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In re 14

Decided: March 16, 1990.


On appeal from the Department of Insurance.

Pressler, Long and Gruccio. The opinion of the court was delivered by Pressler, P.J.A.D.


The Public Advocate appeals from a final order entered by the Commissioner of Insurance on January 10, 1990, approving an average 24.6 percent increase in the rates Blue Cross and Blue Shield of New Jersey, Inc. (BCBS) may charge for all of its non-group contracts. The primary thrust of the Public Advocate's challenge attacks the Commissioner's approval of a demographic rating system for non-group subscribers. The Public Advocate contends that demographic rating contravenes the New Jersey Constitution's equal protection guarantees, public policy, and the BCBS enabling statute. We agree that the enabling statute N.J.S.A. 17:48E-1, et seq., adopted in 1985 and amended in 1988, does not authorize BCBS's asserted right to depart from its historical community rating of non-group contracts. Consequently the Commissioner was without authority to approve rates for those contracts based on any other rating scheme. We therefore reverse the order appealed from.

An understanding of the narrow issue on which we base our decision requires a brief foray into the statutory background and business practices of BCBS. Prior to the adoption of N.J.S.A. 17:48E-1, et seq., by L.1985, c. 236, the statutes authorized separate hospital service corporations and medical service corporations. N.J.S.A. 17:48-1, et seq., and N.J.S.A. 17:48A-1, et seq., respectively. These statutes provided for the formation of non-profit corporations to be operated for the benefit of their subscribers. Blue Cross of New Jersey and Blue Shield of New Jersey were the only corporations ever organized under this legislation, and their investment with the public interest, as intended by the statutes, has never been in doubt. Thus, in Borland, et al. v. Bayonne Hospital et al., 122 N.J. Super. 387, 300 A.2d 584 (Ch.Div.1973), aff'd 136 N.J. Super. 60,

344 A.2d 331 (App.Div.1975), aff'd 72 N.J. 152, 369 A.2d 1 (1977), cert. den. 434 U.S. 817, 98 S. Ct. 56, 54 L. Ed. 2d 73 (1977), the court construed N.J.S.A. 17:48-1 et seq. as

designed particularly to accomplish the purpose of a broad-based community health program, i.e., to satisfy the needs of the hospitals and the community as a whole through a partnership between hospitals and a non profit prepayment plan. [122 N.J. Super. at 398, 300 A.2d 584]

After quoting the observation of the Final Report of the New Jersey Blue Cross Rate Study Commission that "[the] basic philosophy of Blue Cross has always been that of constant progress toward the goal of complete protection against the unpredictable costs of hospital services for all the people of the community," the court further explained that:

The goals and objectives of this partnership are: (a) to provide to the public a payment-in-advance method for financing care provided by hospitals and to guarantee payment to the hospitals; (b) to make hospital care needed by the public financially accessible to the largest number of people at the lowest possible cost, and (c) to help the community carry the social and economic burden created when people are unable to pay for the necessary care rendered by hospitals. [ Id. at 399, 300 A.2d 584]

And in affirming the lower courts in Borland, Justice Sullivan began with the proposition that Blue Cross, in its organization and operation is "clearly * * * affected with a public interest." 72 N.J. at 158, 369 A.2d 1. See also, reiterating the essentially public mission of Blue Shield, Radiological Society of N.J. v. Sheeran, 175 N.J. Super. 367, 375, 418 A.2d 1300 (App.Div. 1980), certif. den. 87 N.J. 311, 434 A.2d 66 (1981).

In 1985, the Legislature enacted the Health Service Corporations Act, N.J.S.A. 17:48E-1, et seq., which, in effect, provided for the merger of Blue Cross and Blue Shield into a single corporate entity.*fn1 BCBS was incorporated in February 1986 under that statute as the only health service corporation in this State, replacing the two separate entities.

The public purposes assigned to a health service corporation established under N.J.S.A. 17:48E-1, et seq., are identical to those which had been committed to the separate predecessor corporations. BCBS continues as a non-profit corporation operated for the benefit of its subscribers and enjoying state tax-exempt status. N.J.S.A. 17:48E-3(a),-41. Moreover, a health service corporation is required to "maintain a continuous open enrollment period, providing coverage to persons who are otherwise unable to obtain hospital, medical-surgical, or major medical coverage." N.J.S.A. 17:48E-3(d). Its rates are not permitted to be "excessive, inadequate, or unfairly discriminatory . . . ." N.J.S.A. 17:48E-27. BCBS is, consequently, the health insurer of last resort, enabled to perform this mission not only by reason of its non-profit, tax-exempt status, which affords it a substantially greater leeway than commercial insurers have both in respect of coverage eligibility and in contract rates, but also by reason of the provider discounts it receives from hospitals, see Borland, supra, and by reason of its controlled administrative expenses resulting from the restrictions and limitations imposed by N.J.S.A. 17:48E-17.

BCBS, like its predecessors, offers two basic types of contracts, group and non-group. There are three categories of non-group contracts, those covering a single individual, those covering a single parent and children, and those covering families. Hospital, medical-surgical and major medical coverages are available to each of these categories. There are additional subcategories. First, there is so-called complementary coverage and non-complementary coverage. Complementary coverage, which supplements Medicare, offers three types of contracts, denominated, in ascending order of benefits, BCBS 65, Select and Super 65. Non-complementary coverage is available to "regular" subscribers, those who were formerly group members ("left group"), students, and high risk subscribers ("Coop"). BCBS also offers two higher benefit packages it denominates as "Medallion" and "Blue Care." The rate increase approval now before us encompasses all these non-group contracts,

also referred to as individual contracts, community contracts and consumer contracts. There are presently outstanding some 425,000 such contracts covering nearly 600,000 people.

