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Coalition for Quality Health Care v. State Dep't of Banking and Insurance

March 4, 2002


On appeal from the New Jersey Department of Banking and Insurance, Division of Insurance.

Before Judges Conley, A. A. Rodríguez and Lisa.

The opinion of the court was delivered by: Lisa, J.A.D.



Argued January 16, 2002

In this case we consider the validity of approvals issued by the Commissioner of the Department of Banking and Insurance (Commissioner/DOBI) to precertification plans and policy forms of various insurers under the provisions of the Automobile Insurance Cost Reduction Act, L. 1998, c. 21 (AICRA) and regulations promulgated by the DOBI under AICRA. Appellants challenge the precertification plans on both procedural and substantive grounds. The challenges to the policy forms implicate provisions that establish copayments for certain diagnostic testing services but waive copayment if the insurance company's approved network is utilized, that compel submission of personal injury protection (PIP) disputes to dispute resolution, and that place restrictions on the assignment of PIP benefits. A challenge is also made to the DOBI's approval of a tier rating system that allows consideration of payment of PIP benefits arising out of a non-fault accident in charging a higher premium. We affirm the challenged actions of the DOBI and its Commissioner. However, we remand on the issue of care path diagnostic tests, noting they do not require precertification, and directing the DOBI to review the provisions in all approved plans and policies to assure their correctness and clarity in this regard and to require any modifications as may be necessary.

Appellants represent health care providers and attorneys, who contend, generally, that the asserted unlawful actions of the DOBI will adversely affect claimants injured in automobile accidents and their health care providers. Appellant Richard Callahan is an Allstate insured who presents the tier rating challenge. Amicus curiae, New Jersey State Bar Association, supports appellants' position. Although the individual insurance companies whose plans and policies are affected were served with the notice of appeal, none have participated in the proceedings before us. Their interests are represented, however, by the intervenors, National Association of Independent Insurers, American Insurance Association, Insurance Council of New Jersey, and Alliance of American Insurers.

The DOBI asserts that appellants lack standing to challenge the Commissioner's approval of the individual insurance company policy forms. Rule 4:26-1 provides that "[e]very action may be prosecuted in the name of the real party in interest. . . ." "Standing 'refers to the plaintiff's ability or entitlement to maintain an action before the court.'" In re Baby T., 160 N.J. 332, 340 (1999) (quoting New Jersey Citizen Action v. Riviera Motel Corp., 296 N.J. Super. 402, 409 (App. Div.), certif. granted, 152 N.J. 13 (1997), appeal dismissed as moot, 152 N.J. 361 (1998)).

"Entitlement to sue requires a sufficient stake and real adverseness with respect to the subject matter of the litigation . . . [and] [a] substantial likelihood of some harm." Ibid. (citation omitted). "Standing has been broadly construed in New Jersey as 'our courts have considered the threshold for standing to be fairly low.'" Triffin v. Somerset Valley Bank, 343 N.J. Super. 73, 81 (App. Div. 2001) (quoting Reaves v. Egg Harbor Tp., 277 N.J. Super. 360, 366 (Ch. Div. 1994)). Moreover, "[w]here the public interest is involved, only a slight additional private interest is necessary to confer standing." Jersey Shore Med. Center-Fitkin Hosp. v. Estate of Baum, 84 N.J. 137, 144 (1980). However, "[o]rdinarily, a litigant may not claim standing to assert the rights of a third party." Ibid.

Appellants are legal and medical professionals representing and treating automobile accident victims. The manner of treatment and compensation for care of such individuals is impacted by the Commissioner's approval of the policies. Moreover, even if appellants' interests are somewhat attenuated, in light of the importance of the issues, and the interests of the organizations' members, we are satisfied that appellants have standing to challenge approval of the policies. See Independent Energy Producers of N.J. v. N.J. Dep't of Envtl. Prot. and Energy, 275 N.J. Super. 46, 56 (App. Div.) ("Although [appellant's] interest in the [agency's] determination may be considered speculative and likened to that of a spoiler, we are satisfied that the public interest will best be served by judicial resolution of the questions presented"), certif. denied, 139 N.J. 187 (1994).


