REPORT ON EXAMINATION
OF THE
MEDCO CONTAINMENT INSURANCE COMPANY OF NEW YORK
AS OF
DECEMBER 31, 2010
DATE OF REPORT SEPTEMBER 27, 2012
EXAMINER JEFFREY USHER
TABLE OF CONTENTS
ITEM NO. PAGE NO.
1.
Sco
p
e of the examination 3
2. Descri
p
tion of the Com
p
an
y
5
A. Mana
g
ement and controls 7
B. Conflict of interest
p
olic
y
9
C. Cor
p
orate
g
overnance 10
D. Enter
p
rise
r
isk
m
ana
g
ement 12
E. Internal audit 14
F. Remediation
p
lan
p
rocedures 16
G. Territor
y
and
p
lan of o
p
eration 18
H. Holdin
g
com
p
an
y
s
y
stem 18
I. Si
g
nificant o
p
eratin
g
ratios 23
J. Accounts and records 24
3. Financial statements 25
A. Balance sheet 25
B. Statement of revenue and expenses and capital and surplus 27
4. Claims un
p
ai
d
28
5. Market conduct activities 29
6. Subse
q
uent events 31
7. Com
p
liance with
p
rior re
p
ort on examination 32
8. Summar
y
of comments and recommendations 34
AndrewM.Cuomo BenjaminM.Lawsky
Governor Superintendent
September 27, 2012
Honorable Benjamin M. Lawsky
Superintendent of Financial Services
Albany, New York 12257
Sir:
Pursuant to the requirements of the New York Insurance Law, and acting in accordance
with the instructions contained in Appointment Number 30656, dated March 17, 2011, attached
hereto, I have made an examination into the condition and affairs of the Medco Containment
Insurance Company of New York, a for-profit accident and health insurance company licensed
pursuant to the provisions of Article 42 of the New York Insurance Law, as of December 31,
2010, and respectfully submit the following report thereon.
The examination was conducted at the Company’s administrative office located at 100
Parsons Pond Drive, Franklin Lakes, New Jersey.
Wherever the designations the “Company” or “MCICNY” appear herein, without
qualification, they should be understood to indicate Medco Containment Insurance Company of
New York.
25 Beaver Street, New York, NY 10004 | WWW.DFS.NY.GOV
2
Wherever the designations “MHS” or the “Parent” appear herein, without qualification,
they should be understood to indicate Medco Health Solutions, Inc., MCICNY’s parent
company.
Wherever the designation the “Department” appears herein, without qualification, it
should be understood to indicate the New York State Department of Financial Services. It should
be noted that the New York State Insurance Department merged with the New York State
Banking Department on October 3, 2011 to become the New York State Department of Financial
Services.
3
1. SCOPE OF THE EXAMINATION
The previous examination of the Company was conducted as of December 31, 2006.
This examination of the Company was a combined (financial and market conduct) examination
and covered the four-year period January 1, 2007 to December 31, 2010. The financial
component of the examination was conducted as a financial examination, as defined in the
National Association of Insurance Commissioners (“NAIC”) Financial Condition Examiners
Handbook, 2010 Edition (the “Handbook”). The examination was conducted observing the
guidelines and procedures in the Handbook. Where deemed appropriate by the examiner,
transactions occurring subsequent to December 31, 2010, were also reviewed.
The financial portion of the examination was conducted on a risk-focused basis in
accordance with the provisions of the Handbook, which provides guidance for the establishment
of an examination plan based on the examiner’s assessment of risk in the Company’s operations
and utilizes that evaluation in formulating the nature and extent of the examination. The risk-
focused examination approach was included in the Handbook for the first time in 2007; thus, this
was the first such type of examination of the Company. The examiner planned and performed
the examination to evaluate the Company’s current financial condition, as well as identify
prospective risks that may threaten the future solvency of MCICNY.
The examiner identified key processes, assessed the risks within those processes and
assessed the internal control systems and procedures used to mitigate those risks. The
examination also included an assessment of the principles used and significant estimates made
by management, an evaluation of the overall financial statement presentation, and a
4
determination of management’s compliance with the Department’s statutes and guidelines,
Statutory Accounting Principles, as adopted by the Department, and NAIC Annual Statement
instructions.
Information concerning the Company’s organizational structure, business approach and
control environment were utilized to develop the examination approach. The examination
evaluated the Company’s risks and management activities in accordance with the NAIC’s nine
branded risk categories.
These categories are as follows:
Pricing/Underwriting
Reserving
Operational
Strategic
Credit
Market
Liquidity
Legal
Reputational
The Company was audited annually for the years 2007 through 2010 by the accounting
firm of PricewaterhouseCoopers LLP (“PwC”). The Company received an unqualified opinion
in each of those years. Certain audit work papers of PwC were reviewed and relied upon in
conjunction with this examination. A review was also made of the Parent’s Internal Audit
function and Enterprise Risk Management program, as they relate to the Company.
A review was also made to ascertain what action was taken by the Company with regard
to comments and recommendations contained in the prior report on examination.
5
This report on examination is confined to financial statements and comments on those
matters which involve departures from laws, regulations or rules, or which require explanation or
description.
2. DESCRIPTION OF THE COMPANY
The Company was incorporated in the State of New York on February 15, 1989, under
the name “American Nisshin Insurance Company”, a property and casualty insurance
corporation. The Company received its licensing authority from New York State on July 15,
1989, and commenced writing business on July 31, 1989. On November 1, 1994, the Company
effected a name change to “Medco Containment Insurance Company of New York” following its
August 31, 1994 acquisition by its current parent company, Medco Health Solutions, Inc.
(formerly known as Merck-Medco Managed Care, LLC). Medco Health Solutions, Inc.
(“MHS”) is a national pharmacy benefits manager and a third-party administrator of the
prescription drug programs and services for such clients as large private and public sector
employers and their employees, physicians, pharmacies, and drug manufacturers.
Effective December 12, 2005, the Department approved MCICNY’s Certificate of
Amendment of Charter whereby all of the authorized property and casualty insurance lines of
business as defined in Section 1113(a) of the New York Insurance Law were deleted from the
Company’s license. The Company simultaneously replaced the aforementioned deleted lines of
business with accident and health insurance lines of business and thereafter, MCICNY converted
to an accident and health insurer, pursuant to Article 42 of the New York Insurance Law.
