On appeal from the New Jersey Individual Health Coverage Program Board of Directors.
Approved for Publication June 26, 1997. As Corrected July 1, 1997.
Before Judges Petrella, Wallace and Kimmelman. The opinion of the court was delivered by Kimmelman, J.A.D.
The opinion of the court was delivered by: Kimmelman
The opinion of the court was delivered by
At issue are two consolidated appeals filed by First Option Health Plan of New Jersey (First Option), a health maintenance organization (HMO), contesting assessments levied upon it for the years 1994 and 1995 representing reimbursable losses and administrative expenses as administered by the New Jersey Individual Health Coverage Program (IHC Program). N.J.S.A. 17B:27A-12; N.J.A.C. 11:20-2.1. These assessments are reflected in the final administrative orders under appeal, 96-01 and 96-22, issued by the IHC Program Board of Directors (IHC Board), the entity charged with administering the IHC Program. See N.J.A.C. 11:20-2.1(6).
The IHC Program was established pursuant to the Individual Health Insurance Reform Act (IHC Act), N.J.S.A. 17B:27A-2 to -16.5, as part of a comprehensive overhaul of New Jersey's individual and small employer health insurance marketplaces. The purpose and operation of the IHC Act has been well summarized in Health Maintenance Organization of New Jersey, Inc. v. Whitman, 72 F. 3d 1123 (3d. Cir. 1995), as follows:
In response to this nation's growing health care crisis, New Jersey enacted the Reform Act to ensure that all its citizens would receive the benefits of individual health care coverage. (Individual health care coverage is coverage offered by an insurance company or health maintenance organization directly to an individual and his or her family. By increasing the availability of individual health care coverage, the State intends to reduce the number of uninsured self-employed or unemployed residents, who often do not have the option of purchasing employer-based or group health coverage).
Under the Reform Act, a non-compensated, nine-member Board of Directors "shall establish the policy and contract forms and benefit levels to be made available" . . . [N.J.S.A. ] 17B:27A-7. In 1993, the Board of Directors devised a program whereby state residents would be offered five standardized individual health plans. The program requires New Jersey health insurance companies and health maintenance organizations (collectively referred to in the Reform Act as "carriers") to offer state residents the five standardized policies as a condition of continuing to issue any type of health benefit plans in the state. See [N.J.S.A. ] 17B:27A-4[;] 17B:27A-1(a)(3)(c). Carriers were required to start offering the five plans on August 1, 1993.
The central component of the Reform Act is the requirement that all carriers in the state pay an "assessment" that is used to defray financial losses incurred by those companies that provide a disproportionate share of the "higher-risk" individual health insurance coverage in the state. In group health plans, the cost of insuring higher-risk people, individuals who require expensive medical treatment, is spread among the entire insured population. In contrast, when people are individually insured, these costs must be borne by either the individual or the insurance company. As a result, insurance sold on an individual basis may be prohibitively expensive for the consumer and unprofitable for the insurance company. Through the assessment, the Reform Act attempts to spread the cost of insuring higher-risk individuals among New Jersey's entire insurance industry in order to reduce the cost to the individual while increasing the profitability of insuring those individuals.
New Jersey carriers are required to "pay or play" with respect to the individual health insurance market. For each carrier, the Board establishes a target goal of individual policies, or more specifically "non-group" policies, that the carrier must issue in a calendar year if it wishes to obtain an exemption from the assessment. In general, a carrier's target number of non-group policies for the exemption is calculated based on the carrier's proportion of the overall state-wide health coverage market. See [N.J.S.A. ] 17B:27A-12(d)(3).
The State pools the money collected pursuant to the annual assessment and uses it to reimburse carriers who suffer losses in the individual insurance market during the calendar year. The assessment is calculated as the proportion of the carrier's "net earned premium" for the calendar year preceding the assessment in relation to the net earned premium of all carriers for the calendar year preceding the assessment. [N.J.S.A. ] 17B:27A-12(a)(2). The Reform Act uses a carrier's net earned premium as a proxy for the carrier's market share. . . . In addition, carriers are assessed their proportion of the administrative expenses incurred by the Individual Health Coverage Program. [N.J.S.A. ] 17B:7A-11(a).
[ Id. at 1124-26 (footnote omitted).]
The IHC Act requires all insurance companies, health service corporations and health maintenance organizations authorized or licensed to issue health benefits plans in New Jersey (collectively defined as "carriers"), to offer individual health benefits plans as a condition of issuing any type of health benefits plan in the State. N.J.S.A. 17B:27A-4. Concurrently, carriers issuing health benefits plans are subject to an assessment to reimburse IHC Program losses. N.J.S.A. 17B:27A-12 and N.J.A.C. 11:20-8.1 to 8.9. The assessments provide a mechanism whereby carriers offering individual health benefits plans to New Jersey residents which sustain losses on those higher risk plans are able to seek reimbursement for their losses. The collective losses of all carriers offering individual health benefits plans in a given calendar year ...