On appeal from the New Jersey Individual Health Coverage Program Board of Directors.
Before Judges Stern, Eichen and Parker.
The opinion of the court was delivered by: Stern, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Approved for Publication June 25, 2002
CIGNA Health Care of Northern New Jersey, CIGNA Health Care of New Jersey and Connecticut General Life Insurance Company (collectively referred to as "appellants" or "CIGNA") appeal from the re-adoption on August 7, 1998 of the Individual Health Coverage Program ("IHCP" or "IHC Program") regulations by the New Jersey Individual Health Coverage Program Board of Directors ("Board"). *fn1 We granted U.S. Life Insurance Company the right to intervene. *fn2
CIGNA argues (1) because the IHCP is "an association of private health insurers and not a state agency," the Board "is not authorized to promulgate regulations," (2) "the readoption with amendments of N.J.A.C. 11:20-1 et seq. is invalid because the IHC program failed to follow the legislatively mandated procedure for adopting these rules and procedures," (3) "the IHC Program's good faith marketing, second-tier assessment and contested case procedures unlawfully exceed its statutory authority and conflict with the requirements of IHC Act," (4) "the IHC Program's good faith marketing and second-tier assessment requirements are arbitrary, capricious and lead to an unreasonable result" and (5) "even assuming that the IHC Program's good faith marketing condition is authorized by statute, it nonetheless fails to contain appropriate standards for carriers seeking to comply with its provisions." We hold that the Board has the power to promulgate regulations and that the "good faith marketing" regulation is valid, but that the "second-tier assessment" with respect to those carriers receiving pro rata first-tier exemptions is invalid. Our holding invalidates N.J.A.C. 11:20-2.17, as amended effective August 7, 1998, and we do not address how the Board may make up any "shortfall" with respect to any second-tier assessment actually imposed thereunder.
The Board was established by the Individual Health Insurance Reform Act, N.J.S.A. 17B:27A-2 to -16.5 ("the Act"), to oversee and regulate a program designed to make individual health care coverage available and affordable for those not in a group. *fn3 See, generally, In the Matter of Individual Health Coverage Program, 302 N.J. Super. 360, 363-66 (App. Div. 1997); Health Maintenance Org. of N.J. v. Whitman, 72 F. 3d 1123, 1124-26 (3d Cir. 1995). It does so by assessing those health insurance carriers that do not meet their requirements of enrollment and do not show a good faith effort to do so.
CIGNA challenges the amended regulations "as an unlawful act of the Individual Health Coverage Program." Specifically, it contends that, because the program is funded only by assessments against the "health insurers members" and "no public funds are used in the mission or administration of the IHC Program, . . . the IHC Program is not a state agency and does not possess the power to promulgate the regulations at issue or to adjudicate contested cases." It further challenges the "good faith marketing precondition to obtaining a statutory pro rata exemption for the obligation of loss sharing" and the "second-tier assessment" of carriers which is designed "to redistribute among non-exempt insurers the losses not shared by exempt and pro rata exempt insurers." CIGNA argues:
In the re-adoption with amendments at issue, the IHC Program added these unlawful procedures and its contested case procedures . . . Each of these provisions exceed the IHC Program's statutory authority and conflicts with the IHC Act. Finally, the IHC Program failed to follow the specific procedures set forth in the IHC act for the taking of actions. Accordingly the IHC Program's actions are invalid. [Footnote omitted.]
CIGNA therefore asks that the "readoption should be declared null and void, the IHC Program should be directed to readjudicate the loss sharing program for every year since 1993 without the use of the ultra vires procedures, and the IHC Program should be directed to adopt its lawful procedures as a Plan of Operation pursuant to the IHC Act." CIGNA tells us that "no hardship will result from a readjudication because the IHC has yet to finally adjudicate the losses for any year since 1992."
The Board emphasizes that the legislation gave it the power to adopt regulations which it claims were drafted to "further and maximize the Legislature's intent in enacting the IHC Act - namely, to increase the availability of health- insurance coverage in the individual market across as wide a spectrum of that market as possible," that the regulations are not arbitrary and capricious, that the good faith marketing requirement provides adequate standards for compliance and that there is no basis to invalidate the regulations.
