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In re Challenges By Chubb Colonial Life Insurance Company of America

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


April 3, 2009

IN THE MATTER OF THE CHALLENGES BY CHUBB COLONIAL LIFE INSURANCE COMPANY OF AMERICA, GUARDIAN LIFE INSURANCE COMPANY, JEFFERSON PILOT LIFE INSURANCE COMPANY, JOHN ALDEN LIFE INSURANCE COMPANY, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, TIME INSURANCE COMPANY, AND UNITED STATES LIFE INSURANCE COMPANY TO THE NEW JERSEY INDIVIDUAL HEALTH COVERAGE PROGRAM'S ADOPTION OF NEW REGULATION N.J.A.C. 11:20-2.17.

On appeal from the New Jersey Individual Health Coverage Program Board of Directors.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued March 4, 2009

Before Judges Stern, Rodríguez and Payne.

In this appeal a number of health insurers challenge the Individual Health Coverage Program ("IHCP") Board's assessments for the years 1993-1996, which were promulgated after the Supreme Court's invalidation of the second-tier assessment methodology in In re N.J. Indiv. Health Coverage Program's Readoption of N.J.A.C. 11:20-1 et seq., 179 N.J. 570 (2004). The appeal is from the promulgation of N.J.A.C. 11.20-2.17, effective on December 18, 2006. Appellants contend that the Board should have reassessed for the years 1993-1996 as it did for the years 1997-2000 under the new regulations. They essentially assert that "[t]he Board's second-tier methodology [employed for years 1993-1996] was fundamentally flawed because it allowed carriers who were only entitled to a partial (or prorata) assessment exemption... to pay nothing in the second tier" and that there was "no difference in the governing law from 1993 to 2000" with respect to the general formula. They further argue that the 1997 amendment to the statute did not change the language of N.J.S.A. 17B:27A-12(d)(5) and that the Legislature did not intend to treat assessments under the pre-1997 amendment differently than subsequent assessments. Therefore, appellants ask us to vacate the amended regulation and remand to the Board with instructions to recalculate the assessments for 1993-1996 using a methodology which accords with the Supreme Court opinion and the assessments for 1997 forward.

In an unpublished opinion filed in August 2007, we concluded that L. 1997, c. 146 ("Chapter 146") and its repeal of N.J.S.A. 17B:27A-12(e) did not apply to pre-1997 loss assessments and that "there is no basis on which to conclude that regulations adopted or amended after adoption of the statutory amendments in 1997 should apply retroactively." In re Challenges by Chubb Colonial Life Ins. Co., No. A-6116-05 (App. Div. Aug. 28, 2007) (slip op. at 30). We therefore upheld the Board's second-tier methodology for 1996. See id. at 31. See generally R. 1:36-3. Appellants now argue that we "should invalidate the Board's new assessment regulation to the extent that it does not correct the 1993-1996 assessments," but our determination in In re Chubb Colonial resolved that issue. Appellants therefore argue that the regulation violates the Equal Protection Clause of the State and Federal Constitutions.

The Board, joined by intervenors Aetna Healthcare, Inc. and CIGNA Healthcare, argues that the distinctions in assessing years before and after 1997 are rational and lawful. We agree.

I.*fn1

In 1992, the Legislature created the IHCP through the Individual Health Insurance Reform Act ("the Act" or the "Reform Act"), effective November 30, 1992. N.J.S.A. 17B:27A-2 to -16.5; L. 1991, c. 161, §§ 1-17, § 21. In In re N.J. IHCP's Readoption, Justice Albin described the Act's purposes as follows:

In 1992, the Legislature enacted the Individual Health Insurance Reform Act (the Reform Act or the Act), N.J.S.A. 17B:27A-2 to -16.5, to address a looming health care crisis that was making health care coverage both unavailable and unaffordable to many of this State's residents. Before passage of the Reform Act, health insurance carriers were reluctant to enter the high-risk market of individual health care coverage because of the losses associated with offering such coverage. Those carriers followed the profits, which were to be found in issuing group coverage to employers and sizeable organizations. That grim market reality inevitably created a dearth of affordable individual health insurance coverage (also known as "non-group" coverage). At the time, under State law, Blue Cross and Blue Shield of New Jersey was "the health insurer of last resort" for the individual health insurance market, and, therefore, bore a disproportionate share of the losses associated with that market. Those losses drove up the cost of the policies to the point that many residents could no longer purchase health care for themselves and their families.