6
On July 21, 2011, subsequent to the examination date, MHS announced an agreement
with Express Scripts, Inc., whereby Express Scripts, Inc. agreed to buy MHS for $29.1 billion in
cash and stock. The Department approved the acquisition, effective March 9, 2012, while the
Federal Trade Commission approved the acquisition on April 2, 2012.
MCICNY is required to maintain a total of $200,000 of minimum paid-in capital based
upon the line of business it is authorized to transact, as set forth in Section 1113(a) of the New
York Insurance Law. The Company reported, as of December 31, 2010, total paid-in capital of
$1,000,000, comprised of one million outstanding issued common shares at $1 par value per
share.
When MCICNY submitted its 2009 and 2010 Medicare bids to the Centers for Medicare
and Medicaid Services (“CMS”), it utilized insufficient experience in establishing the amount of
premiums it would need to support the business. As a result, CMS required the Company to
obtain additional contributions, and as such, a $30 million cash infusion from MHS was made.
This paid-in surplus contribution was approved by the Department on June 28, 2010. The
Company reported total capital and surplus in the amount of $40,373,678 as of December 31,
2010.
The Company’s Risk Based Capital as of December 31, 2010 was 3,114%, up from
1,092% in 2009. This change was primarily due to the $30,000,000 paid-in surplus contribution
mentioned above, made on June 28, 2010. In each of the years under examination, the Risk
Based Capital ratio was maintained at a “No Action Level”.
7
A. Management and Controls
Pursuant to the Company’s charter and by-laws, management of the Company is to be
vested in a Board of Directors (“BOD”) consisting of not less than fourteen members.
The following fourteen (14) individuals served on the Company’s Board of Directors as
of December 31, 2010:
Name and Residence Principal Business Affiliation
Gabriel R. Cappucci Vice-President,
Chatham, NJ Medco Containment Insurance Company of New York
Mary T. Daschner Vice-President and Counsel,
Minneapolis, MN Medco Health Solutions, Inc.
Paul E. Dellorusso Vice-President/Secretary,
Glen Ridge, NJ Medco Containment Insurance Company of New York
Sarina DosSantos Vice-President/Associate Controller,
Denville, NJ Medco Containment Insurance Company of New York
Peter Gaylord Senior Vice-President Retiree Solutions,
New York, NY Medco Health Solutions, Inc.
Jayne Kasarda Vice-President/Retiree Solutions,
Chatham, NJ Medco Health Solutions, Inc.
Lori Beth Marino Senior Director of Insurance /Risk Management,
West Orange, NJ Medco Health Solutions, Inc.
Constantine Milcos Senior Vice-President and Treasurer,
Ramsey, NJ Medco Containment Insurance Company of New York
Richard J. Rubino President,
Oakland, NJ Medco Containment Insurance Company of New York
James Schalago Director Medicare Insurance,
Bloomingdale, NJ Medco Health Solutions, Inc.
8
Name and Residence Principal Business Affiliation
Robert M. Shannon Vice-President and Treasurer,
Harrison, NY Medco Health Solutions, Inc.
Corlette V. Trim Vice-President,
Franklin Lakes, NJ Medco Containment Insurance Company of New York
Daniel C. Walden Vice-President/Assistant Secretary,
New Rochelle, NY Medco Containment Insurance Company of New York
Stephen E. Wogen Senior Vice-President/Part D Solutions,
Towaco, NJ Medco Health Solutions, Inc.
A review of the BOD’s meeting minutes revealed that the board met four (4) times each
year. All of the board’s meetings were generally well attended by the directors with all board
members participating in at least one-half of the meetings they were eligible to attend. It was
noted, however, that the BOD’s meeting minutes lacked meaningful content in that they did not
include substantive details or contain a summary of the issues that were discussed during the
meetings.
It is recommended that MCICNY include a detailed summary of the topics and issues that
were discussed within the minutes of its board meetings.
MCICNY’s by-laws provide the board with the authority to establish committees as it
deems appropriate. The board has three (3) committees: Executive Medicare Part D Committee,
Executive Finance Committee, and Executive New Business Committee. The committee charters
require that the committees meet at least four (4) times annually. The Company was unable to
provide documentation that the meetings were held, including an inability to provide meeting
9
minutes for these committees. Such minutes are critical to ensure that a record of meeting
discussion items is maintained and that appropriate corporate governance is being conducted.
It is recommended that the Company maintain documentation that committee meetings
were held, including minutes for all of its Board of Director’s committee meetings.
The following individuals were the principal officers of the Company as of December 31,
2010:
Name Title
Richard James Rubino President
Constantine Milcos Vice-President and Treasurer
Paul Dellorusso Vice-President and Secretary
B. Conflict of Interest Policy
Policy Statement Four of the Company’s Statement of Policy on Conflicts of Interest
states the following:
“No Director, officer or employee shall divulge to others confidential company
information, or use such information for personal profit.”
The examiner reviewed the signed Board of Directors’ Conflict of Interest Statements for
the examination period. It was noted that none of the signed director statements included Policy
Statement Four of the Statement of Policy on Conflicts of Interest.
It is recommended that the Company require its directors and officers to affirm to Policy
Statement Four when signing their Conflict of Interest Statements.
10
In a request for a list of employee-relatives within the Company, the Company responded
that they do not maintain such a list. Nor does the Company evaluate the duties or positions of
employee-relatives for conflicts of interest.
It is recommended as a good business practice, that the Company maintain a list of
employee-relatives employed within the Company. The list should include the position of each
employee-relative, start dates, job description, and the results of a Compliance Department
review.
C. Corporate Governance
The Company’s Parent, Medco Health Solutions, Inc., is a publicly traded, diversified
healthcare company that is subject to the Sarbanes-Oxley Act of 2002. Internal Audit and
Enterprise Risk Management (“ERM”) services for the Company are provided by MHS. Unless
otherwise noted below, references to Medco Health Solutions, Inc. are applicable to the
Company as well.
