General Description of Business and Recent Developments
Triple-S Management Corporation (Triple-S, TSM, the Company, the Corporation, we, us or our) is a health services company and one of the top players in the Puerto Rico health care industry. With more than 60 years of experience, we are the premier health care brand and serve more people through the most attractive provider networks on the island. We have the exclusive right to use the Blue Cross and Blue Shield (BCBS) name and mark throughout Puerto Rico, the U.S. Virgin Islands (USVI), Costa Rica, the British Virgin Islands (BVI) and Anguilla, and we offer a broad portfolio of managed care and related products in the Commercial, Medicare Advantage and Medicaid markets. In the Commercial market, we offer products to corporate accounts, U.S. federal government employees, local government employees, individual accounts and Medicare Supplement. We also participate in the Government of Puerto Rico Health Insurance Plan, a government of Puerto Rico and U.S. federal government funded managed care program for the medically indigent that is similar to the Medicaid program in the U.S. (Medicaid or the Government health plan).
Our commitment to our valued customers and provider partners, backed by our heritage of excellent care, access and service have positioned Triple-S for continued growth in the health care arena. Our progressive use of technology and clinical data, value-based partnerships with care providers and initial investments in ambulatory and primary care assets are a strong foundation for differentiation and growth through the development of an integrated delivery system over the next several years. We believe continued investment and focus on delivering an excellent health care experience and great service, coupled with health management programs that improve outcomes and quality of life while reducing the total cost of care, will separate Triple-S from our competition and strengthen the financial performance of our business well into the future.
We participate in the managed care market through our subsidiaries, Triple-S Salud, Inc. (TSS); Triple-S Advantage, Inc. (TSA), and Triple-S Blue, Inc. I.I. (TSB). TSS, TSA and TSB are BCBS licensees. As of December 31, 2020, we served approximately 979,000 managed care members across all regions of Puerto Rico.
Triple-S is also a well-known brand in the life insurance and property and casualty insurance markets, with a significant share in each. We participate in the life insurance market through our subsidiary, Triple-S Vida, Inc. (TSV), and in the property and casualty insurance market through our subsidiary, Triple-S Propiedad, Inc. (TSP). Effective June 1, 2020, TSV acquired a life insurance portfolio from a local insurance company. The portfolio represents approximately $5.0 million in annualized premiums.
Substantially all of our premiums are from customers within Puerto Rico. In addition, most of all of our long-lived assets, other than financial instruments, including deferred policy acquisition costs and value of business acquired, goodwill and other intangibles, and the deferred tax assets are related to Puerto Rico.
Operating revenues, with intersegment premiums and service revenue shown separately, operating income and total assets attributable to the reportable segments are set forth in Note 28, Segment Information of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
In 2018, our subsidiary TSP experienced a spillover of losses over its catastrophe reinsurance program for the first time since its incorporation 30 years ago. This spillover was related to the losses caused by Hurricane Maria, a strong Category 4 hurricane that struck Puerto Rico in September 2017. Following the impact of Hurricane Maria, TSP strengthened its reinsurance program by increasing its catastrophe protection and decreasing its insured values. See Note 14, Reinsurance Activity of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Please refer also to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – III. Results of Operations – Property and Casualty Segment Operating Results.
Our subsidiary TSS was granted Utilization Review Accreditation Commission (URAC) effective March 1, 2017. We went through a reaccreditation process in January 2020 successfully maintaining our accreditation. The URAC accreditation is a requirement for the Federal Employees Program representing over $170.0 million in premiums. The accreditation is extensive to the Commercial and Medicaid lines of business since they are managed in the same operational platforms as the Federal Employees Program. Our Star Rating and URAC accreditation evidence the commitment to quality in health services for our members and affiliates.
In August 2017, the Board of Directors authorized the immediate commencement of a Class B $30.0 million share repurchase program. In February 2018 the Company’s Board of Directors authorized a $25.0 million expansion to the existing $30.0 million Class B repurchase program. In October 2019 the Company’s Board of Directors authorized an additional expansion to this repurchase program increasing its remaining balance up to a total of $25.0 million, effective November 2019. This share repurchase program was completed in May 2020 and was conducted in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. See Note 19, Stock Repurchase Programs of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
On July 16, 2019, the Company announced that its Board of Directors authorized the conversion (Conversion) of the Company’s remaining issued and outstanding Class A common shares into Class B common shares, effective August 7, 2019. Preceding the Conversion, as the result of a recent litigation settlement, the Company issued 48,602 Class A shares to the heirs of a former shareholder. The issuance of these new Class A shares entitled all Class B shareholders to certain anti-dilution rights; therefore, all holders of Class B shares at the close of business on July 26, 2019 (Record Date) received a share dividend of 0.051107 Class B shares for every Class B share they owned as of that time, as determined by the anti-dilution formula in the Company’s Articles of incorporation. The Class B share dividend was paid on August 6, 2019; cash was paid in lieu of fractional shares. Effective upon the Company’s public announcement on August 7, 2019, all Class A holders of record received one Class B share for each Class A share held. Upon the Conversion, all remaining outstanding Class A shares were automatically cancelled and extinguished, and the Company now maintains a single class of common shares. See Note 18, Stockholders’ Equity of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
In this Annual Report on Form 10-K, references to “shares” or “common stock” refer collectively to our Class A and Class B common stock, unless the context indicates otherwise.
Industry Overview
Managed Care
In response to increasing focus on health care costs by employers, the government and consumers, alternatives to traditional indemnity health insurance have increased; Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) are two prominent examples. Through the introduction of these alternatives, the managed care industry has attempted to contain the cost of health care by negotiating contracts with hospitals, physicians and other providers to deliver health care services to plan members at favorable rates. These products usually feature medical management and other quality and cost-optimization measures such as pre-admission review and approval for certain non-emergency services, pre-authorization of certain outpatient surgical procedures, network credentialing to determine that network doctors and hospitals have the required certifications and expertise, and various levels of care management programs to help members better understand and navigate the medical system. In addition, providers may have incentives to achieve certain quality measures or may share medical cost risk. Members generally pay co-payments, coinsurance and deductibles when they receive services. While the distinctions between the various types of plans have lessened over recent years, PPO products generally provide reduced benefits for out-of-network services, while traditional HMO products generally provide little to no reimbursement for non-emergency out-of-network utilization. An HMO plan may also require members to select one of the network primary care physicians (PCPs) to coordinate care and approve certain specialist or other services.
The U.S. government provides hospital and medical insurance benefits to eligible people aged 65 and over as well as certain other qualified persons through the Medicare program, including the Medicare Advantage program. The federal government also offers prescription drug benefits to Medicare eligible, both as part of the Medicare Advantage program and on a stand-alone basis, pursuant to Medicare Part D (also referred to as PDP stand-alone product or PDP). In addition, the Government of Puerto Rico provides managed care coverage to the medically indigent population of Puerto Rico.
Economic factors and greater consumer awareness have resulted in (a) the increasing popularity of products that offer larger, more extensive networks; more member choice related to coverage, physicians and hospitals; greater access to preventive care and wellness programs, and a desire for greater flexibility for customers to assume larger deductibles and co-payments in return for lower premiums and (b) products with lower benefits and a narrower network in exchange for lower premiums. We believe we are well positioned to respond to these market preferences due to the breadth and flexibility of our product offering and size of our provider networks.
Life Insurance
Total annual premiums in Puerto Rico for the year ended December 31, 2019 for the life insurance market approximated $1.8 billion. The main products in this market are ordinary life, cancer and other dreaded diseases, term life, disability and annuities. The main distribution channels are independent agents and an internal salaried sales force. Banks have established general agencies to cross sell life insurance products, such as term life and credit life.
Property and Casualty Insurance
The total property and casualty market in Puerto Rico in terms of gross premiums written was approximately $2.4 billion in 2019, an increase of $255.0 million over 2018. The nine months ended September 30, 2020 was approximately $1.8 billion, an increase of just $9.0 million over the same period in 2019. Property and casualty insurance companies compete for accounts based on pricing, policy terms, and quality of services. The main lines of business in Puerto Rico are personal and commercial auto, commercial multi-peril, fire and allied lines, and other general liabilities. Approximately 64% of the market is written by the top six insurance groups or companies in terms of market share, and approximately 87% of the market is written by companies that are incorporated under the laws of and which operate principally in Puerto Rico.
The Puerto Rican property and casualty insurance market is highly dependent on reinsurance. In September 2017 Puerto Rico was hit by two major hurricanes causing severe damages and losses to the insurance market. As a result, premium rates and reinsurance costs increased significantly in 2018 and 2019. Moreover, in January 2020, the southwest part of Puerto Rico was struck by an earthquake causing losses to the insurance industry and affecting catastrophe reinsurance costs. In March 2020 the World Health Organization (WHO) declared the coronavirus (COVID-19) outbreak to be a pandemic which also affected Puerto Rico. The government of Puerto Rico put in place measures to control the effects of the pandemic; these measures included, among others, lockdowns and curfews. In a general sense, the Property and Casualty Insurance markets were not affected for insurance losses as exclusions were in effect for losses caused by the pandemic. The insurers were able to operate using technology and communication tools and with less staff at its offices. The measures to control the pandemic is causing a favorable loss experience in several lines of business. On the other side, the pandemic and measures to control it has affected several economic sectors and businesses and accordingly the level of premiums is affected as new business opportunities are limited. The pandemic has several impacts in the reinsurance worldwide market which are considered in establishing reinsurance costs for the local market.
Puerto Rico’s Economy
The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services. The manufacturing sector now places increased emphasis on higher wages, high technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors and certain high technology machinery and equipment with almost 90% of manufacturing generated by chemical and electronic products. The services sector, which includes finance, insurance, real estate, wholesale and retail trade, transportation, communications and public utilities, and other services, plays a major role in the economy. It ranks second to manufacturing in contribution to the gross domestic product and leads all sectors in providing employment.
The economy of Puerto Rico is affected by external factors determined by the U.S. economy and the policies and results of the U.S. government. These external factors include exports, direct investment, the amount of federal transfer payments, the level of interest rates and the rate of inflation. Historically, the economy of Puerto Rico has followed the economic trends of the U.S. economy. However, for more than a decade, economic growth in Puerto Rico has not been consistent with the performance of the U.S. economy. The Government of Puerto Rico has also faced a number of fiscal challenges, which eventually resulted in it defaulting and having to restructure the majority of debt.
The Puerto Rico economy entered a recession in the fourth quarter of fiscal year 2006. Puerto Rico’s gross national product (GNP) contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. GNP increased by 1.5% (in real terms) in fiscal year 2019, largely due to federal disaster recovery spending related to Hurricane María. The 2020 Fiscal Plan (discussed below) projected that the economy of Puerto Rico would contract by 4% in real terms in fiscal year 2020, largely because of the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021.
Puerto Rico’s population has also been in decline over the past decade. Estimates by the U.S. Census Bureau indicate the population has decreased by 14.3%, or approximately 530,000 people, from April 1, 2010 to July 1, 2019. The 2020 Fiscal Plan projects that population will continue to decline through fiscal year 2025. The weakness of Puerto Rico’s economy has also adversely affected employment. Total average annual employment, as measured by the Puerto Rico Department of Labor and Human Resources (the DLHR) has decreased approximately 20% since 2007. The reduction in total employment began in the fourth quarter of fiscal year 2007, when total employment was 1,244,425, and continued consistently until the first half of fiscal year 2015, after which it mostly stabilized. According to the most recent data from DLHR, Puerto Rico’s average total employment as of November 2020 was 949,000, a decrease of 26,000 from total employment of 975,000 as of November 2019. The DLHR also reports an average unemployment rate of approximately 8.5% as of November 2020, the same unemployment rate reported by the DLHR as of November 2019.
PROMESA and the Oversight Board
The Commonwealth has been enduring a fiscal and economic crisis for over a decade. Such crisis prompted the U.S. Congress to enact the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in June 2016. PROMESA, among other things, created a federal fiscal oversight board (the Oversight Board) with broad powers over the Commonwealth’s fiscal affairs and established two mechanisms for the restructuring of the obligations of the Commonwealth, its instrumentalities and municipalities, contained in Titles III and VI of PROMESA. The Commonwealth and several of its instrumentalities have been in the process of restructuring their debts through the mechanisms provided by PROMESA for some time.
In August 2016, President Barrack Obama appointed the seven voting members of the Oversight Board through the process established in PROMESA, which authorizes the President to select the members from several lists required to be submitted by congressional leaders and which process was recently upheld by the U.S. Supreme Court. During 2020, President Donald Trump reappointed three of the original members and appointed four new members to the Oversight Board.
Commonwealth Fiscal Plan and Plan of Adjustment
The Oversight Board has certified several fiscal plans for the Commonwealth since 2017. The most recent fiscal plan for the Commonwealth certified by the Oversight Board is dated May 27, 2020 (the 2020 Fiscal Plan). In January 2020, however, the Oversight Board established a schedule for a proposed revision to the 2020 Fiscal Plan to incorporate new information regarding Puerto Rico’s macroeconomic environment and government revenues and expenditures, to better inform the fiscal year 2022 budget development, and to incorporate the impact of expenses related to the potential certification of a plan of adjustment for the Commonwealth under Title III of PROMESA. Pursuant to the schedule, the Governor is required to submit a proposed updated fiscal plan to the Oversight Board by February 20, 2021, and the Oversight Board expects to certify a revised updated fiscal plan by April 23, 2021.
The 2020 Fiscal Plan estimated that the economy of Puerto Rico would contract by 4% in real terms in fiscal year 2020, largely because of the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021. The Oversight Board projected that this economic contraction would exacerbate the Commonwealth government’s fiscal challenges. As a result of this, the 2020 Fiscal Plan projected that the Commonwealth would have a pre-contractual debt service deficit each year through 2025 if the measures and structural reforms contemplated by the plan were not successfully implemented. It estimated that the proposed fiscal measures and structural reforms would drive approximately $10 billion in savings and extra revenue through 2025 and a cumulative 0.88% increase in growth by fiscal year 2029. However, even after the fiscal measures and structural reforms, and before contractual debt service, the 2020 Fiscal Plan’s projections reflected an annual deficit starting in fiscal year 2032.
On February 28, 2020, the Oversight Board filed a plan of adjustment for the Commonwealth, the Employees Retirement System of the Government of the Commonwealth and the Puerto Rico Public Buildings Authority in the pending debt restructuring proceedings under Title III of PROMESA. In light of the COVID-19 pandemic, however, the Oversight Board requested that the court adjourn proceedings related to the proposed plan of adjustment so as to allow the Government and the Oversight Board to prioritize the health and safety of the people of Puerto Rico and gain a better understanding of the economic and fiscal impact of the pandemic. The Oversight Board, the Government and certain creditors of the Commonwealth recently resumed negotiations on the economic terms of a proposed plan of adjustment under a court-ordered mediation and, on February 10, 2021, the Oversight Board announced that it had reached an agreement in principle on the economic terms of a proposed plan with the principal parties to the previous plan support agreement. The Title III court set March 8, 2021 as the deadline for the filing of a new proposed plan of adjustment by the Oversight Board.
COVID-19
COVID-19 Situation in Puerto Rico
As of February 18, 2021, the Puerto Rico Department of Health reported 91,047 and 7,459 confirmed (RT-PCR+) and probable (antigen) COVID-19 cases, respectively, and a total of 1,940 confirmed and probable COVID-19-related deaths in Puerto Rico.
Puerto Rico was under a stay-at-home order (as amended and extended, the “Order”) from March 15, 2020 until June 16, 2020. The Order required the closure of non-essential businesses for the same period of time. On May 1, 2020, the Governor issued a new order providing for the gradual re-opening of the economy beginning on May 4, 2020. The Governor has issued several other executive orders establishing the rules to continue the gradual re-opening of the economy, the latest of which is effective until March 14, 2021.
Health care is considered an essential service under the Order; therefore, all functions of our Managed Care business, other than sales, were excluded from closure. Our Life Insurance and Property & Casualty businesses, which had been closed since March 16, 2020, re-opened on May 5, 2020, subject to compliance with certain safety and risk management measures.
Puerto Rico began its COVID-19 vaccination program in December 2020 and is currently implementing the second phase of such program, which includes persons 65 years and older.
We have implemented our business continuity and risk mitigation plans and are closely monitoring outbreak developments in order to ensure the health and safety of our employees and visitors.
Economic Impact
It is still too early to fully assess the ultimate economic impact of the pandemic and lockdown. However, the 2020 Fiscal Plan (as defined above) projected that the economy of Puerto Rico would contract by 4% in real terms in fiscal year 2020 (which ended on June 30, 2020), largely due to the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021. These projections incorporate the combined effect of the measures enacted by the federal and Puerto Rico governments (discussed below), which are expected to play an essential role in mitigating the economic damage from the sudden economic shock caused by the pandemic.
See Item 1A. Risk Factors – Risks Related to our Business – Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us. included in this Annual Report on Form 10-K.
Legislative Measures and Initiatives
The federal and state governments have enacted a number of measures in response to the COVID-19 outbreak and the impact the outbreak has had on the economy, public health, government, individuals, and businesses. We include summaries of some of those measures below.
Funding and Economic Relief for Puerto Rico
The Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, makes approximately $182.9 million available for Puerto Rico’s Medicaid Program and increases the percentage of federal government funding for its Medicaid program expenditures from 76% to approximately 82% during the emergency period. The Coronavirus Aid, Relief, and Economic Security or CARES Act, enacted on March 27, 2020, and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, enacted on December 27, 2020 include a series of direct relief and financial assistance measures for Puerto Rico residents and businesses. The CARES Act also assigns $2.2 billion to the Government of Puerto Rico to cover necessary expenditures related to COVID-19 and not included in the territory’s budget, among other measures. The Puerto Rico government has earmarked approximately $1 billion for its COVID-19 response.
Measures Impacting our Business
The FFCRA and CARES Act also require health plans and insurers to cover testing for COVID-19 without imposing cost-sharing or prior authorization requirements. On April 16, 2020, the Puerto Rico Government enacted Act number 43, which requires health plans and insurers to cover COVID-19-related diagnostic and treatment services, including hospitalization, without cost-sharing. Our regulators have also issued regulations and circular letters requiring waivers of pre-authorizations for certain services and drugs, requiring temporary coverage of certain out-of-network providers and services, and limiting cost-sharing for certain services. See Item 1A. Risk Factors – Risks Related to our Business – Pandemics, like the COVID-19 pandemics and local, state and federal governments’ response to the pandemics may have a material adverse effect on our business, financial condition and results of operations. included in this Annual Report on Form 10-K.
2020 Seismic Activity
On January 7, 2020, a magnitude 6.4 earthquake struck Puerto Rico, causing island-wide power outages and extensive damage to infrastructure and property in the southwest region of the island. The 6.4 magnitude earthquake was preceded by foreshocks and followed by aftershocks. During the three months ended March 31, 2020, the Company recognized $5 million in incurred losses related to this event, which is its maximum exposure for a single event under its current reinsurance program. We also incurred in $3.0 million in reinstatement reinsurance premiums related to the event.
See Item 1A. Risk Factors – Risks Related to Our Business – Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. included in this Annual Report on Form 10-K.
Products and Services
Managed Care
Through our subsidiaries TSS and TSA, we offer a broad range of managed care products, including HMO plans, PPO plans, Medicare Supplement, Medicare Advantage and Medicaid plans. Managed care products represented approximately 92% of our consolidated premiums earned, net before elimination for each of the years ended December 31, 2020, 2019, and 2018. We design our products to meet the needs and objectives of a wide range of customers, including employers, individuals and government entities. Our customers either contract with us to assume underwriting risk or they self-fund underwriting risk and rely on us for provider network access, medical cost management, claim processing, stop-loss insurance and other administrative services. Our products vary with respect to the level of benefits provided; the costs paid by employers and members, including deductibles and co-payments; and the extent to which our members’ access to providers is subject to referral or preauthorization requirements.