The purpose of the Reform Act was to create a market that would provide affordable individual health care coverage to self-employed and unemployed residents as well as others who did not have the option of purchasing employer-based or group health coverage. The Act created the IHCP, which mandates that all health insurance carriers "offer individual health benefits plans" as a condition of issuing health insurance in this State. The aim of the IHCP is to spread the cost of providing individual coverage among New Jersey's entire health care insurance industry, thereby making that coverage more available and affordable to consumers not insured by group policies. In order to achieve that aim, the IHCP creates incentives for all carriers to write individual policies. [In re N.J. IHCP's Readoption, supra, 179 N.J. at 573-74 (citations and footnotes omitted).]

See also id. at 574-78; In re Indiv. Health Coverage Program Final Admin. Orders Nos. 96-01 & 96-22, 302 N.J. Super. 360, 363-64 (App. Div. 1997) (quoting Health Maint. Org. of N.J., Inc. v. Whitman, 72 F.3d 1123, 1124-26 (3d Cir. 1995)) (discussion of the Act's background and purpose).

Pursuant to the Act, each health insurance carrier, as a condition of issuing health benefit plans in New Jersey, must either "offer individual health benefit plans... on an open enrollment, community rated basis," N.J.S.A. 17B:27A-4(a), or pay an annual assessment to reimburse carriers that wrote a disproportionate share of individual health policies for their net losses, N.J.S.A. 17B:27A-12(a)(2), after subtracting any full or pro-rata exemption received, N.J.S.A. 17B:27A-12(d).

The IHCP Board administers reimbursements and apportionment of losses in the individual health care market among all health insurers in proportion to their total market share of the overall health insurance market. N.J.S.A. 17B:27A-12. The Board's initial 1993-1996 loss assessments were calculated using N.J.S.A. 17B:27A-12, which has since been amended by L. 1997, c. 146, § 6, effective July 1, 1997. See L. 1997, c. 146, § 29. Before its amendment in 1997, the statute read:

The board shall establish procedures for the equitable sharing of program losses among all members in accordance with their total market share as follows:

a. (1) By March 1, 1993 and following the close of each calendar year thereafter, on a date established by the board:

(a) every carrier issuing health benefits plans in this State shall file with the board its net earned premium for the preceding calendar year ending December 31; and

(b) every carrier issuing individual health benefits plans in the State shall file with the board the net earned premium on policies or contracts... and the claims paid and the administrative expenses attributable to those policies or contracts. If the claims paid and reasonable administrative expenses for that calendar year exceed the net earned premium and any investment income thereon, the amount of the excess shall be the net paid loss for the carrier that shall be reimburseable [sic] under this act....

(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 for the previous year, 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 persons 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 calendar year preceding the assessment bears to the net earned premium of all members for the calendar year preceding the assessment.

(3) A member that is financially impaired may seek from the commissioner a deferment in whole or in part from any assessment issued by the board.... If an assessment against a member is deferred in whole or in part, the amount by which the assessment is deferred may be assessed against the other members in a manner consistent with the basis for assessment set forth in this section....

....

c. Payment of an assessment made under this section shall be a condition of issuing health benefits plans in the State for a carrier. Failure to pay the assessment shall be grounds for forfeiture of a carrier's authorization to issue health benefits plans of any kind in the State, as well as any other penalties permitted by law. [N.J.S.A. 17B:27A-12 (1996).]

As an alternative to paying the assessment, a carrier that elected to offer individual health benefits plans could request "an exemption from the assessment and reimbursements for losses" by agreeing to cover and then enrolling a proportional share of the individual coverage market, as determined by the Board. N.J.S.A. 17B:27A-12(d)(1); see also N.J.S.A. 17B:27A-12(a)(2). The level of required compliance under an exemption was phased in until the Legislature amended the Act in 1997 and required full coverage of the proportional share. See N.J.S.A. 17B:27A-12(d); L. 1997, c. 146, § 6(11)(d)(6). If the carrier fell short of its target number, the carrier was assessed "by the board on a pro rata basis for any differential between the minimum number established by the board and the actual number enrolled or insured by the carrier." N.J.S.A. 17B:27A-12(d)(5) (1996).

In addition, as it stood prior to 1997, the Act declared that no carrier was liable for an assessment that "exceed[ed] 35% of the aggregate net paid losses of all carriers" and any shortfalls would be distributed among the other non-exempt carriers. N.J.S.A. 17B:27A-12(e) (1996).*fn2

Thus, the purpose of the assessment was "to reimburse carriers issuing individual health benefits plans in this State which sustain net paid losses for the previous year, unless the member has received an exemption from the board pursuant to [N.J.S.A. 17B:27A-12(d)] and has written a minimum number of non-group persons as provided for in that subsection." N.J.S.A. 17B:27A-12(a)(2) (1996).