MHS has adopted an ERM framework for proactively addressing and mitigating risks,
including prospective business risks. Exhibit M of the Handbook (Understanding the Corporate
Governance Structure) was utilized by the examiner as guidance for assessing Corporate
Governance. Although some issues exist, as detailed later in this report, it was determined that
overall, the Company’s Corporate Governance structure is adequate, sets an appropriate “tone at
the top”, supports a proactive approach to operational risk management, and contributes to an
effective system of internal controls. It was concluded that Medco Health Solutions, Inc.’s
11
Board of Directors and key executives encourage integrity and ethical behavior throughout the
organization and that senior management promotes a corporate culture that acknowledges,
understands and maintains an effective control environment.
MHS management has an adequate approach to identifying and mitigating risks across
the organization, including prospective business risks. MHS deals proactively with its areas of
risk. Management is knowledgeable about risk mitigation strategies. Through risk discussions
and other measures, MHS management reviews significant issues and reacts to changes in the
environment with a commitment to address risk factors and manage the business accordingly.
MHS has established an Internal Audit Department (“IAD”) function, independent of
management, to serve MHS and its subsidiaries.
The IAD assists all levels of management by reviewing and testing financial and
operational controls and processes established by management to ensure compliance with laws,
regulations and MHS policies. The scope of the IAD program is coordinated with PwC, MHS’
independent certified public accountant, to ensure audit coverage and efficiency.
During the course of this examination, consideration was given to the significance and
potential impact of certain IAD findings. To the extent possible, the examiner relied upon work
performed by the IAD, as recommended by the NAIC Handbook.
The examiner noted the following reportable items related to Corporate Governance, IAD
and ERM:
During the examination, the Company was requested by the examiner to supply a list of
12
the Internal Audit reports that had been prepared during the examination period. Several of the
report titles that were provided were labeled as “privileged and confidential” with no further
information granted. While the Company has a right to withhold certain documents as
“privileged and confidential”, it is generally the Department’s position that only legal advice can
be withheld in this manner and that legal advice can only be prepared by a licensed attorney. In
order to understand how the reports could be deemed as legal advice, the examiner requested a
brief description of the reports in question. The requested description of reports was not
provided to the examiner by the Company.
After repeated attempts to resolve the issue, the Company continued to resist providing
any information to the Department’s examiners to support their contention, instead simply
repeating that the work was performed by the Internal Audit Department at the behest of the
Company’s General Counsel and that the work therefore qualified as legal advice.
It is recommended that the Company cease the practice of withholding evidence that may
support a conclusion that withheld documents are “Privileged and Confidential” and thus will not
be provided to the examiners.
D. Enterprise Risk Management
MHS’ ERM function was reviewed as part of the examiner’s assessment of the overall
Corporate Governance environment. MHS uses the Internal Audit Department to perform ERM
management for the Company and the Director of the IAD operates in the lead role. The
expertise of the remainder of the IAD staff is also leveraged in risk management and in
establishing internal controls.
13
The examiner noted that the Internal Audit Department performed the following
functions in its role as a consultant for ERM:
Provided advice, facilitated workshops, coached the organization on risk and
control and promoted the development of a common language and framework
for ERM understanding;
Performed as the central point for coordinating, monitoring, and reporting on
risks;
Supported managers as they worked to identify the best way to mitigate risks;
and
Made tools and techniques used by the IAD available to management to
facilitate their analysis of risks and controls.
Since establishing its formal ERM office in April 2008, MHS management’s risk
maturity has increased and management has become more embedded in the operations of the
business and its risks. Since Internal Audit is responsible for auditing the results of its own
work, which can lead to a conflict of interest, it seems prudent for MHS to consider reducing
IAD’s role in championing ERM, and consider utilizing the services of an independent risk
management specialist.
It is recommended that MHS management re-evaluate the current state of the ERM
function and consider the following process improvements:
It is recommended that MHS revisit its Internal Audit Department’s roles and
responsibilities, being mindful of its involvement in the ERM process,
including facilitation roles. There should be a clear distinction between a
facilitation role and the perception of “owning” parts of the ERM process and
related documentation, since facilitation roles may be misconceived as
management roles. In revisiting the ERM function and the primary
responsibilities associated with ERM, it should be clear that management
owns the entire risk management process, as well as the related supporting
documentation. In short, management has ultimate accountability and
responsibility for risk management, not the IAD.
14
It is recommended that MHS establish a Chief Risk Officer (“CRO”) position,
or designate someone with overall accountability for the ERM function (e.g., a
Director of ERM). The CRO/Director of ERM would report directly to the
Senior Risk Management Committee, which reports ERM information to the
MHS Board of Directors. Additionally, MHS should consider reorganizing
the ERM business segment leads so that they report to a CRO/Director of
ERM.
It is recommended that MHS establish a clear strategy and timeline for the
migration of the responsibility and the substantial involvement of the IAD risk
experts to a CRO/Director of ERM.
E. Internal Audit
The Vice-President of Corporate Audit (“VPCA”) reports to the Audit Committee
(“AC”) functionally and reports to the Chief Financial Officer (“CFO”) administratively. A
review of the VPCA’s performance evaluation revealed that the CFO has responsibility to
comment on, as well as to sign the VPCA’s performance evaluation. The Company stated that
the CFO is to acquire input for the VPCA’s evaluation from the Audit Committee. This is
clearly mentioned within the AC Charter. The examiner was also advised that the VCPA’s
compensation and salary are determined by the CFO and reviewed by the Audit Committee.
However, the Company was not able to provide any documentation of the input, review and/or
approval from the AC. Furthermore, no documentation of the AC’s review and approval of the
compensation and salary as determined by the CFO was provided.
From a corporate governance perspective, the responsibilities and performance of the
individual who manages Internal Audit should be directed by the Audit Committee to ensure
independence from Senior Management.
Per guidance from the Information Systems Audit and Control Association (“ISACA”):
15
“Audit independence is a critical component if a business wishes to have an
audit function that can add value to the organization. The [internal] audit
report and opinion must be free of any bias or influence if the integrity of the
audit process is to be valued and recognized for its contribution to the
organization’s goals and objectives.”
