THE ATTORNEY GENERAL
ow TEXAS
April 15, 1988
Hr. Edwin J. Smith, Jr. Opinion No. JM-895
Chairman
State Board of Insurance Re: Requirements of House Bill
1110 San Jacinto Blvd. No. 677 of the 70th Legisla-
Austin, Texas 78701 ture, the Texas Continuing
Care Facility Disclosure and
Rehabilitation Act (RQ-1227)
Dear Mr. Smith:
You ask several questions concerning the Texas
Continuing Care Facility Disclosure and Rehabilitation
Act, which was adopted by House Bill No. 677 of the 70th
Legislature and codified as article 8876, V.T.C.S. It
applies to contracts for continuing care entered into on
or after September 1, 1987. V.T.C.S. art. 8876, 523. The
statute authorizes the State Board of Insurance to
regulate continuing care providers. V.T.C.S. art. 8876,
53. A continuing care retirement community provides
housing, board, care, and health related services to
elderly people who do not want to maintain their own homes
but do not need nursing home care. Texas House of
Representatives, Committee on Human Services, Interim
ReDOrt to the 70th Texas Leaislature, "Continuing Care
Communities,*' 119, 124. It generally consists of
residential facilities and a health care center and
requires a substantial entrance fee in addition to other
monthly fees in return for an assurance of a continuing
living arrangement throughout retirement. House Human
Services Committee, Bill Analysis, H.B. No. 677, 70th Leg.
(1987). Because of the considerable investment which
continuing care centers require from the elderly, House
Bill No. 677 was written to protect the consumer from loss
of his investment through fraud or mismanagement. Id.
The statute defines "continuing care" as follows:
[T]he furnishing, to an individual who is not
related by consanguinity or affinity to the
person furnishing the care, of board and
lodging, together with personal care
services, and nursing services, medical
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Mr. Edwin J. Smith, Jr. - Page 2 (JM-895)
services, or other health-related services,
regardless of whether or not the services
and the lodging are provided at the same
location, under an agreement that requires
the payment of an entrance fee and that is
effective either for the life of the indivi-
dual or for a period of more than one year.
V.T.C.S. art. 8876, 52 (2). The article authorizes the
State Board of Insurance to regulate continuing care
providers and to adopt rules and take other action
necessary to administer and enforce the act. V.T.C.S.
art. 8876, 53. Continuing care providers are required to
receive a certificate of authority from the board.
V.T.C.S. art. 8876, 54. Providers must deliver a
disclosure statement to prospective residents before
entering into a contract to provide continuing care and
must also establish an entrance fee escrow account. Id.
§a. The commissioner of insurance may place a provider
under supervision if it is bankrupt or otherwise is
financially unable to meet its obligations for continuing
care. Id. 511. There are provisions for rehabilitation
or liquidation. Section 13 gives to
[e]ach resident receiving care in a portion
of a facility licensed to provide nursing
home care, personal care, or custodial
care . . . all statutory rights provided to
nursing home, personal care, or custodial
care residents.
The substantive requirements may be enforced by civil and
criminal penalties and by equitable proceedings. Id.
4515-18.
You first ask about the applicability of the certi-
ficate of authority requirement. This provision states as
follows:
Sec. 4. (a) After September 1, 1987, no
provider shall offer to the public a con-
tract for continuing care, or construct or
acquire a facility for the purpose of
providing continuing care, without obtaining
a certificate of authority from the board. ?
(b) The commissioner shall promulgate
rules and regulations setting forth the
information to be submitted by an applicant
for a certificate of authority.
p. 4398
Mr. Edwin J. Sm,ith, Jr. - Page 3 (JM-895)
(c) The commissioner, upon receipt of an
application for a certificate of authority,
shall conduct a hearing on the application
in accordance with the Administrative
Procedure and Texas Register Act (Article
6252-13a, Vernon's Texas Civil Statutes).
The commissioner shall grant the application
if he finds that the applicant or the facil-
ity is financially sound: that the comp-
etence, experience, and integrity of the
applicant, its board of directors, its
officers or its management is such that it
would be in the interest of the public to
issue a certificate of authority; and that
the applicant is capable of complying with
the provisions of this Act. The commis-
sioner may limit issuance of certificates of
authority to incorporated entities. The
commissioner shall issue an order approving
or disapproving the application within 180
days of filing.
(d) No certificate of authority issued
P by the commissioner shall be transferred to
a third party except upon approval by the
commissioner.
.(e) No holder of a certificate of
authority shall enter into a contract with a
third party for management of the facility
unless the commissioner is notified of such
contract.
(f) If a provider: (1) draws upon its
entrance fee escrow in an amount greater
than provided for in Section 8 of this Act:
(2) draws upon its reserve fund escrow in an
amount greater than provided for in Section
9 of this Act; or (3) engages in a wilful
and intentional violation of this Act, the
commissioner, after notice and hearing, may
suspend or revoke the provider's certificate
of authority, in addition to any other
remedies provided for in this Act.
