must allow calls to be of sufficient length to ensure adequate information is provided to the Beneficiaries or Provider. 4. The INSURER shall abide with the present Information Systems and Reporting Requirements established in this agreement and shall cooperate with the ADMINISTRATION in the development and implementation of any future systems. 56 ARTICLE XVI FINANCIAL REQUIREMENTS 1. The INSURER shall notify the ADMINISTRATION of any loans and other special financial arrangements which are made between the INSURER and any HCO or participating provider or related parties. Any such loans shall strictly conform to the legal requirements of the anti-fraud and anti-kickback laws and regulations. 2. The INSURER shall provide to the ADMINISTRATION copies of audited financial statements following Generally Accepted Accounting Principles (GAAP) and of the report to the Insurance Commissioner in the format agreed to by the National ASSOCIATION of Insurance Commissioners (NAIC), for the year ending on December 31, 2001, and subsequently thereafter for the contract term not later than March 15 of each subsequent year. Unaudited GAAP financial statements for each quarter during the contract term shall be presented to the ADMINISTRATION not later than forty five (45) days after the closing of each quarter. 3. The INSURER will maintain adequate procedures and controls to insure that any payments pursuant to this contract are properly made. In establishing and maintaining such procedures the INSURER will provide for separation of the functions of certification and disbursement. 4. The INSURER is required to establish a cash reserve, in accordance with the Insurance Code of Puerto Rico, to insure that outstanding claims can be satisfied in the event of insolvency. 5. The INSURER's Incurred But Not Reported (IBNR) reserve will be reconciled and reevaluated every ninety (90) days and in no way the IBNR reserve shall exceed 10% of the total monthly capitation payments made to HCO's. The ADMINISTRATION reserves the right to retain for custody purposes such IBNR reserve if becomes necessary. 6. The INSURER will ensure that the administrative costs and expenses incurred on an annual basis do not exceed 7.5% of the total premium payments made by the ADMINISTRATION. The INSURER's net earnings in excess of 2.5% premium payments in any given year will be shared with the ADMINISTRATION. The ADMINISTRATION share apportionment of the earnings shall be 75% and the INSURER shall be 25%. 7. The INSURER agrees to provide to the ADMINISTRATION, upon the expiration of each period of twelve (12) consecutive months of the contract year, and not later than ninety (90) days thereafter, audited financial statements following Generally Accepted Accounting Principles (GAAP) which exclusively present the 57 operational financial situation related to the execution of this contract. The ADMINISTRATION reserves the right to request interim audited financial statements not to exceed two (2) during the contract term. 8. The INSURER agrees to provide and make available to the ADMINISTRATION or any accounting firm contracted by the ADMINISTRATION any and all working papers of its external auditors related to this contract. ARTICLE XVII PLAN COMPLIANCE EVALUATION PROGRAM 1. The ADMINISTRATION shall conduct periodical evaluations of the INSURER's compliance with all terms and conditions of this contract including, but not limited to, quality, appropriateness, timeliness and reasonableness of cost and administrative expenses, said evaluation to be defined as the Plan Compliance Evaluation Program. 2. Said program will evaluate compliance of the following aspects in each areas/regions: a) Eligibility and enrollment b) Services to beneficiaries and participating providers c) Coverage of benefits d) Reporting e) Financial requirements f) Rules and Regulations g) Plan initiatives h) Quality, appropriateness, timeliness and cost of services i) Utilization j) Fraud and abuse k) Accessibility l) Grievances and Complaint handling m) Information Systems n) Electronic standards, security and privacy compliance as provided by HIPAA to include review of timetables for compliance and implementation plans o) Such aspects which the ADMINISTRATION considers necessary in order to evaluate full compliance with this contract. 3. The evaluation process will be performed throughout the contract year using specific evaluating parameters. All parameters will be derived exclusively from the Request for Proposals, the INSURER's Proposal and this contract. Each area/region will contain several parameters with each parameter having a specific numeric value adding up a subtotal per area/region and a total for the aggregate of all area/regions of evaluation. Results will be presented in a Plan Compliance Evaluation Report. The evaluating parameters will be presented to the INSURER prior to commencement of the evaluation process. 58 4. The INSURER shall comply with the penalties set for each parameter within the range of values predetermined by the ADMINISTRATION. 5. Compliance with the Plan Compliance Evaluation Program is of essence to this contract and will be a determining factor in the renewal of this contract. Failure to comply with compliance requirements or parameters may also result in the termination of the contract as provided in Article XXXIII. 6. The ADMINISTRATION agrees to furnish the INSURER with the required Plan Performance Evaluation Program prior to its implementation. 7. The INSURER, as an additional tool to assure the evaluation of the insurance contract, agrees to abide, implement and develop the Health Plan-Employer Data and Information Set (HEDIS), as revised and recommended by NCQA and in accordance with the time schedule, work plan and other requirements established in Addendum XI of the RFP referring to HEDIS DATA. 8. DEFAULT AND REMEDIES under Plan Compliance Program. REMEDIES AVAILABLE TO THE ADMINISTRATION UNDER THE PLAN COMPLIANCE PROGRAM FOR INSURER'S DEFAULTS All of the listed remedies below may be exercised by the ADMINISTRATION and are in addition to all other remedies available to the ADMINISTRATION under this contract, by law or in equity, are joint and several, and may be exercised concurrently or consecutively. Exercise of any remedy in whole or in part does not limit the ADMINISTRATION in exercising all or part of any remaining remedies. Any particular default listed under subparagraph (a) to (j) below (which is not intended to be exhaustive) may be subject, when applicable, to any one or more of the following remedies: - Terminate the contract if the applicable conditions set forth in Section 10.1 are met; - Suspend payment to INSURER; - Recommend to CMS that sanctions be taken against INSURER as set out in Section 10.7; - Remove the EPSDT's component from the capitation paid to INSURER if the benchmarks(s) missed is for EPSDT's; - Assess civil monetary penalties as set out in section 10.8; and/or - Withhold premium payment. 59 DEFAULTS BY INSURER a. FAILURE TO PERFORM AN ADMINISTRATIVE FUNCTION Failure of INSURER to perform an administrative function is a default under this contract. Administrative functions are any requirements under this contract that are not direct delivery of health care services. Administrative functions include claims payment; encounter data submission; filing any report when due; cooperating in good faith with THE ADMINISTRATION, an entity acting on behalf of THE ADMINISTRATION, or an agency authorized by statute or law to require the cooperation of INSURER in carrying out an administrative, investigative, or prosecutorial function of the program; providing or producing records upon request; or entering into contracts or implementing procedures necessary to carry out contract obligations. b. ADVERSE ACTION AGAINST INSURER BY PRICO Termination or suspension of INSURER's PRICO Certificate of Authority or any adverse action taken by PRICO that THE ADMINISTRATION determines will affect the ability of INSURER to provide health care services to beneficiaries is a default under this contract. c. INSOLVENCY Failure of INSURER to comply with Commonwealth solvency standards or incapacity of INSURER to meet its financial obligations as they come due is a default under this contract. d. FAILURE TO COMPLY WITH FEDERAL LAWS AND REGULATIONS Failure of INSURER to comply with the federal requirements for Medicaid, including, but not limited to, federal law regarding misrepresentation, fraud, or abuse; and, by incorporation, Medicare standards, requirements, or prohibitions, is a default under this contract. The following events are defaults under this contract pursuant to 42 U.S.C. 1396b(m)(5), 1396u-2(e)(1)(A): INSURER's substantial failure to provide medically necessary items and services that are required under this contract to be provided to beneficiaries; INSURER's imposition of premiums or charges on beneficiaries in excess of the premiums or charge permitted by federal law; 60 INSURER's acting to discriminate among beneficiaries on the basis of their health status or requirements for health care services, including expulsion or refusal to enroll an individual, except as permitted by federal law, or engaging in any practice that would reasonably be expected to have the effect of denying or discouraging enrollment with INSURER by eligible individuals whose medical condition or history indicates a need for substantial future medical services; INSURER's misrepresentation or falsification of information that is furnished to CMS, THE ADMINISTRATION, a beneficiary, a potential beneficiary, or a health care provider; INSURER's failure to comply with physician incentive requirements 1876(1)(8), 1903(m)(2)(A)(v) of the Social Security Act and 42 Code of Federal Regulations 417.479. INSURER's distribution, either directly or through any agent or independent contractor, of marketing materials that contain false or misleading information, excluding materials previously approved by THE ADMINISTRATION. e. MISREPRESENTATION OR FRAUD INSURER's misrepresentation or fraud with respect of any provision of this contract is a default under this contract. f. EXCLUSION FROM PARTICIPATION IN MEDICARE OR MEDICAID Exclusion of INSURER or any of the managing employees or persons with an ownership interest whose disclosure is required by Section 1124(a) of the Social Security Act (the Act) from the Medicaid or Medicare program under the provisions of Section 1128(a) and/or (b) of the Act is a default under this contract. Exclusion of any provider or subcontractor or any of the managing employees or persons with an ownership interest of the provider or subcontractor whose disclosure is required by Section 1124(a) of the Social Security Act (the Act) from the Medicaid or Medicare program under the provisions of Section 1128(a) and/or (b) of the Act is a default under this contract if the exclusion will materially affect INSURER's performance under this contract. 61 g. FAILURE TO MAKE PAYMENTS TO NETWORK PROVIDERS AND SUBCONTRACTORS INSURER's failure to make timely and appropriate payments to network providers and subcontractors is a default under this contract. h. FAILURE TO MONITOR AND/OR SUPERVISE ACTIVITIES OF CONTRACTORS OR NETWORK PROVIDERS Failure of INSURER to audit, monitor, supervise, or enforce functions delegated by contract to another entity that results in a default under this contract or constitutes a violation of state or federal laws, rules, or regulations is a default under this contract. Failure of INSURER to properly credential its providers, conduct reasonable utilization review, or conduct quality monitoring is a default under this contract. Failure of INSURER to require providers and contractors to provide timely and accurate encounter, financial, statistical and utilization data is default under this contract. i. PLACING THE HEALTH AND SAFETY OF BENEFICIARIES IN JEOPARDY INSURER's placing the health and safety of the beneficiaries in jeopardy is a default under this contract, and the ADMINISTRATION may immediately terminate the agreement, providing the INSURER a due process hearing to determine any monetary obligations. j. FAILURE TO MEET ESTABLISHED BENCHMARK Failure of INSURER to repeatedly meet any benchmark established by THE ADMINISTRATION under this contract is a default under this contract. 9. NOTICE OF DEFAULT AND CURE OF DEFAULT WHEN APPLICABLE THE ADMINISTRATION will provide INSURER with written notice of default (Notice of Default) under this contract. The Notice of Default may be given by any means that provides verification of receipt. The Notice of Default must contain the following information: i. A clear and concise statement of the circumstances or conditions that constitute a default under this contract; 62 ii. The contract provision(s) under which default is being declared; iii. A clear and concise statement of how and/or whether the default may be cured; iv. A clear and concise statement of the time period during which INSURER, when applicable, may cure the default; v. The remedy or remedies THE ADMINISTRATION is electing to pursue and when the remedy or remedies will take effect; vi. If THE ADMINISTRATION is electing to impose civil monetary penalties, the amount that THE ADMINISTRATION intends to withhold or impose and the factual basis on which THE ADMINISTRATION is imposing the chosen remedy or remedies; vii. Whether any part of a civil monetary penalty, if THE ADMINISTRATION elects to pursue these remedy, may be passed through to an individual or entity who is or may be responsible for the act or omission for which default is declared; viii. Whether failure to cure the default within the given time period, if any, will result in THE ADMINISTRATION pursuing an additional remedy or remedies, including, but not limited to, additional sanctions, referral for investigation or action by another agency, and/or termination of the contract. 10. EXPLANATION OF REMEDIES 10.1 TERMINATION 10.1.1 TERMINATION BY THE ADMINISTRATION THE ADMINISTRATION may terminate this contract if: 10.1.1.1 INSURER substantially fails or refuses to provide payment for or access to medically necessary services and items that are required under this contract to be provided to beneficiaries after notice and opportunity to cure; 10.1.1.2 INSURER substantially fails or refuses to perform administrative functions under this contract after notice and opportunity to cure; 10.1.1.3 INSURER materially defaults under any of the provisions of Article XVI; 10.1.1.4 Federal or Commonwealth funds for the Medicaid program are no longer available; or 63 10.1.1.5 THE ADMINISTRATION has a reasonable benefit that INSURER has placed the health or welfare of beneficiaries in jeopardy, as established in Article XVII, (8) (i). 10.1.2 THE ADMINISTRATION must give INSURER 30 days written notice of intent to terminate this contract if termination is the result of INSURER's substantial failure or refusal to perform administrative functions or a material default as established in Article XXXIII, except as otherwise stated. 10.1.3 THE ADMINISTRATION may, when termination is due to INSURER's substantial failure or refusal to provide payment for or access to medically necessary services and items, notify INSURER's beneficiaries of any hearing requested by INSURER. Additionally, if THE ADMINISTRATION terminates for this reason, THE ADMINISTRATION may enroll INSURER's beneficiaries with another INSURER or permit INSURER's beneficiaries to receive Medicaid-covered services other than from an INSURER. 10.1.4 INSURER must continue to perform services under the transition plan described in Section 10.2.1 if the termination is for any reason other than THE ADMINISTRATION's reasonable belief that INSURER is placing the health and safety of the beneficiaries in jeopardy. If termination is due to this reason, THE ADMINISTRATION may prohibit INSURER's further performance of services under the contract. 10.1.5 If THE ADMINISTRATION terminates this contract, INSURER may appeal the termination under Article VI Section 12 Law 72 September 7, 1993, as amended. 10.1.9 TERMINATION BY MUTUAL CONSENT This contract may be terminated at any time by mutual consent of both INSURER and THE ADMINISTRATION. 10.2 DUTIES OF CONTRACTING PARTIES UPON TERMINATION BY REASON OF DEFAULT When termination of the contract occurs by reason of default, THE ADMINISTRATION and INSURER must meet the following obligations: 10.2.1 THE ADMINISTRATION and INSURER must prepare a transition plan, which is acceptable to and approved by THE ADMINISTRATION, to ensure that beneficiaries are reassigned to other plans without interruption of services. That transition plan will be implemented during the 90-day 64 period between receipt of notice and the termination date unless termination is the result of THE ADMINISTRATION's reasonable belief that INSURER is placing the health or welfare of beneficiaries in jeopardy. 10.2.2.2 INSURER is responsible for all expenses related to giving notice to beneficiaries; and 10.2.2.3 INSURER is responsible for all expenses incurred by THE ADMINISTRATION in implementing the transition plan. 10.2.2.4 If the contract is terminated by mutual consent: 10.2.3.1 THE INSURER is responsible for notifying all beneficiaries of the date of termination and how beneficiaries can continue to receive contract services and the provisions of Article XXXIV shall apply. 10.7 RECOMMENDATION TO CMS THAT SANCTIONS BE TAKEN AGAINST INSURER 10.7.1 If CMS determines that INSURER has violated federal law or regulations and that federal payments will be withheld, THE ADMINISTRATION will deny and withhold payments for new enrollees of INSURER. 10.7.2 INSURER must be given notice and opportunity to appeal a decision of THE ADMINISTRATION and CMS pursuant to 42 CFR '434.67. 10.8 CIVIL MONETARY PENALTIES 10.8.1 The Administration may impose monetary penalties according to Article XXXVI, Section 4. 10.10 REVIEW OF REMEDY OR REMEDIES TO BE IMPOSED 10.1 INSURER may dispute the notice by the ADMINISTRATION that ADMINISTRATION intends to impose any sanction under this contract. INSURER may notify THE ADMINISTRATION of its objections by filing a written response to the Notice of Default, clearly stating the reason INSURER disputes the proposed sanction. With the written response, INSURER must submit to THE ADMINISTRATION any documentation that supports INSURER's position. INSURER must file the review within fifteen (15) days from INSURER's receipt of the Notice of Default as provided in Article XXXIII, subparagraph 2. Filing a dispute in a written response to the Notice of Default suspends imposition of the proposed sanction. 65 10.10.2 INSURER and THE ADMINISTRATION must attempt to informally resolve the dispute. If INSURER and THE ADMINISTRATION are unable to informally resolve the dispute THE ADMINISTRATION will make the remedy final. 11. The ADMINISTRATION in coordination with the INSURER, will implement a comprehensive fraud, errors and irregularities program. The INSURER will be required to ensure compliance with this program. If after a reasonable period to be determine by the parties, the ADMINISTRATION detected any violation of the program, the ADMINISTRATION may withheld such amount from the INSURER premium. The INSURER will have the right to present its position with following XXXVII(5)(B). ARTICLE XVIII PAYMENT OF PREMIUMS 1. The payment for the first month of coverage under this contract will be made upon the certification by the INSURER that it has complied with all the terms and conditions contained in this contract to the satisfaction of the ADMINISTRATION. For subsequent months the ADMINISTRATION shall pay to the INSURER the corresponding monthly premium within five (5) working days following submission by the INSURER of an invoice containing the list of the beneficiaries enrolled for the month of the invoice. Calculations by ASES of premiums due will be based on the status of beneficiaries eligible at the end of the prior month, following all processing of updates and cancellations effective in that month. 2. The monthly premium calculation for beneficiaries not enrolled for the full month shall be determined on a pro-rata basis by dividing the corresponding monthly premium amount by the number of days in the month and multiplying the result by the number of days the beneficiary was actually enrolled. 3. The monthly premiums for the months comprised within the contract term and covered by this contract are as follows: a) For all beneficiaries including all those who are sixty-five (65) years and older who are Medicare beneficiaries with Part A or Parts A and B and those who are sixty-five years and older who are not Medicare recipients: 66 1) Per member per month rate (PMPM) (Beneficiary) established at SIXTY EIGHT DOLLARS WITH TEN CENTS ($68.10) 4. The per member per month rate (PMPM) herein agreed provides for: a) The billing by providers to Medicare for services rendered to beneficiaries who are also Medicare recipients. The INSURER will not cover deductibles or co-insurance of Part A, but will cover deductibles and co-insurance of Part B of Medicare, except for deductibles and co-insurance for outpatient services provided in hospital setting, other than physician services. b) The recognition as a covered reimbursable Medicare Program cost as bad debts by reason of non-payment of Part A deductibles and/or coinsurance, and for deductibles and co-insurance for outpatient services provided in hospital setting under Medicare Part B, other than physician services. c) Pharmacy coverage for beneficiaries who are also Part A and Part A and B Medicare recipients, as long as the benefits are accessed through the PCP, HCO's, HCO's network of participating providers or the INSURER's participating providers and the prescription is issued by a participating provider of the INSURER. d) Dental coverage for beneficiaries who are also Part A and Part A and B Medicare recipients, the INSURER's participating providers. e) All benefits included in Addendum I that are not covered under Medicare Part A or Part B. 5. The INSURER shall not, at any time, increase the rate agreed in the contract nor reduce the benefits agreed to as defined in Addendum I of this contract. 6. The INSURER guarantees the ADMINISTRATION that the rate and any applicable deductibles or co-payments constitute full payment for the benefits contracted under the plan, and that participating providers cannot collect any additional amount from the beneficiaries. Balance billing is expressly prohibited. Upon a determination made by the ADMINISTRATION that the INSURER or its agents that the INSURER has engaged in balance billing, the ADMINISTRATION will proceed to enforce provisions as established in Article XXXVI. 7. The INSURER understands that the payment of premium by the ADMINISTRATION and the INSURER's payments to its HCO's, HCO's network of participating providers and INSURER's participating providers, shall be considered as full and complete payment for all services rendered except for the deductibles established in Addendum I of the contract herein. 67 8. For those Medicare beneficiaries with Part A, any recovery by the provider for Part A deductibles and/or co-insurance will be made exclusively through the Medicare Part A Program as bad debts. In this instance, beneficiaries would neither pay any reimbursement for rendered services to a participating provider nor pay the deductibles included in Addendum I of this contract. 9. For those Medicare beneficiaries with Part B, any recovery by the participating provider for Part B deductibles and/or co-insurance, other than services provided on an outpatient basis to hospital clinics, will be made through the INSURER and/or the HCOs. In this instance, beneficiaries would neither pay any reimbursement for rendered services to a participating provider nor pay the deductibles included in Addendum I of this contract. 10. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service, through the capitation paid to the HCO. 11. Newborns shall be immediately covered by the INSURER if born to an eligible individual and/or family unit as defined herein the Medicaid Commonwealth Plan, the law and its regulations. 12. The INSURER understands that if the Federal Government submits an alternative to the agreement hereof that is more cost effective and for the benefit of the Government of the Commonwealth Puerto Rico, the ADMINISTRATION along with the INSURER will attempt to renegotiate the coverage for Medicare beneficiaries with Part A or Part A and B. 13. The INSURER certifies that the monthly billing submitted to the ADMINISTRATION includes all beneficiaries, who have been issued an identification card and for which payment of premiums are due either on a monthly or pro-rated basis. The ADMINISTRATION will not accept any new billing once the monthly billing is submitted by the INSURER to the ADMINISTRATION, unless there is a justifiable reason for the omission. 14. If any differences arise in the ADMINISTRATION's payment of premiums to the INSURER, the latter will proceed to analyze the differences between the original billing submitted by the INSURER and the amount paid by the ADMINISTRATION. The INSURER will proceed, after proper analysis, to submit to the ADMINISTRATION a diskette as well as all relevant documentation that supports and details the INSURER's claim not later than thirty (30) working days after payment is made to the INSURER by the ADMINISTRATION. Once this term has ended, the INSURER waives its right to claim any amounts from differences arising from the monthly payment made by the ADMINISTRATION 68 and releases the ADMINISTRATION from any and all obligation to pay any additional premiums, including differences to billing by more than one insurer. During the following one hundred and twenty (120) days the ADMINISTRATION will confirm the validity of the claim and make payment thereof. ARTICLE XIX ACTUARIAL REQUIREMENTS 1. For the purpose of determining future premiums, the loss experience of this contract shall be based exclusively on the results of the cost of health care services provided to the beneficiaries covered under this contract. The INSURER shall maintain all the utilization and financial data related to this contract duly segregated from its regular accounting system including, but not limited to the General Ledger and the necessary Accounting Registers classified by the Area/Region subject to this contract. 2. Administrative expenses to be included in determining the experience of the program are those directly related to this contract. Separate allocations of expenses from the INSURER's regular business, INSURER's related companies, INSURER's parent company or other entities will be reflected or made a part of the financial and accounting records described in the preceding section. 3. Any pooling of operating expenses with other of the INSURER's groups, cost shifting, financial consolidation or the implementation of other combined financial measures is expressly forbidden. 4. Amounts paid for claims or encounters resulting from services determined to be medically unnecessary by the INSURER will not be considered in the contract's experience. 5. The INSURER shall provide the ADMINISTRATION every month with a Premium Disbursement Illustration. Said illustration shall present the distribution of the capitation, claim expenses by coverage, reserves, administrative expenses and premium distributions as referred and contained in the RFP's Actuarial Reports formats. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 6. The determination bY the INSURER as to the payment of the capitation fee and as to any other payments by virtue of this contract will be computed on an actuarially sound basis. 7. The INSURER will provide to the ADMINISTRATION, on a monthly basis, the actuarial data, premium distribution, and reports as contained in the RFP's Actuarial Report formats. Failure to comply with the requirements contained herein will be 69 sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. ARTICLE XX PREVENTIVE MEDICINE PROGRAM 1. The Department of Health will provide for and effectively implement a preventive medicine program with primary emphasis on public health education which will include, but will not be limited to, guidance on lifestyles, AIDS, drug abuse, cancer and mother and child care. This is typically referred to as Primary Prevention. The INSURER will collaborate with the Department of Health and provide for a preventive medicine program with primary emphasis on the provision of clinical services in support of the Preventive Medicine Program, including but not limited to, screening and education of individual patients, such as PAP Smears, colorectal screening mammograms and cholesterol screening as indicated by the best practices of medicine. In cooperation with the INSURER, the Department of Health will develop a surveillance methodology to identify compliance with this program. 2. The INSURER, through its secondary and tertiary Preventive Program, will address, analyze and implement measures to provide effective clinical and educational activities seeking to combat the specific causes of morbidity and mortality in the Area/Region. 3. The INSURER will develop and effectively implement a case management system in order to monitor high risk cases and attend to the covered health care needs of the beneficiaries and dependents within said category. 4. The INSURER represents that under its Preventive Program it will contract, sufficient medical specialists and specialized teams in order to combine the resources of the HCO's and the professional staff of the HCO's, including but not limited to, health educators, nutritionists, dieticians, nurses, other trained personnel and physicians who will act as the team's educator, manager and coordinator. 5. The INSURER will be responsible to direct to a network of other agencies and community resources serving each municipality within the Area/Region so as to guarantee that participating providers and beneficiaries are aware of and understand the available services in their community and the process by which to access them. 6. The INSURER will assure that discharge of the mother and her baby from the hospital is based upon sound clinical judgment determined by the clinician. The coverage for hospital stay following a normal vaginal delivery may not be limited 70 to less than 48 hours for both the mother and newborn child and in the case of childbirth following cesarean section; the hospital stay may not be limited to less than 96 hours for both mother and newborns. 7. The responsibilities of the INSURER in the Preventive Program will include the following: a) A disease management program developed by the INSURER in collaboration with the Department of Health which shall develop standardized processes to address major public health programs such as ASTHMA, DIABETES, HYPERTENSION AND CONGESTIVE HEART FAILURE. This program shall include identification treatment protocols/guidelines and surveillance/monitoring. In cooperation with the Department of Health and the Centers for Disease Control (CDC) annual reports will be published detailing the results. b) A case management program which initially will be under the responsibility of a nurse. Case management will not be limited to the physician's offices or a determined center. Coordination of the services provided is required within the community and at the home of the beneficiary, if necessary. c) An outreach program shall be developed in collaboration with the Department of Health to target specific clinical issues as identified by the Department of Health, for those beneficiaries who cannot access those services. The clinical standard shall conform to the published HEDIS measures. These measures can be modified or supplemented by the Department of Health. d) The INSURER will assure that all pregnant women are screened for alcohol use following the Department of Health Guidelines. e) The INSURER will assure that all pregnant women will obtain counseling for the HIV test. All pregnant women who accept the HIV test will be referred to the HIV Prevention and Detection Program of the Department of Health. The participant provider shall coordinate all referrals with the Department of Health. Pre-natal care and HIV testing will continue to be covered benefits under this contract. f) The INSURER will assure that all pregnant women, following the administration of the HIV test that reports a positive result, are allowed to be treated under the guidelines for the utilization of ZDV in pregnant women and neonatal infants to reduce the risk of mother-infant HIV transmission, published by the Department of Health. g) The INSURER will assure that all pregnant women are properly educated about the WIC Program. Those eligible individuals will be referred to the 71 WIC Program of the Department of Health. It will be the immediate responsibility of the participating providers to comply with all requirements in order to arrange the referral to the WIC Program without any cost to the patient. h) The INSURER will assure that all providers comply with the EPSDT (Early Periodic Screening Diagnosis and Treatment) Program and the Guidelines for Adolescent Preventive Services (GAPS) from the American Medical Association. The itinerary of services that have to be rendered by providers will comply with the EPSDT Itinerary Services Formats. i) The INSURER will be responsible to develop and demonstrate its strategy to meet the appropriate prevention program guidelines as required by the Department of Health. j) The INSURER will provide the ADMINISTRATION monthly reports detailing all services rendered to mother and child classified by age groups and listing the numbers of pregnant women that have: (i) received prenatal care on each month in the reporting period; (ii) counseled as to HIV testing; (iii) referred to the HIV Prevention and Detection Program of the Department of Health; and (iv) referred to the WIC Program. k) The INSURER agrees to comply and assure that all participating providers will comply with the federal and local laws referred in Article XV paragraph (11) (g) of this contract. The INSURER will assure the submission by the participating provider of all the protocols and formats requested by the Department of Health, Department of the Family, Department of Education and Department of Justice as contained in the RFP formats. 8. The INSURER will develop and effectively implement incentive-based programs whereby the providers are motivated toward compliance with all requirements of their Preventive Medicine Program such as EPSDT, Immunizations, Prenatal care, reduction in cesarean sections, and other related services. 9. The ADMINISTRATION shall evaluate these preventive programs through HEDIS and other applicable performance standards. 10. The INSURER will provide the ADMINISTRATION quarterly reports needed by the Department of Health detailing services rendered in the Preventive Program described below. 11. The ADMINISTRATION shall have the right to audit the compliance with these requirements as needed. Non-compliance shall be a determining factor in non-renewal of this contract or breach thereof as defined in Article of XXXIII. 72 ARTICLE XXI MENTAL HEALTH PROGRAM AND DEMONSTRATION PROJECT 1. The INSURER shall direct beneficiaries to access Mental Health and Substance Abuse benefits in coordination with the Managed Behavioral Healthcare Organization in the health region contracted by the ADMINISTRATION and ASSMCA. The ASSMCA will monitor the Mental Health and Substance Abuse Program provided through the MBHO contracted in the Health Region/Area. This will be with sufficient specificity in order to provide for all mental health and substance abuse needs for all eligible beneficiaries residing within the municipalities forming part of said area. 2. The INSURER will abide with the ADMINISTRATION and ASSMCA's guidelines for expediting access of beneficiaries to the mental health and substance abuse benefits covered under the Health Insurance Program. 3. The INSURER acknowledges that the ADMINISTRATION has been delegated by the Department of Health, the implementation of a demonstration project for contracting and ensuring the provision of health services through direct contracts with health care organizations or other governmental health care organizations. INSURER agrees to collaborate with the ADMINISTRATION in the implementation of any demonstration project the ADMINISTRATION intends to simultaneously or progressively develop the contracted health region or another region or municipality during the term of this contract. ARTICLE XXII PHARMACY BENEFITS MANAGEMENT (PBM) 1. The ADMINISTRATION will monitor the Physical Health Program provided through the INSURER contracted in the Health Region/Area. This will be with sufficient specificity in order to provide for all Physical Health needs for all eligible beneficiaries residing within the municipalities comprising said area. 2. The INSURER will abide with the ADMINISTRATION's guidelines for expediting access of beneficiaries to the Physical health Program and benefits covered under the Health Reform Program. 3. Concurrently with the terms of this contract, the INSURER agrees to work with the ADMINISTRATION's Pharmacy Benefit Manager as selected by the ADMINISTRATION. This will include cooperating with the selected PBM to facilitate claims processing in a period specified, working with the selected PBM 73 to specify, develop and implement the flow of information, utilization review and customer service protocols, as well as, to cease billing and collection of rebates from drug manufacturers, if applicable. 4. The ADMINISTRATION's PBM, will provide the INSURER the services set forth in this Section and the services described in any attachment, addendum or amendment hereto: - -------------------------------------------------------------------------------------------------------------- ITEM DESCRIPTION - -------------------------------------------------------------------------------------------------------------- Claims Processing - Contracting and administration of the pharmacy network. The PBM will and Administrative create a network of Participating Pharmacies, which will perform pharmacy Services services for Members at specified fees and discounts - Claims payments summary reports for each payment cycle every two weeks - Notify each INSURER of the payment process, systems involved (NCPDP 2.0) and relevant time line. - Processing and mailing of pharmacy checks and remittance reports - Reconciliation of zero balance accounts - Generate list of participating pharmacies - Coordination of Benefits - On-line access to current eligibility and claims history - Plan set-up - Develop policies and procedures for denials and rejections - Process reasonable denials - Maintenance of plan - Adjudication of electronic claims. The PBM will adjudicate claims submitted by Participating Pharmacies to the PBM based on the participating pharmacy's agreement with the PBM and including online edits for preauthorization requirements and other edits that may be deemed necessary for the accurate payment of claims - Approval and rejection of claims consistent with plan design and concurrent Drug Utilization Review (DUR) - Standard electronic eligibility - Maintain call center - Loading of INSURER providers in network and eligible members - Develop remedies for addressing problems with pharmacies - Pharmacy audits - -------------------------------------------------------------------------------------------------------------- Concurrent Fraud - Develop process for INSURER to notify the PBM of fraud and abuse Investigations complaints made by their beneficiaries. - Track and Investigate fraud and abuse allegations - --------------------------------------------------------------------------------------------------------------
74 - -------------------------------------------------------------------------------------------------------------- Formulary - Incorporate INSURER related issues, such as providing guidance into Management development of the Preferred Drug List (PDL), into the existing Program ADMINISTRATION's Pharmacy and Therapeutic Committee. - Administer the Central Administrative Committee (CAC), a cross functional sub-committee tasked with rebate maximization. The subcommittee will take recommendations on the PDL from the P&T committee and will manage the PDL. - -------------------------------------------------------------------------------------------------------------- Drug Utilization - Incorporate DUR reports and evaluation reviews into the tasks of the Review/Drug Central Administrative Committee (CAC). Utilization - Evaluate new therapeutic classes and determine if drugs need to be Evaluations added or deleted from PDL. - Therapeutic intervention and switching - -------------------------------------------------------------------------------------------------------------- Reports - According to Agreements. - -------------------------------------------------------------------------------------------------------------- Rebates and - Develop and maintain contracts with drug manufacturers for rebates Discounts - Utilize the Central Administrative Committee (CAC) to maximize rebates - -------------------------------------------------------------------------------------------------------------- Optional Services - Custom Management Reports - Manual Claims Input - Special Programming - --------------------------------------------------------------------------------------------------------------
5. The INSURER will provide the following services set forth in this Section and the services described in any attachment, addendum or amendment hereto: - -------------------------------------------------------------------------------------------------------------- ITEM DESCRIPTION - -------------------------------------------------------------------------------------------------------------- Claims Processing - Assume cost of implementing and maintaining on-line connections - The and Administrative INSURER will be responsible for all of its own costs of implementation, Services including but not limited to payment processes, utilization review and approval processes, connection and line charges, and other costs incurred to implement the payment arrangements for pharmacy claims. - Maintain or improve ratio of paid claims to processed claims - Based on past performance, ADMINISTRATION will develop an acceptable ratio of paid claims to processed claims for which each INSURER will be responsible for maintaining or improving. - Review bi-monthly claim payments summary reports for each payment cycle and approve transfer of funds - Review denials and rejections - Maintain call center- INSURER will operate a customer call center to provide for preauthorization of drugs for drugs for which the INSURER retains risk, according to its policies and the approved formulary. - --------------------------------------------------------------------------------------------------------------
75 - -------------------------------------------------------------------------------------------------------------- - Electronically submit a list of all INSURER providers in network and eligible members to PBM - -------------------------------------------------------------------------------------------------------------- Concurrent Fraud - Develop tracking mechanisms for fraud and abuse issues Investigations - Forward fraud and abuse complaints from members to PBM - -------------------------------------------------------------------------------------------------------------- Formulary - Designate and maintain a representative to assist on the P&T Management Committee in developing the official formulary. Program - Submit candidates who are primary care physicians for the Pharmacy and Therapeutic Committee. - Select two (2) representatives of the INSURER to serve on the Central Administrative Committee (CAC), a cross functional committee tasked with rebate maximization. The subcommittee will take recommendations on the PDL from the P&T committee and will update and manage the PDL. - -------------------------------------------------------------------------------------------------------------- Drug Utilization - Perform drug utilization review. Review/Drug - Develop and distribute protocols, when necessary. Utilization - Perform utilization management functions - The INSURER will perform Evaluations utilization review that meets the minimum standards of ADMINISTRATION or that may be required by the Medicaid program. - Perform disease management functions- The INSURER will perform disease management that meets the minimum standards of the ADMINISTRATION or that may be required by the Medicaid program. - -------------------------------------------------------------------------------------------------------------- Reports - Meet with PBM to determine the reports that should be the sole responsibility of the PBM, those performed by the INSURER and those that should be duplicated in order to cross check. - --------------------------------------------------------------------------------------------------------------
6. The INSURER will abide and comply with following payment process hereby established: a) The INSURER will pay claims costs. Every two weeks, the PBM will provide the INSURER with the proposed claims listing. The INSURER will promptly review the payment listing. b) Submit funds for claims payment to zero-balance account. The INSURER will provide funds, wire transfers or otherwise submit payment within two business days to a bank account established for the payment of the claims applicable to each INSURER. c) Payment failure by INSURER or the establishment of a Medicaid Rebate Program. The following payment process will be implemented if either the INSURER fails to make a timely or correct payment to the established zero-balance account or if the ADMINISTRATION enters into a Medicaid Rebate Program: 76 (i) The contract amounts paid to the INSURER will be reduced by the estimated claims cost for the succeeding month, any deficit in funds provided versus the cash requirements for the zero-balance account. Estimates will be made based on actual claims experience. After a reasonable period of time, adjustments will be made to the monthly withholds for the actual experience of the prior month(s) versus the estimated. A final settlement shall be made within a specified period after the end of the contract year. d) Payment of PBM and Collection of Rebates and Discounts: The ADMINISTRATION will collect rebates and provide for the payment of reasonable PBM fees for defined services. The ADMINISTRATION will pay the INSURER seventy five (75%) percent of the net rebates collected; the INSURER will share such rebates with the primary care providers according to their risk. e) Other Savings: The INSURER, the ADMINISTRATION, and the PBM shall cooperate to identify additional savings opportunities, including special purchasing opportunities, changes in network fees, etc. Payment to the INSURER will be adjusted to provide the ADMINISTRATION for its share of the incremental net savings. f) Fees per transaction and DUR and Formulary Management fees will be paid by the INSURER. ARTICLE XXIII BENEFITS 1. The INSURER agrees to provide to the enrolled beneficiaries the benefits included in Addendum I of this contract. The benefits to be provided under the program are divided in three types of coverage: 1) the Basic Coverage that includes preventive, medical, hospital, surgical, diagnostic tests, clinical laboratory tests, x-rays, emergency room, ambulance, maternity and prescription drug services, 2) Dental Coverage based on the right to choose one of the participating dentists from the INSURER's network and 3) the Special Coverage that includes benefits for catastrophic conditions, expensive procedures and specialized diagnostic tests. 2. The INSURER may not modify, change, limit, reduce, or otherwise alter said benefits nor the agreed terms and conditions for their delivery without the express written consent of the ADMINISTRATION. 77 3. The coverage for Medicare beneficiaries is established as follows: (a) Beneficiaries with Part A of Medicare - the INSURER will pay for all services not included in Part A of Medicare, and included in the contract herein. The INSURER will not pay the applicable Part A deductibles and coinsurance. (b) Beneficiaries with Part A and Part B of Medicare - the INSURER will pay for prescription drugs prescribed by PCP and dental coverage. The INSURER will not cover the payment of the applicable Part A deductibles and coinsurance, but will cover the payment of the applicable Part B deductible and co-insurance. (c) Access to services contemplated herein will be through a selected HCO. Beneficiaries with Part A can select from the Medicare's providers list, in which case the benefits under this contract would not be covered. 4. The Medicare beneficiary can select a Part A provider from the Medicare Part A providers list, but has to select a HCO for Part B services for beneficiaries with Part B services or Part B equivalent services for beneficiaries without Part B of Medicare. ARTICLE XXIV CONVERSION CLAUSE 1. If during the term of this contract, the insurance coverage for a beneficiary terminates because the beneficiary ceases to be eligible and is disenrolled, such person has the right to receive a direct payment policy from INSURER without submitting evidence of eligibility. The direct payment policy will be issued by the INSURER without taking into consideration pre-existing conditions or waiting periods. The written request for a direct payment policy must be made, and the first premium submitted to INSURER on or before thirty-one (31) days after the date of disenrollment, bearing in mind that: a) The direct payment policy should be an option of such person, through any of the means which at that date INSURER has currently made available according to the age and benefits requested. It will be subject to the terms and conditions of the direct payment policy. b) The premium for the direct payment policy will be in accordance with the rate then in effect at INSURER, applicable to the form and benefits of the direct payment policy, in accordance with the risk category the person falls in at the moment, and the age reached on the effective date of the direct payment policy. The health condition at the moment of conversion will 78 have no bearing in the eligibility nor will it be an acceptable base for the risk classification. c) The direct payment policy should also provide for coverage to any other individual, if these were considered eligible beneficiaries at the termination date of the health insurance under this contract. Under option by INSURER, a separate direct payment policy may be issued to cover the other individuals who formerly were eligible beneficiaries. d) The direct payment policy will be effective upon termination of coverage under the health insurance contracted. e) INSURER will not be obligated to issue a direct payment policy covering a person who has the right to receive similar services provided by any insurance coverage or under the Medicare Program of the Federal Social Security legislation, as subsequently amended, if such benefits, jointly provided under the direct payment policy, result in an excess of coverage (over insurance), according to the standards of the INSURER. 2. When coverage under this contract terminates due to the expiration of its term, all persons formerly considered eligible beneficiaries, who have been insured for a period of three (3) years prior to the termination date, will be eligible for a INSURER direct payment policy, subject to the conditions and limitations stipulated in clause 1 of this section. 3. Subject to the conditions and limitations stipulated in clause 1 of this section, the conversion privilege will be granted: a) to all eligible beneficiaries whose coverage under the health insurance contracted is terminated because they cease to be eligible beneficiaries and are disenrolled. b) to any eligible beneficiary whose coverage under the health insurance contracted ceases because he no longer qualifies as an eligible beneficiary, regardless of the fact that the principal subscriber and/or any other eligible beneficiary continues covered by said health insurance coverage under this contract. 4. In case an eligible beneficiary under this contract suffers a loss covered by the direct payment policy, described in clause 1 of this section, during the period he/she would have qualified for a direct payment policy and before the said direct payment policy is in effect, the benefits which he/she would have a right to collect under such direct payment policy will be paid as a claim under the direct payment policy, subject to having requested the direct payment policy and the payment of the first premium. 79 5. If any eligible beneficiary under this contract subsequently acquires the right to obtain a direct payment policy, under the terms and conditions of the INSURER's policies without providing evidence of qualifications for such insurance, subject to the request and payment of the first premium during the period specified in the policy; and if this person is not notified of the existence of this right, at least fifteen (15) days prior to the expiration of such period, such person will be granted an additional period during which time he/she can claim his/her right, none of the above implying the continuation of a policy for a period longer than stipulated in said policy. The additional period will expire fifteen (15) days after the person is notified, but in no case will it be extended beyond sixty (60) days after the expiration date of the policy. Written notification handed to the person or mailed to the last known address of the person, as acknowledged by the policy holder, will be considered as notification, for the purposes of this paragraph. If an additional period is granted for the right of conversion as hereby provided, and if the written application for direct payment, enclosed with the first premium payment, is made during the additional period, the effective date of the direct payment policy will be the termination of the health insurance coverage under this contract. 6. Subject to the other conditions expressed before, the eligible beneficiaries will have the right to conversion, up to one of the following dates: a) date of termination of his/her eligibility under this contract; or b) termination date of this contract; or c) date of amendment of this contract, if said amendment in any way eliminates the beneficiaries' eligibility. ARTICLE XXV TRANSACTIONS WITH THE INSURER 1. All transactions between the ADMINISTRATION and the INSURER shall be handled according to the terms and conditions set forth in this contract. 2. The INSURER shall appoint a person that shall be responsible for all transactions with the ADMINISTRATION. 3. All eligibility transactions shall be coordinated on a daily basis. 80 ARTICLE XXVI NON-CANCELLATION CLAUSE The INSURER may not cancel this contract, or make modifications to it for any reason, or otherwise change, restrict or reduce the insurance or the benefits, except for nonpayment of premiums. ARTICLE XXVII APPLICABLE LAW The Request for Proposal that originated this contract, the Proposal submitted by the INSURER, this contract and/or any other document or provision incorporated to it by reference, shall be interpreted and construed according to the laws of the Commonwealth of Puerto Rico. If any controversy may arise regarding the interpretation or performance of this contract, the parties voluntary submit for its resolution to the jurisdiction of the Superior Court of the Commonwealth of Puerto Rico, San Juan Part. ARTICLE XXVIII EFFECTIVE DATE AND TERM 1. This contract shall be in effect for (3) consecutive twelve months periods, starting at 12:01 AM, Puerto Rico time on July 1, 2002, the first day that coverage begins and payment of the premium is due. 2. This contract may not be assigned, transferred or pledged by the INSURER without the express written consent of the ADMINISTRATION. 3. The second and third periods of the contract will require premium payment renegotiation by the ADMINISTRATION and the INSURER taking into consideration actual claims paid and incurred for The Health Area/Region and an assessment of specific trends actuarially based for both medical and prescription cost to reach the applicable premiums for any subsequent period of time. 4. In the event an agreement can not be reached on the premium for the next period after good faith negotiations by the ADMINISTRATION and the INSURER according to the parameters set forth in (3) supra, the contract may be terminated if deemed in the best interest of these beneficiaries, the ADMINISTRATION and the Government of Puerto Rico. 81 ARTICLE XXIX CONFLICT OF INTEREST Any officer, director, employee or agent of the ADMINISTRATION, the Government of the Commonwealth of Puerto Rico, its municipalities or corporations cannot be part of this contract or derive any economic benefit that may arise from its execution. ARTICLE XXX INCOME TAXES The INSURER certifies and guarantees that at the time of execution of this contract, 1) it is a corporation duly authorized to conduct business in Puerto Rico and that has filed income tax returns for the previous five (5) years; 2) that it complied with and paid unemployment insurance tax, disability insurance tax (Law 139), social security for drivers ("seguro social choferil"), if applicable); 3) filed State Department reports, during the five (5) years preceding this contract and 4) that it does not owe any kind of taxes to the Commonwealth of Puerto Rico. ARTICLE XXXI ADVANCE DIRECTIVES The INSURER agrees to enforce and require compliance by all applicable participating providers with 42 CFR 434, Part 489, Subpart I relating to maintaining written policies and procedures respecting advance directives. This requirement includes provisions to inform and distribute written information to adult individuals concerning policies on advance directives, including a description of applicable Commonwealth law. ARTICLE XXXII OWNERSHIP AND THIRD PARTY TRANSACTIONS The INSURER shall report ownership, control interest, and related information to the ADMINISTRATION, and upon request, to the Secretary of the Department of Health and Human Services, the Inspector General of the Department of Health and Human Services, and the Comptroller General of the United States, in accordance with Sections 1124 and 1903 (m)(4) of the Federal Social Security Act. ARTICLE XXXIII MODIFICATION OF CONTRACT If the ADMINISTRATION finds that, because of amendments to Law 72 of September 7, 1993, or by reason of budget reductions, or subsequent Federal or local legislative changes that affect this contract, or because of any reasons deemed by the 82 ADMINISTRATION to be in the best interest of the Government of Puerto Rico in carrying out the provisions of Law 72 of September 7, 1993, or in order to perform experiments and demonstration projects pursuant to legislative enactment, modification of this contract is necessary, the ADMINISTRATION may modify any of the requirements, terms and conditions, functions, part thereof or any other services to be performed by the INSURER. Prior to any such modification, the ADMINISTRATION shall afford the INSURER an opportunity to consult and participate in planning for adjustments which might be necessary and thereafter provide the INSURER written notice that the modification is to be made within ninety (90) days after a date specified in the notice. Said modifications will take place after consultation and cost negotiation with the INSURER. ARTICLE XXXIV TERMINATION OF AGREEMENT 1. If the ADMINISTRATION finds, after reasonable notice and opportunity for a hearing to the INSURER the INSURER has failed substantially to carry out the material terms and conditions of this contract, the ADMINISTRATION may terminate this contract at any time, as provided in Section 10.1, above. 2. In the event that there is non-compliance by the INSURER with any specific clause of this contract, the ADMINISTRATION will notify the INSURER in writing, indicating the area/region(s) of non-compliance. The INSURER will be granted the opportunity to present and discuss its position regarding the issue within fifteen (15) days from the date of the notification. After considering the allegations presented by the INSURER following adequate hearing and the opportunity to present all necessary evidence in support of its position, and the ADMINISTRATION formally determines that there is a non-compliance, at the discretion of the ADMINISTRATION, this contract may be cancelled by giving thirty (30) days prior written notice before the effective date of cancellation. In the event that the INSURER does not remedy, correct or cure the material deficiencies noted in the Plan Compliance Evaluation Report, as provided for in Article XVII of this contract, and following the opportunity of an adequate hearing and the presentation of evidence in support of its position, and the ADMINISTRATION confirms the deficiency, then at the discretion of the ADMINISTRATION this contract may be cancelled by giving thirty (30) days prior notice. If the INSURER were to be declared insolvent, files for bankruptcy or is placed under liquidation, the ADMINISTRATION shall have the option to cancel and immediately terminate this contract. In the event of this happening an enrollee will not be liable for payments under this contract. 83 In the event that this contract is terminated, the INSURER shall promptly provide the ADMINISTRATION all necessary information for the reimbursement of any pending and outstanding Claims. The INSURER hereby recognizes that in the event of termination under this Article it shall be bound to provide reasonable cooperation to the ADMINISTRATION beyond the date of termination in order to properly effect the transition to the new INSURER taking over the region covered by this Contract. This obligation to reasonably cooperate shall survive the date of said effective termination provided, at the ADMINISTRATION's discretion. The INSURER agrees and recognizes that in the event there are no sufficient enough funds designated for the payment of premium, the ADMINISTRATION reserves the right to terminate this contract, effective ninety (90) days after prior written notification. ARTICLE XXXV PHASE-OUT CLAUSE 1. In the event that the contract is terminated, the INSURER will continue to provide services for a reasonable term to guarantee the continuance of services until the ADMINISTRATION has made adequate arrangements to continue the rendering of health care benefits to beneficiaries in the areas affected by the termination. The duration of such transition term will not exceed sixty (60) days. Adjustments in the PMPM during the transition term shall not be borne or agreed upon by ADMINISTRATION, in the event of a termination based on default or breach of contract by the INSURER. 2. Upon the expiration or termination of a contract, the INSURER will provide the ADMINISTRATION with the historical/utilization data of services rendered to beneficiaries in the area/region in formats specified/agreed with the ADMINISTRATION, in order to prevent fraud and double billing of services by the incoming INSURER. 3. Any INSURER phasing out of a Health Region will guarantee payment for services rendered to beneficiaries under the previous contract. Failure to do so, shall entail in accordance with the fair hearing process established on Article XXXIII, the retention of a determined amount of premium payment of INSURER's Health Region Contract. The amount to be retained shall be sufficient to cover the amount owed. 4. The INSURER acknowledges that it will collaborate with the ADMINISTRATION efforts in any health regions or geographic area in transition processes. 5. If in the best interest of the beneficiaries or the Commonwealth of Puerto Rico the ADMINISTRATION terminates any demonstration project, the INSURER will assume responsibility for the geographic areas (municipalities/regions) managed by any health organization in accordance with the contracted premium. 84 6. If in the best interest of the beneficiaries or the Commonwealth of Puerto Rico the ADMINISTRATION expands the direct contracting demonstration project with health care organization, the INSURER will assist in the transition process after ninety (90) days of a written notification and payments of premiums will be adjusted accordingly. ARTICLE XXXVI THIRD PARTY DISCLAIMER None of the obligations, covenants, duties, and responsibilities incurred or assumed under the present Contract, the Request For Proposal, Proposal, the representations and assurances provided at the clarification meeting held on June 11, 2001, by either: (i) the INSURER towards the ADMINISTRATION and any governmental agencies, or (ii) the ADMINISTRATION towards the INSURER, shall be deemed as the assumption by the INSURER or the ADMINISTRATION, as the case might be, of any legal liability or responsibility towards a third party in the event that a negligent or intentional injury, malpractice, damage or wrongdoing, or any harm whatsoever is incurred by or caused by the HCO's, the HCO's network of participating providers and/or the INSURER's participating providers. ARTICLE XXXVII PENALTIES AND SANCTIONS CLAUSES 1. In the event that the INSURER does not furnish the ADMINISTRATION with any kind of monthly reports related to the gathering and reporting of encounter information, the ADMINISTRATION may retain one monthly premium for each month in default said retention to be effective for the subsequent month after the default. Once the INSURER complies with said requirement, the amount retained will be fully paid to the INSURER, within five days after receiving the required reports for the subsequent month. 2. In the event that the INSURER does not comply with its obligation related to the monthly gathering and accurate reporting of encounter information, according to Article XV of this contract, the ADMINISTRATION may retain one monthly premium payable to the INSURER for each month in default, provided: a. the ADMINISTRATION gives, within ten (10) working days after receipt of the monthly report, written notification by certified mail, or personally hand delivers said notification to the INSURER of the non-compliance and the reasons thereof; and b. the ADMINISTRATION grants ten (10) working days for the INSURER to cure the default; and 85 c. the INSURER fails to correct it within said term. Whenever the above events take place, the ADMINISTRATION may retain one monthly premium payment for each month in default. Retention will be effective ten (10) working days after the notice of non-compliance. Once the INSURER corrects the problem, at the satisfaction of the ADMINISTRATION and according to Article XV of this contract, the amount retained will be fully paid to the INSURER, within five days after receiving full and complete reports for the subsequent month. 3. For the purpose of subparagraphs 1 and 2, above, default is defined as the non-compliance by the INSURER of the reporting requirements established for the gathering and reporting of encounter information as established in Article XV of this contract, or when the INSURER does not submit the reports within the established term set in this contract. If the INSURER owes money to the Administration as a result of the imposition of penalties, excess premiums paid or any other reason, the Administration may withhold such amount from any payments due related to the same contract or any other contracts between the parties. 