This position is supported throughout the audit industry, including specific guidance from
organizations such as the American Institute of Certified Public Accountants (“AICPA”) and the
Institute of Internal Auditors (“IIA”). Per the IIA website:
“The internal auditor occupies a unique position, he or she is employed by
management but is also expected to review the conduct of management which
can create significant tension since the internal auditor’s independence from
management is necessary for the auditor to objectively assess the
management’s action, but the internal auditor’s dependence on management
for employment is very clear. To maintain objectivity, internal auditors
should have no personal or professional involvement with or allegiance to the
area being audited; and should maintain an un-biased and impartial mindset
in regard to all engagements.”
When presented with this conclusion, the Company provided industry support for a
reporting structure under which Internal Audit reports to the Chief Executive Officer. In this
case, however, the CEO for MCICNY also serves as the Chief Financial Officer for MCICNY’s
Parent and affiliates. As a result, the industry support does not fit the structure as described.
It is recommended that the Vice-President of Corporate Audit report directly to the Audit
Committee on audit matters.
It is recommended that the salary and performance evaluation of the Vice-President of
Corporate Audit become the full responsibility of the Audit Committee.
16
It is recommended that, on a going forward basis, the Company include within the
minutes of the Audit Committee meetings, documentation to support the Audit Committee’s
review of the Vice-President of Corporate Audit’s performance with compensation being
explicitly stated.
It is recommended that the Company revise the Internal Audit and Audit Committee
charters to clearly reflect the Audit Committee as Internal Audit’s primary report and to provide
the AC with full responsibility for the evaluation and salary of the IA director.
F. Remediation Plan Procedures
When an Internal Audit is performed, findings are presented to the appropriate manager
so the item can be remediated and closed. As part of that process, the Audit Committee requires
Internal Audit to conduct Quarterly Implementation Status Updates for all audit findings until
they have been resolved.
In order to examine this process and to establish whether the Company was actively
monitoring actions taken to close Internal Audit findings, the examiner selected multiple Internal
Audit recommendations and requested the Quarterly Implementation Status Updates for those
items. The following was noted:
The Company was not able to show that remediation plans had been evaluated
by Internal Audit.
The Company was not able to provide support for having consistently
conducted the quarterly implementation updates.
17
Where items had been marked by a Manager as closed, the Company was
unable to provide support to show that the item had in fact been remediated.
In no case reviewed was the Company able to explain why, or show how, it
had responded when items were not closed within the period specified.
It is noted that some of the above weaknesses identified by the examiner were deemed to
be significant. It should also be noted that in certain cases, the Company’s inability to document
the remediation did not permit a conclusion that such remediation did not, in fact, occur.
It is recommended that the Company adhere to its own written procedures for tracking
the Implementation Status Updates for the audit findings.
It is recommended that the Company maintain records/documentation of the Audit
Director’s evaluation of the clients’ responses; the Director’s assertion that actions taken on any
audit finding remedy the underlying conditions; and the Director’s summary reports given to the
Audit Executive Director and Vice-President of Corporate Audit on the overall status of open
audit issues.
It is recommended that the Company document that it has followed-up with business
owners with respect to the mitigation of risks until such risks are mitigated.
It is recommended that the Company maintain accurate and detailed records of the
implementation progress and of the remediation that occurs after an audit.
18
G. Territory and Plan of Operation
As of December 31, 2010, the Company was licensed to transact accident and health
insurance as set forth in Section 1113(a)(3)(i) of the New York Insurance Law.
As of December 31, 2010, the Company was licensed only in the State of New York.
MCICNY reported total direct written premiums of $131,700,322 during the examination
period as per the following schedule:
Year Premiums Written
2007
2008
2009
2010
Total
$ 1,961,004
21,029,682
48,775,668
59,933,968
$131,700,322
As of January 2006, the Company began writing a fully insured prescription drug plan
under the Medicare Part D Prescription Drug program. Prior to its entry into this market,
MCICNY had written a small amount of aggregate stop-loss coverage which was marketed to
large commercial business groups relative to prescription drug business written by MHS. This
stop-loss coverage constituted all of the Company’s writings for 2004 and 2005. There was no
stop-loss coverage in force during the examination period.
H. Holding Company System
The Company is a 100% controlled subsidiary of MHS, a Delaware-incorporated and
publicly traded corporation. Previously a controlled subsidiary of Merck & Co., Inc, (“Merck”),
19
MHS (formerly named Merck-Medco Managed Care, LLC) was spun off from Merck in August
2003. All of the outstanding shares of MHS were distributed to Merck’s shareholders. As a
result of the spin-off, MHS became the ultimate controlling entity of the surviving holding
company system, which currently includes MCICNY.
The following chart illustrates the holding company system of the Company and its
affiliates as of December 31, 2010:
Medco Health Solutions Inc.
(OP) (DE)
Medco Containment
Insurance Company o
f
New Jersey
(OP) (NJ)
Medco Health, LLC
Medco
Containment Life
Insurance Company
(OP) (PA)
Medco Containment
Insurance Company o
f
New York
(OP) (NY)
Medco Health
Solutions of Fairfield,
LLC
MWD Insurance
Company
Medco Health
Solutions of Las
Vegas, Inc.
(OP) (NV)
National Rx Services, Inc.
of Missouri
Clinical Business
Solutions, Inc.
Hemophilia Resources of
America, Inc.
HRA Holding Corp.
Home Healthcare
Resource, Inc.
Home Healthcare
Resources, Limited
Medco Services
Puerto Rico, Inc.
Medco Health
Solutions of Spokane,
Inc. (WA)
Medco Health
Solutions of Columbus
West, Ltd. (OP) (QH)
Medco Health
Solutions of Hidden
River, LC
(OP) (FL)
Medco Health
Solutions of
Henderson, Nevada,
LLC
NJRE, LLC
(OP) (NJ)
Medcohealth.com
LLC (OP) (NJ)
Medco Health
Solutions of Texas,
LLC (OP) (TX)
Medco Health New
York Independent
Practice Assoc., LLC
(
OP
)(
NY
)
Medco Health
Solutions of
Richmond, LLC
(
OP
)(
VA
)
Merck-Medco of
Willingboro Urban
Renewal, LLC
(
OP
)(
NJ
)
Medco Health
Receivables, LLC
Systemed, LLC
(OP) (CA)
Medco Health
Solutions of Columbus
North Ltd. (OP) (OH)
Medco Health
Solutions of North
Versailles, LLC
(
OP
)(
PA
)
Medco Health
Solutions of
Willingboro, LLC
(OP) (NJ)
Replacement Dist.