Managed care generally refers to a method of integrating the financing and delivery of health care within a system that manages the cost, accessibility and quality of care. Managed care products can be further differentiated by the types of provider networks offered, the ability to use providers outside such networks, and the scope of the medical management and quality assurance programs. Our members receive medical care from our networks of providers in exchange for premiums paid by the individuals or their employers, including governmental entities, and, in some instances, a cost-sharing payment between the employer and the member. We reimburse network providers according to pre-established fee arrangements and other contractual agreements.
We currently offer the following managed care plans.
Health Maintenance Organization. We offer HMO plans that provide members with health care coverage for a fixed monthly premium in addition to applicable member co-payments. Health care services can include emergency care; inpatient hospital and physician care; outpatient medical services; and supplemental services such as dental, vision, behavioral and prescription drugs, among others. Members must select a primary care physician within the network to provide and assist in managing care, including referrals to specialists.
Preferred Provider Organization. We offer PPO managed care plans that provide our members and their dependent family members with health care coverage in exchange for a fixed monthly premium. In addition, we provide our PPO members with access to a larger network of providers than our HMO. In contrast to our HMO product, we do not require our PPO members to select a primary care physician or to obtain a referral to utilize in-network specialists. We also provide coverage for PPO members who access providers outside of the network. Out-of-network benefits are generally subject to a higher deductible and coinsurance. We also offer national in-network coverage to our PPO members through the BlueCard program.
BlueCard. For our members who purchase our PPO and selected members under self-funded or Administrative Services Only (ASO) arrangements through our subsidiary TSS, we offer the BlueCard program. The BlueCard program offers these members in-network benefits through the networks of the other BCBS plans in the United States and certain U.S. territories. In addition, the BlueCard worldwide program provides our PPO members with coverage for medical assistance worldwide.
Medicare Supplement. We offer Medicare Supplement products, which provide supplemental coverage for many of the medical expenses that the Medicare Parts A and B programs do not cover, such as deductibles, coinsurance and specified losses that exceed these programs’ maximum benefits.
ASO. In addition to our fully insured plans, we also offer our PPO products on a self-funded or ASO basis, under which we provide claims processing and other administrative services to employers. Employers choosing to purchase our products on an ASO basis fund their own claims, but their employees are able to access our provider network at our negotiated discounted rates. We administer the payment of claims to the providers, but we do not bear any insurance risk in connection with claims costs because we are reimbursed in full by the employer. We are thus subject only to credit risk in this business. For certain self-funded plans, we provide stop-loss insurance pursuant to which we assume some of the medical risk for a premium. The administrative fee charged to self-funded groups is generally based on the size of the group and the scope of services provided.
Life Insurance
We offer a wide variety of life, accident, disability and health and annuity products in Puerto Rico through our subsidiary TSV. TSV markets in-home service life and supplemental health products through a network of company-employed agents. Ordinary life, cancer and dreaded diseases (Cancer line of business), and pre-need life products are marketed through independent agents. TSV is the leading distributor of life products in Puerto Rico. We are the only home service company in Puerto Rico and offer guaranteed issue, funeral and cancer policies to the lower and middle income market segments directly to people in their homes. We also market our group life and disability coverage through our independent producers and brokers.
Property and Casualty Insurance
We offer a wide range of property and casualty insurance products through our subsidiary TSP. Our predominant insurance products are commercial multi-peril package, personal package, commercial auto, hospital malpractice, commercial liability, and commercial property. This segment’s commercial products targeted mainly small-to medium-size accounts.
Because of our geographical location, property and casualty insurance operations in Puerto Rico are subject to natural catastrophic activity, in particular hurricanes, tropical storms and earthquakes. As a result, local insurers, including ourselves, rely on the international reinsurance market. The property and casualty insurance market is affected by the cost of reinsurance, which varies with the catastrophic experience.
We maintain a comprehensive reinsurance program as a means of protecting our surplus in the event of a catastrophe. We also carry reinsurance to protect us from the impact of large unforeseen losses and prevent sudden and unpredictable changes in results of operations and equity. Our policy is to enter into reinsurance agreements with reinsurers considered to be financially sound. Practically all our reinsurers have an A.M. Best rating of ‘A-’ or better, or an equivalent rating from other rating agencies. During the year ended December 31, 2020, 38.7% of the premiums written in the Property and Casualty segment were ceded to reinsurers. Although these reinsurance arrangements do not relieve us of our direct obligations to our insured, we believe that the risk of our reinsurers not paying balances due to us is low.
Marketing and Distribution
Our marketing activities are focused on promoting our strong brands, quality care, customer service efforts, size and quality of provider networks, flexibility of plan designs, financial strength and breadth of product offerings. We distribute and market our products through several channels, including our salaried and commission-based internal sales force, direct mail, independent brokers and agents, telemarketing staff, traditional media (including local and cable TV, national and regional press, billboards, radio and cinema) and digital media (social, search engine optimization and search engine marketing).
Branding and Marketing
Our branding and marketing efforts include brand advertising, which focuses on the Triple-S name and the BCBS brand for our managed care products and services, acquisition marketing, which focuses on attracting new customers; and institutional advertising, which focuses on our overall corporate image. We believe that the strongest element of our brand identity is the Triple-S name. We also believe that the BCBS name and marks are valuable brands of our products and services in the marketplace. We seek to leverage what we believe to be the strong name recognition and comfort level that many existing and potential customers associate with this brand.
Acquisition marketing consists of business-to-business marketing efforts to generate leads for brokers and our sales force, as well as direct-to-consumer marketing efforts used to add new customers to our direct pay businesses. Institutional advertising promotes key corporate interests and overall company image and communicates our company purpose. We believe these efforts support and further our competitive brand advantage. We will continue to utilize the Triple-S name and the BCBS brand for all managed care products and services in Puerto Rico, the USVI, Costa Rica, the BVI and Anguilla.
Sales and Marketing
We employ a wide variety of sales and marketing activities. Such activities are closely regulated by CMS, the Office of Personnel Management (OPM), the U.S. Department of Health and Human Services (HHS), Commissioner of Insurance, Superintendencia General de Seguros de Costa Rica (Costa Rica Insurance Superintendency) and other government of Puerto Rico agencies. For example, some of our sales and marketing materials must be approved in advance by the applicable regulatory authorities, and they often impose other regulatory restrictions on our marketing activities.
Distribution
Managed Care Segment. We rely principally on our internal sales force and a network of independent brokers and agents to market our products. Individual Commercial policies are sold entirely through independent agents who exclusively sell our individual products, and Medicare Advantage and group products are sold through our 415-person internal sales force (promoters and sales representatives), as well through over 239 independent brokers and agents. We believe that each of these marketing methods is optimally suited to address the specific needs of the customer base to which it is assigned.
Strong competition exists among managed care companies for brokers and agents with proven ability to secure new business and maintain existing accounts. The basis of competition for the services of such brokers and agents are commission structure, support services, reputation and prior relationships, the ability to retain clients and the quality of products. We pay monthly commissions based on premiums collections. We believe that we have good relationships with our brokers and agents, and that our products, support services and commission structure are highly competitive in the marketplace.
Life Insurance Segment. In our Life Insurance segment, we offer our insurance products through our network of company-employed home-service agency force, and approximately 300 independent agents and brokers. Most of our premiums (63% in 2020, 63% in 2019 and 61% in 2018) were placed through our home-service distribution channel selling directly to customers in their homes. TSV employs approximately 700 full-time active agents and managers who, operate from 25 district offices around the island.
Property and Casualty Segment. In our Property and Casualty segment, business is primarily subscribed through approximately 13 general agencies, including our insurance agency, Triple-S Insurance Agency, Inc. (TSIA), where business is placed by independent insurance agents and brokers. During the years ended December 31, 2020, 2019, and 2018 TSIA placed approximately 80%, 78%, and 76% of TSP’s total premium volume, respectively. General agencies contracted by TSP remit premiums net of their respective commission.
Customers
Managed Care
We offer our products in the Managed Care segment to three distinct market sectors in Puerto Rico. The following table sets forth enrollment information with respect to each sector:
Market Sector
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|
Enrollment at
December 31, 2020
|
|
|
Percentage of
Total Enrollment
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|
Commercial
|
|
|
419,658
|
|
|
|
42.9
|
%
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Medicare
|
|
|
137,092
|
|
|
|
14.0
|
%
|
Medicaid
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Commercial Sector
The commercial accounts sector includes corporate accounts, federal government employees, individual accounts, local government employees, and Medicare Supplement.
Corporate Accounts. Corporate accounts consist of small (2 to 50 employees) and large employers (over 50 employees). Employer groups may choose various funding options ranging from fully insured to self-funded financial arrangements or a combination of both. While self-funded clients participate in our managed care networks, the clients bear the insurance risk, except to the extent they maintain stop loss coverage.
Federal Government Employees. For over 50 years, we have maintained our leadership in providing managed care services to federal government employees in Puerto Rico. We provide our services to these employees under the Federal Employees Health Benefits Program pursuant to a direct contract with OPM and through the Federal Employee Program of the BCBSA. We are one of two companies in Puerto Rico that has such a contract with OPM. Every year, OPM allows other insurance companies to compete for this business, provided such companies comply with the applicable requirements for service providers. This contract is subject to termination in the event of a noncompliance that is not corrected to the satisfaction of OPM.
Individual Accounts. We provide managed care services to individuals and their dependent family members who contract these services directly with us through our network of independent brokers. We provide individual and family contracts.
Local Government Employees. We provide full risk managed care services to the local government of Puerto Rico employees through a government-sponsored program. Annually, the government qualifies the managed care companies that participate in this program and sets the coverage, including benefits, co-payments and amount to be contributed by the government. Employees then select from one of the authorized companies and pays for the difference between the premium of the selected carrier and the amount contributed by the government.
Medicare Supplement. We offer Medicare Supplement products, which provide supplemental coverage for many of the medical expenses that the Medicare Parts A and B programs do not cover, such as deductibles, coinsurance and specified losses that exceed the federal program’s maximum benefits.
Medicare Advantage Sector
Medicare is a federal program administered by CMS that provides a variety of hospital and medical insurance benefits to eligible persons aged 65 and over as well as to certain other qualified persons. With the approval of the Medicare Modernization Act, Medicare began communicating that managed care organizations (MCO) sponsored Medicare products that offers benefits similar to or better than the traditional Medicare product, but where the risk is assumed by the MCOs. This program is called Medicare Advantage. We have contracts with CMS to provide extended Medicare coverage to Medicare beneficiaries under our Dual and Non-Dual products. Under these annual contracts, CMS pays us a set premium rate based on membership that is risk adjusted for health status. Depending on the total benefits offered, for certain of our Medicare Advantage products the member will also be required to pay a premium.
Our Dual products target the sector of the population eligible for both Medicare and Medicaid, or dual-eligible beneficiaries. The government of Puerto Rico has implemented a plan to allow dual-eligibles enrolled in Medicaid to move to a Medicare Advantage plan under which the government, rather than the insured, will assume all of the premiums for additional benefits not included in the Medicare Advantage programs, such as deductibles and co-payments of prescription drug benefits.
Medicaid
The government of Puerto Rico has privatized the delivery of services to the Medicaid and Child Health Insurance subscribers in Puerto Rico, as defined by the government, by contracting with private managed care companies instead of providing health services directly to such population. This program is based on the Medicaid program, a joint federal and state health insurance program for medically indigent residents of the state. The Medicaid program is structured to provide states the flexibility to establish eligibility requirements, benefits provided, payment rates, and program administration rules, subject to general federal guidelines. As of December 31, 2020, this program provided health care coverage to over a million people.
Under the current agreement with the Health Department of Puerto Rico and ASES, TSS is responsible for the provision of medical, mental, pharmacy, and dental health care services on an at-risk basis to subscribers who enroll with TSS. With this agreement, TSS is now able to serve subscribers who enroll in our plan on an island-wide basis, rather than participating in the specific service regions assigned by ASES. ASES pays TSS a per member per month (PMPM) rate that varies depending on the clinical condition or category of the subscriber.
Before November 1, 2018, the government divided Puerto Rico into eight geographical areas, where we provided health care services on at-risk basis to subscribers in the Metro-North and West regions. Each of these geographical areas was awarded through a competitive bid process, to a managed care company doing business in Puerto Rico.
Our agreement with the government of Puerto Rico is subject to termination in the event of a noncompliance event that is not corrected or cured to the satisfaction of the government entity overseeing Medicaid, or in the event that the government determines that there is an insufficiency of funds to finance the program. See Item 1A – Risks Factors – Risks Related to our Business – We are dependent on a small number of government contracts to generate a significant amount of the revenues of our Managed Care segment. included in this Annual Report on Form 10-K.
Life Insurance
Our Life Insurance segment mainly markets individual life and cancer and other dreaded diseases insurance products. Our policyholders consist primarily of individuals, who hold approximately 672,000 policies. We also insure approximately 1,700 groups.
Property and Casualty Insurance
Our Property and Casualty segment targets mainly small- to medium-size accounts with low to average exposures to catastrophic losses. The auto physical damage and auto liability customer bases are primarily of commercial accounts. Personal business is primarily generated with sales of our personal package product, ProPack, which includes coverage for residences, personal property, and automobile. In addition, a professional liability coverage is offered with hospital and medical malpractice products.
Underwriting and Pricing
Managed Care
We strive to maintain our market leadership by trying to provide all of our managed care members with the best health care coverage at a reasonable cost. We believe that disciplined underwriting and appropriate pricing are core strengths of our business and important competitive advantages. We continually review our underwriting and pricing guidelines on a product-by-product and customer group-by-group basis to maintain competitive rates in terms of both price and scope of benefits. Pricing is based on the overall risk level and the estimated administrative expenses attributable to each particular segment.
Our claims database enables us to establish rates based on each renewing group’s claims experience, which provides us with important insights about the risks in our service areas. We tightly manage the overall rating process and have processes in place to ensure that underwriting decisions are made by properly qualified personnel. In addition, we have developed and implemented a utilization review and fraud and abuse prevention program.
We have been able to maintain relatively high retention rates, which is the percentage of existing clients retained in the renewal process, in the corporate accounts sector of our Managed Care segment. For 2020, 2019 and 2018 our corporate accounts retention factor was 92%, 93% and 96%, respectively.
Our managed care rates are set prospectively, meaning that a fixed premium rate is determined at the beginning of each contract year and revised at renewal. We renegotiate the premiums of different groups in the corporate accounts as their existing annual contracts become due. We set rates for individual contracts based on the most recent semi-annual claims data. We consider the actual claims trend of each group when determining the premium rates for the following contract year. Rates in the Medicare and Medicaid sectors and for federal and local government employees are generally set on an annual basis through negotiations with the U.S. Federal and Puerto Rico Governments, as applicable.
Life Insurance
The individual life insurance business has been priced using mortality, morbidity, lapses and expense assumptions which approximate actual experience for each line of business. We review pricing assumptions on an annual basis. Individual insurance applications are reviewed by utilizing common underwriting standards used in the United States and by our reinsurers, and only those applications that meet these commonly used underwriting requirements are approved for policy issuance. Our group life insurance business is written on a group-by-group basis. We develop the pricing for our group life business based on mortality and morbidity experience and estimated expenses attributable to each particular group.
Property and Casualty Insurance
Prior to 2017, the property and casualty insurance market in Puerto Rico was soft, principally as a result of economic conditions and reinsurance capacity. After the losses generated by the hurricanes that made landfall in the Island during 2017, market conditions hardened. Our Property and Casualty segment has maintained its strong position in the property insurance sector by following prudent underwriting and pricing practices.
Our core business mainly comprises of small- and medium-sized accounts. The volume of business is subject to attentive risk assessment and strict adherence to underwriting guidelines, combined with maintenance of competitive rates on above-par risks designed to maintain a relatively high retention ratio. Underwriting strategies and practices are closely monitored by senior management and constantly updated based on market trends, risk assessment results and loss experience. Commercial risks in particular are fully reviewed by our underwriters.
Quality Initiatives and Medical Management
We utilize a broad range of focused traditional cost-containment and advanced care management processes across various product lines. We continue to enhance our management strategies, which seek to control claims costs while fulfilling the needs of highly informed and demanding managed care consumers. One of these strategies is the reinforcement of population and case management programs, which empower consumers by educating them and engaging them in actively maintaining or improving their own health. Early identification of patients and inter-program referrals are the focus of these programs, which allow us to provide services to our customers based on their specific conditions. Population management programs include programs that target asthma, congestive heart failure, hypertension, diabetes, and a prenatal program that focuses on preventing prenatal complications and promoting adequate nutrition. We developed a medication therapy management program aimed at plan members who are identified as having high drug utilization and unrelated diagnostics. In addition, TSS, through a third-party supplier, provides our members a 24-hour telephone-based triage program and health-information services. We intend to maximize utilization of population and case management programs among our insured populations. Other strategies include innovative partnerships and business alliances with other entities to provide new products and services such as an employee assistance program and the promotion of evidence-based protocols and patient safety programs among our providers. We also employ registered nurses and social workers to manage individual cases and coordinate health care services. We have enhanced our hospital concurrent-review program, the goal of which is to monitor the appropriateness of high admission rate diagnoses and unnecessary stays. To expand the scope of the revision, we established a phone-based review for low admissions hospitals, which freed resources to cover the biggest hospitals and allowed the onsite nurses to participate in patient discharge planning; referral to programs; quality of services, including the occurrence of never events (which are adverse events that are clearly identifiable and measurable, serious and usually preventable). As part of the cost-containment measures, we have preauthorization services for certain procedures and the mandatory validation of member eligibility prior to accessing services. In addition, we provide a variety of services and programs for acute, chronic and complex populations. These services and programs seek to enhance quality at physicians’ premises, thus reducing emergency care and hospitalizations. We promote the use of a formulary for accessing medications, encouraging the use of generic drugs in the three-tier formulary, which offers three co-payment levels.
We have also established an exclusive pharmacy network with higher discounted rates than our broader network. In addition, through arrangements with our pharmacy benefits manager, we are able to obtain discounts and rebates on certain medications based on formulary listing and market share.
We have designed a comprehensive Quality Improvement Program (QIP). This program is designed with a strong emphasis on continuous improvement of clinical and service indicators, such as Health Effectiveness Data and Information Set (HEDIS) and Consumer Assessment of Healthcare Providers and Systems (CAHPS) measures. Our QIP also includes a Physician Incentive Program (PIP) and a Hospital Quality Incentive Program (HQIP), which are directed to support corporate quality initiatives, utilizing clinical and benchmark criteria developed by governmental agencies and nationally recognized professional organizations. The PIP encourages the participation of members in chronic care improvement programs and the achievement of specific clinical outcomes. The HQIP encourages participating hospitals to achieve the national benchmarks related to the five core measures established by CMS and the Joint Commission.
Provider Arrangements
Approximately 99% of member services are provided through one of our contracted provider networks; the remainder is provided by out-of-network providers. Our relationships with managed care providers, physicians, hospitals, other facilities and ancillary managed care providers are guided by standards established by applicable regulatory authorities for network development, reimbursement and contract methodologies.