5. A. Civil Monetary Penalties: In the event that there is a non-compliance with Article VI, XII, XVI, XVII and/or with any specific clause of this contract or the INSURER engages in any of the following practices: (a) Fails to substantially provide medically necessary services to enrollees under this contract; (b) imposes on enrollees premiums and charges in excess of the ones permitted under this contract; (c) discriminates among enrollees on the basis of their health status or requirements for health care (such as terminating an enrollment or refusing to reenroll) except as permitted under the Program or engages in practices to discourage enrollment by recipients whose medical condition or history indicates need for substantial medical services; (d) misrepresents or falsifies information that is furnished to CMS, to the ADMINISTRATION, to an enrollee, potential enrollee or provider of services; (e) distributes, directly or indirectly through any agent, independent contractor, marketing material not approved by the ADMINISTRATION, or that contains false or misleading information; (f) Fails to comply with the requirements for physician incentive plans in section 1876 (i) (8) of the Social Security Act, and at 42 CFR 417.479, or fails to submit to the ADMINISTRATION its physician incentive plans as requested in 42 CFR 434.70 86 The ADMINISTRATION will notify the INSURER in writing, the findings of the violation and the impending intention to impose intermediate sanctions for each violation which could consist of: monetary penalties at the discretion of the Administration may range from five hundred dollars $500 to twenty five thousand dollars $25,000; or the resolution of the contract and temporary management; suspension, and/or with-holding of premium payments, which may range from a percent amount, or more than one monthly premium payments. The imposition of sanctions will depend on the extent and severity of the actions. At the sole discretion of the ADMINISTRATION and after affording the INSURER due process to submit a corrective action as established in paragraph (B), below, the ADMINISTRATION will deduct any amount it may deem adequate from the premium payments or any other administrative items of said payments. The Office of the Inspector General may impose civil money penalties of up to $25,000.00 in addition to, or in lieu of each determination by the ADMINISTRATION, or CMS, for non-compliance conduct as set forth on subparagraphs (a) through (f). The Secretary of the Department of Health and Human Services may seek the enforcement of felony charges, for violation regarding subparagraph (b), above. B. The INSURER will have the right to present and discuss its position regarding the ADMINISTRATION'S finding within thirty (30) days from the receipt of the notification. After such period expires the Administration will issue its decision regarding the contemplated sanctions which could be (i) let stand the initial determination, (ii) modify the sanction or (iii) eliminate the sanction if the Insurer has taken affirmative corrective actions. Upon notifying the INSURER of the final decision, if in disagreement, the INSURER will have (30) days to request a hearing before the Administration. Upon the expiration of the thirty (30) days without invoking a formal hearing, or after the celebration of a hearing and after issuance of findings and recommendations of the hearing examiner, the decision will then become final, subject to the appeal process provided in section 12, Art. VI of Law 72, September 7, 1993, as amended. C. The ADMINISTRATION, shall appoint temporary, management only if it finds that the INSURER has egregiously or repeatedly engaged in any of the stated practices on paragraph (A) of this article; or places a substantial risk on the health of enrollees; or there is a need to assure the health of an organization's enrollees during an orderly termination, reorganization of the Insurer or while improvements are being made to correct violations. The temporary management may not be removed until the INSURER assures the ADMINISTRATION that the violations will not recur. 87 6. If a contractor is found to be in non-compliance with the provisions on ARTICLE VII concerning affiliation with debarred or suspended individuals, the ADMINISTRATION: a) Shall notify the Secretary of non-compliance; b) May continue the existing contract with the Insurer, unless the Secretary (in consultation with the Inspector General of the Department of Health Services directs otherwise); and, c) May not review or otherwise extend the duration of an existing contract with the INSURER unless the Secretary (in consultation with the Inspector General of the DHHS) provides to the ADMINISTRATION and to Congress a written statement describing compelling reasons that exist for renewing or extending the contract. 7. Notwithstanding the provisions set in this Article, the ADMINISTRATION reserves the right to terminate this contract, as established in Article XXXIII. ARTICLE XXXVIII HOLD HARMLESS CLAUSE 1. The INSURER warrants and agrees to indemnify and save harmless the ADMINISTRATION from and against any loss or expense by reason of any liability imposed by law upon the ADMINISTRATION and from and against claims against the ADMINISTRATION for damages because of bodily injuries, including death, at any time resulting therefrom, accidents sustained by any person or persons on account of damage to property arising out of or in consequence of the performance of this contract, whether such injuries to persons or damage to property are due or claimed to be due to any negligence of the INSURER, the INSURER's participating providers, the HCO's, the HCO's network of participating providers, their agents, servants, or employees or of any other person. 2. The INSURER warrants and agrees to purchase insurance coverage to include Contractual Liability Coverage incorporating the obligations herein assumed by the INSURER with limits of liability which shall not be less than one (1) million dollars with said insurance coverage providing for the INSURER's obligation and the insurance company of INSURER to defend and appear on behalf of the ADMINISTRATION in any and all claims or suits which may be brought against the ADMINISTRATION on account of the obligations herein assumed by the INSURER. 88 ARTICLE XXXIX CENTERS FOR MEDICARE AND MEDICAID SERVICES CONTRACT REQUIREMENTS The ADMINISTRATION and INSURER agree and recognize that guidance and directives from the Centers for Medicare and Medicaid Services (CMS) are incorporated in contracts subject to its approval, such as the present one, and that they constitute binding obligations on the part of the INSURER. ARTICLE XL FORCE MAJEURE Whenever a period of time is herein prescribed for action to be taken by the INSURER, the INSURER shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, acts of God, shortages of labor or materials, war, terrorism, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of the INSURER. ARTICLE XLI YEAR 2000 CLAUSE The parties hereby assure that all hardware and software that it uses with respect to this Agreement are Year 2000 Compliant in accordance to CMS's Year Compliance definitions as stated in the RFP. The Parties acknowledge that this provision is an essential condition to this Agreement. ARTICLE XLII FEDERAL GOVERNMENT APPROVAL 1. Inasmuch as it is a requirement that the Centers for Medicare and Medicaid Services (CMS) approves this contract in order to authorize the use of federal funds to finance the health insurance contracted, the same may be subject to modifications in order to incorporate or modify the terms and conditions of this contract. 2. Any provision of this contract which is in conflict with any Federal Laws, Federal Medicaid Statutes, Health Insurance Portability and Accountability Act, Federal Regulations, or CMS policy guidance, as applicable, is hereby amended to conform to the provisions of those laws, regulations, and Federal policy. Such amendment of the contract will be effective on the effective date of the statutes or regulations necessitating it, and will be binding on the parties even though such amendment may not have been reduced to writing and formally agreed upon and executed by the parties. 89 ARTICLE XLIII ACKNOWLEDGMENT AS TO INSURER 1. All responsibilities, obligations, assurances and representations, made, taken, and assumed by the INSURER under this contract will be fully, solely, and entirely assumed by the INSURER. Notwithstanding, the ADMINISTRATION acknowledges that Triple-C will carry out the responsibilities as to the administration and operational management of the Health Insurance subject of this contract and that its officers are authorized to represent Triple-S, Inc. in matters related to be carried out. 2. The ADMINISTRATION acknowledges that the INSURER is in a corporate reorganizational process. The INSURER will notify the ADMINISTRATION the date when the reorganizational process is completed. The INSURER represents that the reorganizational process shall not constituted an assignment of this Contract. ARTICLE XLIV ENTIRE AGREEMENT The parties agree that they accept, consent and promise to abide by each and every one of the clauses contained in this contract and that the contract contains the entire agreement between the parties. In order to acknowledge so, they initial the margin of each of the pages and affix below their respective signatures, in San Juan, Puerto Rico, this 13 day of June 2002. PUERTO RICO HEALTH INSURANCE TRIPLE-S ADMINISTRATION BY BY /s/ Orlando Gonzalez Rivera /s/ Socorro Rivas - --------------------------------- ---------------------------------- ORLANDO GONZALEZ RIVERA SOCORRO RIVAS TRIPLE-C /s/ Luis A. Marini ---------------------------------- LUIS A. MARINI 90 EX-10.2 6 g77580exv10w2.txt CONTRACT FOR THE NORTH REGION EXHIBIT 10.2 HEALTH INSURANCE CONTRACT NORTH HEALTH REGION Between THE PUERTO RICO HEALTH INSURANCE ADMINISTRATION and TRIPLE S, INC. July 1, 2002 CONTRACT This Agreement entered into this 13th day of June, 2002 at San Juan, Puerto Rico, by and between PUERTO RICO HEALTH INSURANCE ADMINISTRATION, a public instrumentality of the Commonwealth of Puerto Rico, organized under Law 72 approved on September 7, 1993, hereinafter referred to as the "ADMINISTRATION", represented by its Executive Director, ORLANDO GONZALEZ RIVERA, and TRIPLE-S, Inc., a domestic corporation duly organized and doing business under the laws of the Commonwealth of Puerto Rico, with employer social security number 66-0229064, hereinafter referred to as the "INSURER", represented by its President, SOCORRO RIVAS. WITNESSETH In consideration of the mutual covenants and agreements hereinafter set forth, the parties, their personal representatives and successors, agree as follows: FIRST: The ADMINISTRATION has the responsibility to seek, negotiate, and contract with public and private insurers, health care insurance programs that eventually will be capable of providing all citizens that reside in the island of Puerto Rico access to quality health care services, regardless of their economic condition and capacity to pay. SECOND: Law 72 of September 7, 1993 dictates the express policy that empowers the ADMINISTRATION to seek, negotiate and contract health insurance programs that will allow its beneficiaries access to quality health services, in particular the medically indigent and the public employees of the Central Government and pensioners. THIRD: The ADMINISTRATION published a Request For Proposals for the NORTH Health Area/Region, seeking to provide health insurance coverage to all eligible beneficiaries in said health Area/Region, by contracting with private insurers. FOURTH: Pursuant to the terms of the aforementioned Request For Proposals, published on April, 2002 different private health insurers submitted to the ADMINISTRATION proposals to underwrite the health insurance for the Health Area/Region. FIFTH: The proposals submitted by the proposing insurers were thoroughly evaluated by a Evaluation Committee, as well as an Administrative Evaluation Committee within the ADMINISTRATION, as a result of which, a recommendation was presented to the Board of Directors of the ADMINISTRATION. SIXTH: The Board of Directors of the ADMINISTRATION, after a careful and complete analysis of all technical and administrative elements of the proposals, decided to award the INSURER the contract to underwrite and administer the health insurance for the NORTH Health Area/Region, composed of ARECIBO, BARCELONETA, CAMUY, 1 CIALES, FLORIDA, HATILLO, LARES, MANATI, MOROVIS, QUEBRADILLAS, UTUADO AND VEGA BAJA. SEVENTH: The benefits to be provided under the plan offered bY the INSURER are divided in three types of coverage: 1) the Basic Coverage that includes preventive, medical, hospital, surgical, diagnostic tests, clinical laboratory tests, x-rays, emergency room, ambulance, maternity and prescription drug services; 2) Dental Coverage based on the free choice of participating dentists from INSURER's network, and 3) the Special Coverage that includes benefits for catastrophic conditions, expensive procedures and specialized diagnostic tests. Benefits shall be provided by the INSURER in strict compliance with Law Number 72 of September 7, 1993, as amended, which is made part of this contract, the terms and conditions contained in Addenda I, II, III, and IV of this contract, and subject to the following: TERMS AND CONDITIONS ARTICLE I DEFINITIONS ACCESS: Adequate availability of all necessary health care services included in the plan being contracted to fulfill the needs of the beneficiaries of the program. ADMINISTRATION: Puerto Rico Health Insurance Administration. ADVANCE DIRECTIVES: A written instruction such as a living will or durable power of attorney for health care, recognized under the laws of the Commonwealth of Puerto Rico (whether statutory or as recognized by the courts of the Commonwealth), relating to the provision of health care when the individual is incapacitated. ANCILLARY SERVICES (Ancillary Charges): Supplemental services, including laboratory, radiology, physical therapy, and inhalation therapy, which are provided in conjunction with medical or hospital care. ASSMCA - Mental Health and Substance Abuse Administration: Spanish acronym for the Puerto Rico Mental Health and Substance Abuse Administration, the state agency that has been delegated the responsibility for the planning, establishment of mental and substance abuse policies and procedures, the coordination, development and monitoring of all mental health and substance abuse services rendered to beneficiaries under the Puerto Rico Health Insurance Program. BENEFICIARY: Any person that under Law 72 of September 7, 1993 is determined eligible to receive services, is reported as such to the INSURER by the ADMINISTRATION, and is enrolled in the plan. 2 CAPITATION: That portion of the premium paid to the INSURER which is disbursed to the HCO in payment for all the benefits provided under the Basic Coverage to the beneficiaries who have selected said HCO, as hereinafter defined. CO-INSURANCE: Percentage based participation of the beneficiary on each loss or portion of the cost of receiving a service. CONTRACT: The present contractual relationship between the ADMINISTRATION and the INSURER, and to which, 1) Law 72 of September 7, 1993, 2) the Request For Proposal, 3) the INSURER's Proposal documents, 4) the representations and assurances provided at the clarification meeting and 5) all other certifications issued by the INSURER following said clarification meeting, are herein incorporated by reference. All of the five (5) preceding set of documents are integral parts of this contract. CONTRACT TERM: The contract term is for three consecutive twelve (12) month periods after the effective date of this contract. The contract may be terminated at the conclusion of each twelve month period pursuant to Article XXVIII (3) (4). CMS: Acronym for the Centers for Medicare and Medicaid Services. DEDUCTIBLE: A fixed amount that the beneficiary has to pay to the provider as part of the cost of receiving a health care service, as provided in Addendum I of this contract. ELECTIVE SURGERY: A surgical procedure that, even though medically necessary and prescribed by a physician, does not need to be performed immediately because no imminent risk to life, permanent damage of a vital organ or permanent impairment is present, and which therefore can be scheduled. EMERGENCY MEDICAL CONDITION: (Prudent Layperson Standard) a medical condition presenting symptoms of sufficient severity that a person with average knowledge of health and medicine would reasonably expect the absence of immediate medical attention to result in (i) placing their health or the health of an unborn child in immediate jeopardy, (ii) serious impairment of bodily functions, or (iii) serious dysfunction of any bodily organ or part. ENCOUNTER: A contact between a patient and health professional during which a service is provided. An encounter form records selected identifying, diagnostic and related information describing an encounter. FAMILY CONTRACT: The benefits provided to the following eligible beneficiaries; 1) principal subscriber; and 2) his or her spouse (legally married or common law); and 3) his or her children (legally, adopted, foster or step children) under 21 years old that depend on the principal subscriber for subsistence; and 4) individuals under 21 years of age who have no children and live in common law with one of the eligible children in the same household; and 5) his or her dependents, of any age, who are blind or permanently disabled and live in the same household. Female beneficiaries (except 3 spouse) covered under family contract who become pregnant shall constitute a separate subscriber under an individual contract as of the first day of the month the pregnancy is diagnosed and reported to the INSURER. HEALTH CARE ORGANIZATION / HCO: A health care entity supported by a network of providers and which is based on a managed care system and accessed through a primary care physician (PCP). Said entity has contracted with the insurer to provide, in adequate facilities, the benefits provided for within the Basic Coverage or the Basic and Special Coverage of the health insurance contract. For the purpose of this contract the HCO will be identified by its descriptive name such as Primary Care Center, Physician Hospital Organization (PHO), Independent Practice Association (IPA), Primary Provider Group (PPG), or any other model. The INSURER is responsible for the availability of all necessary providers to cover both the basic and the special coverage. HEALTH AREA/REGION: The NORTH Health Area/Region as defined by the ADMINISTRATION, composed of ARECIBO, BARCELONETA, CAMUY, CIALES, FLORIDA, HATILLO, LARES, MANATI, MOROVIS, QUEBRADILLAS, UTUADO AND VEGA BAJA. HIPAA: The Health Insurance Portability and Accountability Act is federal legislation (Public law 104-191) approved by Congress in August 21,1996 regulating the continuity and portability of health plans, mandating the adoption and implementation of administrative simplification standards to prevent, fraud, abuse, improve health plan overall operations and guarantee the privacy and confidentiality of individually identifiable health information. INDIVIDUAL CONTRACT: The benefits provided to eligible subscribers that are: 1) children, adolescents and unmarried single adults without minor dependents; or 2) married adults whose spouse and/or dependents are not eligible for coverage under this program; or 3) Female beneficiaries (except spouse) covered under family contract who become pregnant as of the first day of the month the pregnancy is diagnosed and reported to the INSURER. INDIVIDUAL PRACTICE ASSOCIATION (IPA): A managed care delivery model in which the INSURER contracts with a physician organization which, in turn, contracts with individual physicians. The IPA physicians practice in their own offices and continue to see their fee-for-service patients. This type of system combines prepayment with the traditional means of delivering health care, a physician office/private practice. For the purpose of this contract, an IPA will be considered a Health Care Organization (HCO). INSURER: TRIPLE-S, is a private entity which meets the definition of a managed care organization (MCO), previously known as a state defined HMO, has a comprehensive risk contract primarily for the purpose of providing health care services, making the services it provides accessible (in terms of timeliness, amount, duration and scope) as those services are to other non-Medicaid recipients within the Area/Region served by the entity and meets the solvency standards under the law as a state licensed risk-bearing entity. 4 MANAGED BEHAVIORAL HEALTH ORGANIZATION (MBHO): An entity constituted by Mental Health Participating Providers and organized with the purpose of negotiating contracts to provide mental health and substance abuse services. MEDICARE: Federal health insurance program for people 65 or older, people of any age with permanent kidney failure, and certain disabled people according to Title XVIII of the Social Security Act. Medicare has two parts: Part A and Part B. Part A is the hospital insurance that includes inpatient hospital care and certain follow up care. Part B is medical insurance that includes doctor services and many other medical services and items. A Medicare recipient is a person who has either Part A or Part A and B insurance. MEDICARE BENEFICIARY: Any person who is a Medicare recipient of Part A or Part A and B and complies with the definition of beneficiary established in this article. MEDICALLY NECESSARY SERVICES: Shall mean services or supplies provided by an institution, physician, or other providers that are required to identify or treat a beneficiary's illness, disease, or injury and which are: a. Consistent with the symptoms or diagnosis and treatment of the enrollee's illness, disease, or injury; and b. Appropriate with regard to standards of good medical practice; and c. Not solely for the convenience of an enrollee, physician, institution or other provider; and d. The most appropriate supply or level of services which can safely be provided to the enrollee. When applied to the care of an inpatient, it further means that services for the enrollee's medical symptoms or condition require that the services cannot be safely provided to the enrollee as an outpatient; and e. When applied to enrollees under 21 years of age, services shall be provided in accordance with EPSDT requirements including federal regulations as described in 42 CFR Part 441, Subpart B, and the Omnibus Budget Reconciliation Act of 1989. MENTAL HEALTH FACILITIES: Any premises (a) owned, leased, used or operated directly or indirectly by or for the Managed Behavioral Health Organization (MBHO) or its affiliates for purposes related to this Agreement; or (b) maintained by a subcontractor or provider to provide mental health services on behalf of the Managed Behavioral Health Organization. MENTAL HEALTH CARVE-OUT: Specified psychiatric, behavioral, and substance abuse services covered under the Puerto Rico Health Insurance Plan provided through a contract with a separate entity. 5 NON-PARTICIPATING PROVIDER: All health care service providers that do not have a contract in effect with the INSURER. Said provider is barred from providing services under this contract. PARTICIPATING PHYSICIAN: A doctor of medicine that is legally authorized to practice medicine and surgery within the Commonwealth of Puerto Rico and has a contract in effect with the INSURER. PARTICIPATING PROVIDER: All health care service providers that have a contract in effect with the INSURER. PBM: Acronym for Pharmacy Benefits Manager. PERSON WITH AN OWNERSHIP OR CONTROL INTEREST: A person or corporation that: owns, directly or indirectly five percent (5%) or more of the insurer's capital or stock or receives five percent (5%) or more of its profits; has an interest in any mortgage, deed of trust, note, or other obligations secured in whole or in part by the insurer or by its property or assets, and that interest is equal to or exceeds five percent (5%) of the total property and assets of the insurer; or is an officer or director of the INSURER. PHARMACY BENEFITS MANAGER: The private entity contracted by the ADMINISTRATION under the Health Reform Program to function as their pharmaceutical benefit manager responsible, for claims processing, drug utilization review, disease management, formulary control and beneficiary/customer information services for pharmaceutical benefits provided by the basic, special and mental health coverage of the Health Reform Program. PHYSICIAN INCENTIVE PLAN: Any compensation arrangements between INSURER and physician or physician groups that may directly or indirectly have the effect of reducing or limiting services furnished to Medicaid recipients enrolled with the insurer. PRE-AUTHORIZATION: A written or electronic approval by the INSURER to the beneficiary granting authorization for a benefit to be provided under the Special Coverage of the program. The beneficiary is responsible for obtaining the preauthorization for coverage in order to receive covered benefits that require it. Failure to obtain pre-authorization precludes coverage. Notwithstanding the aforementioned, the INSURER has the option of not requiring pre-authorization for all services received within a particular HCO. PREMIUM: The monthly amount that the ADMINISTRATION agrees to pay to the INSURER as a result of having assumed the financial risk for providing the benefits to the beneficiaries covered. Method of payment is referred to hereunder as per member per month (PMPM). 6 PRIMARY CARE PHYSICIAN (PCP): A doctor of medicine legally authorized to practice medicine and surgery within the Commonwealth of Puerto Rico, who initially evaluates and provides treatment to beneficiaries. He/she is responsible for determining the services required by the beneficiaries, provides continuity of care, and refers the beneficiaries to specialized services if deemed medically necessary. Primary physicians will be considered those professionals accepted as such in the local and federal jurisdictions. The following are considered primary care physicians: Pediatricians, Obstetrician/Gynecologist, Family Physicians, Internists and General Practitioners. Each female beneficiary with a pregnancy factor has to select an obstetrician-gynecologist as her primary care physician. Once the pregnant woman completes her maternity care period, she will be allowed to continue with her primary care physician. PROVIDER: An individual or entity that is authorized under the laws of the Commonwealth of Puerto Rico to provide health care services. PRICO: Acronym for the Puerto Rico Insurance Commissioner's Office, the state agency responsible for regulating, monitoring, and licensing insurance business in Puerto Rico. SECOND MEDICAL OPINION: A consultation with a peer requested by the beneficiary, the HCO, a Participating Physician or the INSURER to assess the appropriateness of a previous recommendation for surgery or medical treatment. SECONDARY or SPECIALTY PHYSICIAN: A physician such as a dermatologist, urologist or cardiologist, who provides professional services on a referral from a Primary Care Provider SUBSCRIBER: The beneficiary covered under the individual coverage of the plan or the principal beneficiary who grants eligibility to all those beneficiaries included under the family coverage. SUPPORT PARTICIPATING PROVIDERS: Health care service providers who are needed to complement and provide support services to the Primary Care Physicians and who have a contract with the INSURER to provide said services. A referral from the Gatekeeper is necessary. The following will be considered support participating providers, among others: Pharmacies, Hospitals, Health Related Professionals, Clinical Laboratories, Radiological Facilities, Podiatrists, Optometrists, and all those participating providers that may be needed to provide services under the basic and special coverage considering the specific health problems of the Area/Region. SUPPORT PARTICIPATING PHYSICIANS: Doctors of Medicine legally authorized to practice medicine and surgery within Puerto Rico who are needed to complement and provide support services to the Primary Care Physicians and who have a contract with the INSURER to provide said services. A referral from the PCP is necessary. 7 QUALITY IMPROVEMENT (QI) The ongoing process of responding to data gathered through quality monitoring efforts, in such a way as to improve the quality of health care delivered to individuals. This process necessarily involves follow-up studies of the measures taken to effect change in order to demonstrate that the desired change has occurred. UTILIZATION MANAGEMENT (UM): The process of evaluating necessity, appropriateness and efficiency of healthcare services through the revision of information about hospital, service or procedure from patients and/or providers to determine whether it meets established guidelines and criteria approved by the INSURER. ORGANIZATION AND ADMINISTRATION INSURER must maintain the organizational and administrative capacity and capabilities to carry out all duties and responsibilities under this contract. INSURER must maintain assigned staff with the capacity and capability to provide all services to all Beneficiaries under this contract. INSURER must maintain an administrative office in the service area (local office). The local office must comply with the American with Disabilities Act (ADA) requirements for public buildings.. INSURER must provide training and development programs to all assigned staff to ensure they know and understand the service requirements under this contract including the reporting requirements, the policies and procedures, cultural and linguistic requirements and the scope of services to be provided. The training and development plan must be submitted to THE ADMINISTRATION. INSURER must notify THE ADMINISTRATION immediately no later than 30 days after the effective date of this contract of any changes in its organizational chart as previously submitted to THE ADMINISTRATION. INSURER must notify THE ADMINISTRATION immediately (within fifteen (15) working days) of any change in regional or office managers. This information must be updated whenever there is a significant change in organizational structure or personnel. ARTICLE II ELIGIBILITY AND ENROLLMENT 1. Eligibility shall be determined according to Article VI, Section 5 of Law 72 of September 7, 1993 and the federal laws and regulations governing eligibility requirements for the Medicaid Program. 2. The INSURER shall provide coverage for all the eligible beneficiaries as provided in the prior section. 8 3. The INSURER shall inform beneficiaries, who are also Medicare recipients with Part A or Part A and B, at the time of enrollment that if they choose to become beneficiaries under the contracted health insurance, the benefits provided under said contract will be accessed exclusively through the primary care physician. In this situation: a) bad debt reimbursement, as a result of non-payment of deductibles and/or co-insurance, for covered Part A services and Part B services provided in hospital setting, other than physician services; b) payment for covered Part A services; c) payment for Part B outpatient services provided in a hospital setting; and d) all covered Part B services, will continue to be recognized as a covered reimbursable Medicare Program cost. Medicare beneficiaries with either Part A or Part A and B can choose to access their Part A or Part B services from the Medicare's providers list except that in this case the INSURER will not cover the payment of any benefits provided through this contract. 4. The INSURER represents that neither the capitated amount paid to each HCO nor the fee for service amount paid to all providers includes payment for services covered under the Medicare Federal Program. The primary care physicians, the participating providers or any other physician contracted on a salary basis cannot receive duplicate payments for those beneficiaries that have Medicare Part A or Part B coverage. The INSURER further represents that it will audit and review its billing data to avoid duplicate payment with the Medicare Program. The INSURER shall report its findings to the ADMINISTRATION on a quarterly basis. The ADMINISTRATION will audit and review Medicare billing data for Part A or Part B payment for beneficiaries eligible to said Federal Program. 5. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service through the amount paid to the HCO, when services are accessed through the primary care physician. 6. The INSURER guarantees to maintain adequate services for the Health Area/Region for the prompt enrollment of all eligible beneficiaries on a daily basis and in the order of their application. The INSURER shall maintain sufficient facilities within the Area/Region as needed. The subscriber shall be responsible for visiting the designated facility in order to complete all requirements towards enrollment. The INSURER shall enroll the beneficiary(ies) and issue the official identification card(s) on the same day that the subscriber completes the 9 enrollment requirements. Initial orientation and enrollment will be conducted pursuant to the Instructions to Insurers for Implementation of Orientation and Subscription Process contained in Addendum II. 7. The INSURER shall be responsible to provide the subscriber with specific information allowing for the prompt and reliable enrollment of all eligible individuals. The ADMINISTRATION shall notify the INSURER on a daily basis of all beneficiaries who have become eligible, as well as those who have ceased to be eligible. The INSURER shall guarantee the maintenance, functionality, and reliability of all necessary systems to allow enrollment or disenrollment of subscribers. 8. The beneficiary becomes eligible for enrollment as of the date specified in the ADMINISTRATION's notification to the INSURER. 9. The beneficiary ceases to be eligible as of the disenrollment date specified in the ADMINISTRATION's notification to the INSURER. If the ADMINISTRATION notifies the INSURER that the beneficiary ceased to be eligible on or before the last working day of the month in which eligibility ceases, the disenrollment will be effective on the first day of the following month. Disenrollment will be effected exclusively by a notification issued by the ADMINISTRATION. 10. If, following disenrollment, a beneficiary's contract is reinstated and the beneficiary is re-enrolled on the same month of disenrollment, the contract will be reinstated as of the date of re-enrollment. 11. The INSURER agrees to maintain active enrollment for those beneficiaries reported eligible by the ADMINISTRATION. Notification of eligible persons will be made through electronic transmissions or machine readable media. The ADMINISTRATION will forward this data to the INSURER in the format agreed to by both parties in accordance with the Daily Update/Carrier Eligibility File Format as required in the RFP. 12. Coverage under the plan shall begin the day that the enrollment process has been completed. The INSURER will guarantee that it will be ready to notify the ADMINISTRATION of all newly enrolled beneficiaries through electronic or magnetic media on a daily basis upon the Administration's request. This notification will include all new beneficiaries as of the day before the notification is issued and will be sent to the ADMINISTRATION no later than the following working day after the enrollment process has been completed. Premiums shall be paid on a pro-rata basis as of the date that the enrollment process was completed and the official identification card has been issued, to the end of the month, as specified in the INSURER's notification to the ADMINISTRATION. Premium payments, if applicable, for newborn of beneficiaries will accrue as of the date of birth of the child in the event that the enrollment process of said new beneficiary is completed. Premium payments shall be paid retroactively to the 10 INSURER upon enrollment of the newborn. The INSURER will be required to pay the providers for the services rendered to an unenrolled newborn during ninety (90) days from the date of birth. The INSURER, PCP or HCO will provide orientation to the beneficiary as soon as a baby is born to go to the INSURER's office with the necessary documentation to receive a manual certification from the INSURER for the newborn. The INSURER, PCP or HCO will make every effort to make the beneficiary go to the Department of Health Medicaid Office to register the newborn within the ninety (90) days of his/her date of birth. It should be emphasized to the beneficiary that failure to register the newborn within that period will cause the newborn to loose coverage. After the 90 days period, the INSURER will not be paid premiums if the newborn is not enrolled. In the case in which a newborn dies before being registered at the Medicaid Office, the INSURER must provide ASES with proof of the birth and of the death of the newborn. ASES will then pay premiums for the period from the birth of the newborn until his death. In the case in which the family unit ceases to be eligible before the newborn is registered at the Medicaid Office, the INSURER must provide ASES with proof of the birth of the newborn. ASES will then pay premiums from the date of birth of the newborn until the termination of eligibility of the family. 13. In case that an individual has been certified as eligible by the Department of Health but has not completed the enrollment process, and he/she or his/her dependents need emergency services, the ADMINISTRATION shall verify the eligibility status of the individual. If the individual is eligible as a beneficiary, emergency services will be provided as if the individual is a beneficiary and arrangements for the issuance of the identification card will be made immediately after the notification of eligibility is made by the ADMINISTRATION to the INSURER. The premium in this instance will be paid to the INSURER on a prorata basis from the moment the emergency services needed are provided or the identification card is issued, whichever is first. For the purpose of this situation, the enrollment process is the process that commences at the time that the ADMINISTRATION gives notice to the INSURER of the beneficiaries eligibility status, and results in a letter to said beneficiary establishing the date and location for the completion of the enrollment documents and selection of the HCO. Said process ends when the beneficiary has selected an HCO from those available in the Health Area/Region and has received an identification card. Nothing provided in this section is intended to affect a provider's obligation to screen and stabilize an individual arriving at its facilities for emergency treatment as defined by EMTALA and the applicable Commonwealth laws. 11 14. Coverage shall end effective on the date of disenrollment. Premiums will be paid until the effective date of disenrollment. In the event of disenrollment while the beneficiary is an inpatient of a hospital on the last day of the month of coverage, and continues to be an inpatient of a hospital during the month following his disenrollment, the ADMINISTRATION will cover the payment of the premium for that following month. If the beneficiary remains hospitalized in subsequent months, the conversion clause will apply for the months after the one being paid by the ADMINISTRATION it being the INSURER's responsibility to assure that premiums are paid. Disenrollment will be effected exclusively by a notification issued by the ADMINISTRATION. 15. In the event that a female beneficiary, included as a dependent in a family group, other than as the spouse, becomes pregnant, that beneficiary will be transferred to a new family and become the head of household of the new family. The effective date of the new family will be the date of the first diagnosis of the pregnancy. Such beneficiary has the right to all the services under maternity coverage. At the time of being diagnosed as pregnant, the physicians, the HCO and/or the INSURER are required to provide orientation to the beneficiary towards certifying with the Department of Health Medicaid Office and to present herself at the INSURER to have a membership card issued. 16. The INSURER shall not in any way discriminate nor terminate coverage of any beneficiary(ies) for reasons due to adverse change in recipient's health, or based on expectations that an enrollee will require high cost care, or need of health services, or any reason whatsoever, except for non-payment of premiums or fraudulent use of benefits or participation of fraudulent acts, after prior notification and consultation with the ADMINISTRATION. 17. The INSURER agrees to maintain an Enrollment Data Base which: a) includes each subscriber and all beneficiaries; b) contains for each subscriber and beneficiary the information technically defined in the (Carrier Billing File/Carrier Eligibility File) formats contained in RFP. 18. The INSURER will secure on the date of enrollment a signed statement from the subscriber authorizing the Federal Government, the INSURER, the ADMINISTRATION and/or their designees to review the medical record of the subscriber and other beneficiaries, in order to determine quality, appropriateness, timeliness and cost of services performed under this contract. The terms, content and specifications of said authorization shall be consistent with the standards set forth in 45CFR 164.508 et seq., part of the regulations of the Health Insurance Portability and Accountability Act(HIPAA). 12 19. All individually identified information of services related to beneficiaries which is obtained by the INSURER shall be confidential and shall be used or disclosed by the INSURER, the HCO and/or its participating providers only for purposes directly connected with performance of all obligations contained in this contract. Medical records and management information data concerning any beneficiary enrolled pursuant to this contract shall be confidential and shall be disclosed within the INSURER's organization or to other persons, as authorized by the ADMINISTRATION, only as necessary to provide medical care and quality, peer or grievance review of such medical care under the terms of this contract and in coordination with the mental health carve-out contract subscribed by ASSMCA and the ADMINISTRATION. The confidentiality provisions herein contained shall survive the termination of this contract and shall bind the INSURER, ITS HCO'S and the INSURER's participating providers as long as they maintain any individually identifiable information relating to beneficiaries as provided in the implementation of the HIPAA regulation schedule to be set forth by the Federal Government, 45 CFR 164.102 et. seq. Any request for information which is made by third parties not related to this contract will be forwarded to the ADMINISTRATION for consideration, review and decision as to the pertinence of the request and the authorization for disclosure. Nothing in this section shall limit or affect the ADMINISTRATION's, the INSURER and /or providers obligations regarding protected individually identifiable health information as provided in 45 CFR 164.102 et seq. (HIPAA) regulations. Disclosure of individually identifiable health information to any business associate as defined in 45 CFR 164.504(e) of the HIPAA regulations by the INSURER shall entail the legal obligations set forth therein. 20. The INSURER agrees to notify the ADMINISTRATION immediately of any change in the place of residence of the subscriber, insofar as the subscriber makes the change known to the INSURER. Address changes will be forwarded through electronic and/or machine-readable media as referred in paragraph sixteen. 21. The INSURER agrees to implement a program whereby eligible beneficiaries are properly advised of the date of termination of their eligibility so as to assure that they complete the recertification process prior to said date. Said program should provide for an initial notice of the termination date at least ninety (90) days prior to the effective date of the eligibility termination. 22. The INSURER hereby commits to comply with the electronic transactions, security and privacy requirements of the HIPAA regulations as provided in 45CFR 160 and 142 et seg. within the implementation dates set forth therein or by subsequent regulations schedule. 13 23. DISENROLLMENT The INSURER has a limited right to request a beneficiary be disenrolled from INSURER without the beneficiary's consent. THE ADMINISTRATION must approve any INSURER request for disenrolling a beneficiary for cause. Disenrollment of a beneficiary may be permitted under the following circumstances: (a) Beneficiary misuses or loans his/her membership card to another person to obtain services. (b) Beneficiary is disruptive, unruly, threatening or uncooperative to the extent that beneficiary's membership seriously impairs INSURER's or provider's ability to provide services to beneficiaries or to obtain new beneficiaries, and beneficiary's behavior is not caused by a physical or other mental health condition. The INSURER must take reasonable measures to improve a beneficiary's behavior prior to requesting disenrollment and must notify beneficiary of its intent to disenroll. Reasonable measure may include providing education and counseling regarding the offensive acts or behavior. INSURER must notify the beneficiary of the INSURER's decision to disenroll after reasonable measures have failed to remedy the problem. If the beneficiary disagrees with the decision to disenroll the beneficiary from INSURER, the beneficiary must be notified of the availability of the Complaints and Grievances Procedure and the ADMINISTRATION's fair hearing process, as provided by Law 72 of September 7, 1993, as amended. ARTICLE III RIGHT TO CHOOSE 1. Each principal subscriber shall have the right to select an HCO from those available in the health Area/Region which at no time will be less than two (2) HCO's at each municipality, one of which has to be a privatized or non-privatized government or municipal facility if available, and subject to compliance with INSURER's requirements for HCO's. The selection of the HCO and primary care physician will be made by the beneficiaries at the INSURER's local or regional offices. The right of beneficiaries to transfer or change from an HCO shall be made at any time without cause during the first 90 days following the date of the 14 beneficiary's initial enrollment or the date of enrollment notice is sent, whichever is later, and at most once every twelve (12) months thereafter. The following examples are considered causes for disenrollment: (1) the beneficiary moves out of the area of service of the HCO and is not within a reasonable distance from the area of the service of the HCO; (2) the HCO does not cover the service because of moral and religious objections; (3) the beneficiary needs related services to be performed at the same time; not all related services are available within the network; and the beneficiary's primary care provider or another provider determines that receipt of services separately would subject the beneficiary to unnecessary risk; and, (4) other reasons, including but not limited to, poor quality of care, lack of access to services and lack of access to experienced providers dealing with the beneficiary's health care needs. The beneficiary shall receive proper written notification at least 60 days prior to the end of each 12 month enrollment period from the INSURER. 2. Each HCO will have available at least one of each specialist considered a primary care physician and shall meet the specification of the ratio specified in Article VI, and will have a sufficient number of primary care physicians to provide health care services to all beneficiaries according to the ratio specified in Article VI. Furthermore, the INSURER will provide to each HCO a network with a sufficient number of participating providers to render all services included under the basic, special and dental coverage to beneficiaries pursuant to the ratio specified in Article VI. 3. The beneficiary shall have the right to choose his or her primary care physician from those available within the HCO selected by the principal subscriber. Said right also encompasses the change of the selected primary physician at any time by making the proper administrative arrangements within the HCO in conformity with the HCO's established policy. The selected primary care physician or the substitute on-duty primary care physician within the HCO must be available on a 24 hour basis for emergencies and/or telephone consultations. Each HCO must have available all of the primary care physicians (family physicians, internists, general practitioners, pediatricians and obstetrician-gynecologist) subject to waivers in case of unavailability of a specific provider. 4. A primary care physician can only act as such in only one (1) municipality within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 5. A primary care physician can only act as such in only one (1) HCO within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 15 6. Each female beneficiary may select (i) primary care physician, or (ii) primary care i physician and obstetrician-gynecologist as her primary care physician. If the female is pregnant, the obstetrician-gynecologist automatically will become the primary care physician; if one is not previously selected, she will then have to choose an obstetrician-gynecologist as her primary care physician. Once the pregnant woman completes her maternity care period, she will be allowed to continue with her original primary care physician. 7. Any subscriber may change the selected HCO subject to the provisions of Section I, above. If the request for a change of HCO is filed with the INSURER on or before the fifth day of a month, the change of HCO will become effective on the first day of the following month. If the change is filed after the fifth day of the month, the change of HCO will be effective on the first day of the second succeeding month. Selection guidelines are contemplated in Article VI, paragraph 3 of this contract. 8. The beneficiary shall have the right to choose the provider to be referred to from those participating providers within the HCO's network that are under contract with the INSURER's for benefits covered under the Basic and Special Coverage. 9. Dental services will be provided through the INSURER's network of dentists for the health insurance services contracted. Each subscriber will have the right to select a dentist within the INSURER's network to receive dental services. The accepted dentist/beneficiary ratio is one (1) dentist for each one thousand three hundred fifty (1,350) beneficiaries. 10. In the event that HCO's under 330 Projects of the Rural Health Initiative have contracts with specialists, support participating providers, or support participating physicians, either on a fee-for-service basis or on a salary basis, the INSURER will be responsible for gathering and reporting all required data including the payment of services described in Article VII, Section five (5), Article XV, sections four (4) and eight (8), and the Claim File Layout formats as required in the RFP. 11. The INSURER will provide to each principal, subscriber a complete list of all participating physicians and participating providers, with addresses and specialties or health related services offered, in order to allow the beneficiary to choose among them. 12. The beneficiary shall also have the right to choose the pharmacy according to applicable PBM guidelines established by the ADMINISTRATION and any other participating providers among those contracted by the ADMINISTRATION for basic and/or special coverage services, said guidelines to become effective sixty (60) days after notice to INSURER. The ADMINISTRATION will determine the acceptable pharmacy/beneficiary ratio in order to assure access to the pharmacy benefits. The right to choose requires the availability of sufficient number of pharmacies in each municipality of residence of the beneficiaries. 16 13. The INSURER will develop and effectively disseminate an education and orientation program in order to insure that all eligible beneficiaries are aware of their rights under this contract, including their right to choose physicians and providers. The ADMINISTRATION reserves the right to make changes, modifications and recommendations to said program in coordination and agreement with the INSURER. This program shall be subject to approval by the ADMINISTRATION prior to its implementation and in compliance with the marketing guidelines and prohibitions established in Article IX. 14. Notwithstanding the foregoing, the ADMINISTRATION shall preserve the right in coordination with INSURER, to expand, limit or otherwise amend the provision of services as provided for herein and/or to negotiate in coordination with the INSURER, cost saving and efficiency improvement measures. In those cases in which the ADMINISTRATION acts on its own, changes to the provision of services shall be notified to the INSURER no later than 30 days prior to implementation. Said modifications will take place after consultation and cost negotiation with the INSURER and prior approval by CMS. ARTICLE IV SECONDARY PAYOR 1. The INSURER shall be a secondary payor to any other party liable in any claim for services to a beneficiary, including but not limited to: the INSURER itself, Medicare, other insurers or managed care organizations, health maintenance organizations, non-profit INSURER's operating under law 152 approved May 9, 1942 as amended, "Asociacion de Maestros de Puerto Rico", medical plans sponsored by employee organizations, labor unions, and any other entity that results liable for the benefits claimed against the INSURER for coverage to beneficiaries. 2. It shall be the responsibility of the INSURER to ascertain that the aforementioned provisions of Law 72 of September 7, 1993 are enforced and that the INSURER acts as secondary payor to any other medical insurance. 3. The ADMINISTRATION and the INSURER will cooperate in the exchange of third parties health insurance benefits information. To this effect the INSURER will comply fully with the "Carta Normativa Numero N-E-5-95-98" issued by the Office of the Insurance Commissioner of Puerto Rico and the HIPAA regulations provisions cited elsewhere in this contract. 4. The INSURER will make the most diligent best efforts to determine if beneficiaries have third party coverage and will attempt to utilize such coverage when applicable. 17 The INSURER will be permitted to retain 100% of the collections from subrogation. The plan's experience will be credited with the amount collected from said primary payor, once payment is made and the INSURER recovers payments according to the corresponding transaction process established. If the provider detect that a beneficiary have other health plan coverage not identified in the beneficiary card, the provider will bill the primary payor and will provide the information to the INSURER. 5. The INSURER must report quarterly to the ADMINISTRATION the amounts collected from third parties for health services provided. Said reports must provide a detailed description of the beneficiary's name, contract number, third party payor name and address, date of service, diagnosis and provider's name and address and identification number. 6. The INSURER must report quarterly to the ADMINISTRATION the amounts collected from third parties for health services provided according with standard format to be adopted by the ADMINISTRATION. Said reports must provide a detailed description of the beneficiary's name, contract number, third party payor name and address, date of service, diagnosis and provider's name and address and identification number. 7. The INSURER shall develop specific procedures for the exchange of information, collections and reporting of other primary payor sources and is required to verify its own eligibility files for information on whether or not the beneficiary has private health insurance within the INSURER. 8. The INSURER must implement and execute an effective and diligent mechanism in order to assure the collection from primary payors of all benefits covered under this contract. Said program, mechanisms and method of implementation shall be reported to the ADMINISTRATION as of the first date of the effectiveness of this contract. 9. Failure of the INSURER to comply with this Article may, at the discretion of the ADMINISTRATION, be cause for the application of the provisions under Article XXXIII. ARTICLE V EMERGENCIES 1. In cases of emergency or immediate need of medical care within the Commonwealth of Puerto Rico, the INSURER will be responsible for the payment of emergency service provided to beneficiaries when the emergency or 18 immediate need of medical care occurs within its network or outside of its network or the geographical Area/Region of the selected HCO's emergency care facility. Such services must be paid by the INSURER regardless of whether the entity that furnishes the service has contracted with the INSURER and no prior authorization shall be required by the INSURER for the provision of emergency services. The INSURER will assume the payment of the medical screening examinations or other medically necessary emergency services, whether or not the patients meets the prudent layperson standard, in the event that the beneficiary's PCP or any INSURER representative or provider instructs them to seek emergency care within or out of its network area/region. Such services shall consist of whatever is necessary to stabilize the patient's condition, unless the expected medical benefits of a transfer outweigh the risk of not undertaking the transfer, and the transfer conforms with all applicable requirements. The stabilization services includes all treatment that may be necessary to assure within reasonable medical probability, that no material deterioration of the patients condition is likely to result from or occur during discharge of the patient or transfer of patient to another facility. In the event of a disagreement with the provider concerning whether a patient is stable enough in order to be discharged or transferred or whether the medical benefits outweigh the risk, the judgement of the attending physician caring for the enrollee will prevail and oblige the INSURER. Such services shall be provided in such a manner as to allow the subscriber to be stable for discharge or transfer as defined by EMTALA, in order to safely return the subscriber to the corresponding HCO, or to an appropriate participating provider for continuation of treatment. 2. Since emergency care is of utmost concern to the ADMINISTRATION, the INSURER shall require that adequate ambulance transportation and emergency medical care are available. Each municipality shall have access to an emergency care system composed of ground, air and maritime ambulance transportation as necessary, and emergency medical care. 3. Ambulance transportation and emergency care will be subject to periodic reviews by applicable governmental agencies to ensure the highest quality of services. 4. All participating providers shall provide immediate emergency care services to beneficiaries when requested. 5. Emergency care services as well as ambulance transportation services shall exist in each municipality comprising the health area/region, 24hours a day, and 365 days yearly, operated by an HCO, or by other participating providers. 6. The INSURER and each HCO is required to provide access to emergency care and ambulance transportation services within their own facilities, through their contracted, participating providers or through contract with third parties that 19 guarantee said emergency care and ambulance transportation twenty four (24) hours a day, seven (7) days a week. 7. The INSURER will assure that each HCO makes the necessary arrangements to have readily available ambulance services in good mechanical condition and properly equipped, in order to assure a prompt and effective ambulance transportation service. 8. The INSURER or the HCO will establish Urgent Care Centers within the Health Area/Region. These include physician offices and clinics with extended hours. These Urgent Care Centers may complement emergency care services but at no time will they substitute the requirement to have emergency care services and ambulance transportation available at each municipality 24 hours a day, 7 days a week and 365 days yearly. 9. The INSURER will provide beneficiaries access to a 24-hour-a-day toll-free hotline with licensed qualified professionals to help beneficiaries with questions about particular medical conditions and to guide them to appropriate facilities (emergency rooms, urgent care centers, among others). Notwithstanding, the aforementioned statement, the beneficiary will have the right to choose to attend an emergency room if he believes his condition is an emergency medical condition, as defined in this contract, without prior need of authorization or certification. ARTICLE VI ACCESS TO BENEFITS 1. The INSURER will contract all available private providers that meet its credentialing process and agree to its contractual terms, in order to assure sufficient participating providers, to satisfy the demand of covered services by the beneficiaries enrolled in the program. Considering the expected mix between private patients and beneficiaries the accepted physician/beneficiary ratio will be 1:1,700 for primary care physicians; 1:2,200 for specialists and 1:1,600 for all physicians. In the event that the HCO's provides services only to beneficiaries under this contract, the physician/beneficiary ratio will be the same to that applicable when there is a mix between private patients and beneficiaries. The INSURER will assure compliance with said physician/beneficiary ratio. 2. The INSURER shall be responsible to contract all the necessary health care services and participating providers to insure that all the benefits covered under the Basic, Dental and Special Coverage of the plan are rendered, through the INSURER's participating providers with the timeliness, amount, duration and scope as those services are rendered to non-Medicaid recipients within the area/region served. 20 3. Every subscriber shall be able to select from at least two (2) HCO's with sufficient enrollment capacity in his or her municipality, one of which will be a privatized government facility, if available and subject to compliance with INSURER's requirements for HCO's. Each subscriber shall also be able to choose the HCO outside his or her municipality of domicile as provided for in Article III, paragraph 1 of this contract. 4. A primary care physician can only act as such in only one (1) municipality within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 5. Contracts between the INSURER and HCO's and between the INSURER and its participating providers shall be independent contracts specifically designed to cover all terms and conditions contained in this contract. Coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. 6. HCO enrollment shall be conditioned on the availability of adequate health care services. It shall be the INSURER's responsibility to maintain a constant assessment of the enrollment capacity of each HCO. Adequate health care services will be those determined acceptable under the ADMINISTRATION's Compliance Evaluation Program as outlined in Article XVII of this contract. 7. That INSURER shall be responsible for communicating to its participating providers the public policy that prohibits provider inquiries with the purpose of determining if the beneficiary is subject to the benefits provided under Law 72 of September 7, 1993. 8. The INSURER is responsible for the implementation, development and maintenance of an adequate system for referrals of health services under this contract. The referral system must be approved by the ADMINISTRATION and must be audited periodically by the INSURER and the ADMINISTRATION. In no way the INSURER, the HCO's or any participating provider or health organization will submit for approval, specialists referrals to any internal or external committee or will interfere, prohibit, or restrict any health care professional's advice within their scope of practice. 9. All referral systems must comply with timeframes established in paragraph (23). If the system developed by the INSURER is by electronic means, it must be installed at all primary care offices. It is unacceptable to force the beneficiary to move to another facility to obtain referrals. 10. The INSURER assures the ADMINISTRATION that no HCO'S or participating providers will impose limit quotas or restrain services to subcontracted providers 21 for the services medically needed (e.g. laboratory, pharmacies, or other services). 11. The INSURER shall expedite access to benefits of beneficiaries diagnosed with conditions under the Special Coverage. The identification of these beneficiaries will allow rapid access of the medical services covered under our Special Coverage. 12. Any denial, unreasonable delay or rationing of services to the beneficiaries is expressly prohibited. The INSURER shall require strict compliance with this prohibition by its participating providers or any other entity related to the rendering of medical care services to the beneficiaries. Any action in violation of this prohibition shall be subject to the provisions of Article VI, Section 6 of Law 72 of September 7, 1993. Furthermore, the INSURER shall be responsible for posting information at every HCO, addressed to the beneficiaries, stating the policy that prohibits denying, unreasonably delaying or rationing services by participating providers or any other entity related to the rendering of medical care services to the beneficiaries, and providing information on procedures for filing a grievance on the subject. The INSURER shall notify the HCO's and participating providers that they must comply with the policy that prohibits the denial, the unreasonable delay or the rationing of services by participating providers or any other entity rendering medical services to beneficiaries, and further that they must provide information on procedures for filing a grievance. The INSURER shall comply with the performance measures established and scheduled by the ADMINISTRATION. 13. The INSURER will ensure that HCO's and participating providers have a mix of patients distributed between private and eligible beneficiaries so as to avoid any possibility of discrimination by reason of medical indigence, whenever feasible. 14. No participating provider, or its agents, may deny a beneficiary access to medically necessary health care services, except for the reasons specified in Article VI, section 6 of Law 72 of September 7, 1993. 15. The INSURER is responsible for having an adequate number of participating physicians and providers to supply all the benefits offered in the Basic, Dental and the Special Coverage of the contracted health insurance. The benefits under the Basic, Special and Dental coverage will be provided to the beneficiaries at the location of the participating providers. 16. The INSURER is responsible to have available all participating providers needed in order to render all the medically necessary services required to provide the beneficiaries with the benefits included in the Basic, Dental and Special Coverage of the contracted health insurance as specified in Addendum I of this contract. 22 17. The INSURER agrees to require compliance by all participating physicians and providers with all provisions contained in this contract. 18. The INSURER has a continuous legal responsibility toward the ADMINISTRATION to assure that all activities under this contract are carried out. INSURER will use its best efforts to prevent unauthorized actions by HCO's or participating providers. INSURER will take appropriate measures to ensure that all activities under this Contract are carried out. Failure to properly discharge the obligation to assure, by all means necessary and appropriate, full compliance with said activities, shall result in the termination of this contract as provided in Article XXXIII hereof. 