In 1972 New Jersey enacted its first "no-fault" automobile law, the New Jersey Automobile Reparation Reform Act. N.J.S.A. 39:6A-1 to -35. This law provided for mandatory PIP benefits, payable without regard to fault. N.J.S.A. 39:6A-4; New Jersey Coalition of Health Care Professionals, Inc. v. N.J. Dep't of Banking and Ins., Div. of Ins., 323 N.J. Super. 207, 215-16 (App. Div.), certif. denied, 162 N.J. 485 (1999). Its goal was to compensate a larger class of citizens than the traditional tort-based system, with "greater efficiency" and at a lower premium cost. Id. at 216 (quoting Emmer v. Merin, 233 N.J. Super. 568, 572 (App. Div.), certif. denied, 118 N.J. 181 (1989)). Inherent in the no-fault system was a limitation on conventional tort-based personal injury lawsuits. Ibid.

However, automobile insurance premiums continued to rise. In the succeeding twenty-six years, the Legislature adopted numerous provisions in an attempt to reduce insurance rates within the no- fault system. Ibid. For example in 1983, the Legislature enacted the "New Jersey Automobile Insurance Freedom of Choice and Cost Containment Act" which introduced the concept of tort options and the choice between monetary thresholds for soft-tissue injuries. Ibid.; N.J.S.A. 39:6A-8(a) (repealed 1988). In 1988, the Legislature replaced the monetary threshold with a newly defined "verbal threshold," and added a $250 medical deductible, and a 20% copayment for some medical expenses. New Jersey Coalition of Health Care, supra, 323 N.J. Super. at 217; Oswin v. Shaw, 250 N.J. Super. 461, 464 (App. Div. 1991), aff'd, 129 N.J. 290 (1992). And in 1990 the Legislature enacted the "Fair Automobile Insurance Reform Act"(FAIRA), N.J.S.A. 17:33B-1 to -63, which provided, among other reforms, for a maximum payment of $250,000 per person per accident for reasonable medical expenses, an option to make the insured's health insurance the primary source for payment of medical and hospital expenses, and a revision of the medical fee schedule provisions. New Jersey Coalition of Health Care, supra, 323 N.J. Super. at 217.

These reforms, however, were not successful, and in 1998 the Legislature enacted AICRA, which made further comprehensive changes to the no-fault automobile insurance laws in an effort to "preserve the no-fault system, while at the same time reducing unnecessary costs" which had resulted in increased premiums. N.J.S.A. 39:6A- 1.1b. The Legislature found that although New Jersey's no-fault law had "provided valuable benefits in the form of medical benefits,"

[s]ince the enactment of the verbal threshold in 1988, the substantial increase in the cost of medical expense benefits indicates that the benefits are being overutilized for the purpose of gaining standing to sue for pain and suffering, thus undermining the limitations imposed by the threshold and necessitating the imposition of further controls on the use of those benefits, including the establishment of a basis for determining whether treatments or diagnostic tests are medically necessary. . . .


The Legislature recognized that "in order to keep premium costs down, the cost of the benefit must be offset by a reduction in the cost of other coverages, most notably a restriction on the right of persons who have non-permanent or non-serious injuries to sue for pain and suffering." Ibid. In addition, the Legislature found that fraud, stemming from unnecessary medical treatments and the overutilization of medical services and diagnostic tests used to satisfy the verbal threshold, combined with an arbitration system that did not effectively eliminate payment for unnecessary treatment and tests, had directly contributed to New Jersey's high insurance costs. Ibid. The Legislature compelled an overall 15% premium cost reduction, and a 25% PIP cost reduction. N.J.S.A. 17:29A-51.

To facilitate those reductions, AICRA substantially revised the process for resolving disputed PIP claims, and amended the mandatory PIP coverages to provide for treatment in accordance with protocols, or care paths, and for the precertification of certain medical procedures, treatments, tests or other services. N.J.S.A. 39:6A-3.1, -4, and -5.1.

