SECTIONS 1399.70-1399.76

1399.70.  (a) In addition to the information required by subdivision(a) of Section 1399.73, a nonprofit health care service plansubmitting an application to the director to restructure or convertits activities pursuant to this article shall submit to the directora copy of all of its original and amended articles of incorporationand bylaws, as well as a report summarizing the activities undertakenby the plan to meet its nonprofit obligations as directed by thedirector. (b) The report required by this section shall include a summary ofthe following: (1) The nature of public benefit or charitable activitiesundertaken by the plan. (2) The expenditures incurred by the plan on these public benefitor charitable activities. (3) The plan's procedure for avoiding conflicts of interestinvolving public benefit or charitable activities and a summary ofany conflicts that have occurred and the manner in which they wereresolved. (c) The report required by this section shall also include awritten plan that specifies on a projected basis the informationrequired by subdivision (b) for the immediately following fiscalyear. (d) When requested by the director, the plan shall promptlysupplement the report to include any additional information as thedirector deems necessary to ascertain whether the plan's assets areappropriately being used by the plan to meet its nonprofitobligations. (e) For purposes of this article, a "nonprofit health care serviceplan" includes a plan formed under or subject to Part 2 (commencingwith Section 5110) or Part 3 (commencing with Section 7110) ofDivision 2 of the Corporations Code.1399.71.  (a) Any nonprofit health care service plan that intends torestructure its activities as defined in subdivision (d) shall,prior to restructuring, secure approval from the director. (b) Every nonprofit health care service plan that applies to thedepartment to restructure its activities shall submit for approval bythe department a public benefit program that identifies activitiesto be undertaken by the nonprofit health care service plan followingrestructuring to continue to meet its nonprofit public benefitobligations. The program shall include all information requiredpursuant to subdivisions (b) and (c) of Section 1399.70. (c) The director shall apply the requirements of Section 1399.72to the public benefit program submitted for approval as part of arestructuring proposal submitted pursuant to subdivision (b) of thissection. The set-aside requirement in paragraph (1) of subdivision(c) of Section 1399.72 shall apply only to the fair value of theportion of the nonprofit health care service plan involved in therestructuring, as determined by the director. (d) (1) For the purposes of this section, a "restructuring" or"restructure" by a nonprofit health care service plan means the sale,lease, conveyance, exchange, transfer, or other similar dispositionof a substantial amount of a nonprofit health care service plan'sassets, as determined by the director, to a business or entitycarried on for profit. Nothing in this section shall be construed toprohibit the director from consolidating actions taken by a plan forthe purpose of treating the consolidated actions as a restructuringor restructure of the plan. (2) For the purposes of this section, a "restructuring" or"restructure" by a nonprofit health care service plan shall notinclude any sales or purchases undertaken in the normal and ordinarycourse of plan business. The director may request information fromthe plan to verify that transactions qualify as occurring in thenormal and ordinary course of plan business, and are not subject tothe requirements of subdivision (e). (e) Notwithstanding that a transaction or consolidatedtransactions involve a substantial amount of a nonprofit health careservice plan's assets and are not in the normal and ordinary courseof plan business, a "restructuring" or "restructure" by a nonprofithealth care service plan shall not include any of the followingtransactions: (1) Investments in a wholly owned subsidiary of the nonprofithealth care service plan in which all of the following occur: (A) Any profit from the investment will not inure to the benefitof any individual. (B) The investment is fundamentally consistent with and advancesthe public benefit, charitable, or mutual benefit purpose of theplan. (C) The investment does not adversely impact the plan's ability tofulfill its public benefit, charitable, or mutual benefit purposes. (D) No officer or director of the plan has any financial interestconstituting a conflict of interest in the investments. (E) The investment results in the provision of services, goods, orinsurance to or for the benefit of the plan or its members,enrollees, or groups. (2) Sales or purchases of plan assets, including interests inwholly owned subsidiaries and in joint ventures, partnerships, andother investments in for-profit entities, in which all of thefollowing occur: (A) Any profit from the sale will not inure to the benefit of anyindividual. (B) The sale or purchase is fundamentally consistent with andadvances the public benefit, charitable, or mutual benefit purposesof the plan. (C) The plan receives all proceeds from the sale. (D) No officer or director of the plan has any financial interestconstituting a conflict of interest in the sale or purchase. (E) The transaction is conducted at arm's length and for fairmarket value. (F) The sale or purchase does not adversely impact the plan'sability to fulfill its public benefit, charitable, or mutual benefitpurposes. (3) Investments in or joint ventures and partnerships with afor-profit entity in which all of the following occur: (A) Any profit will not inure to the benefit of any individual. (B) The mission or