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In re Individual Health Coverage Program Board's Adjustment of Blue Cross and Blue Shield of New Jersey's Requests for Reimbursement of Losses for Calendar Years 1993 and 1994

August 28, 2007

IN THE MATTER OF THE INDIVIDUAL HEALTH COVERAGE PROGRAM BOARD'S ADJUSTMENT OF BLUE CROSS AND BLUE SHIELD OF NEW JERSEY'S REQUESTS FOR REIMBURSEMENT OF LOSSES FOR CALENDAR YEARS 1993 AND 1994.
HORIZON BLUE CROSS BLUE SHIELD OF NEW JERSEY, PETITIONER-APPELLANT,
v.
NEW JERSEY INDIVIDUAL HEALTH COVERAGE PROGRAM BOARD OF DIRECTORS, RESPONDENT-RESPONDENT.



On appeal from a Final Agency Decision and Administrative Order of New Jersey Individual Health Coverage Program Board of Directors, OAL Docket No. IHC 08083-02, Order No. 05-IHC-01.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued November 14, 2001

Remanded April 16, 2002

Reargued May 2, 2007

Before Judges Stern, A. A. Rodríguez and Sabatino.

Following our limited remand for a hearing on issues of waiver, Administrative Law Judge (ALJ) Hurd found that appellant, Blue Cross and Blue Shield of New Jersey (now known as "Horizon"*fn1 ), waived any claim to be reimbursed by the State Individual Health Coverage Program (the "IHCP") for $6,092,000 in certain expenses that Horizon had allegedly incurred in calendar years 1993 and 1994. On November 4, 2004, the IHC Board of Directors ("the IHC Board") adopted the ALJ's recommendation.

Horizon now appeals the IHC Board's final administrative decision. We affirm.

I.

As our prior opinion of April 16, 2002 (A-4020-98T1) explains, Horizon provides individual health coverage to New Jersey residents and is consequently a member of the IHCP. The Legislature created the IHCP in 1992 to help assure that citizens in our State would receive the benefits of individual health care coverage. See N.J.S.A. 17B:27A-2 to -16.5 ("the IHCA"). Members of the IHCP that provide health coverage pursuant to the terms of the program are allowed to seek reimbursement from the IHC Board for certain net paid losses they sustain in providing that coverage. Any such reimbursement is calculated with reference to the provider's (a) net earned premiums, (b) claims paid, and (c) administrative expenses for individual coverage issued during the applicable years. See N.J.S.A. 17B:27A-12a(1)(b). Upon receipt of a claim for reimbursement, the IHC Board may appoint independent auditors to examine the provider's books and records, see N.J.A.C. 11:20-8.8, and then makes a determination of the appropriate amount of any reimbursement.

At issue here are employee incentive expenses (known as "MICP") and deferred (computer) system development expenses (known as "CARS"), totaling $6,092,000, which Horizon asserts that it incurred in calendar years 1993 and 1994, the first two "start-up" years of the IHCP. As we noted in our April 16, 2002 opinion, Horizon omitted these expenses from the so-called "Exhibit K" certifications that it submitted to the IHCP under N.J.A.C. 11:20-8.6(b) for calendar years 1993 and 1994. The certifications for each of those years were signed by Robert Pures, Horizon's Vice President of Finance and Treasurer.

Specifically, Horizon's Exhibit K for 1993 omitted from its "net paid losses" $2,969,000 of the company's reported overall expenses of $29,404,058. As the certification, signed by Pures, stated:

The combined administrative expenses of $29,404,058, as reported to the IHC Board on the 1993 Net Paid Loss Report, have been allocated to the Individual Under Age 65 Business on a basis consistent with the prior Net Paid Loss Report and Annual Statements filed with the Commissioner of Insurance except for the fact that:

i) Employee incentive expenses of $373,000 for [Horizon] have been taken out of the reported expenses, since [Horizon] believes that they should not be subsidized by other carriers; and

ii) Amortization of deferred system development costs of $2,596,000 have been taken out of the reported expenses, since they pertain to expenditures incurred prior to 1993.

iii) Expenses reported on the 1992 Annual Statement and Paid Loss Report for Individual Under Age 65 Business were understated by $2,437,000, due to an error in preparation of Exhibit 5. This was offset by an overstatement in the reported Over Age 65 expenses. 1993 expenses are reported correctly.

Likewise, for calendar year 1994, Horizon's Exhibit K excluded $3,123,000 in employee incentive expenses and deferred system development costs. As Pures' certification for that year stated, in language virtually identical to the 1993 Exhibit K:

The combined administrative expenses of $31,009,888 as reported to the IHC Board on the 1994 Net Paid Loss Report, have been allocated to the Individual Under Age 65 Business on a basis consistent with the prior Net Paid Loss Report and Annual Statements filed with the Commissioner of Insurance. In order to be consistent with the 1993 Net Paid Loss Report the following two adjustments have been made:

i) Employee incentive expenses of $885,000 for [Horizon] have been taken out of the reported expenses, since [Horizon] believes that they should not be subsidized by other carriers; and

ii) Amortization of deferred system development costs of $2,238,000 have been taken out of the reported expenses, since they pertain to expenditures incurred in 1993.