The Legislature directed that plans for protocols, or care paths, be submitted to the Commissioner for approval, and that

[t]he policy form . . . shall set forth the benefits provided under the policy, including eligible medical treatments, diagnostic tests and services as well as such other benefits as the policy may provide. The commissioner shall set forth by regulation a statement of the basic benefits which shall be included in the policy. Medical treatments, diagnostic tests, and services provided by the policy shall be rendered in accordance with commonly accepted protocols and professional standards and practices which are deemed to be commonly accepted as being beneficial for the treatment of the covered injury. Protocols and professional standards and practices which are deemed to be commonly accepted pursuant to this section shall be those recognized by national standard setting organizations, national or state professional organizations of the same discipline as the treating provider, or those designated or approved by the commissioner in consultation with the professional licensing boards in the Division of Consumer Affairs in the Department of Law and Public Safety. The commissioner, in consultation with the Commissioner of the Department of Health and Senior Services and the applicable licensing boards, may reject the use of protocols, standards and practices or lists of diagnostic tests set by any organization deemed not to have standing or general recognition by the provider community or the applicable licensing boards. Protocols shall be deemed to establish guidelines as to standard appropriate treatment and diagnostic tests for injuries sustained in automobile accidents, but the establishment of standard treatment protocols or protocols for the administration of diagnostic tests shall not be interpreted in such a manner as to preclude variance from the standard when warranted by reason of medical necessity.

[N.J.S.A. 39:6A-3.1a (the basic plan).]*fn1

With regard to precertification, the Legislature directed that

[t]he policy form may provide for the precertification of certain procedures, treatments, diagnostic tests, or other services or for the purchase of durable medical goods, as approved by the commissioner, provided that the requirement for precertification shall not be unreasonable, and no precertification requirement shall apply within ten days of the insured event. The policy may provide that certain benefits provided by the policy which are in excess of the basic benefits required by the commissioner to be included in the policy may be subject to reasonable copayments in addition to the copayments provided for herein, provided that the copayments shall not be unreasonable and shall be established in such manner [as not] to serve to encourage underutilization of benefits subject to the copayments, nor encourage overutilization of benefits.


To facilitate implementation of these reforms the Legislature granted the Commissioner broad powers to "promulgate any rules and regulations . . . deemed necessary in order to effectuate the provisions of this . . . act." N.J.S.A. 39:6A-1.2.

Thereafter, on November 30, 1998, in accordance with its delegated authority, the DOBI adopted N.J.A.C. 11:3-4 (Personal Injury Protection Benefits; Medical Protocols; Diagnostic Tests) and N.J.A.C. 11:3-5 (Personal Injury Protection Dispute Resolution). The regulations establish a series of medical protocols or care paths as the standard course of "medically necessary treatment" for certain soft tissue injuries of the neck and back ("identified injuries," N.J.A.C. 11:3-4.2), N.J.A.C. 11:3-4.6(a), "injuries which the DOBI thought were fraught with potential for unnecessary treatment and overutilization of benefits." New Jersey Coalition of Health Care, supra, 323 N.J. Super. at 223. These medical protocols or care paths were adopted with the assistance of a health-benefits consultant and an ad hoc committee of the professional boards. Id. at 224. "The care paths use a flow-chart method which presents a diagrammatic view of expected treatment patterns based on patient symptoms and objective evaluations by practitioners. . . . [and] contain projected utilization norms for assessing intensity and length of treatment." Id. at 223, See N.J.A.C. 11:3-4, Appendix. The care path regulations thus establish typical courses of treatment for certain common automobile-related injuries and serve as standards for measuring medical necessity, but do not "prescribe a course of conduct for a particular patient." New Jersey Coalition of Health Care, supra, 323 N.J. Super. at 224. Treatments that vary from the care paths are "reimbursable only when warranted by reason of medical necessity." N.J.A.C. 11:3-4.6(c).