Significantly, in language that was originally adopted in 1992 and has not been amended thereafter, the Legislature vested the Board with regulatory authority to "establish procedures for the equitable sharing of program losses among all members in accordance with their total market share." N.J.S.A. 17B:27A-12 (emphasis added). Acting on this authorization, in 1993, the Board adopted various regulations to implement the original 1992 Act. Among other things, these regulations recognized the 35% limitation on assessments provided for in Section 12(e) of the Act ― that is, that no carrier would pay more than 35% of the total IHCP reimbursable losses. 25 N.J.R. 4183 (Sept. 7, 1993); 25 N.J.R. 4196 (Sept. 7, 1993) (adopting N.J.A.C. 11:20-9.5(e)). The regulations also provided the good-faith marketing component to the assessment process that was in effect in 1996. N.J.A.C. 11:20-9.5(b)(2) (1993) (adopted in 25 N.J.R. 4196 (Sept. 7, 1993)), renumbered N.J.A.C. 11:20-9.5(f) (26 N.J.R. 1296 (Mar. 21, 2004)); 26 N.J.R. 1509-12 (April 4, 1994); see also N.J.A.C. 11:20-9.6 (1996) (last amended prior to 1996 in 26 N.J.R. 4193-94 (Oct. 17, 1994)). Moreover, the regulations, in another subsection unchanged since originally promulgated, made clear that any carrier requesting either a full or pro-rata exemption had to agree "[n]ot to seek reimbursement" for all losses in that calendar year. N.J.A.C. 11:20-9.2(b)(3); see 25 N.J.R. 4195 (Sept. 7, 1993).

In December 1997, the Board calculated the 1996 IHCP total loss assessments based on the regulations as they stood at the time, as detailed above.*fn3 Under those regulations, N.J.A.C. 11:20-2.17 established the specific formula for assessing IHCP losses to members and set forth how the assessment would be calculated. 26 N.J.R. 1508-09 (April 4, 1994) (adoption); 26 N.J.R. 1200-02 (Mar. 7, 1994) (proposal). The Board also established what became known as "the second-tier assessment" to compensate for any shortfalls that would occur due to the Act's now-repealed provision in Section 12(e) that maxed out carrier's liability once an assessment reached 35% of the aggregate net paid losses of all carriers filing and required that other non-exempt carriers make up any shortfalls. 26 N.J.R. 1508 (Apr. 4, 1994) (adopting N.J.A.C. 11:20-2.17(c)(2) as it read in 1996). Moreover, carriers could be granted a deferral from the assessment and have their assessment amounts "apportioned to other members based on their respective adjusted market shares."

26 N.J.R. 1508 (April 4, 1994) (adopting N.J.A.C. 11:20-2:17(c) (3)).*fn4

At the time of the original 1993-1996 loss assessments, all carriers, except those granted a deferral from the assessment, were responsible for paying the first or preliminary assessment unless the Board had granted them a full exemption. 26 N.J.R. 1508-09 (Apr. 4, 1994) (adopting N.J.S.A. 11:20-2.17 as it read in 1996). Carriers that received a pro-rata exemption were only responsible for a pro-rata assessment amount. Ibid. In either case, under the pre-1997 Act, a carrier was not liable for any part of its assessment that exceeded 35% of the total reimbursable net paid losses for that calendar year. Ibid. Any shortfall that was created from these exemptions or from the 35% limitation was redistributed by a second-tier assessment, and all carriers that received a full or pro rata exemption were not liable to pay that assessment. Ibid. As a result, any shortfall created was continually redistributed among the other carriers until those members reached the 35% limit or the total reimbursable net paid losses for that calendar year were fully assessed. See ibid.

As already noted, in 1997, the Legislature amended the loss sharing portion of the Act by (1) changing the assessment cycle to a "two-year calculation period" beginning on March 1, 1999 or other date set by the Board, L. 1997, c. 146, § 6(11)(a)(1); (2) removing N.J.S.A. 17B:27A-12(e)'s 35% limitation on any carrier's share of IHCP losses, L. 1997, c. 146, § 6(11)(e); and (3) deleting N.J.S.A. 17B:27A-12(d)(6)(a)-(c)'s exemption phase-in, L. 1997, c. 146, § 6(11)(d)(6)(a)-(c).*fn5

