January 12, 2011
IN THE MATTER OF THE APPEAL OF PROTECTIVE LIFE INSURANCE COMPANY OF THE INDIVIDUAL HEALTH COVERAGE PROGRAM BOARD OF DIRECTORS'
On appeal from the New Jersey Department of Banking and Insurance, Individual Health Coverage Program, Agency No. 09-1HC-02.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
FINAL DECISION DENYING REQUEST FOR INDEPENDENT ADJUDICATORY HEARING.
Argued December 15, 2010 - Decided Before Judges Fisher, Simonelli and Fasciale.
Protective Life Insurance Company (Protective) appeals a final decision of the Board of Directors (the Board) of the New Jersey Individual Health Coverage Program (the Program) that required Protective to repay with interest all its loss reimbursements and assessment credits for the two-year period between 1997 and 1998. Because the Board's determination was neither arbitrary nor capricious, we affirm.
A. Applicable Legislation
The Individual Health Insurance Reform Act of 1992, N.J.S.A. 17B:27A-2 to -56 (the Reform Act), created the Program "as part of a comprehensive overhaul of New Jersey's individual and small employer health insurance marketplaces." In re Individual Health Coverage Program Final Admin. Orders Nos. 96-01 and 96-22, 302 N.J. Super. 360, 363 (App. Div. 1997). The Act was intended to increase the availability of health care coverage by spreading the cost of insuring higher risk individuals among the entire industry. In re N.J. Individual Health Coverage Program's Readoption of N.J.A.C. 11:20-1, 179 N.J. 570, 573-74 (2004). As one court explained:
In group health plans, the cost of insuring higher-risk people, individuals who require expensive medical treatment, is spread among the entire insured population. In contrast, when people are individually insured, these costs must be borne by either the individual or the insurance company. As a result, insurance sold on an individual basis may be prohibitively expensive for the consumer and unprofitable for the insurance company.
Through the [loss] 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. [Health Maint. Org. of N.J., Inc. v. Whitman, 72 F.3d 1123, 1125 (3d Cir. 1995).]
The Program requires all authorized or licensed insurance carriers that issue health benefits plans in New Jersey to offer individual health benefits plans as a condition of issuing any type of plan within the State. N.J.S.A. 17B:27A-4. The collective losses of all such carriers in a given calendar year comprise the Program losses for that year. N.J.S.A. 17B:27A-11, -12. Each New Jersey insurance carrier is required to pay a loss assessment, which is used to defray the financial losses of those carriers that supply a disproportionate share of higher risk individual health insurance policies. Ibid. In other words, "[t]he assessments provide a mechanism whereby carriers offering individual health benefits plans to New Jersey residents which sustain losses on those higher risk plans are able to seek reimbursement for their losses." Final Admin. Orders Nos. 96-01 and 96-22, supra, 302 N.J. Super. at 364-65; see also N.J.S.A. 17B:27A-12(a)(1)(b).
The annual assessments are pooled and used to reimburse carriers that incur losses. Final Admin. Orders Nos. 96-01 and 96-22, supra, 302 N.J. Super. at 364. If a member's claims paid exceed 115% of that member's net earned premium and the net investment income earned thereon, the excess is the reimbursable net paid loss. N.J.S.A. 17B:27A-12(a)(1)(b); N.J.A.C. 11:20-8.5(e).
The Board is charged with the duty of ensuring that losses are
equitably shared by Program members. See N.J.S.A. 17B:27A-11, -12. In
meeting this obligation, the Board promulgated regulations that enable
it to audit members filing for reimbursements to guarantee the
accuracy of their reported losses. N.J.A.C. 11:20-2.8, -8.8. These
regulations require that Program members seeking reimbursement provide
specific information to the Board and its auditor. N.J.A.C.
11:20-2.8(c). With respect to any premiums earned, the Program member
must submit an Exhibit K Assessment Report (Exhibit K),*fn1
cooperate with audits and provide additional requested information.
Ibid.; N.J.A.C. 11:20-8.8(a).
B. Protective's Request
In February 1999, Protective filed an Exhibit K certifying it had no net paid losses for the 1997/1998 two-year calculation period. A few months later, Protective filed a revised Exhibit K certifying a net paid loss of $412,248. The Board confirmed receipt and advised Protective to "make available the minimum data set forth in N.J.A.C. 11:20-2.8(c) for review by the Board and its auditors . . . no later than August 18, 1999." The Board also cautioned that "[f]ailure to provide this data by that date could result in a delay in reimbursement of losses or in the loss of the carrier's right to receive reimbursement." Protective filed two more revised Exhibit Ks, the last of which was submitted in July 1999 and certified a net paid loss of $577,505.
On November 17, 1999, the Board assessed members for the 1997/1998 two-year calculation period and advised it would distribute a partial payment to members seeking reimbursement, including Protective. However, as a prerequisite to receipt of the partial payment, the Board required potential recipients to certify they understood all requests for reimbursement of losses would be audited and possibly adjusted. Protective submitted the required certification in December 1999, and the Board provided Protective with three advance payments for its asserted net losses, totaling $344,507.59, and an assessment credit for its administrative and loss assessment liabilities, which had been billed in 1999 and 2000, in the combined amount of $117,496.38.