The IHC Board arranged for the accounting firm of Deloitte & Touche ("D&T"), which already had familiarity with Horizon's books and records, to audit Horizon's 1993 and 1994 loss reimbursement claims. D&T presented a final audit report to the IHC Board in May 1996. The auditors slightly reduced Horizon's reimbursement from $54,178,827 to $54,153,372 for 1993, and from $39,976,793 to $38,081,088 for 1994. The auditors did not, however, disallow the $6,092,000 in combined expenses for MICP and CARS that Horizon had disclaimed in its Exhibit K submissions.

In May 1996, the IHC Board adopted the auditors' recommendations, except that it also determined, from its review of the written record, that Horizon had waived reimbursement of the $6,092,000 for employee incentive expenses and deferred system development expenses. Horizon then requested a hearing on the IHC Board's waiver finding. The IHC Board denied a hearing on that issue, but did allow Horizon to submit additional affidavits on the subject. After considering those affidavits, in which Horizon tried to explain why it had initially eschewed reimbursement of the expenses, the IHC Board reaffirmed its determination that such reimbursement had been waived.

Horizon also challenged the auditors' methodology in reducing its other expenses for 1993 and 1994. The IHC Board did refer that contested issue to the Office of Administrative Law. After a hearing, an ALJ found, among other things, that the audit methodology was appropriate, and consequently recommended that Horizon's challenge to it be rejected. In February 1999 the IHC Board adopted that recommendation.

Horizon appealed the IHC Board's findings of waiver and also its rejection of Horizon's challenge to the auditors' methodology. In our April 16, 2002 opinion, we affirmed the IHC Board's determination on the methodology issue. However, on the waiver issue, we reversed the IHC Board's decision to deny Horizon's request for a hearing on that subject. In particular, we perceived that sufficient disputed facts existed to warrant a hearing. See High Horizons Dev. Co. v. State of N.J., Dep't of Transp., 120 N.J. 40, 53 (1990). Consequently we remanded the matter for a hearing "solely on the waiver issue," specifically as to "whether the 1993 and 1994 certifications constituted waivers of Horizon's right to reimbursement of the employee incentive expenses and amortization of deferred system development costs."

On remand, the IHC Board transmitted the waiver issue to the OAL. The assigned ALJ, Douglas Hurd, presided over two days of testimony in October 2003 and in January 2004. ALJ Hurd also considered numerous documentary exhibits. The following is a summary of those proofs.

In general, Horizon's witnesses alleged that the insurer had decreased its overall reimbursement figures in its 1993 and 1994 Exhibit K submissions to the IHC Board for three main reasons: (1) because Horizon wanted to solidify the future of the IHCP; (2) because Horizon did not believe the IHC Board would reimburse the true amounts, since those amounts were so high; and (3) because Horizon believed the audit would confirm the overall amount that Horizon had set forth as its net paid losses, instead of reducing that amount.

For example, Horizon's deputy general counsel, Michael L.B. Kaplan, asserted in an affidavit that Horizon had decided to decrease its total claimed losses for the two years because [Horizon] was concerned that its losses were so high that claiming them in their entirety would create a hostile atmosphere among other carriers and thus endanger the future of the Program. [Horizon], in reading the IHC Board's Regulations, decided that it could not just reduce its claimed losses without providing some sort of explanation as to why it was doing so but for the same reason it decided to reduce its losses, it did not believe that it could express the true reason.

[Horizon] decided to reduce its total claimed reimbursable losses by excluding from its net loss calculation two specific types of administrative expenses, employee incentive expenses and amortized deferred system development costs. The decision [Horizon] made to exclude these expenses was based on [Horizon]'s belief and understanding that any audit of [Horizon]'s paid losses would be made on the accounting system which [Horizon] has used for years and which has been accepted by its present and past independent auditors.

. . . [Horizon]'s decision to reduce its claim for reimbursable net paid losses was made exclusively in that context and was never intended to waive [Horizon]'s entitlement to reimbursement for these expenses under changed circumstances.

The [D&T] audit of [Horizon]'s 1993 and 1994 loss reports and the IHC Board's resulting challenge to [Horizon]'s reported loss and expense figures changed all of the circumstances and assumptions under which [Horizon]'s previous submissions had been made. If [Horizon] had known that the auditors were going to create a new accounting system for [Horizon], instead of using the accounting system with which D&T was familiar, one which D&T had approved when it was [Horizon]'s own independent auditor, and thereby reduce [Horizon]'s paid losses, [Horizon] would not have attempted to reduce those claimed losses further by excluding the two items of reimbursable expenses noted above.

In that same vein, Horizon's Assistant Vice President and Controller, William Frantel, stated in an affidavit that Horizon made the decision in March, 1994 to decrease its 1993 claimed net paid losses to $54.2 million because [Horizon] desired the continued success of the IHC Board program, and was cognizant that to claim losses in excess of $57 million might cause something akin to "sticker shock[,"] and thereby potentially harm the entire IHC program.

Also, there was a recognition that because the IHC Board required that claims be reported on a paid rather than incurred basis, and given that [Horizon]'s individual enrollment was declining during the relevant time period, the individual paid claims and net paid losses would be (and were) significantly higher than the incurred amounts for the same periods, so every effort was made to lower expenses so that the net amount of ...


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