We contract with our managed care providers in different forms, including capitation-based reimbursement. For certain ancillary services, such as behavioral health services and certain products of primary care services, we generally enter into capitation arrangements with entities that offer broad-based services through their own contracts with providers. We attempt to provide market-based reimbursement along industry standards. We seek to ensure that providers in our networks are paid in a timely manner, and we provide means and procedures for claims adjustments and dispute resolution. We also provide a dedicated service center for our providers. We seek to maintain broad provider networks to ensure member choice while implementing effective management programs designed to improve the quality of care received by our members.
We promote the use of electronic claims billing by our providers. Approximately 84% of claims are submitted electronically through our fully automated claims processing system, and our provider-claim first-pass rate, or rate at which a claim is approved for payment when first processed by our system without human intervention, has averaged 84% in 2020.
We believe that physicians and other providers primarily consider member volume, reimbursement rates, timeliness of reimbursement and administrative service capabilities along with the “non-hassle” factor, or reduction of non-value adding administrative tasks, when deciding whether to contract with a managed care plan. As a result of our established position in the Puerto Rican market, the strength of the Triple-S name and our association with the BCBSA, we believe we have strong relationships with hospital and provider networks leading to a strong competitive position in terms of hospital count, number of providers and number of in-network specialists.
Hospitals
We generally contract for hospital services to be paid on an all-inclusive per diem basis, which includes all services necessary during a hospital stay. We also contract some hospital services to be paid on diagnosis-related groups (DRG), an all-inclusive rate per admission. Negotiated rates vary among hospitals based on the complexity of services provided. We annually evaluate these rates and revise them, as appropriate.
Physicians
Fee-for-service is our predominant reimbursement methodology for physicians in our PPO products and for services referred by the independent practice associations (IPAs) under capitation agreements. Our physician rate schedules applicable to services provided by in-network physicians are pegged to a resource-based relative value system fee schedule and then adjusted for competitive rates in the market. This structure is similar to reimbursement agreement methodologies developed and used by the Medicare program and other major payers. Payments to physicians under the Medicare Advantage program are based on Medicare fees. For certain of our Medicare products we contract with IPAs in the form of capitation-based reimbursement for certain risks. We have a network of IPAs that provide managed care services to our members in exchange for a capitation fee. The IPAs assume the costs of certain primary care services provided and referred by their PCPs, including procedures and in-patient services not related to risks assumed by us.
Services are provided to our members through our network providers with whom we contract directly. Members seeking medical treatment outside of Puerto Rico are served by providers in these areas through the BlueCard program, which offers access to the provider networks of other BCBS plans.
Subcontracting
We subcontract our triage call center, certain utilization management, mental and substance abuse health services, and pharmacy benefits management services through contracts with third parties. We also have a Master Services Agreement with OptumInsight, Inc. to provide health care technology and operations services, including information technology, claims processing, and application development, to TSS and its affiliates.
In addition, we contract with a number of other ancillary service providers, including laboratory service providers, home health agency providers and intermediate and long-term care providers, to provide access to a wide range of services. These providers are normally paid on either a fee schedule or fixed per day or per case basis.
Competition
The insurance industry in Puerto Rico is highly competitive and comprises both local and national entities. The approval of the Gramm-Leach-Bliley Act of 1999 has opened the insurance market to new competition by allowing financial institutions such as banks to enter into the insurance business. Several banks in Puerto Rico have established subsidiaries that operate as insurance agencies, brokers and reinsurers.
Managed Care
The managed care industry is highly competitive, both nationally and in Puerto Rico. Competition continues to be intense due to aggressive marketing, business consolidations, a proliferation of new products and increased quality awareness and price sensitivity among customers. Industry participants compete for customers based on the ability to provide a total value proposition which we believe includes quality of service and flexibility in benefit design, access to and quality of provider networks, brand recognition and reputation, price and financial stability.
Competitors in the managed care industry include national and local managed care plans. Our market share in terms of premiums written in Puerto Rico was estimated at approximately 28% for the nine-month period ended September 30, 2020.
We believe that our competitive strengths, including our leading presence in Puerto Rico, our BCBS license, the size and quality of our provider network, the broad range of our product offerings, our strong complementary businesses, and our experienced management team position us well to satisfy these competitive requirements.
Life Insurance
We are one of the leading providers of life insurance products in Puerto Rico. In 2019, we were the second largest life insurance company in Puerto Rico, as measured by direct premiums, with a market share of approximately 11.5%. We are the only life insurance company that distributes our products through a home service agency force. However, we face competition in each of our product lines. Excluding annuities, we are the largest company in the life insurance and cancer lines of business, with market shares of approximately 20.9% and 26.2% respectively.
Property & Casualty Insurance
Property and casualty insurance companies tend to compete for the same accounts through price, policy terms and quality of services. We compete by reasonably pricing our products and providing efficient services to producers, agents and clients.
In the nine-month period ended September 30, 2020, we were the fifth largest property and casualty insurance company in Puerto Rico, as measured by direct premiums, with a market share approximating 6.4%.
Blue Cross and Blue Shield License
We have license agreements with (BCBSA) that permit us the exclusive use of the BCBS name and marks for the sale, marketing and administration of managed care plans and related services in Puerto Rico, the USVI, Costa Rica, the BVI and Anguilla. We believe that the BCBS name and marks are valuable brands of our products and services in the marketplace. The license agreements, which have a perpetual term (but are subject to termination under circumstances described below), contain certain requirements and restrictions regarding our operations and our use of the BCBS name and marks.
Upon the occurrence of any event causing the termination of our license agreements, we would cease to have the right to use the BCBS name and marks. We also would no longer have access to the networks of providers of the different plans that are members of the Association nor the BlueCard Program. We would expect to lose some portion of our membership if we were to lose these licenses. Loss of these licenses could impact our ability to compete in our markets and could require payment of a significant fee to the BCBSA. Furthermore, if our licenses were terminated, the BCBSA would be free to issue a new license to use the BCBS name and marks to another entity, which could have a material adverse effect on our business, financial condition and results of operations. See Item 1A Risk Factors – Risks Related to Our Business – The termination or modification of our license agreements to use the BCBS name and mark could have a material adverse effect on our business, financial condition and results of operations. included in this Annual Report on Form 10-K.
Events which could result in termination of our license agreements include, but are not limited to:
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Failure to maintain our total adjusted capital at or above 375% of Health Risk-Based Capital (HRBC) Authorized Control Level (ACL) as defined by the National Association of Insurance Commissioners (NAIC) for the for Primary Licensee (TSM) and Larger BCBS Controlled Affiliate (TSS) and 100% HRBC ACL for the Smaller BCBS Controlled Affiliate (TSA);
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Failure to maintain liquidity of greater than one month of underwritten claims and administrative expenses, as defined by the BCBSA, for two consecutive quarters;
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Failure to satisfy state-mandated statutory net worth requirements;
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Impending financial insolvency; and
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A change of control not otherwise approved by the BCBSA or a violation of the BCBSA voting and ownership limitations on our capital stock.
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The BCBSA license agreements and membership standards specifically permit a licensee to operate as a for-profit, publicly-traded stock company, subject to certain governance and ownership requirements.
Pursuant to our license agreements with BCBSA, at least 80% of the revenue that we earn from health care plans and related services in Puerto Rico, and at least 66.7% of the revenue that we earn from (or at least 66.7% of the enrollment for) health care plans and related services both in the United States and in Puerto Rico together, must be sold, marketed, administered, or underwritten through use of the BCBS name and marks. However, although subject to final court approval, as part of the settlement agreement reached between Triple-S and other BCBS plans with subscribers in connection with an antitrust suit, the BCBSA will no longer restrict member plans’ unbranded business outside of their territories.
As required by our BCBS license agreements, our Articles of incorporation prohibit any institutional investor from owning 10% or more of our voting power, any person that is not an institutional investor from owning 5% or more of our voting power, and any person from beneficially owning shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest in us. To the extent that a person, including an institutional investor, acquires shares in excess of these limits, our Articles provide that we will have the power to take certain actions, including refusing to give effect to a transfer or instituting proceedings to enjoin or rescind a transfer, in order to avoid a violation of the ownership limitation in the Articles.
Pursuant to the rules and license standards of the BCBSA, TSM guarantees TSS and TSB contractual and financial obligations to their respective customers. Also, TSS guarantees TSA’s contractual and financial obligations to their respective customers. In addition, pursuant to the rules and license standards of the BCBSA, we have agreed to indemnify the BCBSA against any claims asserted against it resulting from our contractual and financial obligations.
Each license requires an annual fee to be paid to the BCBSA. The fee is determined based on a per-contract charge from products using the BCBS name and marks. The annual BCBSA fee for the year 2021 is $1,508,502. During the years ended December 31, 2020 and 2019, we paid fees to the BCBSA in the amount of $1,299,208 and $1,367,352, respectively. The BCBSA is a national trade association of 36 independent Primary Licensees (Plans), including TSM, the primary function of which is to promote and preserve the integrity of the BCBS name and marks, as well as to provide certain centralized services to entities licensed by the BCBSA (the Member Plans). Each Member Plan is an independent legal organization and is not responsible for obligations of other BCBSA Member Plans. With a few limited exceptions, we have no right to market products and services using the BCBS name and marks outside our BCBS licensed territory.
BlueCard
Under the rules and license standards of the BCBSA, other Member Plans must make available their provider networks to members of the BlueCard Program in a manner and scope as consistent as possible to what such member would be entitled to in his or her home region. Specifically, a plan located where a member receives the service (each, a Host Plan) must pass on discounts to BlueCard members from other Member Plans that are at least as great as the discounts that the providers give to the Host Plan’s local members. The BCBSA requires us to pay fees to any Host Plan whose providers submit claims for health care services rendered to our members who receive care in their service area. Similarly, we are paid fees for submitting claims and providing other services to members of other Member Plans who receive care in our service area.
Trademarks
We consider our trademarks Triple-S and SSS to be very important and material to all segments in which we are engaged. These trademarks have been duly registered with the Department of State of Puerto Rico and the United States Patent and Trademark Office. It is our policy to register all our important and material trademarks to protect our rights under applicable corporate and intellectual property laws. In addition, we have the exclusive right to use the BCBS name and marks in Puerto Rico, Costa Rica, USVI, British Virgin Islands, and Anguilla. See section – Blue Cross and Blue Shield License.
Regulation
Our business operations are subject to comprehensive and detailed regulation in all the jurisdictions in which we conduct business. Regulatory agencies include the Commissioner of Insurance, ASES, which administers Medicaid, including the Medicare dual-eligible beneficiaries program; the Division of Banking and Insurance of the Office of the Lieutenant Governor of the U.S. Virgin Islands; Costa Rica Insurance Superintendency; the Insurance Division of the Financial Service Commission of British Virgin Islands; and the Financial Services Commission of Anguilla. Federal regulatory agencies that oversee our operations include HHS—directly and through the Office of the Inspector General (OIG), the Office of Civil Rights (OCR), CMS, the U.S. Department of Justice (DOJ), the U.S. Department of Labor (DOL), and OPM. These government agencies have the right to:
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Grant, suspend and revoke licenses to transact business;
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Regulate many aspects of the products and services we offer, including the review and approval of health insurance rates in the individual and small group markets;
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Assess fines, penalties and/or sanctions;
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Monitor our solvency and the adequacy of our financial reserves; and
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Regulate our investment activities based on quality, diversification and other quantitative criteria, within the parameters of a list of permitted investments set forth in the insurance laws and regulations.
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Our operations and accounts are subject to examination and audits at regular intervals by a number of these agencies. In addition, the U.S federal and local governments continue to consider and enact many legislative and regulatory proposals that have affected, or could materially affect, various aspects of the health care and insurance industries. Some of the more significant current issues that may affect our business include:
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Initiatives to provide greater access to coverage for uninsured and under-insured populations without adequate funding to health plans, or to fund such coverage through taxes or other negative financial levies on health plans;
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Other efforts or specific legislative changes to the Medicare or Medicaid program, including changes in the bidding process or other means that materially reduce premiums;
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Local government regulatory changes;
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Increased government enforcement, or changes in interpretation or application of fraud and abuse laws; and
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Regulations that increase the operational burden on health plans or laws that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health care plans.
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The federal government and the government of Puerto Rico, including the Commissioner of Insurance, have adopted laws and regulations that govern our business activities in various ways. These laws and regulations may restrict how we conduct our business and may result in additional burdens and costs to us. Areas of governmental regulation include:
• Licensure;
• Policy forms, including plan design and disclosures;
• Premium rates and rating methodologies;
• Underwriting rules and procedures;
• Benefit mandates;
• Eligibility requirements;
• Security of electronically transmitted individually identifiable health information;
• Geographic service areas;
• Market conduct;
• Utilization review;
• Payment of claims, including timeliness and accuracy of payment;
• Special rules on contracts to administer government programs;
• Transactions with affiliated entities;
• Limitations on the ability to pay dividends;
• Payment rates to health care providers;
• Rate review and approval;
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• Transactions resulting in a change of control;
• Member rights and responsibilities;
• Fraud and abuse;
• Sales and marketing activities;
• Quality assurance procedures;
• Privacy of medical and other information and permitted disclosures;
• Surcharges on payments to providers;
• Provider contract forms;
• Delegation of financial risk and other financial arrangements in rates paid to health care providers;
• Agent licensing;
• Financial condition (including reserves);
• Reinsurance;
• Business continuity plans;
• Issuance of new capital stock shares;
• Corporate governance;
• Permissible investments; and
• Guaranteed issue and renewability.
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These laws and regulations are subject to amendments and changing interpretations in each jurisdiction. Failure to comply with existing or future laws and regulations could materially and adversely affect our operations, financial condition and prospects.
Puerto Rico Insurance Laws
Our insurance subsidiaries are subject to the regulations and supervision of the Commissioner of Insurance. The regulations and supervision of the Commissioner of Insurance consist primarily of the approval of certain policy forms, solvency standards, the nature of and limitations on investments, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations and the form and content of the financial reports, among others. In general, such regulations are for the protection of policyholders rather than shareholders.
Puerto Rico insurance laws prohibit any person from offering to purchase or sell voting stock of an insurance company that constitutes 10% or more of the total issued and outstanding stock of such company or of the total issued and outstanding stock of a company that controls an insurance company, without the prior approval of the Commissioner of Insurance.
Puerto Rico insurance laws also require that stock insurers obtain the Commissioner of Insurance’s approval prior to any merger or consolidation. The Commissioner of Insurance cannot approve any such transaction unless it determines that such transaction is fair, equitable, consistent with law, and that no reasonable objection exists. The reinsurance of all or substantially all of the insurance of an insurance company by another insurance company is deemed to be a merger or consolidation.
Puerto Rico insurance laws further prohibit insurance companies and insurance holding companies, among other entities, from soliciting or receiving funds in exchange for any new issuance of its securities, other than through a stock dividend, unless the Commissioner of Insurance has granted a solicitation permit in respect of such transaction. The Commissioner of Insurance will issue the permit unless it finds that the funds proposed to be secured are excessive for the purpose intended, the proposed securities and their distribution would be inequitable, or the issuance of the securities would jeopardize the interests of policyholders or security-holders.
In addition, Puerto Rico insurance laws limit insurance companies’ ability to reinsure risk. Insurance companies can only accept reinsurance in respect of the types of insurance which they are authorized to transact directly. Also, except for life and disability insurance, insurance companies cannot accept any reinsurance in respect of any risk resident, located, or to be performed in Puerto Rico, which was insured as direct insurance by an insurance company not then authorized to transact such insurance in Puerto Rico. Insurance companies cannot reinsure 75% or more of their direct risk with respect to any type of insurance without first obtaining the approval of the Commissioner of Insurance.
Privacy of Financial and Health Information
Puerto Rico law requires that companies that manage individual financial, insurance and health information maintain the confidentiality of such information. The Commissioner of Insurance has promulgated regulations relating to the privacy of such information. As a result, our Managed Care subsidiaries must periodically inform our clients of our privacy policies, and in the case of our Life Insurance and Property and Casualty subsidiaries, allow our clients to opt-out if they do not want their financial information to be shared. Also, Puerto Rico law requires that managed care providers give patients access to their health information within a specified time and that they not charge more than a predetermined amount for such access. The law imposes various sanctions on managed care providers that fail to comply with these provisions.
Managed Care Provider Services
Participating managed care providers of the dual-eligible sector of the population, administered by ASES, are required to provide specific services to their subscribers. Such services include access to a provider network that guarantees emergency and specialty services. In addition, the Patient’s Solicitor Office (the Solicitor) is authorized to review and supervise the operations of entities contracted by the government of Puerto Rico to provide services to the dual-eligible sector of the population. The Solicitor may investigate and adjudicate claims filed by Medicaid beneficiaries against the various service providers contracted by the government of Puerto Rico. See Business – Customers – Medicare Supplement and Medicare Advantage Sector sections included in this Item for more information.
Capital and Reserve Requirements
Local insurers and health maintenance organizations are required by the Insurance Code to submit to the Puerto Rico Commissioner of Insurance, Risk Based Capital (RBC) reports following the National Association of Insurance Commissioners (NAIC) RBC Model Act, and accordingly are subject to certain regulatory actions if their capital levels do not meet minimum requirements. Our minimum RBC requirement is currently 200%, subject to the compliance with certain regulatory ratios. Noncompliance with required regulatory ratios would subject TSS, TSV, TSB and TSP to a minimum RBC requirement of 300%. As a health maintenance organization TSA is not subject to compliance with regulatory ratios and is therefore always required to maintain a minimum RBC of 200%.
In addition, TSS, TSA, and TSB are subject to the capital and surplus licensure requirements of the BCBSA. The capital and surplus requirements of the BCBSA are also based on the RBC Model Act and are intended to assess capital adequacy taking into account the risk characteristics of an insurer’s investments and products. The RBC Model Act sets forth the formula for calculating the risk-based capital requirements, which are designed to take into account various risks, including insurance risks, interest rate risks and other relevant risks, with respect to an individual insurance company’s business.
The RBC Model Act requires increasing degrees of regulatory oversight and intervention as an insurance company’s risk-based capital declines. The level of regulatory oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary insurance commissioner of a comprehensive financial plan for increasing its risk-based capital to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control, in rehabilitation or liquidation proceeding. The RBC Model Act provides for four different levels of regulatory attention depending on the ratio of the company’s total adjusted capital (defined as the total of its statutory capital, surplus, assets valuation reserve and dividend liability) to its “authorized control level.” At the “company action level,” occurring when a company’s total adjusted capital is less than 200% but greater than or equal to 150% of its “authorized control level,” a company must submit to the regulatory authority a comprehensive plan proposing corrective actions to improve its capital position. When a company’s adjusted capital is between 200% and 300% and it has a combined ratio greater than 150%, a company action level is triggered pursuant to a health trend test. The regulatory action level is triggered if a company’s total adjusted capital is less than 150% but greater than or equal to 100% of its authorized control level. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The authorized control level is triggered if a company’s total adjusted capital is less than 100% but greater than or equal to 70% of its authorized control level, at which level the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. The ‘‘mandatory control level’’ is triggered if a company’s total adjusted capital is less than 70% of its authorized control level, at which level the regulatory authority must place the company under its control.
As of December 31, 2020, our insurance subsidiaries met and exceeded the minimum capital requirements established by the Commissioner of Insurance and the BCBSA, as applicable.