Center, Inc.
Medco at Home, LLC
BioPartners in Care,
Inc.
Medco Health
Puerto Rico, LLC
Medco Health
Solutions of Netpark,
LLC
(OP) (DE)
Medco Health
Solutions of Franklin
Lakes, LLC
National Rx Services
No. 3, Inc. of Ohio
Accredo Health,
Incorporated
Accredo Health
Group, Inc.
Accredo Health
Services
(Infusion), Inc.
Accredo Health
Resources Inc.
(New York)
AHG of New York,
Inc.
** No one individual or entity held interest of ten percent or more of the ultimate parent
company, Medco Health Solutions, Inc., as of December 31, 2010.
20
Section 1505(d)(3) of the New York Insurance Law states in part:
“(d) The following transactions between a domestic controlled insurer and any
person in its holding company system may not be entered into unless the insurer
has notified the superintendent in writing of its intention to enter into any such
transaction at least thirty days prior thereto, or such shorter period as he may
permit, and he has not disapproved it within such period: …
(3) rendering of services on a regular and systematic basis…”
The following inter-company agreements were in effect between the Company and MHS,
as of December 31, 2010:
Service Agreement effective August 31, 1994 and as amended by addendum, dated
April 16, 1998
The captioned agreement calls for MHS to provide the Company with accounting,
underwriting, claims and investment services. On June 26, 2007, the Department
approved an amendment to this agreement. Such amendment included the following
additional provisions: (i) MHS is to provide the Company with management and
administrative services, including all personnel, necessary for the management of the
operations and services of MCICNY and the implementation of the Company’s policies;
and (ii) the Company is to maintain its accounts and records in Franklin Lakes, New
Jersey.
Tax Sharing Agreement with Medco Health Solutions, Inc., dated March 10, 2004
The captioned agreement, which was approved by the Department, states that the
Company is to be included in MHS’ consolidated Federal income tax return and
consolidated state income tax returns.
The Department issued a non-objection letter to the Company on March 4, 2004, relative
to this agreement.
Integrated Medicare Part D Prescription Drug Program Master Agreement with
Medco Health Solutions, Inc., dated June 6, 2005 (Master Drug Program Agreement)
This agreement provides for MCICNY to retain MHS and its subsidiaries, which hold
TPA licenses in certain states, to provide a Medicare Prescription Drug Program
including, but not limited to, retail pharmacy, mail order pharmacy, and specialty drug
pharmacy services for eligible persons, point-of-care, physician office communications
and cost containment initiatives developed and implemented by MHS. Such cost
containment initiatives may include communications with prescribers, patients and/or
participating pharmacies, and financial incentives to participating pharmacies for their
participation in such initiatives.
21
The Company failed to file the Master Drug Program Agreement with the Department, in
violation of Section 1505(d)(3) of the New York Insurance Law.
It is recommended that the Company comply with the requirements of Section 1505(d)(3)
of the New York Insurance Law by filing its inter-company agreements with the Department
prior to implementation. It should be noted that during the examination, the Company complied
with this recommendation and the agreement was approved by this Department on April 19,
2012.
The Service Agreement between MCICNY and its Parent indicates that inter-company
balances will be due and payable within fifteen (15) days of the applicable statement. A review
of the inter-company transactions between the Company and its Parent, MHS, revealed that
settlement dates were not within the timeframe set forth by the agreement.
It is recommended that the Company settle inter-company transactions with its Parent
within the timeframe of 15 days, in accordance with its service agreement.
New York Insurance Law §1505 (a)(3) states:
“(a) Transactions within a holding company system to which a controlled insurer
is a party shall be subject to the following:
(3) Expenses incurred and payments received shall be allocated to the insurer on
an equitable basis in conformity with customary insurance accounting practices
consistently applied.”
22
Part 91.4 of Department Regulation No. 33 (11 NYCRR 91) states in part:
“(a) General instructions. (1) It is the responsibility of each life insurer to use
only such methods of allocation as will produce a suitable and equitable
distribution of income and expenses by lines of business. Unless impractical or
unfeasible, an insurer may use only such methods of allocation in its distribution
of income and expenses within annual statement lines of business as are
compatible with the methods it uses for distribution between annual statement
lines of business…
4) Bases of allocation shall be reviewed periodically to ascertain their suitability
for continued use.
5) Allocations of income and expenses between companies shall be treated in the
same manner as if made for major annual statement lines of business.”
Further, Paragraphs 8 and 9 of Statement of Statutory Accounting Principles (“SSAP”)
No. 70 of the NAIC Accounting Practices and Procedures Manual state in part:
“8. Many entities operate within a group where personnel and facilities are
shared. Shared expenses, including expenses under the terms of a management
contract, shall be apportioned to the entities incurring the expense as if the
expense had been paid solely by the incurring entity. The apportionment shall be
completed based upon specific identification to the entity incurring the expense.
Where specific identification is not feasible, apportionment shall be based upon
pertinent factors and ratios.
9. Any basis adopted to apportion expenses shall be that which yields the most
accurate results and may result from special studies of employee activities, salary
ratios, premium ratios or similar analyses. Expenses that relate solely to the
operations of a reporting entity, such as personnel costs associated with the
adjusting and paying of claims, must be borne solely by the reporting entity and
are not to be apportioned to other entities within a group.”
The Addendum to the Service Agreement between MCICNY and its Parent states in part:
“Analyses of time devoted… by each individual will be evaluated by reports and
studies from each organization unit providing direct services to the companies.
These reports and studies will be developed annually…”
The Parent pays its employees directly and allocates those expenses to the various
subsidiaries. When considering the amount to charge MCICNY, the Parent consolidates
insurance company expenses into a single amount. It was noted that the Parent charged 85% of
total expenses to MCICNY’s Pennsylvania affiliate, and 15% to MCICNY. Both Companies
23
provide Medicare Part D coverage. When asked, the Company was not able to provide reports or
studies to support the rationale behind the 85%/15% allocation split. The Company stated that
the percentage has not changed since 2005.