(g) The commissioner shall issue a cer-
tificate of authority to any facility which
is occupied by one or more residents on
September 1, 1987, which is under con-
P struction on September 1, 1987, or which,
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Mr. Edwin J. Smith, Jr. - Page 4 U-M-895)
prior to September 1, 1987, had incurred
substantial financial obligations related to
the development of a facility. Such
certificates shall be subject to revocation
or suspension as provided for in this
section.
V.T.C.S. art. 8876.
Section 4(a) of article 8876, V.T.C.S., requires a
provider to obtain a certificate of authority if he offers
a contract for continuing care or constructs or acquires a
facility for that purpose after September 1, 1987.
Section 4(c) establishes procedures and substantive
requirements governing issuance of certificates of
authority by the insurance commissioner. Section 4(g),
however, states that "the commissioner shall issue a
certificate of authority" (emphasis added) to any facility
which is occupied, under construction, or is the subject
of substantial financial obligations by September 1, 1987.
You ask whether a facility described in section 4(g)
is required to meet the criteria of section 4(c) or
whether instead the commissioner must issue a certificate
of authority to such a facility without considering those
criteria.
Section 4(g) provides an exception from the criteria
in section 4(c) for the three categories of continuing
care facilities it describes. In each category there has
been considerable investment in a facility prior to the
effective date of article 8876. V.T.C.S. art. 8876, §23.
As shown by the use of the mandatory Btshalll* in section
4 (9) I these facilities are entitled to receive a certi-
ficate of authority from the commissioner without meeting
the substantive requirements set out in section 4(c).
Your next question involves the relationship between
section 4(g) of article 8876, V.T.C.S., and section 20,
the transition provision. Section 20 provides as follows:
Sec. 20. (a) A provider who operates a
continuing care facility that is in exis-
tence on the effective date of this Act must
comply with the disclosure and escrow
requirements imposed under this Act as
provided by this section.
(b) A provider subject to Subsection (a)
of this section must file annual revised
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Mr. Edwin J. Smith, Jr. - Page 5 W-895)
disclosure statements with the board as
provided by Section 7 of this Act beginning
P with a statement that covers the provider's
most recent fiscal year that begins on or
after September 1, 1987.
(c) A provider subject to Subsection (a)
of this section must comply with the escrow
requirements imposed under Sections 8 and 9
of this Act not later than September 1,
1990. If the commissioner determines that a
provider subject to Subsection (a) of this
section is unable to comply with this
section after making a good faith effort to
do so, the commissioner may extend the time
for compliance for a reasonable period of
time.
(d) Failure to comply with the reguire-
ments of this section constitutes a criminal
offense under Section 18 of this Act.
You ask whether the entire act as well as the rules
adopted by the State Board of Insurance apply to
facilities described by section 4(g), or only those
delayed requirements listed in section 20.
Section 20 applies to continuing care facilities that
are in existence and are being operated on September 1,
1987, the effective date of the act. House Bill No. 677
as introduced did not include the requirement that con-
tinuing care facilities obtain a certificate of authority
from the State Board of Insurance. Bill Analysis, H.B.
No. 677, m. Thus, the bill as introduced did not
include any provision like subsection 4(g) that allowed
certain facilities to receive a certificate of authority
without making the showing required by section 4(c). The
provision enacted as section 20 of article 8876, V.T.C.S.,
provided the only exception in the original bill from
compliance with the act's requirements on its effective
date. Section 4 was added as part of the Committee
Substitute to House Bill No. 677, sunra. Section 4(g)
excepts the facilities it describes only from the
substantive requirements of section 4(c); it does not
authorize those facilities to meet the statutory
requirements on the delayed basis outlined in section 20.
Section 4(g) expressly states that certificates of
authority given under its provisions "shall be subject to
revocation or suspension as provided for in this section."
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Mr. Edwin J. Smith, Jr. - Page 6 (JM-895)
V.T.C.S. art. 8876, 54(g). Subsection 4(f) provides for
suspension or revocation of a certificate of authority as
follows:
(f) If a provider: (1) draws upon its
entrance fee escrow in an amount greater
than provided for in Section 8 of this Act:
(2) draws upon its reserve fund escrow in
an amount greater than provided for in
Section 9 of this Act: or (3) enaaaes in
wilful and intentional violation of thiz
A& the commissioner, after notice and
hearing, may suspend or revoke the pro-
vider's certificate of authority, '
addition to any other remedies provided f:z
in this Act. (Emphasis added.)
V.T.C.S. art. 8876, 54(f). This provision makes clear the
legislature's intent that subsection 4(g) not exempt
facilities from provisions of the act other than that
describing the criteria for a certificate of authority.