In addition to its catastrophic reinsurance coverage, TSP is required by local regulatory authorities to establish and maintain a reserve supported by a trust fund (the Trust) to protect policyholders against their dual exposure to hurricanes and earthquakes. The funds in the Trust are solely to be used to pay catastrophic losses whenever qualifying catastrophic losses exceed 5% of catastrophe premiums or when authorized by the Commissioner of Insurance. Contributions to the Trust, and accordingly additions to the reserve, are determined by a rate, imposed by the Commissioner of Insurance on the catastrophe premiums written in that year. As a result of the hurricanes affecting Puerto Rico in September 2017, TSP withdrew $10.0 million from the Trust in 2018. TSP requested and obtained approval for a $5.0 million withdrawal from the Trust during the year ended December 31, 2020, to cover net earthquake-related losses. During January 2021, TSP withdrew the $5.0 million from the Trust.
At December 31, 2020 and 2019, the reserve for catastrophes is $35.9 and $39.4 million, respectively. The supporting Trust has assets of $43.1 miliion and $41.0 million as of December 31, 2020 and 2019, respectively. Assets consist primarily of investment in securities available-for-sale, securities held for maturity, accrued investment income, cash and cash equivalents. The income generated by investment securities deposited in the Trust becomes part of the Trust fund balance and are therefore considered an addition to the reserve. For additional details see Note 17, Catastrophe Loss Reserve and Trust Fund, of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Dividend Restrictions
We are subject to the provisions of the General Corporation Law of Puerto Rico (PRGCL), which contains certain restrictions on the declaration and payment of dividends by corporations organized pursuant to the laws of Puerto Rico. These provisions specify that Puerto Rico corporations may only declare dividends charged to their surplus or, in the absence of such surplus, net profits of the fiscal year in which the dividend is declared and/or the preceding fiscal year. The PRGCL also contains provisions regarding the declaration and payment of dividends and directors’ liability for illegal payments.
TSM’s ability to pay dividends is dependent on our receiving cash dividends from our subsidiaries. Our insurance subsidiaries are subject to regulatory surplus requirements and additional regulatory requirements, which may restrict their ability to declare and pay dividends or distributions to TSM. In addition, our secured term loan restricts our ability to pay dividends if a default thereunder has occurred and is continuing. Please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Restrictions on Certain Payments by the Corporation’s Subsidiaries.
Guaranty Fund Assessments
We are required by Puerto Rico law and by the BCBSA guidelines to participate in certain guarantee associations. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Contingencies—Guarantee Associations for additional information.
Federal Regulation
Our business is subject to extensive federal law and regulation. New laws, regulations or guidance or changes to existing laws, regulations or guidance or their enforcement, may materially impact our business financial condition and results of operations.
Medicare Generally
Medicare is the federal health insurance program created in 1965 for all people aged 65 and older (regardless of income or medical history), qualifying disabled persons and persons suffering from end-stage renal disease. Medicare is funded by the federal government and administered by CMS, with the day-to-day operations of the program (e.g., provider enrollment, claims payment) handled by private contractors under contract with CMS. There are approximately 60 million Medicare beneficiaries.
Medicare is divided into four distinct parts:
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Part A covers, among other things, inpatient hospital stays, skilled nursing facility stays, home health visits (also covered under Part B), and hospice care. Individuals are automatically enrolled in Part A and inpatient hospital stays are subject to an annual deductible.
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Part B covers physician visits, outpatient services, laboratory services, durable medical equipment, certain preventive services, and home health visits. Enrollment in Part B is voluntary and subject to an annual deductible and monthly premiums.
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Part C, which encompasses Medicare Advantage in addition to other supplemental plans, allows beneficiaries to enroll in private health plans and receive Medicare-covered benefits.
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Medicare Advantage. Medicare Advantage plans are required to maintain a medical loss ratio (MLR) of at least 85%, meaning, very basically, that if Medicare Advantage plans do not spend at least 85% of their revenue on patient care costs, they may face various sanctions, including refunds, prohibition on enrolling new members, and contract termination. The Part C premium varies by plan.
Other Medicare Supplemental Plans. “Medigap” is another type of private plan that fills in the patient out-of-pocket gaps in traditional fee-for-service Medicare Part A and B coverage. These Medigap policies are standardized by CMS, but funded and administered by private organizations.
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Part D is the voluntary, subsidized outpatient prescription drug benefit created under the Medicare Modernization Act of 2003 (the MMA). Part D includes subsidies for beneficiaries with low incomes that do not apply to Puerto Rico. Part D is offered through private plans that contract with Medicare, including stand-alone prescription drug plans and Medicare Advantage prescription drug plans. Part D plans are also subject to MLR requirements and their premium varies by plan.
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Historical Changes to the Medicare Program – Creation of Private Plans and the Part D Program
In the 1980s, as an alternative to the traditional fee-for-service Medicare program, Medicare began offering Medicare managed care benefits provided through contracted private health plans. CMS initially reimbursed health plans participating in the Medicare program primarily on the basis of the demographic data of the plans’ members. Beginning in 1997, CMS gradually phased in a risk-adjustment payment methodology that based its monthly premium payments to plans on various clinical and demographic factors. This methodology uses two risk-adjustment models: a Hierarchical Condition Category based model and an End-Stage Renal Disease (ESRD) model, each applying to the corresponding population. Beginning in 2003, Congress introduced a Medicare managed care approach, which itself has subsequently undergone several changes.
In 2006, Congress introduced the Medicare Part D program, which offered a voluntary outpatient prescription drug benefit to fee-for-service as well as Medicare Advantage beneficiaries. An Rx Hierarchical Condition Category Model is used in the determination of the Part D premium, and a Low-Income Subsidy (LIS) is applied to Part D premiums for members that qualify.
Medicare Advantage Program Over Time
Under the Patient Protection and Affordable Care Act of 2010 (Pub. L No. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152), on March 30, 2010 (referred to herein as ACA), payments to Medicare Advantage plans were reduced over time, and bonus payments are available to certain plans based on quality ratings.
Among other things, the ACA mandated several changes, implemented by CMS, to the Medicare Advantage and Medicare Part D programs, including strengthening CMS’ ability to remove poor performers from the Medicare Advantage and Part D programs beginning in 2015. Beginning with Medicare contract year 2015, CMS has the authority to terminate its contract with any Medicare Advantage or Part D plan for substantial contract noncompliance, or refuse to renew such plan, if the plan fails to achieve an overall Star Rating of 3.0 stars (out of 5.0) for any consecutive three year period. Although CMS has issued annual Star Ratings for Part D plans since 2007 and for Medicare Advantage plans since 2008, CMS uses Star Ratings issued for Medicare contract years 2013 and beyond in implementing this provision. In April 2015, CMS announced that it would for the first time exercise its authority to terminate low performing Medicare Advantage and Part D plans beginning in 2016. CMS now issues Star Ratings on a prospective basis, typically in the fall preceding the contract year. CMS also has the authority to use the lower Star Ratings as a means to invoke its existing authority under Section 1857(c)(2) of the Social Security Act to terminate a contract when CMS determines that the Medicare Advantage or Part D plan has failed to substantially carry out the contract or is carrying out the contract in a manner that is inconsistent with the efficient or effective administration of the Medicare Advantage or Part D program.
In addition, under the ACA, Medicare Advantage plan payment rates were subject to transitionally phased-in reductions intended to bring Medicare Advantage rates more in line with Medicare fee-for-service rates. The transition began in 2012 and was completed in 2017.
Payments to Medicare Advantage Participating Plans
Since 2006, Medicare Advantage has used a bidding system by which plans submit bids based on costs per enrollee for Part A and Part B covered services. Medicare Advantage also pays plans for providing prescription drug benefits under Part D. Bids are based on estimated costs per enrollee for the Medicare-covered services. The bids are then analyzed against a benchmark established by federal statute, and which vary by county or region. A Medicare Advantage plan’s actual payment rate is based on a complex statutory formula that takes into account a number of factors, including the relationship between the plan’s bid and the applicable benchmark. When a bid is higher than the benchmark, enrollees generally pay the difference (through an additional premium) between the benchmark and the bid, in addition to any other Medicare premiums. If the bid is lower than the benchmark, the plan and Medicare generally share the difference, and the plan must use its share (known as a rebate) to provide additional benefits to enrollees. For plans obtaining up to 3.0 Stars (explained below), the rebate share to the plan is 50%. When the plan reaches 3.5 or 4.0 Stars, that rebate share rises to 65%, and when the plan reaches 4.5 or 5.0 Stars it rises to 70%.
Plans reaching 4.0 Stars or higher, also receive a 5% quality bonus payment (QBP), which could be doubled for certain qualifying counties. The resulting benchmark plus QBP amount can be reduced to a cap determined for each county, so the effective bonus payment for such qualifying counties could be between 5% and 10%. Rebates and QBPs only apply to Part C premium payments.
Star Ratings for plans are calculated based on the results achieved by the plan on a contract in terms of measures (46 in the contract year 2021 as established in the 2021 Rate Announcement published by CMS in April 2020) spanning four categories: HEDIS measures, CAHPS and Health Outcomes Survey (HOS) measures, Administrative measures and Part D measures. CMS assigns from one to five stars for each numeric measure score by applying one of two methods: relative distribution with significance testing (CAHPS) or clustering (all other measures). Case-mix adjustments are applied to the survey results as part of the scoring. CMS has recognized that socio-economic factors create significant variations in results for some metrics. CMS’ interim response to address the within-contract disparity in performance associated with a contract’s percentages of beneficiaries with low income subsidy and dual eligible (LIS/DE) and disability status revealed in our comprehensive research conducted over multiple years culminated in the creation of the Categorical Adjustment Index (CAI). Each measure is also assigned a relative weight used in the calculation of the Part C, Part D and overall Star Rating. CMS has also adopted policies to consider the impact of extreme natural disasters in the results, recognizing that the aftermath can present unanticipated barriers to achieving solid results.
Medicaid Generally
Medicaid is a public insurance program intended for low-income individuals and families. To participate in Medicaid, states are required to cover certain groups, but may cover additional population groups at their discretion. States may apply to CMS for waivers to provide coverage to populations beyond those normally covered under the program. States are able to establish eligibility criteria within federal minimum standards, to set Medicaid provider payment rates and to reimburse providers through fee-for-service or managed care. They also have the flexibility to determine the type, amount, duration, and scope of services of their respective Medicaid programs, as long as they remain within federal guidelines, although states are required to cover certain mandatory benefits. In Puerto Rico, the Medicaid program is administered by ASES.
Medicaid is jointly funded by the federal government and state governments. States receive a percentage of their Medicaid program expenditures from the federal government, through a formula known as the Federal Medical Assistance Percentage (FMAP). The FMAP varies by state based on factors such as per capita income. However, unlike states, the FMAP for Puerto Rico and other U.S. territories is fixed, and federal funding is capped per funding period. Pursuant to the Further Consolidated Appropriations Act of 2020, the FMAP for Puerto Rico is 76% until September 30, 2021, and up to approximately $5.342 billion will be provided in Medicaid funding to Puerto Rico through such date. This funding will bring temporary financial stability to Puerto Rico’s Medicaid program, and funding conditions related to compliance with program management standards will further promote stability and predictability. However, a longer-term solution is necessary due to a shortfall that continues to be perpetuated by the FMAP established in the ACA in 2010.
Dual-Eligible Beneficiaries
A dual-eligible beneficiary is a person who is eligible for both Medicare, because of age or other qualifying status, and Medicaid, because of economic status. Dual-eligibles are a high-cost population that account for a disproportionate share of government health care expenditures. Given the disproportionately high cost of treating dual-eligibles, there has been a spate of initiatives designed to address the issue. The government of Puerto Rico established a model that wraps-around benefits included in Medicaid that were not included in original Medicare benefits. Dual-eligible beneficiaries in Puerto Rico have the option to participate in this model called Platino. Health plans that offer Platino products receive premiums from CMS and the government of Puerto Rico. In this plan the government, rather than the insured, will assume all of the premiums for additional benefits not included in traditional Medicare programs, such as prescription drug benefits. By managing utilization and implementing disease management programs, many Medicare Advantage plans can profitably care for dual-eligible members. The MMA established subsidies and reduced or eliminated deductibles for certain low-income beneficiaries, including dual-eligible individuals. Pursuant to the MMA, dual-eligible individuals receive drug coverage from the Medicare program rather than the Medicaid program. Companies offering Medicare Part D stand-alone prescription drug plans with bids at or below the regional weighted average bid resulting from the annual bidding process received a pro-rata allocation and auto-enrollment of the dual-eligible beneficiaries within the applicable region.
Additionally, ACA created the Medicare-Medicaid Coordination Office to better integrate Medicare and Medicaid benefits and improve coordination between federal and state governments, which has, among other things implemented initiatives such as demonstration projects and limited coordinated care contracts, intended to improve quality and lower costs with respect to dual eligible beneficiaries. Under authority of the ACA, a number of states (not including Puerto Rico) have been awarded contracts to support the design of demonstration projects that aim to improve the coordination of care for people with Medicare and Medicaid coverage.
Special Needs Plans
Special Needs Plans are intended to address Medicare beneficiaries with special care needs, particularly those with chronic conditions. Essentially, Medicare Advantage Special Needs Plans (SNPs) are a type of Medicare Advantage Plan for people with certain chronic diseases and conditions or who have specialized needs (such as people who have both Medicare and Medicaid or people who live in certain institutions). SNPs limit membership to people with specific diseases or characteristics, and tailor their benefits, provider choices, and drug formularies (list of covered drugs) to best meet the specific needs of the groups they serve.
Sales and Marketing. Our sales and marketing activities are closely regulated by CMS, ASES, the Puerto Rico Office of the Commissioner of Insurance and the Solicitor General. CMS regulations in this area preempt local law.
Fraud and Abuse Laws. Insurance providers in Puerto Rico are subject to local and federal laws that prohibit fraud and abuse, and are required to have anti-fraud units in place. In addition, entities, such as TSS and TSA, that receive federal funds from government health care programs, such as Medicare and Medicaid, are subject to a wide variety of federal fraud and abuse laws and enforcement activities. Such laws include, among others, the federal anti-kickback laws and the False Claims Act.
Anti-kickback Laws. Insurance providers in Puerto Rico are subject to local and federal anti-kickback laws. These anti-kickback laws prohibit the payment, solicitation, offering or receipt of any form of remuneration (including kickbacks, bribes, and rebates) in exchange for business, and under federal law, in exchange for the referral of federal health care program patients or any item or service that is reimbursed by any federal health care program. In addition, the federal regulations include certain safe harbors that describe relationships that have been determined by CMS not to violate the federal Anti-Kickback Statute. Relationships that do not fall within one of the enumerated safe harbors are not a per se violation of the federal law, but will be subject to enhanced scrutiny by regulatory authorities. The ACA amended the intent requirement of the federal Anti-Kickback Statute, and other health care criminal fraud statutes, so that a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute and other health care criminal fraud statutes, or the specific intent to violate them, to have committed a violation. The ACA also provided that a violation of the federal Anti-Kickback Statute is grounds for the government or a whistleblower to assert that a claim for payment of items or services resulting from such violation constitutes a false or fraudulent claim for purposes of the federal False Claims Act. Failure to comply with the anti-kickback provisions, and other health care criminal fraud statutes, may result in civil damages and penalties, criminal sanctions, and administrative remedies, such as exclusion from the applicable federal health care program, and additional reporting requirements and oversight if subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance.
Federal False Claims Act. Federal regulations also strictly prohibit the presentation of false claims or the submission of false information to the federal government. Under the federal False Claims Act, any person or entity that has knowingly presented or caused to be presented a false or fraudulent request for payment from the federal government or who has made a false statement or used a false record in the submission of a claim may be subject to treble damages and penalties of up to $23,331 thousand per claim. The ACA codified the federal government’s prior position that claims presented in relationships that violate the federal Anti-Kickback Statute may also be considered to be violations of the federal False Claims Act. Furthermore, the federal False Claims Act permits private citizen “whistleblowers” to bring actions on behalf of the federal government for violations of the False Claims Act and to share in the settlement or judgment that may result from the lawsuit. Financial recoveries from civil health care matters brought under the False Claims Act are significant; according to the United States Department of Justice, it recovered over $3 billion from False Claims Act cases in fiscal year 2019.
HIPAA, HITECH, and Gramm-Leach-Bliley Act
Health care entities, such as TSS and TSA, are subject to laws, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their respective implementing regulations, and the Gramm-Leach-Bliley Act, that require the protection of certain health and other information. HIPAA authorized HHS to issue standards for administrative simplification, as well as privacy and security of medical records and other individually identifiable health information. The regulations pursuant to the HIPAA Administrative Simplification provisions and HITECH impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors. These requirements apply to self-funded group plans, health insurers and HMOs, health care clearinghouses and health care providers who transmit health information electronically (collectively, covered entities) and their business associates that access, maintain, create, and/or receive individually identifiable health information (collectively business associates). These regulations also establish significant criminal penalties and civil sanctions for noncompliance.
HHS also sets standards relating to the privacy of individually identifiable health information. In general, these regulations restrict how covered entities and business associates may use and disclose medical records and other individually identifiable health information in any form, whether communicated electronically, on paper or orally, subject only to limited exceptions. In addition, the regulations provide patients’ rights to understand and control how their health information is used. HHS has also published security regulations designed to protect member health information from unauthorized use or disclosure and require notification to members, the Secretary of HHS, and in certain cases the media, in the event of a breach of unsecured individually identifiable health information.
HHS has released rules mandating the use of standard formats in electronic health care transactions (for example, health care claims submission and payment, plan eligibility, precertification, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules mandating the use of standardized code sets and unique identifiers for employers and providers. Our Managed Care subsidiaries believe that they are in material compliance with these requirements.
The Gramm-Leach-Bliley Act applies to financial institutions in the United States, including those domiciled in Puerto Rico, such as TSV and TSP. The Gramm-Leach-Bliley Act generally places restrictions on the disclosure of non-public information to non-affiliated third parties, and requires financial institutions including insurers, to provide customers with notice regarding how their non-public personal information is used, including an opportunity to opt out of certain disclosures. The Gramm-Leach-Bliley Act also gives banks and other financial institutions the ability to affiliate with insurance companies, which has led to new competitors in the insurance and health benefits fields in Puerto Rico.
Employee Retirement Income Security Act of 1974
The services we provide to certain employee welfare benefit plans maintained by private sector employers are subject to regulation under the Employee Retirement Income Security Act of 1974, as amended (ERISA), a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service, the U.S. Department of Labor, and federal courts. ERISA regulates certain aspects of the relationships between us, private sector employers who maintain employee welfare benefit plans subject to ERISA, and the participants and beneficiaries in such plans. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, certain states require licensure or registration of companies providing third-party claims administration services for benefit plans. We provide a variety of products and services to employee welfare benefit plans that are covered by ERISA and its regulations. Plans subject to ERISA can also be subject to state laws and the question of whether ERISA preempts a state law has been, and will continue to be, interpreted by federal and state courts.
Dodd-Frank Act
In 2010, Congress enacted the Dodd-Frank Wall-Street Reform and Consumer Protection Act (the Dodd-Frank Act) which provides for a number of reforms and regulations in the corporate governance, financial reporting and disclosure, investments, tax and enforcement areas that affect our subsidiaries. Among other things, the Dodd-Frank Act creates a Federal Insurance Office (FIO) within the U.S. Department of the Treasury with powers that include information-gathering and subpoena authority. Pursuant to the Dodd-Frank Act, the FIO issues annual reports on the insurance industry. Although the FIO’s authority does not extend to health insurance, it extends to other parts of the business, primarily life and property and casualty insurance. The FIO, however, does not have supervisory or regulatory authority over the insurance business.