It is recommended that the Company comply with Section 1505(a)(3) of the New York
Insurance Law, Part 91.4 of Department Regulation No. 33, and Paragraphs 8 and 9 of Statement
of Statutory Accounting Principles No. 70 and ensure that expenses are allocated from the Parent
to the Company on an equitable, prescribed basis.
It is recommended that the Company comply with its own service agreement and prepare
and update studies on a regular basis to ensure that the allocations are prepared accurately.
It is also recommended that the Company comply with its own service agreement and
maintain the monthly reports and supporting documentation for all inter-company allocations.
MCICNY made all the required holding company filings for the years under examination,
pursuant to Department Regulation No. 52, in a timely manner.
I. Significant Operating Ratios
The following ratios have been computed as of December 31, 2010, based upon the
results of this examination:
Net Premiums Written to Surplus 148.00%
Uncollected Premiums to Surplus 0.29%
Liabilities to Liquid Assets 90.00%
24
Each of the above ratios fell within the benchmark ranges established by the NAIC.
The following underwriting ratios are presented on an earned-incurred basis and
encompass the four-year period covered by this examination:
Amounts Ratios
Claims $117,700,136 89.37%
Claim adjustment expenses 1,475,090 1.12%
General administrative expenses 12,475,571 9.47%
Net underwriting gain 49,525 .04%
Premium earned $131,700,322 100.00%
J. Accounts and Records
During a review of Part 3 of the Company’s “Underwriting and Investment Exhibit –
Analysis of Expenses”, it was noted that all expenses were reported in the “General
Administrative Expenses” column 3. The Company failed to allocate its expenses within the
appropriate categories contained in Part 3 of the Underwriting and Investment Exhibit, in
accordance with Department Regulation No. 33 (11 NYCRR 91) and the NAIC Health Annual
Statement Instructions.
It is recommended that the Company properly allocate the claims adjustment expenses
and investment expenses to the line items shown in Part 3 of its Annual Statement Underwriting
and Investment Exhibit (“Analysis of Expenses”) in accordance with the requirements of
Department Regulation No. 33 and the NAIC Health Annual Statement Instructions.
25
3. FINANCIAL STATEMENTS
A. Balance Sheet
The following shows the assets, liabilities, and capital and surplus as determined by this
examination and reported by the Company in its filed annual statement, as of December 31,
2010. This is the same as the balance sheet filed by the Company as of December 31, 2010.
Assets Examination Company
Bonds $ 5,416,058 $ 5,416,058
Cash 10,410,426 10,410,426
Investment income due and accrued 4,683 4,683
Uncollected premiums and agents’ balances
in the course of collection 117,627 117,627
Accrued retrospective premiums 1,765,366 1,765,366
Amounts receivable relating to uninsured
plans 35,043,999 35,043,999
Current federal and foreign income tax
recoverable and interest thereon 1,120,154 1,120,154
Net deferred tax asset 190,320 190,320
Health care and other amounts receivable 565,783 565,783
Total assets $ 54,634,416 $ 54,634,416
26
Liabilities Examination Company
Claims unpaid $11,999,842 $11,999,842
Unpaid claims adjustment expenses 149,531 149,531
Premiums received in advance 5,408 5,408
General expenses due and accrued 247,657 247,657
Amounts due parent, subsidiaries and
affiliates 1,858,300 1,858,300
Total liabilities $ 14,260,738 $ 14,260,738
Capital and surplus
Common capital stock $ 1,000,000 $ 1,000,000
Gross paid-in and contributed surplus 34,068,941 34,068,941
Unassigned surplus funds 5,304,737 5,304,737
Total capital and surplus $ 40,373,678 $ 40,373,678
Total liabilities, capital and surplus $ 54,634,416 $ 54,634,416
Note: The Internal Revenue Service has completed its audits of the Company’s consolidated
federal income tax return with its Parent Company for tax years 2006 - 2007. The next cycle
(2008-2009) commenced in the fall of 2010. The examiner is unaware of any potential
exposure of the Company to any tax assessment and no liability has been established herein
relative to any contingency.
27
B. Statement of Revenue and Expenses and Capital and Surplus
Capital and surplus increased by $30,231,506 during the four-year period covered by this
examination, January 1, 2007 through December 31, 2010, detailed as follows:
Revenue
Net premium income $ 131,700,322
Total revenue $131,700,322
Expenses
Prescription drugs $ 117,700,136
Claim adjustment expenses 1,475,090
General administration expenses 12,475,571
Total underwriting deductions $131,650,797
Net underwriting gain $ 49,525
Net investment income $ 869,683
Net realized capital gains 1,042
Net investment income 870,725
Net loss from agents or premium balances
charged off (478,813)
Aggregate write-in for other expenses (2,001)
Net income before all other federal income
taxes incurred $ 439,436
Federal income taxes incurred (225,081)
Net income $ 214,355
28
Changes in Capital and Surplus
Capital and surplus, per report on examination,
as of December 31, 2006 $ 10,142,172
Gains in
Surplus
Losses in
Surplus
Net income
Change in net deferred income taxes
Paid in surplus
Change in non-admitted assets
$ 214,355
100,974
30,000,000
_________ $ 83,823
Net increase in capital and surplus
Capital and surplus, per report on examination,
as of December 31, 2010
30,231,506
$ 40,373,678
4. CLAIMS UNPAID
The examination liability of $11,999,842 is the same as the amount reported by the
Company as of the examination date.
The examination analysis of the unpaid claims reserve was conducted in accordance with
generally accepted actuarial principles and practices and was based on statistical information
contained in the Company’s internal records and filed annual statements as verified during the
examination. The examination reserve was based upon actual payments made through a point in
time, plus an estimate for claims remaining unpaid at that date. Such estimate was calculated
based on actuarial principles, which utilized the Company’s past experience in projecting the
ultimate cost of claims incurred on or prior to December 31, 2010.