In September 1998, the Board re-adopted its regulations with amendments. 30 N.J.R. 3289 (Sept. 8, 1998) (adoption); 30 N.J.R. 2581 (July 20, 1998) (proposal). In doing so, the Board made minor changes to N.J.A.C. 11:20-9.6's good-faith marketing requirement. 30 N.J.R. 3305 (Sept. 8, 1998); 30 N.J.R. 2599 (July 20 1998). However, it also retained the second-tier assessment and the requirement that carriers granted an exemption could not request reimbursement embodied in N.J.A.C. 11:20-2.17. 30 N.J.R. 3300-01 (Sept. 8, 1998); 30 N.J.R. 2592-94 (July 20, 1998). The 35% limitation on assessments was eliminated in light of the statutory amendment. See 30 N.J.R. 3301 (Sept. 8, 1998); 30 N.J.R. 2593 (July 20, 1998).

CIGNA and related carriers appealed from the regulations as amended and readopted in 1998, and we invalidated the second-tier assessment. In re N.J. Indiv. Health Coverage Program's Readoption of N.J.A.C. 11:20-1 et seq., 353 N.J. Super. 494, 525-26 (App. Div. 2002), aff'd in part, rev'd in part, 179 N.J. 570 (2004). In doing so, we relied on the 1997 amendment of the Act eliminating Section 12(e), which had given the Board authority to allow carriers with pro-rata exemptions to completely avoid the second-tier assessment:

In this connection, we also note that in deleting N.J.S.A. 17B:12A-12(e), the Legislature deleted reference to the fact that carriers receiving pro rata exemptions "shall be deemed to have received an exemption [for purposes of making up the shortfall] notwithstanding the fact that the carrier failed to enroll or insure the minimum number of non-group persons required for that calendar year." L. 1992, c. 161, § 11, repealed by L. 1997, c. 146, § 6, eff. July 1, 1997.....

As we have noted, although N.J.S.A. 17B:27A-12(e), repealed by L. 1997, c. 146, § 6, originally excluded all members that received any exemption, including pro rata exemptions, from paying any shortfall due to the 35% cap, the Legislature deleted that section in 1997. The Act is now clear that carriers that do not cover their minimum requirements must pay a pro-rata assessment, N.J.S.A. 17B:27A-12(d)(5). They must also contribute to reimbursement of the shortfall, particularly in light of N.J.S.A. 17B:27A-12(a)(2). [Ibid. (footnote omitted).]

However, we expressly declined "to apply our decision to the assessments made prior to [1998] or its 'two-year calculation period.'" Id. at 526. We also expressly declined to address the pre-1996 loss assessments, but permitted a further challenge before the Board. Id. at 497 n.2. Moreover we upheld the good-faith marketing regulation. Id. at 520-23.

In In re N.J. IHCP's Readoption, supra, 179 N.J. at 580-82, the Supreme Court agreed with our ruling striking down the second-tier assessment in the Act as amended in 1997. The Court declared that it was "clear" that the agency action was inconsistent with the Act. Id. at 580. Justice Albin explained that the "Act does not square with giving carriers that fail to write their target number of individual policies a full exemption from the second-tier assessment." Id. at 581. The Court wrote:

We agree with the appellate panel's thorough analysis of the infirmity of the second-tier regulation. The Reform Act provides that in given circumstances health insurance carriers issuing individual policy coverage are entitled to reimbursement for their losses. Those reimbursements are funded through assessments levied on "every" healthcare carrier unless the carrier has received an exemption from the Board pursuant to N.J.S.A. 17B:27A-12d as a result of issuing its minimum number of non-group policies. Those carriers writing their "minimum number" of individual policies are entitled to a full exemption from the first assessment pursuant to the statute, N.J.S.A. 17B:27A-12d(6), and a full exemption from the second-tier assessment pursuant to the regulation, N.J.A.C. 11:20-2.17(c). Under the Reform Act, all other carriers are subject to either pro rata or full assessments. N.J.S.A. 17B:27A-12d(5).

The current regulatory scheme permits carriers writing at least fifty percent of their target number of individual policies to receive a pro rata exemption on the initial exemption, N.J.A.C. 11:20-9.5(f)(1), and a complete exemption on the second-tier assessment, N.J.A.C. 11:20-2.17(c)(1)(ii). Thus, non-exempt carriers that write less than fifty percent of their target number and who fail to convince the Board that they marketed individual policies in good faith, are left to shoulder the entire burden of the second-tier assessment and, therefore, a disproportionate amount of the program losses. The language of the Reform Act does not square with giving carriers that fail to write their target number of individual policies a full exemption from the second-tier assessment.