In addition, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of financial services companies, including insurance companies, if they are designated by the Financial Stability Oversight Council as systemically important. In such a case, the Federal Reserve’s supervisory authority could include the ability to impose heightened financial regulation upon that insurance company and could impact its capital, liquidity and leverage requirements as well as its business and investment conduct. We have not been designated as systemically important by the Financial Stability Oversight Council.
Legislative and Regulatory Initiatives
Puerto Rico Initiatives
In recent years we have seen an increase in legislative activity related to managed care organizations, and in the enactment of laws that are inconsistent with the managed care model. These laws may increase operational costs, limit our ability to review courses of treatment, and alter the way we negotiate and contract with providers, among other adverse effects.
For example, Act 26-2017 among other things, calls for a considerable reduction in public corporations’ health plan contributions to its employees, to the extent required to comply with the government’s Fiscal Plan. Contributions to employees with pre-existing catastrophic, chronic or terminal conditions, however, shall remain the same. It also authorizes the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) to negotiate health insurance coverage for such public employees.
Act 138-2019 requires health services organizations to contract any provider who requests to become a provider for the organization, when such provider meets the necessary requirements for practicing the medical profession and/or is authorized by the competent entities, among other things. Act 138-2019 also forbids organizations from terminating a provider’s contract without cause, and provides for the Government of Puerto Rico’s automatic cancellation of all contracts with any organization that incurs in practices inconsistent with the purposes of the law or seeks to use subterfuges to circumvent its objectives.
Act 138-2020 purports to reduce applicable periods for insurers to process and pay claims, and to further regulate the utilization review process, and Act 142-2020 limits insurers’ ability to review the course of treatment or medication prescribed by a physician and requires insurers to provide immediate, temporary coverage for prescribed medication to patients while their claims are resolved, among other matters.
Several of such laws have not yet been implemented, and a number have been challenged by health care insurers on federal preemption grounds, and by the Oversight Board on grounds that they have not complied with the economic impact certification requirements of PROMESA, among others. Recently, a federal court enjoined the Government from implementing and enforcing a number of legislative measures, including Act 138-2019, until such a time as the Government certifies the fiscal impact of the legislative measure.
See Item 1A. Risk Factors—Risks Relating to the Regulation of Our Industry – Changes in public policy, enactment of new laws, changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations. included in this Annual Report on Form 10-K.
Federal Initiatives
When the ACA was enacted in 2010, it expanded Medicaid to an eligibility floor of 138% of the federal poverty level (FPL) beginning in 2014. A 2012 U.S. Supreme Court decision regarding health care reform limited the federal government’s ability to enforce Medicaid expansion—meaning that the issue of Medicaid expansion is effectively left to each individual state as an option with enhanced federal match if they choose to do so. Puerto Rico and the other U.S. territories were not included in the Medicaid expansion; instead Congress approved one billion in federal funding for Puerto Rico and the other U.S. territories to establish local affordable insurance exchanges or expand their Medicaid programs, at their option. Puerto Rico elected to use the approximately $925 million made available by Congress for expanding its Medicaid program.
Most of the provisions of ACA with more significant effects on the health insurance marketplace went into effect on or before January 1, 2014, including a requirement that insurers guarantee the issuance of coverage to all individuals regardless of health status, strict rules on how health insurance is rated, and the assessment of new taxes and fees, including an annual Health Insurance Providers Fee (HIP Fee) on insurance plans.
On July 16, 2014, HHS notified the Commissioner of Insurance of Puerto Rico that the guarantee issue, community rating, single-risk pool, rate review, MLR, and essential health benefits provisions under the ACA do not apply to U.S. territories; however they continue to apply to Puerto Rico by virtue of an amendment to the Health Insurance Code of Puerto Rico passed on July 22, 2013 to enact similar provisions in Puerto Rico. ACA affects all aspects of the health care delivery and reimbursement system in the United States, including health insurers, managed care organizations, health care providers, employers, and U.S. states and territories.
The HIP Fee was allocated to health insurers based on the ratio of the amount of an insurer’s net premium revenues, and was assessed on plans in Puerto Rico even though Puerto Ricans did not receive subsidies or other ACA benefits. In the years that followed, Congress waived the HIP Fee for 2017 and 2019, which – applied broadly – also provided relief to plans operating in Puerto Rico. The total tax levied on the health insurance industry was $11.3 billion in 2016, $14.3 billion in 2018 and an estimated $16.0 billion in 2020. We incurred $44.2 million, $50.1 million and $55.5 million in fees during 2016, 2018 and 2020, respectively. In December 2019, the HIP Fee was permanently repealed for calendar years beginning after December 31, 2020 as part of the Further Consolidated Appropriations Act of 2020.
The Budget Control Act of 2011 was enacted to reduce the deficit and avoid default on the national debt. When a joint committee of Congress established to develop debt reduction legislation failed to cut at least $1.5 trillion over the coming 10 years, an automatic process of across-the-board cuts (sequestration) split equally between defense and non-defense programs was triggered. Under the sequestration, automatic spending cuts for the mandatory portion became effective beginning April 1, 2013, and these cuts have been extended through subsequent legislation through 2029 unless additional Congressional action is taken. This resulted in a 2% cut to Medicare payments to providers. Medicaid programs are not subject to automatic spending cuts. Of note, the budget caps that were enacted to reduce the deficit are no longer in effect and were lifted for the final time in the Bipartisan Budget Act of 2019 for FY 2019 and FY 2020, which set the stage for the Further Consolidated Appropriations Act of 2020.
In December 2017 Congress passed tax reform, the 2017 Tax Cuts and Jobs Act (TCJA), that also zeroed out the individual mandate tax penalty for not complying with the requirement to purchase qualified health insurance coverage. In light of zeroing out the tax penalty, in 2018 a group of 20 states, led by Texas, sued the federal government in February 2018, (Texas v. Azar) seeking to have the entire ACA declared unconstitutional. They argued that with the removal of the tax penalty, the individual mandate and the entire law was no longer constitutional. They based their claim on the Supreme Court of the United States’ (SCOTUS) previous ruling in 2012 that the individual mandate was upheld under Congress’ constitutional authority to tax. SCOTUS heard the case in November 2020, and is expected to rule in 2021.
We no longer anticipate significant legislative action regarding the repeal and replacement of the ACA in Washington in the near future. However, the White House and various federal agencies, including, but not limited to, HHS, DOL, and the U.S. Department of the Treasury may issue Executive Orders and regulations related to the stabilization of the individual insurance market and ACA generally. Congress, now controlled by Democrats, may also seek to make improvements to the ACA at some point.
See Item 1A Risk Factors – Risk Relating to the Regulation of Our Industry – The health care reform law, changes in laws related to the health care system, and the implementation of such law could have a material effect on our business, financial condition, cash flows, or results of operations. included in this Annual Report on Form 10-K.
Human Capital
Workforce Demographics
As of December 31, 2020, our workforce consists of 3,911 full time employees serving a variety of business units, of which, 73% identify as female. 50% of our executive team identifies as female and 68% of all company management identifies as female. Seven percent (7%) of the overall workforce identifies having a disability or special need. Given our location, nearly 100% of our workforce is Hispanic/Latino. Our workforce includes a variety of generations, from Baby Boomers to Generation Z which provides for a rich work environment where diverse perspectives, ideas and views are considered valuable and a key factor to company long-term success. Approximately 12% of employees are unionized. The current labor agreement expires in 2023. Overall, Management considers the relationship with the Union to be satisfactory.
Our Strategy
We believe that our workforce is our most valuable asset. We invest in leadership, engagement, organizational culture and volunteer initiatives. The investments we make in our workforce are implemented in the context of our business strategy and provide for continuous evolution of our standards and expectations on effectively executing plans and achieving business objectives that sustain long-term growth and diversification.
Governance
Our Chief Human Resources Officer is accountable for workforce productivity, effectiveness and holistic well-being. The Board oversees human capital management through quarterly reports and discussion by the Chief Human Resources Officer to the Talent & Compensation Committee, including on specific enterprise wide metrics, operational key performance indicators and key initiatives on topics relative to Succession Planning, Leadership, Engagement Index and Diversity, Equity & Inclusion.
As part of our governance structure, we have an executive-level Talent Management Council, led by the Chief Human Resources Officer and comprised of the Chief Executive Officer and the Chief Financial Officers and Presidents of each business line, whose main objective is to discuss and agree on strategies that attract, retain, develop and ensure adequate positioning of talent across the organization to meet evolving business needs.
In addition, human capital management is included in the Company Risk Management Program, which is subject to regular Board of Directors oversight.
Engagement
We believe that high employee engagement contributes to better service for our customers, lower turnover rates, and higher productivity.
We conduct an annual engagement survey of our employees, administered, and analyzed by a leading outside firm that specializes in employee engagement. Our belief is that measuring engagement levels provides for perspective on how employees feel about the Company and the areas we should focus on to continually enhance employee experience. The results of this engagement survey are shared with all leaders and their teams, who are then tasked with designing an action plan based on their results, and employee’s feedback. In 2019, we were recognized as Mejores Patronos de Puerto Rico, (Spanish for Best Employers of Puerto Rico) and we sustained adequate levels of engagement during 2020 in spite of the COVID-19 pandemic challenges. Our results are in line with the average percentage for the insurance industry benchmark in Puerto Rico, and higher when compared with United States general engagement index.
Diversity, Equity and Inclusion
We value a diverse workforce and strive for an inclusive culture where the thoughts, ideas and styles of all our employees are valued and respected. Triple-S Management and subsidiaries values excellence and recognizes that by embracing the diverse backgrounds of its workforce, it will sustain a competitive advantage and continue to hold its position as an employer of choice on our island.
In 2020, we implemented a new microlearning training series titled Unconscious Bias for General Awareness about Diversity, Equity and Inclusion. Multiple other initiatives and activities aim at fostering inter-generational connections through common interests or characteristics, for example, we host an Annual Women Leadership Conference, and have running “Pets at Work,” “Bring Your Child to Work,” and “Play Soccer with Our CEO” initiatives, among others. We also encourage employee volunteering by offering four paid hours per month to volunteer at non-for-profit organizations. The total average annual volunteer hours is approximately 1,200.
In order to ensure continued diversity, equity and inclusion, we perform continued assessments on compensation internal equity by gender, organizational hierarchy, and work groups and constantly communicate policies on a safe environment against discrimination, retaliation or harassment.
Our compensation is internally equitable and externally competitive as a result of robust policies, continuous assessments and standard processes. We perform job evaluations, market data analysis, salary structures revision and have clear procedures for salary administration.
Talent Acquisition, Retention and Stability
We are committed to recruiting and retaining the best talent for our organization without regard to gender, ethnicity, religion, age, sexual orientation, gender identity, disability or protected veteran status or any other protected trait. We are an equal employment opportunity employer and we strongly believe in developing and promoting talent from within. We use internal and external resources to recruit skilled and talented people. As part of our efforts on employee retention, we measure employee engagement and reward employee innovation and productivity. The approach of our recognition program “Tu Brillas” (Spanish for “You Shine”) is to foster a culture that values those contributions and outcomes that are aligned with our organization’s goals and values. The program includes a variety of categories depending on the level of results achieved and behaviors we want to highlight.
Our focus on retention is evident in the length of service of our employees -- who have an average tenure of seven years.
Triple-S aims to attract qualified resources through an inclusive and accessible recruiting process that encourages employee referrals. Triple-S also has partnerships with local universities and alumni organizations to attract external talent. Last year, we trained 47% of our management on competency-based interviewing techniques.
Training and Development
As part of the performance evaluation cycle, we include a professional development plan where the employee and the supervisor discuss the opportunities for training, development and priorities to enable performance excellence and career growth. Over 94% of our workforce complete their performance reviews.
Our team of 13 training and organizational development professionals provides employees with learning programs and experiences to enhance their leadership and technical skills, including: (a) corporate onboarding training and activities (b) mandatory annual compliance trainings (c) leadership development programs (d) professional and personal productivity courses and (e) specialized business and technical training programs based on specific job nature.
All learning experiences are designed and implemented in alignment with company strategy and business needs to ensure company performance and leadership.
In 2020, all training programs were converted from in-person classroom to virtual mode to ensure all training and development activities were on track regardless of the remote work mode forced on by the COVID-19 pandemic. In 2020, our employees completed over 2,900 hours of training and development.
Safety and Wellbeing
Employee health, safety and wellness is a high priority at all times. In addition to traditional employee benefits, we offer an in-house clinic with medical staff, two onsite gyms, employee assistance program, telemedicine, weight loss and stop smoking programs, financial, physical and emotional health awareness and support resources, among others. In response to the COVID-19 pandemic, the Company took early actions aligned with the Center for Disease Control and Prevention rules, implementing comprehensive protocols to protect our employees, insurers, providers and patients. These protocols include complying with social distancing and other health and safety standards as required by federal and local government agencies and public health authorities. During the pandemic we have also:
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Offered remote work and hybrid work options for over 92% of our workforce;
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Awarded Company-granted days above regulations;
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Implemented flexible use of PTO according to individual needs;
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Issued a variety of wellness education communications;
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Distributed personal protection equipment;
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Modified workstations and areas of common use to ensure required social distancing;
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Prohibited travelling; and
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Surveyed employees twice to listen to their needs and reaction to company actions, among other initiatives.
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In spite of a difficult year, our turnover decreased when compared to the previous year, and engagement levels were sustained as validated through our annual survey, with absenteeism at a minimum.
Available Information
We are an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) and are required, pursuant to Item 101 of Regulation S-K, to provide certain information regarding our website and the availability of certain documents filed with or furnished to the Securities and Exchange Commission (SEC). We make available free of charge, or through our website (https://investors.triplesmanagement.com/sec-filings/documents/default.aspx, under the Investors − SEC Filings caption), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. We also include on our website our Corporate Governance Guidelines, our Code of Business Conduct and Ethics, Code of Ethics for Financial Managers and Supervisors and the charter of each standing committee of our Board of Directors (https://investors.triplesmanagement.com/governance/documents/default.aspx, under the ‘‘Investors − Corporate Governance’’ caption). In addition, we intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics and Code of Ethics for Financial Managers and Supervisors that are required to be publicly disclosed pursuant to rules of the SEC and the New York Stock Exchange (NYSE). The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (https://www.sec.gov/edgar/searchedgar/companysearch.html). The website addresses listed above are provided for the information of the reader and are not intended to be an active link. We will provide free of charge copies of our filings to any shareholder that requests them at the following address: Triple-S Management Corporation; Office of the Secretary; PO Box 363628; San Juan, P.R. 00936-3628.
We must deal with several risk factors during the normal course of business. You should carefully consider the following risks and all other information set forth in this Annual Report on Form 10-K. The risk and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that are currently deemed insignificant may also impair our business operations. The occurrence of any of the following risks could materially affect our business, financial condition, operating results, and cash flows. See section Special Note Regarding Forward-Looking Statements in this Annual Report on Form 10-K for a summary of our Risk Factors.
Risks Related to Our Business
Our inability to contain managed care costs may adversely affect our business and profitability.
A substantial portion of our managed care revenue is generated by premiums consisting of monthly payments per member that are established by contracts with our commercial customers, ASES or CMS (for our Medicare Advantage plans), all of which are typically renewable on an annual basis. If our medical expenses exceed our estimates, except in very limited circumstances or resulting from risk score adjustments for member acuity in case of the Medicare Advantage products, we will be unable to increase the premiums we receive for these contracts during the then-current terms. As a result, our profitability in any year depends, to a significant degree, on our ability to adequately predict and effectively manage our medical expenses related to the provision of managed care services through underwriting criteria, medical management, product design and negotiation of favorable provider contracts with hospitals, physicians and other health care providers. The aging of the population and other demographic characteristics and advances in medical technology continue to contribute to rising health care costs. Also, we may continue to enter into new lines of business in the future, and it may be difficult to estimate the anticipated costs. Numerous factors affecting the cost of managed care, including changes in health care practices, inflation, new technologies such as genetic laboratory screening for diseases including breast cancer, electronic recordkeeping, cost of prescription drugs, clusters of high cost cases, changes in the regulatory environment including the implementation of ACA, may adversely affect our ability to predict and manage managed care costs, as well as our business, financial condition and results of operations.
Introduction of new high-cost specialty drugs and sudden costs spikes for existing drugs increase the risk that the pharmacy cost assumptions used to develop our rates are not adequate enough to cover the actual pharmacy costs, which jeopardizes the overall actuarial soundness of our rates. Bearing the high costs of new specialty drugs or the high cost inflation of generic drugs without an appropriate rate adjustment or other reimbursement mechanism adversely affects our financial condition and operational results. In addition, evolving state and federal regulation may affect the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. Although we will continue to work with state agencies in an effort to ensure that we receive appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceutical cost and utilization trends, there can be no assurance that we will always be successful.
Our profitability may be adversely affected if we are unable to maintain our current provider agreements and unable to enter into other appropriate agreements.
Our profitability is partially dependent upon our ability to contract on favorable terms with hospitals, physicians and other managed care providers. Puerto Rico legislation authorizes providers to collectively negotiate the services fees through cooperatives, on a voluntary basis, with health insurance companies and other health care related organizations. If collective negotiations with providers become mandatory or we are otherwise required to enter into collective negotiations with providers, it could become more difficult to maintain cost-effective managed care provider contracts, which could adversely affect our business.
We are dependent on a small number of government contracts to generate a significant amount of the revenues for our Managed Care segment.
Our managed care business participates in government contracts that generate a significant amount of our consolidated operating revenues, including:
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Commercial: One of our Managed Care subsidiaries is a qualified contractor that provides managed care coverage to federal government employees within Puerto Rico. Such coverage is provided pursuant to a contract with the OPM that is subject to termination in the event of noncompliance not corrected to the satisfaction of the OPM. During each of the years ended December 31, 2020, 2019, and 2018 premiums generated under this contract represented 4.6%, 5.3%, and 5.5% of our consolidated premiums earned, net, respectively.
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Under the commercial business, we also provide health coverage to certain employees of the Government of Puerto Rico and its instrumentalities. During each of the years ended December 31, 2020, 2019, and 2018, earned premium revenue related to such health plans represented 1.8%, 2.2%, and 3.0% of our consolidated premiums earned, net, respectively.
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Medicare: We provide services through our Medicare Advantage products pursuant to a limited number of contracts with CMS. These contracts generally have terms of one year and must be renewed annually. Each of our CMS contracts are cancellable for cause if we breach a material provision of the contract or violate relevant laws or regulations. If we are unable to renew, or to successfully re-bid or compete for any of these contracts, or if the process for bidding materially changes or if any of these contracts are terminated, our business could be materially impaired. During each of the years ended December 31, 2020, 2019, and 2018, contracts with CMS represented 42.9%, 43.3%, and 38.5% of our consolidated Premiums Earned, Net, respectively.
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Medicaid: We participate in the government of Puerto Rico Health Reform Program (similar to Medicaid), known as Vital (Vital), to provide health coverage (including medical, mental, pharmacy and dental services) to medically indigent citizens in Puerto Rico. The term of our current agreement with ASES is from November 1, 2018 to September 30, 2021, and may be extended for an additional year at ASES’s option. Premium rates are negotiated for each contract year. Participants may change insurance carriers once every year. Under the previous agreement with ASES, we provided services to eligible members in the Metro North and West regions of Puerto Rico. During the years ended December 31, 2020, 2019, and 2018 Medicaid premiums generated through our agreements with ASES represented 26.3%, 26.5% and 26.4%, respectively.