C. The Audit of Protective's Request for Reimbursement
By letter dated September 27, 2000, the Board notified Protective that
it retained Deloitte & Touche (D&T) to conduct an audit*fn2
of members seeking reimbursement for the 1997/1998 period and
reminded Protective of the documents it would have to supply to D&T.
On March 22, 2001, D&T asked Protective to supply "schedules,
worksheets, and data files which contain underlying detail supporting
the amounts reported on Exhibit K." Protective acknowledged on August
17, 2001, that it understood the nature and scope of the services D&T
would be performing, as well as its own responsibilities.
On April 2, 2002, D&T summarized for Protective the status of the matter. D&T noted Protective's inability to provide detailed premium data to support the 1997 premiums earned amount reported. Two months later, having received no response, D&T forwarded Protective a preliminary draft of the audit and invited the submission of additional information. The draft audit noted D&T obtained a data file from Protective, which included a detailed listing, by policy, of premium information for each of the thirteen months for the period December 1997 to December 1998, but that "Company management informed us that detailed listings, by policy, were not available for premium activity for the 11-month period from January 1997 to November 1997."
Two weeks later, Protective notified D&T that because of the bankruptcy of American Chambers, its serving agent/reinsurer, "much historical information was lost." Protective advised that it could not "offer any help in further resolving the matters" referred to in D&T's preliminary draft audit.
By letter dated November 6, 2002, the Board again requested the outstanding information from Protective in order to verify the requested reimbursement but received nothing further and again reminded Protective that if its losses were not verified, the advanced reimbursements, with interest, would have to be refunded. The Board received nothing in response and D&T issued its final report, which noted "detailed listings, by policy, were not available for premium activity for the 11-month period from January 1997 to November 1997" but that "[f]or each of the 13 months in the period from December 1997 to December 1998 . . . policy level detail of premium activity was available." The report also described Protective's failure to adequately explain significant differences in premium and claims information between its Annual Statement and its Exhibit K filing.
D. The Board's Administrative Order No. 04-01 and Subsequent Events
On August 4, 2004, the Board issued Administrative Order No. 04-01, finding Protective ineligible for reimbursement for 1997/1998 based on its failure to provide sufficient proof of its asserted losses. Pursuant to N.J.A.C. 11:20-8.8(b), the Board ordered Protective to repay $514,541.62, representing the total of: advancements to Protective for 1997/1998 net paid losses ($344,507.59); loss and administrative expenses assessment credits ($117,496.38); interest ($46,155.15); and one-half of the cost of the fee for D&T ($6,382.50). Protective responded by requesting a formal hearing pursuant to N.J.A.C. 11:20-8.9 and N.J.A.C. 11:20-20.2, explaining again the American Chambers situation and asserting it "has continued its efforts to obtain additional documentation."
The Board granted Protective's request for an extension and also advised that its order was still in effect and interest was continuing to accrue. On January 11, 2005, the Board provided Protective with a twenty-day deadline to submit additional documents. Protective timely submitted a package of materials, which included: (1) its reiteration that certain records were unavailable because of American Chambers' bankruptcy*fn3 ; (2) a May 1999 report from Topel Forman, Certified Public Accountants; (3) a summary-by-state report of premiums earned by Protective for each of the twenty-four months in question, including the eleven month period starting January 1997; and (4) affidavits from two Protective employees that offered an explanation of why some of the entries in Protective's financial reports were inconsistent with entries in its Exhibit K filing. The Board forwarded these materials to D&T for its review.
Protective provided supplemental materials in response to follow-up inquiries by the Board and D&T. Specifically, D&T sought to clarify exactly what records Topel Forman reviewed in lieu of the detailed premium records missing for the eleven-month period. Topel Forman advised it conducted a random sampling of billing statements, which it claimed constituted random selections "from the entire population . . . reconciled in total to the summary reports."
At its June 28, 2005 meeting, the Board found these additional materials to be insufficient to meet the regulatory requirements but provided Protective one final opportunity to submit any additional relevant documents. A few weeks later, Protective confirmed it was unable to provide any additional documentation, but requested that the materials submitted be deemed sufficient, arguing it substantially complied with the Board's regulations. On August 10, 2005, Protective submitted a statement of material facts at issue, pursuant to N.J.A.C. 11:20-20.2(a)(1)(iv), as support for its request for a hearing.
In April of 2006, D&T requested a management representation letter*fn4 from Protective in order to complete its final report. Protective initially objected but later agreed to sign a revised version "without prejudice to its position."
Nearly eight months later, D&T sought a third version of the management representation letter that would include "minor changes." On June 8, 2009, Protective advised the Board it found D&T's requested modifications "inappropriate," "unnecessary" and "untimely" and also requested the Board reconsider AO 04-01 in light of its "substantial compliance with governing regulatory standards."