A regulation that exempts carriers that meet only fifty percent of their goals from any second-tier assessment, while requiring certain carriers meeting forty-nine percent and less of their goals to bear the entire cost, is not in line with the legislative authority that mandates an "equitable sharing of program losses" among all carriers. The Reform Act provides for carriers to receive pro rata assessments based on the difference between the number of individual policies they were required to write and the number of policies actually written. The regulation is completely at odds with that statutory formula and, thus, cannot be sustained.

Moreover, the regulation arguably works as a disincentive to an insurance carrier to write 100 percent of its target enrollment because that carrier gains a second-tier assessment exemption by meeting only fifty percent of its goal. That result is contrary to the legislative aim of encouraging carriers to write policies in proportion to their fair share of the market. [Id. at 581-82 (citations and footnotes omitted).]

However, the Court expressly limited its decision to "the present methodology that restricts the class of carriers subject to the second-tier assessment in a manner contrary to the Reform Act," noting that it "affirm[ed] the Appellate Division's invalidation of N.J.A.C. 11:20-2.17 as amended effective August 7, 1998." Id. at 582 (emphasis added). The Court also reversed our judgment as to the good-faith marketing regulations and invalidated them. Id. at 583.

II.

In early 2006, as a result of the Supreme Court's opinion in In re N.J. IHCP's Readoption, the Board repealed the good- faith marketing requirement and amended other IHCP procedures, including the exemption process, calculating minimum enrollment shares or target goals, and the appeals procedure. See, e.g., 38 N.J.R. 1005(a) (Feb. 6, 2006) (administrative correction); 38 N.J.R. 311(a)-33 (Jan. 3, 2006) (adoption); 37 N.J.R. 2994(a)-3024 (Aug. 15, 2005) (proposal). Nevertheless, the regulation, N.J.A.C. 11:20-2.15(a), requiring that any dispute be filed by an IHCP member "within 20 days of receiving the notice of the assessment" did not change. See 38 N.J.R. at 318 (no change to subsection (a)).

In the regulations effective December 18, 2006, the Board also adopted a new loss assessment methodology, as embodied in N.J.A.C. 11:20-2.17, called "the adjusted net earned premium" methodology ("ANEP"), for "two-year calculation periods beginning with 1997 and 1998." 38 N.J.R. at 5383(a) (Dec. 18, 2006) (adoption); 38 N.J.R. 1159(a)-63 (Feb. 21, 2006) (proposal). Under that new methodology, pro-rata exempt carriers pay their pro-rata share of the total reimbursable net-paid-loss amount for the two-year calculation period, and carriers with a full exemption pay no assessment. N.J.A.C. 11:20-2.17 (2006) states:

(b) The IHC Program Board shall determine the preliminary total reimbursable net paid losses, if any, for each preceding two-year calculation period beginning in 1997/1998 based upon the information submitted by members....

(c) The total reimbursable net paid losses for the preceding two-year calculation period shall be the aggregate of the reimbursable net paid losses for all members... subject to any independent audit.... The loss assessment shall provide for full reimbursement of reimbursable losses, notwithstanding the granting of exemptions....

(d) Every member shall be liable for its proportional share of the total reimbursable net paid losses for the preceding two-year calculation period unless the Board has granted the member an exemption from assessments for the preceding two-year calculation period....

....

(e) The Board shall determine each member's loss assessment share by multiplying the member's market share, as determined pursuant to (e)1 below, by the total reimbursable net paid loss amount for the two-year calculation period.

1. The Board shall determine each member's market share by dividing the member's adjusted net earned premium, as determined pursuant to (e)li, (e)lii, or (e)liii below, for the two-year calculation period by the aggregate adjusted net earned premium of all members for the two-year calculation period.

i. For a member that has been granted a full exemption, the member's adjusted net earned premium shall be $0.

ii. For a member that has been granted a pro rata exemption, the member's adjusted net earned premium shall be calculated as the reported net earned premium... multiplied by (100 percent minus the percentage of the non-group enrollment target the member satisfied).

iii. For a member that has not been granted a full or pro rata exemption, the member's adjusted net earned premium shall be the same as the net earned premium....

2. Assessment amounts for members granted a deferral by the Commission, or subject to dispute by a member after the dispute is resolved in favor of the disputing member, shall be apportioned to the remaining members based on their respective market shares.