The IHCP was created pursuant to the Act, adopted in 1992, see N.J.S.A. 17B:27A-10(a), as part of a comprehensive overhaul of New Jersey's individual and small-employer health insurance market places. The main purpose of the Act "'was to ensure that all [New Jersey] citizens would receive the benefits of individual health care coverage.'" In re Individual Health Coverage Program, supra, 302 N.J. Super. at 363 (App. Div. 1997), quoting Health Maint. Org. of N.J., Inc. v. Whitman, supra, 72 F.3d at 1124-26. The Legislature found that health insurance insurers were reluctant to offer health insurance on an individual basis or "non-group basis" because of the high risks involved. Health Maint. Org., supra, 72 F. 3d at 1126. The result was that individual health insurance was prohibitively expensive for individual consumers and unprofitable for the insurance company. Ibid. The goal of the Act, therefore, was to increase the availability of individual health care coverage, spread the cost of insuring higher-risk individuals among New Jersey's entire insurance industry, reduce the cost of individual health care coverage, and increase the profitability of the individual health care market. Ibid.
As the Third Circuit explained:
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. . . . 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. [In Re Individual Health Coverage, supra, 302 N.J. Super. at 364, quoting Health Maint. Org., supra, 72 F.3d at 1125.]
We have previously concluded that the Act has "a rational purpose," In re Individual Health Coverage Program, supra, 302 N.J. Super. at 369, and that "[t]he 'pay or play' concept with respect to the individual health benefits insurance market built into the statute is a legitimate device to ensure that health insurance coverage is made available to individual residents of this state who are unable to obtain group or employer-based health coverage insurance." Ibid.
The IHCP Board consists of nine representatives, four insurance carrier representatives elected by the "members," four individual representatives appointed by the Governor with the advice and consent of the Senate, and the Commissioner of Banking and Insurance or her designee. N.J.S.A. 17B:27A- 10(b). Within ninety days after the appointment of the initial Board members, the Board was required to submit to the Commissioner "a plan of operation and thereafter, any amendments to the plan necessary or suitable to assure the fair, reasonable, and equitable administration of the [IHCP]." N.J.S.A. 17B:27A-10(d)(emphasis added). The Commissioner was granted authority to disapprove the plan of operation if "it [was] not suitable to assure the fair, reasonable, and equitable administration of the [IHCP]" and did "not provide for the sharing of program losses on an equitable and proportionate basis in accordance with" the Act. N.J.S.A. 17B:27A-10(d).
According to the Act, the Board is required to establish procedures for (1) "the handling and accounting of [IHCP] assets" and to prepare an annual fiscal report to the Commissioner; (2) the collection of assessments from IHCP "members"; (3) the approval of "coverage, benefit levels and contract forms"; (4) the imposition of an "interest penalty for late payment of an assessment", and (5) "any additional matters at the discretion of the board." N.J.S.A. 17B:27A- 10(f). In addition, the Board was given express authority to: a. assess members their proportionate share of program losses and administrative expenses in accordance with the [IHCP], and make advance interim assessments, as may be reasonable and necessary for organizational and reasonable operating expenses and estimated losses. . . ; b. establish rules, conditions, and procedures pertaining to the sharing of program losses and administrative expenses among the members of the program; c. review rate applications and form filings submitted by carriers in accordance with this act; d. define the provisions of individual health benefits plans in accordance with the requirements of this act; e. enter into contracts which are necessary or proper to carry out the provisions and purposes of this act; . . . . j. sue or be sued, including taking any legal actions necessary or proper for recovery of an assessment for, on behalf of, or against the program or a member . . . . [N.J.S.A. 17B:27A-11.] *fn4 Under the Act, all insurance companies, health service corporations and health maintenance organizations authorized or licensed to issue health benefit plans in New Jersey are "members" of the IHCP, N.J.S.A. 17B:27A-2, -4, and are required to "offer individual health benefits plans" "as a condition of issuing health benefits plans in this State." N.J.S.A. 17B:27A-4(a). *fn5 The plans shall be offered on an "open enrollment, community rated basis," N.J.S.A. 17B:27A- 4(a), "except that a carrier shall be deemed to have satisfied its obligation to provide the individual health benefits plans by paying an assessment or receiving an exemption pursuant to [N.J.S.A. 17B:27A-12]." N.J.S.A. 17B:27A-4(a). As a result, the Act provides two options by which IHCP members may fulfill their statutory obligation. Members may elect not to offer any individual or non-group health coverage. These members, however, must pay an "assessment" to reimburse the losses incurred by the members that do write such policies at a loss ("the [IHCP] losses"). N.J.S.A. 17B:27A-12(a)(2). Alternatively, a "member" that elects to offer individual health benefits coverage may obtain "an exemption from the assessment," N.J.S.A. 17B:27A-12(d)(1) "by agreeing to enroll its fair share of individuals as determined by the . . .Board." In re Indiv. Health Coverage, supra, 302 N.J. Super. at 365; N.J.S.A. 17B:27A-12(d)(1). "Carriers that seek exemptions may thus reduce or avoid assessment altogether if they meet their enrollment targets." Ibid.