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If any of these contracts is terminated for any reason, including noncompliance by us, or not renewed or replaced by a comparable contract, our consolidated premiums and profitability earned could be materially adversely affected. See also Risks Relating to the Regulation of our Industry — As a Medicare Advantage program participant, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties. Our Medicare Advantage contracts may also be terminated or our operations may be required to change in a manner that has a material effect on our business. in this Annual Report on Form 10-K.
A change in our managed care commercial product mix may affect our profitability.
Our managed care products that involve greater potential risk, such as fully insured arrangements, generally tend to be more profitable than ASO products and those managed care products where employer groups retain the risk, such as self-funded financial arrangements. As of December 31, 2020, 2019 and 2018, 76%, 73% and 69% of our managed care commercial customers, respectively, had fully insured arrangements and 24%, 27% and 31%, respectively, had ASO arrangements. Unfavorable changes in the relative profitability or customer participation among our various products could have a material adverse effect on our business, financial condition, and results of operations.
Our failure to accurately estimate incurred but not reported claims would affect our reported financial results.
A portion of the claim liabilities recorded by our insurance segments represents an estimate of amounts needed to pay for insured events that have occurred, including events that have not yet been reported to us. These amounts are based on estimates of the ultimate expected cost of claims and on actuarial estimation techniques. Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under each segment’s current facts and circumstances. Accordingly, the ultimate liability may be in excess of or less than the amount provided. We regularly compare prior period liabilities to re-estimate claim liabilities based on subsequent claims development; any difference between these amounts is adjusted in the operations of the period determined. Additional information on how each reportable segment determines its claim liabilities, and the variables considered in the development of this amount, is included elsewhere in this Annual Report on Form 10-K under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations―Critical Accounting Estimates. Actual experience will likely differ from assumed experience. And to the extent the actual claims experience is less favorable than estimated based on our underlying assumptions, our incurred losses would increase and future earnings could be adversely affected.
The termination or modification of our license agreements to use the BCBS name and mark could have a material adverse effect on our business, financial condition and results of operations.
We are a party to license agreements with the BCBSA that entitle us to the exclusive use of the BCBS name and mark in Puerto Rico, the USVI, Costa Rica, the BVI and Anguilla. These license agreements contain certain standards, requirements and restrictions regarding our operations and our use of the BCBS name and mark, which may be modified in certain instances by the BCBSA. Changes to the terms of our license agreements may restrict various potential business activities. Failure to comply with the standards, requirements and restrictions established could result in the termination of a license agreement. Events that could cause the termination of a license agreement with the BCBSA: include failure to comply with minimum capital requirements imposed by the BCBSA, a change of control or violation of the BCBSA ownership limitations on our capital stock, impending financial insolvency and the appointment of a trustee or receiver or the commencement of any action against a licensee seeking its dissolution. Upon termination of a license agreement, the BCBSA would impose a re-establishment fee upon us, which would allow the BCBSA to entitle another managed care company to use the BCBS name and marks in the service areas we currently serve. This re-establishment fee is currently $98.33 per licensed enrollee. If the re-establishment fee were applied to our total BCBS enrollees as of December 31, 2020, we would be assessed approximately $96.0 million by the BCBSA.
We believe that the BCBS name and mark are valuable identifiers of our products and services in the marketplace. Termination of these license agreements, including modifications to the current term and conditions, could have a material adverse effect on our business, financial condition and results of operations. See Item 1. Business ― Blue Cross and Blue Shield License for more information.
Our ability to manage our exposure to underwriting risks in our Life Insurance and Property and Casualty segments depends on the availability and cost of reinsurance coverage.
Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. During 2020, 40.4%, or $62.5 million, of the premiums written in the Property and Casualty segment and 4.9%, or $10.0 million, of the premiums written in the Life Insurance segment were ceded to reinsurers. Total premiums ceded, on a consolidated basis, represent 2.1%, or $76.8 million of our premiums. The premiums ceded and the availability and cost of reinsurance is subject to changing market conditions and may vary significantly over time. Any decrease in the amount of our reinsurance coverage will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.
It is also possible that the losses we experience on insured risks for which we have obtained reinsurance will exceed the coverage limits of the reinsurance. See Risks Related to Our Business ― Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.
If our reinsurers do not pay our claims or do not pay them in a timely manner, we may incur losses.
We are subject to loss and credit risk with respect to the reinsurers with whom we deal. In accordance with general industry practices, our Property and Casualty and Life Insurance subsidiaries annually purchase reinsurance to lessen the impact of large unforeseen losses and mitigate sudden and unpredictable changes in our net income and shareholders’ equity. Reinsurance contracts do not relieve us from our obligations to policyholders. In the event that all or any of the reinsurance companies are unable to meet their obligations under existing reinsurance agreements or pay on a timely basis, we will continue to be liable to our policyholders notwithstanding such defaults or delays. If our reinsurers are not capable of fulfilling their financial obligations to us, our insurance losses would increase, which would negatively affect our financial condition and results of operations.
A downgrade in our A.M. Best rating could affect our ability to write new business or renew our existing business in our Property and Casualty segment.
Ratings assigned by AM Best are an important factor influencing the competitive position of the property and casualty insurance companies in Puerto Rico. On June 18, 2020, AM Best rated our Property and Casualty subsidiary B+ (Good).
AM Best ratings represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Financial strength ratings are used by brokers and customers as a means of assessing the financial strength and quality of insurers. AM Best reviews its ratings periodically and we may be further downgraded following their annual evaluation. Since the lines of business that this segment writes and the market in which it operates are particularly sensitive to changes in AM Best financial strength ratings, any downgrade of our Property and Casualty segment’s rating could limit or prevent us from writing and renewing certain types of business or accounts that requires insurers with stronger ratings.
We are dependent on the success of our relationships with third parties for various services and functions, including outsourced IT, claims processing and PBM services.
We contract with various third parties to perform certain functions and services and provide us with certain information technology systems. Certain of these third parties provide us with significant portions of our business infrastructure and operating requirements, and we could become overly dependent on key vendors, which could cause us to lose core competencies. We are also dependent on some third parties for compliance with certain regulatory requirements. A termination of our agreements with, or disruption in the performance of, one or more of these service providers could result in service disruptions or unavailability; reduced service quality and effectiveness; increased or duplicative costs; fines or corrective action plans imposed by our regulators; or an inability to meet our obligations to our customers. In addition, we may also have to seek alternative service providers, which may be unavailable or only available on less favorable contract terms. Any of these outcomes could adversely affect our business, reputation, cash flows, financial condition and operating results.
TSS has a Master Services Agreement (MSA) with OptumInsight, Inc. (Optum), pursuant to which Optum provides health care technology and operations services, including information technology, claims processing and application development, to Triple-S and its affiliates. As a result, we are dependent on Optum for the provision of essential services to our business, and there can be no assurances that the quality of the services will be appropriate or that Optum will be able to continue to provide us with the necessary claims processing and technology services. Potential breakdowns or failures of Optum could harm our business by disrupting our delivery of services, which could have a material adverse impact on our financial condition and results of operations.
Abarca Health provides pharmacy benefit management services for all of our Commercial and Medicare Advantage managed care members. Therefore, any issues or failures affecting this vendor or the services it provides us could have a material adverse effect on our managed care business, which could adversely affect our reputation, financial condition and operating results.
Significant competition and market conditions in Puerto Rico could negatively affect our ability to maintain or increase our profitability.
We are subject to strong competition in each line of business in which we operate. Competition in the insurance industry is based on many factors, including premiums charged, services provided, speed of claim payments and reputation. This competitive environment has produced and will likely continue to produce significant pressures on our profitability. The industry in which we operate has unique characteristics that, if we are unable to manage adequately, may adversely affect our business, financial conditions and results of operations. Some of the trends and characteristics related to the competition we contend with in our different lines of business include the following:
The managed care market in Puerto Rico is mature. According to the U.S. Census Bureau, Puerto Rico’s population decreased by 14.3% between 2010 and 2019. However, for the same period, the population 65 years and older increased. As a result, the competition for this segment of the market is significant.
Local economy is in a downturn. A challenging economy and a shrinking population in Puerto Rico continue to produce conditions that are adverse to the generation of new sources of business in this segment. As a result, insurance companies compete for the same customers through pricing, policy terms and quality of services. Also, our industry is subject to aggressive marketing and sales practices that target our current and prospective customers. We may not be successful in attracting and retaining our customers. See Risks Related to Our Business ― Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us.
Our industry is highly regulated. Future legislation at the federal and local levels may also result in increased competition, especially in the Managed Care segment. While we do not anticipate that any of the current legislative proposals of which we are aware would increase the competition we face, future legislative proposals, if enacted, might do so.
Market concentration. Concentration in our industry has created an increasingly competitive environment, both for customers and for potential acquisition targets, which may make it difficult for us to grow our business. The parent companies of some of our competitors are larger and have greater financial and other resources than we do. We may have difficulty competing with larger companies, which can create downward price pressures on premium rates.
We believe these trends will continue. There can be no assurance that these competitive pressures will not adversely affect our business, financial condition and results of operations.
As a holding company, we are largely dependent on rental payments, dividends and other payments from our subsidiaries. The ability of our regulated subsidiaries to pay dividends or make other payments to us is subject to the regulations of the Commissioner of Insurance including maintenance of minimum levels of capital, as well as covenant restrictions in their indebtedness.
We are a holding company whose assets include, among other things, all of the outstanding shares of common stock of our subsidiaries, including our regulated insurance subsidiaries. We principally rely on rental income and dividends from our subsidiaries to fund our debt service, dividend payments and operating expenses, although our subsidiaries may not declare dividends every year. We also benefit to a lesser extent from income on our investment portfolio.
Our insurance subsidiaries are subject to the regulations of the Commissioner of Insurance, which include, among other things, the requirement that insurance entities to maintain certain levels of capital, thereby restricting the amount of earnings that can be distributed. See Risks Related to Our Business ― Our insurance subsidiaries are subject to minimum capital requirements. Our failure to meet these standards could subject us to regulatory actions. Our subsidiaries’ ability to make any payments to us will also depend on their earnings, the terms of their indebtedness, if any, and other business and legal restrictions. Furthermore, our subsidiaries are not obligated to make funds available to us, and creditors of our subsidiaries have a superior claim to such subsidiaries’ assets. Our subsidiaries may not be able to pay dividends or otherwise contribute or distribute funds to us in an amount sufficient for us to meet our financial obligations. In addition, from time to time, we may find it necessary to provide financial assistance, either through subordinated loans or capital infusions to our subsidiaries that may adversely affect our financial condition.
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry.
Results of companies in the insurance industry, historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:
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Rising levels of actual costs that are not known by companies at the time they price their products;
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Volatile and unpredictable developments, including man-made and natural catastrophes;
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Changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and
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Fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital.
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Historically, the financial performance of the insurance industry has fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting from increased competition, followed by periods of high premium rates and a shortage of underwriting capacity resulting from decreased competition. Fluctuations in underwriting capacity, demand and competition, and the impact on us from the other factors identified above, could have a negative impact on our results of operations and financial condition. We believe that underwriting capacity and price competition in the current market is increasing. This additional underwriting capacity may result in increased competition from other insurers seeking to expand the kinds or amounts of business they write or cause some insurers to seek to maintain market share at the expense of underwriting discipline. We may not be able to retain or attract customers in the future at prices we consider adequate.
Our investment portfolios are subject to varying economic and market conditions.
We have exposure to market risk and credit risk in our investment activities. The fair values of our investments vary from time to time depending on economic and market conditions. Fixed-maturity securities expose us to interest rate risk as well as credit risk. Equity securities expose us to equity price risk. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the equity securities we own. The outlook of our investment portfolio depends on the future direction of interest rates, fluctuations in the equity markets and the amount of cash flows available for investment.
Therefore, adverse conditions in the U.S. and global capital markets could significantly and adversely affect the value of our investments in debt and equity securities, other investments, our profitability and our financial position.
As an insurer, we have a substantial investment portfolio comprised mainly of debt and equity securities of issuers located in the U.S. As a result, the income we earn from our investment portfolio is largely driven by interest rate levels in the U.S. financial markets, volatility, uncertainty and/or disruptions in the global capital markets, particularly the U.S. credit markets, and governments’ monetary policy. These factors can significantly and adversely affect the value of our investment portfolio, our profitability and/or our financial position by:
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Significantly reducing the value of debt and equity securities we hold in our investment portfolio, and creating net unrealized capital losses that reduce our operating results and/or net realized capital losses in the event we are required to sell some of those investments.
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Lowering interest rates on high-quality short-term debt securities and thereby materially reducing our net investment income and operating results.
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Making it more difficult to value certain of our investment securities. For example, if trading becomes less frequent, it could lead to significant period-to-period changes in our estimates of the fair values of these securities and cause period-to-period volatility in our operating results and shareholders’ equity.
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Reducing our ability to issue other securities.
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We believe our cash balances, investment securities, operating cash flows, and funds available under credit agreement, taken together, provide adequate resources to fund ongoing operating and regulatory requirements. However, continuing adverse securities and credit market conditions could significantly affect the availability of credit.
For additional information, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk for an analysis of our exposure to interest and equity price risks and the procedures in place to manage these risks. Our investment portfolios may lose money in future periods, which could have a material adverse effect on our financial condition.
In addition, our insurance subsidiaries are subject to local laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain riskier investment categories, such as below-investment-grade fixed income securities, equities, and private market investments, among others, which could generate higher returns on our investments. Notwithstanding, the Insurance Code of Puerto Rico requires insurers to invest an amount equal to no less than half of the insurer’s required capital in Puerto Rico Securities. Since February 2014, the credit ratings of bonds issued by the Government of Puerto Rico and most of Puerto Rico public corporations have been downgraded to below-investment grade, which makes it difficult to comply with this requirement. We therefore requested and obtained a waiver authorization from the Commissioner of Insurance to fulfill the requirement by investing in mortgage securities issued by Ginnie Mae, backed by mortgages issued in Puerto Rico for 2020, and will request an extension of this waiver for 2021. These securities are of high credit quality due to the Ginnie Mae guarantee.
If we experience a significant realized or unrealized loss on investments or fail to comply with the Insurance Code requirements, any investments exceeding regulatory limitations would be treated as non-admitted assets for purposes of measuring statutory surplus and risk-based capital and may adversely affect our financial condition and results of operations.
Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us.
Our principal lines of business are concentrated in Puerto Rico, which is currently in the midst of a severe fiscal and economic crisis. The Puerto Rico economy entered a recession in the fourth quarter of fiscal year 2006 and its GNP contracted (in real terms) every fiscal year between 2007 and 2018, with the exception of fiscal year 2012. The 2020 Fiscal Plan estimated that the economy of Puerto Rico would contract by 4% in real terms in fiscal year 2020, largely because of the COVID-19 pandemic, with a limited recovery of 0.5% in fiscal year 2021.
Puerto Rico’s population has also been in decline over the past decade. Estimates by the U.S. Census Bureau indicate the population has declined in the past decade by approximately 14.3%, from 2010 to 2019, and the 2020 Fiscal Plan projects that the population will continue to decline through fiscal year 2025.
The weakness of Puerto Rico’s economy has also adversely affected employment. Total average annual employment, as measured by the Puerto Rico Department of Labor and Human Resources (the DLHR) has decreased approximately 20% since 2007, and the unemployment rate stands at 8.5% as of November 2020.
The Government of Puerto Rico has also faced significant fiscal and financial challenges over the past years.
In response to such challenges, the U.S. Congress enacted PROMESA in June 2016. The Commonwealth of Puerto Rico and several of its instrumentalities are currently in the process of restructuring their debts through the mechanisms provided by PROMESA. In February 2020, the Oversight Board announced it had reached an agreement with certain creditors on a new framework for a plan of adjustment for the Commonwealth of Puerto Rico and certain of its instrumentalities. However, the confirmation of such proposed plan was put on hold as a result of the COVID-19 pandemic, and stakeholders are currently in court-ordered mediation negotiating the economic terms of a revised plan of adjustment.
We have significant direct exposure to the government through our contract with ASES, which administers the Medicaid program in Puerto Rico, and certain other business relationships with the government of Puerto Rico and its instrumentalities. As a result, we may be adversely affected by the liquidity problems of such entities, reductions in such entities’ contributions to their employees’ health plans as a result of fiscal control measures, by a reduction in the size of government or privatization of public corporations.
On the other hand, as part of the Further Consolidated Appropriations Act of 2020, Puerto Rico’s Medicaid program will receive up to approximately $5.342 billion in funding through September 30, 2021. This action has brought temporary financial stability to Puerto Rico’s Medicaid program, and funding conditions related to compliance with program management standards have further promoted stability and predictability. The government of Puerto Rico and the health care industry are lobbying Congress to address Puerto Rico’s Medicaid spending cliff permanently. However, there are no guarantees that these efforts will succeed. If our efforts are not successful, ASES may not be able to fulfill its payment obligations to us under our agreement for the provision of health coverage to Vital participants, which would adversely affect our financial results
Furthermore, our insureds’ financial capacity is affected by, among other things, the general economic conditions in Puerto Rico and other adverse conditions affecting Puerto Rico consumers and businesses. The effects of the prolonged recession are reflected as a decrease in insured customers in our commercial line of business and premiums earned, net. Moreover, the measures taken to address the fiscal crisis and those that may have to be taken in the near future, will likely affect many of our insureds, which could result in a lower amount of insureds, insureds moving to lower premium plans, among others. The foregoing could also result in decreased demand for our insurance products or migration to less profitable products.
If global or local economic conditions worsen or the government of Puerto Rico is unable to manage its fiscal and economic challenges, including consummating an orderly restructuring of its debt obligations while continuing to provide essential services, the conditions described above could continue or worsen in ways that are unpredictable and outside of our control. While PROMESA provides the government with tools to restructure Puerto Rico’s debt obligations and that of its instrumentalities, these restructuring tools are relatively new and untested. Furthermore, the Fiscal Plan’s projections indicate the possibility of significant creditor losses. Both of these factors have made the debt restructuring processes lengthy and highly adversarial.
The success of our business depends on developing and maintaining effective information systems.
Our business and operations may be affected if we do not maintain and upgrade our information systems and the integrity of our proprietary information. We are materially dependent on our information systems, including Internet-enabled products and information, for all aspects of our business operations. Monitoring utilization and other factors, supporting our managed care management techniques, processing provider claims, providing data to our regulators, and our ability to compete depends on adopting technology on a timely and cost-effective basis. Malfunctions in our information systems, fraud, error, communication and energy disruptions, security breaches or the failure to maintain effective and up-to-date information systems could disrupt our business operations, alienate customers, and contribute to customer and provider disputes. This could result in regulatory violations, possible liability, increase administrative expenses or lead to other adverse consequences any of which could have a material adverse effect on our results of operations or financial condition.
The use of member data by all of our businesses is regulated at federal and local levels. These laws and rules change frequently, and developments require adjustments or modifications to our technology infrastructure. Our information systems and applications therefore require an ongoing commitment of significant resources to maintain, upgrade and enhance existing systems and develop new systems in order to keep pace these changes and evolving operational needs, technology and industry standards. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties’ failure to perform adequately or failure to secure against cyber threats.