In response to many comments from the public that the Board should have applied the ANEP to all loss assessments, past and future, the Board quoted the courts' decisions in In re N.J. IHCP's Readoption and noted that neither this court nor the Supreme Court intended their decision to apply to the pre-1997 assessments. 38 N.J.R. at 5385-86. The Board stated:

The Board notes that the Court left consideration of the impact of the decision to the Board. Since the loss assessment methodology set forth in the 1998 readoption with amendments was invalidated, and the Board has not billed final reconciliations for 1997/1998 and 1999/2000, the Board's proposal applies to the 1997/1998 and 1999/2000 calculation periods as well as future calculation periods.

[35 N.J.R. at 5386 (response to comment 15).].... The Board disagrees with the commenter's statements that there is no relevant difference between the pre- and post-1997 law and that the 1993, 1994, 1995 and 1996 assessments need to be recalculated using the "adjusted net earned premium" methodology....

[35 N.J.R. at 5386 (response to comment 16).]

The commenter mistakenly understands the Supreme Court decision as having application to periods prior to the 1997/1998 calculation period. The Appellate Division wrote, "Since the appeal challenges only the 1998 readoption of, or amendments to, the regulations, we decline to apply our decision to the assessments made prior to that year or its two year calculation period." 353 N.J. Super[.] at 526. The Supreme Court of New Jersey agreed with and affirmed "Judge Stern's well-reasoned opinion striking down the second-tier assessment regulation based on its present methodology." 179 N.J. at 579 (emphasis added). The Board finds nothing in the Supreme Court decision or the decision of the Appellate Division that could be read as requiring the Board to apply the assessment methodology set forth in proposed N.J.A.C. 11:20-2.17 to periods prior to the 1997/1998 calculation period....

[35 N.J.R. at 5386 (response to comment 17).]

In March 2006, the Board recalculated the 1996 calendar-year loss assessments and mailed each IHCP member a new invoice for the "Interim Reconciliation-1996 Assessment," which resulted in the In re Chubb Colonial and related appeals concerning the interim reconciliation of the 1996 loss assessments.

Appellants did not challenge the specific amounts of those interim assessments; instead they complained that the Board had improperly used the second-tier assessment methodology that allowed both the full and pro-rata exempt members to pay nothing in the second tier. They argued that the Supreme Court and the Appellate Division in In re N.J. IHCP's Readoption had invalidated that methodology, and they wanted the Board to recalculate the 1996 assessments using the new ANEP method, that is, by making the IHCP members with pro-rata exemptions essentially pay the pro-rata amount in the second-tier. See In re Chubb Colonial, supra, slip op. at 3, 25-26. Carriers with full and pro-rata exemptions, who did not have to pay in the second tier, intervened. Id. at 3, 19.

We rejected appellants' arguments:

The Board argues that "[t]he apportionment of the second[-]tier calculation... among non-exempt IHCP [members for the 1996 loss assessment and the interim reconciliations for that year] was within [its] statutory authority." We agree. The Supreme Court's decision in In re N.J. IHCP's Readoption, supra, 179 N.J. 570, invalidating N.J.A.C. 11:20-2.17 as to post-1996 calendar-year assessments, was, like our underlying opinion in that case, based on the Legislature's 1997 amendments to the Act. Simply stated, In re N.J. IHCP's Readoption does not apply to pre-1997 loss assessments. We expressly declined to apply our holding to pre-1997 calendar-year assessments, In re N.J. IHCP's Readoption, supra, 353 N.J. Super. at 526, and the Supreme Court affirmed our "invalidation of N.J.A.C. 11:20-2.17 as amended effective August 7, 1998," In re N.J. IHCP's Readoption, supra, 179 N.J. at 582. Moreover, there is no basis on which to conclude that regulations adopted or amended after adoption of the statutory amendments in 1997 should apply retroactively to 1996. Indeed, it would be inappropriate to apply the present second-tier regulation ― N.J.A.C. 11:20-2.17 (200[6]) ― to the submissions made under regulations existing in the year of the assessments under review here, which were initially calculated prior to the amendments based on the 1997 legislation.

In any event, the 1997 repeal of Section 12(e) is critical to an understanding of the issue before us. In re N.J. IHCP's Readoption recognized that the 1997 repeal of N.J.S.A. 17B:27A-12(e) created a distinction between assessments before and after 1997. The existence of Section 12(e) in 1996 saves the second-tier assessment regulation in effect when the Board calculated the 1996 assessments and the subsequent 1996 interim reconciliation, because it prevented unlimited second-tier assessments. [Id. at 29-30.]