Historically, distinct rating methodologies have been statutorily prescribed for group and non-group contracts. Under the predecessor legislation, groups of 50 or more were permitted to be experience rated. That is, subject to formulas approved by the Commissioner of Insurance, each group's annual premium was effectively based on its own claim experience for the prior year. N.J.S.A. 17:48-6.9, 17:48A-7.9. Non-group contracts and contracts covering groups under 50 (small groups) were required to be community rated, that is, every subscriber within the state pays the same rate for the same coverage.*fn2 Consequently all parties agree that under the two original statutes demographic rating, that is, rating of subscribers based on statistical risk factors, was not permitted although commercial health insurers typically use such rating systems. All parties also agree that N.J.S.A. 17:48E-1, et seq., as originally enacted in 1985, adhered to the same dichotomy, namely, mandatory community rating for all non-group and small-group contracts and permitted experience rating for groups of 50 or more. The question of statutory construction now before us is whether the 1988 amendments to N.J.S.A. 17:48E-1, et seq., effected by L.1988, c. 71, eliminated the community rating mandate for non-group contracts, thereby authorizing the demographic rating scheme that the Commissioner permitted BCBS to implement.


In deciding this question, we address first the events preceding and resulting in the 1988 amendments. As this record makes clear, BCBS, like its predecessors, had operated on a financially sound basis until 1986. Its annual statements for fiscal 1986 showed an underwriting loss before investment income of $96 million and for fiscal 1987 a loss of $177 million. By the end of 1988, it reported a plan deficit of $278 million, $203 million attributed to group contracts and $75 million to non-group contracts. This deficit, however, was estimated to be reduced to $219 million by the end of 1989, $61 million of which was attributed to non-group contracts. These losses, according to consulting actuaries retained by the Commissioner, were primarily due to a combination of BCBS's actuarial miscalculations and a variety of circumstances beyond its control, including federal Medicare cutbacks that resulted in larger than anticipated rate increases allowed by the Hospital Rate Setting Commission.*fn3 BCBS's fiscal problems during this period led to the Commissioner's approval of several rate increase requests. But, as the Commissioner himself pointed out in the Final Decision 1 and Order now under review, these increases further exacerbated BCBS's financial problems by causing a large number of subscribers to drop coverage, because, as he surmised, either the coverage was too expensive for the poor or near-poor to afford or low risk subscribers were able to obtain equivalent coverage with lower rates from commercial carriers, or because of an unquantified combination of the two.

In any event, the Legislature, obviously concerned about the continued financial viability of BCBS, responded by the enactment of L.1988, c. 71 which amended N.J.S.A. 17:48E-1, et seq. The act evidently was intended both to give BCBS some immediate fiscal relief and to insure its future solvency. The first

salient 2 feature of the act was its repeal of N.J.S.A. 17:48E-17(e) and (f), which had addressed the required special contingent surplus and its replacement with a new provision, N.J.S.A. 17:48E-17.1, mandating among other provisions, the submission of a plan to the Commissioner for meeting its redefined contingent surplus requirements. The second was the amendment of N.J.S.A. 17:48E-26 to permit experience rating, based on "past or projected" experience and utilizing appropriate "claim costs and utilization trend factors" for groups of at least two -- that is, for all groups. The third was the adoption of N.J.S.A. 17:48E-27.1, providing for a form of automatic approval of rate-increase requests by requiring the Commissioner to act within 45 days after filing. The fourth was an amendment of N.J.S.A. 17:48E-26(d) permitting, subject to an automatic 20-day approval period, rate increases for both individual and group contracts not experience rated to reflect increases in hospital payment rates allowed by the Hospital Rate Setting Commission pursuant to N.J.S.A. 26:2H-4.1. The fifth and final major feature was the creation by L.1988, c. 71, § 8, not codified, 3 of a Study Commission to study Health Service Corporations and to which a specific agenda was assigned by §§ (b) and (c).

The 1988 amendments did not, in express terms, either authorize demographic rating of non-group contracts or eliminate or modify the historical, commonly understood and long-since accepted predicate of mandatory community rating of those contracts. Based on a statutory construction argument we address with specificity hereafter, BCBS nevertheless interpreted the 1988 amendments as permitting demographic rating of non-group contracts and, in November 1988, it sought a rate increase based thereon. The Public Advocate, in the rate-counsel role assigned to him by N.J.S.A. 52:27E-16 to 20, objected to this rate-setting method, but did not appeal the Commissioner's approval. On November 14, 1989, BCBS sought an additional increase, again based on demographic rating, this time asking for an average 32 percent in non-group contract rates. It is

from the Commissioner's approval of a 24.6 percent average increase so based that the Public Advocate now appeals.

A further word about demographic rating. As noted, it is a premium-setting system based 4 on statistically projected risk factors. The BCBS system is based on three demographic factors, age, gender, and place of residence. A total of 40 separate categories was established by the creation of five age classifications, the two gender classifications, and four geographical classifications, by which designated contiguous counties are grouped on a risk-predictive basis. The 40 categories are then assigned to one of five basic risk classes, designated alphabetically in ascending order of risk, from A to E. The premiums for coverage are then calculated based on the risk category to which the subscriber is assigned.

The intended effect of demographic rating is to create a premium structure that favors good statistical risks and burdens high statistical risks. The Commissioner, in his Final Decision and Order, recognized that as a consequence of demographic rating many statistically high risk subscribers, particularly the less economically advantaged, would be driven out of the BCBS pool by reason of unaffordable premiums and would consequently become uninsured. He nevertheless approved the demographic rating scheme*fn4 because he was "not convinced that demographic rating 5 is contrary to the statutory mission of Blue Cross and Blue Shield" ...

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