The accuracy and reliability of the information we rely upon to run our business is crucial. Therefore, failure to maintain our information systems and data integrity effectively could result in operational disruptions, such as the inability to pay claims or to make claims payments on a timely basis, problems in determining medical cost estimates and establishing appropriate pricing and reserves, loss of members, and difficulty in attracting new members, regulatory violations, possible liability and limitations on our operations, increases in operating expenses or suffer other adverse consequences. See Item 1A Risk Factors – Risks Relating to the Regulation of Our Industry – As a Medicare Advantage program participant, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties.Our Medicare Advantage contracts may also be terminated or our operations may be required to change in a manner that has a material effect on our business. See also Item 1A. Risk Factors – Risks Relating to the Regulation of Our Industry – We may be subject to government audits, regulatory proceedings or investigative actions, that, may find our policies, procedures, practices or contracts are not compliant with, or are in violation of, applicable health care regulations.
Security breaches could result in misappropriation of our confidential information or interruptions in services or operations. Because of the confidential health information we store and transmit, such security breaches could expose us to a risk of regulatory action, litigation, possible liability and loss. See “Item 1A. Risk Factors–Risks Relating to the Regulation of Our Industry – If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf; or if we fail to address emerging security threats, including cybersecurity threats, or fail to detect and prevent privacy and security incidents, including those related to cybersecurity, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected. In the past, computer viruses or software programs that disable or impair computers have been distributed and have rapidly spread over the internet. Computer viruses could be introduced into our systems, or those of our providers or regulators, which could disrupt our operations, or make our systems inaccessible to our providers or regulators.
We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches.
We face risks related to litigation.
We are subject to a variety of legal actions that affect any business, such as employment-related suits, employee benefit claims, breach of contract actions, tort claims and intellectual property-related litigation. In addition, because of the nature of our business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of our products and services, claims relating to the denial of benefits or coverage, medical malpractice actions, allegations of anti-competitive and unfair business activities, provider disputes, broker and agent disputes, and regulatory action claims by agencies for noncompliance, among others. We may also be subject to increases in litigation in connection with insureds’ claims following large scale natural disasters. For example, we experienced an increase in litigation in our Property and Casualty segment in connection with insureds’ Hurricanes Irma and Maria claims. See Risks Related to Our Business ― Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. Legal proceedings are inherently unpredictable and we cannot ascertain their outcome. We have insurance to cover liabilities relating to litigation; however, insurance coverage may not be sufficient to cover any such liability or our insurers could deny or dispute coverage. Results of regulatory actions could require us to change our business practices and may affect our profitability. Substantial liability relating to legal or regulatory actions could adversely affect our cash flow, results of operations, and financial condition. See Item 3. Legal Proceedings.
Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations.
Puerto Rico has historically had a relatively high risk of natural disasters, such as hurricanes and earthquakes. If Puerto Rico were to experience a large-scale natural disaster, claims incurred by our Managed Care, Life Insurance and Property and Casualty segments would likely increase and our properties may incur substantial damage, which could have a material adverse effect on our business, financial condition and results of operations. Puerto Rico has recently experienced consecutive large-scale natural disasters, such as Hurricane Maria in September 2017, and a series of earthquakes affecting certain areas in the southern portion of the island in January 2020. If the severity of any such natural disaster exceeds what our catastrophe reinsurance protection, as was the case of Hurricane Maria in September 2017, we may potentially incur material losses. Furthermore, unforeseen major public health issues following these catastrophic events, such as pandemics and epidemics, like mosquito-borne epidemics (Dengue, Zika, etc.), where conditions for vaccines may not exist, are not effective, or have not been widely administered, could have a material adverse effect on our business, financial condition and results of operations.
The Puerto Rico Insurance Code requires the Company to resolve claims within a period of 90 days. Due to the substantial increase in the volume of claims following a catastrophic event, there is a business risk that not all claims will be resolved within the timeframe stipulated in the Puerto Rico Insurance Code, which may result in penalties imposed by the Commissioner of Insurance of Puerto Rico. Claims in our Property and Casualty segment increased in 2017 and 2018 as a result of the losses caused by Hurricanes Irma and Maria in Puerto Rico. Furthermore, following a large-scale catastrophic event, there is a risk of an increase in the volume of litigations by insureds who are not satisfied with the insurance payout or adjustments. In fact, lawsuits against our Property and Casualty segment increased in 2018 and 2019. As of December 31, 2020, our Property and Casualty segment had been served in a total of 477 lawsuits, of which 300 remained opened as of December 31, 2020. After a review of all cases, we have determined that our reserves as of December 31, 2020 are adequate. However, there is a risk that litigation results in payments and expenses may materially exceed our reserved amount. See Note 25, Contingencies, of the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Pandemics, like the COVID-19 pandemic and local, state and federal governments’ response to the pandemics may have a material adverse effect on our business, financial condition and results of operations.
On March 11, 2020, the World Health Organization characterized the outbreak of a novel strain of coronavirus (COVID-19) as a global pandemic. In response, the Puerto Rico Governor issued a stay at home order (as amended and extended, the Order) from March 15, 2020 until June 16, 2020. The Order required the closure of non-essential businesses for the same period of time. On May 1, 2020, the Governor issued a new order providing for the gradual reopening of the economy beginning on May 4, 2020. The Governor has issued several other executive orders establishing the rules to continue the gradual reopening of the economy, the latest of which is effective until March 14, 2021.
Although a number of COVID-19 vaccines have been approved by the U.S. and several other countries, at this point it is not possible to reliably estimate the speed and effectiveness of inoculation efforts worldwide, and therefore the length or severity of this outbreak, the length and effectiveness of government and private sector mitigation measures, and other variables that will determine the ultimate financial impact of the pandemic on the Company. However, certain risks discussed in our Annual Report on Form 10-K may increase or materialize. We are closely monitoring the development of the situation to assess its impact on our business. New sales were affected in all our segments and lines of business during the lockdown given that sales functions of all our businesses were not considered essential under the Order and therefore had to be performed remotely. Even though the government-mandated lockdown has been relaxed and most of our sales force has returned to our offices, new sales continue to be affected as social distancing measures continue to restrict certain sales activities. We also experienced a temporary decrease in utilization caused by postponement or cancelation of elective services and medical appointments driven by the Order, which caused our MLR to temporarily drop. Conversely, the pandemic could result in a material increase in medical claims as COVID-19 cases rise and deferred utilizations return. In addition, the postponement or cancellation of medical appointments, treatments and evaluations in our High Cost High Needs (HCHN) Medicaid membership during the pandemic has and may continue to affect our ability to provide qualifying encounter or utilization data to certify them as such, which has and may continue to result in assignment of such members to a different rate cell with lower premium payments and retroactive premium adjustments by ASES. See Item 1A. Risk Factors – Risks Relating to the Regulation of Our Industry – ASES’s risk-adjustment payment system and payment structure, and its dependence on scarce or unavailable data, make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.
Furthermore, COVID-19 related federal and state legislation and regulation may adversely impact our business, financial condition and results of operations. For example, the U.S. and Puerto Rico legislatures have enacted or are contemplating measures requiring health care insurers to cover and/or waive pre-authorization and cost-sharing for COVID-19 related testing, vaccines, treatment or services, which may adversely affect our profitability. In addition, any legislation requiring insurance companies to make advance payments to providers not linked to services previously provided increases our credit risk and could have a material impact on our financial condition and results of operations. See Item 1A. Risk Factors – Risks Related to our Business – Our inability to contain managed care costs may adversely affect our business and profitability. Our Property & Casualty business interruption policies include an exclusion of coverage due to virus or bacteria. However, there have been federal and local legislative efforts to retroactively eliminate such exclusions or otherwise require property and casualty insurers to cover COVID-19 losses under their business interruption policies. While such efforts have not prospered, and if enacted, we believe this type of legislative measure could be challenged on constitutional and other grounds, if successfully implemented, such measures would have a material adverse effect on our Property and Casualty Insurance segment. With respect to our Life Insurance segment, there is a risk that the pandemic could result in a higher number of deaths, and therefore a higher number of claims for death benefits than assumed in our actuarial models. See Item 1A. Risk Factors – Risks Related to our Business – Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations. Finally, while estimates vary, the COVID-19 pandemic is widely considered to have had and continue to have a significant effect on the Puerto Rico, U.S. and global economies. Financial market volatility caused by the pandemic may decrease the value of our investment portfolios, including our pension plan asset portfolio. Furthermore, as the financial capacity of our customers is adversely affected, we may experience delinquency in premium payments and ultimately a decrease in insured customers in our commercial line of business and premiums earned, net, or other adverse effects. See Item 1A. Risk Factors – Risks Related to our Business – Our investment portfolios are subject to varying economic and market conditions. See also Our business is geographically concentrated in Puerto Rico and weakness in the economy and the fiscal health of the government has adversely affected and may continue to adversely affect us. These and other risks, some of which we may be unable to identify at this time due to the evolving and highly uncertain nature of this event, could adversely impact our business, financial condition and results of operations.
Present and future covenants in our secured term loans and note purchase agreements may restrict our operations and adversely affect our ability to pursue desirable business opportunities.
The secured term loans contain financial and non-financial covenants that restrict, among other things, the granting of certain liens, limitations on acquisitions and limitations on changes in control. These non-financial covenants could restrict our operations. In addition, if we fail to make any required payment under our secured term loans or to comply with any of the non-financial covenants included therein, we would be in default and the lenders or holders of our debt, as the case may be, could cause all of our outstanding debt obligations under our secured term loans to become immediately due and payable, together with accrued and unpaid interest, and cease to make further extensions of credit. If the indebtedness under our secured term loans is accelerated, we may be unable to repay or refinance the amounts due and our business may be materially adversely affected.
We may incur additional indebtedness in the future. Our debt service obligations may require us to use a portion of our cash flow to pay interest and principal on debt instead of for other corporate purposes, including funding future expansion. If our cash flow and capital resources are insufficient to service our debt obligations, we may be forced to seek extraordinary dividends from our subsidiaries, sell assets, seek additional equity or debt capital or restructure our debt. However, these measures might be prohibited by applicable regulatory requirements, unsuccessful or inadequate in permitting us to meet scheduled debt service obligations. We may also incur future debt obligations that might subject us to restrictive covenants that could affect our financial and operational flexibility.
Our breach or failure to comply with any of these covenants could result in a default under our secured term loan and the acceleration of amounts due thereunder. Indebtedness could also limit our ability to pursue desirable business opportunities and may affect our ability to maintain an investment grade rating for our indebtedness.
If we do not effectively manage the organic and inorganic growth of our operations, we may not be able to achieve our profitability targets.
Our growth strategy includes expanding our health care delivery business, expanding our participation in Puerto Rico’s health and insurance industry, introducing new products and operating models, further developing our relationships with customers, care delivery providers, independent agencies and brokers and pursuing acquisition opportunities. Our growth strategy exposes us to additional risks, including our ability to:
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Identify profitable growth opportunities in current and new markets where we do not presently participate;
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Transact successful acquisitions, capital investments and other growth initiatives;
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Determine the correct value of assets and investments;
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Implement adequate pricing and operational models and structures, including underwriting and claim management processes;
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Design attractive and profitable insurance and health care products and services;
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Implement new, or modify existing operating models and implement internal monitoring and control systems to manage them;
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Recruit required personnel for expanded operations, including officers, agents, brokers, medical providers, and other key personnel;
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Obtain regulatory permission required to operate in other jurisdictions or lines of business;
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Comply with regulatory requirements;
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Integrate acquired businesses into our operations, including integration of information technology, management and personnel, culture and administrative systems;
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Acquire business and regulatory knowledge and expertise necessary to manage new lines of business; and
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Create the expected return over time.
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Additionally, our management and other key personnel may expend considerable time and effort which may distract them from their core activities. We may face risks associated with unknown or unidentified liabilities resulting from our investments or acquisitions, or new products, services, business models and markets, and the processes we implement to materialize them. We may also be subject to changes in trade protection laws, policies and measures, and other regulatory requirements affecting our business, including the Foreign Corrupt Practices Act and laws prohibiting corrupt payments.
If our goodwill or intangible assets become impaired, our financial condition and future results of operations may be adversely affected.
As of December 31, 2020, we had approximately $28.6 million and $1.4 million of goodwill and intangible assets recorded on our Balance Sheet, primarily related to the TSA acquisition, that represent 1.0% of our total consolidated assets and 3.1% of our consolidated stockholders’ equity. In an effort to expand the health clinics reporting unit, the Company purchased various health clinics across different municipalities in Puerto Rico, resulting in a recognition of goodwill of approximately $3.2 million in 2019. The fair values initially assigned to the assets acquired and liabilities assumed are preliminary and are subject to refinement for up to one year after the closing date of the acquisition, as new information becomes available. If we make additional acquisitions, it is likely that we will record additional goodwill and intangible assets on our consolidated balance sheet.
In accordance with applicable accounting standards, we periodically evaluate our goodwill and other intangible assets to determine the recoverability of their carrying values. Goodwill and other intangible assets with indefinite lives are tested for impairment at least annually. Impairment testing requires us to make assumptions and judgments regarding the estimated fair value of our reporting units, including goodwill and other intangible assets (with indefinite lives). Estimated fair values developed based on our assumptions and judgments might be significantly different if other reasonable assumptions and estimates were to be used. If estimated fair values are less than the carrying values of the equity and other intangible assets (with indefinite lives) in future impairment tests, or if significant impairment indicators are noted relative to other intangible assets subject to amortization, we may be required to record significant impairment losses against future income. Factors that may be considered a change in circumstances, indicating that the carrying value of the goodwill or amortizable intangible assets may not be recoverable, include reduced future cash flow estimates and slower growth rates than the industry.
Any future evaluations requiring an impairment of our goodwill and other intangible assets could adversely affect our results of operations and stockholders’ equity in the period in which the impairment occurs. A material decrease in stockholders’ equity could, in turn, negatively impact our debt ratings or potentially impact our compliance with existing debt covenants.
In addition, the estimated value of our reporting units may be affected as a result of the implementation of various Health Care Reform regulations. Such regulations could have significant effects on our future operations, which in turn could unfavorably affect our ability to support the carrying value of certain goodwill and other intangible assets, and result in significant impairment charges in future periods. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations―Critical Accounting Estimates―Goodwill and Other Intangible Assets.
Risks Relating to Taxation
If we are considered to be a controlled foreign corporation under the related person insurance income rules or a passive foreign investment company for U.S federal income tax purposes, U.S. persons owning our shares of Class B common stock could be subject to adverse tax consequences.
We do not expect that we will be considered a controlled foreign corporation under the related person insurance income rules (a RPII CFC) for U.S. federal income tax purposes. However, because RPII CFC status depends in part upon the correlation between an insurance company’s shareholders and its insurance customers and the extent of insurance business outside its country of incorporation, there can be no assurance that we will not be a RPII CFC in any taxable year. We do not intend to monitor whether we generate RPII or becomes a RPII CFC.
Based on our current business assets and operations, we do not expect that we will be considered a passive foreign investment company (a PFIC) for U.S. federal income tax purposes. However, because PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, less than 25% owned equity investments) in each year, which may be uncertain and may vary substantially over time, there can be no assurance that we will not be considered a PFIC for any taxable year. Our belief that our Company is not a PFIC is based, in part, on the fact that the PFIC rules include provisions intended to provide an exception for bona fide insurance companies predominately engaged in an insurance business. However, the scope of this exception is not entirely clear and there are no administrative pronouncements, judicial decisions or Treasury regulations that provide guidance as to the application of the PFIC rules to insurance companies.
If we were a RPII CFC in any taxable year or if the Company was treated as a PFIC for any taxable year, certain adverse consequences could apply to certain U.S. persons that own our shares of Class B common stock.
Legislative and other measures that may be taken by local and federal government taxing authorities could materially increase our tax burden.
Our business is subject to substantial federal and local tax regulation and frequent changes to the applicable legislative and regulatory schemes could have a material impact in our business, cash flows, financial position or operating results.
Risks Relating to the Regulation of Our Industry
Changes in public policy, enactment of new laws, changes in governmental regulations, or the application thereof, may adversely affect our business, financial condition and results of operations.
Our business is subject to substantial federal and local regulation and frequent changes to the applicable legislative and regulatory schemes, including general business regulations and laws relating to taxation, privacy, data protection, pricing, insurance, Medicare and health care fraud and abuse laws. Please refer to Item 1. Business – Regulation. Changes in these laws, enactment of new laws or regulations, shifts in public policy, changes in interpretation of existing laws or changes in enforcement of existing laws and regulations may materially impact our business. Such changes include without limitation:
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Initiatives to provide greater access to coverage for uninsured and under-insured populations without adequate funding to health plans, or to be funded through taxes or other negative financial levy on health plans;
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Initiatives to limit health plans’ ability to review courses of treatment of patients;
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Payments to health plans that are tied to the achievement of certain quality performance measures and medical loss ratio requirements;
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Specific legislative or regulatory changes to the Medicare or Medicaid programs, including changes in the bidding process or other means to materially reduce premiums;
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Local government regulatory changes;
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Increased government enforcement actions, or changes in the interpretation or application, of fraud and abuse of health information privacy laws; and
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Regulations that increase the operational burden on health plans, or that increase a health plan’s exposure to liabilities, including efforts to expand the tort liability of health plans.
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Regulations promulgated by the Commissioner of Insurance and CMS and other agencies, among other things, influence how our insurance subsidiaries conduct business and place limitations on investments and dividends. Possible penalties for violations of such regulations include fines, orders to cease and desist, and possible suspension or termination of licenses. The regulatory powers of the Commissioner of Insurance are mainly designed to protect policyholders, not shareholders. While we cannot predict the terms of future regulation, the enactment of new legislation could affect the cost or demand for insurance policies, limit our ability to obtain rates or premiums, when needed, otherwise restrict our operations, limit the expansion of our business, expose us to expanded liability or impose additional compliance requirements. In addition, we may incur increased operating expenses in order to comply with new legislation.
Future regulatory actions by the Commissioner of Insurance or other governmental agencies, including federal authorities, could have a material adverse effect on the profitability or marketability of our business, financial condition and results of operations, which in turn could impact the value of our business model and result in potential impairments of our goodwill and other intangible assets.
The health care reform law, changes in laws related to the health care system, and the implementation of such law could have a material adverse effect on our business, financial condition, cash flows or results of operations.
The ACA provides comprehensive changes to the U.S. health care system.
For example, health plans serving the individual market are subject to the guaranteed issue provisions under which the plans are required to issue coverage to individuals without regard to their health status of pre-existing conditions, which could lead to adverse selection by consumers. On July 16, 2014, the Department of Health and Human Services sent a letter to the Commissioner of Insurance of Puerto Rico notifying that guarantee issue provisions under ACA are not applicable to U.S. territories. However, on July 22, 2013, similar guarantee issue and other market reform provisions were enacted in Puerto Rico as part of amendments made to the Health Insurance Code of Puerto Rico. Although the Puerto Rico legislature is considering additional legislation to provide insurance companies more flexibility to comply with the additional requirements enacted in 2013, it is uncertain whether such legislation will in fact be enacted or the effect of any such additional legislation may have on our business. If we are unable to adapt our premium structure to address the guaranteed issue requirement, our results of operations, financial position and liquidity may be materially adversely affected.
In the years since its enactment, there have been, and continue to be, significant developments in and continued legislative activity around ACA, including attempts to repeal or repeal and replace the ACA. For example, on October 12, 2017, President Trump signed an executive order requiring the implementation of regulations that would exempt certain association plans from complying with ACA requirements, easing restrictions on certain short-term health plans and health reimbursement arrangements and limiting hospital and insurance company consolidation while promoting competition and choice. In August 2018 the Administration adopted a final rule to support short-term, limited duration scope policies. Additional activity related to the individual market is anticipated through state waivers although the Biden administration may seek to change this.