19. Pursuant to the Health Reform Concept of 1993, the INSURER shall contract as participating providers those Commonwealth owned facilities that have been privatized in the Health Area/Region by virtue of Laws 103 of July 12, 1985, and 190 of September 5, 1996, the 330 and 339 Projects of the Rural Health Initiatives, those State owned facilities not privatized, as well as the privatized or non privatized municipally owned facilities in the different areas/regions and regions which will complement access to covered medical services, subject to its credentialing requirements and contractual terms. 20. The INSURER assures the ADMINISTRATION that physician and providers of services under this contract will provide the full range of medical counseling that is appropriate for beneficiary's condition. In no way the INSURER or any of its contractors may interfere, prohibit, or restrict any health care professional's advice within their scope of practice, regardless of whether a care or treatment is covered under the contract. 21. The INSURER assures the ADMINISTRATION that its Physician Incentive Plan does not in any way compensate directly or indirectly physicians, individual physicians, group of physicians or subcontractors as an inducement to reduce or limit medically necessary services furnished to individual enrollees and that it meets or exceeds the stop-loss protection and enrollee survey and disclosure requirements under the Social Security Act. The INSURER shall ensure that at the intermediate level all physician providers groups are afforded with adequate stop-loss protection within the required thresholds under the Medicaid Program regulations. 22. The INSURER assures that it will provide an adequate stop-loss insurance set at no more than ten thousand ($10,000) dollars to protect physicians from loss and comply with to the risk thresholds established under sections 42CFR 422.208. In the event, INSURER places physicians at substantial risk it shall conduct enrollee/disenrollee surveys not later than one year after the effective date of the contract and at least annually thereafter. 23 23. Timeframes for Access Requirements. INSURER must have sufficient network of providers and must establish procedures to ensure beneficiaries have access to routine, urgent, and emergency services; telephone appointments; advice and Beneficiaries service lines. These services must be accessible to beneficiaries within the following timeframes: - Urgent Care within 24 hours of request; - Routine care within 2 weeks of request; - Physical/Wellness Exams for adults must be provided within 8 to 10 weeks of the request; - Referrals: Appointments of referrals must be delivered and notified to beneficiaries within five (5) days from the date prescribed by the provider. THE SERVICES REQUIRED MUST BE DELIVERED OR RENDERED WITHIN A REASONABLE PERIOD AS MEDICALLY NEEDED BY THE BENEFICIARY, IN A TIME FRAME WHICH MAY NOT EXCEED THIRTY (30) DAYS FROM THE TIME OF THE APPOINTMENT, EXCEPT IN CASES WERE THE PARTICULAR NATURE OF SPECIALIST SERVICES REQUIRE ADDITIONAL WAITING TIME BECAUSE OF UNAVAILABILITY OF A SPECIALTY SERVICE. 24. INSURER must establish policies and procedures to ensure access to EPSDT Checkups be provided within ninety (90) days of new enrollment, except that newborn beneficiaries should be seen within two (2) weeks of enrollment, and that in all cases, and for all beneficiaries such policies and procedures be consistent with the American Academy of Pediatrics and EPSDT periodicity schedule which is based on the American Academy of Pediatrics schedule and the guidelines established by the ADMINISTRATION. The INSURER must advice the beneficiary of his right to have a checkup. ARTICLE VII CONTRACTS WITH HCO's AND ALL PARTICIPATING PROVIDERS 1. All services necessary to provide beneficiaries the benefits of the Basic, Special and Dental Coverage shall be contracted in writing with all participating providers. The INSURER will ensure that all provisions and requirements contained in this contract are properly included in the contracts with the HCO's and with all participating providers and that they are carried out by said HCO's and participating providers. Such provisions and requirements made part of these contracts will be properly notified to the ADMINISTRATION. Coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. 24 2. The INSURER may not discriminate with respect to participation, reimbursement or indemnification as to any provider who is acting within the scope of the provider's license or certification under applicable Commonwealth Law. 3. The INSURER agrees to draft, execute and enforce a specific contract between the INSURER and the HCO and between the INSURER and its participating providers that will include all applicable provisions contained in this contract. The INSURER will insure that said applicable provisions are properly complied with by the HCO's and its network of participating providers. To this effect, the Insurer also agrees to certify or attest that none of his contractors, subcontractors or providers of services: (1) consults, employs or procures services from any individual that has been debarred or suspended from any federal agency; or (2) has a director, partner or employee with a beneficial ownership of more than a 5% on their organization's equity who has been debarred or suspended by any federal agency, or (3) procures self-referral of services to any provider in which it may have directly or indirectly any economic or proprietary interest. The INSURER will certify and attest that it has provided all HCO's, complete written instructions describing procedures to be used for the compliance with all duties and obligations arising under this contract. These instructions will include the following information: provider selection by beneficiaries, covered services, reporting requirements, record- keeping requirements, grievance procedures, deductibles and co-payment amounts, confidentiality, and prohibitions against denial or rationing of services. Copy of these instructions will be submitted to the ADMINISTRATION, who reserves the right to request modifications or amendments to said instructions following consultation with the INSURER. 4. The INSURER agrees to incorporate in its contracts with HCO's and in those between the INSURER and its participating providers, the following provisions, among others, contained in this contract: a. A payment time schedule to pay the HCO's for services rendered and for payment for services rendered by the participating providers to the HCO's, the schedules will not exceed the time limitation standards required by the Administration under this contract to assure prompt payments of sums due to providers. b. A warranty by the HCO insuring that the method and system used to pay for the services rendered by the HCO's network of participating providers are reasonable and that the negotiated terms do not jeopardize or infringe upon the quality of the services provided. c. A procedure that establishes how the HCO's network of participating providers can recover from the INSURER monies owed for services 25 rendered and not paid by the HCO, after the HCO's participating provider has demanded payment from the HCO. d. That payments received for services rendered under the health insurance plan shall constitute full and complete payment except for: (i) the deductibles contained in Addendum I of this contract, and (ii) that the benefits or services rendered are not covered. The INSURER will insure compliance with Article XVIII, paragraphs (6) and (7) of this contract. e. A release clause authorizing access by the ADMINISTRATION to the participating providers' Medicare billing data for beneficiaries covered by this contract who are also Part A and Part A and B Medicare beneficiaries, provided that such access is authorized by CMS and other related statutory or regulatory provisions thereof. Access by the ADMINISTRATION shall be at all times subject to all HIPAA regulations requirements mentioned elsewhere in this contract. f. That INSURER will cover the payment of Medicare Part B deductibles and co-insurance for services received by a beneficiary under Medicare Part B, accessed through the HCO's primary care provider, with primary care physician's authorization, their network of participating providers and the participating providers of the INSURER for the basic and/or special coverage. g. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics and other institutional care providers, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service. h. That the only Part A deductible and co-insurance, and Part B deductible and co-insurance for outpatient services provided in a hospital clinic and other institutional care providers, other that physician services, will be the one billed to Medicare as bad debt. No other amount will be charged to these beneficiaries. The INSURER will neither cover the payment of Medicare Part A deductibles and co-insurance for services received by a beneficiary under Medicare Part A nor the Part B deductible and co insurance for services provided in hospital clinics, other than physician services. The INSURER will cover the deductibles and co-insurances of all Part B services including Part B deductibles and co-insurance for physician services provided in an outpatient basis to hospital clinics. i. That coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. j. The INSURER will establish directives for allowing providers to write prescriptions for psychotropic drugs in accordance with the applicable agreement with the ADMINISTRATION's Pharmacy Benefit Manager (PBM). The ADMINISTRATION's terms and conditions for pharmacy benefit management have been agreed by the parties and WILL BE 26 complied and implemented according to Addendum XIV, to the Request for Proposal and the Benefits Coverage included herein. k. All performance, timeframes, administrative standards and requirements as established under this contract. 5. The INSURER agrees to provide to the ADMINISTRATION a detailed description of the payment methodology used to pay for services rendered by the HCO's, HCO's network of providers (primary care physicians and other providers), and other participating providers. Said description of the payment methodology will also address the methodology used by the HCO's in the distribution within their own group of the capitation payments, fee for services or other basis for payment of services to providers servicing said HCO's. The INSURER will submit to the ADMINISTRATION a monthly report detailing all payments made to the HCO, HCO's network of participating providers and to the INSURER's participating providers classified by specialty. 6. The INSURER represents that neither the premium or the capitated payments or capitated payments with a fee-for-service component for services, made to HCO's, to HCO's network of participating providers, as well as to the INSURER's participating providers, include payment of services covered under the Medicare Federal Program. 7. As part of the terms and conditions contained in the contracts with participating providers, the INSURER will include in those with privatized government facilities (to include those under management contract, that have been sold or are under lease), a provision that will authorize the INSURER upon the written request of the Department of Health, to withhold a determined amount from the monthly payments to said participating providers for services rendered under this contract. Said amount will be determined by the Department of Health on the basis of the payments contractually agreed to between the Department of Health of the Commonwealth of Puerto Rico and said participating providers on account of the management fee, sale price or lease fee, as well as 50% of the employees' payroll which the participating providers are required to reimburse the Department of Health. The INSURER will remit said withheld amounts directly to the Department of Health. 8. The INSURER shall provide all reasonable means necessary to ensure that the contracting practices between its participating HCO and providers are in compliance with federal anti-fraud provisions and particularly, in conformity with the limitations and prohibitions of the False Claims Act, the Anti-kickback statute and regulations and Stark II Law and regulations prohibiting self-referral to designated medical services by participating medical providers. 9. To the extent feasible within INSURER'S existing claims processing systems, INSURER should have a single or central address to which providers must 27 submit claims. If a central processing center is not possible within INSURER's existing claims processing system, INSURER must provide each network provider a complete list of all entities to whom the providers must submit claims for processing and/or adjudication. The list must include the name of the entity, the address to which claims must be sent, explanation for determination of the correct claims payer based on services rendered, and a phone number the provider may call to make claims inquiries. INSURER must notify providers in writing of any changes in the claims filing list at least 30 days prior to effective date of change. If INSURER is unable to provide 30 days notice, providers must be given a 30-day extension on their claims filing deadline to ensure claims are routed to correct processing center. 10. The Administration and the Department of Health Medicaid Fraud Control Unit must be allowed to conduct private interviews of providers and the providers' employees, contractors, and patients. Requests for information must be complied with, in the form and language requested. Providers and their employees and contractors must cooperate fully in making themselves available in person for interviews, consultation, grand jury proceedings, pre-trial conference, hearings, trial and in any other process, including investigations. 11. PROVIDER MANUAL AND PROVIDER TRAINING INSURER must prepare and issue a Provider Manual(s), including any necessary specialty manuals to the providers in the INSURER network and to newly contracted providers in the INSURER network within five (5) working days from inclusion of the provider into the network. The Provider Manual must contain sections relating to special requirements. INSURER must provide training to all network providers and their staff regarding the requirements of THE ADMINISTRATION/INSURER contract and special needs of beneficiaries under this contract. INSURER training for all providers must be completed no later than 30 days after placing a newly contracted provider on active status. INSURER must provide ongoing training to new and existing providers as required by INSURER or THE ADMINISTRATION to comply with this contract. INSURER must maintain and make available upon request enrollment or attendance rosters dated and signed by each attendee or other written evidence of training of each network provider and their staff. 12. PROVIDER QUALIFICATIONS - GENERAL The providers in INSURER network must meet the following qualifications: 28 - -------------------------------------------------------------------------------- FQHC A Federally Qualified Health Center is an entity that provides outpatient health services pursuant to 42 U.S.C. 201 et. seq. and meets the standards and regulations established by the federal law and is an eligible provider enrolled in the Medicaid Program. - -------------------------------------------------------------------------------- Physician An individual who is licensed to practice medicine as an M.D. or a D.O. in Puerto Rico either as a primary care provider or in the area of specialization under which they will provide medical services under contract with INSURER; who is a provider enrolled in the Medicaid program; and who has a valid Drug Enforcement Agency registration number and a Puerto Rico Controlled Substance Certificate, if either is required in their practice. - -------------------------------------------------------------------------------- Hospital An institution licensed as a general or special hospital by the Puerto Rico Health Department under Chapter 241 of the Health and Safety Code and Private Psychiatric Hospitals under Chapter 577 of the Health and Safety Code (or is a provider which is a component part of a State or local government entity which does not require a license under the laws of the Commonwealth of Puerto Rico), which is enrolled as a provider in the Puerto Rico Medicaid Program. - -------------------------------------------------------------------------------- Non-Physician An individual holding a license issued by the applicable Practitioner licensing agency of the Commonwealth of Puerto Rico who is Provider enrolled in the Puerto Rico Medicaid Program or an individual properly trained to provide health support services who practices under the direct supervision of an appropriately licensed professional. - -------------------------------------------------------------------------------- Clinical An entity having a current certificate issued under the Laboratory Federal Clinical Laboratory Improvement Act (CLIA) and has a license issued by the Commonwealth's licensing agency the Puerto Rico Department of Health. - -------------------------------------------------------------------------------- Rural Health A health facility that has been determined by the Secretary Clinic (RHC) to meet the requirements of section 1861(aa)(2) of the Act and part 491; of this chapter; and has filed an agreement with the Secretary to provide RHC services under Medicare and pursuant to 42 CFR 405.2402. - -------------------------------------------------------------------------------- Local Health A local health department established pursuant to Health and Department Safety Code, Title 2, Local Public Health Reorganization Act ss. 121.031ff. - -------------------------------------------------------------------------------- Non-Hospital A provider of health care services which is licensed and Facility credentialed to provide services, and enrolled in our program. Provider - -------------------------------------------------------------------------------- School Based Clinics located at school campuses that provide on-site Health Clinic primary and preventive care to children and adolescents. (SBHC) 29 ARTICLE VIII SUBSCRIPTION PROCESS AND IDENTIFICATION CARDS 1. The INSURER agrees to comply and implement in full all instructions and guidelines contained in the Administration's Instructions to Insurers for Implementation of Orientation and Subscription Process. (Addendum II) 2. The INSURER shall issue to each beneficiary a card of durable plastic material that provides proper identification to access the benefits covered under this contract. 3. This card shall be similar to those the INSURER issues to the rest of their subscribers and shall not contain information that may identify the cardholder as medically indigent. 4. The INSURER shall be responsible to assure delivery of the cards at a location accessible to the beneficiaries in each municipality. 5. The INSURER shall deliver the card on the same day that the beneficiary completes the enrollment process. 6. The identification cards shall contain the following information: a) Name of Beneficiary b) INSURER's Group Number c) Subscriber's Social Security Number d) Relationship of beneficiary with subscriber (if applicable) e) HCO name and number f) Issue Date g) Type of Contract (individual or family) h) Coverage effective date i) Other Insurance code j) Medicare Part A and/or Part A and B deductible code. 7. The INSURER will replace lost, stolen, mutilated cards and will have the right to charge in beneficiaries one dollar ($1.00) for each card replaced. This charge will not be applicable to Medicaid Beneficiaries, which are categorized within the established indigence level 0 (0%-50%). 30 8. The INSURER will replace free of charge the identification card whenever a change of HCO is made. 9. Identification cards are the property of the INSURER and they shall be returned by the beneficiary upon losing eligibility to the plan or when a change of HCO is made. 10. The INSURER shall be responsible for notifying each beneficiary that the identification card is for the personal identification of the beneficiary to whom it has been issued, and that lending, transferring or in any other way consenting to the use of the card by any other person constitutes a fraudulent act. 11. Identification Card contents and layout are subject to the prior approval of the ADMINISTRATION to be in accordance with Law 72 of September 7, 1993. 12. INSURER will comply with all changes requested by the ADMINISTRATION resulting from the implementation of the "Smart Card". Monetary implications as a result of such changes, will be negotiated with the INSURER. ARTICLE IX SUMMARY PLAN DESCRIPTION BOOKLET AND ORIENTATION PROGRAMS MARKETING PROVISIONS 1. The INSURER shall be responsible for the preparation, printing and distribution, at its own cost, of booklets, in the Spanish language, that describe the plan and the benefits covered therein. The Insurer agrees to submit before the effective date of the contract a translated copy of the beneficiaries' booklet in the English language by the proper revision of federal authorities. These booklets will be delivered to each subscriber upon enrollment, along with the required identification card(s). 2. The booklets shall serve as guarantee of the benefits to be provided and shall contain the following information: a) Schedule of benefits covered, all services and items that are available and that are covered either directly or through methods of referral and/or prior authorization, a written description of how and where the services that have been available through the plan services may be obtained. b) Benefit's exclusions and limitations. For benefits that enrollees are entitled to but are not available through the MCO, a written description on how and where to obtain benefits; description of procedures for requesting disenrollments/changes. 31 c) Beneficiary's rights and responsibilities, in accordance with specific rights and requirements to be afforded in accordance with Medicaid Program regulations as amended, the Puerto Rico Patient Bill of Rights Law 194 of August 25, 2000, the Puerto Rico Mental Health Code, of October 2, 2000, as amended and implemented by their regulations, and Law 11 creating the Office of Patients Solicitor General of April 11, 2001. d) Instructions on how to access benefits, including a list of (1) available HCO's and its participating providers, PCP or Specialists (its locations and qualifications), (2) providers from which to obtain benefits under the Special Coverage. Said list can be provided in a separate booklet. e) Official grievances and appeal filing procedures. f) In the event a Physician Incentive Plan affects the use of referral services and/or places physicians at substantial risk, the INSURER shall provide the following information upon beneficiaries' requests: the type of incentive arrangements, whether stop-loss insurance is provided and the survey results of any enrollee/disenrollee surveys that will have to be conducted by INSURER. g) Unless otherwise specified, subscription materials must be written at the 4th-6th grade reading comprehension level. h) Explanations of instances under which a beneficiary's disenrollment may be requested without his/her consent by a provider. i) Explanations of right of beneficiary to transfer from HCO at any time for cause and to transfer or change within first ninety (90) days of the date of enrollment or the later date of receipt of notice of enrollment, and at least every (12) months thereafter without cause. 3. The booklets shall be approved by the ADMINISTRATION prior to printing, distribution, and dissemination in compliance with provisions of Article IX. 4. The INSURER shall also be responsible for the preparation, printing and distribution, at its own cost, of an Informative Bulletin, in the Spanish language, that describes the plan, services and benefits covered therein as well as the managed care concept. This Informative Bulletin will be distributed among the HCO's, HCO's network of participating providers and the INSURER's participating providers. 5. The INSURER shall be responsible to conduct and assure the participation of all providers under this contract to diverse seminars to be held throughout the Health Area/Region in order to properly orient and familiarize said providers with all aspects and requirements related to the Preventive Medicine Program, Benefits and Coverage under this contract, and the Managed Care concept. Said seminars will be organized, scheduled, conducted and offered at the expense of the INSURER. The curriculum for said seminars will be coordinated with and approved by the ADMINISTRATION Healthcare Coordinators. 32 6. All participating providers are mandated required to receive yearly during the contract term at least fifteen (15) hours of orientation, education and familiarization with different aspects related to this contract on/or before the expiration of the first four and a half (4 1/2) months of the contract term. Failure to comply with this requirement will be sufficient grounds to exclude from the Health Insurance Program the participating provider. If, at the expiration of the first four and half (4 1/2 months) of the contract term, the participating provider has not fully complied with this requirement, it will be excluded as participating provider for subsequent periods of the contract or the contract term. At the discretion of the ADMINISTRATION, and for good cause the excluded provider may be authorized to be contracted as a participating provider if it subsequently complies with the requirement. 7. The ADMINISTRATION will monitor and evaluate all marketing activities by the INSURER, its contractor, sub-contractors or any provider of services under this contract. 8. Any marketing material addressed to enrollees can not contain false or misleading information. All oral, written or audiovisual information addressed to enrollees should be accurate and sufficient for beneficiaries to make an informed consent decision as to whether or not to enroll and will have to be pre-approved by the ADMINISTRATION. 9. The INSURER, contractor or subcontractor or any providers of services must distribute the material to its entire service area/region. In the event the INSURER or any of its contractors develop new and revised materials they shall submit them to the ADMINISTRATION for prior approval. 10. The ADMINISTRATION will appoint an Advisory Committee, with representation of at least: a board certified physician, a beneficiary of a consumer advocate organization that includes Medicaid recipients a health related professional related with the medical needs of low-income population and a Director of a Welfare Department that does not head a Medicaid agency. 11. The Advisory Committee will assist the ADMINISTRATION in the evaluation and the review of any marketing or informational material addressed to assist Medicaid recipients in the provision of health services under this contract. All the marketing activities and the information which shall be allowed will be limited to the following: a) Clear description of health care benefits coverage and exclusions to enrollees; b) Explain how, when, where benefits are available to enrollees; c) Explain how to access emergency, family-planning services, and services that do or do not require referrals and authorizations; 33 d) Explain any benefits enrollees are entitled to, that are not available through the INSURER and how to obtain them; e) Enrollees rights and responsibilities; f) Grievance and appeal procedures. 12. The INSURER, its agents, any contractor or sub-contractor party under this contract shall not engage in cold call marketing that is, unsolicited personal contact with potential enrollees for the purpose of influencing them to enroll with any of its contractors. Also telephone, door-to-door or telemarketing for the same purposes is hereby prohibited. 13. Neither the INSURER, its contractor, subcontractor or any provider may put into effect a plan under which compensation, reward, gift or opportunity are offered to enrollees as an inducement to enroll other than to offer health care benefits. The INSURER its contractor, subcontractor or provider is prohibited from influencing an individual enrollment with the sale of any other insurance. 14. In the event of a final determination reached by the ADMINISTRATION that the INSURER, its agents, any of its contractor or subcontractors, has failed to comply with any of the provisions set forth on this article, the ADMINISTRATION in compliance with due process guarantees and remedies available under its regulations; Law 72 of September 7, 1993; the Social Security and Balance Budget Act, will proceed to enforce the compliance of these provisions by pursuing within its empowered authority the sanctions established in Article XXXVI. ARTICLE X GRIEVANCE PROCEDURE 1. The INSURER represents that it has established an effective procedure that assures the filing, receipt, and prompt handling and resolution of all grievances and complaints made by the beneficiaries and the participating providers. The INSURER will prepare a grievance form that must be approved by the ADMINISTRATION. The approved grievance form shall be made available to all beneficiaries, HCO's, HCO's network of participating providers and the INSURER's participating providers. The parties will make whatever adjustments are necessary to reconcile their grievance procedure with provisions of Law 194 of August 25, 2000 (known as "Patient Bill of Rights") or those contained in Law 11 of April 11, 2001 (known as "Law Creating the Office of Patient's Solicitor General") as implemented by regulations. 2. Any written or telephone communication from a beneficiary or participating provider, which expresses dissatisfaction with an action or decision arising under the health insurance contracted, shall be promptly and properly handled and 34 resolved through a routine complaint procedure to be implemented by the INSURER, after prior approval from the ADMINISTRATION. The INSURER shall be responsible for documenting in writing all aspects and details of said complaints. 3. The routine complaint procedure which must be implemented by the INSURER must provide for (i) the availability of complaint forms to document oral complaints; (ii) for the proper handling of the complaints; and (iii) for the disposition by notice to the complainant of the action taken. This notice shall advise the complainant of the INSURER's official Grievance Procedure. The INSURER will submit to the ADMINISTRATION, on a monthly basis a written report detailing all grievances and routine complaints received, solved and pending solution and/or copies of the complaint forms with the notation of the action taken. All grievance files and complaint forms must be made available to the ADMINISTRATION for auditing. All grievance documents and related information shall be considered as containing individually identifiable health information, and shall be treated in accordance with the HIPAA regulations cited elsewhere. 4. The Grievance Procedure shall assure the participation of persons with authority to require corrective action. 5. The INSURER's Grievance Procedure shall contain all the necessary provisions that assure the affected parties right to due process of law. In the event that changes are made to the existing Grievance Procedure, a copy of the proposed changes will be made available to the ADMINISTRATION for approval prior to its implementation. A copy of the INSURER's Grievance Procedure is attached hereto as Addendum III and incorporated as part of this contract. The INSURER acknowledges that the arbitration process contemplated in the Grievance Procedure shall not be applicable to disputes between the ADMINISTRATION and the INSURER. 6. Pursuant to Law 72 of September 7, 1993, any decision issued by the INSURER is subject to appeal before the ADMINISTRATION. Such appeal shall be regulated by the ADMINISTRATION's regulations and the Uniform Administrative Procedure Act, Law 170 of August 12, 1988, as amended and as applicable, provided however, that subscribers' grievances shall be expeditiously solved and that INSURER shall therefore fully cooperate with the prompt solutions of any such grievance. 7. The decision issued by the ADMINISTRATION is subject to review before the Circuit Court of Appeals of the San Juan Panel of the Commonwealth of Puerto Rico. 8. INSURER must have written policies and procedures for receiving, tracking, reviewing, and reporting and resolving of beneficiaries complaints. The 35 procedures must be reviewed and approved in writing by THE ADMINISTRATION. Any changes or modifications to the procedures must be submitted to THE ADMINISTRATION for approval thirty (30) days prior to the effective date of the amendment. 9. INSURER must designate an officer of INSURER who has primary responsibility for ensuring that complaints are resolved in compliance with written policy and within the time required. An "officer" of INSURER means a president, vice president, secretary, treasurer, or chairperson of the Board of Directors of a corporation, the sole proprietor, the managing general partner of a partnership, or a person having similar executive authority in the organization. 10. INSURER must have a routine process to detect patterns of complaints and disenrollments and involve management and supervisory staff to develop policy and procedural improvements to address the complaints. INSURER must cooperate with the ADMINISTRATION in beneficiaries' complaints relating to enrollment and disenrollment. INSURER's complaints procedures must be provided to beneficiaries in writing and in alternative communication formats. A written description of INSURER's complaints procedures must be in appropriate languages and easy for beneficiaries to understand. INSURER must include a written description in the beneficiaries Handbook. INSURER must maintain at least one local and one toll-free telephone number for making complaints. 11. INSURER's process must require that every complaint received in person, by telephone or in writing, is recorded in a written record and is logged with the following details: date; identification of the individual filing the complaint; identification of the individual recording the complaint; nature of the complaint; disposition of the complaint; corrective action required; and date resolved. 12. The INSURER Grievance Procedures must comply with the reasonable standards and timeframes for prompt resolution of grievances to be established under the Puerto Rico Patients Bill of Rights Act, Law 194 approved October 2, 2000 and the Mental Health Code, Law 408, approved in August 25, 2000. The State established standards, shall comply with Medicaid Regulations to ensure that in the case of standard resolution of grievances, the standard time frames for prompt resolution, do not exceed 30 days after an insurer receives grievances. And in the case of grievances concerning the particular enrollees' health condition, which requires expedited resolution, they shall, be resolved, within a time frame that shall not exceed, 72 hours after a grievance is received. ARTICLE XI HEALTH CARE ORGANIZATIONS 1. All Health Care Organizations (HCO's) shall have a sufficient number of primary care physicians as specified in Article VI to attend to the medical needs of the 36 beneficiaries. All specialties specified in this section have to be available at each HCO. The following are considered primary care physicians (PCP): a) General Practitioners b) Internists c) Family Physicians d) Pediatricians e) Obstetricians and Gynecologists 2. The INSURER shall have available and under contract a sufficient number of the following types of support participating providers to render services to all beneficiaries: a) Optometrists b) Podiatrists c) Clinical laboratories - (The INSURER shall insure that all laboratory testing sites providing services under this contract have either a clinical laboratory improvement amendment (CLIA) certificate with the registration and (CLIA) identification number or a waiver certification). d) Radiological facilities e) Health Related Professionals f) Hospitals g) Pharmacies h) All those participating providers that may be needed to provide services under the basic, special and dental coverage considering the specific health problems of an area/region. The INSURER may not discriminate with respect to participation, reimbursement or indemnification as to any provider who is acting within the scope of the provider's license or certification under applicable state law. 3. The INSURER shall enter into adequate arrangements to provide its beneficiaries with the services provided for under the dental and pharmacy coverage, as contractually agreed to between the dentists and pharmacies and the INSURER. These arrangements will provide for an adequate number of dentists and pharmacies that guarantee the right to choose of the beneficiaries. 37 4. The INSURER shall have available and under contract a sufficient number of the following types of support participating physicians to provide services to all beneficiaries: a) Ophthalmologists b) Radiologists c) All those physicians that may be necessary and are available considering the morbidity and mortality rates of the specific health area/region, and those needed to provide all the benefits contained in the Basic Coverage of the plan. 5. Considering the expected mix between private patients and beneficiaries the accepted physician/beneficiary ratio will be 1:1,700 for primary care physicians; 1:2,200 for specialists and 1:1,600 for all physicians. In the event that the HCO's provides services only to beneficiaries under this contract, the physician/beneficiary ratio will be the same to that applicable when there is a mix between private patients and beneficiaries. The INSURER will assure compliance with said physician/beneficiary ratio. 6. The INSURER shall not have, directly or indirectly, any conflict of interest through economic participation in any HCO, participating provider, its subsidiaries, or affiliates. 7. The INSURER shall enforce upon each HCO strict quality assurance and utilization review programs as described in this contract, the Request for Proposals, the INSURER's proposal and its Operations Manual. 8. The INSURER shall contract and have available all the participating providers required to provide to the beneficiaries, in a prompt and efficient manner, the benefits included in the Basic, Special and Dental Coverage as specified in Addendum I of this contract. 9. The INSURER agrees to enforce and assure compliance by the HCO's with all provisions contained in this contract. 10. The INSURER will prepare and provide to all HCO's complete written instructions describing procedures to be used for the compliance with all duties and obligations arising under this contract. These instructions will cover at least the following topics: provider selection by beneficiaries, covered services, instructions and coordination of access to mental health services through the mental carve-out contractors, reporting requirements, record keeping requirements, grievance procedures, deductibles and co-payment amounts, confidentiality, and the prohibition against denial or rationing of services. A copy of these instructions will be submitted to the ADMINISTRATION, who reserves the right to request modifications or amendments to said instructions following consultation with the INSURER. 38 ARTICLE XII GUARANTEE OF PAYMENT 1. The INSURER expressly guarantees payment for all medically necessary services rendered to beneficiaries by any and all participating providers. 2. The insolvency, liquidation, bankruptcy or breach of contract of an HCO, or of a contracted participating provider does not release the INSURER from its obligation and guarantee to pay for all services rendered as authorized under this health insurance contract. The nature of INSURER's obligations to guarantee payment to all HCO's, providers or subcontractors for services rendered under this health insurance contract is solidary, subject to complying with whatever established claim proceedings require. As such, the INSURER will respond directly to the ADMINISTRATION as principal obligor to comply in its entirety with all the contract terms. 3. In accordance with the payments rights guaranteed under paragraph (4) and (5), the provider shall claim direct payments due by a HCO/Contractor, to the INSURER. The INSURER shall deduct any amount payable directly to a provider from the capitation payments owed to an HCO or other contractor. In case the INSURER owes money to the HCO's or any provider, following due process, the Administration may retain the amounts owed to the providers. 4. The INSURER agrees to pay all monies due to the HCO's and/or participating providers according to the agreed payment schedule in the contracts with said parties. The INSURER represents as of the date of this contract that payment to HCO's, HCO's network of participating providers and INSURER's participating providers will be made no later than thirty (30) days or as provided by legislation from the date that a full, complete and ready to process claim is received at the INSURER, when received within sixty (60) days of date of service. The INSURER expressly commits to implement all internal systems necessary to promptly pay its HCO's and providers all full, complete and ready to process claims within the term provided in this section, and to avoid unjustifiable delay in payment by submitting said claims to audits and evaluation of contested claims; said practice is expressly prohibited, and may result in the remedies set forth at Article XXXVI or termination as provided in Article XXXIII. A complete and ready to process claim (clean claim) is a claim received by the INSURER for adjudication, and which requires no further information, adjustment, or alteration by the provider of the services in order to be processed and paid by the INSURER. 39 5. In the event that, following the receipt of the claim, the same is totally or partially contested by the INSURER or HCO, the participating provider shall be notified in writing within thirty (30) days that the claim is contested with the contested portion identified and provided the reasons thereof. Upon receipt of a new or supplemented claim, the INSURER or the HCO, shall pay or deny the contested claim or portion of the contested claim within thirty (30) days. Upon expiration of any of the aforementioned periods of time, the overdue payments shall bear interest at the prevailing rate for personal loans as determined by the Financial Board of the Office of the Commissioner of Financial Institutions. 6. Checks for capitated payments to HCO's, HCO's network of participating providers and INSURER's participating providers are to be regularly issued by the INSURER on the 15th day of each month. The INSURER further represents that it has contracted with the HCO the payment of the corresponding capitation no later than the last day of the month to which said capitation corresponds. 7. The INSURER agrees and warrants that it will be the central payor for all valid claims that will be generated throughout their contracted participating provider network for the health insurance contract for the Health Region/Area. 8. All payments distribution within the capitated services will be made by the INSURER accordingly within sound actuarial methods and in compliance with the ADMINISTRATION's commitments and efforts to assure a more uniform and equitable distribution of risk among providers throughout all the island health regions. In the event that participating providers in their arrangements with the HCO's consent to the disbursement of the payment checks directly to the HCO's, the INSURER will assure and require the HCO's to provide on a monthly basis a schedule of the amount of the payments made to said participating providers. In any event, the INSURER will provide the ADMINISTRATION with a detailed monthly report listing by providers the monthly payment distribution. The claims for services rendered will be generated and forwarded by the participating providers directly to the INSURER. The claims submitted by the participating providers will comply with the requirements contained in Article XV, Sections four (4) and eight (8). 9. The INSURER agrees and warrants that the method and system used to pay for the services rendered to and by the HCO's and all participating providers is reasonable and that the amount paid does not jeopardize or infringe upon the quality of the services provided. 10. The guarantee of payment contained in this article will be reinforced through the establishment of different alternatives in order to insure that HCO's, HCO's participating providers and INSURER's participating providers are paid in full for contracted services in accordance with established budgets. Said alternatives will be submitted to the ADMINISTRATION for approval prior to its implementation. 40 11. Inasmuch as the INSURER will be the central payor for all payments for valid claims for services rendered by the HCO's, HCO's network of participating providers and INSURER's participating providers the INSURER agrees to incorporate in the contracts with the HCO's, and to require the HCO's to incorporate in their arrangements with their participating providers a provision whereby the INSURER is authorized to adjudicate and determine the validity of any claim or dispute between the HCO and its participating providers regarding a controversy surrounding the validity of the claims of services submitted by said participating provider. Said provision will assure that the payment to the HCO's network of participating providers for a valid claim for services is not improperly withheld and that in no event payment in this situation is made more than sixty (60) days from the date that the claim or dispute is received by the INSURER. It will be the INSURER's responsibility to verify the terms of the arrangements between the HCO and its network of participating providers, the rendering of the services, the reasonableness of the claim and that payment has not been made. 12. The guarantee of payment and the representations as to the payment schedule to HCO's and participating providers will be enforceable and not set aside or altered in the event that the INSURER is notified of the expiration of the term of this contract or of its termination. 13. The INSURER agrees to provide the ADMINISTRATION, on a monthly basis, and through electronic or magnetic media format, a detailed report containing all payments made to HCO's, to HCO's network of participating providers, and to the INSURER's participating providers during the month immediately preceding the report. Said report will also include a list of all claims received on account of those payments during the preceding month by the INSURER from the HCO's, the HCO's network of participating providers as well as a detail as to all claims received but not paid by reason of accounting or administrative objections. The INSURER further agrees to make available to the ADMINISTRATION for auditing purposes any and all records or financial data related to claims submitted but not paid by reason of accounting or administrative objections. The intention of this clause is for the ADMINISTRATION to be able to determine on a monthly basis the amount of money paid to each participating provider, the amount billed by and not paid to each participating provider and the reasons for non-payment in order to keep track of the regularity of payments of the Insurer and the HCO's and their compliance with this contract. 14. The INSURER also agrees to provide to HCO's, on a monthly basis, and through electronic or machine readable media format, a detailed report classified by beneficiaries, by providers, by diagnosis, by procedure, by date of service and by its real cost of all payments made by the INSURER which entails a deduction from the gross monthly payment to said HCO's. Copy of said report will be made available to the ADMINISTRATION each month. 41 15. Each HCO must report each encounter to the INSURER on a monthly basis classified by each participating provider within the HCO, as well as the real cost of the services of each encounter of service. The INSURER must submit to the ADMINISTRATION the distribution of the capitation within each HCO as established on the Actuarial Reports formats required in the RFP. 16. The INSURER will abide with the ADMINISTRATION efforts to implement cost reduction measures and future implementation of payment methods based on fee schedules or diagnosis related group that may be established. In no way a beneficiary will be discriminated nor will health services be rationed based on diagnosis or illness or an expectation that the beneficiary may require high cost care. ARTICLE XIII UTILIZATION REVIEW AND QUALITY ASSURANCE 1. The INSURER will establish a Quality of Care Program with the following guidelines: a) PHYSICIAN-CREDENTIALING: The INSURER shall follow strict provider screening procedures before contracting. In order to assure quality health services for the medically indigent, the INSURER will follow stringent physician selection and credentialing process for this plan as per the INSURER's Proposal. The ADMINISTRATION may review participating providers' credentials at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all accepted and non-accepted providers. b) PROVIDER CONTRACTING: The INSURER will assure that all hospitals facilities, doctors, dentists, and all health care providers are appropriately licensed and in good standing with all their governing bodies and accrediting agencies and meet all practice requirements established by law, the Department of Health, the ADMINISTRATION and other governing agencies, as described in the INSURER's Proposal. The ADMINISTRATION may review participating provider credentials at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all accepted and non-accepted providers. c) INSPECTION OF ALL FACILITIES: The INSURER will insure that all providers' physical facilities are safe, sanitary and follow sound operating procedures, as described in the INSURER's Proposal and that all laboratory testing site providing services under this contract have their duly CLIA certification along with their identification number or waiver certificate. The ADMINISTRATION may review participating provider 42 facilities at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all inspections done. d) MEDICAL RECORD REVIEW: The INSURER will establish a program to monitor the appropriateness of care being provided, the adequacy and consistency of record keeping, and completeness of records, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Medical Record Review Program. The ADMINISTRATION may review and/or audit Program records and reports at any time. e) CLINICAL DATABASE SYSTEM: The HCO's will provide the INSURER with statistical records of utilization of medical services by beneficiaries, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Clinical Database System. The ADMINISTRATION may review and/or audit the Clinical Database System records and reports at any time. f) RETROSPECTIVE REVIEW: The INSURER will establish a Retrospective review Program that will address quality and utilization problems that may arise, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Retrospective Review Program. The ADMINISTRATION may review and/or audit the program findings at any time. g) OUTCOME REVIEW: The INSURER will establish an Outcome Review Program to assess the quality of inpatient and ambulatory care management provided by the primary health care providers, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Outcome Review Program. The ADMINISTRATION may review and/or audit the program findings at any time. h) QUALITY OF CARE COMMITTEE: The INSURER will establish a Quality of Care Committee to insure provider's compliance with the INSURER's quality of care program, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Quality of Care Committee. The ADMINISTRATION may review and/or audit the program findings and reports at any time. 2. The INSURER will establish cost containment and utilization review programs as follows: 43 a) HOSPITAL ADMISSION AND STAY REVIEW: The INSURER will establish programs to reduce unnecessary hospital use and to review hospital admissions through the following programs, as described in the INSURER's Proposal: (1) CONCURRENT REVIEW: The INSURER will establish a program to review hospital admissions to guarantee adequacy and duration of stay. (2) RETROSPECTIVE REVIEW: The INSURER will establish a program to determine medical necessity and service adequacy after the service has been rendered or paid to providers or physicians. (3) PROSPECTIVE REVIEW: The INSURER will establish a program to determine appropriate lengths of stay at the hospital prior to admission for elective or non-emergency hospitalizations. b) UTILIZATION REVIEW PROGRAM: The INSURER will establish a program to identify patterns of medical practice and their effect in the care being provided, as described in the INSURER's Proposal, and through the following: (1) PRE-PAYMENT REVIEW: The INSURER will establish a program to prevent inappropriate billing of services prior to claims payment and to evaluate questionable practices, problematic coding, inappropriate level of care, excessive tests and services. (2) POST PAYMENT REVIEW: The INSURER will establish a program to review service claims for purposes of creating a provider profiling system. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings under the Utilization Review Programs. The ADMINISTRATION may review and/or audit the programs' findings and reports at any time. c) SECOND SURGICAL OPINION: The INSURER will establish a program to allow beneficiaries to obtain a second surgical opinion for elective surgical procedures on a voluntary basis, as described in the INSURER's Proposal. d) INDIVIDUAL CASE MANAGEMENT PROGRAM: The INSURER will establish a program to identify and manage cases that involve high health care costs, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all 44 findings in the Individual Case Management Program. The ADMINISTRATION may review and/or audit the program findings and reports at any time. e) FRAUD AND ABUSE: The INSURER will establish a program to assure reasonable levels of utilization and quality of care, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Fraud and Abuse Program. The Fraud and Abuse Reports must include: (1) the number of complaints of fraud and abuse made to the Commonwealth that warrant a preliminary investigation, and, (2) for each case of suspected fraud and abuse warranting a full investigation, the INSURER must report the following information: (i) the provider's name and number; (ii) the source of the complaint; (iii) the type of provider; (iv) the nature of the complaint; (v) the approximate range of dollars involved, (vi) the legal and administrative disposition or status of the case. f) COORDINATION OF BENEFITS PROGRAM: The INSURER will establish a program to identify beneficiaries with other insurance in order to coordinate health insurance benefits from other carriers, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Coordination of Benefits Program. The ADMINISTRATION may review and/or audit the program findings and reports at any time. 3. DENTAL SERVICES UTILIZATION REVIEW PROGRAM: The INSURER agrees to maintain a program to determine that the services provided to beneficiaries are in accordance to established quality parameters by the dental community as provided for in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION quarterly of all findings of said review program. The ADMINISTRATION may review and/or audit the program findings at any time. 4. EPSDT AND MIGRANT SERVICES PROGRAM: The INSURER will implement a program that addresses EPSDT screening and Migrant services indicators for preventive diagnostic tests according to age in all areas/regions and shall notify the ADMINISTRATION on a monthly basis all findings of said program. INSURER assures the compliance with Section 1905(r) of the Social Security Act and the applicable protocols adopted by the Department of Health for the implementation of these Programs. 45 5. The INSURER shall continue to submit the ADMINISTRATION on a monthly basis a report that includes all services rendered by diagnosis and procedures identified by all specialties, by place of service including those under dental coverage, and procedures in laboratories and X-rays. It will be reported beginning with the most common diagnosis and procedures until reaching the least common. 6. All services rendered shall be identified by Current Procedure Terminology, International Classification of Diseases, Clinical Modifications Diagnostic Statistic Manual and American Dental Association's Current Dental Terminology, as applicable. 7. The ADMINISTRATION and the INSURER will agree on the required format in order to comply with the reporting requirements in this section and which will be accomplished through electronic or magnetic media. 8. All the required programs, processes and reports heretofore referred to, will also be an obligation on the part of the INSURER's participating providers, HCO's and HCO's participating providers. The INSURER will assure compliance therewith on the part of said INSURER's participating providers, HCO's and HCO's participating providers. 9. The ADMINISTRATION reserves the right to require the INSURER to implement additional specific cost and utilization controls, subject to prior consultation and cost negotiation with the INSURER if necessary. ARTICLE XIV COMPLIANCE AND AGREEMENT FOR INSPECTION OF RECORDS 1. Since funds from the Commonwealth Plan under Title XIX and Title XXI of the Social Security Act Medical Assistance Programs (Medicaid) and SCHIPS as well as from Title V of the Social Security Act and Mental Health Block Grants are used to finance this project in part the INSURER shall agree to comply with the requirements and conditions of the Centers for Medicare and Medicaid Services (CMS), the Comptroller General of the United States, the Comptroller of Puerto Rico and this ADMINISTRATION, as to the maintenance of records related to this contract and audit rights thereof, as well as all other legal obligations attendant thereto, including, but not limited to, non-discrimination, coverage benefit eligibility as provided by the Puerto Rico State Plan and Law 72 of 1993, anti-fraud and anti-kickback laws, and those terms and provisions of the SSA as applicable. All disclosure obligations and access requirements set forth in this Article or any other Article shall be subject at all times and to the extent 46 mandated by law and regulation, to the HIPAA regulations described elsewhere in this agreement. 2. The INSURER shall require from the HCO's and all participating providers that they maintain an appropriate record system for services rendered to beneficiaries, including separate medical files and records for each beneficiary as is necessary to record all clinical information pertaining to said beneficiaries, including notations of personal contacts, primary care visits, diagnostic studies and all other services. The INSURER shall also maintain records to document fiscal activities and expenditures relating to compliance under this agreement. The INSURER and all participating providers shall preserve, and retain in readily accessible form, the records mentioned herein during the term of this contract and for the period of six (6) years thereafter. 3. At all times during the term of this contract and for a period of six (6) years thereafter, the INSURER and all participating providers will provide the ADMINISTRATION, CMS, the Comptroller of Puerto Rico, the Comptroller General of the United States of America and/or their authorized representatives, access to all records relating to the INSURER's compliance under this contract for the purpose of examination, audit or copying of such records. The audits of such records include examination and review of the sources and applications of funds under this contract. The INSURER shall also furnish access to and permit inspection and audit by the ADMINISTRATION, CMS, the Comptroller of Puerto Rico, the Comptroller General of the United States of America and/or their authorized representatives to any financial records relating to the capacity of the INSURER or its HCO's, if relevant, to bear the risk of potential financial losses. 4. The INSURER shall ensure that the HCO's and all participating providers and their subcontractors furnish to the Peer Review Organization (PRO) or to the ADMINISTRATION on-site access to, or copies of patient care records as needed to evaluate quality of care. 5. The ADMINISTRATION and CMS shall have the right to inspect, evaluate, copy and audit any pertinent books, documents, papers and records of the INSURER related to this contract and those of any HCO or participating provider in order to evaluate the services performed, determination of amounts payable, reconciliation of benefits, liabilities and compliance with this contract. 6. The INSURER shall provide for the review of services (including both in-patient and out-patient services) covered by the plan for the purpose of determining whether such services meet professional recognized standards of health care, including whether appropriate services have not been provided or have been provided in inappropriate settings. It shall also provide for review, by random sampling, by the ADMINISTRATION, of written complaints, and the results thereof, filed by beneficiaries or their representatives as to the quality of services provided. 47 7. The INSURER agrees that the ADMINISTRATION and CMS may conduct inspections and evaluations, at all reasonable times, through on-site audits, systems tests, assessments, performance review and regular reports to assure the quality, appropriateness, timeliness and cost of services furnished to the beneficiaries. 8. The ADMINISTRATION and CMS shall have the right to inspect all of the INSURER's financial records related to this contract that may be necessary to assure that the ADMINISTRATION pays no more than its fair share of general overhead costs as contracted. The ADMINISTRATION and CMS shall have the right to inspect all the HCO's financial records related to this contract. 9. The INSURER agrees that the ADMINISTRATION may evaluate, through inspection or other means, the facilities of the INSURER's participating providers, HCO's and its participating providers. All facilities shall comply with the applicable licensing and certification requirements as established by regulations of the Department of Health of Puerto Rico. It shall be the INSURER's responsibility to take all necessary measures to ascertain that all facilities contracting with INSURER comply with the required licensing and certification regulations of the Puerto Rico Health Department, and to terminate the contract of any facility not in compliance with said provisions. Failure to adequately monitor the licensing and certification of the facilities may result in the termination of this contract as provided in Article XXXIII. 10. The INSURER agrees and also will require all HCO's and participating providers to agree that the ADMINISTRATION's right to inspect, evaluate, copy and audit, will survive the termination of this contract for a period of six (6) years from said termination date unless: a) The ADMINISTRATION determines there is a special need to retain a particular record or group of records for a longer period and notifies the INSURER at least thirty (30) days before the normal disposition date; b) There has been a termination, dispute, fraud, or similar fault by the INSURER, in which case the retention may be extended to three (3) years from the date of any resulting final settlement; or c) The ADMINISTRATION determines that there is a reasonable possibility of fraud, in which case it may reopen a final settlement at any time; d) There has been an audit intervention by CMS, the office of the Comptroller of Puerto Rico, the Comptroller General of the United States or the ADMINISTRATION, in which case the retention may be extended until the conclusion of the audit and publication of the final report. 11. The INSURER agrees to require all HCO's and participating providers to permit the ADMINISTRATION to review and audit all aspects related to quality, 48 appropriateness, timeliness and cost of services rendered, and to demonstrate that the services for which payment was made were actually provided. ARTICLE XV INFORMATION SYSTEMS AND REPORTING REQUIREMENTS 1. The INSURER agrees to comply with the reporting and information systems requirements as provided for in the Request for Proposals and the Proposal submitted by the INSURER. Accordingly the INSURER must submit to the ADMINISTRATION a detailed Systems Requirements Inventory Report which details the following: a) Plan's compliance with each information system requirement; b) Action plan of INSURER's response to the requirements; c) Actual date that each system requirement will be completely operational, not to exceed the effective date of coverage under this contract. 2. The INSURER agrees to submit to the ADMINISTRATION the System Inventory Report for final approval not later than the date of the signing of this contract. 3. All Management Information Systems Requirements included in the Request for Proposal and those included in the INSURER's Proposal must commence implementation as of the date of the signing of this contract and shall be fully operational as of the first day of coverage under this contract. Material non compliance with this requirement shall be enough reason to cancel the contract herein, with prior written notification by the ADMINISTRATION to the INSURER according to the time set in Article XXXIII. 4. The INSURER shall be responsible for the data collection and other statistics of all services provided including, but not limited, to encounter and real cost of each one, claims services and any other pertinent data from all HCO's, participating providers or any other entity which provide services to beneficiaries under the program, said data to be classified by provider, by beneficiary, by diagnosis, by procedure and by the date the service is rendered. The data collected must then be forwarded to the ADMINISTRATION on a monthly basis in an electronic or on machine readable media format. The data fields and specific data elements required to be transmitted are contained in the RFP's Claim File Layout format. The ADMINISTRATION reserves the right to modify, expand or delete the requirements contained therein or issue new requirements, subject to consultation with the INSURER and cost negotiation, if necessary. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 49 5. The INSURER agrees that all required data and information needs to be collected and reported through electronic or machine readable media commencing with the effective date of coverage of this contract. 6. The information systems of all HCO's shall be compatible with the systems in use by the INSURER. 7. The INSURER shall supply the HCO's and, upon request, all participating providers with eligibility information on a daily basis. Said information shall be secured through on-line access with the INSURER. 8. The INSURER agrees to submit to the ADMINISTRATION in such form and detail as indicated in the Claim File Layout format and any other formats the ADMINISTRATION requires in the RFP, the following information: a) Within fifteen (15) days of the end of each month: 1) Data pertaining to health insurance claims, and encounters for all services provided to beneficiaries. 2) Enrollment data b) Within twenty-five (25) days of the end of each month: 1) Statistical data on providers, medical services and any other services; 2) Any and all data and information as required in the Request for Proposals and in the Proposal submitted; 3) Any other reports or data that the ADMINISTRATION may require after consultation with the INSURER and cost negotiation, if necessary. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 9. The INSURER agrees to provide to the ADMINISTRATION, on a regular basis as needed, any and all data, information, reports, and documentation that will permit Governmental Agencies, to compile statistical data to substantiate the need for, and the appropriate use of federal funds for federally financed health programs. 10. The INSURER agrees to report to the ADMINISTRATION on a daily basis all information pertaining to enrollment, disenrollment, and other subscriber or beneficiary transactions as required by the ADMINISTRATION. All records shall be transmitted: 1) through approved ADMINISTRATION systems contractor; or 2) over data transmission lines directly to the ADMINISTRATION; or 3) on machine readable media. All machine readable media or electronic transmissions shall be consistent with the relevant ADMINISTRATION's record layouts and specifications. 50 11. The INSURER will submit to the ADMINISTRATION on a monthly basis reports and data generated electronically that allows the ADMINISTRATION: a. Evaluation of the effectiveness of the delivery of services by providers and the adequacy of these services. b. Monitoring and evaluation of the efficiency and propriety of the services that are being received by the beneficiaries and their dependents. c. Comparison of experience with that of other providers. d. Comparison of the utilization of health care and the cost tendencies within the community and the group that renders service. e. Demonstration of how the quality of care is being improved for the insured and their dependents. f. Comparison of the administrative measures taken by the INSURER with reference points to be able to evaluate the progress towards constant improvement. g. Compliance with the information requirements and reports of the Federal Programs such as: Title II of the Health Insurance Portability and Accountability Act; Title IV-B Part 1 and 2, Title IV-E, Title V, Title XIX, and Title XXI of the Social Security Act; the applicable state laws as (the Child Abuse Act, "Ley de Maltrato de Menores" Public Law 75 of May 28, 1980; the Protection and Assistance to Victims and Witness Act, "Ley de Proteccion y Asistencia a Victimas de Delitos y Testigos", Public Law 77 of July 9, 1986), and any other information requirements which in the future are mandated by federal and state programs. h. Evaluation of each service provided with separate identification by beneficiary, by provider, by diagnosis, by diagnostic code, by procedure code and by date and place of service. The provider must be identified by his/her provider's identification number or his/her social security account number. 12. The INSURER will provide the ADMINISTRATION with a uniform system for data collection. 13. The INSURER'S Information Systems must provide a continuous flow of information to measure the quality of services rendered to the beneficiaries and their dependents. The purpose of these systems must be to help the ADMINISTRATION and the INSURER in the process of achieving continuous improvement in the quality of services rendered to beneficiaries and their dependents within a cost effective system. 14. The INSURER will prepare the necessary reports requested herein for the administration of the health insurance contract. Daily reports are due by the end of the following business day. Weekly reports are due on the first business day of the following week. Monthly reports are due twenty-five (25) days after the 51 end of each month. Quarterly reports are due thirty (30) days after the end of each quarter. 15. The INSURER must inform the Administration on a monthly basis all cancellation and disenrollment of providers. 16. The INSURER must provide the ADMINISTRATION on a monthly basis an updated version of its Providers Directory. 17. The INSURER will coordinate the enrollment of beneficiaries. 18. The INSURER will assure adequate and efficient functioning for the term of the contract that includes an insurance against economic loss due to system failure or data loss. 19. As an additional measure to guarantee quality and adequacy of the medical health services, the INSURER will conduct periodical statistics analysis of the medical services rendered to the beneficiaries and will compare them with the primary physician practice profile of their regular health insurance plan. Quarterly reports as to the analysis and comparison statistics will be submitted to the ADMINISTRATION. 20. In order to insure that all subscriber encounters are registered and recorded, the INSURER will conduct audits of statistical samples and unannounced personal audits of the HCO's and participating provider's facilities to assure that the medical records reconcile with the encounter reported, and corrective measures will be taken in case of any violation of the INSURER's regulations regarding the registration and reporting of encounters. The INSURER will provide quarterly reports to the ADMINISTRATION covering all the findings and corrective measures, if any, taken regarding any violation of said regulations. 21. The INSURER, as a minimum must guarantee the following: a. The security and integrity of the information and communication systems through: 1. Regular Backups on a daily basis 2. Controlled Access to the physical plant 3. Control logical access to information systems 4. Verification of the accuracy of the data and information b. The continuity of services through: 1. Regular maintenance of the systems, programs and equipment 2. A staff of duly trained personnel 3. An established and proven system of Disaster Recovery 4. Cost Effective systems. 52 c. Identification of the beneficiary via the use of plastic cards. d. Automated system of communication with statistics of the management of calls (Occurrence of busy lines, etc.) e. A comprehensive health insurance claim processing system to handle receiving, processing and payment of claims and encounters. f. Analysis/Control of utilization (The INSURER must provide said analysis to the ADMINISTRATION on a monthly basis in the format outlined by the ADMINISTRATION): 1. by patient/family 2. by region, area/region town, (zip code) 3. by provider (provider's identification number or social security account numbers) 4. by diagnosis 5. by procedure or service 6. by date of service g. Financial and Actuarial reports h. System of Control for claims payment that includes payment history. i. Computerized pharmacy system that permits its integration to the payment procedures to the providers. j. Outcome Analysis k. Electronic creation of data files related to mortality, morbidity, and vital statistics. l. Integration to central systems 1. Procedures and communications protocol compatibility; 2. Ability to transmit reports, and or files via electronic means. m. Electronic Handling of: 1. The process of Admission to hospitals and ambulatory services 2. Verification of eligibility and subscription to the plan. 3. Verification of benefits 4. Verification of Financial information (Deductibles, Co-payments, etc.) 5. Verification of individual demographic data 6. Coordination of Benefits. n. Computerized applications for general accounting. o. As to HCO's and all Participating Providers the information system shall provide for: 1. On line access to service history for each beneficiary. 2. Register of diagnosis and procedures for each service rendered. 3. Complete demography on line, including the aspect of coverage and financial responsibility of the patient. 4. Individual and family transactions 53 5. Annotations on line (General notes such as allergies, reminders or other clinical aspects (free form) 6. Analysis of activity by: a. department b. provider c. diagnosis d. procedures e. age f. sex g. origin h. others, as mutually agreed upon. 7. Diagnosis history by patient with multiple codes per service. 8. AD Hoc Reports 9. Referrals Control 10. Electronic Billing 11. Pharmacy system 12. Dental system 13. Ability to handle requirements of the Medicare programs such as RBRVS (Relative Base Relative Value System). 14. Ability to collect data as to the quarter in which the pregnant female beneficiary commences her ob-gyn treatment. The format for the collection of this data shall be approved by the ADMINISTRATION prior to its implementation. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 22. The INSURER agrees to report all procedure and diagnostic information using the current versions of Current Procedural Terminology, International Classification of Diseases, Clinical Modification, Diagnostic Statistic Manual and American Dental Association's Current Dental Terminology, respectively. This does not prevent the adoption by INSURER of the ANSI X-12 ELECTRONIC transactions for standards set forth in the HIPAA regulations; which shall be implemented on or before October 2002, unless modified by DHHS. 23. Non compliance with any of the Information Systems and Reporting Requirements; with any requirements related to the electronic standards transactions to be implemented within the schedule set forth by the HIPAA regulations, or with other requirements contained herein, shall be subject to the provisions of Articles XXXIII and XXXVI of this contract, as well as to Article IV, Section 2(n) of Law 72 of September 7, 1993, which provides the right of the 54 ADMINISTRATION to enforce compliance through the Circuit Court of Appeals of Puerto Rico, Part of San Juan. 24. The INSURER shall provide the ADMINISTRATION with one or more telephone numbers of dial-in data lines, and a minimum of three user's ID's and passwords that will allow the ADMINISTRATION's authorized personnel access to the INSURER's on-line computer applications, Such access will allow the ADMINISTRATION use of the same systems and access to the same information as used by the INSURER and enable the inquiry on beneficiaries, providers, and statistics files related to this contract. 25. As per the INSURER's proposal, INSURER shall provide to each HCO's, HCO s network of participating providers and INSURER's participating providers in the Health Area/Region, as well as to those outside of the area/region who provide services to beneficiaries from within the area/region, the necessary hardware and software to maintain on-line communication with the INSURER's Information System to document all encounters and services rendered to beneficiaries. Said hardware and software will be provided at a reasonable cost for the implementation and servicing. 26. The INSURER agrees to submit to the ADMINISTRATION reports as to the data and information gathered through the use of the Health Plan Employer Data and Information Set (HEDIS) and the work plan required in the RFP formats, as per Article XVII, Section VII. 27. The INSURER must disclose to the ADMINISTRATION the following information on provider incentive plans in sufficient detail to determine whether their incentive plan complies with the regulatory requirements set forth on 42 CFR 434.70(a) and 422.10: a) Whether services not furnished by the physician or physician group are covered by the incentive plan. If only the services furnished by the physician or physician group are covered by the incentive plan, disclosure of other aspects of the plan need not be made. b) The type of incentive arrangement (i.e., withhold, bonus, capitation). c) A determination on the percent of payment under the contract that is based on the use of referral services. If the incentive plan involves a withholding or bonus, the percent of the withholding of bonus. If the calculated amount is 25% or less, disclosure of the remaining elements in this list is not required and there is no substantial risk. d) Proof that the physician or physician group has adequate stop-loss protection, including the amount and type of stop-loss protection. e) The panel size and, if patients are pooled, the method used. f) In the case of those prepaid plans that are required to conduct beneficiary surveys, the survey's results. 55 The information items (a) through (e) above, must be disclosed to the ADMINISTRATION: (1) prior to approval of its initial contracts or agreements, upon the contract or agreements anniversary or renewal effective date or upon request by the Administration or CMS. The disclosure item (f) is due 3 months after the end of the contract year or upon request by CMS. If the contract with the INSURER is an initial Medicaid contract, but the INSURER has operated previously in the commercial or Medicare markets, information on physician incentive plans for the year preceding the initial contract period must be disclosed. If the contract is an initial contract with INSURER, but the INSURER has not operated previously in the commercial or Medicare markets, the INSURER should provide assurance that the provider agreements that they sign will meet CMS and Commonwealth requirements (i.e. there is no Physician Incentive Plan (PIP); there is a PIP but no Substantial Financial Risk (SFR); there is a PIP and SFR so stop-loss and survey requirements will be met). For contracts being renewed or extended, the INSURER must provide PIP disclosure information for the prior contracting period's contracts. The INSURER must update PIP disclosures annually and must disclose to administration whether PIP arrangements have changed from the previous year. Where arrangements have not changed, a written assurance that there has not been a change is sufficient. This also applies when INSURER analyze the PIP arrangements in their direct and downstream contracts to determine which disclosure items are due from their contractors. INSURER is expected to maintain the current written assurances and the prior periods' documentation so that the materials are available during on-site reviews. 28. INSURER TELEPHONE ACCESS REQUIREMENTS INSURER must have adequately-staffed telephone lines available. Telephone personnel must receive customer service telephone training. INSURER must ensure that telephone staffing is adequate to fulfill the standards of promptness and quality listed below: 1. 80% of all telephone calls must be answered within an average of 30 seconds; 2. The lost (abandonment) rate must not exceed 5%; 3. INSURER cannot impose maximum call duration limits but must allow calls to be of sufficient length to ensure adequate information is provided to the Beneficiaries or Provider. 4. The INSURER shall abide with the present Information Systems and Reporting Requirements established in this agreement and shall cooperate with the ADMINISTRATION in the development and implementation of any future systems. 56 ARTICLE XVI FINANCIAL REQUIREMENTS 1. The INSURER shall notify the ADMINISTRATION of any loans and other special financial arrangements which are made between the INSURER and any HCO or participating provider or related parties. Any such loans shall strictly conform to the legal requirements of the anti-fraud and anti-kickback laws and regulations. 2. The INSURER shall provide to the ADMINISTRATION copies of audited financial statements following Generally Accepted Accounting Principles (GAAP) and of the report to the Insurance Commissioner in the format agreed to by the National ASSOCIATION of Insurance Commissioners (NAIC), for the year ending on December 31, 2001, and subsequently thereafter for the contract term not later than March 15 of each subsequent year. Unaudited GAAP financial statements for each quarter during the contract term shall be presented to the ADMINISTRATION not later than forty five (45) days after the closing of each quarter. 3. The INSURER will maintain adequate procedures and controls to insure that any payments pursuant to this contract are properly made. In establishing and maintaining such procedures the INSURER will provide for separation of the functions of certification and disbursement. 4. The INSURER is required to establish a cash reserve, in accordance with the Insurance Code of Puerto Rico, to insure that outstanding claims can be satisfied in the event of insolvency. 5. The INSURER's Incurred But Not Reported (IBNR) reserve will be reconciled and reevaluated every ninety (90) days and in no way the IBNR reserve shall exceed 10% of the total monthly capitation payments made to HCO's. The ADMINISTRATION reserves the right to retain for custody purposes such IBNR reserve if becomes necessary. 6. The INSURER will ensure that the administrative costs and expenses incurred on an annual basis do not exceed 7.5% of the total premium payments made by the ADMINISTRATION. The INSURER's net earnings in excess of 2.5% premium payments in any given year will be shared with the ADMINISTRATION. The ADMINISTRATION share apportionment of the earnings shall be 75% and the INSURER shall be 25%. 7. The INSURER agrees to provide to the ADMINISTRATION, upon the expiration of each period of twelve (12) consecutive months of the contract year, and not later than ninety (90) days thereafter, audited financial statements following Generally Accepted Accounting Principles (GAAP) which exclusively present the 57 operational financial situation related to the execution of this contract. The ADMINISTRATION reserves the right to request interim audited financial statements not to exceed two (2) during the contract term. 8. The INSURER agrees to provide and make available to the ADMINISTRATION or any accounting firm contracted by the ADMINISTRATION any and all working papers of its external auditors related to this contract. ARTICLE XVII PLAN COMPLIANCE EVALUATION PROGRAM 1. The ADMINISTRATION shall conduct periodical evaluations of the INSURER's compliance with all terms and conditions of this contract including, but not limited to, quality, appropriateness, timeliness and reasonableness of cost and administrative expenses, said evaluation to be defined as the Plan Compliance Evaluation Program. 2. Said program will evaluate compliance of the following aspects in each areas/regions: a) Eligibility and enrollment b) Services to beneficiaries and participating providers c) Coverage of benefits d) Reporting e) Financial requirements f) Rules and Regulations g) Plan initiatives h) Quality, appropriateness, timeliness and cost of services i) Utilization j) Fraud and abuse k) Accessibility 1) Grievances and Complaint handling m) Information Systems n) Electronic standards, security and privacy compliance as provided by HIPAA to include review of timetables for compliance and implementation plans o) Such aspects which the ADMINISTRATION considers necessary in order to evaluate full compliance with this contract. 3. The evaluation process will be performed throughout the contract year using specific evaluating parameters. All parameters will be derived exclusively from the Request for Proposals, the INSURER's Proposal and this contract. Each area/region will contain several parameters with each parameter having a specific numeric value adding up a subtotal per area/region and a total for the aggregate of all area/regions of evaluation. Results will be presented in a Plan Compliance Evaluation Report. The evaluating parameters will be presented to the INSURER prior to commencement of the evaluation process. 58 4. The INSURER shall comply with the penalties set for each parameter within the range of values predetermined by the ADMINISTRATION. 5. Compliance with the Plan Compliance Evaluation Program is of essence to this contract and will be a determining factor in the renewal of this contract. Failure to comply with compliance requirements or parameters may also result in the termination of the contract as provided in Article XXXIII. 6. The ADMINISTRATION agrees to furnish the INSURER with the required Plan Performance Evaluation Program prior to its implementation. 7. The INSURER, as an additional tool to assure the evaluation of the insurance contract, agrees to abide, implement and develop the Health Plan-Employer Data and Information Set (HEDIS), as revised and recommended by NCQA and in accordance with the time schedule, work plan and other requirements established in Addendum XI of the RFP referring to HEDIS DATA. 8. DEFAULT AND REMEDIES under Plan Compliance Program. REMEDIES AVAILABLE TO THE ADMINISTRATION UNDER THE PLAN COMPLIANCE PROGRAM FOR INSURER'S DEFAULTS All of the listed remedies below may be exercised by the ADMINISTRATION and are in addition to all other remedies available to the ADMINISTRATION under this contract, by law or in equity, are joint and several, and may be exercised concurrently or consecutively. Exercise of any remedy in whole or in part does not limit the ADMINISTRATION in exercising all or part of any remaining remedies. Any particular default listed under subparagraph (a) to (j) below (which is not intended to be exhaustive) may be subject, when applicable, to any one or more of the following remedies: - Terminate the contract if the applicable conditions set forth in Section 10.1 are met; - Suspend payment to INSURER; - Recommend to CMS that sanctions be taken against INSURER as set out in Section 10.7; - Remove the EPSDT's component from the capitation paid to INSURER if the benchmarks(s) missed is for EPSDT's; - Assess civil monetary penalties as set out in section 10.8; and/or - Withhold premium payment. DEFAULTS BY INSURER 59 a. FAILURE TO PERFORM AN ADMINISTRATIVE FUNCTION Failure of INSURER to perform an administrative function is a default under this contract. Administrative functions are any requirements under this contract that are not direct delivery of health care services. Administrative functions include claims payment; encounter data submission; filing any report when due; cooperating in good faith with THE ADMINISTRATION, an entity acting on behalf of THE ADMINISTRATION, or an agency authorized by statute or law to require the cooperation of INSURER in carrying out an administrative, investigative, or prosecutorial function of the program; providing or producing records upon request; or entering into contracts or implementing procedures necessary to carry out contract obligations. b. ADVERSE ACTION AGAINST INSURER BY PRICO Termination or suspension of INSURER's PRICO Certificate of Authority or any adverse action taken by PRICO that THE ADMINISTRATION determines will affect the ability of INSURER to provide health care services to beneficiaries is a default under this contract. c. INSOLVENCY Failure of INSURER to comply with Commonwealth solvency standards or incapacity of INSURER to meet its financial obligations as they come due is a default under this contract. d. FAILURE TO COMPLY WITH FEDERAL LAWS AND REGULATIONS Failure of INSURER to comply with the federal requirements for Medicaid, including, but not limited to, federal law regarding misrepresentation, fraud, or abuse; and, by incorporation, Medicare standards, requirements, or prohibitions, is a default under this contract. The following events are defaults under this contract pursuant to 42 U.S.C. 1396b(m)(5), 1396u-2(e)(1)(A): INSURER's substantial failure to provide medically necessary items and services that are required under this contract to be provided to beneficiaries; INSURER's imposition of premiums or charges on beneficiaries in excess of the premiums or charge permitted by federal law; 60 INSURER's acting to discriminate among beneficiaries on the basis of their health status or requirements for health care services, including expulsion or refusal to enroll an individual, except as permitted by federal law, or engaging in any practice that would reasonably be expected to have the effect of denying or discouraging enrollment with INSURER by eligible individuals whose medical condition or history indicates a need for substantial future medical services; INSURER's misrepresentation or falsification of information that is furnished to CMS, THE ADMINISTRATION, a beneficiary, a potential beneficiary, or a health care provider; INSURER's failure to comply with physician incentive requirements 1876(1)(8), 1903(m)(2)(A)(v) of the Social Security Act and 42 Code of Federal Regulations 417.479. INSURER's distribution, either directly or through any agent or independent contractor, of marketing materials that contain false or misleading information, excluding materials previously approved by THE ADMINISTRATION. e. MISREPRESENTATION OR FRAUD INSURER's misrepresentation or fraud with respect of any provision of this contract is a default under this contract. f. EXCLUSION FROM PARTICIPATION IN MEDICARE OR MEDICAID Exclusion of INSURER or any of the managing employees or persons with an ownership interest whose disclosure is required by Section 1124(a) of the Social Security Act (the Act) from the Medicaid or Medicare program under the provisions of Section 1128(a) and/or (b) of the Act is a default under this contract. Exclusion of any provider or subcontractor or any of the managing employees or persons with an ownership interest of the provider or subcontractor whose disclosure is required by Section 1124(a) of the Social Security Act (the Act) from the Medicaid or Medicare program under the provisions of Section 1128(a) and/or (b) of the Act is a default under this contract if the exclusion will materially affect INSURER's performance under this contract. g. FAILURE TO MAKE PAYMENTS TO NETWORK PROVIDERS AND SUBCONTRACTORS 61 INSURER's failure to make timely and appropriate payments to network providers and subcontractors is a default under this contract. h. FAILURE TO MONITOR AND/OR SUPERVISE ACTIVITIES OF CONTRACTORS OR NETWORK PROVIDERS Failure of INSURER to audit, monitor, supervise, or enforce functions delegated by contract to another entity that results in a default under this contract or constitutes a violation of state or federal laws, rules, or regulations is a default under this contract. Failure of INSURER to properly credential its providers, conduct reasonable utilization review, or conduct quality monitoring is a default under this contract. Failure of INSURER to require providers and contractors to provide timely and accurate encounter, financial, statistical and utilization data is default under this contract. i. PLACING THE HEALTH AND SAFETY OF BENEFICIARIES IN JEOPARDY INSURER's placing the health and safety of the beneficiaries in jeopardy is a default under this contract, and the ADMINISTRATION may immediately terminate the agreement, providing the INSURER a due process hearing to determine any monetary obligations. j. FAILURE TO MEET ESTABLISHED BENCHMARK Failure of INSURER to repeatedly meet any benchmark established by THE ADMINISTRATION under this contract is a default under this contract. 9. NOTICE OF DEFAULT AND CURE OF DEFAULT WHEN APPLICABLE THE ADMINISTRATION will provide INSURER with written notice of default (Notice of Default) under this contract. The Notice of Default may be given by any means that provides verification of receipt. The Notice of Default must contain the following information: i. A clear and concise statement of the circumstances or conditions that constitute a default under this contract; ii. The contract provision(s) under which default is being declared; 62 iii. A clear and concise statement of how and/or whether the default may be cured; iv. A clear and concise statement of the time period during which INSURER, when applicable, may cure the default; v. The remedy or remedies THE ADMINISTRATION is electing to pursue and when the remedy or remedies will take effect; vi. If THE ADMINISTRATION is electing to impose civil monetary penalties, the amount that THE ADMINISTRATION intends to withhold or impose and the factual basis on which THE ADMINISTRATION is imposing the chosen remedy or remedies; vii. Whether any part of a civil monetary penalty, if THE ADMINISTRATION elects to pursue these remedy, may be passed through to an individual or entity who is or may be responsible for the act or omission for which default is declared; viii. Whether failure to cure the default within the given time period, if any, will result in THE ADMINISTRATION pursuing an additional remedy or remedies, including, but not limited to, additional sanctions, referral for investigation or action by another agency, and/or termination of the contract. 10. EXPLANATION OF REMEDIES 10.1 TERMINATION 10.1.1 TERMINATION BY THE ADMINISTRATION THE ADMINISTRATION may terminate this contract if: 10.1.1.1 INSURER substantially fails or refuses to provide payment for or access to medically necessary services and items that are required under this contract to be provided to beneficiaries after notice and opportunity to cure; 10.1.1.2 INSURER substantially fails or refuses to perform administrative functions under this contract after notice and opportunity to cure; 10.1.1.3 INSURER materially defaults under any of the provisions of Article XVI; 10.1.1.4 Federal or Commonwealth funds for the Medicaid program are no longer available; or 63 10.1.1.5 THE ADMINISTRATION has a reasonable belief that INSURER has placed the health or welfare of beneficiaries in jeopardy, as established in Article XVII, (8) (i). 10.1.2 THE ADMINISTRATION must give INSURER 30 days written notice of intent to terminate this contract if termination is the result of INSURER's substantial failure or refusal to perform administrative functions or a material default as established in Article XXXIII, except as otherwise stated. 10.1.3 THE ADMINISTRATION may, when termination is due to INSURER's substantial failure or refusal to provide payment for or access to medically necessary services and items, notify INSURER's beneficiaries of any hearing requested by INSURER. Additionally, if THE ADMINISTRATION terminates for this reason, THE ADMINISTRATION may enroll INSURER's beneficiaries with another INSURER or permit INSURER's beneficiaries to receive Medicaid-covered services other than from an INSURER. 10.1.4 INSURER must continue to perform services under the transition plan described in Section 10.2.1 if the termination is for any reason other than THE ADMINISTRATION's reasonable belief that INSURER is placing the health and safety of the beneficiaries in jeopardy. If termination is due to this reason, THE ADMINISTRATION may prohibit INSURER's further performance of services under the contract. 10.1.5 If THE ADMINISTRATION terminates this contract, INSURER may appeal the termination under Article VI Section 12 Law 72 September 7, 1993, as amended. 10.1.9 TERMINATION BY MUTUAL CONSENT This contract may be terminated at any time by mutual consent of both INSURER and THE ADMINISTRATION. 10.2 DUTIES OF CONTRACTING PARTIES UPON TERMINATION BY REASON OF DEFAULT When termination of the contract occurs by reason of default, THE ADMINISTRATION and INSURER must meet the following obligations: 10.2.1 THE ADMINISTRATION and INSURER must prepare a transition plan, which is acceptable to and approved by THE ADMINISTRATION, to ensure that beneficiaries are reassigned to other plans without interruption of services. That transition plan will be implemented during the 90-day period between receipt of notice and the termination date unless 64 termination is the result of THE ADMINISTRATION's reasonable belief that INSURER is placing the health or welfare of beneficiaries in jeopardy. 10.2.2.2 INSURER is responsible for all expenses related to giving notice to beneficiaries; and 10.2.2.3 INSURER is responsible for all expenses incurred by THE ADMINISTRATION in implementing the transition plan. 10.2.2.4 If the contract is terminated by mutual consent: 10.2.3.1 THE INSURER is responsible for notifying all beneficiaries of the date of termination and how beneficiaries can continue to receive contract services and the provisions of Article XXXIV shall apply. 10.7 RECOMMENDATION TO CMS THAT SANCTIONS BE TAKEN AGAINST INSURER 10.7.1 If CMS determines that INSURER has violated federal law or regulations and that federal payments will be withheld, THE ADMINISTRATION will deny and withhold payments for new enrollees of INSURER. 10.7.2 INSURER must be given notice and opportunity to appeal a decision of THE ADMINISTRATION and CMS pursuant to 42 CFR 434.67. 10.8 CIVIL MONETARY PENALTIES 10.8.1 The Administration may impose monetary penalties according to Article XXXVI, Section 4. 10.10 REVIEW OF REMEDY OR REMEDIES TO BE IMPOSED 10.10.1 INSURER may dispute the notice by the ADMINISTRATION that ADMINISTRATION intends to impose any sanction under this contract. INSURER may notify THE ADMINISTRATION of its objections by filing a written response to the Notice of Default, clearly stating the reason INSURER disputes the proposed sanction. With the written response, INSURER must submit to THE ADMINISTRATION any documentation that supports INSURER's position. INSURER must file the review within fifteen (15) days from INSURER's receipt of the Notice of Default as provided in Article XXXIII, subparagraph 2. Filing a dispute in a written response to the Notice of Default suspends imposition of the proposed sanction. 65 10.10.2 INSURER and THE ADMINISTRATION must attempt to informally resolve the dispute. If INSURER and THE ADMINISTRATION are unable to informally resolve the dispute THE ADMINISTRATION will make the remedy final. 11. The ADMINISTRATION, in coordination with the INSURER, will implement a comprehensive fraud, errors and irregularities program. The INSURER will be required to ensure compliance with this program. If after a reasonable period to be determine by the parties, the ADMINISTRATION detected any violation of the program; the ADMINISTRATION may withheld such amount from the INSURER premium. The INSURER will have the right to present its position with following XXXVII (5) (B). ARTICLE XVIII PAYMENT OF PREMIUMS 1. The payment for the first month of coverage under this contract will be made upon the certification by the INSURER that it has complied with all the terms and conditions contained in this contract to the satisfaction of the ADMINISTRATION. For subsequent months the ADMINISTRATION shall pay to the INSURER the corresponding monthly premium within five (5) working days following submission by the INSURER of an invoice containing the list of the beneficiaries enrolled for the month of the invoice. Calculations by ASES of premiums due will be based on the status of beneficiaries eligible at the end of the prior month, following all processing of updates and cancellations effective in that month. The monthly premium calculation for beneficiaries not enrolled for the full month shall be determined on a pro-rata basis by dividing the corresponding monthly premium amount by the number of days in the month and multiplying the result by the number of days the beneficiary was actually enrolled. 3. The monthly premiums for the months comprised within the contract term and covered by this contract are as follows: a) For all beneficiaries including all those who are sixty-five (65) years and older who are Medicare beneficiaries with Part A or Parts A and B and those who are sixty-five years and older who are not Medicare recipients: 66 1) Per member per month rate (PMPM) (Beneficiary) established at FIFTY EIGHT WITH EIGHTY CENTS ($58.80). 4. The per member per month rate (PMPM) herein agreed provides for: a) The billing by providers to Medicare for services rendered to beneficiaries who are also Medicare recipients. The INSURER will not cover deductibles or co-insurance of Part A, but will cover deductibles and co-insurance of Part B of Medicare, except for deductibles and co-insurance for outpatient services provided in hospital setting, other than physician services. b) The recognition as a covered reimbursable Medicare Program cost as bad debts by reason of non-payment of Part A deductibles and/or coinsurance, and for deductibles and co-insurance for outpatient services provided in hospital setting under Medicare Part B, other than physician services. c) Pharmacy coverage for beneficiaries who are also Part A and Part A and B Medicare recipients, as long as the benefits are accessed through the PCP, HCO's, HCO's network of participating providers or the INSURER's participating providers and the prescription is issued by a participating provider of the INSURER. d) Dental coverage for beneficiaries who are also Part A and Part A and B Medicare recipients, the INSURER's participating providers. e) All benefits included in Addendum I that are not covered under Medicare Part A or Part B. 5. The INSURER shall not, at any time, increase the rate agreed in the contract nor reduce the benefits agreed to as defined in Addendum I of this contract. 6. The INSURER guarantees the ADMINISTRATION that the rate and any applicable deductibles or co-payments constitute full payment for the benefits contracted under the plan, and that participating providers cannot collect any additional amount from the beneficiaries. Balance billing is expressly prohibited. Upon a determination made by the ADMINISTRATION that the INSURER or its agents that the INSURER has engaged in balance billing, the ADMINISTRATION will proceed to enforce provisions as established in Article XXXVI. 7. The INSURER understands that the payment of premium by the ADMINISTRATION and the INSURER's payments to its HCO's, HCO's network of participating providers and INSURER's participating providers, shall be considered as full and complete payment for all services rendered except for the deductibles established in Addendum I of the contract herein. 67 8: For those Medicare beneficiaries with Part A, any recovery by the provider for Part A deductibles and/or co-insurance will be made exclusively through the Medicare Part A Program as bad debts. In this instance, beneficiaries would neither pay any reimbursement for rendered services to a participating provider nor pay the deductibles included in Addendum I of this contract. 9. For those Medicare beneficiaries with Part B, any recovery by the participating provider for Part B deductibles and/or co-insurance, other than services provided I on an outpatient basis to hospital clinics, will be made through the INSURER and/or the HCOs. In this instance, beneficiaries would neither pay any reimbursement for rendered services to a participating provider nor pay the deductibles included in Addendum I of this contract. 10. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service, through the capitation paid to the HCO. 11. Newborns shall be immediately covered by the INSURER if born to an eligible individual and/or family unit as defined herein the Medicaid Commonwealth Plan, the law and its regulations. 12. The INSURER understands that if the Federal Government submits an alternative to the agreement hereof that is more cost effective and for the benefit of the Government of the Commonwealth Puerto Rico, the ADMINISTRATION along with the INSURER will attempt to renegotiate the coverage for Medicare beneficiaries with Part A or Part A and B. 13. The INSURER certifies that the monthly billing submitted to the ADMINISTRATION includes all beneficiaries, who have been issued an identification card and for which payment of premiums are due either on a monthly or pro-rated basis. The ADMINISTRATION will not accept any new billing once the monthly billing is submitted by the INSURER to the ADMINISTRATION, unless there is a justifiable reason for the omission. 14. If any differences arise in the ADMINISTRATION's payment of premiums to the INSURER, the latter will proceed to analyze the differences between the original billing submitted by the INSURER and the amount paid by the ADMINISTRATION. The INSURER will proceed, after proper analysis, to submit to the ADMINISTRATION a diskette as well as all relevant documentation that supports and details the INSURER's claim not later than thirty (30) working days after payment is made to the INSURER by the ADMINISTRATION. Once this term has ended, the INSURER waives its right to claim any amounts from differences arising from the monthly payment made by the ADMINISTRATION 68 and releases the ADMINISTRATION from any and all obligation to pay any additional premiums, including differences to billing by more than one insurer. During the following one hundred and twenty (120) days the ADMINISTRATION will confirm the validity of the claim and make payment thereof. ARTICLE XIX ACTUARIAL REQUIREMENTS 1. For the purpose of determining future premiums, the loss experience of this contract shall be based exclusively on the results of the cost of health care services provided to the beneficiaries covered under this contract. The INSURER shall maintain all the utilization and financial data related to this contract duly segregated from its regular accounting system including, but not limited to the General Ledger and the necessary Accounting Registers classified by the Area/Region subject to this contract. 2. Administrative expenses to be included in determining the experience of the program are those directly related to this contract. Separate allocations of expenses from the INSURER's regular business, INSURER's related companies, INSURER's parent company or other entities will be reflected or made a part of the financial and accounting records described in the preceding section. 3. Any pooling of operating expenses with other of the INSURER's groups, cost shifting, financial consolidation or the implementation of other combined financial measures is expressly forbidden. 4. Amounts paid for claims or encounters resulting from services determined to be medically unnecessary by the INSURER will not be considered in the contract's experience. 5. The INSURER shall provide the ADMINISTRATION every month with a Premium Disbursement Illustration. Said illustration shall present the distribution of the capitation, claim expenses by coverage, reserves, administrative expenses and premium distributions as referred and contained in the RFP's Actuarial Reports formats. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article I of this contract. 6. The determination by the INSURER as to the payment of the capitation fee and as to any other payments by virtue of this contract will be computed on an actuarially sound basis. 7. The INSURER will provide to the ADMINISTRATION, on a monthly basis, the actuarial data, premium distribution, and reports as contained in the RFP's Actuarial Report formats. Failure to comply with the requirements contained herein will be 69 sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. ARTICLE XX PREVENTIVE MEDICINE PROGRAM 1. The Department of Health will provide for and effectively implement a preventive medicine program with primary emphasis on public health education which will include, but will not be limited to, guidance on lifestyles, AIDS, drug abuse, cancer and mother and child care. This is typically referred to as Primary Prevention. The INSURER will collaborate with the Department of Health and provide for a preventive medicine program with primary emphasis on the provision of clinical services in support of the Preventive Medicine Program, including but not limited to, screening and education of individual patients, such as PAP Smears, colorectal screening mammograms and cholesterol screening as indicated by the best practices of medicine. In cooperation with the INSURER, the Department of Health will develop a surveillance methodology to identify compliance with this program. 2. The INSURER, through its secondary and tertiary Preventive Program, will address, analyze and implement measures to provide effective clinical and educational activities seeking to combat the specific causes of morbidity and mortality in the Area/Region. 3. The INSURER will develop and effectively implement a case management system in order to monitor high risk cases and attend to the covered health care needs of the beneficiaries and dependents within said category. 4. The INSURER represents that under its Preventive Program it will contract, sufficient medical specialists and specialized teams in order to combine the resources of the HCO's and the professional staff of the HCO's, including but not limited to, health educators, nutritionists, dieticians, nurses, other trained personnel and physicians who will act as the team's educator, manager and coordinator. 5. The INSURER will be responsible to direct to a network of other agencies and community resources serving each municipality within the Area/Region so as to guarantee that participating providers and beneficiaries are aware of and understand the available services in their community and the process by which to access them. 6. The INSURER will assure that discharge of the mother and her baby from the hospital is based upon sound clinical judgment determined by the clinician. The coverage for hospital stay following a normal vaginal delivery may not be limited 70 to less than 48 hours for both the mother and newborn child and in the case of childbirth following cesarean section; the hospital stay may not be limited to less than 96 hours for both mother and newborns. 7. The responsibilities of the INSURER in the Preventive Program will include the following: a) A disease management program developed by the INSURER in collaboration with the Department of Health which shall develop standardized processes to address major public health programs such as ASTHMA, DIABETES, HYPERTENSION AND CONGESTIVE HEART FAILURE. This program shall include identification treatment protocols/guidelines and surveillance/monitoring. In cooperation with the Department of Health and the Centers for Disease Control (CDC) annual reports will be published detailing the results. b) A case management program which initially will be under the responsibility of a nurse. Case management will not be limited to the physician's offices or a determined center. Coordination of the services provided is required within the community and at the home of the beneficiary, if necessary. c) An outreach program shall be developed in collaboration with the Department of Health to target specific clinical issues as identified by the Department of Health, for those beneficiaries who cannot access those services. The clinical standard shall conform to the published HEDIS measures. These measures can be modified or supplemented by the Department of Health. d) The INSURER will assure that all pregnant women are screened for alcohol use following the Department of Health Guidelines. e) The INSURER will assure that all pregnant women will obtain counseling for the HIV test. All pregnant women who accept the HIV test will be referred to the HIV Prevention and Detection Program of the Department of Health. The participant provider shall coordinate all referrals with the Department of Health. Pre-natal care and HIV testing will continue to be covered benefits under this contract. f) The INSURER will assure that all pregnant women, following the administration of the HIV test that reports a positive result, are allowed to be treated under the guidelines for the utilization of ZDV in pregnant women and neonatal infants to reduce the risk of mother-infant HIV transmission, published by the Department of Health. g) The INSURER will assure that all pregnant women are properly educated about the WIC Program. Those eligible individuals will be referred to the 71 WIC Program of the Department of Health. It will be the immediate responsibility of the participating providers to comply with all requirements in order to arrange the referral to the WIC Program without any cost to the patient. h) The INSURER will assure that all providers comply with the EPSDT (Early Periodic Screening Diagnosis and Treatment) Program and the Guidelines for Adolescent Preventive Services (GAPS) from the American Medical Association. The itinerary of services that have to be rendered by providers will comply with the EPSDT Itinerary Services Formats. i) The INSURER will be responsible to develop and demonstrate its strategy to meet the appropriate prevention program guidelines as required by the Department of Health. j) The INSURER will provide the ADMINISTRATION monthly reports detailing all services rendered to mother and child classified by age groups and listing the numbers of pregnant women that have: (i) received prenatal care on each month in the reporting period; (ii) counseled as to HIV testing; (iii) referred to the HIV Prevention and Detection Program of the Department of Health; and (iv) referred to the WIC Program. k) The INSURER agrees to comply and assure that all participating providers will comply with the federal and local laws referred in Article XV paragraph (11) (g) of this contract. The INSURER will assure the submission by the participating provider of all the protocols and formats requested by the Department of Health, Department of the Family, Department of Education and Department of Justice as contained in the RFP formats. 8. The INSURER will develop and effectively implement incentive-based programs whereby the providers are motivated toward compliance with all requirements of their Preventive Medicine Program such as EPSDT, Immunizations, Prenatal care, reduction in cesarean sections, and other related services. 9. The ADMINISTRATION shall evaluate these preventive programs through HEDIS and other applicable performance standards. 10. The INSURER will provide the ADMINISTRATION quarterly reports needed by the Department of Health detailing services rendered in the Preventive Program described below. 11. The ADMINISTRATION shall have the right to audit the compliance with these requirements as needed. Non-compliance shall be a determining factor in nonrenewal of this contract or breach thereof as defined in Article of XXXIII. 72 ARTICLE XXI MENTAL HEALTH PROGRAM AND DEMONSTRATION PROJECT 1. The INSURER shall direct beneficiaries to access Mental Health and Substance Abuse benefits in coordination with the Managed Behavioral Healthcare Organization in the health region contracted by the ADMINISTRATION and ASSMCA. The ASSMCA will monitor the Mental Health and Substance Abuse Program provided through the MBHO contracted in the Health Region/Area. This will be with sufficient specificity in order to provide for all mental health and substance abuse needs for all eligible beneficiaries residing within the municipalities forming part of said area. 2. The INSURER will abide with the ADMINISTRATION and ASSMCA's guidelines for expediting access of beneficiaries to the mental health and substance abuse benefits covered under the Health Insurance Program. 3. The INSURER acknowledges that the ADMINISTRATION has been delegated by the Department of Health, the implementation of a demonstration project for contracting and ensuring the provision of health services through direct contracts with health care organizations or other governmental health care organizations. INSURER agrees to collaborate with the ADMINISTRATION in the implementation of any demonstration project the ADMINISTRATION intends to simultaneously or progressively develop the contracted health region or another region or municipality during the term of this contract. ARTICLE XXII PHARMACY BENEFITS MANAGEMENT (PBM) 1. The ADMINISTRATION will monitor the Physical Health Program provided through the INSURER contracted in the Health Region/Area. This will be with sufficient specificity in order to provide for all Physical Health needs for all eligible beneficiaries residing within the municipalities comprising said area. 2. The INSURER will abide with the ADMINISTRATION's guidelines for expediting access of beneficiaries to the Physical health Program and benefits covered under the Health Reform Program. 3. Concurrently with the terms of this contract, the INSURER agrees to work with the ADMINISTRATION's Pharmacy Benefit Manager as selected by the ADMINISTRATION. This will include cooperating with the selected PBM to facilitate claims processing in a period specified, working with the selected PBM 73 to specify, develop and implement the flow of information, utilization review and customer service protocols, as well as, to cease billing and collection of rebates from drug manufacturers, if applicable. 4. The ADMINISTRATION's PBM, will provide the INSURER the services set forth in this Section and the services described in any attachment, addendum or amendment hereto:
- ---------------------------------------------------------------------------------------------- ITEM DESCRIPTION - ---------------------------------------------------------------------------------------------- Claims Processing - Contracting and administration of the pharmacy network. The and Administrative PBM will create a network of Participating Pharmacies, which Services will perform pharmacy services for Members at specified fees and discounts - Claims payments summary reports for each payment cycle every two weeks - Notify each INSURER of the payment process, systems involved (NCPDP 2.0) and relevant time line. - Processing and mailing of pharmacy checks and remittance reports - Reconciliation of zero balance accounts - Generate list of participating pharmacies - Coordination of Benefits - On-line access to current eligibility and claims history - Plan set-up - Develop policies and procedures for denials and rejections - Process reasonable denials - Maintenance of plan - Adjudication of electronic claims. The PBM will adjudicate claims submitted by Participating Pharmacies to the PBM based on the participating pharmacy's agreement with the PBM and including online edits for preauthorization requirements and other edits that may be deemed necessary for the accurate payment of claims - Approval and rejection of claims consistent with plan design and concurrent Drug Utilization Review (DUR) - Standard electronic eligibility - Maintain call center - Loading of INSURER providers in network and eligible members - Develop remedies for addressing problems with pharmacies - Pharmacy audits - ---------------------------------------------------------------------------------------------- Concurrent Fraud - Develop process for INSURER to notify the PBM of fraud Investigations and abuse complaints made by their beneficiaries. - Track and Investigate fraud and abuse allegations - ----------------------------------------------------------------------------------------------
74 - ---------------------------------------------------------------------------------------------- Formulary - Incorporate INSURER related issues, such as providing guidance Management into development of the Preferred Drug List (PDL), into the Program existing ADMINISTRATION's Pharmacy and Therapeutic Committee. - Administer the Central Administrative Committee (CAC), a cross functional sub-committee tasked with rebate maximization. The subcommittee will take recommendations on the PDL from the P&T committee and will manage the PDL. - ---------------------------------------------------------------------------------------------- Drug Utilization - Incorporate DUR reports and evaluation reviews into the tasks Review/Drug of the Central Administrative Committee (CAC). Utilization - Evaluate new therapeutic classes and determine if drugs Evaluations need to be added or deleted from PDL. - Therapeutic intervention and switching - ---------------------------------------------------------------------------------------------- Reports - According to Agreements. - ---------------------------------------------------------------------------------------------- Rebates and - Develop and maintain contracts with drug manufacturers for Discounts rebates - Utilize the Central Administrative Committee (CAC) to maximize rebates - ---------------------------------------------------------------------------------------------- Optional Services - Custom Management Reports - Manual Claims Input - Special Programming - ----------------------------------------------------------------------------------------------
5. The INSURER will provide the following services set forth in this Section and the services described in any attachment, addendum or amendment hereto:
- ---------------------------------------------------------------------------------------------- ITEM DESCRIPTION - ---------------------------------------------------------------------------------------------- Claims Processing - Assume cost of implementing and maintaining on-line and Administrative connections - The INSURER will be responsible for all of its Services own costs of implementation, including but not limited to payment processes, utilization review and approval processes, connection and line charges, and other costs incurred to implement the payment arrangements for pharmacy claims. - Maintain or improve ratio of paid claims to processed claims - Based on past performance, ADMINISTRATION will develop an acceptable ratio of paid claims to processed claims for which each INSURER will be responsible for maintaining or improving. - Review bi-monthly claim payments summary reports for each payment cycle and approve transfer of funds - Review denials and rejections - Maintain call center - INSURER will operate a customer call center to provide for preauthorization of drugs for drugs for which the INSURER retains risk, according to its policies and the approved formulary. - ----------------------------------------------------------------------------------------------
75 - ---------------------------------------------------------------------------------------------- - Electronically submit a list of all INSURER providers in network and eligible members to PBM - ---------------------------------------------------------------------------------------------- Concurrent Fraud - Develop tracking mechanisms for fraud and abuse issues Investigations - Forward fraud and abuse complaints from members to PBM - ---------------------------------------------------------------------------------------------- Formulary - Designate and maintain a representative to assist on the Management P&T Committee in developing the official formulary. Program - Submit candidates who are primary care physicians for the Pharmacy and Therapeutic Committee. - Select two (2) representatives of the INSURER to serve on the Central Administrative Committee (CAC), a cross functional committee tasked with rebate maximization. The subcommittee will take recommendations on the PDL from the P&T committee and will update and manage the PDL. - ---------------------------------------------------------------------------------------------- Drug Utilization - Perform drug utilization review. Review/Drug - Develop and distribute protocols, when necessary. Utilization - Perform utilization management functions - The INSURER will Evaluations perform utilization review that meets the minimum standards of ADMINISTRATION or that may be required by the Medicaid program. - Perform disease management functions - The INSURER will perform disease management that meets the minimum standards of the ADMINISTRATION or that may be required by the Medicaid program. - ---------------------------------------------------------------------------------------------- Reports - Meet with PBM to determine the reports that should be the sole responsibility of the PBM, those performed by the INSURER and those that should be duplicated in order to cross check. - ----------------------------------------------------------------------------------------------