Moreover, we were not swayed by appellants' assertion that the Legislature's deletion of Section 12(e) was "insignificant, because the 35% cap was... never needed." Id. at 31. The fact that the Board never used the cap "does not affect the legislative scheme or the question of whether the regulations are consistent with the governing statute." Ibid. Thus, we upheld the Board's use of second-tier methodology in N.J.A.C. 11:20-2.17 (1994, readopted 1998) to calculate the 1996 interim reconciliations. Ibid.*fn6

III.

Appellants argue that the Board's assessment methodology in N.J.A.C. 11:20-2.17 (2006) is valid and "adopts a lawful calculation method... for 1997 to 2000 [biennial loss assessments]." However, they contend that the regulation is inconsistent with the IHCP's enabling statute since the Board did not write it broadly enough to cover the unlawfully calculated 1993 through 1996 annual loss assessments. They argue that In re N.J. IHCP's Readoption invalidated the secondtier assessment methodology, and it applied to that methodology for the 1993 through 1996 assessments. Thus, they ask us to order the Board (1) to amend N.J.A.C. 11:20-2.17 (2006) and have the ANEP methodology apply to all prior IHCP assessment periods, and (2) to recalculate those prior assessments.

The Board, however, argues that N.J.A.C. 11:20-2.17 (2006) is not arbitrary and that, following L. 1997, c. 146, and the courts' decisions, it properly limited application of the ANEP calculation methodology to only the post-1996 biennial loss assessments. Intervenors support the Board's arguments and also argue that the calculation methodology in N.J.A.C. 11:20-2.17 (1994, readopted in 1998), which applied to the 1993 through 1996 loss assessments, is not arbitrary or inconsistent with the Reform Act, and this court's decision in In re Chubb Colonial is fully consistent with In re N.J. IHCP's Readoption, supra, 179 N.J. at 580-85, and is dispositive of this appeal.*fn7

Our courts give "great deference" to administrative agencies when they adopt rules implementing their enabling statutes. N.J. Soc'y for the Prevention of Cruelty to Animals v. N.J. Dep't of Agriculture, 196 N.J. 366, 385 (2008). An agency regulation "is presumed to be valid and the burden is on the challenger to show either that the regulation is inconsistent with its enabling statute or is plainly arbitrary." In re N.J. IHCP's Readoption, supra, 179 N.J. at 579; see also In re Adoption of Amendments to N.J.A.C. 6:28-2.10, 3.6 & 4.3, 305 N.J. Super. 389, 401-02 (App. Div. 1997). A court may not invalidate a regulation so long as it is "within the fair contemplation of the delegation of the enabling statute." N.J. Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 561-62 (1978) (quoting S. Jersey Airways, Inc. v. Nat'l Bank of Secaucus, 108 N.J. Super. 369, 383 (1970)). Furthermore, "the grant of authority to an administrative agency is to be liberally construed in order to enable the agency to accomplish its statutory responsibilities and... courts should readily imply such incidental powers as are necessary to effectuate fully the legislative intent." Id. at 562.

However, this "presumption of validity does not attach if the regulation on its face reveals that the agency exceeded the power delegated to it by the Legislature." In re N.J. IHCP's Readoption, supra, 179 N.J. at 579. Further, "[a]dministrative regulations 'cannot alter the terms of a statute or frustrate the legislative policy.'" Ibid. (quoting Med. Soc'y of N.J. v. N.J. Dep't of Law & Pub. Safety, 120 N.J. 18, 25 (1990)). Although great weight is placed on the interpretation of legislation by the administrative agency to which its enforcement is entrusted, an agency may not give itself authority not legislatively delegated. Cooper Univ. Hosp. v. Jacobs, 191 N.J. 125, 140-41 (2007).

As already noted, in In re Chubb Colonial we found the deletion of Section 12(e) in 1997 to be "critical" and "save[d]" the second-tier assessment methodology employed while Section 12(e) was in effect, "because it prevented unlimited second-tier assessments," especially in light of the fact that some carriers would receive full or partial exemptions from the assessments. Id. at 30. We also pointed out that the Court in "In re N.J. IHCP's Readoption recognized that the 1997 repeal of [Section] 12(e) created a distinction between assessments before and after 1997." Ibid.