The examination liability consisted of contract claims on Medicare Part D prescription
drug coverage.
29
5. MARKET CONDUCT ACTIVITES
In the course of this examination, a review was made of the manner in which the
Company conducts its business and fulfills its contractual obligations to policyholders and
claimants. In determining the scope of this review, the examiner took into consideration the
Company’s line of business, Medicare Part D Prescription Drug, which mainly falls under the
purview of CMS’ requirements, instead of the statutory requirements of the Department. Thus,
the market conduct review was limited to agents and brokers. Noted are the following
compliance issues:
The Company uses a combination of internal and external distribution methodologies for
the Medco Pharmaceutical Drug Plan. The external sales force is limited to General Agencies
(“GAs”). The GAs are paid a commission for enrollments in accordance with CMS’ rules and
guidance.
Section 2112(a) of the New York Insurance Law states:
“Every insurer, fraternal benefit society or health maintenance organization doing
business in this state shall file a certificate of appointment in such form as the
superintendent may prescribe in order to appoint insurance agents to represent
such insurer, fraternal benefit society or health maintenance organization.”
Section 2112(d) of the New York Insurance Law states in part:
“Every insurer, fraternal benefit society or health maintenance organization…
doing business in this state shall, upon termination of the certificate of
appointment... file with the superintendent within thirty days a statement, in such
form as the superintendent may prescribe, of the facts relative to such termination
for cause...”
During the examination period, the Company failed to properly appoint its GA or the
GA’s sub-agents. The Company did not notify the Superintendent of the agents’ appointments,
30
as required by Section 2112(a) of the New York Insurance Law. Furthermore, the Company
failed to file agent termination notices with the Superintendent, as required by Section 2112(d) of
the New York Insurance Law.
It is recommended that the Company comply with the requirements of Sections 2112(a)
and 2112(d) of the New York Insurance Law and notify the Department of all appointments and
terminations of its agents.
Sections 2101(a)(1) and (10) of the New York Insurance Law states:
(a) In this article, “insurance agent” means any authorized or acknowledged
agent of an insurer, fraternal benefit society or health maintenance organization
issued a certificate of authority pursuant to article forty-four of the public health
law, and any sub-agent or other representative of such an agent, who acts as such
in the solicitation of, negotiations for, or sale of, an insurance, health
maintenance organization or annuity contract, other than as a licensed insurance
broker, expect that such term shall not include:
(1) any regular salaried officer or employee of a licensed insurer, fraternal benefit
society or health maintenance organization or a licensed insurance agent, who
does not solicit or accept from the public, outside of an office of such insurer,
health maintenance organization or agent, applications or not receive a
commission or other compensation for his services which commission or other
compensation is directly dependent upon the amount of business done;
(10) Any salaried full-time employee who counsels or advises his or her
employer relative to the insurance interests of the employer or of the subsidiaries
or business affiliates of the employer, provided that the employee does not sell or
solicit insurance or receive a commission.
Section 2114(a)(3) of the New York Insurance Law states in part:
“No insurer, fraternal benefit society or health maintenance organization doing
business in this state… shall pay any commission or other compensation to any
person… except to a licensed… agent of such insurer…”
The Company’s Internal Distribution Department consists of call center-based Customer
Service Representatives (“CSRs”) who respond to inbound phone calls. The Company noted that
31
CSRs are MCICNY employees and are compensated via salary, not enrollments. The
compensation paid to the Company’s CSRs consists of a bi-weekly salary that is based on an
hourly rate and a “qualified-based bonus”. This bonus is a volume-based compensation and is,
therefore, considered a form of commission. Thus, it appears that the Company paid
commissions to unlicensed agents, which is a violation of Section 2114(a)(3) of the New York
Insurance Law.
It is recommended that the Company comply with the requirements of Section 2114(a)(3)
of New York Insurance Law and pay commissions only to licensed and appropriately appointed
agents.
6. SUBSEQUENT EVENTS
As noted earlier in this report on examination, On July 21, 2011, subsequent to the
examination date, MHS announced an agreement with Express Scripts, Inc., whereby Express
Scripts, Inc. agreed to buy MHS for $29.1 billion in cash and stock. The Department approved
the acquisition, effective March 9, 2012, while the Federal Trade Commission approved the
acquisition on April 2, 2012.
32
7. COMPLIANCE WITH PRIOR REPORT ON EXAMINATION
The prior report on examination as of December 31, 2006, contained nine (9)
recommendations. The current status of these matters is as follows (page numbers refer to the
prior report):
ITEM NO. PAGE NO.
Holding Company System
1. It is recommended that the Company comply with Section 10
1505(d) of the New York Insurance Law and file all of its
inter-company agreements with the Department prior to
implementation.
The Company did not comply with this recommendation. A
similar recommendation is in this report under item 2 (H).
2. It is recommended that the Company comply with the expense 10
allocation method included in its Department approved inter-
company service agreement with Medco Health Solutions, Inc.
The Company did not comply with this recommendation. A
similar recommendation was issued in this report under item 2
(H).
3. It is recommended that the Company file with the Department, 11
with its new service agreement, the related addendum section
detailing the method of expense allocation.
The Company has complied with this recommendation.
4. It is recommended that the Company fully comply with 12
Department Regulation 52 (11 NYCRR 80-1.2) by ensuring
that its HC 1 Statements are filed timely with this Department.
The Company has complied with this recommendation.
33
ITEM NO. PAGE NO.
Accounts and Records
5. It is recommended that all incurred expenses related to the 13
Company’s inter-company service agreements with Medco
Health be booked to the Company’s inter-company payable
account in accordance with SSAP No. 67 of the NAIC
Accounting Practices and Procedures Manual.
The Company has complied with this recommendation.
6. It is recommended that the Company report its related 14
investment expenses in the manner prescribed by Department
Regulation 33 and the NAIC annual statement instructions.
Also, it is further recommended that MCICNY follow the
annual statement instructions by disclosing in the Notes to the
Financial Statement its method used for allocation of expenses
in connection with management and service fees reported.
The Company did not fully comply with this recommendation.
A similar recommendation in this report is under item 2 (J).