You have not submitted any rules to us, and we can
consider the application of rules to section 4(g) faci-
lities only in general terms. Ordinarily, your rules
applicable to other continuing care facilities would also
apply to section 4(g) facilities, except for rules imple-
menting section 4(c).
Your third question recognizes that some facilities
will be covered by both the exception in section 4(g) and
the exception in section 20. If a facility is occupied by
one or more residents on September 1, 1987, it will be "in
existence on the effective date" of the act and thus will
be entitled to a certificate of authority under section
4(g) and will also have the benefit of the transition
provision: section 20. You ask whether a facility
described in section 20 includes only a facility occupied
by one or more residents on September 1, 1987, or also
includes a facility which is under construction on
September 1, 1987 and one which, prior to September 1,
1987, had incurred substantial financial obligations
related to the development of the facility.
Section 20(a) applies to "[a] provider who operates a
continuing care facility that is in existence on the
effective date of this Act. . . .*I A "continuing care
facility" is "a place in which a person undertakes to
provide continuing care to an individual.** V.T.C.S. art.
8876, 552(2), (4). U'Operate'*is defined as "to perform a
p. 4402
,
Mr. Edwin J. Smith, Jr. - Page 7 (JM-895)
function." Webster's Ninth New Collegiate Dictionary.
Section 20(a) applies to a facility where a person is
already providing continuing care as of September 1, 1987.
If the facility is merely under construction, or if the
provider has done no more than incur substantial financial
obligations toward construction of a facility, the
facility cannot be used to provide continuing care and is
not even in existence. Section 20(a) does not apply to
the latter two categories of "facility."
You next ask whether the commissioner, in imple-
menting section 4(g), has discretion to determine whether
the financial obligations related to the development of a
facility incurred prior to September 1, 1987, are "sub-
stantial." V.T.C.S. art. 8876, 54(g). Whether financial
obligations incurred are "substantial" is a fact question,
which must be answered in relevant cases before a
certificate can be issued. Section 4(b) of article 8876,
V.T.C.S., authorizes the commissioner to "promulgate rules
and regulations setting forth the information to be
submitted by an applicant for a certificate of authority."
He is to conduct a hearing on the applications submitted.
V.T.C.S. art. 8876. The commissioner has access to the
- information and the procedural framework for deciding
whether an applicant for a certificate of authority has
incurred substantial financial obligations toward the
development of a facility. This determination is not a
matter for the commissioner's unfettered discretion but
must be made in accordance with the Administrative
Procedure and Texas Register Act, article 6252-13a,
V.T.C.S. V.T.C.S. art. 8876, 54 (c) : see also V.T.C.S.
art. 6252-13a, §§3(2), (13).
You finally ask several questions about the defini-
tions of "entrance fee" and "continuing care" in the
statute. Section 2 provides as follows:
(2) 'Continuing care' means the fur-
nishing, to an individual who is not related
by consanguinity or affinity to the person
furnishing the care, of board and lodging,
together with personal care services, and
nursing services, medical services, or other
health-related services, regardless of
whether or not the services and the lodging
are provided at the same location, under an
aareement that recuires the navment of an
entrance fee and that is effective either
for the life of the indiv~idual or for a
period of more than one year.
p. 4403
Mr. Edwin J. Smith, Jr. - Page 8 (*SgS)
-,
(3) 'Entrance fee' means an initial or
deferred transfer of money, other
property valued at an amount in z&ess of
three months' rent, made, or promised to be
made as full or partial consideration for
acceptance by a provider of a specified
individual as a resident in a facility.
(Emphasis added.)
V.T.C.S. art. 8876, 52.
You ask:
Does the use of an agreement that is of
less than one years' duration, including a
month-to-month contract, but which is
guaranteed renewable by the resident,
subject a facility to regulation under the
act?
Any renewal provision must be evaluated according to its
language and its function in the context of the whole
contract. For example, a renewal provision which provides
for automatic renewal every month in the absence of notice ?
by the resident or one which provides for renewal on the
receipt of each rent check could in effect be a contract
for the life of the resident. The significance of such
provisions should be determined on a case by case basis by
the commissioner or the board in the exercise of their
enforcement powers under the statute. See V.T.C.S. art.
8876, 5516, 17.
You next ask:
Does the charging of an upfront fee
greater than the amount of three months'
rent, but which is called an 'initial fee,'
'deposit,' or 'application fee' and is fully
or partially refundable, subject a facility
to regulation under the act?
If the fee fits the definition found in section 2(3), it
is an entrance fee, even though the provider calls it
something else. The fact that a fee is refundable does
not remove it from the definition of "entrance fee."