purpose of the investment, joint venture, orpartnership is fundamentally consistent with the public benefit,charitable, or mutual benefit purposes of the plan. (C) No officer or director of the plan has any financial interestconstituting a conflict of interest in the investment, joint venture,or partnership. (D) The transaction is conducted at arm's length and for fairmarket value. (E) The investment, joint venture, or partnership furthers theplan's ability to fulfill its public benefit, charitable, or mutualbenefit purposes. (F) The investment, joint venture, or partnership results in theprovision of services, goods, or insurance to or for the benefit ofthe plan or its members, enrollees, or groups. The sharing of profits or earnings upon a reasonable and equitablebasis reflecting the contribution of other participants to theinvestment, joint venture, or partnership or the success thereofshall not constitute private inurement. (f) All transactions subject to the exemptions listed insubdivision (e) may not be executed by the plan without the writtenprior approval of the director. In the application for materialmodification seeking approval, the plan shall demonstrate that theproposed transaction meets all of the relevant conditions forexemption required by subdivision (e). (g) Prior to issuing a decision to approve an application for amaterial modification involving a transaction that is exempt pursuantto subdivision (e), the director shall issue a public notice of thefiling of the application and may seek public review and comment onthe director's determination that the transaction is exempt undersubdivision (e). (h) The director may approve or deny the material modificationrequest, or approve the request with conditions necessary to satisfythe requirements of this section, taking into consideration anypublic comments submitted to the director.1399.72.  (a) Any health care service plan that intends to convertfrom nonprofit to for-profit status, as defined in subdivision (b),shall, prior to the conversion, secure approval from the director. (b) For the purposes of this section, a "conversion" or "convert"by a nonprofit health care service plan means the transformation ofthe plan from nonprofit to for-profit status, as determined by thedirector. (c) Prior to approving a conversion, the director shall find thatthe conversion proposal meets all of the following charitable trustrequirements: (1) The fair market value of the nonprofit plan is set aside forappropriate charitable purposes. In determining fair market value,the director shall consider, but not be bound by, any market-basedinformation available concerning the plan. (2) The set-aside shall be dedicated and transferred to one ormore existing or new tax-exempt charitable organizations operatingpursuant to Section 501(c)(3) (26 U.S.C.A. Sec. 501(c)(3)) of thefederal Internal Revenue Code. The director shall consider requiringthat a portion of the set-aside include equity ownership in the plan.Further, the director may authorize the use of a federal InternalRevenue Code Section 501(c)(4) organization (26 U.S.C.A. Sec. 501(c)(4)) if, in the director's view, it is necessary to ensure effectivemanagement and monetization of equity ownership in the plan and ifthe plan agrees that the Section 501(c)(4) organization will belimited exclusively to these functions, that funds generated by themonetization shall be transferred to the Section 501(c)(3)organization except to the extent necessary to fund the level ofactivity of the Section 501(c)(4) organization as may be necessary topreserve the organization's tax status, that no funds or otherresources controlled by the Section 501(c)(4) organization shall beexpended for campaign contributions, lobbying, or other politicalactivities, and that the Section 501(c)(4) organization shall complywith reporting requirements that are applicable to Section 501(c)(3)organizations, and that the 501(c)(4) organization shall be subjectto any other requirements imposed upon 501(c)(3) organizations thatthe director determines to be appropriate. (3) Each 501(c)(3) or 501(c)(4) organization receiving aset-aside, its directors and officers, and its assets including anyplan stock, shall be independent of any influence or control by thehealth care service plan and its directors, officers, subsidiaries,or affiliates. (4) The charitable mission and grant-making functions of thecharitable organization receiving any set-aside shall be dedicated toserving the health care needs of the people of California. (5) Every 501(c)(3) or 501(c)(4) organization that receives aset-aside under this section shall have in place procedures andpolicies to prohibit conflicts of interest, including thoseassociated with grant-making activities that may benefit the plan,including the directors, officers, subsidiaries, or affiliates of theplan. (6) Every 501(c)(3) or 501(c)(4) organization that receives aset-aside under this section shall demonstrate that its directors andofficers have sufficient experience and judgment to administergrant-making and other charitable activities to serve the state'shealth care needs. (7) Every 501(c)(3) or 501(c)(4) organization that receives aset-aside under this section shall provide the director and theAttorney General with an annual report that includes a detaileddescription of its grant-making and other charitable activitiesrelated to its use of the set-aside received from the health careservice plan. The annual report shall be made available by thedirector and the Attorney General for public inspection,notwithstanding the California Public Records Act (Chapter 3.5(commencing with Section 6250) of Division 7 of Title 1 of theGovernment Code). Each organization shall submit the annual reportfor its immediately preceding fiscal year within 120 days after theclose of that fiscal year. When requested by the director or theAttorney General, the organization shall promptly supplement thereport to include any additional information that the director or theAttorney General deems necessary to ascertain compliance with thisarticle. (8) The plan has satisfied the requirements of this chapter, and adisciplinary action pursuant to Section 1386 is not warrantedagainst the plan. (d) The plan shall not file any forms or documents required by theSecretary of State in connection with any conversion orrestructuring until the plan has received an order of the directorapproving the conversion or restructuring, or unless authorized to doso by the director.1399.73.  (a) An application for a conversion or restructuring shallcontain the information the director may require, by rule or order. (b) The director shall charge a health care service plan anapplication filing fee. The fee for filing an application shall bethe actual cost of processing the application, including the overheadcosts. The filing fee shall include the costs of undertaking theactivities described in subdivisions (c), (d), and (e) of Section1399.74. (c) The director may contract with experts or consultants toassist the director in reviewing the application. Contract costsshall not exceed an amount that is reasonable and necessary to reviewthe application. Any contract entered into under this subdivisionshall be on a noncompetitive bid basis and shall be exempt fromChapter 2 (commencing with Section 10290) of Part 2 of Division 2 ofthe Public Contract Code. The applicant shall promptly pay thedirector, upon request, for all contract costs.1399.74.  (a) By July 1, 1996, the director shall adopt regulations,on an emergency basis, that specify the application procedures andrequirements for the restructuring or conversion of nonprofit healthcare service plans. This subdivision shall not be construed to limitor otherwise restrict the director's authority to adopt regulationsunder Section 1344, including, but not limited to, any additionalregulations to implement this article. (b) Upon receiving an application to restructure or convert, thedirector shall publish a notice in one or more newspapers of generalcirculation in the plan's service area describing the name of theapplicant, the nature of the application, and the date of receipt ofthe application. The notice shall indicate that the director will besoliciting public comments and will hold a public hearing on theapplication. The director shall require the plan to publish a writtennotice concerning the application pursuant to conditions imposed byrule or order. (c) Any applications, reports, plans, or other documents underthis article shall be public records, subject to the CaliforniaPublic Records Act (Chapter 3.5 (commencing with Section 6250) ofDivision 7 of Title 1 of the Government Code) and regulations adoptedby the director thereunder. The director shall provide the publicwith prompt and reasonable access to public records relating to therestructuring and conversion of health care service plans. Access topublic records covered by this section shall be made available nolater than one month prior to any solicitation for public comments orpublic hearing scheduled pursuant to this article. (d) Prior to approving any conversion or restructuring, thedirector shall solicit public comments in written form and shall holdat least one public hearing concerning the plan's proposal to complywith the set- aside and other conditions required under thisarticle. (e) The director may disapprove any application to restructure orconvert if the application does not meet the requirements of thischapter or of the Nonprofit Corporation Law (Div. 2 (commencing withSec. 5000), Title 1, Corp. C.), including any requirements imposed byrule or order of the director.1399.75.  (a) This article shall apply to the restructuring orconversion of nonprofit mutual benefit health care service plans tothe extent these plans have held or currently hold assets subject toa charitable trust obligation, as determined by the director. (b) Nonprofit mutual benefit health care service plans that do nothave, or have only a partial, charitable trust obligation, and thatintend to convert or restructure their activities shall, prior to theconversion or restructuring, secure approval from the director. (c) Prior to approving a mutual benefit health care service planrestructuring or conversion under subdivision (b), the director shallfind that the plan has complied with its noncharitable obligationsincluding, but not limited to, any obligations set forth in itsarticles of incorporation regarding the dedication and distributionof assets. (d) The director, in carrying out the department'sresponsibilities under subdivision (c), may apply, to the extentappropriate in each case as determined by the director, thebeneficiary protections authorized in this act, including, but notlimited to, protections concerning the fair market value of assets,the avoidance of conflicts of interest, and the avoidance of undueinfluence or control, with respect to a mutual benefit plan'sproposed disposition of assets. (e) Nothing in this section shall be construed to limit thedirector's, Attorney General's, or a court's authority under existinglaw to impose charitable trust obligations upon any or all of theassets of a mutual benefit corporation or otherwise treat a mutualbenefit corporation in the same manner as a public benefitcorporation.1399.76.  This article shall not apply to a nonprofit health careservice plan restructure or conversion that has been submitted as amaterial modification to the department for review and approval priorto May 16, 1995.