7. It is recommended that MCICNY follow the annual statement 14
instructions by disclosing in the Notes to the Financial
Statement its method used for allocation of expenses in
connection with management and service fees reported.
The Company did not fully comply with this recommendation.
A similar recommendation in this report is under item 2 (J).
8. It is recommended that the Company continue to enhance its 14
controls and monitor CMS’s rules regarding premium billing
and collection.
The Company has complied with this recommendation.
9. It is recommended that the Company update its current 15
custodial investment agreement to include each of the above
standard provisions as listed in the NAIC Examiners Handbook
for inclusion within such custodial agreement.
The Company has complied with this recommendation.
34
8. SUMMARY OF COMMENTS AND RECOMMENDATIONS
ITEM PAGE NO.
A.
Management and Controls
i. It is recommended that MCICNY include a detailed summary
of the topics and issues that were discussed within the minutes
of its board meetings.
8
ii. It is recommended that the Company maintain documentation
that committee meetings were held, including minutes for all
of its Board of Director’s committee meetings.
9
B.
Conflict of Interest
i. It is recommended that the Company require its directors and
officers to affirm to Policy Statement Four when signing their
Conflict of Interest Statements.
9
ii. It is recommended as a good business practice, that the
Company maintain a list of employee-relatives employed
within the company. The list should include the position of
each employee-relative, start dates, job description, and the
results of a Compliance Department review.
10
C.
Corporate Governance
It is recommended that the Company cease the practice of
withholding evidence that may support a conclusion that
withheld documents are “Privileged and Confidential” and
thus will not be provided to the examiners.
12
35
ITEM PAGE NO.
D.
Enterprise Risk Management
It is recommended that MHS management re-evaluate the
current state of the ERM function and consider the following
process improvements:
13
i. It is recommended that MHS revisit its Internal Audit
Department’s roles and responsibilities, being mindful of its
involvement in the ERM process, including facilitation roles.
There should be a clear distinction between a facilitation role
and the perception of “owning” parts of the ERM process and
related documentation, since facilitation roles may be mis-
conceived as management roles. In revisiting the ERM
function and the primary responsibilities associated with ERM,
it should be clear that management owns the entire risk
management process, as well as the related supporting
documentation. In short, management has ultimate
accountability and responsibility for risk management, not the
IAD
ii. It is recommended that MHS establish a Chief Risk Officer
(“CRO”) position, or designate someone with overall
accountability for the ERM function (e.g., a Director of ERM).
The CRO/Director of ERM would report directly to the Senior
Risk Management Committee, which reports ERM
information to the MHS Board of Directors. Additionally,
MHS should consider reorganizing the ERM business segment
leads so that they report to a CRO/Director of ERM.
14
iii. It is also recommended that MHS establish a clear strategy and
timeline for the migration of the responsibility and the
substantial involvement of the IAD risk experts to a
CRO/Director of ERM.
14
E.
Internal Audit
i. It is recommended that the Vice-President of Corporate Audit
report directly to the Audit Committee on audit matters.
15
36
ITEM PAGE NO.
ii. It is recommended that the salary and performance evaluation
of the Vice-President of Corporate Audit become the full
responsibility of the Audit Committee.
15
iii. It is recommended that, on a going forward basis, the
Company include within the minutes of the Audit Committee
meetings, documentation to support the Audit Committee’s
review of the Vice-President of Corporate Audit’s
performance with compensation being explicitly stated.
16
iv. It is recommended that the Company revise the Internal Audit
and Audit Committee charters to clearly reflect the Audit
Committee as Internal Audit’s primary report and to provide
the AC with full responsibility for the evaluation and salary of
the IA director.
16
F.
Remediation Plan Procedures
i. It is recommended that the Company adhere to its own written
procedures for tracking the Implementation Status Updates for
the audit findings.
17
ii. It is recommended that the Company maintain
records/documentation of the Audit Director’s evaluation of
the clients’ responses; the Director’s assertion that actions
taken on any audit finding remedy the underlying conditions;
and the Director’s summary reports given to the Audit
Executive Director and Vice-President of Corporate Audit on
the overall status of open audit issues.
17
iii. It is recommended that the Company document that it has
followed-up with business owners with respect to the
mitigation of risks until such risks are mitigated.
17
iv. It is recommended that the Company maintain accurate and
detailed records of the implementation progress and of the
remediation that occurs after an audit.
17
37
ITEM PAGE NO.
G.
Holding Company Agreement
i. It is recommended that the Company comply with the
requirements of Section 1505(d)(3) of the New York Insurance
Law by filing its inter-company agreements with the
Department prior to implementation. It should be noted that
during the examination, the Company complied with this
recommendation and the agreement was approved by this
Department on April 19, 2012.
21
ii. It is recommended that the Company settle inter-company
transactions with its Parent within the timeframe of 15 days, in
accordance with its service agreement.
21
iii. It is recommended that the Company comply with Section
1505(a)(3) of the New York Insurance Law, Part 91.4 of
Department Regulation No. 33, and Paragraphs 8 and 9 of
Statement of Statutory Accounting Principles No. 70 and
ensure that expenses are allocated from the Parent to the
Company on an equitable, prescribed basis.
23
iv. It is recommended that the Company comply with its own
service agreement and prepare and update studies on a regular
basis to ensure that the allocations are prepared accurately.
23
v. It is also recommended that the Company comply with its own
service agreement and maintain the monthly reports and
supporting documentation of all inter-company allocations.
23
H.
Accounts and Records
It is recommended that the Company properly allocate the
claims adjustment expenses and investment expenses to the
line items shown in Part 3 of its Annual Statement
Underwriting and Investment Exhibit (“Analysis of
Expenses”) in accordance with the requirements of
Department Regulation No. 33 and the NAIC Health Annual
Statement Instructions.
24
38
ITEM PAGE NO.
I.
i.
ii.
Market Conduct Activities
It is recommended that the Company comply with the
requirements of Sections 2112(a) and 2112(d) of the New
York Insurance Law and notify the Department of all
appointments and terminations of its agents.
It is recommended that the Company comply with the
requirements of Section 2114(a)(3) of New York Insurance
Law and pay commissions only to licensed and appropriately
appointed agents.
30
31