Decision point review occurs at certain junctures during the treatment, as designated in the care paths, and may require a second opinion, development of a treatment plan, or case management. N.J.A.C. 11:3-4.6(b). Decision point is defined as "those junctures in the treatment of identified injuries where a decision must be made about the continuation or choice of further treatment . . . . [and] tests." N.J.A.C. 11:3-4.2. The failure to comply with decision point review procedures may result in additional copayments not to exceed 50%; however, such review does not require an affirmative response by the insurer and failure by an insurer to respond to notice of a proposed course of care path treatment, indicates that the treatment may continue. N.J.A.C. 11:3-4.7(b)3; New Jersey Coalition of Health Care, supra, 323 N.J. Super. at 225-26.

In contrast, precertification is defined as "a program, described in policy forms in compliance with these rules, by which the medical necessity of certain diagnostic tests, medical treatments and procedures are subject to prior authorization, utilization review and/or case management." N.J.A.C. 11:3-4.2. The regulations for precertification adopted by the DOBI which were in effect when the actions under review occurred (N.J.A.C. 11:3-4.8(a)) provided that "[i]nsurers may file for approval policy forms that provide for a precertification of certain medical procedures, treatments, diagnostic tests, or other services, non- medical expenses and durable medical equipment by the insurer or its designated representative." New Jersey Coalition Health Care, supra, 323 N.J. Super. at 283 (Appendix). Subsequent to the disputed actions and the filing of this appeal, that section was amended to provide that "[i]nsurers may require precertification of certain specific medical procedures, treatments, diagnostic tests, other services and durable medical equipment that are not subject to decision point review and that may be subject to overutilization." N.J.A.C. 11:3-4.8(a)(emphasis added). A new section was added which provides that "[p]recertification requirements shall be included with a decision point review plan submission but the medical procedures, treatments, diagnostic tests, durable medical equipment or other services that require precertification shall be identified separately from decision point review." N.J.A.C. 11:3-4.8(b).

Under the earlier and amended versions, these regulations prohibit a precertification requirement within ten days of the insured event, N.J.A.C. 11:3-4.8(c), require that precertification be based exclusively on medical necessity and not encourage over or under utilization of the treatment or test, N.J.A.C. 11:3-4.8(d), allow a requirement that injured persons obtain durable medical equipment directly from the insurer or its designee, N.J.A.C. 11:3- 4.8(g), and authorize inclusion in policy forms of an additional co-payment not to exceed 50% of the eligible charge for medically necessary tests, treatments, surgery, durable medical equipment and non-medical expenses for non-compliance with precertification requirements. N.J.A.C. 11:3-4.8(h).

Appellants do not appeal the regulations. In neither version did the DOBI specifically designate which procedures, services, or treatments could be subject to precertification.*fn3


Against this background, we consider the precertification issues raised by appellants. Appellants' initially attack the DOBI's approval of precertification plans on procedural grounds, asserting that in the approval process the DOBI issued and distributed an administrative rule in violation of the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -24. Substantively, appellants challenge various provisions in the precertification plans. They contend the plans are overly broad, encompassing within their scope the equivalent of all medical treatment and testing, they impermissibly equate decision point review with precertification, and they impermissibly require precertification for care path diagnostic tests. Our analysis requires that we first recount the events culminating in the Commissioner's approval of the disputed precertification plans and policy provisions.


In March and April 1999, the DOBI reviewed and approved decision point review and precertification plans submitted by five insurers: Allstate; Prudential Insurance Company (Prudential); State Farm Insurance Company (State Farm); First Trenton Indemnity Company (First Trenton); and Palisades Safety and Insurance Association (Palisades). These plans required precertification for virtually all PIP medical care. For example, Allstate required "precertification for all services, treatments and procedures, diagnostic tests, prescription supplies, durable medical equipment or otherwise potentially covered medical expense benefits."

On May 3, 1999, the Commissioner issued Bulletin No: 99-07, suspending those approvals, stating that the DOBI had received and reviewed a number of precertification plan filings pursuant to [AICRA] and the Department's rules . . . and has determined it is necessary to develop additional standards for approval of these plans.

This bulletin is intended to advise insurers that additional standards will be promulgated in the near future, which will require revisions to the documents submitted to the Department and to the procedures implementing the plans.