The Further Consolidated Appropriations Act of 2020 provides up to approximately $5.342 billion in Medicaid funding to Puerto Rico through September 30, 2021. Although we believe this legislation, together with the ACA and any changes thereto, may provide us with significant opportunities to grow our business, the implementation of enacted reforms, as well as future regulations and legislative changes, may have a material adverse effect on our results of operations, financial position or liquidity. If we fail to effectively implement our operational and strategic initiatives with respect to the implementation of health care reform, or do not do so as effectively as our competitors, our business may be materially adversely affected.
As a Medicare Advantage program participant, we are subject to complex regulations. If we fail to comply with these regulations, we may be exposed to criminal sanctions and significant civil penalties. Our Medicare Advantage contracts may also be terminated or our operations may be required to change in a manner that has a material effect on our business.
The laws and regulations governing Medicare Advantage program participants are complex, subject to interpretation and frequent change and can expose us to penalties for noncompliance. If we fail to comply with these laws and regulations, we could be subject to criminal fines, civil penalties or other sanctions, including the termination of our Medicare Advantage contracts. In addition, maintaining compliance with such laws and regulations as they change may, in some cases, entail substantial direct costs.
Under CMS regulations to implement certain ACA requirements that became effective on June 1, 2012, CMS has the authority not to renew our contracts beginning in 2015 based solely on the Star Ratings of our Medicare Advantage plans if their respective ratings do not achieve three or more stars (out of 5.0 stars) for three consecutive contract years. See the subcaption Federal Regulation in Item 1 of this Annual Report on Form 10-K for detailed information of the Stars Ratings. In the final call letter to Medicare Advantage organizations dated April 6, 2015, CMS stated that it would not delay contract terminations based on a plan’s Star Ratings.
CMS provides an increase to the rebate share in the bid from 50% to 65% when a program reaches 3.5 Stars, and to 70% when a plan reaches 4.5 Stars. Also, a 5% quality bonus is provided to plans with Star Ratings of 4.0 or more. As of December 31, 2020, TSA’s HMO plan achieved 4.0 Stars overall on a 5.0 Star rating system and TSA’s PPO plan achieved an overall rating of 3.5 Stars on a 5.0-Star rating system effective for product offerings in the year 2021.
The Company is subject, and will likely continue to be subject, to audits from CMS in connection with the Medicare Advantage contracts. A CMS audit may review the effectiveness of multiple matters, including the performance of the benefit administration, coverage determinations, claims processing and payment, process of appeals and grievances, dismissals, oversight of agents and brokers, and enrollment process. CMS may impose civil monetary penalties as a result of their findings or require changes to our business practices that may adversely affect our profitability. CMS may also prevent us from subscribing new members or terminate any of our Medicare Advantage contracts if it determines that any of these plans have failed to substantially carry out the contract or is carrying out the contract in a manner that is inconsistent with the efficient or effective administration of the Medicare Advantage program. Compliance with CMS requirements may require us to divert resources that may affect the results of our operations and financial condition. Any termination or nonrenewal of our Medicare Advantage plans would have a material adverse effect on our business and financial results.
We may be subject to government audits, regulatory proceedings or investigative actions, that, may find that our policies, procedures, practices or contracts are not compliant with, or are in violation of, applicable health care regulations.
Federal, Puerto Rico, and Costa Rica government authorities, including but not limited to the Commissioner of Insurance, ASES, CMS, the OIG, the Office of the Civil Rights of HHS, the U.S. Department of Justice, the U.S. Department of Labor, and the OPM, regularly make inquiries and conduct audits concerning our compliance with applicable insurance and other laws and regulations. In addition, CMS has the right to require Medicare Advantage plan sponsors such as ourselves to self-disclose instances of noncompliance, enter into a corrective action plan, and/or hire an independent auditor to work in accordance with CMS specifications to validate if the deficiencies that were found during a CMS full or partial program audit have been corrected and provide CMS with a copy of their audit findings. If, in the future, we are required by CMS to hire an independent auditor, such an audit would entail direct costs to us, in addition to potential penalties in the event of negative audit findings. We may also become the subject of nonroutine regulatory or other investigations or proceedings brought by these or other authorities, and our compliance with and interpretation of applicable laws and regulations may be challenged. In addition, our regulatory compliance may also be challenged by private citizens under the whistleblower provisions of applicable laws. The defense of any such challenge could result in substantial cost, diversion of resources, and a possible material adverse effect on our business.
An adverse action could result in one or more of the following:
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Recoupment of amounts we have been paid pursuant to our government contracts;
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Mandated changes in our business practices;
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Imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key employees;
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Additional reporting requirements and oversight and mandated corrective action or remediation plans;
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Loss or nonrenewal of our government contracts or loss of our ability to participate in Medicare or other federal or local governmental payer programs;
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Damage to our reputation;
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Increased difficulty in marketing our products and services;
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Inability to obtain approval for future services or geographic expansions;
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Loss of one or more of our licenses to act as an insurance company, preferred provider or managed care organization or other licensed entity or to otherwise provide a service; and
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Suspension of ability to subscribe members.
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Our failure to maintain an effective corporate compliance program may increase our exposure to civil damages and penalties, criminal sanctions and administrative remedies, such as program exclusion, resulting from an adverse review. Any adverse review, audit or investigation could reduce our revenue and profitability and otherwise adversely affect our operating results.
Effective prevention, detection and control systems are critical to maintaining regulatory compliance and preventing fraud. Failure of these systems could adversely affect the Company.
Failure to prevent, detect or control systems related to regulatory compliance or the failure of employees to comply with our internal policies, including data systems security or unethical conduct by managers and employees, could adversely affect our reputation and also expose us to litigation and other proceedings, fines and penalties. Federal and state governments have made investigating and prosecuting health care and other insurance fraud and abuse a priority. Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of members, billing for unnecessary medical services, improper marketing, and violations of patient privacy rights. The regulations and contractual requirements applicable to the Company are complex and subject to change. In addition, ongoing vigorous law enforcement, a highly technical regulatory scheme and the Dodd-Frank legislation and related regulations being adopted that enhance regulators’ enforcement powers and whistleblower incentives and protections, mean that the compliance efforts in this area will continue to require significant resources.
In addition, provider or member fraud that is not prevented or detected could impact our medical costs or those of our self-insured customers. Further, during an economic downturn, our segments, including our Life Insurance and Property and Casualty segments may see increased fraudulent claims volume which may lead to additional costs because of increased disputed claims and litigation.
If we fail to comply with applicable privacy and security laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf; or if we fail to address emerging security threats, including cybersecurity threats, or fail to detect and prevent privacy and security incidents, including those related to cybersecurity, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected.
The collection, maintenance, protection, use, transmission, disclosure and disposal of sensitive personal information are regulated at the federal, state, international and industry levels and requirements are imposed on us by contracts with customers. HIPAA regulations also provide access rights and other rights for health plan beneficiaries with respect to their health information. These regulations include standards for certain electronic transactions, including encounter and claims information, health plan eligibility and payment information. Health plans are also subject to beneficiary notification and remediation obligations in the event of an authorized use or disclosure of personal health information. HIPAA also requires business associates as well as covered entities to comply with certain privacy and security requirements. Even though we provide for appropriate protections through our contracts with our third-party service providers and, in certain cases assess their security controls, we still have limited oversight or control over their actions and practices.
Our facilities and systems and those of our third-party service providers may be vulnerable to privacy and security incidents, security attacks and breaches, acts of vandalism or theft, computer viruses, coordinated attacks by activist entities, emerging cybersecurity risks, misplaced or lost data, programming and/or human errors or other similar events. Emerging and advanced security threats, including coordinated attacks, require additional layers of security that may disrupt or impact efficiency of operations.
Compliance with multiple and/or new privacy and security laws, regulations and requirements may result in increased operating costs, and may constrain our ability to manage our business model. In addition, HHS has expanded its HIPAA audit program to assess compliance efforts not only by covered entities, but also business associates. Although we are not aware of HHS plans to audit any of our covered entities or business associates, an audit resulting in findings or allegations of noncompliance could have a material adverse effect on our results of operations, financial position and cash flows. We are also subject to stricter breach notification requirements than those imposed on covered entities by virtue of HIPAA in terms of having to provide ASES with notice of a breach within 24 hours. These and other regulatory aspects make compliance with applicable health information laws more difficult. For these reasons, our total compliance costs may increase in the future.
Noncompliance or findings of noncompliance with applicable laws, regulations or requirements, or the occurrence of any privacy or security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive personal information, whether by us or by one of our third-party service providers, could have a material adverse effect on our reputation and business. This includes mandatory disclosure to the media, significant increases in the cost of managing and remediating privacy or security incidents and material fines, penalties and litigation awards, among other consequences, any of which could have a material and adverse effect on our results of operations, financial position and cash flows.
The revised rate calculation system for Medicare Advantage, the payment system for Medicare Part D, and changes in the methodology and payment policies used by CMS to establish rates could reduce our profitability and the benefits we offer our beneficiaries.
Medicare Advantage managed care plans are paid based off a CMS-calculated benchmark amount, and plans submit competitive bids that reflect the costs they expect to incur in providing the base Medicare benefits. A Medicare Advantage plan’s actual payment rate is based on a complex statutory formula that takes into account a number of factors, including the relationship between the plan’s bid and the benchmark. Medicare generally will rebate a portion of the amount by which the benchmark amount exceeded the accepted bid for certain plans. For plans achieving a Star rating of at least 3.5 Stars, the portion of the savings retained by the plan is higher. For plans achieving a Star rating of at least 4 Stars, the starting benchmark amount from which the savings is computed is also higher (a quality bonus). If the bid is greater than the benchmark, the plan will be required to charge a premium to enrollees equal to the difference between the bid and the benchmark, which could affect our ability to attract enrollees. CMS reviews the methodology and assumptions used in bidding with respect to medical and administrative costs, profitability and other factors. CMS could challenge such methodology or assumptions or seek to cap or limit plan profitability. CMS also could administratively seek to implement certain methodological changes to the Medicare Advantage rate calculations that could result in functionally lower payment rates, and may have a material adverse effect on our revenue, financial position, results of operations or cash flow.
We also face the risk of reduced or insufficient government funding and we may need to terminate our Medicare Advantage contracts with respect to unprofitable markets. In addition, as a result of the competitive bidding process, our ability to participate in the Medicare Advantage program is affected by the pricing and design of our competitors’ bids. Moreover, we may in the future be required to reduce benefits or charge our members an additional premium in order to maintain our current level of profitability, either of which could make our health plans less attractive to members and adversely affect our membership.
CMS’s risk-adjustment payment system and other Medicare Advantage funding pressures make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.
CMS has implemented a risk-adjustment payment system for Medicare Advantage plans to improve the accuracy of payments and establish incentives for such plans to enroll and treat less healthy Medicare beneficiaries. The risk-adjusted premiums we receive are based on claims and encounter data that we submit to CMS within prescribed deadlines. We develop our estimates for risk-adjusted premiums utilizing historical experience, or other data, and predictive models as sufficient member risk score data becomes available over the course of each CMS plan year. We recognize periodic changes to risk-adjusted premiums as revenue when the amounts are determinable and collection is reasonably assured. This is possible as additional diagnosis code information is reported to CMS, when the ultimate adjustment settlements are received from CMS, or we receive notification of such settlement amounts. CMS adjusts premiums on two separate occasions on a retrospective basis. The first retrospective adjustment for a given plan year generally occurs during the third quarter of that year. This initial settlement represents the update of risk scores for the current plan year based on the severity of claims incurred in the prior plan year. CMS then issues a final retrospective risk adjusted premium settlement for that plan year in the following year. The data provided to CMS to determine members’ risk scores is subject to audit by CMS even after the annual settlements occur, which may result in the refund of premiums to CMS. The result of these audits could materially reduce premium revenue in the year in which CMS determines a refund is required and could be material to our result of operations, financial position and cash flows.
CMS is making significant changes to the manner in which it determines risk-adjustment payments, including possible retroactive recoveries. CMS introduced a new model for 2020 and continues to shift towards encounter-based risk scores (EDS). As a result of the risk-adjustment process and CMS’s ability to modify the manner in which it applies such risk-adjustments, it is difficult to predict with certainty our future revenue or profitability. In addition, our own risk scores for any period may result in favorable or unfavorable adjustment to payment from CMS and our Medicare payment revenue.
Finally, we generally rely on providers, including certain network providers who are not our employees, to appropriately document all medical data, including the diagnosis codes submitted with claims, as the basis for our risk scores under the program. Thus, our ability to meet our premium revenue estimates depends largely on the success of third-party efforts to collect and properly reflect medical data, including diagnosis codes that must be submitted with claims. There is no assurance that our providers will be successful in accurately collecting such medical data and diagnosis codes and, to the extent their efforts are not successful, such failure may have a material adverse effect on our premium revenues.
ASES’s risk-adjustment payment system and payment structure, and its dependence on scarce or unavailable data, make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.
ASES has implemented a risk-adjustment payment system for the Vital Program plan to reflect the differences in morbidity of enrolled members and differences in the regional cost of care. The risk adjusted payment transfers are based on claims and encounter data that is submitted to ASES. The risk-adjustment factors are based on a prospective model, whereby the data for the prior year is used to establish the risk-adjustment payments for the current year. For example, the risk scores are assigned to each member for the contract year ending October 31, 2019 using claims data for those members during the year ending October 31, 2018. We have been unable to develop reliable estimates for risk-adjusted premiums due to the lack of available data from prior periods which are the basis for risk scores. We were instructed of a final risk-adjustment transfer payment for the fiscal period ending October 31, 2019, but have not received any notification for the second fiscal period ending June 30, 2020. We have not recognized any expected risk-adjustment payment or receipt and the final risk-adjustment calculations may result in an unfavorable adjustment. ASES has not provided a timeline for the communication of the risk transfer payments.
Furthermore, the premium rates for the second contract year, which represents the period November 1, 2019 to June 30, 2020, will be adjusted by a morbidity factor that will reflect the change in the overall morbidity of the population from the base period (July 1, 2016 to June 30, 2017) and the contract year. This adjustment may result in unfavorable adjustment to payments from ASES and our Medicaid premium revenue.
ASES has additionally implemented a payment structure for the program that assigns members to one of 37 rate cells based on their age, gender, eligibility category and health conditions. Members assigned to High Cost High Needs (HCHN) rate cells receive premium payments that are much higher than those assigned based only on age and gender. If our enrollees are not assigned to the adequate rate cell, the premium we receive may not be sufficient to cover their utilization, particularly in the case of HCHN members.
Finally, ASES may recover premiums paid for non-eligible participants. However, we are dependent on ASES, which is in turn dependent on the local Medicaid office, for eligibility data. Historically, ASES has not received updated eligibility data from the local Medicaid office in a timely manner. Therefore, if we are not provided with timely eligibility data and we bill ASES for non-eligible members, ASES could attempt to recoup premiums from us, which could have a significant impact on our consolidated premiums and profitability.
If our Medicare Advantage members enroll in another Medicare Advantage plan during the open enrollment season, they will be automatically disenrolled from our plan, possibly without our immediate knowledge.
Pursuant to the MMA, members enrolled in one insurer’s Medicare Advantage program will be automatically disenrolled from that program if they enroll in another insurer’s Medicare Advantage program. If our members enroll in another insurer’s Medicare Advantage program, we may not discover that such member has been disenrolled from our program until we fail to receive reimbursement from CMS in respect of such member, which may occur sometime after the disenrollment. Therefore, we may discover that a member has disenrolled from our program after we have already provided services to such individual. Our profitability would be reduced as a result of such failure to receive payment from CMS, if we had made related payments to providers and were unable to recoup such payments from them.
Our insurance subsidiaries are subject to minimum capital requirements. Our failure to meet these standards could expose us to regulatory actions.
Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance, among other things, impose minimum capital requirements on our insurance subsidiaries. Although our insurance subsidiaries are currently in compliance with these requirements, there can be no assurance that we will continue to comply in the future. Failure to maintain required levels of capital or to otherwise comply with the reporting requirements of the Commissioner of Insurance could subject our insurance subsidiaries to corrective actions, including involuntary rehabilitation or liquidation processes, or require us to provide financial assistance, either through subordinated loans or capital infusions, to ensure they maintain their minimum statutory capital requirements.
We are also subject to minimum capital requirements pursuant to our BCBSA license agreements. See Risks Related to Our Business―The termination or modification of our license agreements to use the BCBS name and mark could have a material adverse effect on our business, financial condition and results of operations.
Puerto Rico insurance laws and regulations, our license agreement with the BCBSA, and provisions of our Articles of incorporation and bylaws could delay, deter or prevent a takeover attempt that shareholders might consider to be in their best interests. It may also make it more difficult to replace members of our Board of Directors and have the effect of entrenching management.
Puerto Rico insurance laws and the regulations promulgated thereunder, in addition to our amended and restated Articles of Incorporations (Articles) and bylaws, may delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider to be in their best interests. For instance, they may prevent our shareholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
Our Articles and bylaws have anti-takeover effects and may delay, defer or prevent a takeover attempt that our shareholders might consider to be in their best interests. In particular, our Articles and bylaws:
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Permit our Board of Directors to issue one or more series of preferred stock;
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Divide our Board of Directors into three classes serving staggered three-year terms;
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Limit the ability of shareholders to remove Directors;
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Impose restrictions on shareholders’ ability to fill vacancies on our Board of Directors;
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Impose advance notice requirements for shareholder proposals and nominations of Directors to be considered at meetings of shareholders; and
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Impose restrictions on shareholders’ ability to amend our Articles and bylaws.
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Puerto Rico insurance laws and the regulations promulgated by the Commissioner of Insurance may also delay, defer, prevent or render more difficult a takeover attempt that our shareholders might consider to be in their best interests. For instance, the Commissioner of Insurance must review any merger, consolidation or new issuance of shares of capital stock of an insurer or its parent company and make a determination as to the fairness of the transaction. Also, a Director of an insurer must meet certain requirements imposed by Puerto Rico insurance laws.
Furthermore, change of control statutes that apply to insurance companies provide that no person may make an offer to acquire or to sell the issued and outstanding voting stock of an insurance company, which constitutes 10% or more of its issued and outstanding stock, or of the total issued and outstanding stock of an insurance holding company, without the prior approval of the Commissioner of Insurance. We are also subject to change of control limitations pursuant to our BCBSA license agreements. The BCBSA ownership limits restrict beneficial ownership of our voting capital stock to less than 10% for an institutional investor and less than 5% for a non-institutional investor, both as defined in our amended and restated Articles. In addition, no person may beneficially own shares of our common stock or other equity securities, or a combination thereof, representing a 20% or more ownership interest, whether voting or non-voting, in our company. This provision in our Articles cannot be changed without prior approval of the BCBSA and the vote of holders of at least 75% of our common stock.
These voting and other restrictions may operate to make it more difficult to replace members of our Board of Directors and may have the effect of entrenching management regardless of their performance.
General Risk Factors
The effectiveness of our Company’s strategy, our ability to align talent to our business needs and risks, and our ability to manage and safeguard our brand and reputation present overarching risks for our Company.
Effectiveness of our enterprise strategy, talent management and alignment of talent to our business needs and risks to our brand and reputation present overarching risks to our Company. There can be no assurance regarding the effectiveness of our enterprise strategy, our ability to manage and align our talent to our business needs or our ability to avoid harm to our brand and reputation. In addition, there can be no assurance that U.S. government fiscal policy, the implementation of the ACA, repeal or other changes to the ACA or additional changes to the U.S. health care system will not require us to revise the ways in which we conduct business, put us at risk of loss of business or materially adversely affect our business, cash flows, financial position or operating results.