Article 8876, V.T.C.S., contemplates that some providers
might charge an entrance fee that is fully or partly
refundable. Section 6(g)(4) requires that a disclosure
statement set out
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a
Mr. Edwin J. Smith, Jr. - Page 9 (JM-895)
P
the conditions, if any, under which all or
part of the entrance fee is refundable on
- cancellation of the contract by the provider
or by the resident, or in the event of the
death of the resident. . . .
V.T.C.S. art. 8876, 56(g)(4).
You next ask:
Does the charging of an entrance fee less
than the amount of three months' rent with
an additional lump sum fee payable annually,
the aggregate of which would be greater than
three months' rent, subject a facility to
regulation under the act?
An entrance fee includes an "initial or deferred
transfer" of money or other property as consideration for
acceptance of a specified individual as a resident in a
facility. If the additional lump sum fee is part of the
consideration for accepting the individual as a resident,
it is an "entrance fee" even though its payment is
deferred.
You next ask:
Does the act impose any duty on the State
Board of Insurance or the commissioner to
review a facility's arrangements for the
purpose of determining applicability of the
act to that facility?
We understand your question to relate to financial
and contractual arrangements of continuing care providers,
and not to the physical premises of continuing care
facilities. The statute imposes the following duty on the
State Board of Insurance:
Sec. 3. The State Board of Insurance
shall regulate continuing care providers as
provided by this Act. The board may adopt
rules and take other action as necessary to
administer and enforce this Act. (Emphasis
added.)
V.T.C.S. art. 8876, 53. The board has a mandatory duty to
enforce this statute to protect consumers from the loss of
investment that might occur through fraud or mismanage-
ment. We cannot tell you, as a matter of law, how to
p. 4405
Mr. Edwin J. Smith, Jr. - Page 10 (a895)
exercise your powers and carry out your duties under
article 8876, V.T.C.S. That is a matter for the board's
discretion. We note, however, that the board has been
given power to make rules and regulations, as well as
considerable authority to require the submission of
information necessary to carry out its responsibilities.
See. e.a., V.T.C.S. art. 8876, 54(c) (information to be
submitted by an applicant for a certificate of authority):
555-7 (recording requirements); 516 (conduct of investiga-
tions, subpoena power). See also V.T.C.S. art. 8876, 5511,
17 (power to act on investigation prompted by complaint).
We also point out that some provisions state how
particular powers shall be exercised. For example, the
commissioner shall conduct a hearing on an application for
a certificate of authority in accordance with the Adminis-
trative Procedure and Texas Register Act, and shall grant
the certificate on certain fact findings. V.T.C.S. art.
8876, 54(c). In addition, with respect to the requirement
that providers file a disclosure statement and revised
disclosure statements with the State Board of Insurance,
[t]he commissioner shall review the dis-
closure statement for completeness but shall
not be required to review the disclosure
statement for accuracy.
V.T.C.S. art. 8876, 57(c).
Your last question is as follows:
The definitions of 'continuing care' and
'entrance fee' state five elements that
describe the type of facilities to be regu-
lated under the Act. These five elements are
as follows:
(1) furnishing board:
(2) furnishing lodging:
(3) furnishing personal care services,
and either nursing services, medical ser-
vices, QE other health-related services:
(4) an agreement that is effective
either for the life of an individual x for
a period of more than one year: &
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,
c,
Mr. Edwin J. Smith, Jr. - Page 11 M-895)
,
(5) requirements of an entrance fee
(money or property of value in excess of
three months' rent) in the agreement.
Must a facility meet all five requirements in
order to be subject to this act?
Your question essentially tracks the definitions of
"continuing care" and "entrance fee" that are set out in
the statute. See V.T.C.S. art. 8876, §2(2), (3). We
therefore answer your question in the affirmative: the
five elements you set out must be present for a facility
to be a continuing care facility subject to regulation
under the statute. Whether those five elements are
present in a given facility must be decided in the context
of all relevant facts and circumstances. Of course, it is
the substance of the agreement, not the form, that is
determined, and subterfuges will not avoid the statute.
SUMMARY
A continuing care facility described in
section 4(g) of article 8876, V.T.C.S., 1s
/c- entitled to receive a certificate of authority
without meeting the criteria found in section
4(c) of that statute. Except for the section
4(c) criteria, the entire statute becomes
applicable on its effective date to section
4(g) facilities. If a facility is merely
under construction on September 1, 1987, or if
the provider has done no more than incur sub-
stantial financial obligations toward con-
struction of a facility, the transition
provision found in section 20 is not applic-
able to it. The commissioner has authority to
make the fact findings necessary to implement
section 4(g) of article 8876, V.T.C.S.
JIM MATTOX
Attorney General of Texas
MARY KELLER
First Assistant Attorney General
LOU MCCREARY
- Executive Assistant Attorney General
p. 4407
Mr. Edwin J. Smith, Jr. - Page 12 UM-895)
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Susan L. Garrison
.Assistant Attorney General
p. 4408