The Act sets forth a formula for "the equitable sharing" of IHCP losses:
The board shall establish procedures for the equitable sharing of program losses among all members in accordance with their total market share as follows:
. . . . (2) Every member shall be liable for an assessment to reimburse carriers issuing individual health benefits plans in this State which sustain net paid losses during the two-year calculation period, unless the member has received an exemption from the board pursuant to subsection d. of this section and has written a minimum number of non-group person life years as provided for in that subsection. The assessment of each member shall be in the proportion that the net earned premium of the member for the two-year calculation period preceding the assessment bears to the net earned premium of all members for the two-year calculation period preceding the assessment. . . . [N.J.S.A. 17B:27A-12(a)(2).]
Accordingly, every member pays an assessment unless it has received an exemption by meeting its target enrollment.
The exemption, which is based on the assumption of a sufficient risk by writing individual or non-group plans, is set forth in N.J.S.A. 17B:27A-12(d), which provides:
Notwithstanding the provisions of this act to the contrary, a carrier may apply to the board . . . for an exemption from the assessment and reimbursement for losses provided for in this section. A carrier which applies for an exemption shall agree to cover a minimum number of non-group person life years on an open enrollment community rated basis, under a managed care or indemnity plan . . . . Pursuant to regulations adopted by the board, the carrier shall determine the number of non- group person life years it has covered by adding the number of non-group persons covered on the last day of each calendar quarter of the two-year calculation period, taking into account the limitations on counting Medicaid recipients and Medicare cost and risk lives, and dividing the total by eight.
. . . . (3) The minimum number of non-group person life years required to be covered, as determined by the board, shall equal the total number of non-group person life years of community rated, individually enrolled or insured persons, including Medicare costs and risk lives and enrolled Medicaid lives, of all carriers subject to this act for the two-year calculation period, multiplied by the proportion that that carrier's net earned premium bears to the net earned premium of all carriers for that two-year calculation period, including those carriers that are exempt from the assessment.
. . . . (5) . . . To the extent that the carrier has failed to cover the minimum number of non-group person life years established by the board, the carrier shall be assessed by the board on a pro rata basis for any differential between the minimum number established by the board and the actual number covered by the carrier.
(6) A carrier that applies for the exemption shall be deemed to be in compliance with the requirements of this subsection if it has covered 100% of the minimum number of non-group person life years required.
(7) Any carrier that writes both managed care and indemnity business that is granted an exemption pursuant to this subsection may satisfy its obligation to cover a minimum number of non-group person life years by issuing either managed care or indemnity business, or both. *fn6 [Emphasis added.]
Accordingly, members that satisfy their prescribed enrollment targets pay no assessment and are exempted from the assessment. N.J.S.A. 17B:27A-12(d)(6). However, as just quoted, the Act mandates that a member pay a "pro rata" assessment for any "differential between the minimum number . . . and the actual number" of "non-group" persons insured. N.J.S.A. 17B:27A-12(d)(5). When the Act was first adopted in 1992, it had a phase-in process for granting exemptions. N.J.S.A. 17B:27A-12(d)(6)(a)-(c), deleted by L. 1997, c. 146, § 6. At that time the Act provided: A carrier that applies for the exemption shall be deemed to be in compliance with the requirements of this subsection if:
(a) by the end of calendar year 1993, it has enrolled or insured at least 40% of the minimum number of ...