6. The INSURER will abide and comply with following payment process hereby established: a) The INSURER will pay claims costs. Every two weeks, the PBM will provide the INSURER with the proposed claims listing. The INSURER will promptly review the payment listing. b) Submit funds for claims payment to zero-balance account. The INSURER will provide funds, wire transfers or otherwise submit payment within two business days to a bank account established for the payment of the claims applicable to each INSURER. c) Payment failure by INSURER or the establishment of a Medicaid Rebate Program. The following payment process will be implemented if either the INSURER fails to make a timely or correct payment to the established zero-balance account or if the ADMINISTRATION enters into a Medicaid Rebate Program: 76 (i) The contract amounts paid to the INSURER will be reduced by the estimated claims cost for the succeeding month, any deficit in funds provided versus the cash requirements for the zero-balance account. Estimates will be made based on actual claims experience. After a reasonable period of time, adjustments will be made to the monthly withholds for the actual experience of the prior month(s) versus the estimated. A final settlement shall be made within a specified period after the end of the contract year. d) Payment of PBM and Collection of Rebates and Discounts: The ADMINISTRATION will collect rebates and provide for the payment of reasonable PBM fees for defined services. The ADMINISTRATION will pay the INSURER seventy five (75%) percent of the net rebates collected; the INSURER will share such rebates with the primary care providers according to their risk. e) Other Savings: The INSURER, the ADMINISTRATION, and the PBM shall cooperate to identify additional savings opportunities, including special purchasing opportunities, changes in network fees, etc. Payment to the INSURER will be adjusted to provide the ADMINISTRATION for its share of the incremental net savings. f) Fees per transaction and DUR and Formulary Management fees will be paid by the INSURER. ARTICLE XXIII BENEFITS 1. The INSURER agrees to provide to the enrolled beneficiaries the benefits included in Addendum I of this contract. The benefits to be provided under the program are divided in three types of coverage: 1) the Basic Coverage that includes preventive, medical, hospital, surgical, diagnostic tests, clinical laboratory tests, x-rays, emergency room, ambulance, maternity and prescription drug services, 2) Dental Coverage based on the right to choose one of the participating dentists from the INSURER's network and 3) the Special Coverage that includes benefits for catastrophic conditions, expensive procedures and specialized diagnostic tests. 2. The INSURER may not modify, change, limit, reduce, or otherwise alter said benefits nor the agreed terms and conditions for their delivery without the express written consent of the ADMINISTRATION. 77 3. The coverage for Medicare beneficiaries is established as follows: (a) Beneficiaries with Part A of Medicare- the INSURER will pay for all services not included in Part A of Medicare, and included in the contract herein. The INSURER will not pay the applicable Part A deductibles and coinsurance. (b) Beneficiaries with Part A and Part B of Medicare- the INSURER will pay for prescription drugs prescribed by PCP and dental coverage. The INSURER will not cover the payment of the applicable Part A deductibles and coinsurance, but will cover the payment of the applicable Part B deductible and co-insurance. (c) Access to services contemplated herein will be through a selected HCO. Beneficiaries with Part A can select from the Medicare's providers list, in which case the benefits under this contract would not be covered. 4. The Medicare beneficiary can select a Part A provider from the Medicare Part A providers list, but has to select a HCO for Part B services for beneficiaries with Part B services or Part B equivalent services for beneficiaries without Part B of Medicare. ARTICLE XXIV CONVERSION CLAUSE 1. If during the term of this contract, the insurance coverage for a beneficiary terminates because the beneficiary ceases to be eligible and is disenrolled, such person has the right to receive a direct payment policy from INSURER without submitting evidence of eligibility. The direct payment policy will be issued by the INSURER without taking into consideration pre-existing conditions or waiting periods. The written request for a direct payment policy must be made, and the first premium submitted to INSURER on or before thirty-one (31) days after the date of disenrollment, bearing in mind that: a) The direct payment policy should be an option of such person, through any of the means which at that date INSURER has currently made available according to the age and benefits requested. It will be subject to the terms and conditions of the direct payment policy. b) The premium for the direct payment policy will be in accordance with the rate then in effect at INSURER, applicable to the form and benefits of the direct payment policy, in accordance with the risk category the person falls in at the moment, and the age reached on the effective date of the direct payment policy. The health condition at the moment of conversion will 78 have no bearing in the eligibility nor will it be an acceptable base for the risk classification. c) The direct payment policy should also provide for coverage to any other individual, if these were considered eligible beneficiaries at the termination date of the health insurance under this contract. Under option by INSURER, a separate direct payment policy may be issued to cover the other individuals who formerly were eligible beneficiaries. d) The direct payment policy will be effective upon termination of coverage under the health insurance contracted. e) INSURER will not be obligated to issue a direct payment policy covering a person who has the right to receive similar services provided by any insurance coverage or under the Medicare Program of the Federal Social Security legislation, as subsequently amended, if such benefits, jointly provided under the direct payment policy, result in an excess of coverage (over insurance), according to the standards of the INSURER. 2. When coverage under this contract terminates due to the expiration of its term, all persons formerly considered eligible beneficiaries, who have been insured for a period of three (3) years prior to the termination date, will be eligible for a INSURER direct payment policy, subject to the conditions and limitations stipulated in clause 1 of this section. 3. Subject to the conditions and limitations stipulated in clause 1 of this section, the conversion privilege will be granted: a) to all eligible beneficiaries whose coverage under the health insurance contracted is terminated because they cease to be eligible beneficiaries and are disenrolled. b) to any eligible beneficiary whose coverage under the health insurance contracted ceases because he no longer qualifies as an eligible beneficiary, regardless of the fact that the principal subscriber and/or any other eligible beneficiary continues covered by said health insurance coverage under this contract. 4. In case an eligible beneficiary under this contract suffers a loss covered by the direct payment policy, described in clause 1 of this section, during the period he/she would have qualified for a direct payment policy and before the said direct payment policy is in effect, the benefits which he/she would have a right to collect under such direct payment policy will be paid as a claim under the direct payment policy, subject to having requested the direct payment policy and the payment of the first premium. 79 5. If any eligible beneficiary under this contract subsequently acquires the right to obtain a direct payment policy, under the terms and conditions of the INSURER's policies without providing evidence of qualifications for such insurance, subject to the request and payment of the first premium during the period specified in the policy; and if this person is not notified of the existence of this right, at least fifteen (15) days prior to the expiration of such period, such person will be granted an additional period during which time he/she can claim his/her right, none of the above implying the continuation of a policy for a period longer than stipulated in said policy. The additional period will expire fifteen (15) days after the person is notified, but in no case will it be extended beyond sixty (60) days after the expiration date of the policy. Written notification handed to the person or mailed to the last known address of the person, as acknowledged by the policy holder, will be considered as notification, for the purposes of this paragraph. If an additional period is granted for the right of conversion as hereby provided, and if the written application for direct payment, enclosed with the first premium payment, is made during the additional period, the effective date of the direct payment policy will be the termination of the health insurance coverage under this contract. 6. Subject to the other conditions expressed before, the eligible beneficiaries will have the right to conversion, up to one of the following dates: a) date of termination of his/her eligibility under this contract; or b) termination date of this contract; or c) date of amendment of this contract, if said amendment in any way eliminates the beneficiaries' eligibility. ARTICLE XXV TRANSACTIONS WITH THE INSURER 1. All transactions between the ADMINISTRATION and the INSURER shall be handled according to the terms and conditions set forth in this contract. 2. The INSURER shall appoint a person that shall be responsible for all transactions with the ADMINISTRATION. 3. All eligibility transactions shall be coordinated on a daily basis. 80 ARTICLE XXVI NON-CANCELLATION CLAUSE The INSURER may not cancel this contract, or make modifications to it for any reason, or otherwise change, restrict or reduce the insurance or the benefits, except for nonpayment of premiums. ARTICLE XXVII APPLICABLE LAW The Request for Proposal that originated this contract, the Proposal submitted by the INSURER, this contract and/or any other document or provision incorporated to it by reference, shall be interpreted and construed according to the laws of the Commonwealth of Puerto Rico. If any controversy may arise regarding the interpretation or performance of this contract, the parties voluntary submit for its resolution to the jurisdiction of the Superior Court of the Commonwealth of Puerto Rico, San Juan Part. ARTICLE XXVIII EFFECTIVE DATE AND TERM 1. This contract shall be in effect for (3) consecutive twelve months periods, starting at 12:01 AM, Puerto Rico time on July 1, 2002, the first day that coverage begins and payment of the premium is due. 2. This contract may not be assigned, transferred or pledged by the INSURER without the express written consent of the ADMINISTRATION. 3. The second and third periods of the contract will require premium payment renegotiation by the ADMINISTRATION and the INSURER taking into consideration actual claims paid and incurred for The Health Area/Region and an assessment of specific trends actuarially based for both medical and prescription cost to reach the applicable premiums for any subsequent period of time. In the event an agreement can not be reached on the premium for the next period after good faith negotiations by the ADMINISTRATION and the INSURER according to the parameters set forth in (3) supra, the contract may be terminated if deemed in the best interest of these beneficiaries, the ADMINISTRATION and the Government of Puerto Rico. ARTICLE XXIX CONFLICT OF INTEREST 81 Any officer, director, employee or agent of the ADMINISTRATION, the Government of the Commonwealth of Puerto Rico, its municipalities or corporations cannot be part of this contract or derive any economic benefit that may arise from its execution. ARTICLE XXX INCOME TAXES The INSURER certifies and guarantees that at the time of execution of this contract, 1) it is a corporation duly authorized to conduct business in Puerto Rico and that has filed income tax returns for the previous five (5) years; 2) that it complied with and paid unemployment insurance tax, disability insurance tax (Law 139), social security for drivers ("seguro social choferil"), if applicable); 3) filed State Department reports, during the five (5) years preceding this contract and 4) that it does not owe any kind of taxes to the Commonwealth of Puerto Rico. ARTICLE XXXI ADVANCE DIRECTIVES The INSURER agrees to enforce and require compliance by all applicable participating providers with 42 CFR 434, Part 489, Subpart I relating to maintaining written policies and procedures respecting advance directives. This requirement includes provisions to inform and distribute written information to adult individuals concerning policies on advance directives, including a description of applicable Commonwealth law. ARTICLE XXXII OWNERSHIP AND THIRD PARTY TRANSACTIONS The INSURER shall report ownership, control interest, and related information to the ADMINISTRATION, and upon request, to the Secretary of the Department of Health and Human Services, the Inspector General of the Department of Health and Human Services, and the Comptroller General of the United States, in accordance with Sections 1124 and 1903(m)(4) of the Federal Social Security Act. ARTICLE XXXIII MODIFICATION OF CONTRACT If the ADMINISTRATION finds that, because of amendments to Law 72 of September 7, 1993, or by reason of budget reductions, or subsequent Federal or local legislative changes that affect this contract, or because of any reasons deemed by the ADMINISTRATION to be in the best interest of the Government of Puerto Rico in carrying out the provisions of Law 72 of September 7, 1993, or in order to perform experiments and demonstration projects pursuant to legislative enactment, modification 82 of this contract is necessary, the ADMINISTRATION may modify any of the requirements, terms and conditions, functions, part thereof or any other services to be performed by the INSURER. Prior to any such modification, the ADMINISTRATION shall afford the INSURER an opportunity to consult and participate in planning for adjustments which might be necessary and thereafter provide the INSURER written notice that the modification is to be made within ninety (90) days after a date specified in the notice. Said modifications will take place after consultation and cost negotiation with the INSURER. ARTICLE XXXIV TERMINATION OF AGREEMENT 1. If the ADMINISTRATION finds, after reasonable notice and opportunity for a hearing to the INSURER the INSURER has failed substantially to carry out the material terms and conditions of this contract, the ADMINISTRATION may terminate this contract at any time, as provided in Section 10.1, above. 2. In the event that there is non-compliance by the INSURER with any specific clause of this contract, the ADMINISTRATION will notify the INSURER in writing, indicating the area/region(s) of non-compliance. The INSURER will be granted the opportunity to present and discuss its position regarding the issue within fifteen (15) days from the date of the notification. After considering the allegations presented by the INSURER following adequate hearing and the opportunity to present all necessary evidence in support of its position, and the ADMINISTRATION formally determines that there is a non-compliance, at the discretion of the ADMINISTRATION, this contract may be cancelled by giving thirty (30) days prior written notice before the effective date of cancellation. In the event that the INSURER does not remedy, correct or cure the material deficiencies noted in the Plan Compliance Evaluation Report, as provided for in Article XVII of this contract, and following the opportunity of an adequate hearing and the presentation of evidence in support of its position, and the ADMINISTRATION confirms the deficiency, then at the discretion of the ADMINISTRATION this contract may be cancelled by giving thirty (30) days prior notice. If the INSURER were to be declared insolvent, files for bankruptcy or is placed under liquidation, the ADMINISTRATION shall have the option to cancel and immediately terminate this contract. In the event of this happening an enrollee will not be liable for payments under this contract. In the event that this contract is terminated, the INSURER shall promptly provide the ADMINISTRATION all necessary information for the reimbursement of any pending and outstanding Claims. The INSURER hereby recognizes that in the event of termination under this Article it shall be bound to provide reasonable 83 cooperation to the ADMINISTRATION beyond the date of termination in order to properly effect the transition to the new INSURER taking over the region covered by this Contract. This obligation to reasonably cooperate shall survive the date of said effective termination provided, at the ADMINISTRATION'S discretion. The INSURER agrees and recognizes that in the event there are no sufficient enough funds designated for the payment of premium, the ADMINISTRATION reserves the right to terminate this contract, effective ninety (90) days after prior written notification. ARTICLE XXXV PHASE-OUT CLAUSE 1. In the event that the contract is terminated, the INSURER will continue to provide services for a reasonable term to guarantee the continuance of services until the ADMINISTRATION has made adequate arrangements to continue the rendering of health care benefits to beneficiaries in the areas affected by the termination. The duration of such transition term will not exceed sixty (60) days. Adjustments in the PMPM during the transition term shall not be borne or agreed upon by ADMINISTRATION, in the event of a termination based on default or breach of contract by the INSURER. 2. Upon the expiration or termination of a contract, the INSURER will provide the ADMINISTRATION with the historical/utilization data of services rendered to beneficiaries in the area/region in formats specified/agreed with the ADMINISTRATION, in order to prevent fraud and double billing of services by the incoming INSURER. 3. Any INSURER phasing out of a Health Region will guarantee payment for services rendered to beneficiaries under the previous contract. Failure to do so, shall entail in accordance with the fair hearing process established on Article XXXIII, the retention of a determined amount of premium payment of INSURER's Health Region Contract. The amount to be retained shall be sufficient to cover the amount owed. 4. The INSURER acknowledges that it will collaborate with the ADMINISTRATION efforts in any health regions or geographic area in transition processes. 5. If in the best interest of the beneficiaries or the Commonwealth of Puerto Rico the ADMINISTRATION terminates any demonstration project, the INSURER will assume responsibility for the geographic areas (municipalities/regions) managed by any health organization in accordance with the contracted premium. 6. If in the best interest of the beneficiaries or the Commonwealth of Puerto Rico the ADMINISTRATION expands the direct contracting demonstration project with 84 health care organization, the INSURER will assist in the transition process after ninety (90) days of a written notification and payments of premiums will be adjusted accordingly. ARTICLE XXXVI THIRD PARTY DISCLAIMER None of the obligations, covenants, duties, and responsibilities incurred or assumed under the present Contract, the Request For Proposal, Proposal, the representations and assurances provided at the clarification meeting held on June 11, 2001, by either: (i) the INSURER towards the ADMINISTRATION and any governmental agencies, or (ii) the ADMINISTRATION towards the INSURER, shall be deemed as the assumption by the INSURER or the ADMINISTRATION, as the case might be, of any legal liability or responsibility towards a third party in the event that a negligent or intentional injury, malpractice, damage or wrongdoing, or any harm whatsoever is incurred by or caused by the HCO's, the HCO's network of participating providers and/or the INSURER's participating providers. ARTICLE XXXVII PENALTIES AND SANCTIONS CLAUSES 1. In the event that the INSURER does not furnish the ADMINISTRATION with any kind of monthly reports related to the gathering and reporting of encounter information, the ADMINISTRATION may retain one monthly premium for each month in default said retention to be effective for the subsequent month after the default. Once the INSURER complies with said requirement, the amount retained will be fully paid to the INSURER, within five days after receiving the required reports for the subsequent month. 2. In the event that the INSURER does not comply with its obligation related to the monthly gathering and accurate reporting of encounter information, according to Article XV of this contract, the ADMINISTRATION may retain one monthly premium payable to the INSURER for each month in default, provided: a. the ADMINISTRATION gives, within ten (10) working days after receipt of the monthly report, written notification by certified mail, or personally hand delivers said notification to the INSURER of the non-compliance and the reasons thereof; and b. the ADMINISTRATION grants ten (10) working days for the INSURER to cure the default; and c. the INSURER fails to correct it within said term. Whenever the above events take place, the ADMINISTRATION may retain one monthly premium payment for each month in default. Retention will be effective ten (10) working days after the notice of non-compliance. Once the INSURER 85 corrects the problem, at the satisfaction of the ADMINISTRATION and according to Article XV of this contract, the amount retained will be fully paid to the INSURER, within five days after receiving full and complete reports for the subsequent month. 3. For the purpose of subparagraphs 1 and 2, above, default is defined as the non-compliance by the INSURER of the reporting requirements established for the gathering and reporting of encounter information as established in Article XV of this contract, or when the INSURER does not submit the reports within the established term set in this contract. If the INSURER owes money to the Administration as a result of the imposition of penalties, excess premiums paid or any other reason, the Administration may withhold such amount from any payments due related to the same contract or any other contracts between the parties. 5. A. Civil Monetary Penalties: In the event that there is a non-compliance with Article VI, XII, XVI, XVII and/or with any specific clause of this contract or the INSURER engages in any of the following practices: (a) Fails to substantially provide medically necessary services to enrollees under this contract; (b) imposes on enrollees premiums and charges in excess of the ones permitted under this contract; (c) discriminates among enrollees on the basis of their health status or requirements for health care (such as terminating an enrollment or refusing to reenroll) except as permitted under the Program or engages in practices to discourage enrollment by recipients whose medical condition or history indicates need for substantial medical services; (d) misrepresents or falsifies information that is furnished to CMS, to the ADMINISTRATION, to an enrollee, potential enrollee or provider of services; (e) distributes, directly or indirectly through any agent, independent contractor, marketing material not approved by the ADMINISTRATION, or that contains false or misleading information; (f) Fails to comply with the requirements for physician incentive plans in section 1876 (i) (8) of the Social Security Act, and at 42 CFR 417.479, or fails to submit to the ADMINISTRATION its physician incentive plans as requested in 42 CFR 434.70 The ADMINISTRATION will notify the INSURER in writing, the findings of the violation and the impending intention to impose intermediate sanctions for each violation which could consist of: monetary penalties at the discretion of the Administration may range from five hundred dollars $500 to twenty five thousand 86 dollars $25,000; or the resolution of the contract and temporary management; suspension, and/or with-holding of premium payments, which may range from a percent amount, or more than one monthly premium payments. The imposition of sanctions will depend on the extent and severity of the actions. At the sole discretion of the ADMINISTRATION and after affording the INSURER due process to submit a corrective action as established in paragraph (B), below, the ADMINISTRATION will deduct any amount it may deem adequate from the premium payments or any other administrative items of said payments. The Office of the Inspector General may impose civil money penalties of up to $25,000.00 in addition to, or in lieu of each determination by the ADMINISTRATION, or CMS, for non-compliance conduct as set forth on subparagraphs (a) through (f). The Secretary of the Department of Health and Human Services may seek the enforcement of felony charges, for violation regarding subparagraph (b), above. B. The INSURER will have the right to present and discuss its position regarding the ADMINISTRATION'S finding within thirty (30) days from the receipt of the notification. After such period expires the Administration will issue its decision regarding the contemplated sanctions which could be (i) let stand the initial determination, (ii) modify the sanction or (iii) eliminate the sanction if the Insurer has taken affirmative corrective actions. Upon notifying the INSURER of the final decision, if in disagreement, the INSURER will have (30) days to request a hearing before the Administration. Upon the expiration of the thirty (30) days without invoking a formal hearing, or after the celebration of a hearing and after issuance of findings and recommendations of the hearing examiner, the decision will then become final, subject to the appeal process provided in section 12, Art. VI of Law 72, September 7, 1993, as amended. C. The ADMINISTRATION, shall appoint temporary management only if it finds that the INSURER has egregiously or repeatedly engaged in any of the stated practices on paragraph (A) of this article; or places a substantial risk on the health of enrollees; or there is a need to assure the health of an organization's enrollees during an orderly termination, reorganization of the Insurer or while improvements are being made to correct violations. The temporary management may not be removed until the INSURER assures the ADMINISTRATION that the violations will not recur. 6. If a contractor is found to be in non-compliance with the provisions on ARTICLE VII concerning affiliation with debarred or suspended individuals, the ADMINISTRATION: a) Shall notify the Secretary of non-compliance; 87 b) May continue the existing contract with the Insurer, unless the Secretary (in consultation with the Inspector General of the Department of Health Services directs otherwise); and, c) May not review or otherwise extend the duration of an existing contract with the INSURER unless the Secretary (in consultation with the Inspector General of the DHHS) provides to the ADMINISTRATION and to Congress a written statement describing compelling reasons that exist for renewing or extending the contract. 7. Notwithstanding the provisions set in this Article, the ADMINISTRATION reserves the right to terminate this contract, as established in Article XXXIII. ARTICLE XXXVIII HOLD HARMLESS CLAUSE 1. The INSURER warrants and agrees to indemnify and save harmless the ADMINISTRATION from and against any loss or expense by reason of any liability imposed by law upon the ADMINISTRATION and from and against claims against the ADMINISTRATION for damages because of bodily injuries, including death, at any time resulting therefrom, accidents sustained by any person or persons on account of damage to property arising out of or in consequence of the performance of this contract, whether such injuries to persons or damage to property are due or claimed to be due to any negligence of the INSURER, the INSURER's participating providers, the HCO's, the HCO's network of participating providers, their agents, servants, or employees or of any other person. 2. The INSURER warrants and agrees to purchase insurance coverage to include Contractual Liability Coverage incorporating the obligations herein assumed by the INSURER with limits of liability which shall not be less than one (1) million dollars with said insurance coverage providing for the INSURER's obligation and the insurance company of INSURER to defend and appear on behalf of the ADMINISTRATION in any and all claims or suits which may be brought against the ADMINISTRATION on account of the obligations herein assumed by the INSURER. 88 ARTICLE XXXIX CENTERS FOR MEDICARE AND MEDICAID SERVICES CONTRACT REQUIREMENTS The ADMINISTRATION and INSURER agree and recognize that guidance and directives from the Centers for Medicare and Medicaid Services (CMS) are incorporated in contracts subject to its approval, such as the present one, and that they constitute binding obligations on the part of the INSURER. ARTICLE XL FORCE MAJEURE Whenever a period of time is herein prescribed for action to be taken by the INSURER, the INSURER shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, acts of God, shortages of labor or materials, war, terrorism, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of the INSURER. ARTICLE XLI YEAR 2000 CLAUSE The parties hereby assure that all hardware and software that it uses with respect to this Agreement are Year 2000 Compliant in accordance to CMS's Year Compliance definitions as stated in the RFP. The Parties acknowledge that this provision is an essential condition to this Agreement. ARTICLE XLII FEDERAL GOVERNMENT APPROVAL 1. Inasmuch as it is a requirement that the Centers for Medicare and Medicaid Services (CMS) approves this contract in order to authorize the use of federal funds to finance the health insurance contracted, the same may be subject to modifications in order to incorporate or modify the terms and conditions of this contract. 2. Any provision of this contract which is in conflict with any Federal Laws, Federal Medicaid Statutes, Health Insurance Portability and Accountability Act, Federal Regulations, or CMS policy guidance, as applicable, is hereby amended to conform to the provisions of those laws, regulations, and Federal policy. Such amendment of the contract will be effective on the effective date of the statutes or regulations necessitating it, and will be binding on the parties even though such amendment may not have been reduced to writing and formally agreed upon and executed by the parties. 89 ARTICLE XLIII ACKNOWLEDGMENT AS TO INSURER 1. All responsibilities, obligations, assurances and representations, made, taken, and assumed by the INSURER under this contract will be fully, solely, and entirely assumed by the INSURER. Notwithstanding, the ADMINISTRATION acknowledges that Triple-C will carry out the responsibilities as to the administration and operational management of the Health Insurance subject of this contract and that its officers are authorized to represent Triple-S, Inc. in matters related to be carried out. 2. The ADMINISTRATION acknowledges that the INSURER is in a corporate reorganizational process. The INSURER will notify the ADMINISTRATION the date when the reorganizational process is completed. The INSURER represents that the reorganizational process shall not constituted an assignment of this Contract. ARTICLE XLIV ENTIRE AGREEMENT The parties agree that they accept, consent and promise to abide by each and every one of the clauses contained in this contract and that the contract contains the entire agreement between the parties. In order to acknowledge so, they initial the margin of each of the pages and affix below their respective signatures, in San Juan, Puerto Rico, this 13 day of June 2002. PUERTO RICO HEALTH INSURANCE TRIPLE-S ADMINISTRATION by by /s/ Orlando Gonzalez Rivera /s/ Socorro Rivas - ----------------------------- ---------------------------------- ORLANDO GONZALEZ RIVERA SOCORRO RIVAS TRIPLE-C /s/ Luis A. Marini ---------------------------------- LUIS A. MARINI 90 EX-10.3 7 g77580exv10w3.txt CONTRACT FOR THE SOUTH-WEST REGION EXHIBIT 10.3 HEALTH INSURANCE CONTRACT SOUTH WEST HEALTH REGION Between THE PUERTO RICO HEALTH INSURANCE ADMINISTRATION and TRIPLE S, INC. July 1, 2002 CONTRACT This Agreement entered into this 13th day of June, 2002 at San Juan, Puerto Rico, by and between PUERTO RICO HEALTH INSURANCE ADMINISTRATION, a public instrumentality of the Commonwealth of Puerto Rico, organized under Law 72 approved on September 7, 1993, hereinafter referred to as the "ADMINISTRATION", represented by its Executive Director, ORLANDO GONZALEZ RIVERA, and TRIPLE-S, INC., a domestic corporation duly organized and doing business under the laws of the Commonwealth of Puerto Rico, with employer social security number 66-0229064 hereinafter referred to as the "INSURER", represented by its President, SOCORRO RIVAS. WITNESSETH In consideration of the mutual covenants and agreements hereinafter set forth, the parties, their personal representatives and successors, agree as follows: FIRST: The ADMINISTRATION has the responsibility to seek, negotiate, and contract with public and private insurers, health care insurance programs that eventually will be capable of providing all citizens that reside in the island of Puerto Rico access to quality health care services, regardless of their economic condition and capacity to pay. SECOND: Law 72 of September 7, 1993 dictates the express policy that empowers the ADMINISTRATION to seek, negotiate and contract health insurance programs that will allow its beneficiaries access to quality health services, in particular the medically indigent and the public employees of the Central Government and pensioners. THIRD: The ADMINISTRATION published a Request For Proposals for the SOUTH WEST Health Area/Region, seeking to provide health insurance coverage to all eligible beneficiaries in said health Area/Region, by contracting with private insurers. FOURTH: Pursuant to the terms of the aforementioned Request For Proposals, published on April, 2002 different private health insurers submitted to the ADMINISTRATION proposals to underwrite the health insurance for the Health Area/Region. FIFTH: The proposals submitted by the proposing insurers were thoroughly evaluated by a Evaluation Committee, as well as an Administrative Evaluation Committee within the ADMINISTRATION, as a result of which, a recommendation was presented to the Board of Directors of the ADMINISTRATION. SIXTH: The Board of Directors of the ADMINISTRATION, after a careful and complete analysis of all technical and administrative elements of the proposals, decided to award the INSURER the contract to underwrite and administer the health insurance for the SOUTH WEST Health Area/Region, composed of ADJUNTAS, GUANICA, GUAYANILLA, JAYUYA, PENUELAS, PONCE and YAUCO. 1 SEVENTH: The benefits to be provided under the plan offered by the INSURER are divided in three types of coverage: 1) the Basic Coverage that includes preventive, medical, hospital, surgical, diagnostic tests, clinical laboratory tests, x-rays, emergency room, ambulance, maternity and prescription drug services; 2) Dental Coverage based on the free choice of participating dentists from INSURER's network, and 3) the Special Coverage that includes benefits for catastrophic conditions, expensive procedures and specialized diagnostic tests. Benefits shall be provided by the INSURER in strict compliance with Law Number 72 of September 7, 1993, as amended, which is made part of this contract, the terms and conditions contained in Addenda I, II, III, and IV of this contract, and subject to the following: TERMS AND CONDITIONS ARTICLE 1 DEFINITIONS ACCESS: Adequate availability of all necessary health care services included in the plan being contracted to fulfill the needs of the beneficiaries of the program. ADMINISTRATION: Puerto Rico Health Insurance Administration. ADVANCE DIRECTIVES: A written instruction such as a living will or durable power of attorney for health care, recognized under the laws of the Commonwealth of Puerto Rico (whether statutory or as recognized by the courts of the Commonwealth), relating to the provision of health care when the individual is incapacitated. ANCILLARY SERVICES (Ancillary Charges): Supplemental services, including laboratory, radiology, physical therapy, and inhalation therapy, which are provided in conjunction with medical or hospital care. ASSMCA - Mental Health and Substance Abuse Administration: Spanish acronym for the Puerto Rico Mental Health and Substance Abuse Administration, the state agency that has been delegated the responsibility for the planning, establishment of mental and substance abuse policies and procedures, the coordination, development and monitoring of all mental health and substance abuse services rendered to beneficiaries under the Puerto Rico Health Insurance Program. BENEFICIARY: Any person that under Law 72 of September 7, 1993 is determined eligible to receive services, is reported as such to the INSURER by the ADMINISTRATION, and is enrolled in the plan. 2 CAPITATION: That portion of the premium paid to the INSURER which is disbursed to the HCO in payment for all the benefits provided under the Basic Coverage to the beneficiaries who have selected said HCO, as hereinafter defined. CO-INSURANCE: Percentage based participation of the beneficiary on each loss or portion of the cost of receiving a service. CONTRACT: The present contractual relationship between the ADMINISTRATION and the INSURER, and to which, 1) Law 72 of September 7, 1993, 2) the Request For Proposal, 3) the INSURER's Proposal documents, 4) the representations and assurances provided at the clarification meeting and 5) all other certifications issued by the INSURER following said clarification meeting, are herein incorporated by reference. All of the five (5) preceding set of documents are integral parts of this contract. CONTRACT TERM: The contract term is for three consecutive twelve (12) month periods after the effective date of this contract. The contract may be terminated at the conclusion of each twelve month period pursuant to Article XXVIII (3) (4). CMS: Acronym for the Centers for Medicare and Medicaid Services. DEDUCTIBLE: A fixed amount that the beneficiary has to pay to the provider as part of the cost of receiving a health care service, as provided in Addendum I of this contract. ELECTIVE SURGERY: A surgical procedure that, even though medically necessary and prescribed by a physician, does not need to be performed immediately because no imminent risk to life, permanent damage of a vital organ or permanent impairment is present, and which therefore can be scheduled. EMERGENCY MEDICAL CONDITION: (Prudent Layperson Standard) a medical condition presenting symptoms of sufficient severity that a person with average knowledge of health and medicine would reasonably expect the absence of immediate medical attention to result in (i) placing their health or the health of an unborn child in immediate jeopardy, (ii) serious impairment of bodily functions, or (iii) serious dysfunction of any bodily organ or part. ENCOUNTER: A contact between a patient and health professional during which a service is provided. An encounter form records selected identifying, diagnostic and related information describing an encounter. FAMILY CONTRACT: The benefits provided to the following eligible beneficiaries; 1) principal subscriber; and 2) his or her spouse (legally married or common law); and 3) his or her children (legally, adopted, foster or step children) under 21 years old that depend on the principal subscriber for subsistence; and 4) individuals under 21 years of age who have no children and live in common law with one of the eligible children in the same household; and 5) his or her dependents, of any age, who are blind or permanently disabled and live in the same household. Female beneficiaries (except 3 spouse) covered under family contract who become pregnant shall constitute a separate subscriber under an individual contract as of the first day of the month the pregnancy is diagnosed and reported to the INSURER. HEALTH CARE ORGANIZATION / HCO: A health care entity supported by a network of providers and which is based on a managed care system and accessed through a primary care physician (PCP). Said entity has contracted with the insurer to provide, in adequate facilities, the benefits provided for within the Basic Coverage or the Basic and Special Coverage of the health insurance contract. For the purpose of this contract the HCO will be identified by its descriptive name such as Primary Care Center, Physician Hospital Organization (PHO), Independent Practice Association (IPA), Primary Provider Group (PPG), or any other model. The INSURER is responsible for the availability of all necessary providers to cover both the basic and the special coverage. HEALTH AREA/REGION: The SOUTH WEST Health Area/Region as defined by the ADMINISTRATION, composed of ADJUNTAS, GUANICA, GUAYANILLA, JAYUYA, PENUELAS, PONCE AND YAUCO. HIPAA: The Health Insurance Portability and Accountability Act is federal legislation (Public law 104-191) approved by Congress in August 21, 1996 regulating the continuity and portability of health plans, mandating the adoption and implementation of administrative simplification standards to prevent, fraud, abuse, improve health plan overall operations and guarantee the privacy and confidentiality of individually identifiable health information. INDIVIDUAL CONTRACT: The benefits provided to eligible subscribers that are: 1) children, adolescents and unmarried single adults without minor dependents; or 2) married adults whose spouse and/or dependents are not eligible for coverage under this program; or 3) Female beneficiaries (except spouse) covered under family contract who become pregnant as of the first day of the month the pregnancy is diagnosed and reported to the INSURER. INDIVIDUAL PRACTICE ASSOCIATION (IPA): A managed care delivery model in which the INSURER contracts with a physician organization which, in turn, contracts with individual physicians. The IPA physicians practice in their own offices and continue to see their fee-for-service patients. This type of system combines prepayment with the traditional means of delivering health care, a physician office/private practice. For the purpose of this contract, an IPA will be considered a Health Care Organization (HCO). INSURER: TRIPLE-S, INC, is a private entity which meets the definition of a managed care organization (MCO), previously known as a state defined HMO, has a comprehensive risk contract primarily for the purpose of providing health care services, making the services it provides accessible (in terms of timeliness, amount, duration and scope) as those services are to other non-Medicaid recipients within the Area/Region 4 served by the entity and meets the solvency standards under the law as a state licensed risk-bearing entity. MANAGED BEHAVIORAL HEALTH ORGANIZATION (MBHO): An entity constituted by Mental Health Participating Providers and organized with the purpose of negotiating contracts to provide mental health and substance abuse services. MEDICARE: Federal health insurance program for people 65 or older, people of any age with permanent kidney failure, and certain disabled people according to Title XVIII of the Social Security Act. Medicare has two parts: Part A and Part B. Part A is the hospital insurance that includes inpatient hospital care and certain follow up care. Part B is medical insurance that includes doctor services and many other medical services and items. A Medicare recipient is a person who has either Part A or Part A and B insurance. MEDICARE BENEFICIARY: Any person who is a Medicare recipient of Part A or Part A and B and complies with the definition of beneficiary established in this article. MEDICALLY NECESSARY SERVICES: Shall mean services or supplies provided by an institution, physician, or other providers that are required to identify or treat a beneficiary's illness, disease, or injury and which are: a. Consistent with the symptoms or diagnosis and treatment of the enrollee's illness, disease, or injury; and b. Appropriate with regard to standards of good medical practice; and c. Not solely for the convenience of an enrollee, physician, institution or other provider; and d. The most appropriate supply or level of services which can safely be provided to the enrollee. When applied to the care of an inpatient, it further means that services for the enrollee's medical symptoms or condition require that the services cannot be safely provided to the enrollee as an outpatient; and e. When applied to enrollees under 21 years of age, services shall be provided in accordance with EPSDT requirements including federal regulations as described in 42 CFR Part 441, Subpart B, and the Omnibus Budget Reconciliation Act of 1989. MENTAL HEALTH FACILITIES: Any premises (a) owned, leased, used or operated directly or indirectly by or for the Managed Behavioral Health Organization (MBHO) or its affiliates for purposes related to this Agreement; or (b) maintained by a subcontractor or provider to provide mental health services on behalf of the Managed Behavioral Health Organization. MENTAL HEALTH CARVE-OUT: Specified psychiatric, behavioral, and substance abuse services covered under the Puerto Rico Health Insurance Plan provided through a contract with a separate entity. 5 NON-PARTICIPATING PROVIDER: All health care service providers that do not have a contract in effect with the INSURER. Said provider is barred from providing services under this contract. PARTICIPATING PHYSICIAN: A doctor of medicine that is legally authorized to practice medicine and surgery within the Commonwealth of Puerto Rico and has a contract in effect with the INSURER. PARTICIPATING PROVIDER: All health care service providers that have a contract in effect with the INSURER. PBM: Acronym for Pharmacy Benefits Manager. PERSON WITH AN OWNERSHIP OR CONTROL INTEREST: A person or corporation that: owns, directly or indirectly five percent (5%) or more of the insurer's capital or stock or receives five percent (5%) or more of its profits; has an interest in any mortgage, deed of trust, note, or other obligations secured in whole or in part by the insurer or by its property or assets, and that interest is equal to or exceeds five percent (5%) of the total property and assets of the insurer; or is an officer or director of the INSURER. PHARMACY BENEFITS MANAGER: The private entity contracted by the ADMINISTRATION under the Health Reform Program to function as their pharmaceutical benefit manager responsible, for claims processing, drug utilization review, disease management, formulary control and beneficiary/customer information services for pharmaceutical benefits provided by the basic, special and mental health coverage of the Health Reform Program. PHYSICIAN INCENTIVE PLAN: Any compensation arrangements between INSURER and physician or physician groups that may directly or indirectly have the effect of reducing or limiting services furnished to Medicaid recipients enrolled with the insurer. PRE-AUTHORIZATION: A written or electronic approval by the INSURER to the beneficiary granting authorization for a benefit to be provided under the Special Coverage of the program. The beneficiary is responsible for obtaining the pre-authorization for coverage in order to receive covered benefits that require it. Failure to obtain pre-authorization precludes coverage. Notwithstanding the aforementioned, the INSURER has the option of not requiring pre-authorization for all services received within a particular HCO. PREMIUM: The monthly amount that the ADMINISTRATION agrees to pay to the INSURER as a result of having assumed the financial risk for providing the benefits to the beneficiaries covered. Method of payment is referred to hereunder as per member per month (PMPM). 6 PRIMARY CARE PHYSICIAN (PCP): A doctor of medicine legally authorized to practice medicine and surgery within the Commonwealth of Puerto Rico, who initially evaluates and provides treatment to beneficiaries. He/she is responsible for determining the services required by the beneficiaries, provides continuity of care, and refers the beneficiaries to specialized services if deemed medically necessary. Primary physicians will be considered those professionals accepted as such in the local and federal jurisdictions. The following are considered primary care physicians: Pediatricians, Obstetrician/Gynecologist, Family Physicians, Internists and General Practitioners. Each female beneficiary with a pregnancy factor has to select an obstetrician-gynecologist as her primary care physician. Once the pregnant woman completes her maternity care period, she will be allowed to continue with her primary care physician. PROVIDER: An individual or entity that is authorized under the laws of the Commonwealth of Puerto Rico to provide health care services. PRICO: Acronym for the Puerto Rico Insurance Commissioner's Office, the state agency responsible for regulating, monitoring, and licensing insurance business in Puerto Rico. SECOND MEDICAL OPINION: A consultation with a peer requested by the beneficiary, the HCO, a Participating Physician or the INSURER to assess the appropriateness of a previous recommendation for surgery or medical treatment. SECONDARY or SPECIALTY PHYSICIAN: A physician such as a dermatologist, urologist or cardiologist, who provides professional services on a referral from a Primary Care Provider. SUBSCRIBER: The beneficiary covered under the individual coverage of the plan or the principal beneficiary who grants eligibility to all those beneficiaries included under the family coverage. SUPPORT PARTICIPATING PROVIDERS: Health care service providers who are needed to complement and provide support services to the Primary Care Physicians and who have a contract with the INSURER to provide said services. A referral from the Gatekeeper is necessary. The following will be considered support participating providers, among others: Pharmacies, Hospitals, Health Related Professionals, Clinical Laboratories, Radiological Facilities, Podiatrists, Optometrists, and all those participating providers that may be needed to provide services under the basic and special coverage considering the specific health problems of the Area/Region. SUPPORT PARTICIPATING PHYSICIANS: Doctors of Medicine legally authorized to practice medicine and surgery within Puerto Rico who are needed to complement and provide support services to the Primary Care Physicians and who have a contract with the INSURER to provide said services. A referral from the PCP is necessary. 7 QUALITY IMPROVEMENT (QI): The ongoing process of responding to data gathered through quality monitoring efforts, in such a way as to improve the quality of health care delivered to individuals. This process necessarily involves follow-up studies of the measures taken to effect change in order to demonstrate that the desired change has occurred. UTILIZATION MANAGEMENT (UM): The process of evaluating necessity, appropriateness and efficiency of healthcare services through the revision of information about hospital, service or procedure from patients and/or providers to determine whether it meets established guidelines and criteria approved by the INSURER. ORGANIZATION AND ADMINISTRATION INSURER must maintain the organizational and administrative capacity and capabilities to carry out all duties and responsibilities under this contract. INSURER must maintain assigned staff with the capacity and capability to provide all services to all Beneficiaries under this contract. INSURER must maintain an administrative office in the service area (local office). The local office must comply with the American with Disabilities Act (ADA) requirements for public buildings. INSURER must provide training and development programs to all assigned staff to ensure they know and understand the service requirements under this contract including the reporting requirements, the policies and procedures, cultural and linguistic requirements and the scope of services to be provided. The training and development plan must be submitted to THE ADMINISTRATION. INSURER must notify THE ADMINISTRATION immediately no later than 30 days after the effective date of this contract of any changes in its organizational chart as previously submitted to THE ADMINISTRATION. INSURER must notify THE ADMINISTRATION immediately (within fifteen (15) working days) of any change in regional or office managers. This information must be updated whenever there is a significant change in organizational structure or personnel. ARTICLE II ELIGIBILITY AND ENROLLMENT 1. Eligibility shall be determined according to Article VI, Section 5 of Law 72 of September 7, 1993 and the federal laws and regulations governing eligibility requirements for the Medicaid Program. 2. The INSURER shall provide coverage for all the eligible beneficiaries as provided in the prior section. 8 3. The INSURER shall inform beneficiaries, who are also Medicare recipients with Part A or Part A and B, at the time of enrollment that if they choose to become beneficiaries under the contracted health insurance, the benefits provided under said contract will be accessed exclusively through the primary care physician. In this situation: a) bad debt reimbursement, as a result of non-payment of deductibles and/or co-insurance, for covered Part A services and Part B services provided in hospital setting, other than physician services; b) payment for covered Part A services; c) payment for Part B outpatient services provided in a hospital setting; and d) all covered Part B services, will continue to be recognized as a covered reimbursable Medicare Program cost. Medicare beneficiaries with either Part A or Part A and B can choose to access their Part A or Part B services from the Medicare's providers list except that in this case the INSURER will not cover the payment of any benefits provided through this contract. 4. The INSURER represents that neither the capitated amount paid to each HCO nor the fee for service amount paid to all providers includes payment for services covered under the Medicare Federal Program. The primary care physicians, the participating providers or any other physician contracted on a salary basis cannot receive duplicate payments for those beneficiaries that have Medicare Part A or Part B coverage. The INSURER further represents that it will audit and review its billing data to avoid duplicate payment with the Medicare Program. The INSURER shall report its findings to the ADMINISTRATION on a quarterly basis. The ADMINISTRATION will audit and review Medicare billing data for Part A or Part B payment for beneficiaries eligible to said Federal Program. 5. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service through the amount paid to the HCO, when services are accessed through the primary care physician. 6. The INSURER guarantees to maintain adequate services for the Health Area/Region for the prompt enrollment of all eligible beneficiaries on a daily basis and in the order of their application. The INSURER shall maintain sufficient facilities within the Area/Region as needed. The subscriber shall be responsible for visiting the designated facility in order to complete all requirements towards enrollment. The INSURER shall enroll the beneficiary(ies) and issue the official identification card(s) on the same day that the subscriber completes the enrollment requirements. Initial orientation and enrollment will be conducted 9 pursuant to the Instructions to Insurers for Implementation of Orientation and Subscription Process contained in Addendum II. 7. The INSURER shall be responsible to provide the subscriber with specific information allowing for the prompt and reliable enrollment of all eligible individuals. The ADMINISTRATION shall notify the INSURER on a daily basis of all beneficiaries who have become eligible, as well as those who have ceased to be eligible. The INSURER shall guarantee the maintenance, functionality, and reliability of all necessary systems to allow enrollment or disenrollment of subscribers. 8. The beneficiary becomes eligible for enrollment as of the date specified in the ADMINISTRATION's notification to the INSURER. 9. The beneficiary ceases to be eligible as of the disenrollment date specified in the ADMINISTRATION's notification to the INSURER. If the ADMINISTRATION notifies the INSURER that the beneficiary ceased to be eligible on or before the last working day of the month in which eligibility ceases, the disenrollment will be effective on the first day of the following month. Disenrollment will be effected exclusively by a notification issued by the ADMINISTRATION. 10. If, following disenrollment, a beneficiary's contract is reinstated and the beneficiary is re-enrolled on the same month of disenrollment, the contract will be reinstated as of the date of re-enrollment. 11. The INSURER agrees to maintain active enrollment for those beneficiaries reported eligible by the ADMINISTRATION. Notification of eligible persons will be made through electronic transmissions or machine readable media. The ADMINISTRATION will forward this data to the INSURER in the format agreed to by both parties in accordance with the Daily Update/Carrier Eligibility File Format as required in the RFP. 12. Coverage under the plan shall begin the day that the enrollment process has been completed. The INSURER will guarantee that it will be ready to notify the ADMINISTRATION of all newly enrolled beneficiaries through electronic or magnetic media on a daily basis upon the Administration's request. This notification will include all new beneficiaries as of the day before the notification is issued and will be sent to the ADMINISTRATION no later than the following working day after the enrollment process has been completed. Premiums shall be paid on a pro-rata basis as of the date that the enrollment process was completed and the official identification card has been issued, to the end of the month, as specified in the INSURER's notification to the ADMINISTRATION. Premium payments, if applicable, for newborn of beneficiaries will accrue as of the date of birth of the child in the event that the enrollment process of said new beneficiary is completed. Premium payments shall be paid retroactively to the INSURER upon enrollment of the newborn. The INSURER will be required to pay 10 the providers for the services rendered to an unenrolled newborn during ninety (90) days from the date of birth. The INSURER, PCP or HCO will provide orientation to the beneficiary as soon as a baby is born to go to the INSURER's office with the necessary documentation to receive a manual certification from the INSURER for the newborn. The INSURER, PCP or HCO will make every effort to make the beneficiary go to the Department of Health Medicaid Office to register the newborn within the ninety (90) days of his/her date of birth. It should be emphasized to the beneficiary that failure to register the newborn within that period will cause the newborn to loose coverage. After the 90 days period, the INSURER will not be paid premiums if the newborn is not enrolled. In the case in which a newborn dies before being registered at the Medicaid Office, the INSURER must provide ASES with proof of the birth and of the death of the newborn. ASES will then pay premiums for the period from the birth of the newborn until his death. In the case in which the family unit ceases to be eligible before the newborn is registered at the Medicaid Office, the INSURER must provide ASES with proof of the birth of the newborn. ASES will then pay premiums from the date of birth of the newborn until the termination of eligibility of the family. 13. In case that an individual has been certified as eligible by the Department of Health but has not completed the enrollment process, and he/she or his/her dependents need emergency services, the ADMINISTRATION shall verify the eligibility status of the individual. If the individual is eligible as a beneficiary, emergency services will be provided as if the individual is a beneficiary and arrangements for the issuance of the identification card will be made immediately after the notification of eligibility is made by the ADMINISTRATION to the INSURER. The premium in this instance will be paid to the INSURER on a prorata basis from the moment the emergency services needed are provided or the identification card is issued, whichever is first. For the purpose of this situation, the enrollment process is the process that commences at the time that the ADMINISTRATION gives notice to the INSURER of the beneficiaries eligibility status, and results in a letter to said beneficiary establishing the date and location for the completion of the enrollment documents and selection of the HCO. Said process ends when the beneficiary has selected an HCO from those available in the Health Area/Region and has received an identification card. Nothing provided in this section is intended to affect a provider's obligation to screen and stabilize an individual arriving at its facilities for emergency treatment as defined by EMTALA and the applicable Commonwealth laws. 11 14. Coverage shall end effective on the date of disenrollment. Premiums will be paid until the effective date of disenrollment. In the event of disenrollment while the beneficiary is an inpatient of a hospital on the last day of the month of coverage, and continues to be an inpatient of a hospital during the month following his disenrollment, the ADMINISTRATION will cover the payment of the premium for that following month. If the beneficiary remains hospitalized in subsequent months, the conversion clause will apply for the months after the one being paid by the ADMINISTRATION it being the INSURER's responsibility to assure that premiums are paid. Disenrollment will be effected exclusively by a notification issued by the ADMINISTRATION. 15. In the event that a female beneficiary, included as a dependent in a family group, other than as the spouse, becomes pregnant, that beneficiary will be transferred to a new family and become the head of household of the new family. The effective date of the new family will be the date of the first diagnosis of the pregnancy. Such beneficiary has the right to all the services under maternity coverage. At the time of being diagnosed as pregnant, the physicians, the HCO and/or the INSURER are required to provide orientation to the beneficiary towards certifying with the Department of Health Medicaid Office and to present herself at the INSURER to have a membership card issued. 16. The INSURER shall not in any way discriminate nor terminate coverage of any beneficiary(ies) for reasons due to adverse change in recipient's health, or based on expectations that an enrollee will require high cost care, or need of health services, or any reason whatsoever, except for non-payment of premiums or fraudulent use of benefits or participation of fraudulent acts, after prior notification and consultation with the ADMINISTRATION. 17. The INSURER agrees to maintain an Enrollment Data Base which: a) includes each subscriber and all beneficiaries; b) contains for each subscriber and beneficiary the information technically defined in the (Carrier Billing File/Carrier Eligibility File) formats contained in RFP. 18. The INSURER will secure on the date of enrollment a signed statement from the subscriber authorizing the Federal Government, the INSURER, the ADMINISTRATION and/or their designees to review the medical record of the subscriber and other beneficiaries, in order to determine quality, appropriateness, timeliness and cost of services performed under this contract. The terms, content and specifications of said authorization shall be consistent with the standards set forth in 45CFR 164.508 et seq., part of the regulations of the Health Insurance Portability and Accountability Act (HIPAA). 12 19. All individually identified information of services related to beneficiaries which is obtained by the INSURER shall be confidential and shall be used or disclosed by the INSURER, the HCO and/or its participating providers only for purposes directly connected with performance of all obligations contained in this contract. Medical records and management information data concerning any beneficiary enrolled pursuant to this contract shall be confidential and shall be disclosed within the INSURER's organization or to other persons, as authorized by the ADMINISTRATION, only as necessary to provide medical care and quality, peer or grievance review of such medical care under the terms of this contract and in coordination with the mental health carve-out contract subscribed by ASSMCA and the ADMINISTRATION. The confidentiality provisions herein contained shall survive the termination of this contract and shall bind the INSURER, its HCO's and the INSURER's participating providers as long as they maintain any individually identifiable information relating to beneficiaries as provided in the implementation of the HIPAA regulation schedule to be set forth by the Federal Government, 45 CFR 164.102 et. seq. Any request for information which is made by third parties not related to this contract will be forwarded to the ADMINISTRATION for consideration, review and decision as to the pertinence of the request and the authorization for disclosure. Nothing in this section shall limit or affect the ADMINISTRATION's, the INSURER and/or providers obligations regarding protected individually identifiable health information as provided in 45 CFR 164.102 et seq. (HIPAA) regulations. Disclosure of individually identifiable health information to any business associate as defined in 45 CFR 164.504(e) of the HIPAA regulations by the INSURER shall entail the legal obligations set forth therein. 20. The INSURER agrees to notify the ADMINISTRATION immediately of any change in the place of residence of the subscriber, insofar as the subscriber makes the change known to the INSURER. Address changes will be forwarded through electronic and/or machine-readable media as referred in paragraph sixteen. 21. The INSURER agrees to implement a program whereby eligible beneficiaries are properly advised of the date of termination of their eligibility so as to assure that they complete the recertification process prior to said date. Said program should provide for an initial notice of the termination date at least ninety (90) days prior to the effective date of the eligibility termination. 22. The INSURER hereby commits to comply with the electronic transactions, security and privacy requirements of the HIPAA regulations as provided in 45CFR 160 and 142 et seg. within the implementation dates set forth therein or by subsequent regulations schedule. 13 23. DISENROLLMENT The INSURER has a limited right to request a beneficiary be disenrolled from INSURER without the beneficiary's consent. THE ADMINISTRATION must approve any INSURER request for disenrolling a beneficiary for cause. Disenrollment of a beneficiary may be permitted under the following circumstances: (a) Beneficiary misuses or loans his/her membership card to another person to obtain services. (b) Beneficiary is disruptive, unruly, threatening or uncooperative to the extent that beneficiary's membership seriously impairs INSURER's or provider's ability to provide services to beneficiaries or to obtain new beneficiaries, and beneficiary's behavior is not caused by a physical or other mental health condition. The INSURER must take reasonable measures to improve a beneficiary's behavior prior to requesting disenrollment and must notify beneficiary of its intent to disenroll. Reasonable measure may include providing education and counseling regarding the offensive acts or behavior. INSURER must notify the beneficiary of the INSURER's decision to disenroll after reasonable measures have failed to remedy the problem. If the beneficiary disagrees with the decision to disenroll the beneficiary from INSURER, the beneficiary must be notified of the availability of the Complaints and Grievances Procedure and the ADMINISTRATION's fair hearing process, as provided by Law 72 of September 7, 1993, as amended. ARTICLE III RIGHT TO CHOOSE 1. Each principal subscriber shall have the right to select an HCO from those available in the health Area/Region which at no time will be less than two (2) HCO's at each municipality, one of which has to be a privatized or non-privatized government or municipal facility if available, and subject to compliance with INSURER's requirements for HCO's. The selection of the HCO and primary care physician will be made by the beneficiaries at the INSURER's local or regional offices. The right of beneficiaries to transfer or change from an HCO shall be made at any time without cause during the first 90 days following the date of the 14 beneficiary's initial enrollment or the date of enrollment notice is sent, whichever is later, and at most once every twelve (12) months thereafter. The following examples are considered causes for disenrollment: (1) the beneficiary moves out of the area of service of the HCO and is not within a reasonable distance from the area of the service of the HCO; (2) the HCO does not cover the service because of moral and religious objections; (3) the beneficiary needs related services to be performed at the same time; not all related services are available within the network; and the beneficiary's primary care provider or another provider determines that receipt of services separately would subject the beneficiary to unnecessary risk; and, (4) other reasons, including but not limited to, poor quality of care, lack of access to services and lack of access to experienced providers dealing with the beneficiary's health care needs. The beneficiary shall receive proper written notification at least 60 days prior to the end of each 12 month enrollment period from the INSURER. 2. Each HCO will have available at least one of each specialist considered a primary care physician and shall meet the specification of the ratio specified in Article VI, and will have a sufficient number of primary care physicians to provide health care services to all beneficiaries according to the ratio specified in Article VI. Furthermore, the INSURER will provide to each HCO a network with a sufficient number of participating providers to render all services included under the basic, special and dental coverage to beneficiaries pursuant to the ratio specified in Article VI. 3. The beneficiary shall have the right to choose his or her primary care physician from those available within the HCO selected by the principal subscriber. Said right also encompasses the change of the selected primary physician at any time by making the proper administrative arrangements within the HCO in conformity with the HCO's established policy. The selected primary care physician or the substitute on-duty primary care physician within the HCO must be available on a 24 hour basis for emergencies and/or telephone consultations. Each HCO must have available all of the primary care physicians (family physicians, internists, general practitioners, pediatricians and obstetrician-gynecologist) subject to waivers in case of unavailability of a specific provider. 4. A primary care physician can only act as such in only one (1) municipality within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 5. A primary care physician can only act as such in only one (1) HCO within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 15 6. Each female beneficiary may select (i) primary care physician, or (ii) primary care physician and obstetrician-gynecologist as her primary care physician. If the female is pregnant, the obstetrician-gynecologist automatically will become the primary care physician; if one is not previously selected, she will then have to choose an obstetrician-gynecologist as her primary care physician. Once the pregnant woman completes her maternity care period, she will be allowed to continue with her original primary care physician. 7. Any subscriber may change the selected HCO subject to the provisions of Section I, above. If the request for a change of HCO is filed with the INSURER on or before the fifth day of a month, the change of HCO will become effective on the first day of the following month. If the change is filed after the fifth day of the month, the change of HCO will be effective on the first day of the second succeeding month. Selection guidelines are contemplated in Article VI, paragraph 3 of this contract. 8. The beneficiary shall have the right to choose the provider to be referred to from those participating providers within the HCO's network that are under contract with the INSURER's for benefits covered under the Basic and Special Coverage. 9. Dental services will be provided through the INSURER's network of dentists for the health insurance services contracted. Each subscriber will have the right to select a dentist within the INSURER's network to receive dental services. The accepted dentist/beneficiary ratio is one (1) dentist for each one thousand three hundred fifty (1,350) beneficiaries. 10. In the event that HCO's under 330 Projects of the Rural Health Initiative have contracts with specialists, support participating providers, or support participating physicians, either on a fee-for-service basis or on a salary basis, the INSURER will be responsible for gathering and reporting all required data including the payment of services described in Article VII, Section five (5), Article XV, sections four (4) and eight (8), and the Claim File Layout formats as required in the RFP. 11. The INSURER will provide to each principal subscriber a complete list of all participating physicians and participating providers, with addresses and specialties or health related services offered, in order to allow the beneficiary to choose among them. 12. The beneficiary shall also have the right to choose the pharmacy according to applicable PBM guidelines established by the ADMINISTRATION and any other participating providers among those contracted by the ADMINISTRATION for basic and/or special coverage services, said guidelines to become effective sixty (60) days after notice to INSURER. The ADMINISTRATION will determine the acceptable pharmacy/beneficiary ratio in order to assure access to the pharmacy benefits. The right to choose requires the availability of sufficient number of pharmacies in each municipality of residence of the beneficiaries. 16 13. The INSURER will develop and effectively disseminate an education and orientation program in order to insure that all eligible beneficiaries are aware of their rights under this contract, including their right to choose physicians and providers. The ADMINISTRATION reserves the right to make changes, modifications and recommendations to said program in coordination and agreement with the INSURER. This program shall be subject to approval by the ADMINISTRATION prior to its implementation and in compliance with the marketing guidelines and prohibitions established in Article IX. 14. Notwithstanding the foregoing, the ADMINISTRATION shall preserve the right in coordination with INSURER, to expand, limit or otherwise amend the provision of services as provided for herein and/or to negotiate in coordination with the INSURER, cost saving and efficiency improvement measures. In those cases in which the ADMINISTRATION acts on its own, changes to the provision of services shall be notified to the INSURER no later than 30 days prior to implementation. Said modifications will take place after consultation and cost negotiation with the INSURER and prior approval by CMS. ARTICLE IV SECONDARY PAYOR 1. The INSURER shall be a secondary payor to any other party liable in any claim for services to a beneficiary, including but not limited to: the INSURER itself, Medicare, other insurers or managed care organizations, health maintenance organizations, non-profit INSURER's operating under law 152 approved May 9, 1942 as amended, "Asociacion de Maestros de Puerto Rico", medical plans sponsored by employee organizations, labor unions, and any other entity that results liable for the benefits claimed against the INSURER for coverage to beneficiaries. 2. It shall be the responsibility of the INSURER to ascertain that the aforementioned provisions of Law 72 of September 7, 1993 are enforced and that the INSURER acts as secondary payor to any other medical insurance. 3. The ADMINISTRATION and the INSURER will cooperate in the exchange of third parties health insurance benefits information. To this effect the INSURER will comply fully with the "Carta Normativa Numero N-E-5-95-98" issued by the Office of the Insurance Commissioner of Puerto Rico and the HIPAA regulations provisions cited elsewhere in this contract. 