Some insurers have undertaken to precertify all, or virtually all, medical care provided to injured motorists either by designating in the plan that all medical treatment must be precertified or by including an exhaustive list of treatments or procedures for which precertification is required. I am not authorizing the approval of such broad precertification plans, and the precertification plans already approved with overly broad precertifications requirements are suspended and must be revised and refiled.

More precise standards for the approval of precertification plans will be promulgated by the Department shortly. In the meantime, insurers with already approved plans should prepare to promptly file amendments to your plans upon receipt of the revised standards

Meanwhile, in 1998 the appellants in this case, among others, challenged the DOBI's adoption of N.J.A.C. 11:3-4 and -5. New Jersey Coalition of Health Care, supra, 323 N.J. Super. at 214-15. We issued our opinion in that case on June 14, 1999, upholding the validity of all of the challenged regulations (except one not relevant here). Id. at 215. We held that

[t]he establishment of standard treatments and diagnostic tests established in N.J.A.C. 11:3-4 are consistent with the legislative intent to discourage the performance of unnecessary medical services. The regulations are designed to provide all necessary medical care to those injured accident victims in need of treatment. They neither deny patients access to care nor interfere with physicians' ability to practice medicine. What the regulations do, however, consistent with AICRA's objective, is to establish meaningful standards against which to measure the reimbursement of medical treatments and diagnostic tests. We conclude the regulations are authorized by AICRA's plain language and consistent with the legislative intent.

[Id. at 239.]

We further held that

[t]he establishment of basic benefits, standard treatment protocols and diagnostic tests, provided for in N.J.A.C. 11:3-4, is expressly authorized by AICRA. Not only is N.J.A.C. 11:3-4 authorized by the plain language of AICRA, it rationally serves the legislative public policy of ensuring that medically necessary care is reimbursed while placing limitations on medically unnecessary treatments and diagnostic testing; this will result in lower insurance premiums for New Jersey consumers. Appellants' criticisms of the care paths fall short of overcoming the presumption of validity and reasonableness accorded to the Department's regulations.

[Id. at 253-54.]

We did not, however, address the precertification regulations, in light of the Commissioner's decision, expressed in Bulletin 99- 07 (issued nine days prior to oral argument), to withdraw her earlier approval of certain plans and to "reconsider these procedures before issuing new directives or regulations on precertification of treatment or tests." Id. at 223.

In July 1999, the DOBI issued a short guideline memorandum, developed in the course of its ongoing discussions with insurance companies, intended to serve as guidance to insurers of acceptable uses for a pre-certification program. The guideline provided that the DOBI would approve of plans requiring precertification of: 1) tests and procedures identified in N.J.A.C. 11:3-4.5(b)*fn4 (diagnostic tests) as acceptable for use in certain circumstances; 2) non-emergency surgical procedures; and 3) "other services and supplies," including home health care, skilled nursing care, non-emergency hospital care, infusion therapy, and durable medical equipment priced over a stated dollar amount.

However, the DOBI cautioned that the

[m]andated use of pre-certification, in connection with medical treatment of injuries addressed in the Department's care paths is problematic. Decision point review already sets the manner in which treating practitioners must interact with an insurer or its representatives.

Pre-certification of an entire course of treatment involving care paths can be voluntary. No penalty co-payments should be imposed during the period of insurer review, outside examination or until a determination is communicated, while treatment may continue uninterrupted pursuant to decision point review and the care paths.

Pre-certification may also be identified for use as a tool to monitor overutilization of treatment of injuries outside of care paths. The plan should not, however, be structured too broadly. It should be limited to the kinds of injuries or treatments that are subject to overutilization. But again, the program should not be structured to interrupt care, nor to impose penalty co- payments for treatments generally unless and until approved by insurer or its representative. To apply penalty co-payments, specific treatments, services or diagnostic tests must be identified in order for the Department to assess the reasonable use of the proposed pre-certification program.

In the summer of 1999, insurers began to submit to the DOBI revised decision point review and precertification plans for approval. At that time the DOBI engaged in considerable dialogue with Parkway Insurance Company (Parkway) and Parkway's vendor, ...

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