There is other evidence that Section 12(e) was important to the 1993 through 1996 loss assessments and that the Legislature intended a distinction between assessments before and after 1997. That is, the Reform Act in N.J.S.A. 17B:27A-12(d)(6)(a) to (c) (1992) gradually phased in the level of required compliance for full exemptions from the loss assessments, whereas Chapter 146 had no such need. A carrier could receive a full exemption from the 1993 IHCP loss assessment if it enrolled or insured at least 40% of its target number of non-group persons. N.J.S.A. 17B:27A-12(d)(6)(a). In 1994, it was 75%. N.J.S.A. 17B:27A-12(d)(6)(b). Thus, there was even greater potential for assessment shortfalls from the exemptions under the Reform Act and Section 12(e)'s 35% cap was an important protection under that scheme. Therefore, its repeal was significant and contributed to the issues which flowed from the 1998 statutory amendment and 1998 implementing regulation.

Invalidation of the second-tier assessment methodology in In re N.J. IHCP's Readoption clearly applied to loss assessments after 1996. We specifically declined to apply its invalidation to assessments made prior to the 1997-1998 period and expressly declined to address the 1996 loss assessments, In re N.J. IHCP's Readoption, supra, 353 N.J. Super. at 497 n.2, 526, and the Supreme Court limited its affirmance of "the Appellate Division's invalidation of N.J.A.C. 11:20-2.17 as amended effective August 7, 1998." In re N.J. IHCP's Readoption, supra, 179 N.J. at 582. Moreover, applying the ANEP methodology to current interim reconciliations of the older 1993 through 1996 loss assessments would be unfair to all of the IHCP members who had relied on the second-tier methodology in effect at the time the Board calculated the initial assessments for those periods. See Eastampton Ctr., LLC v. Planning Bd. of Eastampton, 354 N.J. Super. 171, 197 (App. Div. 2002) (equitable considerations apply to the time-of-decision rule).

We therefore reject the contention that N.J.A.C. 11:20-2.17 (2006) and its ANEP methodology should apply to the 1993 through 1996 IHCP loss assessments.

IV.

Finally, we reject the contention that N.J.A.C. 11:20-2.17 (2006) violates appellants' state and federal equal protection rights because the regulation and its ANEP assessment methodology do not apply to the 1993 through 1996 annual loss assessment periods. Using a rational-basis test for economic regulations, appellants argue that there is no rational relationship between any legitimate government interest and the Board's applying that regulation to loss assessment periods only after 1997, especially since no loss assessments have been finalized. They claim that "there [was] no rational basis for treating the 1993-1996 assessments differently from the 1997-2000 assessments."

The federal constitution provides that no State shall "deny to any person within its jurisdiction the equal protection of the laws." U.S. Const. amend. XIV, ¶ 1. The state right of equal protection derives from N.J. Const. art. I, ¶ 1, which provides that "[a]ll persons are by nature free and independent, and have certain natural and unalienable rights, among which are those of enjoying and defending life and liberty, of acquiring, possessing, and protecting property, and of pursuing and obtaining safety and happiness." See State v. O'Hagen, 189 N.J. 140, 164 (2007); Caviglia v. Royal Tours of Am., 178 N.J. 460, 472 (2004); Sojourner A. v. N.J. Dep't of Human Servs., 177 N.J. 318, 332 (2003). "Equal protection does not preclude the use of classifications, but requires only that those classifications not be arbitrary." Doe v. Poritz, 142 N.J. 1, 91 (1995). Under federal law, if a statute regulates a fundamental right or affects a suspect class of persons, it is subjected to strict scrutiny; if not, it is sufficient that the statute is rationally related to a legitimate governmental interest. O'Hagen, supra, 189 N.J. at 164. Under state law, our courts have rejected the tiered federal analytical framework of a strict scrutiny versus rational basis. Rutgers Council of AAUP Chapters v. Rutgers, The State Univ., 298 N.J. Super. 442, 452 (App. Div. 1997), certif. denied, 153 N.J. 48 (1998). Instead, our courts balance "three factors: (1) the nature of the right asserted; (2) the extent to which the statute intrudes upon that right; and (3) the public need for the intrusion." O'Hagen, supra, 189 N.J. at 164 (citing Sojourner A., supra, 177 N.J. at 333). Although the federal and state tests are different, they "weigh the same factors and often produce the same result." Sojourner A., supra, 177 N.J. at 333.

In our view, appellants have not been deprived of equal protection because the Board applied the loss assessment methodology in force during each assessment period equally to all carriers. Furthermore, the Board was required to distinguish between the assessments, for different years and different loss assessment periods, before and after 1997, as a result of the major differences between the Reform Act before 1997 and Chapter 146, thereafter. Chapter 146 followed the Reform Act's full exemption phase-in and repealed the mandate in Section 12(e) that reduced and limited the assessment liability of members with any type of exemption. The different statutory authority governing the program at different times warranted different loss assessment methodologies.

Affirmed.


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