4. The INSURER will make the most diligent best efforts to determine if beneficiaries have third party coverage and will attempt to utilize such coverage when applicable. 17 The INSURER will be permitted to retain 100% of the collections from subrogation. The plan's experience will be credited with the amount collected from said primary payor, once payment is made and the INSURER recovers payments according to the corresponding transaction process established. If the provider detect that a beneficiary have other health plan coverage not identified in the beneficiary card, the provider will bill the primary payor and will provide the information to the INSURER. 5. The INSURER must report quarterly to the ADMINISTRATION the amounts collected from third parties for health services provided. Said reports must provide a detailed description of the beneficiary's name, contract number, third party payor name and address, date of service, diagnosis and provider's name and address and identification number. 6. The INSURER must report quarterly to the ADMINISTRATION the amounts collected from third parties for health services provided according with standard format to be adopted by the ADMINISTRATION. Said reports must provide a detailed description of the beneficiary's name, contract number, third party payor name and address, date of service, diagnosis and provider's name and address and identification number. 7. The INSURER shall develop specific procedures for the exchange of information, collections and reporting of other primary payor sources and is required to verify its own eligibility files for information on whether or not the beneficiary has private health insurance within the INSURER. 8. The INSURER must implement and execute an effective and diligent mechanism in order to assure the collection from primary payors of all benefits covered under this contract. Said program, mechanisms and method of implementation shall be reported to the ADMINISTRATION as of the first date of the effectiveness of this contract. 9. Failure of the INSURER to comply with this Article may, at the discretion of the ADMINISTRATION, be cause for the application of the provisions under Article XXXIII. ARTICLE V EMERGENCIES 1. In cases of emergency or immediate need of medical care within the Commonwealth of Puerto Rico, the INSURER will be responsible for the payment of emergency service provided to beneficiaries when the emergency or 18 immediate need of medical care occurs within its network or outside of its network or the geographical Area/Region of the selected HCO's emergency care facility. Such services must be paid by the INSURER regardless of whether the entity that furnishes the service has contracted with the INSURER and no prior authorization shall be required by the INSURER for the provision of emergency services. The INSURER will assume the payment of the medical screening examinations or other medically necessary emergency services, whether or not the patients meets the prudent layperson standard, in the event that the beneficiary's PCP or any INSURER representative or provider instructs them to seek emergency care within or out of its network area/region. Such services shall consist of whatever is necessary to stabilize the patient's condition, unless the expected medical benefits of a transfer outweigh the risk of not undertaking the transfer, and the transfer conforms with all applicable requirements. The stabilization services includes all treatment that may be necessary to assure within reasonable medical probability, that no material deterioration of the patients condition is likely to result from or occur during discharge of the patient or transfer of patient to another facility. In the event of a disagreement with the provider concerning whether a patient is stable enough in order to be discharged or transferred or whether the medical benefits outweigh the risk, the judgment of the attending physician caring for the enrollee will prevail and oblige the INSURER. Such services shall be provided in such a manner as to allow the subscriber to be stable for discharge or transfer as defined by EMTALA, in order to safely return the subscriber to the corresponding HCO, or to an appropriate participating provider for continuation of treatment. 2. Since emergency care is of utmost concern to the ADMINISTRATION, the INSURER shall require that adequate ambulance transportation and emergency medical care are available. Each municipality shall have access to an emergency care system composed of ground, air and maritime ambulance transportation as necessary, and emergency medical care. 3. Ambulance transportation and emergency care will be subject to periodic reviews by applicable governmental agencies to ensure the highest quality of services. 4. All participating providers shall provide immediate emergency care services to beneficiaries when requested. 5. Emergency care services as well as ambulance transportation services shall exist in each municipality comprising the health area/region, 24 hours a day, and 365 days yearly, operated by an HCO, or by other participating providers. 6. The INSURER and each HCO is required to provide access to emergency care and ambulance transportation services within their own facilities, through their contracted, participating providers or through contract with third parties that 19 guarantee said emergency care and ambulance transportation twenty four (24) hours a day, seven (7) days a week. 7. The INSURER will assure that each HCO makes the necessary arrangements to have readily available ambulance services in good mechanical condition and properly equipped, in order to assure a prompt and effective ambulance transportation service. 8. The INSURER or the HCO will establish Urgent Care Centers within the Health Area/Region. These include physician offices and clinics with extended hours. These Urgent Care Centers may complement emergency care services but at no time will they substitute the requirement to have emergency care services and ambulance transportation available at each municipality 24 hours a day, 7 days a week and 365 days yearly. 9. The INSURER will provide beneficiaries access to a 24-hour-a-day toll-free hotline with licensed qualified professionals to help beneficiaries with questions about particular medical conditions and to guide them to appropriate facilities (emergency rooms, urgent care centers, among others). Notwithstanding, the aforementioned statement, the beneficiary will have the right to choose to attend an emergency room if he believes his condition is an emergency medical condition, as defined in this contract, without prior need of authorization or certification. ARTICLE VI ACCESS TO BENEFITS 1. The INSURER will contract all available private providers that meet its credentialing process and agree to its contractual terms, in order to assure sufficient participating providers, to satisfy the demand of covered services by the beneficiaries enrolled in the program. Considering the expected mix between private patients and beneficiaries the accepted physician/beneficiary ratio will be 1:1,700 for primary care physicians; 1:2,200 for specialists and 1:1,600 for all physicians. In the event that the HCO's provides services only to beneficiaries under this contract, the physician/beneficiary ratio will be the same to that applicable when there is a mix between private patients and beneficiaries. The INSURER will assure compliance with said physician/beneficiary ratio. 2. The INSURER shall be responsible to contract all the necessary health care services and participating providers to insure that all the benefits covered under the Basic, Dental and Special Coverage of the plan are rendered, through the INSURER's participating providers with the timeliness, amount, duration and scope as those services are rendered to non-Medicaid recipients within the area/region served. 20 3. Every subscriber shall be able to select from at least two (2) HCO's with sufficient enrollment capacity in his or her municipality, one of which will be a privatized government facility, if available and subject to compliance with INSURER'S requirements for HCO's. Each subscriber shall also be able to choose the HCO outside his or her municipality of domicile as provided for in Article III, paragraph 1 of this contract. 4. A primary care physician can only act as such in only one (1) municipality within the Health Area/Region subject of this contract and must be available to attend the health care needs of the beneficiary on a twenty four (24) hour basis, seven (7) days a week. 5. Contracts between the INSURER and HCO's and between the INSURER and its participating providers shall be independent contracts specifically designed to cover all terms and conditions contained in this contract. Coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER'S participating providers to comply with all terms and conditions contained herein. 6. HCO enrollment shall be conditioned on the availability of adequate health care services. It shall be the INSURER's responsibility to maintain a constant assessment of the enrollment capacity of each HCO. Adequate health care services will be those determined acceptable under the ADMINISTRATION's Compliance Evaluation Program as outlined in Article XVII of this contract. 7. That INSURER shall be responsible for communicating to its participating providers the public policy that prohibits provider inquiries with the purpose of determining if the beneficiary is subject to the benefits provided under Law 72 of September 7, 1993. 8. The INSURER is responsible for the implementation, development and maintenance of an adequate system for referrals of health services under this contract. The referral system must be approved by the ADMINISTRATION and must be audited periodically by the INSURER and the ADMINISTRATION. In no way the INSURER, the HCO's or any participating provider or health organization will submit for approval, specialists referrals to any internal or external committee or will interfere, prohibit, or restrict any health care professional's advice within their scope of practice. 9. All referral systems must comply with timeframes established in paragraph (23). If the system developed by the INSURER is by electronic means, it must be installed at all primary care offices. It is unacceptable to force the beneficiary to move to another facility to obtain referrals. 10. The INSURER assures the ADMINISTRATION that no HCO'S or participating providers will impose limit quotas or restrain services to subcontracted providers 21 for the services medically needed (e.g. laboratory, pharmacies, or other services). 11. The INSURER shall expedite access to benefits of beneficiaries diagnosed with conditions under the Special Coverage. The identification of these beneficiaries will allow rapid access of the medical services covered under our Special Coverage. 12. Any denial, unreasonable delay or rationing of services to the beneficiaries is expressly prohibited. The INSURER shall require strict compliance with this prohibition by its participating providers or any other entity related to the rendering of medical care services to the beneficiaries. Any action in violation of this prohibition shall be subject to the provisions of Article VI, Section 6 of Law 72 of September 7, 1993. Furthermore, the INSURER shall be responsible for posting information at every HCO, addressed to the beneficiaries, stating the policy that prohibits denying, unreasonably delaying or rationing services by participating providers or any other entity related to the rendering of medical care services to the beneficiaries, and providing information on procedures for filing a grievance on the subject. The INSURER shall notify the HCO's and participating providers that they must comply with the policy that prohibits the denial, the unreasonable delay or the rationing of services by participating providers or any other entity rendering medical services to beneficiaries, and further that they must provide information on procedures for filing a grievance. The INSURER shall comply with the performance measures established and scheduled by the ADMINISTRATION. 13. The INSURER will ensure that HCO's and participating providers have a mix of patients distributed between private and eligible beneficiaries so as to avoid any possibility of discrimination by reason of medical indigence, whenever feasible. 14 No participating provider, or its agents, may deny a beneficiary access to medically necessary health care services, except for the reasons specified in Article VI, section 6 of Law 72 of September 7, 1993. 15. The INSURER is responsible for having an adequate number of participating physicians and providers to supply all the benefits offered in the Basic, Dental and the Special Coverage of the contracted health insurance. The benefits under the Basic, Special and Dental coverage will be provided to the beneficiaries at the location of the participating providers. 16. The INSURER is responsible to have available all participating providers needed in order to render all the medically necessary services required to provide the beneficiaries with the benefits included in the Basic, Dental and Special Coverage of the contracted health insurance as specified in Addendum I of this contract. 22 17. The INSURER agrees to require compliance by all participating physicians and providers with all provisions contained in this contract. 18. The INSURER has a continuous legal responsibility toward the ADMINISTRATION to assure that all activities under this contract are carried out. INSURER will use its best efforts to prevent unauthorized actions by HCO's or participating providers. INSURER will take appropriate measures to ensure that all activities under this Contract are carried out. Failure to properly discharge the obligation to assure, by all means necessary and appropriate, full compliance with said activities, shall result in the termination of this contract as provided in Article XXXIII hereof. 19. Pursuant to the Health Reform Concept of 1993, the INSURER shall contract as participating providers those Commonwealth owned facilities that have been privatized in the Health Area/Region by virtue of Laws 103 of July 12, 1985, and 190 of September 5, 1996, the 330 and 339 Projects, of the Rural Health Initiatives, those State owned facilities not privatized, as well as the privatized or non privatized municipally owned facilities in the different areas/regions and regions which will complement access to covered medical services, subject to its credentialing requirements and contractual terms. 20. The INSURER assures the ADMINISTRATION that physician and providers of services under this contract will provide the full range of medical counseling that is appropriate for beneficiary's condition. In no way the INSURER or any of its contractors may interfere, prohibit, or restrict any health care professional's advice within their scope of practice, regardless of whether a care or treatment is covered under the contract. 21. The INSURER assures the ADMINISTRATION that its Physician Incentive Plan does not in any way compensate directly or indirectly physicians, individual physicians, group of physicians or subcontractors as an inducement to reduce or limit medically necessary services furnished to individual enrollees and that it meets or exceeds the stop-loss protection and enrollee survey and disclosure requirements under the Social Security Act. The INSURER shall ensure that at the intermediate level all physician providers groups are afforded with adequate stop-loss protection within the required thresholds under the Medicaid Program regulations. 22. The INSURER assures that it will provide an adequate stop-loss insurance set at no more than ten thousand ($10,000) dollars to protect physicians from loss and comply with to the risk thresholds established under sections 42CFR 422.208. In the event, INSURER places physicians at substantial risk it shall conduct enrollee/disenrollee surveys not later than one year after the effective date of the contract and at least annually thereafter. 23 23. Timeframes for Access Requirements. INSURER must have sufficient network of providers and must establish procedures to ensure beneficiaries have access to routine, urgent, and emergency services; telephone appointments; advice and Beneficiaries service lines. These services must be accessible to beneficiaries within the following timeframes: - Urgent Care within 24 hours of request; - Routine care within 2 weeks of request; - Physical/Wellness Exams for adults must be provided within 8 to 10 weeks of the request; - Referrals: Appointments of referrals must be delivered and notified to beneficiaries within five (5) days from the date prescribed by the provider. The services required must be delivered or rendered within a reasonable period as medically needed by the beneficiary, in a time frame which may not exceed thirty (30) days from the time of the appointment, except in cases were the particular nature of specialist services require additional waiting time because of unavailability of a specialty service. 24. INSURER must establish policies and procedures to ensure access to EPSDT Checkups be provided within ninety (90) days of new enrollment, except that newborn beneficiaries should be seen within two (2) weeks of enrollment, and that in all cases, and for all beneficiaries such policies and procedures be consistent with the American Academy of Pediatrics and EPSDT periodicity schedule which is based on the American Academy of Pediatrics schedule and the guidelines established by the ADMINISTRATION. The INSURER must advice the beneficiary of his right to have a checkup. ARTICLE VII CONTRACTS WITH HCO'S AND ALL PARTICIPATING PROVIDERS 1. All services necessary to provide beneficiaries the benefits of the Basic, Special and Dental Coverage shall be contracted in writing with all participating providers. The INSURER will ensure that all provisions and requirements contained in this contract are properly included in the contracts with the HCO's and with all participating providers and that they are carried out by said HCO's and participating providers. Such provisions and requirements made part of these contracts will be properly notified to the ADMINISTRATION. Coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. 24 2. The INSURER may not discriminate with respect to participation, reimbursement or indemnification as to any provider who is acting within the scope of the provider's license or certification under applicable Commonwealth Law. 3. The INSURER agrees to draft, execute and enforce a specific contract between the INSURER and the HCO and between the INSURER and its participating providers that will include all applicable provisions contained in this contract. The INSURER will insure that said applicable provisions are properly complied with by the HCO's and its network of participating providers. To this effect, the Insurer also agrees to certify or attest that none of his contractors, subcontractors or providers of services: (1) consults, employs or procures services from any individual that has been debarred or suspended from any federal agency; or (2) has a director, partner or employee with a beneficial ownership of more than a 5% on their organization's equity who has been debarred or suspended by any federal agency, or (3) procures self-referral of services to any provider in which it may have directly or indirectly any economic or proprietary interest. The INSURER will certify and attest that it has provided all HCO's, complete written instructions describing procedures to be used for the compliance with all duties and obligations arising under this contract. These instructions will include the following information: provider selection by beneficiaries, covered services, reporting requirements, record-keeping requirements, grievance procedures, deductibles and co-payment amounts, confidentiality, and prohibitions against denial or rationing of services. Copy of these instructions will be submitted to the ADMINISTRATION, who reserves the right to request modifications or amendments to said instructions following consultation with the INSURER. 4. The INSURER agrees to incorporate in its contracts with HCO's and in those between the INSURER and its participating providers, the following provisions, among others, contained in this contract: a. A payment time schedule to pay the HCO's for services rendered and for payment for services rendered by the participating providers to the HCO's, the schedules will not exceed the time limitation standards required by the Administration under this contract to assure prompt payments of sums due to providers. b. A warranty by the HCO insuring that the method and system used to pay for the services rendered by the HCO's network of participating providers are reasonable and that the negotiated terms do not jeopardize or infringe upon the quality of the services provided. c. A procedure that establishes how the HCO's network of participating providers can recover from the INSURER monies owed for services rendered and not paid by the HCO, after the HCO's participating provider has demanded payment from the HCO. 25 d. That payments received for services rendered under the health insurance plan shall constitute full and complete payment except for: (i) the deductibles contained in Addendum I of this contract, and (ii) that the benefits or services rendered are not covered. The INSURER will insure compliance with Article XVIII, paragraphs (6) and (7) of this contract, e. A release clause authorizing access by the ADMINISTRATION to the participating providers' Medicare billing data for beneficiaries covered by this contract who are also Part A and Part A and B Medicare beneficiaries, provided that such access is authorized by CMS and other related statutory or regulatory provisions thereof. Access by the ADMINISTRATION shall be at all times subject to all HIPAA regulations requirements mentioned elsewhere in this contract. f. That INSURER will cover the payment of Medicare Part B deductibles and co-insurance for services received by a beneficiary under Medicare Part B, accessed through the HCO's primary care provider, with primary care physician's authorization, their network of participating providers and the participating providers of the INSURER for the basic and/or special coverage. g. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics and other institutional care providers, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service. h. That the only Part A deductible and co-insurance, and Part B deductible and co-insurance for outpatient services provided in a hospital clinic and other institutional care providers, other that physician services, will be the one billed to Medicare as bad debt. No other amount will be charged to these beneficiaries. The INSURER will neither cover the payment of Medicare Part A deductibles and co-insurance for services received by a beneficiary under Medicare Part A nor the Part B deductible and co-insurance for services provided in hospital clinics, other than physician services. The INSURER will cover the deductibles and co-insurances of all Part B services including Part B deductibles and co-insurance for physician services provided in an outpatient basis to hospital clinics. i. That coverage afforded to beneficiaries under this contract constitutes a direct obligation on the part of the INSURER's participating providers to comply with all terms and conditions contained herein. j. The INSURER will establish directives for allowing providers to write prescriptions for psychotropic drugs in accordance with the applicable agreement with the ADMINISTRATION's Pharmacy Benefit Manager (PBM). The ADMINISTRATION's terms and conditions for pharmacy benefit management have been agreed by the parties and will be complied and implemented according to Addendum XIV, to the Request for Proposal and the Benefits Coverage included herein. 26 k. All performance, timeframes, administrative standards and requirements as established under this contract. 5. The INSURER agrees to provide to the ADMINISTRATION a detailed description of the payment methodology used to pay for services rendered by the HCO's, HCO's network of providers (primary care physicians and other providers), and other participating providers. Said description of the payment methodology will also address the methodology used by the HCO's in the distribution within their own group of the capitation payments, fee for services or other basis for payment of services to providers servicing said HCO's. The INSURER will submit to the ADMINISTRATION a monthly report detailing all payments made to the HCO, HCO's network of participating providers and to the INSURER's participating providers classified by specialty. 6. The INSURER represents that neither the premium or the capitated payments or capitated payments with a fee-for-service component for services, made to HCO's, to HCO's network of participating providers, as well as to the INSURER's participating providers, include payment of services covered under the Medicare Federal Program. 7. As part of the terms and conditions contained in the contracts with participating providers, the INSURER will include in those with privatized government facilities (to include those under management contract, that have been sold or are under lease), a provision that will authorize the INSURER upon the written request of the Department of Health, to withhold a determined amount from the monthly payments to said participating providers for services rendered under this contract. Said amount will be determined by the Department of Health on the basis of the payments contractually agreed to between the Department of Health of the Commonwealth of Puerto Rico and said participating providers on account of the management fee, sale price or lease fee, as well as 50% of the employees' payroll which the participating providers are required to reimburse the Department of Health. The INSURER will remit said withheld amounts directly to the Department of Health. 8. The INSURER shall provide all reasonable means necessary to ensure that the contracting practices between its participating HCO and providers are in compliance with federal anti-fraud provisions and particularly, in conformity with the limitations and prohibitions of the False Claims Act, the Anti-kickback statute and regulations and Stark II Law and regulations prohibiting self-referral to designated medical services by participating medical providers. 9. To the extent feasible within INSURER'S existing claims processing systems, INSURER should have a single or central address to which providers must submit claims. If a central processing center is not possible within INSURER's existing claims processing system, INSURER must provide each network 27 provider a complete list of all entities to whom the providers must submit claims for processing and/or adjudication. The list must include the name of the entity, the address to which claims must be sent, explanation for determination of the correct claims payer based on services rendered, and a phone number the provider may call to make claims inquiries. INSURER must notify providers in writing of any changes in the claims filing list at least 30 days prior to effective date of change. If INSURER is unable to provide 30 days notice, providers must be given a 30-day extension on their claims filing deadline to ensure claims are routed to correct processing center. 10. The Administration and the Department of Health Medicaid Fraud Control Unit must be allowed to conduct private interviews of providers and the providers' employees, contractors, and patients. Requests for information must be complied with, in the form and language requested. Providers and their employees and contractors must cooperate fully in making themselves available in person for interviews, consultation, grand jury proceedings, pre-trial conference, hearings, trial and in any other process, including investigations. 11. PROVIDER MANUAL AND PROVIDER TRAINING INSURER must prepare and issue a Provider Manual(s), including any necessary specialty manuals to the providers in the INSURER network and to newly contracted providers in the INSURER network within five (5) working days from inclusion of the provider into the network. The Provider Manual must contain sections relating to special requirements. INSURER must provide training to all network providers and their staff regarding the requirements of THE ADMINISTRATION/INSURER contract and special needs of beneficiaries under this contract. INSURER training for all providers must be completed no later than 30 days after placing a newly contracted provider on active status. INSURER must provide ongoing training to new and existing providers as required by INSURER or THE ADMINISTRATION to comply with this contract. INSURER must maintain and make available upon request enrollment or attendance rosters dated and signed by each attendee or other written evidence of training of each network provider and their staff. 12. PROVIDER QUALIFICATIONS - GENERAL The providers in INSURER network must meet the following qualifications: 28 FQHC A Federally Qualified Health Center is an entity that provides outpatient health services pursuant to 42 U.S. C. 201 et. seg. and meets the standards and regulations established by the federal law and is an eligible provider enrolled in the Medicaid Program. Physician An individual who is licensed to practice medicine as an M.D. or a D.O. in Puerto Rico either as a primary care provider or in the area of specialization under which they will provide medical services under contract with INSURER; who is a provider enrolled in the Medicaid program; and who has a valid Drug Enforcement Agency registration number and a Puerto Rico Controlled Substance Certificate, if either is required in their practice. Hospital An institution licensed as a general or special hospital by the Puerto Rico Health Department under Chapter 241 of the Health and Safety Code and Private Psychiatric Hospitals under Chapter 577 of the Health and Safety Code (or is a provider which is a component part of a State or local government entity which does not require a license under the laws of the Commonwealth of Puerto Rico), which is enrolled as a provider in the Puerto Rico Medicaid Program. Non-Physician An individual holding a license issued by the applicable Practitioner licensing agency of the Commonwealth of Puerto Rico who is Provider enrolled in the Puerto Rico Medicaid Program or an individual properly trained to provide health support services who practices under the direct supervision of an appropriately licensed professional. Clinical An entity having a current certificate issued under the Laboratory Federal Clinical Laboratory Improvement Act (CLIA) and has a license issued by the Commonwealth's licensing agency the Puerto Rico Department of Health. Rural Health A health facility that has been determined by the Secretary Clinic (RHC) to meet the requirements of section 1861(aa) (2) of the Act and part 491; of this chapter; and has filed an agreement with the Secretary to provide RHC services under Medicare and pursuant to 42 CFR 405.2402. Local Health A local health department established pursuant to Health and Department Safety Code, Title 2, Local Public Health Reorganization Act ss. 121.031ff. Non-Hospital A provider of health care services which is licensed and Facility credentialed to provide services, and enrolled in our Provider program. School Based Clinics located at school campuses that provide on-site Health Clinic primary and preventive care to children and adolescents. (SBHC) 29 ARTICLE VIII SUBSCRIPTION PROCESS AND IDENTIFICATION CARDS 1. The INSURER agrees to comply and implement in full all instructions and guidelines contained in the Administration's Instructions to Insurers for Implementation of Orientation and Subscription Process. (Addendum II) 2. The INSURER shall issue to each beneficiary a card of durable plastic material that provides proper identification to access the benefits covered under this contract. 3. This card shall be similar to those the INSURER issues to the rest of their subscribers and shall not contain information that may identify the cardholder as medically indigent. 4. The INSURER shall be responsible to assure delivery of the cards at a location accessible to the beneficiaries in each municipality. 5. The INSURER shall deliver the card on the same day that the beneficiary completes the enrollment process. 6. The identification cards shall contain the following information: a) Name of Beneficiary b) INSURER's Group Number c) Subscriber's Social Security Number d) Relationship of beneficiary with subscriber (if applicable) e) HCO name and number f) Issue Date g) Type of Contract (individual or family) h) Coverage effective date i) Other Insurance code j) Medicare Part A and/or Part A and B deductible code. 7. The INSURER will replace lost, stolen, mutilated cards and will have the right to charge in beneficiaries one dollar ($1.00) for each card replaced. This charge will not be applicable to Medicaid Beneficiaries, which are categorized within the established indigence level 0 (0%-50%). 8. The INSURER will replace free of charge the identification card whenever a change of HCO is made. 30 9. Identification cards are the property of the INSURER and they shall be returned by the beneficiary upon losing eligibility to the plan or when a change of HCO is made. 10. The INSURER shall be responsible for notifying each beneficiary that the identification card is for the personal identification of the beneficiary to whom it has been issued, and that lending, transferring or in any other way consenting to the use of the card by any other person constitutes a fraudulent act. 11. Identification Card contents and layout are subject to the prior approval of the ADMINISTRATION to be in accordance with Law 72 of September 7, 1993. 12. INSURER will comply with all changes requested by the ADMINISTRATION resulting from the implementation of the "Smart Card". Monetary implications as a result of such changes, will be negotiated with the INSURER. ARTICLE IX SUMMARY PLAN DESCRIPTION BOOKLET AND ORIENTATION PROGRAMS MARKETING PROVISIONS 1. The INSURER shall be responsible for the preparation, printing and distribution, at its own cost, of booklets, in the Spanish language, that describe the plan and the benefits covered therein. The Insurer agrees to submit before the effective date of the contract a translated copy of the beneficiaries' booklet in the English language by the proper revision of federal authorities. These booklets will be delivered to each subscriber upon enrollment, along with the required identification card(s). 2. The booklets shall serve as guarantee of the benefits to be provided and shall contain the following information: a) Schedule of benefits covered, all services and items that are available and that are covered either directly or through methods of referral and/or prior authorization, a written description of how and where the services that have been available through the plan services may be obtained. b) Benefit's exclusions and limitations. For benefits that enrollees are entitled to but are not available through the MCO, a written description on how and where to obtain benefits; description of procedures for requesting disenrollments/changes. c) Beneficiary's rights and responsibilities, in accordance with specific rights and requirements to be afforded in accordance with Medicaid Program regulations as amended, the Puerto Rico Patient Bill of Rights Law 194 of 31 August 25, 2000, the Puerto Rico Mental Health Code, of October 2, 2000, as amended and implemented by their regulations, and Law 11 creating the Office of Patients Solicitor General of April 11, 2001. d) Instructions on how to access benefits, including a list of (1) available HCO's and its participating providers, PCP or Specialists (its locations and qualifications), (2) providers from which to obtain benefits under the Special Coverage. Said list can be provided in a separate booklet. e) Official grievances and appeal filing procedures. f) In the event a Physician Incentive Plan affects the use of referral services and/or places physicians at substantial risk, the INSURER shall provide the following information upon beneficiaries' requests: the type of incentive arrangements, whether stop-loss insurance is provided and the survey results of any enrollee/disenrollee surveys that will have to be conducted by INSURER. g) Unless otherwise specified, subscription materials must be written at the 4th-6th grade reading comprehension level. h) Explanations of instances under which a beneficiary's disenrollment may be requested without his/her consent by a provider. i) Explanations of right of beneficiary to transfer from HCO at any time for cause and to transfer or change within first ninety (90) days of the date of enrollment or the later date of receipt of notice of enrollment, and at least every (12) months thereafter without cause. 3. The booklets shall be approved by the ADMINISTRATION prior to printing, distribution, and dissemination in compliance with provisions of Article IX. 4. The INSURER shall also be responsible for the preparation, printing and distribution, at its own cost, of an Informative Bulletin, in the Spanish language, that describes the plan, services and benefits covered therein as well as the managed care concept. This Informative Bulletin will be distributed among the HCO's, HCO's network of participating providers and the INSURER's participating providers. 5. The INSURER shall be responsible to conduct and assure the participation of all providers under this contract to diverse seminars to be held throughout the Health Area/Region in order to properly orient and familiarize said providers with all aspects and requirements related to the Preventive Medicine Program, Benefits and Coverage under this contract, and the Managed Care concept. Said seminars will be organized, scheduled, conducted and offered at the expense of the INSURER. The curriculum for said seminars will be coordinated with and approved by the ADMINISTRATION Healthcare Coordinators. 6. All participating providers are mandated required to receive yearly during the contract term at least fifteen (15) hours of orientation, education and familiarization with different aspects related to this contract on/or before the 32 expiration of the first four and a half (4 1/2) months of the contract term. Failure to comply with this requirement will be sufficient grounds to exclude from the Health Insurance Program the participating provider. If, at the expiration of the first four and half (4 1/2 months) of the contract term, the participating provider has not fully complied with this requirement, it will be excluded as participating provider for subsequent periods of the contract or the contract term. At the discretion of the ADMINISTRATION, and for good cause the excluded provider may be authorized to be contracted as a participating provider if it subsequently complies with the requirement. 7. The ADMINISTRATION will monitor and evaluate all marketing activities by the INSURER, its contractor, sub-contractors or any provider of services under this contract. 8. Any marketing material addressed to enrollees can not contain false or misleading information. All oral, written or audiovisual information addressed to enrollees should be accurate and sufficient for beneficiaries to make an informed consent decision as to whether or not to enroll and will have to be pre-approved by the ADMINISTRATION. 9. The INSURER, contractor or subcontractor or any providers of services must distribute the material to its entire service area/region. In the event the INSURER or any of its contractors develop new and revised materials they shall submit them to the ADMINISTRATION for prior approval. 10. The ADMINISTRATION will appoint an Advisory Committee, with representation of at least: a board certified physician, a beneficiary of a consumer advocate organization that includes Medicaid recipients a health related professional related with the medical needs of low-income population and a Director of a Welfare Department that does not head a Medicaid agency. 11. The Advisory Committee will assist the ADMINISTRATION in the evaluation and the review of any marketing or informational material addressed to assist Medicaid recipients in the provision of health services under this contract. All the marketing activities and the information which shall be allowed will be limited to the following: a) Clear description of health care benefits coverage and exclusions to enrollees; b) Explain how, when, where benefits are available to enrollees; c) Explain how to access emergency, family-planning services, and services that do or do not require referrals and authorizations; d) Explain any benefits enrollees are entitled to, that are not available through the INSURER and how to obtain them; e) Enrollees rights and responsibilities; 33 f) Grievance and appeal procedures. 12. The INSURER, its agents, any contractor or sub-contractor party under this contract shall not engage in cold call marketing that is, unsolicited personal contact with potential enrollees for the purpose of influencing them to enroll with any of its contractors. Also telephone, door-to-door or telemarketing for the same purposes is hereby prohibited. 13. Neither the INSURER, its contractor, subcontractor or any provider may put into effect a plan under which compensation, reward, gift or opportunity are offered to enrollees as an inducement to enroll other than to offer health care benefits. The INSURER its contractor, subcontractor or provider is prohibited from influencing an individual enrollment with the sale of any other insurance. 14. In the event of a final determination reached by the ADMINISTRATION that the INSURER, its agents, any of its contractor or subcontractors, has failed to comply with any of the provisions set forth on this article, the ADMINISTRATION in compliance with due process guarantees and remedies available under its regulations; Law 72 of September 7, 1993; the Social Security and Balance Budget Act, will proceed to enforce the compliance of these provisions by pursuing within its empowered authority the sanctions established in Article XXXVI. ARTICLE X GRIEVANCE PROCEDURE 1. The INSURER represents that it has established an effective procedure that assures the filing, receipt, and prompt handling and resolution of all grievances and complaints made by the beneficiaries and the participating providers. The INSURER will prepare a grievance form that must be approved by the ADMINISTRATION. The approved grievance form shall be made available to all beneficiaries, HCO's, HCO's network of participating providers and the INSURER's participating providers. The parties will make whatever adjustments are necessary to reconcile their grievance procedure with provisions of Law 194 of August 25, 2000 (known as "Patient Bill of Rights") or those contained in Law 11 of April 11, 2001 (known as "Law Creating the Office of Patient's Solicitor General") as implemented by regulations. 2. Any written or telephone communication from a beneficiary or participating provider, which expresses dissatisfaction with an action or decision arising under the health insurance contracted, shall be promptly and properly handled and resolved through a routine complaint procedure to be implemented by the INSURER, after prior approval from the ADMINISTRATION. The INSURER 34 shall be responsible for documenting in writing all aspects and details of said complaints. 3. The routine complaint procedure which must be implemented by the INSURER must provide for (i) the availability of complaint forms to document oral complaints; (ii) for the proper handling of the complaints; and (iii) for the disposition by notice to the complainant of the action taken. This notice shall advise the complainant of the INSURER's official Grievance Procedure. The INSURER will submit to the ADMINISTRATION, on a monthly basis a written report detailing all grievances and routine complaints received, solved and pending solution and/or copies of the complaint forms with the notation of the action taken. All grievance files and complaint forms must be made available to the ADMINISTRATION for auditing. All grievance documents and related information shall be considered as containing individually identifiable health information, and shall be treated in accordance with the HIPAA regulations cited elsewhere. 4. The Grievance Procedure shall assure the participation of persons with authority to require corrective action. 5. The INSURER's Grievance Procedure shall contain all the necessary provisions that assure the affected parties right to due process of law. In the event that changes are made to the existing Grievance Procedure, a copy of the proposed changes will be made available to the ADMINISTRATION for approval prior to its implementation. A copy of the INSURER's Grievance Procedure is attached hereto as Addendum III and incorporated as part of this contract. The INSURER acknowledges that the arbitration process contemplated in the Grievance Procedure shall not be applicable to disputes between the ADMINISTRATION and the INSURER. 6. Pursuant to Law 72 of September 7, 1993, any decision issued by the INSURER is subject to appeal before the ADMINISTRATION. Such appeal shall be regulated by the ADMINISTRATION's regulations and the Uniform Administrative Procedure Act, Law 170 of August 12, 1988, as amended and as applicable, provided however, that subscribers' grievances shall be expeditiously solved and that INSURER shall therefore fully cooperate with the prompt solutions of any such grievance. 7. The decision issued by the ADMINISTRATION is subject to review before the Circuit Court of Appeals of the San Juan Panel of the Commonwealth of Puerto Rico. 8. INSURER must have written policies and procedures for receiving, tracking, reviewing, and reporting and resolving of beneficiaries complaints. The procedures must be reviewed and approved in writing by THE ADMINISTRATION. Any changes or modifications to the procedures must be 35 submitted to THE ADMINISTRATION for approval thirty (30) days prior to the effective date of the amendment. 9. INSURER must designate an officer of INSURER who has primary responsibility for ensuring that complaints are resolved in compliance with written policy and within the time required. An "officer" of INSURER means a president, vice president, secretary, treasurer, or chairperson of the Board of Directors of a corporation, the sole proprietor, the managing general partner of a partnership, or a person having similar executive authority in the organization. 10. INSURER must have a routine process to detect patterns of complaints and disenrollments and involve management and supervisory staff to develop policy and procedural improvements to address the complaints. INSURER must cooperate with the ADMINISTRATION in beneficiaries' complaints relating to enrollment and disenrollment. INSURER's complaints procedures must be provided to beneficiaries in writing and in alternative communication formats. A written description of INSURER's complaints procedures must be in appropriate languages and easy for beneficiaries to understand. INSURER must include a written description in the beneficiaries Handbook. INSURER must maintain at least one local and one toll-free telephone number for making complaints. 11. INSURER's process must require that every complaint received in person, by telephone or in writing, is recorded in a written record and is logged with the following details: date; identification of the individual filing the complaint; identification of the individual recording the complaint; nature of the complaint; disposition of the complaint; corrective action required; and date resolved. 12. The INSURER Grievance Procedures must comply with the reasonable standards and timeframes for prompt resolution of grievances to be established under the Puerto Rico Patients Bill of Rights Act, Law 194 approved October 2, 2000 and the Mental Health Code, Law 408, approved in August 25, 2000. The State established standards, shall comply with Medicaid Regulations to ensure that in the case of standard resolution of grievances, the standard time frames for prompt resolution, do not exceed 30 days after an insurer receives grievances. And in the case of grievances concerning the particular enrollees' health condition, which requires expedited resolution, they shall, be resolved, within a time frame that shall not exceed, 72 hours after a grievance is received. ARTICLE XI HEALTH CARE ORGANIZATIONS 1. All Health Care Organizations (HCO's) shall have a sufficient number of primary care physicians as specified in Article VI to attend to the medical needs of the beneficiaries. All specialties specified in this section have to be available at each HCO. The following are considered primary care physicians (PCP): 36 a) General Practitioners b) Internists c) Family Physicians d) Pediatricians e) Obstetricians and Gynecologists 2. The INSURER shall have available and under contract a sufficient number of the following types of support participating providers to render services to all beneficiaries: a) Optometrists b) Podiatrists c) Clinical laboratories- (The INSURER shall insure that all laboratory testing sites providing services under this contract have either a clinical laboratory improvement amendment (CLIA) certificate with the registration and (CLIA) identification number or a waiver certification). d) Radiological facilities e) Health Related Professionals f) Hospitals g) Pharmacies h) All those participating providers that may be needed to provide services under the basic, special and dental coverage considering the specific health problems of an area/region. The INSURER may not discriminate with respect to participation, reimbursement or indemnification as to any provider who is acting within the scope of the provider's license or certification under applicable state law. 3. The INSURER shall enter into adequate arrangements to provide its beneficiaries with the services provided for under the dental and pharmacy coverage, as contractually agreed to between the dentists and pharmacies and the INSURER. These arrangements will provide for an adequate number of dentists and pharmacies that guarantee the right to choose of the beneficiaries. 4. The INSURER shall have available and under contract a sufficient number of the following types of support participating physicians to provide services to all beneficiaries: 37 a) Ophthalmologists b) Radiologists c) All those physicians that may be necessary and are available considering the morbidity and mortality rates of the specific health area/region, and those needed to provide all the benefits contained in the Basic Coverage of the plan. 5. Considering the expected mix between private patients and beneficiaries the accepted physician/beneficiary ratio will be 1:1,700 for primary care physicians; 1:2,200 for specialists and 1:1,600 for all physicians. In the event that the HCO's provides services only to beneficiaries under this contract, the physician/beneficiary ratio will be the same to that applicable when there is a mix between private patients and beneficiaries. The INSURER will assure compliance with said physician/beneficiary ratio. 6. The INSURER shall not have, directly or indirectly, any conflict of interest through economic participation in any HCO, participating provider, its subsidiaries, or affiliates. 7. The INSURER shall enforce upon each HCO strict quality assurance and utilization review programs as described in this contract, the Request for Proposals, the INSURER's proposal and its Operations Manual. 8. The INSURER shall contract and have available all the participating providers required to provide to the beneficiaries, in a prompt and efficient manner, the benefits included in the Basic, Special and Dental Coverage as specified in Addendum I of this contract. 9. The INSURER agrees to enforce and assure compliance by the HCO's with all provisions contained in this contract. 10. The INSURER will prepare, and provide to all HCO's, complete written instructions describing procedures to be used for the compliance with all duties and obligations arising under this contract. These instructions will cover at least the following topics: provider selection by beneficiaries, covered services, instructions and coordination of access to mental health services through the mental carve-out contractors, reporting requirements, record keeping requirements, grievance procedures, deductibles and co-payment amounts, confidentiality, and the prohibition against denial or rationing of services. A copy of these instructions will be submitted to the ADMINISTRATION, who reserves the right to request modifications or amendments to said instructions following consultation with the INSURER. 38 ARTICLE XII GUARANTEE OF PAYMENT 1. The INSURER expressly guarantees payment for all medically necessary services rendered to beneficiaries by any and all participating providers. 2. The insolvency, liquidation, bankruptcy or breach of contract of an HCO, or of a contracted participating provider does not release the INSURER from its obligation and guarantee to pay for all services rendered as authorized under this health insurance contract. The nature of INSURER's obligations to guarantee payment to all HCO's, providers or subcontractors for services rendered under this health insurance contract is solidary, subject to complying with whatever established claim proceedings require. As such, the INSURER will respond directly to the ADMINISTRATION as principal obligor to comply in its entirety with all the contract terms. 3. In accordance with the payments rights guaranteed under paragraph (4) and (5), the provider shall claim direct payments due by a HCO/Contractor, to the INSURER. The INSURER shall deduct any amount payable directly to a provider from the capitation payments owed to an HCO or other contractor. In case the INSURER owes money to the HCO's or any provider, following due process, the Administration may retain the amounts owed to the providers. 4. The INSURER agrees to pay all monies due to the HCO's and/or participating providers according to the agreed payment schedule in the contracts with said parties. The INSURER represents as of the date of this contract that payment to HCO's, HCO's network of participating providers and INSURER's participating providers will be made no later than thirty (30) days or as provided by legislation from the date that a full, complete and ready to process claim is received at the INSURER, when received within sixty (60) days of date of service. The INSURER expressly commits to implement all internal systems necessary to promptly pay its HCO's and providers all full, complete and ready to process claims within the term provided in this section, and to avoid unjustifiable delay in payment by submitting said claims to audits and evaluation of contested claims; said practice is expressly prohibited, and may result in the remedies set forth at Article XXXVI or termination as provided in Article XXXIII. A complete and ready to process claim (clean claim) is a claim received by the INSURER for adjudication, and which requires no further information, adjustment, or alteration by the provider of the services in order to be processed and paid by the INSURER. 39 5. In the event that, following the receipt of the claim, the same is totally or partially contested by the INSURER or HCO, the participating provider shall be notified in writing within thirty (30) days that the claim is contested with the contested portion identified and provided the reasons thereof. Upon receipt of a new or supplemented claim, the INSURER or the HCO, shall pay or deny the contested claim or portion of the contested claim within thirty (30) days. Upon expiration of any of the aforementioned periods of time, the overdue payments shall bear interest at the prevailing rate for personal loans as determined by the Financial Board of the Office of the Commissioner of Financial Institutions. 6. Checks for capitated payments to HCO's, HCO's network of participating providers and INSURER's participating providers are to be regularly issued by the INSURER on the 15th day of each month. The INSURER further represents that it has contracted with the HCO the payment of the corresponding capitation no later than the last day of the month to which said capitation corresponds. 7. The INSURER agrees and warrants that it will be the central payor for all valid claims that will be generated throughout their contracted participating provider network for the health insurance contract for the Health Region/Area. 8. All payments distribution within the capitated services will be made by the INSURER accordingly within sound actuarial methods and in compliance with the ADMINISTRATION's commitments and efforts to assure a more uniform and equitable distribution of risk among providers throughout all the island health regions. In the event that participating providers in their arrangements with the HCO's consent to the disbursement of the payment checks directly to the HCO's, the INSURER will assure and require the HCO's to provide on a monthly basis a schedule of the amount of the payments made to said participating providers. In any event, the INSURER will provide the ADMINISTRATION with a detailed monthly report listing by providers the monthly payment distribution. The claims for services rendered will be generated and forwarded by the participating providers directly to the INSURER. The claims submitted by the participating providers will comply with the requirements contained in Article XV, Sections four (4) and eight (8). 9. The INSURER agrees and warrants that the method and system used to pay for the services rendered to and by the HCO's and all participating providers is reasonable and that the amount paid does not jeopardize or infringe upon the quality of the services provided. 10. The guarantee of payment contained in this article will be reinforced through the establishment of different alternatives in order to insure that HCO's, HCO's participating providers and INSURER's participating providers are paid in full for contracted services in accordance with established budgets. Said alternatives will be submitted to the ADMINISTRATION for approval prior to its implementation. 40 11. Inasmuch as the INSURER will be the central payor for all payments for valid claims for services rendered by the HCO's, HCO's network of participating providers and INSURER's participating providers the INSURER agrees to incorporate in the contracts with the HCO's, and to require the HCO's to incorporate in their arrangements with their participating providers a provision whereby the INSURER is authorized to adjudicate and determine the validity of any claim or dispute between the HCO and its participating providers regarding a controversy surrounding the validity of the claims of services submitted by said participating provider. Said provision will assure that the payment to the HCO's network of participating providers for a valid claim for services is not improperly withheld and that in no event payment in this situation is made more than sixty (60) days from the date that the claim or dispute is received by the INSURER. It will be the INSURER's responsibility to verify the terms of the arrangements between the HCO and its network of participating providers, the rendering of the services, the reasonableness of the claim and that payment has not been made. 12. The guarantee of payment and the representations as to the payment schedule to HCO's and participating providers will be enforceable and not set aside or altered in the event that the INSURER is notified of the expiration of the term of this contract or of its termination. 13. The INSURER agrees to provide the ADMINISTRATION, on a monthly basis, and through electronic or magnetic media format, a detailed report containing all payments made to HCO's, to HCO's network of participating providers, and to the INSURER's participating providers during the month immediately preceding the report. Said report will also include a list of all claims received on account of those payments during the preceding month by the INSURER from the HCO's, the HCO's network of participating providers as well as a detail as to all claims received but not paid by reason of accounting or administrative objections. The INSURER further agrees to make available to the ADMINISTRATION for auditing purposes any and all records or financial data related to claims submitted but not paid by reason of accounting or administrative objections. The intention of this clause is for the ADMINISTRATION to be able to determine on a monthly basis the amount of money paid to each participating provider, the, amount billed by and not paid to each participating provider and the reasons for non-payment in order to keep track of the regularity of payments of the Insurer and the HCO's and their compliance with this contract. 14. The INSURER also agrees to provide to HCO's, on a monthly basis, and through electronic or machine readable media format, a detailed report classified by beneficiaries, by providers, by diagnosis, by procedure, by date of service and by its real cost of all payments made by the INSURER which entails a deduction from the gross monthly payment to said HCO's. Copy of said report will be made available to the ADMINISTRATION each month. 41 15. Each HCO must report each encounter to the INSURER on a monthly basis classified by each participating provider within the HCO, as well as the real cost of the services of each encounter of service. The INSURER must submit to the ADMINISTRATION the distribution of the capitation within each HCO as established on the Actuarial Reports formats required in the RFP. 16. The INSURER will abide with the ADMINISTRATION efforts to implement cost reduction measures and future implementation of payment methods based on fee schedules or diagnosis related group that may be established. In no way a beneficiary will be discriminated nor will health services be rationed based on diagnosis or illness or an expectation that the beneficiary may require high cost care. ARTICLE XIII UTILIZATION REVIEW AND QUALITY ASSURANCE 1. The INSURER will establish a Quality of Care Program with the following guidelines: a) PHYSICIAN-CREDENTIALING: The INSURER shall follow strict provider screening procedures before contracting. In order to assure quality health services for the medically indigent, the INSURER will follow stringent physician selection and credentialing process for this plan as per the INSURER's Proposal. The ADMINISTRATION may review participating providers' credentials at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all accepted and non-accepted providers. b) PROVIDER CONTRACTING: The INSURER will assure that all hospitals facilities, doctors, dentists, and all health care providers are appropriately licensed and in good standing with all their governing bodies and accrediting agencies and meet all practice requirements established by law, the Department of Health, the ADMINISTRATION and other governing agencies, as described in the INSURER's Proposal. The ADMINISTRATION may review participating provider credentials at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all accepted and non-accepted providers. c) INSPECTION OF ALL FACILITIES: The INSURER will insure that all providers' physical facilities are safe, sanitary and follow sound operating procedures, as described in the INSURER's Proposal and that all laboratory testing site providing services under this contract have their duly CLIA certification along with their identification number or waiver certificate. The ADMINISTRATION may review participating provider 42 facilities at any time and submit its findings to the INSURER for consideration by the INSURER if necessary. The INSURER shall notify the ADMINISTRATION quarterly of all inspections done. d) MEDICAL RECORD REVIEW: The INSURER will establish a program to monitor the appropriateness of care being provided, the adequacy consistency of record keeping, and completeness of records, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Medical Record Review Program. The ADMINISTRATION may review and/or audit Program records and reports at any time. e) CLINICAL DATABASE SYSTEM: The HCO's will provide the INSURER with statistical records of utilization of medical services by beneficiaries, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Clinical Database System. The ADMINISTRATION may review and/or audit the Clinical Database System records and reports at any time. f) RETROSPECTIVE REVIEW: The INSURER will establish a Retrospective review Program that will address quality and utilization problems that may arise, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Retrospective Review Program. The ADMINISTRATION may review and/or audit the program findings at any time. g) OUTCOME REVIEW: The INSURER will establish an Outcome Review Program to assess the quality of inpatient and ambulatory care management provided by the primary health care providers, as described in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION on a quarterly basis of all findings in the Outcome Review Program. The ADMINISTRATION may review and/or audit the program findings at any time. h) QUALITY OF CARE COMMITTEE: The INSURER will establish a Quality of Care Committee to insure provider's compliance with the INSURER's quality of care program, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Quality of Care Committee. The ADMINISTRATION may review and/or audit the program findings and reports at any time. 2. The INSURER will establish cost containment and utilization review programs as follows: 43 a) HOSPITAL ADMISSION AND STAY REVIEW: The INSURER will establish programs to reduce unnecessary hospital use and to review hospital admissions through the following programs, as described in the INSURER's Proposal: (1) CONCURRENT REVIEW: The INSURER will establish a program to review hospital admissions to guarantee adequacy and duration of stay. (2) RETROSPECTIVE REVIEW: The INSURER will establish a program to determine medical necessity and service adequacy after the service has been rendered or paid to providers or physicians. (3) PROSPECTIVE REVIEW: The INSURER will establish a program to determine appropriate lengths of stay at the hospital prior to admission for elective or non-emergency hospitalizations. b) UTILIZATION REVIEW PROGRAM: The INSURER will establish a program to identify patterns of medical practice and their effect in the care being provided, as described in the INSURER's Proposal, and through the following: (1) PRE-PAYMENT REVIEW: The INSURER will establish a program to prevent inappropriate billing of services prior to claims payment and to evaluate questionable practices, problematic coding, inappropriate level of care, excessive tests and services. (2) POST PAYMENT REVIEW: The INSURER will establish a program to review service claims for purposes of creating a provider profiling system. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings under the Utilization Review Programs. The ADMINISTRATION may review and/or audit the programs' findings and reports at any time. c) SECOND SURGICAL OPINION. The INSURER will establish a program to allow beneficiaries to obtain a second surgical opinion for elective surgical procedures on a voluntary basis, as described in the INSURER's Proposal. d) INDIVIDUAL CASE MANAGEMENT PROGRAM: The INSURER will establish a program to identify and manage cases that involve high health care costs, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all 44 findings in the Individual Case Management Program. The ADMINISTRATION may review and/or audit the program findings and reports at any time. e) FRAUD AND ABUSE: The INSURER will establish a program to assure reasonable levels of utilization and quality of care, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Fraud and Abuse Program. The Fraud and Abuse Reports must include: (1) the number of complaints of fraud and abuse made to the Commonwealth that warrant a preliminary investigation, and, (2) for each case of suspected fraud and abuse warranting a full investigation, the INSURER must report the following information: (i) the provider's name and number; (ii) the source of the complaint; (iii) the type of provider; (iv) the nature of the complaint; (v) the approximate range of dollars involved, (vi) the legal and administrative disposition or status of the case. f) COORDINATION OF BENEFITS PROGRAM: The INSURER will establish a program to identify beneficiaries with other insurance in order to coordinate health insurance benefits from other carriers, as described in the INSURER's Proposal. The INSURER shall submit a report to the ADMINISTRATION on a quarterly basis of all findings in the Coordination of Benefits Program. The ADMINISTRATION may review and/or audit the program findings and reports at any time. 3. DENTAL SERVICES UTILIZATION REVIEW PROGRAM: The INSURER agrees to maintain a program to determine that the services provided to beneficiaries are in accordance to established quality parameters by the dental community as provided for in the INSURER's Proposal. The INSURER shall notify the ADMINISTRATION quarterly of all findings of said review program. The ADMINISTRATION may review and/or audit the program findings at any time. 4. EPSDT AND MIGRANT SERVICES PROGRAM: The INSURER will implement a program that addresses EPSDT screening and Migrant services indicators for preventive diagnostic tests according to age in all areas/regions and shall notify the ADMINISTRATION on a monthly basis all findings of said program. INSURER assures the compliance with Section 1905(r) of the Social Security Act and the applicable protocols adopted by the Department of Health for the implementation of these Programs. 45 5. The INSURER shall continue to submit the ADMINISTRATION on a monthly basis a report that includes all services rendered by diagnosis and procedures identified by all specialties, by place of service including those under dental coverage, and procedures in laboratories and X-rays. It will be reported beginning with the most common diagnosis and procedures until reaching the least common. 6. All services rendered shall be identified by Current Procedure Terminology, International Classification of Diseases, Clinical Modifications Diagnostic Statistic Manual and American Dental Association's Current Dental Terminology, as applicable. 7. The ADMINISTRATION and the INSURER will agree on the required format in order to comply with the reporting requirements in this section and which will be accomplished through electronic or magnetic media. 8. All the required programs, processes and reports heretofore referred to, will also be an obligation on the part of the INSURER's participating providers, HCO's and HCO's participating providers. The INSURER will assure compliance therewith on the part of said INSURER's participating providers, HCO's and HCO's participating providers. 9. The ADMINISTRATION reserves the right to require the INSURER to implement additional specific cost and utilization controls, subject to prior consultation and cost negotiation with the INSURER if necessary. ARTICLE XIV COMPLIANCE AND AGREEMENT FOR INSPECTION OF RECORDS 1. Since funds from the Commonwealth Plan under Title XIX and Title XXI of the Social Security Act Medical Assistance Programs (Medicaid) and SCHIPS as well as from Title V of the Social Security Act and Mental Health Block Grants are used to finance this project in part the INSURER shall agree to comply with the requirements and conditions of the Centers for Medicare and Medicaid Services (CMS), the Comptroller General of the United States, the Comptroller of Puerto Rico and this ADMINISTRATION, as to the maintenance of records related to this contract and audit rights thereof, as well as all other legal obligations attendant thereto, including, but not limited to, non-discrimination, coverage benefit eligibility as provided by the Puerto Rico State Plan and Law 72 of 1993, anti-fraud and anti-kickback laws, and those terms and provisions of the SSA as applicable. All disclosure obligations and access requirements set forth in this Article or any other Article shall be subject at all times and to the extent 46 mandated by law and regulation, to the HIPAA regulations described elsewhere in this agreement. 2. The INSURER shall require from the HCO's and all participating providers that they maintain an appropriate record system for services rendered to beneficiaries, including separate medical files and records for each beneficiary as is necessary to record all clinical information pertaining to said beneficiaries, including notations of personal contacts, primary care visits, diagnostic studies and all other services. The INSURER shall also maintain records to document fiscal activities and expenditures relating to compliance under this agreement. The INSURER and all participating providers shall preserve, and retain in readily accessible form, the records mentioned herein during the term of this contract and for the period of six (6) years thereafter. 3. At all times during the term of this contract and for a period of six (6) years thereafter, the INSURER and all participating providers will provide the ADMINISTRATION, CMS, the Comptroller of Puerto Rico, the Comptroller General of the United States of America and/or their authorized representatives, access to all records relating to the INSURER's compliance under this contract for the purpose of examination, audit or copying of such records. The audits of such records include examination and review of the sources and applications of funds under this contract. The INSURER shall also furnish access to and permit inspection and audit by the ADMINISTRATION, CMS, the Comptroller of Puerto Rico, the Comptroller General of the United States of America and/or their authorized representatives to any financial records relating to the capacity of the INSURER or its HCO's, if relevant, to bear the risk of potential financial losses. 4. The INSURER shall ensure that the HCO's and all participating providers and their subcontractors furnish to the Peer Review Organization (PRO) or to the ADMINISTRATION on-site access to, or copies of patient care records as needed to evaluate quality of care. 5. The ADMINISTRATION and CMS shall have the right to inspect, evaluate, copy and audit any pertinent books, documents, papers and records of the INSURER related to this contract and those of any HCO or participating provider in order to evaluate the services performed, determination of amounts payable, reconciliation of benefits, liabilities and compliance with this contract. 6. The INSURER shall provide for the review of services (including both in-patient and out-patient services) covered by the plan for the purpose of determining whether such services meet professional recognized standards of health care, including whether appropriate services have not been provided or have been provided in inappropriate settings. It shall also provide for review, by random sampling, by the ADMINISTRATION, of written complaints, and the results thereof, filed by beneficiaries or their representatives as to the quality of services provided. 47 7. The INSURER agrees that the ADMINISTRATION and CMS may conduct inspections and evaluations, at all reasonable times, through on-site audits, systems tests, assessments, performance review and regular reports to assure the quality, appropriateness, timeliness and cost of services furnished to the beneficiaries. 8. The ADMINISTRATION and CMS shall have the right to inspect all of the INSURER's financial records related to this contract that may be necessary to assure that the ADMINISTRATION pays no more than its fair share of general overhead costs as contracted. The ADMINISTRATION and CMS shall have the right to inspect all the HCO's' financial records related to this contract. 9. The INSURER agrees that the ADMINISTRATION may evaluate, through inspection or other means, the facilities of the INSURER's participating providers, HCO's and its participating providers. All facilities shall comply with the applicable licensing and certification requirements as established by regulations of the Department of Health of Puerto Rico. It shall be the INSURER's responsibility to take all necessary measures to ascertain that all facilities contracting with INSURER comply with the required licensing and certification regulations of the Puerto Rico Health Department, and to terminate the contract of any facility not in compliance with said provisions. Failure to adequately monitor the licensing and certification of the facilities may result in the termination of this contract as provided in Article XXXIII. 10. The INSURER agrees and also will require all HCO's and participating providers to agree that the ADMINISTRATION's right to inspect, evaluate, copy and audit, will survive the termination of this contract for a period of six (6) years from said termination date unless: a) The ADMINISTRATION determines there is a special need to retain a particular record or group of records for a longer period and notifies the INSURER at least thirty (30) days before the normal disposition date; b) There has been a termination, dispute, fraud, or similar fault by the INSURER, in which case the retention may be extended to three (3) years from the date of any resulting final settlement; or c) The ADMINISTRATION determines that there is a reasonable possibility of fraud, in which case it may reopen a final settlement at any time; d) There has been an audit intervention by CMS, the office of the Comptroller of Puerto Rico, the Comptroller General of the United States or the ADMINISTRATION, in which case the retention may be extended until the conclusion of the audit and publication of the final report. 11. The INSURER agrees to require all HCO's and participating providers to permit the ADMINISTRATION to review and audit all aspects related to quality, 48 appropriateness, timeliness and cost of services rendered, and to demonstrate that the services for which payment was made were actually provided. ARTICLE XV INFORMATION SYSTEMS AND REPORTING REQUIREMENTS 1. The INSURER agrees to comply with the reporting and information systems requirements as provided for in the Request for Proposals and the Proposal submitted by the INSURER. Accordingly the INSURER must submit to the ADMINISTRATION a detailed Systems Requirements Inventory Report which details the following: a) Plan's compliance with each information system requirement; b) Action plan of INSURER's response to the requirements; c) Actual date that each system requirement will be completely operational, not to exceed the effective date of coverage under this contract. 2. The INSURER agrees to submit to the ADMINISTRATION the System Inventory Report for final approval not later than the date of the signing of this contract. 3. All Management Information Systems Requirements included in the Request for Proposal and those included in the INSURER's Proposal must commence implementation as of the date of the signing of this contract and shall be fully operational as of the first day of coverage under this contract. Material non compliance with this requirement shall be enough reason to cancel the contract herein, with prior written notification by the ADMINISTRATION to the INSURER according to the time set in Article XXXIII. 4. The INSURER shall be responsible for the data collection and other statistics of all services provided including, but not limited, to encounter and real cost of each one, claims services and any other pertinent data from all HCO's, participating providers or any other entity which provide services to beneficiaries under the program, said data to be classified by provider, by beneficiary, by diagnosis, by procedure and by the date the service is rendered. The data collected must then be forwarded to the ADMINISTRATION on a monthly basis in an electronic or on machine readable media format. The data fields and specific data elements required to be transmitted are contained in the RFP's Claim File Layout format. The ADMINISTRATION reserves the right to modify, expand or delete the requirements contained therein or issue new requirements, subject to consultation with the INSURER and cost negotiation, if necessary. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 49 5. The INSURER agrees that all required data and information needs to be collected and reported through electronic or machine readable media commencing with the effective date of coverage of this contract. 6. The information systems of all HCO's shall be compatible with the systems in use by the INSURER. 7. The INSURER shall supply the HCO's and, upon request, all participating providers with eligibility information on a daily basis. Said information shall be secured through on-line access with the INSURER. 8. The INSURER agrees to submit to the ADMINISTRATION in such form and detail as indicated in the Claim File Layout format and any other formats the ADMINISTRATION requires in the RFP, the following information: a) Within fifteen (15) days of the end of each month: 1) Data pertaining to health insurance claims, and encounters for all services provided to beneficiaries. 2) Enrollment data b) Within twenty-five (25) days of the end of each month: 1) Statistical data on providers, medical services and any other services; 2) Any and all data and information as required in the Request for Proposals and in the Proposal submitted; 3) Any other reports or data that the ADMINISTRATION may require after consultation with the INSURER and cost negotiation, if necessary. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 9. The INSURER agrees to provide to the ADMINISTRATION, on a regular basis as needed, any and all data, information, reports, and documentation that will permit Governmental Agencies, to compile statistical data to substantiate the need for, and the appropriate use of federal funds for federally financed health programs. 10. The INSURER agrees to report to the ADMINISTRATION on a daily basis all information pertaining to enrollment, disenrollment, and other subscriber or beneficiary transactions as required by the ADMINISTRATION. All records shall be transmitted: 1) through approved ADMINISTRATION systems contractor; or 2) over data transmission lines directly to the ADMINISTRATION; or 3) on machine readable media. All machine readable media or electronic transmissions shall be consistent with the relevant ADMINISTRATION's record layouts and specifications. 50 11. The INSURER will submit to the ADMINISTRATION on a monthly basis reports and data generated electronically that allows the ADMINISTRATION: a. Evaluation of the effectiveness of the delivery of services by providers and the adequacy of these services. b. Monitoring and evaluation of the efficiency and propriety of the services that are being received by the beneficiaries and their dependents. c. Comparison of experience with that of other providers. d. Comparison of the utilization of health care and the cost tendencies within the community and the group that renders service. e. Demonstration of how the quality of care is being improved for the insured and their dependents. f. Comparison of the administrative measures taken by the INSURER with reference points to be able to evaluate the progress towards constant improvement. g. Compliance with the information requirements and reports of the Federal Programs such as: Title II of the Health Insurance Portability and Accountability Act; Title IV-B Part 1 and 2, Title IV-E, Title V, Title XIX, and Title XXI of the Social Security Act; the applicable state laws as (the Child Abuse Act, "Ley de Maltrato de Menoresn" Public Law 75 of May 28, 1980; the Protection and Assistance to Victims and Witness Act, "Ley de Proteccion y Asistencia a Victimas de Delitos y Testigos", Public Law 77 of July 9, 1986), and any other information requirements which in the future are mandated by federal and state programs. h. Evaluation of each service provided with separate identification by beneficiary, by provider, by diagnosis, by diagnostic code, by procedure code and by date and place of service. The provider must be identified by his/her provider's identification number or his/her social security account number. 12. The INSURER will provide the ADMINISTRATION with a uniform system for data collection. 13. The INSURER'S Information Systems must provide a continuous flow of information to measure the quality of services rendered to the beneficiaries and their dependents. The purpose of these systems must be to help the ADMINISTRATION and the INSURER in the process of achieving continuous improvement in the quality of services rendered to beneficiaries and their dependents within a cost effective system. 14. The INSURER will prepare the necessary reports requested herein for the administration of the health insurance contract. Daily reports are due by the end of the following business day. Weekly reports are due on the first business day of the following week. Monthly reports are due twenty-five (25) days after the 51 end of each month. Quarterly reports are due thirty (30) days after the end of each quarter. 15. The INSURER must inform the Administration on a monthly basis all cancellation and disenrollment of providers. 16. The INSURER must provide the ADMINISTRATION on a monthly basis an updated version of its Providers Directory. 17. The INSURER will coordinate the enrollment of beneficiaries. 18. The INSURER will assure adequate and efficient functioning for the term of the contract that includes an insurance against economic loss due to system failure or data loss. 19. As an additional measure to guarantee quality and adequacy of the medical health services, the INSURER will conduct periodical statistics analysis of the medical services rendered to the beneficiaries and will compare them with the primary physician practice profile of their regular health insurance plan. Quarterly reports as to the analysis and comparison statistics will be submitted to the ADMINISTRATION. 20. In order to insure that all subscriber encounters are registered and recorded, the INSURER will conduct audits of statistical samples and unannounced personal audits of the HCO's and participating provider's facilities to assure that the medical records reconcile with the encounter reported, and corrective measures will be taken in case of any violation of the INSURER's regulations regarding the registration and reporting of encounters. The INSURER will provide quarterly reports to the ADMINISTRATION covering all the findings and corrective measures, if any, taken regarding any violation of said regulations. 21. The INSURER, as a minimum must guarantee the following: a. The security and integrity of the information and communication systems through: 1. Regular Backups on a daily basis 2. Controlled Access to the physical plant 3. Control logical access to information systems 4. Verification of the accuracy of the data and information b. The continuity of services through: 1. Regular maintenance of the systems, programs and equipment 2. A staff of duly trained personnel 3. An established and proven system of Disaster Recovery 4. Cost Effective systems. 52 c. Identification of the beneficiary via the use of plastic cards. d. Automated system of communication with statistics of the management of calls (Occurrence of busy lines, etc.) e. A comprehensive health insurance claim processing system to handle receiving, processing and payment of claims and encounters. f. Analysis/Control of utilization (The INSURER must provide said analysis to the ADMINISTRATION on a monthly basis in the format outlined by the ADMINISTRATION): 1. by patient/family 2. by region, area/region town, (zip code) 3. by provider (provider's identification number or social security account numbers) 4. by diagnosis 5. by procedure or service 6. by date of service g. Financial and Actuarial reports h. System of Control for claims payment that includes payment history. i. Computerized pharmacy system that permits its integration to the payment procedures to the providers. j. Outcome Analysis k. Electronic creation of data files related to mortality, morbidity, and vital statistics. l. Integration to central systems 1. Procedures and communications protocol compatibility; 2. Ability to transmit reports, and or files via electronic means. m. Electronic Handling of: 1. The process of Admission to hospitals and ambulatory services 2. Verification of eligibility and subscription to the plan. 3. Verification of benefits 4. Verification of Financial information (Deductibles, Co-payments, etc.) 5. Verification of individual demographic data 6. Coordination of Benefits. n. Computerized applications for general accounting. o. As to HCO's and all Participating Providers the information system shall provide for: 1. On line access to service history for each beneficiary 2. Register of diagnosis and procedures for each service rendered. 3. Complete demography on line, including the aspect of coverage and financial responsibility of the patient. 4. Individual and family transactions 53 5. Annotations on line (General notes such as allergies, reminders or other clinical aspects (free form) 6. Analysis of activity by: a. department b. provider c. diagnosis d. procedures e. age f. sex g. origin h. others, as mutually agreed upon. 7. Diagnosis history by patient with multiple codes per service. 8. AD Hoc Reports 9. Referrals Control 10. Electronic Billing 11. Pharmacy system 12. Dental system 13. Ability to handle requirements of the Medicare programs such as RBRVS (Relative Base Relative Value System). 14. Ability to collect data as to the quarter in which the pregnant female beneficiary commences her ob-gyn treatment. The format for the collection of this data shall be approved by the ADMINISTRATION prior to its implementation. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 22. The INSURER agrees to report all procedure and diagnostic information using the current versions of Current Procedural Terminology, International Classification of Diseases, Clinical Modification, Diagnostic Statistic Manual and American Dental Association's Current Dental Terminology, respectively. This does not prevent the adoption by INSURER of the ANSI X-12 electronic transactions for standards set forth in the HIPAA regulations; which shall be implemented on or before October 2002, unless modified by DHHS. 23. Non compliance with any of the Information Systems and Reporting Requirements; with any requirements related to the electronic standards transactions to be implemented within the schedule set forth by the HIPAA regulations, or with other requirements contained herein, shall be subject to the provisions of Articles XXXIII and XXXVI of this contract, as well as to Article IV, Section 2(n) of Law 72 of September 7, 1993, which provides the right of the 54 ADMINISTRATION to enforce compliance through the Circuit Court of Appeals of Puerto Rico, Part of San Juan. 24. The INSURER shall provide the ADMINISTRATION with one or more telephone numbers of dial-in data lines, and a minimum of three user's ID's and passwords that will allow the ADMINISTRATION's authorized personnel access to the INSURER's on-line computer applications, Such access will allow the ADMINISTRATION use of the same systems and access to the same information as used by the INSURER and enable the inquiry on beneficiaries, providers, and statistics files related to this contract. 25. As per the INSURER's proposal, INSURER shall provide to each HCO's, HCO's network of participating providers and INSURER's participating providers in the Health Area/Region, as well as to those outside of the area/region who provide services to beneficiaries from within the area/region, the necessary hardware and software to maintain on-line communication with the INSURER's Information System to document all encounters and services rendered to beneficiaries. Said hardware and software will be provided at a reasonable cost for the implementation and servicing. 26. The INSURER agrees to submit to the ADMINISTRATION reports as to the data and information gathered through the use of the Health Plan Employer Data and Information Set (HEDIS) and the work plan required in the RFP formats, as per Article XVII, Section VII. 27. The INSURER must disclose to the ADMINISTRATION the following information on provider incentive plans in sufficient detail to determine whether their incentive plan complies with the regulatory requirements set forth on 42 CFR 434.70(a) and 422.10: a) Whether services not furnished by the physician or physician group are covered by the incentive plan. If only the services furnished by the physician or physician group are covered by the incentive plan, disclosure of other aspects of the plan need not be made. b) The type of incentive arrangement (i.e., withhold, bonus, capitation). c) A determination on the percent of payment under the contract that is based on the use of referral services. If the incentive plan involves a withholding or bonus, the percent of the withholding of bonus. If the calculated amount is 25% or less, disclosure of the remaining elements in this list is not required and there is no substantial risk. d) Proof that the physician or physician group has adequate stop-loss protection, including the amount and type of stop-loss protection. e) The panel size and, if patients are pooled, the method used. f) In the case of those prepaid plans that are required to conduct beneficiary surveys, the survey's results. 55 The information items (a) through (e) above, must be disclosed to the ADMINISTRATION: (1) prior to approval of its initial contracts or agreements, upon the contract or agreements anniversary or renewal effective date or upon request by the Administration or CMS. The disclosure item (f) is due 3 months after the end of the contract year or upon request by CMS. If the contract with the INSURER is an initial Medicaid contract, but the INSURER has operated previously in the commercial or Medicare markets, information on physician incentive plans for the year preceding the initial contract period must be disclosed. If the contract is an initial contract with INSURER, but the INSURER has not operated previously in the commercial or Medicare markets, the INSURER should provide assurance that the provider agreements that they sign will meet CMS and Commonwealth requirements (i.e. there is no Physician Incentive Plan (PIP); there is a PIP but no Substantial Financial Risk (SFR); there is a PIP and SFR so stop-loss and survey requirements will be met). For contracts being renewed or extended, the INSURER must provide PIP disclosure information for the prior contracting period's contracts. The INSURER must update PIP disclosures annually and must disclose to administration whether PIP arrangements have changed from the previous year. Where arrangements have not changed, a written assurance that there has not been a change is sufficient. This also applies when INSURER analyze the PIP arrangements in their direct and downstream contracts to determine which disclosure items are due from their contractors. INSURER is expected to maintain the current written assurances and the prior periods' documentation so that the materials are available during on-site reviews. 28. INSURER TELEPHONE ACCESS REQUIREMENTS INSURER must have adequately-staffed telephone lines available. Telephone personnel must receive customer service telephone training. INSURER must ensure that telephone staffing is adequate to fulfill the standards of promptness and quality listed below: 1. 80% of all telephone calls must be answered within an average of 30 seconds; 2. The lost (abandonment) rate must not exceed 5%; 3. INSURER cannot impose maximum call duration limits but must allow calls to be of sufficient length to ensure adequate information is provided to the Beneficiaries or Provider. 4. The INSURER shall abide with the present Information Systems and Reporting Requirements established in this agreement and shall cooperate with the ADMINISTRATION in the development and implementation of any future systems. 56 ARTICLE XVI FINANCIAL REQUIREMENTS 1. The INSURER shall notify the ADMINISTRATION of any loans and other special financial arrangements which are made between the INSURER and any HCO or participating provider or related parties. Any such loans shall strictly conform to the legal requirements of the anti-fraud and anti-kickback laws and regulations. 2. The INSURER shall provide to the ADMINISTRATION copies of audited financial statements following Generally Accepted Accounting Principles (GAAP) and of the report to the Insurance Commissioner in the format agreed to by the National ASSOCIATION of Insurance Commissioners (NAIC), for the year ending on December 31, 2001, and subsequently thereafter for the contract term not later than March 15 of each subsequent year. Unaudited GAAP financial statements for each quarter during the contract term shall be presented to the ADMINISTRATION not later than forty five (45) days after the closing of each quarter. 3. The INSURER will maintain adequate procedures and controls to insure that any payments pursuant to this contract are properly made. In establishing and maintaining such procedures the INSURER will provide for separation of the functions of certification and disbursement. 4. The INSURER is required to establish a cash reserve, in accordance with the Insurance Code of Puerto Rico, to insure that outstanding claims can be satisfied in the event of insolvency. 5. The INSURER's Incurred But Not Reported (IBNR) reserve will be reconciled and reevaluated every ninety (90) days and in no way the IBNR reserve shall exceed 10% of the total monthly capitation payments made to HCO's. The ADMINISTRATION reserves the right to retain for custody purposes such IBNR reserve if becomes necessary. 6. The INSURER will ensure that the administrative costs and expenses incurred on an annual basis do not exceed 7.5% of the total premium payments made by the ADMINISTRATION. The INSURER's net earnings in excess of 2.5% premium payments in any given year will be shared with the ADMINISTRATION. The ADMINISTRATION share apportionment of the earnings shall be 75% and the INSURER shall be 25%. 7. The INSURER agrees to provide to the ADMINISTRATION, upon the expiration of each period of twelve (12) consecutive months of the contract year, and not later than ninety (90) days thereafter, audited financial statements following Generally Accepted Accounting Principles (GAAP) which exclusively present the 57 operational financial situation related to the execution of this contract. The ADMINISTRATION reserves the right to request interim audited financial statements not to exceed two (2) during the contract term. 8. The INSURER agrees to provide and make available to the ADMINISTRATION or any accounting firm contracted by the ADMINISTRATION any and all working papers of its external auditors related to this contract. ARTICLE XVII PLAN COMPLIANCE EVALUATION PROGRAM 1. The ADMINISTRATION shall conduct periodical evaluations of the INSURER's compliance with all terms and conditions of this contract including, but not limited to, quality, appropriateness, timeliness and reasonableness of cost and administrative expenses, said evaluation to be defined as the Plan Compliance Evaluation Program. 2. Said program will evaluate compliance of the following aspects in each areas/regions: a) Eligibility and enrollment b) Services to beneficiaries and participating providers c) Coverage of benefits d) Reporting e) Financial requirements f) Rules and Regulations g) Plan initiatives h) Quality, appropriateness, timeliness and cost of services i) Utilization j) Fraud and abuse k) Accessibility l) Grievances and Complaint handling m) Information Systems n) Electronic standards, security and privacy compliance as provided by HIPAA to include review of timetables for compliance and implementation plans o) Such aspects which the ADMINISTRATION considers necessary in order to evaluate full compliance with this contract. 3. The evaluation process will be performed throughout the contract year using specific evaluating parameters. All parameters will be derived exclusively from the Request for Proposals, the INSURER's Proposal and this contract. Each area/region will contain several parameters with each parameter having a specific numeric value adding up a subtotal per area/region and a total for the aggregate of all area/regions of evaluation. Results will be presented in a Plan Compliance Evaluation Report. The evaluating parameters will be presented to the INSURER prior to commencement of the evaluation process. 58 4. The INSURER shall comply with the penalties set for each parameter within the range of values predetermined by the ADMINISTRATION. 5. Compliance with the Plan Compliance Evaluation Program is of essence to this contract and will be a determining factor in the renewal of this contract. Failure to comply with compliance requirements or parameters may also result in the termination of the contract as provided in Article XXXIII. 6. The ADMINISTRATION agrees to furnish the INSURER with the required Plan Performance Evaluation Program prior to its implementation. 7. The INSURER, as an additional tool to assure the evaluation of the insurance contract, agrees to abide, implement and develop the Health Plan-Employer Data and Information Set (HEDIS), as revised and recommended by NCQA and in accordance with the time schedule, work plan and other requirements established in Addendum XI of the RFP referring to HEDIS DATA. 8. DEFAULT AND REMEDIES under Plan Compliance Program. REMEDIES AVAILABLE TO THE ADMINISTRATION UNDER THE PLAN COMPLIANCE PROGRAM FOR INSURER'S DEFAULTS All of the listed remedies below may be exercised by the ADMINISTRATION and are in addition to all other remedies available to the ADMINISTRATION under this contract, by law or in equity, are joint and several, and may be exercised concurrently or consecutively. Exercise of any remedy in whole or in part does not limit the ADMINISTRATION in exercising all or part of any remaining remedies. Any particular default listed under subparagraph (a) to (j) below (which is not intended to be exhaustive) may be subject, when applicable, to any one or more of the following remedies: - Terminate the contract if the applicable conditions set forth in Section 10.1 are met; - Suspend payment to INSURER; - Recommend to CMS that sanctions be taken against INSURER as set out in Section 10.7; - Remove the EPSDT's component from the capitation paid to INSURER if the benchmarks(s) missed is for EPSDT's; - Assess civil monetary penalties as set out in section 10.8; and/or - Withhold premium payment. 59 DEFAULTS BY INSURER a. FAILURE TO PERFORM AN ADMINISTRATIVE FUNCTION Failure of INSURER to perform an administrative function is a default under this contract. Administrative functions are any requirements under this contract that are not direct delivery of health care services. Administrative functions include claims payment; encounter data submission; filing any report when due; cooperating in good faith with THE ADMINISTRATION, an entity acting on behalf of THE ADMINISTRATION, or an agency authorized by statute or law to require the cooperation of INSURER in carrying out an administrative, investigative, or prosecutorial function of the program; providing or producing records upon request; or entering into contracts or implementing procedures necessary to carry out contract obligations. b. ADVERSE ACTION AGAINST INSURER BY PRICO Termination or suspension of INSURER's PRICO Certificate of Authority or any adverse action taken by PRICO that THE ADMINISTRATION determines will affect the ability of INSURER to provide health care services to beneficiaries is a default under this contract. c. INSOLVENCY Failure of INSURER to comply with Commonwealth solvency standards or incapacity of INSURER to meet its financial obligations as they come due is a default under this contract. d. FAILURE TO COMPLY WITH FEDERAL LAWS AND REGULATIONS Failure of INSURER to comply with the federal requirements for Medicaid, including, but not limited to, federal law regarding misrepresentation, fraud, or abuse; and, by incorporation, Medicare standards, requirements, or prohibitions, is a default under this contract. The following events are defaults under this contract pursuant to 42 U.S.C. 1396b(m)(5), 1396u-2(e)(1)(A): INSURER's substantial failure to provide medically necessary items and services that are required under this contract to be provided to beneficiaries; INSURER's imposition of premiums or charges on beneficiaries in excess of the premiums or charge permitted by federal law; 60 INSURER's acting to discriminate among beneficiaries on the basis of their health status or requirements for health care services, including expulsion or refusal to enroll an individual, except as permitted by federal law, or engaging in any practice that would reasonably be expected to have the effect of denying or discouraging enrollment with INSURER by eligible individuals whose medical condition or history indicates a need for substantial future medical services; INSURER's misrepresentation or falsification of information that is furnished to CMS, THE ADMINISTRATION, a beneficiary, a potential beneficiary, or a health care provider; INSURER's failure to comply with physician incentive requirements 1876(I)(8), 1903(m)(2)(A)(v) of the Social Security Act and 42 Code of Federal Regulations 417.479. INSURER's distribution, either directly or through any agent or independent contractor, of marketing materials that contain false or misleading information, excluding materials previously approved by THE ADMINISTRATION. e. MISREPRESENTATION OR FRAUD INSURER's misrepresentation or fraud with respect of any provision of this contract is a default under this contract. f. EXCLUSION FROM PARTICIPATION IN MEDICARE OR MEDICAID Exclusion of INSURER or any of the managing employees or persons with an ownership interest whose disclosure is required by Section 1124(a) of the Social Security Act (the Act) from the Medicaid or Medicare program under the provisions of Section 1128(a) and/or (b) of the Act is a default under this contract. Exclusion of any provider or subcontractor or any of the managing employees or persons with an ownership interest of the provider or subcontractor whose disclosure is required by Section 1124(a) of the Social Security Act (the Act) from the Medicaid or Medicare program under the provisions of Section 1128(a) and/or (b) of the Act is a default under this contract if the exclusion will materially affect INSURER's performance under this contract. 61 g. FAILURE TO MAKE PAYMENTS TO NETWORK PROVIDERS AND SUBCONTRACTORS INSURER's failure to make timely and appropriate payments to network providers and subcontractors is a default under this contract. h. FAILURE TO MONITOR AND/OR SUPERVISE ACTIVITIES OF CONTRACTORS OR NETWORK PROVIDERS Failure of INSURER to audit, monitor, supervise, or enforce functions delegated by contract to another entity that results in a default under this contract or constitutes a violation of state or federal laws, rules, or regulations is a default under this contract. Failure of INSURER to properly credential its providers, conduct reasonable utilization review, or conduct quality monitoring is a default under this contract. Failure of INSURER to require providers and contractors to provide timely and accurate encounter, financial, statistical and utilization data is default under this contract. i. PLACING THE HEALTH AND SAFETY OF BENEFICIARIES IN JEOPARDY INSURER's placing the health and safety of the beneficiaries in jeopardy is a default under this contract, and the ADMINISTRATION may immediately terminate the agreement, providing the INSURER a due process hearing to determine any monetary obligations. j. FAILURE TO MEET ESTABLISHED BENCHMARK Failure of INSURER to repeatedly meet any benchmark established by THE ADMINISTRATION under this contract is a default under this contract. 9. NOTICE OF DEFAULT AND CURE OF DEFAULT WHEN APPLICABLE THE ADMINISTRATION will provide INSURER with written notice of default (Notice of Default) under this contract. The Notice of Default may be given by any means that provides verification of receipt. The Notice of Default must contain the following information: i. A clear and concise statement of the circumstances or conditions that constitute a default under this contract; 62 ii. The contract provision(s) under which default is being declared; iii. A clear and concise statement of how and/or whether the default may be cured; iv. A clear and concise statement of the time period during which INSURER, when applicable, may cure the default; v. The remedy or remedies THE ADMINISTRATION is electing to pursue and when the remedy or remedies will take effect; vi. If THE ADMINISTRATION is electing to impose civil monetary penalties, the amount that THE ADMINISTRATION intends to withhold or impose and the factual basis on which THE ADMINISTRATION is imposing the chosen remedy or remedies; vii. Whether any part of a civil monetary penalty, if THE ADMINISTRATION elects to pursue these remedy, may be passed through to an individual or entity who is or may be responsible for the act or omission for which default is declared; viii. Whether failure to cure the default within the given time period, if any, will result in THE ADMINISTRATION pursuing an additional remedy or remedies, including, but not limited to, additional sanctions, referral for investigation or action by another agency, and/or termination of the contract. 10. EXPLANATION OF REMEDIES 10.1 TERMINATION 10.1.1 TERMINATION BY THE ADMINISTRATION THE ADMINISTRATION may terminate this contract if: 10.1.1.1 INSURER substantially fails or refuses to provide payment for or access to medically necessary services and items that are required under this contract to be provided to beneficiaries after notice and opportunity to cure; 10.1.1.2 INSURER substantially fails or refuses to perform administrative functions under this contract after notice and opportunity to cure; 10.1.1.3 INSURER materially defaults under any of the provisions of Article XVI; 10.1.1.4 Federal or Commonwealth funds for the Medicaid program are no longer available; or 63 10.1.1.5 THE ADMINISTRATION has a reasonable belief that INSURER has placed the health or welfare of beneficiaries in jeopardy, as established in Article XVII, (8) (i). 10.1.2 THE ADMINISTRATION must give INSURER 30 days written notice of intent to terminate this contract if termination is the result of INSURER's substantial failure or refusal to perform administrative functions or a material default as established in Article XXXIII, except as otherwise stated. 10.1.3 THE ADMINISTRATION may, when termination is due to INSURER's substantial failure or refusal to provide payment for or access to medically necessary services and items, notify INSURER's beneficiaries of any hearing requested by INSURER. Additionally, if THE ADMINISTRATION terminates for this reason, THE ADMINISTRATION may enroll INSURER's beneficiaries with another INSURER or permit INSURER's beneficiaries to receive Medicaid-covered services other than from an INSURER. 10.1.4 INSURER must continue to perform services under the transition plan described in Section 10.2.1 if the termination is for any reason other than THE ADMINISTRATION's reasonable belief that INSURER is placing the health and safety of the beneficiaries in jeopardy. If termination is due to this reason, THE ADMINISTRATION may prohibit INSURER's further performance of services under the contract. 10.1.5 If THE ADMINISTRATION terminates this contract, INSURER may appeal the termination under Article VI Section 12 Law 72 September 7, 1993, as amended. 10.1.9 TERMINATION BY MUTUAL CONSENT This contract may be terminated at any time by mutual consent of both INSURER and THE ADMINISTRATION. 10.2 DUTIES OF CONTRACTING PARTIES UPON TERMINATION BY REASON OF DEFAULT When termination of the contract occurs by reason of default, THE ADMINISTRATION and INSURER must meet the following obligations: 10.2.1 THE ADMINISTRATION and INSURER must prepare a transition plan, which is acceptable to and approved by THE ADMINISTRATION, to ensure that beneficiaries are reassigned to other plans without interruption of services. That transition plan will be implemented during the 90-day 64 period between receipt of notice and the termination date unless termination is the result of THE ADMINISTRATION's reasonable belief that INSURER is placing the health or welfare of beneficiaries in jeopardy. 10.2.2.2 INSURER is responsible for all expenses related to giving notice to beneficiaries; and 10.2.2.3 INSURER is responsible for all expenses incurred by THE ADMINISTRATION in implementing the transition plan. 10.2.2.4 If the contract is terminated by mutual consent: 10.2.3.1 THE INSURER is responsible for notifying all beneficiaries of the date of termination and how beneficiaries can continue to receive contract services and the provisions of Article XXXIV shall apply. 10.7 RECOMMENDATION TO CMS THAT SANCTIONS BE TAKEN AGAINST INSURER 10.7.1 If CMS determines that INSURER has violated federal law or regulations and that federal payments will be withheld, THE ADMINISTRATION will deny and withhold payments for new enrollees of INSURER. 10.7.2 INSURER must be given notice and opportunity to appeal a decision of THE ADMINISTRATION and CMS pursuant to 42 CFR 434.67. 10.8 CIVIL MONETARY PENALTIES 10.8.1 The Administration may impose monetary penalties according to Article XXXVI, Section 4. 10.10 REVIEW OF REMEDY OR REMEDIES TO BE IMPOSED 10.1 INSURER may dispute the notice by the ADMINISTRATION that ADMINISTRATION intends to impose any sanction under this contract. INSURER may notify THE ADMINISTRATION of its objections by filing a written response to the Notice of Default, clearly stating the reason INSURER disputes the proposed sanction. With the written response, INSURER must submit to THE ADMINISTRATION any documentation that supports INSURER's position. INSURER must file the review within fifteen (15) days from INSURER's receipt of the Notice of Default as provided in Article XXXIII, subparagraph 2. Filing a dispute in a written response to the Notice of Default suspends imposition of the proposed sanction. 65 10.10.2 INSURER and THE ADMINISTRATION must attempt to informally resolve the dispute. If INSURER and THE ADMINISTRATION are unable to informally resolve the dispute THE ADMINISTRATION will make the remedy final. 11. The ADMINISTRATION in coordination with the INSURER, will implement a comprehensive fraud, errors and irregularities program. The INSURER will be required to ensure compliance with this program. If after a reasonable period to be determine by the parties, the ADMINISTRATION detected any violation of the program, the ADMINISTRATION may withheld such amount from the INSURER premium. The INSURER will have the right to present its position with following XXXVII (5) (B). ARTICLE XVIII PAYMENT OF PREMIUMS 1. The payment for the first month of coverage under this contract will be made upon the certification by the INSURER that it has complied with all the terms and conditions contained in this contract to the satisfaction of the ADMINISTRATION. For subsequent months the ADMINISTRATION shall pay to the INSURER the corresponding monthly premium within five (5) working days following submission by the INSURER of an invoice containing the list of the beneficiaries enrolled for the month of the invoice. Calculations by ASES of premiums due will be based on the status of beneficiaries eligible at the end of the prior month, following all processing of updates and cancellations effective in that month. 2. The monthly premium calculation for beneficiaries not enrolled for the full month shall be determined on a pro-rata basis by dividing the corresponding monthly premium amount by the number of days in the month and multiplying the result by the number of days the beneficiary was actually enrolled. 3. The monthly premiums for the months comprised within the contract term and covered by this contract are as follows: a) For all beneficiaries including all those who are sixty-five (65) years and older who are Medicare beneficiaries with Part A or Parts A and B and those who are sixty-five years and older who are not Medicare recipients: 66 1) Per member per month rate (PMPM) (Beneficiary) established at FIFTY SEVEN DOLLARS WITH TEN CENTS ($57.10) 4. The per member per month rate (PMPM) herein agreed provides for: a) The billing by providers to Medicare for services rendered to beneficiaries who are also Medicare recipients. The INSURER will not cover deductibles or co-insurance of Part A, but will cover deductibles and co-insurance of Part B of Medicare, except for deductibles and co-insurance for outpatient services provided in hospital setting, other than physician services. b) The recognition as a covered reimbursable Medicare Program cost as bad debts by reason of non-payment of Part A deductibles and/or coinsurance, and for deductibles and co-insurance for outpatient services provided in hospital setting under Medicare Part B, other than physician services. c) Pharmacy coverage for beneficiaries who are also Part A and Part A and B Medicare recipients, as long as the benefits are accessed through the PCP, HCO's, HCO's network of participating providers or the INSURER's participating providers and the prescription is issued by a participating provider of the INSURER. d) Dental coverage for beneficiaries who are also Part A and Part A and B Medicare recipients, the INSURER's participating providers. e) All benefits included in Addendum I that are not covered under Medicare Part A or Part B. 5. The INSURER shall not, at any time, increase the rate agreed in the contract nor reduce the benefits agreed to as defined in Addendum I of this contract. 6. The INSURER guarantees the ADMINISTRATION that the rate and any applicable deductibles or co-payments constitute full payment for the benefits contracted under the plan, and that participating providers cannot collect any additional amount from the beneficiaries. Balance billing is expressly prohibited. Upon a determination made by the ADMINISTRATION that the INSURER or its agents that the INSURER has engaged in balance billing, the ADMINISTRATION will proceed to enforce provisions as established in Article XXXVI. 7. The INSURER understands that the payment of premium by the ADMINISTRATION and the INSURER's payments to its HCO's, HCO's network of participating providers and INSURER's participating providers, shall be considered as full and complete payment for all services rendered except for the deductibles established in Addendum I of the contract herein. 67 8. For those Medicare beneficiaries with Part A, any recovery by the provider for Part A deductibles and/or co-insurance will be made exclusively through the Medicare Part A Program as bad debts. In this instance, beneficiaries would neither pay any reimbursement for rendered services to a participating provider nor pay the deductibles included in Addendum I of this contract. 9. For those Medicare beneficiaries with Part B, any recovery by the participating provider for Part B deductibles and/or co-insurance, other than services provided on an outpatient basis to hospital clinics, will be made through the INSURER and/or the HCOs. In this instance, beneficiaries would neither pay any reimbursement for rendered services to a participating provider nor pay the deductibles included in Addendum I of this contract. 10. Co-insurance and deductible for Part B services provided on an outpatient basis to hospital clinics, other than physician services, will be considered as a covered bad debt reimbursement item under the Medicare program cost. In this instance, the INSURER will pay for the co-insurance and deductibles related to the physician services provided as a Part B service, through the capitation paid to the HCO. 11. Newborns shall be immediately covered by the INSURER if born to an eligible individual and/or family unit as defined herein the Medicaid Commonwealth Plan, the law and its regulations. 12. The INSURER understands that if the Federal Government submits an alternative to the agreement hereof that is more cost effective and for the benefit of the Government of the Commonwealth Puerto Rico, the ADMINISTRATION along with the INSURER will attempt to renegotiate the coverage for Medicare beneficiaries with Part A or Part A and B. 13. The INSURER certifies that the monthly billing submitted to the ADMINISTRATION includes all beneficiaries, who have been issued an identification card and for which payment of premiums are due either on a monthly or pro-rated basis. The ADMINISTRATION will not accept any new billing once the monthly billing is submitted by the INSURER to the ADMINISTRATION, unless there is a justifiable reason for the omission. 14. If any differences arise in the ADMINISTRATION's payment of premiums to the INSURER, the latter will proceed to analyze the differences between the original billing submitted by the INSURER and the amount paid by the ADMINISTRATION. The INSURER will proceed, after proper analysis, to submit to the ADMINISTRATION a diskette as well as all relevant documentation that supports and details the INSURER's claim not later than thirty (30) working days after payment is made to the INSURER by the ADMINISTRATION. Once this term has ended, the INSURER waives its right to claim any amounts from differences arising from the monthly payment made by the ADMINISTRATION 68 and releases the ADMINISTRATION from any and all obligation to pay any additional premiums, including differences to billing by more than one insurer. During the following one hundred and twenty (120) days the ADMINISTRATION will confirm the validity of the claim and make payment thereof. ARTICLE XIX ACTUARIAL REQUIREMENTS 1. For the purpose of determining future premiums, the loss experience of this contract shall be based exclusively on the results of the cost of health care services provided to the beneficiaries covered under this contract. The INSURER shall maintain all the utilization and financial data related to this contract duly segregated from its regular accounting system including, but not limited to the General Ledger and the necessary Accounting Registers classified by the Area/Region subject to this contract. 2. Administrative expenses to be included in determining the experience of the program are those directly related to this contract. Separate allocations of expenses from the INSURER's regular business, INSURER's related companies, INSURER's parent company or other entities will be reflected or made a part of the financial and accounting records described in the preceding section. 3. Any pooling of operating expenses with other of the INSURER's groups, cost shifting, financial consolidation or the implementation of other combined financial measures is expressly forbidden. 4. Amounts paid for claims or encounters resulting from services determined to be medically unnecessary by the INSURER will not be considered in the contract's experience. 5. The INSURER shall provide the ADMINISTRATION every month with a Premium Disbursement Illustration. Said illustration shall present the distribution of the capitation, claim expenses by coverage, reserves, administrative expenses and premium distributions as referred and contained in the RFP's Actuarial Reports formats. Failure to comply with the requirements contained herein will be sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. 6. The determination by the INSURER as to the payment of the capitation fee and as to any other payments by virtue of this contract will be computed on an actuarially sound basis. 7. The INSURER will provide to the ADMINISTRATION, on a monthly basis, the actuarial data, premium distribution, and reports as contained in the RFP's Actuarial Report formats. Failure to comply with the requirements contained herein will be 69 sufficient cause for the imposition against the INSURER of the penalty provided for in Article XXXVI of this contract. ARTICLE XX PREVENTIVE MEDICINE PROGRAM 1. The Department of Health will provide for and effectively implement a preventive medicine program with primary emphasis on public health education which will include, but will not be limited to, guidance on lifestyles, AIDS, drug abuse, cancer and mother and child care. This is typically referred to as Primary Prevention. The INSURER will collaborate with the Department of Health and provide for a preventive medicine program with primary emphasis on the provision of clinical services in support of the Preventive Medicine Program, including but not limited to, screening and education of individual patients, such as PAP Smears, colorectal screening mammograms and cholesterol screening as indicated by the best practices of medicine. In cooperation with the INSURER, the Department of Health will develop a surveillance methodology to identify compliance with this program. 2. The INSURER, through its secondary and tertiary Preventive Program, will address, analyze and implement measures to provide effective clinical and educational activities seeking to combat the specific causes of morbidity and mortality in the Area/Region. 3. The INSURER will develop and effective) implement a case management system in order to monitor high risk cases and attend to the covered health care needs of the beneficiaries and dependents within said category. 4. The INSURER represents that under its Preventive Program it will contract, sufficient medical specialists and specialized teams in order to combine the resources of the HCO's and the professional staff of the HCO's, including but not limited to, health educators, nutritionists, dieticians, nurses, other trained personnel and physicians who will act as the team's educator, manager and coordinator. 5. The INSURER will be responsible to direct to a network of other agencies and community resources serving each municipality within the Area/Region so as to guarantee that participating providers and beneficiaries are aware of and understand the available services in their community and the process by which to access them. 6. The INSURER will assure that discharge of the mother and her baby from the hospital is based upon sound clinical judgment determined by the clinician. The coverage for hospital stay following a normal vaginal delivery may not be limited 70 to less than 48 hours for both the mother and newborn child and in the case of childbirth following cesarean section; the hospital stay may not be limited to less than 96 hours for both mother and newborns. 7. The responsibilities of the INSURER in the Preventive Program will include the following: a) A disease management program developed by the INSURER in collaboration with the Department of Health which shall develop standardized processes to address major public health programs such as ASTHMA, DIABETES, HYPERTENSION AND CONGESTIVE HEART FAILURE. This program shall include identification treatment protocols/guidelines and surveillance/monitoring. In cooperation with the Department of Health and the Centers for Disease Control (CDC) annual reports will be published detailing the results. b) A case management program which initially will be under the responsibility of a nurse. Case management will not be limited to the physician's offices or a determined center. Coordination of the services provided is required within the community and at the home of the beneficiary, if necessary. c) An outreach program shall be developed in collaboration with the Department of Health to target specific clinical issues as identified by the Department of Health, for those beneficiaries who cannot access those services. The clinical standard shall conform to the published HEDIS measures. These measures can be modified or supplemented by the Department of Health. d) The INSURER will assure that all pregnant women are screened for alcohol use following the Department of Health Guidelines. e) The INSURER will assure that all pregnant women will obtain counseling for the HIV test. All pregnant women who accept the HIV test will be referred to the HIV Prevention and Detection Program of the Department of Health. The participant provider shall coordinate all referrals with the Department of Health. Pre-natal care and HIV testing will continue to be covered benefits under this contract. f) The INSURER will assure that all pregnant women, following the administration of the HIV test that reports a positive result, are allowed to be treated under the guidelines for the utilization of ZDV in pregnant women and neonatal infants to reduce the risk of mother-infant HIV transmission, published by the Department of Health. g) The INSURER will assure that all pregnant women are properly educated about the WIC Program. Those eligible individuals will be referred to the 71 WIC Program of the Department of Health. It will be the immediate responsibility of the participating providers to comply with all requirements in order to arrange the referral to the WIC Program without any cost to the patient. h) The INSURER will assure that all providers comply with the EPSDT (Early Periodic Screening Diagnosis and Treatment) Program and the Guidelines for Adolescent Preventive Services (GAPS) from the American Medical Association. The itinerary of services that have to be rendered by providers will comply with the EPSDT Itinerary Services Formats. i) The INSURER will be responsible to develop and demonstrate its strategy to meet the appropriate prevention program guidelines as required by the Department of Health. j) The INSURER will provide the ADMINISTRATION monthly reports detailing all services rendered to mother and child classified by age groups and listing the numbers of pregnant women that have: (i) received prenatal care on each month in the reporting period; (ii) counseled as to HIV testing; (iii) referred to the HIV Prevention and Detection Program of the Department of Health; and (iv) referred to the WIC Program. k) The INSURER agrees to comply and assure that all participating providers will comply with the federal and local laws referred in Article XV paragraph (11) (g) of this contract. The INSURER will assure the submission by the participating provider of all the protocols and formats requested by the Department of Health, Department of the Family, Department of Education and Department of Justice as contained in the RFP formats. 8. The INSURER will develop and effectively implement incentive-based programs whereby the providers are motivated toward compliance with all requirements of their Preventive Medicine Program such as EPSDT, Immunizations, Prenatal care, reduction in cesarean sections, and other related services. 9. The ADMINISTRATION shall evaluate these preventive programs through HEDIS and other applicable performance standards. 10. The INSURER will provide the ADMINISTRATION quarterly reports needed by the Department of Health detailing services rendered in the Preventive Program described below. 11. The ADMINISTRATION shall have the right to audit the compliance with these requirements as needed. Non-compliance shall be a determining factor in nonrenewal of this contract or breach thereof as defined in Article of XXXIII. 72 ARTICLE XXI, MENTAL HEALTH PROGRAM AND DEMONSTRATION PROJECT 1. The INSURER shall direct beneficiaries to access Mental Health and Substance Abuse benefits in coordination with the Managed Behavioral Healthcare Organization in the health region contracted by the ADMINISTRATION and ASSMCA. The ASSMCA will monitor the Mental Health and Substance Abuse Program provided through the MBHO contracted in the Health Region/Area. This will be with sufficient specificity in order to provide for all mental health and substance abuse needs for all eligible beneficiaries residing within the municipalities forming part of said area. 2. The INSURER will abide with the ADMINISTRATION and ASSMCA's guidelines for expediting access of beneficiaries to the mental health and substance abuse benefits covered under the Health Insurance Program. 3. The INSURER acknowledges that the ADMINISTRATION has been delegated by the Department of Health, the implementation of a demonstration project for contracting and ensuring the provision of health services through direct contracts with health care organizations or other governmental health care organizations. INSURER agrees to collaborate with the ADMINISTRATION in the implementation of any demonstration project the ADMINISTRATION intends to simultaneously or progressively develop the contracted health region or another region or municipality during the term of this contract. ARTICLE XXII PHARMACY BENEFITS MANAGEMENT (PBM) 1. The ADMINISTRATION will monitor the Physical Health Program provided through the INSURER contracted in the Health Region/Area. This will be with sufficient specificity in order to provide for all Physical Health needs for all eligible beneficiaries residing within the municipalities comprising said area. 2. The INSURER will abide with the ADMINISTRATION's guidelines for expediting access of beneficiaries to the Physical health Program and benefits covered under the Health Reform Program. 3. Concurrently with the terms of this contract, the INSURER agrees to work with the ADMINISTRATION's Pharmacy Benefit Manager as selected by the ADMINISTRATION. This will include cooperating with the selected PBM to facilitate claims processing in a period specified, working with the selected PBM 73 to specify, develop and implement the flow of information, utilization review and customer service protocols, as well as, to cease billing and collection of rebates from drug manufacturers, if applicable. 4. The ADMINISTRATION's PBM, will provide the INSURER the services set forth in this Section and the services described in any attachment, addendum or amendment hereto:
- -------------------------------------------------------------------------------- ITEM DESCRIPTION - -------------------------------------------------------------------------------- Claims Processing - Contracting and administration of the pharmacy and Administrative network. The PBM will create a network of Services Participating Pharmacies, which will perform pharmacy services for Members at specified fees and discounts - Claims payments summary reports for each payment cycle every two weeks - Notify each INSURER of the payment process, systems involved (NCPDP 2.0) and relevant time line. - Processing and mailing of pharmacy checks and remittance reports - Reconciliation of zero balance accounts - Generate list of participating pharmacies - Coordination of Benefits - On-line access to current eligibility and claims history - Plan set-up - Develop policies and procedures for denials and rejections - Process reasonable denials - Maintenance of plan - Adjudication of electronic claims. The PBM will adjudicate claims submitted by Participating Pharmacies to the PBM based on the participating pharmacy's agreement with the PBM and including online edits for preauthorization requirements and other edits that may be deemed necessary for the accurate payment of claims - Approval and rejection of claims consistent with plan design and concurrent Drug Utilization Review (DUR) - Standard electronic eligibility - Maintain call center - Loading of INSURER providers in network and eligible members - Develop remedies for addressing problems with pharmacies - Pharmacy audits - -------------------------------------------------------------------------------- Concurrent Fraud - Develop process for INSURER to notify the PBM of Investigations fraud and abuse complaints made by their beneficiaries. - Track and Investigate fraud and abuse allegations - --------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------- ITEM DESCRIPTION - -------------------------------------------------------------------------------- Formulary - Incorporate INSURER related issues, such as Management providing guidance into development of the Preferred Program Drug List (PDL), into the existing ADMINISTRATION's Pharmacy and Therapeutic Committee. - Administer the Central Administrative Committee (CAC), a cross functional sub-committee tasked with rebate maximization. The subcommittee will take recommendations on the PDL from the P&T committee and will manage the PDL. - -------------------------------------------------------------------------------- Drug Utilization - Incorporate DUR reports and evaluation reviews Review/Drug into the tasks of the Central Administrative Utilization Committee (CAC). Evaluations - Evaluate new therapeutic classes and determine if drugs need to be added or deleted from PDL. - Therapeutic intervention and switching - -------------------------------------------------------------------------------- Reports - According to Agreements. - -------------------------------------------------------------------------------- Rebates and - Develop and maintain contracts with drug Discounts manufacturers for rebates - Utilize the Central Administrative Committee (CAC) to maximize rebates - -------------------------------------------------------------------------------- Optional Services - Custom Management Reports - Manual Claims Input - Special Programming - --------------------------------------------------------------------------------
5. The INSURER will provide the following services set forth in this Section and the services described in any attachment, addendum or amendment hereto:
- -------------------------------------------------------------------------------- ITEM DESCRIPTION - -------------------------------------------------------------------------------- Claims Processing - Assume cost of implementing and maintaining on-line and Administrative connections- The INSURER will be responsible for all Services of its own costs of implementation, including but not limited to payment processes, utilization review and approval processes, connection and line charges, and other costs incurred to implement the payment arrangements for pharmacy claims. - Maintain or improve ratio of paid claims to processed claims- Based on past performance, ADMINISTRATION will develop an acceptable ratio of paid claims to processed claims for which each INSURER will be responsible for maintaining or improving. - Review bi-monthly claim payments summary reports for each payment cycle and approve transfer of funds - Review denials and rejections - Maintain call center- INSURER will operate a customer call center to provide for preauthorization of drugs for drugs for which the INSURER retains risk, according to its policies and the approved formulary. - --------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------- ITEM DESCRIPTION - -------------------------------------------------------------------------------- - Electronically submit a list of all INSURER providers in network and eligible members to PBM - -------------------------------------------------------------------------------- Concurrent Fraud - Develop tracking mechanisms for fraud and abuse Investigations issues - Forward fraud and abuse complaints from members to PBM - -------------------------------------------------------------------------------- Formulary - Designate and maintain a representative to assist Management on the P&T Committee in developing the official Program formulary. - Submit candidates who are primary care physicians for the Pharmacy and Therapeutic Committee. - Select two (2) representatives of the INSURER to serve on the Central Administrative Committee (CAC), a cross functional committee tasked with rebate maximization. The subcommittee will take recommendations on the PDL from the P&T committee and will update and manage the PDL. - -------------------------------------------------------------------------------- Drug Utilization - Perform drug utilization review. Review/Drug - Develop and distribute protocols, when necessary. Utilization - Perform utilization management functions- The Evaluations INSURER will perform utilization review that meets the minimum standards of ADMINISTRATION or that may be required by the Medicaid program. - Perform disease management functions- The INSURER will perform disease management that meets the minimum standards of the ADMINISTRATION or that may be required by the Medicaid program. - -------------------------------------------------------------------------------- Reports - Meet with PBM to determine the reports that should be the sole responsibility of the PBM, those performed by the INSURER and those that should be duplicated in order to cross check. - --------------------------------------------------------------------------------
6. The INSURER will abide and comply with following payment process hereby established: a) The INSURER will pay claims costs. Every two weeks, the PBM will provide the INSURER with the proposed claims listing. The INSURER will promptly review the payment listing. b) Submit funds for claims payment to zero-balance account. The INSURER will provide funds, wire transfers or otherwise submit payment within two business days to a bank account established for the payment of the claims applicable to each INSURER. c) Payment failure by INSURER or the establishment of a Medicaid Rebate Program. The following payment process will be implemented if either the INSURER fails to make a timely or correct payment to the established zero-balance account or if the ADMINISTRATION enters into a Medicaid Rebate Program: 76 (i) The contract amounts paid to the INSURER will be reduced by the estimated claims cost for the succeeding month, any deficit in funds provided versus the cash requirements for the zero-balance account. Estimates will be made based on actual claims experience. After a reasonable period of time, adjustments will be made to the monthly withholds for the actual experience of the prior month(s) versus the estimated. A final settlement shall be made within a specified period after the end of the contract year. d) Payment of PBM and Collection of Rebates and Discounts: The ADMINISTRATION will collect rebates and provide for the payment of reasonable PBM fees for defined services. The ADMINISTRATION will pay the INSURER seventy five (75%) percent of the net rebates collected; the INSURER will share such rebates with the primary care providers according to their risk. e) Other Savings: The INSURER, the ADMINISTRATION, and the PBM shall cooperate to identify additional savings opportunities, including special purchasing opportunities, changes in network fees, etc. Payment to the INSURER will be adjusted to provide the ADMINISTRATION for its share of the incremental net savings. f) Fees per transaction and DUR and Formulary Management fees will be paid by the INSURER. ARTICLE XXIII BENEFITS 1. The INSURER agrees to provide to the enrolled beneficiaries the benefits included in Addendum I of this contract. The benefits to be provided under the program are divided in three types of coverage: 1) the Basic Coverage that includes preventive, medical, hospital, surgical, diagnostic tests, clinical laboratory tests, x-rays, emergency room, ambulance, maternity and prescription drug services, 2) Dental Coverage based on the right to choose one of the participating dentists from the INSURER's network and 3) the Special Coverage that includes benefits for catastrophic conditions, expensive procedures and specialized diagnostic tests. 2. The INSURER may not modify, change, limit, reduce, or otherwise alter said benefits nor the agreed terms and conditions for their delivery without the express written consent of the ADMINISTRATION. 77 3. The coverage for Medicare beneficiaries is established as follows: (a) Beneficiaries with Part A of Medicare- the INSURER will pay for all services not included in Part A of Medicare, and included in the contract herein. The INSURER will not pay the applicable Part A deductibles and coinsurance. (b) Beneficiaries with Part A and Part B of Medicare- the INSURER will pay for prescription drugs prescribed by PCP and dental coverage. The INSURER will not cover the payment of the applicable Part A deductibles and coinsurance, but will cover the payment of the applicable Part B deductible and co-insurance. (c) Access to services contemplated herein will be through a selected HCO. Beneficiaries with Part A can select from the Medicare's providers list, in which case the benefits under this contract would not be covered. 4. The Medicare beneficiary can select a Part A provider from the Medicare Part A providers list, but has to select a HCO for Part B services for beneficiaries with Part B services or Part B equivalent services for beneficiaries without Part B of Medicare. ARTICLE XXIV CONVERSION CLAUSE 1. If during the term of this contract, the insurance coverage for a beneficiary terminates because the beneficiary ceases to be eligible and is disenrolled, such person has the right to receive a direct payment policy from INSURER without submitting evidence of eligibility. The direct payment policy will be issued by the INSURER without taking into consideration pre-existing conditions or waiting periods. The written request for a direct payment policy must be made, and the first premium submitted to INSURER on or before thirty-one (31) days after the date of disenrollment, bearing in mind that: a) The direct payment policy should be an option of such person, through any of the means which at that date INSURER has currently made available according to the age and benefits requested. It will be subject to the terms and conditions of the direct payment policy. b) The premium for the direct payment policy will be in accordance with the rate then in effect at INSURER, applicable to the form and benefits of the direct payment policy, in accordance with the risk category the person falls in at the moment, and the age reached on the effective date of the direct payment policy. The health condition at the moment of conversion will 78 have no bearing in the eligibility nor will it be an acceptable base for the risk classification. c) The direct payment policy should also provide for coverage to any other individual, if these were considered eligible beneficiaries at the termination date of the health insurance under this contract. Under option by INSURER, a separate direct payment policy may be issued to cover the other individuals who formerly were eligible beneficiaries. d) The direct payment policy will be effective upon termination of coverage under the health insurance contracted. e) INSURER will not be obligated to issue a direct payment policy covering a person who has the right to receive similar services provided by any insurance coverage or under the Medicare Program of the Federal Social Security legislation, as subsequently amended, if such benefits, jointly provided under the direct payment policy, result in an excess of coverage (over insurance), according to the standards of the INSURER. 2. When coverage under this contract terminates due to the expiration of its term, all persons formerly considered eligible beneficiaries, who have been insured for a period of three (3) years prior to the termination date, will be eligible for a INSURER direct payment policy, subject to the conditions and limitations stipulated in clause 1 of this section. 3. Subject to the conditions and limitations stipulated in clause 1 of this section, the conversion privilege will be granted: a) to all eligible beneficiaries whose coverage under the health insurance contracted is terminated because they cease to be eligible beneficiaries and are disenrolled. b) to any eligible beneficiary whose coverage under the health insurance contracted ceases because he no longer qualifies as an eligible beneficiary, regardless of the fact that the principal subscriber and/or any other eligible beneficiary continues covered by said health insurance coverage under this contract. 4. In case an eligible beneficiary under this contract suffers a loss covered by the direct payment policy, described in clause 1 of this section, during the period he/she would have qualified for a direct payment policy and before the said direct payment policy is in effect, the benefits which he/she would have a right to collect under such direct payment policy will be paid as a claim under the direct payment policy, subject to having requested the direct payment policy and the payment of the first premium. 79 5. If any eligible beneficiary under this contract subsequently acquires the right to obtain a direct payment policy, under the terms and conditions of the INSURER's policies without providing evidence of qualifications for such insurance, subject to the request and payment of the first premium during the period specified in the policy; and if this person is not notified of the existence of this right, at least fifteen (15) days prior to the expiration of such period, such person will be granted an additional period during which time he/she can claim his/her right, none of the above implying the continuation of a policy for a period longer than stipulated in said policy. The additional period will expire fifteen (15) days after the person is notified, but in no case will it be extended beyond sixty (60) days after the expiration date of the policy. Written notification handed to the person or mailed to the last known address of the person, as acknowledged by the policy holder, will be considered as notification, for the purposes of this paragraph. If an additional period is granted for the right of conversion as hereby provided, and if the written application for direct payment, enclosed with the first premium payment, is made during the additional period, the effective date of the direct payment policy will be the termination of the health insurance coverage under this contract. 6. Subject to the other conditions expressed before, the eligible beneficiaries will have the right to conversion, up to one of the following dates: a) date of termination of his/her eligibility under this contract; or b) termination date of this contract; or c) date of amendment of this contract, if said amendment in any way eliminates the beneficiaries' eligibility. ARTICLE XXV TRANSACTIONS WITH THE INSURER 1. All transactions between the ADMINISTRATION and the INSURER shall be handled according to the terms and conditions set forth in this contract. 2. The INSURER shall appoint a person that shall be responsible for all transactions with the ADMINISTRATION. 3. All eligibility transactions shall be coordinated on a daily basis. 80 ARTICLE XXVI NON-CANCELLATION CLAUSE The INSURER may not cancel this contract, or make modifications to it for any reason, or otherwise change, restrict or reduce the insurance or the benefits, except for nonpayment of premiums. ARTICLE XXVII APPLICABLE LAW The Request for Proposal that originated this contract, the Proposal submitted by the INSURER, this contract and/or any other document or provision incorporated to it by reference, shall be interpreted and construed according to the laws of the Commonwealth of Puerto Rico. If any controversy may arise regarding the interpretation or performance of this contract, the parties voluntary submit for its resolution to the jurisdiction of the Superior Court of the Commonwealth of Puerto Rico, San Juan Part. ARTICLE XXVIII EFFECTIVE DATE AND TERM 1. This contract shall be in effect for (3) consecutive twelve months periods, starting at 12:01 AM, Puerto Rico time on July 1, 2002, the first day that coverage begins and payment of the premium is due. 2. This contract may not be assigned, transferred or pledged by the INSURER without the express written consent of the ADMINISTRATION. 3. The second and third periods of the contract will require premium payment renegotiation by the ADMINISTRATION and the INSURER taking into consideration actual claims paid and incurred for The Health Area/Region and an assessment of specific trends actuarially based for both medical and prescription cost to reach the applicable premiums for any subsequent period of time. 4. In the event an agreement can not be reached on the premium for the next period after good faith negotiations by the ADMINISTRATION and the INSURER according to the parameters set forth in (3) supra, the contract may be terminated if deemed in the best interest of these beneficiaries, the ADMINISTRATION and the Government of Puerto Rico. 81 ARTICLE XXIX CONFLICT OF INTEREST Any officer, director, employee or agent of the ADMINISTRATION, the Government of the Commonwealth of Puerto Rico, its municipalities or corporations cannot be part of this contract or derive any economic benefit that may arise from its execution. ARTICLE XXX INCOME TAXES The INSURER certifies and guarantees that at the time of execution of this contract, 1) it is a corporation duly authorized to conduct business in Puerto Rico and that has filed income tax returns for the previous five (5) years; 2) that it complied with and paid unemployment insurance tax, disability insurance tax (Law 139), social security for drivers ("seguro social choferil"), if applicable); 3) filed State Department reports, during the five (5) years preceding this contract and 4) that it does not owe any kind of taxes to the Commonwealth of Puerto Rico. ARTICLE XXXI ADVANCE DIRECTIVES The INSURER agrees to enforce and require compliance by all applicable participating providers with 42 CFR 434, Part 489, Subpart I relating to maintaining written policies and procedures respecting advance directives. This requirement includes provisions to inform and distribute written information to adult individuals concerning policies on advance directives, including a description of applicable Commonwealth law. ARTICLE XXXII OWNERSHIP AND THIRD PARTY TRANSACTIONS The INSURER shall report ownership, control interest, and related information to the ADMINISTRATION, and upon request, to the Secretary of the Department of Health and Human Services, the Inspector General of the Department of Health and Human Services, and the Comptroller General of the United States, in accordance with Sections 1124 and 1903 (m)(4) of the Federal Social Security Act. ARTICLE XXXIII MODIFICATION OF CONTRACT If the ADMINISTRATION finds that, because of amendments to Law 72 of September 7, 1993, or by reason of budget reductions, or subsequent Federal or local legislative changes that affect this contract, or because of any reasons deemed by the 82 ADMINISTRATION to be in the best interest of the Government of Puerto Rico in carrying out the provisions of Law 72 of September 7, 1993, or in order to perform experiments and demonstration projects pursuant to legislative enactment, modification of this contract is necessary, the ADMINISTRATION may modify any of the requirements, terms and conditions, functions, part thereof or any other services to be performed by the INSURER. Prior to any such modification, the ADMINISTRATION shall afford the INSURER an opportunity to consult and participate in planning for adjustments which might be necessary and thereafter provide the INSURER written notice that the modification is to be made within ninety (90) days after a date specified in the notice. Said modifications will take place after consultation and cost negotiation with the INSURER. ARTICLE XXXIV TERMINATION OF AGREEMENT 1. If the ADMINISTRATION finds, after reasonable notice and opportunity for a hearing to the INSURER the INSURER has failed substantially to carry out the material terms and conditions of this contract, the ADMINISTRATION may terminate this contract at any time, as provided in Section 10.1, above. 2. In the event that there is non-compliance by the INSURER with any specific clause of this contract, the ADMINISTRATION will notify the INSURER in writing, indicating the area/region(s) of non-compliance. The INSURER will be granted the opportunity to present and discuss its position regarding the issue within fifteen (15) days from the date of the notification. After considering the allegations presented by the INSURER following adequate hearing and the opportunity to present all necessary evidence in support of its position, and the ADMINISTRATION formally determines that there is a non-compliance, at the discretion of the ADMINISTRATION, this contract may be cancelled by giving thirty (30) days prior written notice before the effective date of cancellation. In the event that the INSURER does not remedy, correct or cure the material deficiencies noted in the Plan Compliance Evaluation Report, as provided for in Article XVII of this contract, and following the opportunity of an adequate hearing and the presentation of evidence in support of its position, and the ADMINISTRATION confirms the deficiency, then at the discretion of the ADMINISTRATION this contract may be cancelled by giving thirty (30) days prior notice. If the INSURER were to be declared insolvent, files for bankruptcy or is placed under liquidation, the ADMINISTRATION shall have the option to cancel and immediately terminate this contract. In the event of this happening an enrollee will not be liable for payments under this contract. 83 In the event that this contract is terminated, the INSURER shall promptly provide the ADMINISTRATION all necessary information for the reimbursement of any pending and outstanding Claims. The INSURER hereby recognizes that in the event of termination under this Article it shall be bound to provide reasonable cooperation to the ADMINISTRATION beyond the date of termination in order to properly effect the transition to the new INSURER taking over the region covered by this Contract. This obligation to reasonably cooperate shall survive the date of said effective termination provided, at the ADMINISTRATION' discretion. The INSURER agrees and recognizes that in the event there are no sufficient enough funds designated for the payment of premium, the ADMINISTRATION reserves the right to terminate this contract, effective ninety (90) days after prior written notification. ARTICLE XXXV PHASE-OUT CLAUSE 1. In the event that the contract is terminated, the INSURER will continue to provide services for a reasonable term to guarantee the continuance of services until the ADMINISTRATION has made adequate arrangements to continue the rendering of health care benefits to beneficiaries in the areas affected by the termination. The duration of such transition term will not exceed sixty (60) days. Adjustments in the PMPM during the transition term shall not be borne or agreed upon by ADMINISTRATION, in the event of a termination based on default or breach of contract by the INSURER. 2. Upon the expiration or termination of a contract, the INSURER will provide the ADMINISTRATION with the historical/utilization data of services rendered to beneficiaries in the area/region in formats specified/agreed with the ADMINISTRATION, in order to prevent fraud and double billing of services by the incoming INSURER. 3. Any INSURER phasing out of a Health Region will guarantee payment for services rendered to beneficiaries under the previous contract. Failure to do so, shall entail in accordance with the fair hearing process established on Article XXXIII, the retention of a determined amount of premium payment of INSURER's Health Region Contract. The amount to be retained shall be sufficient to cover the amount owed. 4. The INSURER acknowledges that it will collaborate with the ADMINISTRATION efforts in any health regions or geographic area in transition processes. 5. If in the best interest of the beneficiaries or the Commonwealth of Puerto Rico the ADMINISTRATION terminates any demonstration project, the INSURER will assume responsibility for the geographic areas (municipalities/regions) managed by any health organization in accordance with the contracted premium. 84 6. If in the best interest of the beneficiaries or the Commonwealth of Puerto Rico the ADMINISTRATION expands the direct contracting demonstration project with health care organization, the INSURER will assist in the transition process after ninety (90) days of a written notification and payments of premiums will be adjusted accordingly. ARTICLE XXXVI THIRD PARTY DISCLAIMER None of the obligations, covenants, duties, and responsibilities incurred or assumed under the present Contract, the Request For Proposal, Proposal, the representations and assurances provided at the clarification meeting held on June 11, 2001, by either: (I) the INSURER towards the ADMINISTRATION and any governmental agencies, or (ii) the ADMINISTRATION towards the INSURER, shall be deemed as the assumption by the INSURER or the ADMINISTRATION, as the case might be, of any legal liability or responsibility towards a third party in the event that a negligent or intentional injury, malpractice, damage or wrongdoing, or any harm whatsoever is incurred by or caused by the HCO's, the HCO's network of participating providers and/or the INSURER's participating providers. ARTICLE XXXVII PENALTIES AND SANCTIONS CLAUSES 1. In the event that the INSURER does not furnish the ADMINISTRATION with any kind of monthly reports related to the gathering and reporting of encounter information, the ADMINISTRATION may retain one monthly premium for each month in default said retention to be effective for the subsequent month after the default. Once the INSURER complies with said requirement, the amount retained will be fully paid to the INSURER, within five days after receiving the required reports for the subsequent month. 2. In the event that the INSURER does not comply with its obligation related to the monthly gathering and accurate reporting of encounter information, according to Article XV of this contract, the ADMINISTRATION may retain one monthly premium payable to the INSURER for each month in default, provided: a. the ADMINISTRATION gives, within ten (10) working days after receipt of the monthly report, written notification by certified mail, or personally hand delivers said notification to the INSURER of the non-compliance and the reasons thereof; and b. the ADMINISTRATION grants ten (10) working days for the INSURER to cure the default; and 85 c. the INSURER fails to correct it within said term. Whenever the above events take place, the ADMINISTRATION may retain one monthly premium payment for each month in default. Retention will be effective ten (10) working days after the notice of non-compliance. Once the INSURER corrects the problem, at the satisfaction of the ADMINISTRATION and according to Article XV of this contract, the amount retained will be fully paid to the INSURER, within five days after receiving full and complete reports for the subsequent month. 3. For the purpose of subparagraphs 1 and 2, above, default is defined as the non-compliance by the INSURER of the reporting requirements established for the gathering and reporting of encounter information as established in Article XV of this contract, or when the INSURER does not submit the reports within the established term set in this contract. If the INSURER owes money to the Administration as a result of the imposition of penalties, excess premiums paid or any other reason, the Administration may withhold such amount from any payments due related to the same contract or any other contracts between the parties. 5. A. Civil Monetary Penalties: In the event that there is a non-compliance with Article VI, XII, XVI, XVII and/or with any specific clause of this contract or the INSURER engages in any of the following practices: (a) Fails to substantially provide medically necessary services to enrollees under this contract; (b) imposes on enrollees premiums and charges in excess of the ones permitted under this contract; (c) discriminates among enrollees on the basis of their health status or requirements for health care (such as terminating an enrollment or refusing to reenroll) except as permitted under the Program or engages in practices to discourage enrollment by recipients whose medical condition or history indicates need for substantial medical services; (d) misrepresents or falsifies information that is furnished to CMS, to the ADMINISTRATION, to an enrollee, potential enrollee or provider of services; (e) distributes, directly or indirectly through any agent, independent contractor, marketing material not approved by the ADMINISTRATION, or that contains false or misleading information; (f) Fails to comply with the requirements for physician incentive plans in section 1876 (i) (8) of the Social Security Act, and at 42 CFR 417.479, or fails to submit to the ADMINISTRATION its physician incentive plans as requested in 42 CFR 434.70 86 The ADMINISTRATION will notify the INSURER in writing, the findings of the violation and the impending intention to impose intermediate sanctions for each violation which could consist of: monetary penalties at the discretion of the Administration may range from five hundred dollars $500 to twenty five thousand dollars $25,000; or the resolution of the contract and temporary management; suspension, and/or with-holding of premium payments, which may range from a percent amount, or more than one monthly premium payments. The imposition of sanctions will depend on the extent and severity of the actions. At the sole discretion of the ADMINISTRATION and after affording the INSURER due process to submit a corrective action as established in paragraph (B), below, the ADMINISTRATION will deduct any amount it may deem adequate from the premium payments or any other administrative items of said payments. The Office of the Inspector General may impose civil money penalties of up to $25,000.00 in addition to, or in lieu of each determination by the ADMINISTRATION, or CMS, for non-compliance conduct as set forth on subparagraphs (a) through (f). The Secretary of the Department of Health and Human Services may seek the enforcement of felony charges, for violation regarding subparagraph (b), above. B. The INSURER will have the right to present and discuss its position regarding the ADMINISTRATION'S finding within thirty (30) days from the receipt of the notification. After such period expires the Administration will issue its decision regarding the contemplated sanctions which could be (i) let stand the initial determination, (ii) modify the sanction or (iii) eliminate the sanction if the Insurer has taken affirmative corrective actions. Upon notifying the INSURER of the final decision, if in disagreement, the INSURER will have (30) days to request a hearing before the Administration. Upon the expiration of the thirty (30) days without invoking a formal hearing, or after the celebration of a hearing and after issuance of findings and recommendations of the hearing examiner, the decision will then become final, subject to the appeal process provided in section 12, Art. VI of Law 72, September 7, 1993, as amended. C. The ADMINISTRATION, shall appoint temporary management only if it finds that the INSURER has egregiously or repeatedly engaged in any of the stated practices on paragraph (A) of this article; or places a substantial risk on the health of enrollees; or there is a need to assure the health of an organization's enrollees during an orderly termination, reorganization of the Insurer or while improvements are being made to correct violations. The temporary management may not be removed until the INSURER assures the ADMINISTRATION that the violations will not recur. 87 6. If a contractor is found to be in non-compliance with the provisions on ARTICLE VII concerning affiliation with debarred or suspended individuals, the ADMINISTRATION: a) Shall notify the Secretary of non-compliance; b) May continue the existing contract with the Insurer, unless the Secretary (in consultation with the Inspector General of the Department of Health Services directs otherwise); and, c) May not review or otherwise extend the duration of an existing contract with the INSURER unless the Secretary (in consultation with the Inspector General of the DHHS) provides to the ADMINISTRATION and to Congress a written statement describing compelling reasons that exist for renewing or extending the contract. 7. Notwithstanding the provisions set in this Article, the ADMINISTRATION reserves the right to terminate this contract, as established in Article XXXIII. ARTICLE XXXVIII HOLD HARMLESS CLAUSE 1. The INSURER warrants and agrees to indemnify and save harmless the ADMINISTRATION from and against any loss or expense by reason of any liability imposed by law upon the ADMINISTRATION and from and against claims against the ADMINISTRATION for damages because of bodily injuries, including death, at any time resulting therefrom, accidents sustained by any person or persons on account of damage to property arising out of or in consequence of the performance of this contract, whether such injuries to persons or damage to property are due or claimed to be due to any negligence of the INSURER, the INSURER's participating providers, the HCO's, the HCO's network of participating providers, their agents, servants, or employees or of any other person. 2. The INSURER warrants and agrees to purchase insurance coverage to include Contractual Liability Coverage incorporating the obligations herein assumed by the INSURER with limits of liability which shall not be less than one (1) million dollars with said insurance coverage providing for the INSURER's obligation and the insurance company of INSURER to defend and appear on behalf of the ADMINISTRATION in any and all claims or suits which may be brought against the ADMINISTRATION on account of the obligations herein assumed by the INSURER. 88 ARTICLE XXXIX CENTERS FOR MEDICARE AND MEDICAID SERVICES CONTRACT REQUIREMENTS The ADMINISTRATION and INSURER agree and recognize that guidance and directives from the Centers for Medicare and Medicaid Services (CMS) are incorporated in contracts subject to its approval, such as the present one, and that they constitute binding obligations on the part of the INSURER. ARTICLE XL FORCE MAJEURE Whenever a period of time is herein prescribed for action to be taken by the INSURER, the INSURER shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, acts of God, shortages of labor or materials, war, terrorism, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of the INSURER. ARTICLE XLI YEAR 2000 CLAUSE The parties hereby assure that all hardware and software that it uses with respect to this Agreement are Year 2000 Compliant in accordance to CMS's Year Compliance definitions as stated in the RFP. The Parties acknowledge that this provision is an essential condition to this Agreement. ARTICLE XLII FEDERAL GOVERNMENT APPROVAL 1. Inasmuch as it is a requirement that the Centers for Medicare and Medicaid Services (CMS) approves this contract in order to authorize the use of federal funds to finance the health insurance contracted, the same may be subject to modifications in order to incorporate or modify the terms and conditions of this contract. 2. Any provision of this contract which is in conflict with any Federal Laws, Federal Medicaid Statutes, Health Insurance Portability and Accountability Act, Federal Regulations, or CMS policy guidance, as applicable, is hereby amended to conform to the provisions of those laws, regulations, and Federal policy. Such amendment of the contract will be effective on the effective date of the statutes or regulations necessitating it, and will be binding on the parties even though such amendment may not have been reduced to writing and formally agreed upon and executed by the parties. 89 ARTICLE XLIII ACKNOWLEDGMENT AS TO INSURER 1. All responsibilities, obligations, assurances and representations, made, taken, and assumed by the INSURER under this contract will be fully, solely, and entirely assumed by the INSURER. Notwithstanding, the ADMINISTRATION acknowledges that Triple-C will carry out the responsibilities as to the administration and operational management of the Health Insurance subject of this contract and that its officers are authorized to represent Triple-S, Inc. in matters related to be carried out. 2. The ADMINISTRATION acknowledges that the INSURER is in a corporate reorganizational process. The INSURER will notify the ADMINISTRATION the date when the reorganizational process is completed. The INSURER represents that the reorganizational process shall not constituted an assignment of this Contract. ARTICLE XLIV ENTIRE AGREEMENT The parties agree that they accept, consent and promise to abide by each and every one of the clauses contained in this contract and that the contract contains the entire agreement between the parties. In order to acknowledge so, they initial the margin of each of the pages and affix below their respective signatures, in San Juan, Puerto Rico, this 13 day of June 2002. PUERTO RICO HEALTH INSURANCE TRIPLE-S ADMINISTRATION by by /s/ Orlando Gonzalez Rivera /s/ Socorro Rivas - ------------------------------------- ---------------------------------- ORLANDO GONZALEZ RIVERA SOCORRO RIVAS TRIPLE-C /s/ Luis A. Marini ---------------------------------- LUIS A. MARINI 90 EX-10.4 8 g77580exv10w4.txt EMPLOYMENT CONTRACT, RAMON RUIZ COMAS EXHIBIT 10.4 EMPLOYMENT CONTRACT In the city of San Juan, Puerto Rico, today the ___ of ____________ of 2002. APPEAR FOR THE FIRST PART: TRIPLE-S MANAGEMENT CORP., a corporation organized and engaged in business in conformance with Commonwealth of Puerto Rico laws, represented here by its Board of Directors' President, DR. FERNANDO J. YSERN BORRAS, of legal age, married, a physician by trade, and residing in Caguas, Puerto Rico, and by ATTY. JUAN JOSE LEON SOTO, of legal age, married, a licensed attorney, residing in Caguas, Puerto Rico, and the Director of this Board of Directors whose authorities and duties they are prepared to justify as soon as it is required of them. FOR THE SECOND PART: RAMON M. RUIZ COMAS, of legal age, married, an executive and a resident of Guaynabo, Puerto Rico. The undersigned have the legal capacity to execute this document, and to that effect, freely and voluntarily. EXPOSE FIRST: For purposes of abbreviation and ease in understanding and analyzing this agreement of intentions, the following terms shall have the meaning stated in these definitions: a. "TRIPLE-S": Triple-S Management Corp.; b. The "CEO": The Chief Executive Officer, Mr. Ramon M. Ruiz Comas; c. The "BOARD": The Board of Directors of Triple-S Management Corp. d. The "CONTRACT": This Employment Contract; e. The "BUSINESS PLAN": The Business Plan or Annual Budget of Triple-S, just as it is prepared in November each year, for the following natural year and; f. The "AAB": The Additional Annual Bonus, one of the CEO's concepts for economic remuneration, as specified in the seventh and eighth clauses in this CONTRACT g. The "PBD"; President of the BOARD OF Triple-S management Corporation SECOND: That Triple-S is a shareholding company engaged in the business of insurance, in businesses related to insurance, and in other types of business enterprises and in other activities, and whose main offices are located in the Commonwealth of Puerto Rico. THIRD: That the CEO is a vastly experienced professional in the business field, having obtained a Bachelors Degree in Business Administration, and a Juris Doctor Degree, both from the University of Puerto Rico, as well as the Certified Public Accountant certification. The CEO also is knowledgeable about the business of insurance having served in various capacities in Triple-S and one of its subsidiaries since June 11, 1990. FOURTH: For purposes of establishing the internal relationship between both contracting parts as herein stated, they agree to the present CONTRACT subject to the following Clauses and Conditions. GENERAL PROVISIONS 1. EXCELLENCE IN PERFORMANCE. Through this CONTRACT, the CEO is under the obligation of dedicating and directing all of his working time, intellect, attention, energy, experience and knowledge towards the protection of Triple-S' best interests, within the framework of excellence his capacity and ability permit, according to industry norms. 2. OFFICER AND TITLE. The CEO will carry the Title of Chief Executive Officer and Corporate President of Triple-S Management Corporation. 3. HIERARCHY. The CEO will respond directly to the Board. 4. FIDUCIARY NORMS AND OBLIGATIONS. The CEO will be under the obligation to conform loyally and fully with all administrative guidelines, rules, regulations and norms established by Triple-S, developing and establishing the operational controls necessary to administer, direct and protect Triple-S' best interests. The CEO will be loyal to Triple-S and its subsidiaries at all times, and will solemnly recognize the obligation represented in his acceptance of the current title. SPECIFIC PROVISIONS 5. PRINCIPAL FUNCTIONS. The functions the CEO will undertake through this contract will be all those necessary and proper for the Chief Executive Officer of a corporation size, complexity and nature of Triple-S. The CEO's functions will invariably be performed in Triple-S' best interests and for its protection. 6. INCIDENTAL OR ACCESSORY FUNCTIONS. The CEO should also fulfill all those functions, tasks and commissions, incidental or accessory, which the BOARD assigns him from time to time. 7. ECONOMIC REMUNERATION. The CEO will be economically remunerated in the following manner for the services that, in keeping with this CONTRACT, he is under the obligation to fulfill: a. Salary. An monthly salary of $29,166.66, (equivalent to an annual salary of $350,000.00) for the term of this CONTRACT, and as may be modified in keeping with the provisions of this CONTRACT's clause number ten (10). b. Christmas Bonus. A Christmas bonus equivalent to 5% of his annual salary, plus half a month's salary, plus any bonus Triple-S is obligated by law provisions to pay. This Christmas bonus will be paid in conformance to the Triple-S' policies and norms applicable to their management employees and as modified from time to time. c. Additional Annual Bonus. The Additional Annual Bonus (AAB) that will be computed by the Board of Directors each year, as is established in the following clause. 8. COMPUTING THE ADDITIONAL ANNUAL BONUS. The Additional Annual Bonus (AAB) will be an amount never to exceed FORTY PERCENT (40%) of the annual salary for the year in question (MAXIMUM BONUS). The AAB is determined annually by the Board of Directors immediately after Triple-S receives its financial statements for the pertinent economic year, certified by their external auditors. The AAB will be credited to the CEO as soon as the Board has determined it, which will never be later than sixty (60) calendar days beginning on the date in which the certified financial statements are received. The AAB will vary depending on whether or not Triple-S achieves ONE HUNDRED PERCENT (100%) or more of the budgeted and audited year's BUSINESS PLAN, in the following manner: A. In case Triple-S achieves ONE HUNDRED PERCENT (100%) or more of the BUSINESS PLAN for the year in question, the AAB will be EIGHTY PERCENT (80%) of the MAXIMUM BONUS, plus: 1. An additional TEN PERCENT (10%), for NINETY PERCENT (90%) of the maximum bonus, considering the total effect of the following factors: a) A reduction (in percentages) of the recurring administrative expenses, in regards to the gross income earned by Triple-S and its subsidiaries, over the consolidated budget. b) A net income larger than the consolidated budget. c) The volume of business from Triple-S and its subsidiaries exceed what was budgeted. d) The achievement, by each of the subsidiaries, of at least 90% of the year's Business Plan. 2. An additional TEN PERCENT (10%) in order to reach the ONE HUNDRED PERCENT (100%) of the MAXIMUM BONUS, at the Board's discretion. B. If TRIPLE-S achieves less than ONE HUNDRED PERCENT (100%) of its BUSINESS PLAN, the AAB will vary between ZERO PERCENT (0%) up to SEVENTY NINE PERCENT (79%) of the MAXIMUM BONUS, at the BOARD'S discretion, considering the following factors: 1. The magnitude of an unfavorable deviation, larger than TEN PERCENT (10%), from the BUSINESS PLAN. 2. The magnitude of the annual increase of recurrent administrative expenses, in regards to the gross income earned by Triple-S and its subsidiaries, over the consolidated budget. 3. A net annual income lower than the consolidated budget. 4. The business volume from Triple-S and its subsidiaries does not reach the amount budgeted. 5. Any other factors the BOARD deems, at its discretion, should be considered. 9. DEFERRED COMPENSATION. The CEO will have the power to, from time to time, defer payments for any of the before mentioned economic remuneration concepts in keeping with his wishes, if and when such action is in accordance to the applicable law provisions and to good corporate practices. 10. ANNUAL SALARY REVISION. The CEO's SALARY will be reviewed annually, effective January 1st of each year, beginning on January 1, 2003. Said revision would take into account the increase of Triple-S share's book value, the percentile increase in Puerto Rico's general economic inflation rate, as determined by the Planning Board for the previous year, and other factors regarding compensation of other Officers of same or similar position and responsibility within the local industry and commerce, and any other relevant factor. The Compensation Committee shall do the computing of the salary change for the Board's recommendation and approval at the time it reviews compensation. 11. FRINGE BENEFITS. The CEO will have the right to all fringe benefits such as: Retirement Plan, Health Plan, vacations, sick leave, disability insurance and others, in conformance to Triple-S' policies and norms as applicable to its management employees, and as modified from time to time. Triple-S will also reimburse or pay the CEO the following: a. Representation, travel and miscellaneous expenses which are reasonably and necessarily incurred in carrying out his official duties; b. The right to use an automobile of a category in keeping with the post he occupies; c. Annual membership fees to a private club and two business related clubs, i.e., Banker's Club and; d. Annual membership fees to two professional associations such as the College of Certified Public Accountants, and the American Institute of Certified Public Accountants; e. Any other related expenses that the BOARD deems necessary in carrying out his duties. 12. DEDUCTIONS. Triple-S will make all deductions from the CEO's remuneration that the law requires such as: social security, retained income taxes, and his spouse's and any other optional dependent's life and disability insurance portion. The CEO is authorized to acquire any life insurance coverage in addition to the one currently held by Triple-S at his own responsibility and cost. 13. EFFECTIVENESS AND TERM OF CONTRACT. This contract's effective date is established to be January 1, 2002 and its ending date is December 31, 2004. The Board of Directors must notify the CEO no later than one year before the ending date of this original contract term or of its renovation, of their decision to renew or not renew it. In the same manner, the CEO must notify Triple-S no later than one year before the ending date, of his decision to renew or not renew it. If Triple-S decides not to renew the Contract, it is under the obligation to pay the CEO one year's salary. Triple-S must also have fulfilled all obligations to the CEO, which correspond to his contract's terms, including those regarding compensation and fringe benefits. Disbursement of this amount shall occur no later than the last effective date of this contract. In case this contract is renewed and then terminated before the renovation's ending date, Triple-S is under the obligation of providing the CEO with the same compensation. 14. UNILATERAL RESOLUTION. The parties agree that Triple-S has the right to dissolve this contract at any time before the agreed ending date. To exercise this right, the PBD will notify the CEO thirty (30) days before the effective date of said unilateral dissolution. As a condition for Triple-S to exercise this right, it must proceed immediately with the total cash liquidation of the balance of this professional employment contract, in addition to the one year salary specified in paragraph 13, including the fringe benefits, and subtracting the discounts applicable by law. Triple-S will have the option of continuing monthly payments until the contract is completed. 15. UNILATERAL RESOLUTION- JUST CAUSE. It is understood that Triple-S is assisted by just cause for unilaterally dissolving this CONTRACT when the CEO incurs in any of the following behaviors: a. negligence in carrying out his duties, or their late, inadequate or inept performance; b. conviction of a felony or misdemeanor involving moral depravation; c. insubordination; d. material non-conformance to corporate norms, rules and agreements, or those of this CONTRACT; e. improper or disorderly conduct; f. existence of a conflict of interests; g. substantial reduction of Triple-S` operations; 16. PRIVILEGED MATERIAL- CONFIDENTIALITY. Except as formerly stated, all the information Triple-S and its subsidiaries shares with the CEO, or that he is privy to as a consequence of his employee relationship with Triple-S, in the guise of any chores, relationships, contacts, businesses, clients and duties, will constitute privileged and confidential material. Consequently, the CEO will not divulge said information to third parties, including Triple-S employees, functionaries or officers who do not have a legitimate reason to know this information. The confidentiality and privilege obligation discussed here shall survive the conclusion, unilateral resolution or termination of this CONTRACT. 17. DOCUMENTS. At the end of this contract, the CEO will keep or return all documents, objects, materials and the rest of the information he has obtained through Triple-S business, in the Triple-S offices, recognizing at the same time that said documents, objects, materials and related information are the exclusive property of Triple-S. 18. TRIPLE-S PERSONNEL. The CEO will not solicit or encourage the Triple-S and subsidiary personnel to quit their jobs and join him or a third party in other activities that are not to Triple-S's benefit during the duration of his contract with Triple-S and for one year after the contract with Triple-S ends. THIS CONTRACT IS AGREED UPON BY THE UNDERSIGNED IN CONSIDERATION OF THE FOLLOWING: MISCELLANEOUS PROVISIONS 19. CONTRACT CONSTRUCTION. Triple-S wrote this contract, therefore its intellectual property and author's rights are theirs. At the same time, the contract is a product of negotiations between both parties, so no assumption or inference should be made in favor of any of them. 20. CEDING. The CEO may not totally or partially cede the obligations and responsibilities assumed through this CONTRACT to a third party. 21. PACT TOTALITY. This document constitutes the total and complete pact agreed to by the contracting parts. No other former agreement, contract or pact should be considered valid or effective. 22. AMENDMENTS. In case the undersigned wish to amend the content of any clause in this CONTRACT, this should be done in writing, clearly stating which clause is being amended and what the amendment consists of. 23. HEADINGS. The headings included in this CONTRACT have been added to aid in reading and analyzing it. At no time should these headings be interpreted as the pact agreed upon by the undersigned, or that they amend the content of the clauses each one heads. 28. LIMITED INVALIDITY. In case any clause in this CONTRACT is declared null or illegal, the rest of the clauses will continue with full effectiveness and force. 29. INTERPRETATION. This CONTRACT will be interpreted according to the prevailing judicial order in the Commonwealth of Puerto Rico. 30. JURISDICTION AND COMPETENCE. If it were necessary to judicially annul any controversy related to this CONTRACT, the parties will submit voluntarily to the jurisdiction of the Puerto Rico Court of First Instance and would choose the San Juan Halls of the Superior or District Court, as were the case, to void it. SUCH IS THE PACT agreed upon by contracting parties, which they recognize and sign in San Juan, Puerto Rico on the date stated above. Triple-S Management Corporation Mr. Ramon M. Ruiz Comas Signed Signed - -------------------------------- ---------------------------- By: Dr. Fernando J. Ysern Borras By: Mr. Ramon M. Ruiz Comas Signed - ------------------------------- By: Atty. Juan Jose Leon Soto EX-10.5 9 g77580exv10w5.txt EMPLOYMENT CONTRACT, SOCORRO RIVAS EXHIBIT 10.5 EMPLOYMENT CONTRACT In the city of San Juan, Puerto Rico, today the ___ of ____________ of 2002. APPEAR FOR THE FIRST PART: Triple-S, INC., a corporation organized and engaged in business in conformance with Commonwealth of Puerto Rico laws, represented here by its Board of Directors' President, DR. FERNANDO J. YSERN BORRAS, of legal age, married, a physician by trade, and residing in Caguas, Puerto Rico, and by ATTY. JUAN JOSE LEON SOTO, of legal age, married, a licensed attorney, residing in Caguas, Puerto Rico, and the Director of this Board of Directors whose authorities and duties they are prepared to justify as soon as it is required of them. FOR THE SECOND PART: SOCORRO RIVAS RODRIGUEZ, of legal age, married, an executive and a resident of San Juan, Puerto Rico. The undersigned have the legal capacity to execute this document, and to that effect, freely and voluntarily. EXPOSE FIRST: For purposes of abbreviation and ease in understanding and analyzing this agreement of intentions, the following terms shall have the meaning stated in these definitions: a. "TRIPLE-S": Triple-S, Inc.; b. The "CEO": The Chief Executive Officer, Socorro Rivas Rodriguez; c. The "BOARD": The Board of Directors of Triple-S, Inc.; d. The "CONTRACT": This Employment Contract; e. The "BUSINESS PLAN": The Business Plan or Annual Budget of Triple-S, just as it is prepared in November each year, for the following natural year and; f. The "AAB": The Additional Annual Bonus, one of the CEO's concepts for economic remuneration, as specified in the seventh and eighth clauses in this CONTRACT g. The "PBD"; President of the BOARD OF Triple-S, Inc. SECOND: That Triple-S, Inc. is a company dedicated, among other activities, to providing insurance coverage for the receipt of medical-hospital services throughout the Commonwealth of Puerto Rico. THIRD: That the CEO is a vastly experienced professional in the business field, having obtained a Bachelors Degree in Business Administration from the University of Puerto Rico, as well as the Certified Public Accountant certification. The CEO also is knowledgeable about the business of insurance having served in various capacities in Triple-S since January 2, 1982. FOURTH: For purposes of establishing the internal relationship between both contracting parts as herein stated, they agree to the present CONTRACT subject to the following Clauses and Conditions. GENERAL PROVISIONS 1. EXCELLENCE IN PERFORMANCE. Through this CONTRACT, the CEO is under the obligation of dedicating and directing all of her working time, intellect, attention, energy, experience and knowledge towards the protection of Triple-S' best interests, within the framework of excellence her capacity and ability permit, according to industry norms. 2. OFFICER AND TITLE. The CEO will carry the Title of Chief Executive Officer and Corporate President of Triple-S. 3. HIERARCHY. The CEO will respond to the President of Triple-S Management as well as to the Board. 4. FIDUCIARY NORMS AND OBLIGATIONS. The CEO will be under the obligation to conform loyally and fully with all administrative guidelines, rules, regulations and norms established by Triple-S, developing and establishing the operational controls necessary to administer, direct and protect Triple-S' best interests. The CEO will be loyal to Triple-S and the rest of the companies within the Tripe-S Corporate Group at all times, and will solemnly recognize the obligation represented in her acceptance of the current title. SPECIFIC PROVISIONS 5. PRINCIPAL FUNCTIONS. The functions the CEO will undertake through this contract will be all those necessary and proper for the Chief Executive Officer of a corporation size, complexity and nature of Triple-S. The CEO's functions will invariably be performed in Triple-S' best interests and for its protection. 6. INCIDENTAL OR ACCESSORY FUNCTIONS. The CEO should also fulfill all those functions, tasks and commissions, incidental or accessory, which the BOARD assigns her from time to time. 7. ECONOMIC REMUNERATION. The CEO will be economically remunerated in the following manner for the services that, in keeping with this CONTRACT, she is under the obligation to fulfill: a. Salary. An monthly salary of $25,000.66, (equivalent to an annual salary of $300,000.00) for the term of this CONTRACT, and as may be modified in keeping with the provisions of this CONTRACT's clause number ten (10). b. Christmas Bonus. A Christmas bonus equivalent to 5% of her annual salary, plus half a month's salary, plus any bonus Triple-S is obligated by law provisions to pay. This Christmas bonus will be paid in conformance to the Triple-S' policies and norms applicable to their management employees and as modified from time to time. c. Additional Annual Bonus. The Additional Annual Bonus (AAB) that will be computed each year as is established in the following clause of this CONTRACT. 8. COMPUTING THE ADDITIONAL ANNUAL BONUS. The Additional Annual Bonus (AAB) will be an amount never to exceed FORTY PERCENT (40%) of the annual salary for the year in question (MAXIMUM BONUS). The AAB is determined annually by the Board of Directors immediately after Triple-S receives its financial statements for the pertinent economic year, certified by their external auditors. The AAB will be credited to the CEO as soon as the Board has determined it, which will never be later than sixty (60) calendar days beginning on the date in which the certified financial statements are received. The AAB will vary depending on whether or not Triple-S achieves ONE HUNDRED PERCENT (100%) or more of the budgeted and audited year's BUSINESS PLAN, in the following manner: A. In case Triple-S achieves ONE HUNDRED PERCENT (100%) or more of the BUSINESS PLAN for the year in question, the AAB will be EIGHTY PERCENT (80%) of the MAXIMUM BONUS, plus: 1. An additional TEN PERCENT (10%), for NINETY PERCENT (90%) of the maximum bonus, considering the total effect of the following factors: a) A reduction (in percentages) of the recurring administrative expenses, in regards to the gross income earned by Triple-S over the consolidated budget. b) A net income larger than the one budgeted. c) The volume of business from Triple-S exceeds what was budgeted. -11- 2. An additional TEN PERCENT (10%) in order to reach the ONE HUNDRED PERCENT (100%) of the MAXIMUM BONUS, at the Board's discretion. B. If TRIPLE-S achieves less than ONE HUNDRED PERCENT (100%) of its BUSINESS PLAN, the AAB will vary between ZERO PERCENT (0%) up to SEVENTY NINE PERCENT (79%) of the MAXIMUM BONUS, at the BOARD'S discretion, considering the following factors: 1. The magnitude of an unfavorable deviation, larger than TEN PERCENT (10%), from the BUSINESS PLAN. 2. The magnitude of the annual increase of recurrent administrative expenses, in regards to the gross income earned by Triple-S over the budget. 3. A net annual income lower than the budget. 4. The business volume from Triple-S does not reach the amount budgeted. 5. Any other factors the BOARD deems, at its discretion, should be considered. 9. DEFERRED COMPENSATION. The CEO will have the power to, from time to time, defer payments for any of the before mentioned economic remuneration concepts in keeping with her wishes, if and when such action is in accordance to the applicable law provisions and to good corporate practices. 10. ANNUAL SALARY REVISION. The CEO's SALARY will be reviewed annually, effective January 1st of each year, beginning on January 1, 2003. Said revision would take into account the percentile increase in Puerto Rico's general economic inflation rate, as determined by the Planning Board for the previous year, and other factors regarding compensation of other Officers of same or similar position and responsibility within the local industry and commerce, and any other relevant factor. The Compensation Committee shall do the computing of the salary change for the Board's recommendation and approval at the time it reviews compensation. 11. FRINGE BENEFITS. The CEO will have the right to all fringe benefits such as: Retirement Plan, Health Plan, vacations, sick leave, disability insurance and others, in conformance to Triple-S' policies and norms as applicable to its management employees, and as modified from time to time. Triple-S will also reimburse or pay the CEO the following: -12- a. Representation, travel and miscellaneous expenses which are reasonably and necessarily incurred in carrying out her official duties; b. The right to use an automobile of a category in keeping with the post she occupies; c. Annual membership fees to a private club and two business related clubs, i.e., Banker's Club and; d. Annual membership fees to two professional associations such as the College of Certified Public Accountants, and the American Institute of Certified Public Accountants; e. Any other related expenses that the BOARD deems necessary in carrying out her duties. 12. DEDUCTIONS. Triple-S will make all deductions from the CEO's remuneration that the law requires such as: social security, retained income taxes, and her spouse's and any other optional dependent's life and disability insurance portion. The CEO is authorized to acquire any life insurance coverage in addition to the one currently held by Triple-S at her own responsibility and cost. 13. EFFECTIVENESS AND TERM OF CONTRACT. This contract's effective date is established to be May 1, 2002 and its ending date is December 31, 2004. The Board of Directors must notify the CEO no later than one year before the ending date of this original contract term or of its renovation, of their decision to renew or not renew it. In the same manner, the CEO must notify Triple-S no later than one year before the ending date, of her decision to renew or not renew it. If Triple-S decides not to renew the Contract, it is under the obligation to pay the CEO one year's salary. Triple-S must also have fulfilled all obligations to the CEO, which correspond to her contract's terms, including those regarding compensation and fringe benefits. Disbursement of this amount shall occur no later than the last effective date of this contract. In case this contract is renewed and then terminated before the renovation's ending date, Triple-S is under the obligation of providing the CEO with the same compensation. 14. UNILATERAL RESOLUTION. The parties agree that Triple-S has the right to dissolve this contract at any time before the agreed ending date. To exercise this right, the PBD will notify the CEO thirty (30) days before the effective date of said unilateral dissolution. As a condition for Triple-S to exercise this right, it must proceed immediately with the total cash liquidation of the balance of this professional employment contract, in addition to the one year salary -13- specified in paragraph 13, including the fringe benefits, and subtracting the discounts applicable by law. Triple-S will have the option of continuing monthly payments until the contract is completed. 15. UNILATERAL RESOLUTION- JUST CAUSE. It is understood that Triple-S is assisted by just cause for unilaterally dissolving this CONTRACT when the CEO incurs in any of the following behaviors: a. negligence in carrying out her duties, or their late, inadequate or inept performance; b. conviction of a felony or misdemeanor involving moral depravation; c. insubordination; d. material non-conformance to corporate norms, rules and agreements, or those of this CONTRACT; e. improper or disorderly conduct; f. existence of a conflict of interests; g. substantial reduction of Triple-S` operations; 16. PRIVILEGED MATERIAL- CONFIDENTIALITY. Except as formerly stated, all the information Triple-S and all the companies under the Triple-S Corporate Group share with the CEO, or that she is privy to as a consequence of her employee relationship with Triple-S, in the guise of any chores, relationships, contacts, businesses, clients and duties, will constitute privileged and confidential material. Consequently, the CEO will not divulge said information to third parties, including Triple-S employees, functionaries or officers who do not have a legitimate reason to know this information. The confidentiality and privilege obligation discussed here shall survive the conclusion, unilateral resolution or termination of this CONTRACT. 17. DOCUMENTS. At the end of this contract, the CEO will keep or return all documents, objects, materials and the rest of the information she has obtained through Triple-S business, in the Triple-S offices, recognizing at the same time that said documents, objects, materials and related information are the exclusive property of Triple-S. 18. TRIPLE-S PERSONNEL. The CEO will not solicit or encourage the Triple-S and subsidiary personnel to quit their jobs and join her or a third party in other activities that are not to Triple-S's benefit during the duration of her contract with Triple-S and for one year after the contract with Triple-S ends. -14- THIS CONTRACT IS AGREED UPON BY THE UNDERSIGNED IN CONSIDERATION OF THE FOLLOWING: MISCELLANEOUS PROVISIONS 19. CONTRACT CONSTRUCTION. Triple-S wrote this contract, therefore its intellectual property and author's rights are theirs. At the same time, the contract is a product of negotiations between both parties, so no assumption or inference should be made in favor of any of them. 20. CEDING. The CEO may not totally or partially cede the obligations and responsibilities assumed through this CONTRACT to a third party. 21. PACT TOTALITY. This document constitutes the total and complete pact agreed to by the contracting parts. No other former agreement, contract or pact should be considered valid or effective. 22. AMENDMENTS. In case the undersigned wish to amend the content of any clause in this CONTRACT, this should be done in writing, clearly stating which clause is being amended and what the amendment consists of. 23. HEADINGS. The headings included in this CONTRACT have been added to aid in reading and analyzing it. At no time should these headings be interpreted as the pact agreed upon by the undersigned, or that they amend the content of the clauses each one heads. 28. LIMITED INVALIDITY. In case any clause in this CONTRACT is declared null or illegal, the rest of the clauses will continue with full effectiveness and force. 29. INTERPRETATION. This CONTRACT will be interpreted according to the prevailing judicial order in the Commonwealth of Puerto Rico. 30. JURISDICTION AND COMPETENCE. If it were necessary to judicially annul any controversy related to this CONTRACT, the parties will submit voluntarily to the jurisdiction of the Puerto Rico Court of First Instance and would choose the San Juan Halls of the Superior or District Court, as were the case, to void it. SUCH IS THE PACT agreed upon by contracting parties, which they recognize and sign in San Juan, Puerto Rico on the date stated above. Triple-S, Inc. Mrs. Socorro Rivas Rodriguez Signed Signed - -------------------------------- ---------------------------- By: Dr. Fernando J. Ysern Borras By: Mrs. Socorro Rivas Rodriguez Signed - ------------------------------ By: Atty. Juan Jose Leon Soto -----END PRIVACY-ENHANCED MESSAGE-----