Administrative Orders And the Filing of This Appeal On June 29, 2009, the Board issued Administrative Order No. 09-IHC-01, which denied reconsideration of AO 04-01 and required Protective's payment of $621,965.01.*fn5 Protective again requested a hearing, and remitted $236,462.37, representing the $147,788.98 invoiced in March 2006, plus interest at 1.5% per month from April 2006 to the date of payment in accordance with N.J.A.C. 11:20-2.17(f)(1)(i).
On August 19, 2009, the Board issued Administrative Order No. 09-IHC-02, which denied the request for a hearing and Protective's request for reimbursement of losses for the 1997/1998 period, and ordered Protective to pay $473,334.18.
The Board also reiterated that the Topel Report was inadequate as a substitute for access to premium records that the Board found vital and concluded that Protective's failure to produce nearly half the required premium records was not a "mere technical violation of the rules." In addition, the order declared that the imposition of interest was a result of Protective's own actions in failing to pay the amounts specified in AO 04-01 and in the invoice for the 2006 reconciliation of the 1996 loss assessment.
On September 21, 2009, Protective remitted payment of $473,334.18, and filed this appeal, arguing:
I. THE BOARD'S FINAL DECISION REQUIRING PROTECTIVE TO REPAY ALL OF THE SUBJECT LOSS REIMBURSEMENTS AND ASSESSMENT CREDITS WAS ARBITRARY AND CAPRICIOUS AS THE COMPANY SUBSTANTIATED, TO THE SATISFACTION OF D&T, ITS LOSSES FOR THIRTEEN OUT OF THE TWENTY-FOUR MONTHS IN QUESTION, AND OTHERWISE SUBSTANTIALLY COMPLIED WITH THE APPLICABLE REPORTING REGULATION.
A. Protective Substantiated its Losses in Accordance with N.J.A.C. 11:20-2.8(c) for the Thirteen Month Period Between December 1997 and December 1998.
B. Protective Substantially Complied with N.J.A.C. 11:20-2.8(c) in Substantiating its Losses for the Remaining Eleven Months of the 1997/1998 Reporting Period.
II. THE UNREASONABLE AND UNNECESSARY DELAY BY BOTH THE BOARD AND D&T HAS UNFAIRLY COMPOUNDED PROTECTIVE'S INTEREST LIABILITY AND DIRECTLY VIOLATES THE LEGISLATIVE POLICY OF THE IHC ACT.
III. THE BOARD'S DECISION TO DENY PROTECTIVE OF ITS RIGHT TO AN ADJUDICATORY HEARING WAS ARBITRARY AND CAPRICIOUS, AS WELL AS SEVERELY PREJUDICIAL TO PROTECTIVE.
II Our disposition of Protective's appeal turns largely on the applicable standard of review. Once an administrative agency has rendered a final decision, our "review of that decision is a limited one." Clowes v. Terminix Int'l, Inc., 109 N.J. 575, 587 (1988). Reversal is ordinarily limited to situations where an agency's action was arbitrary, capricious, unreasonable, or not supported by credible evidence on the record as a whole. In re Taylor, 158 N.J. 644, 657 (1999); see also Brady v. Bd. of Review, 152 N.J. 197, 210 (1997); Henry v. Rahway State Prison, 81 N.J. 571, 579-80 (1980). As the Supreme Court explained: Arbitrary and capricious action of administrative bodies means willful and unreasoning action, without consideration and in disregard of circumstances. Where there is room for two opinions, action is [valid] when exercised honestly and upon due consideration, even though it may be believed that an erroneous conclusion has been reached. [Worthington v. Fauver, 88 N.J. 183, 204-05, (1982) (quoting Bayshore Sewerage Co. v. Dep't of Envtl. Prot., 122 N.J. Super. 184, 199 (Ch. Div. 1973), aff'd, 131 N.J. Super. 37 (App. Div. 1974)).]
Accordingly, a presumption of reasonableness attaches to agency decisions, Bergen Pines Cnty. Hosp. v. Dep't of Human Servs., 96 N.J. 456, 477 (1984), and where, as here, the agency's actions implicate its inherent expertise, "an even stronger presumption of reasonableness exists," IFA Ins. Co. v. N.J. Dep't of Ins., 195 N.J. Super. 200, 208 (App. Div.), certif. denied, 99 N.J. 218 (1984). This is particularly so in insurance matters, where the expertise and judgment of the agency is "allowed great weight." In re Comm'r's Failure to Adopt 861 CPT Codes, 358 N.J. Super. 135, 149 (App. Div. 2003).
In asserting a claim to reimbursement for at least the thirteen-month period for which it was able to provide supporting documentation, Protective's argument fails to account for the fact that the months making up the two-year reimbursement period are not fungible. The Board reasonably concluded it would be improper to calculate the loss reimbursement based only on a partial assessment extrapolated over the entire twenty-four-month period. This was a reasonable response to Protective's inadequate submissions.
Accuracy was essential to the Board's determinations and its insistence upon full and complete documentation for the entire twenty-four-month period was hardly "willful" or "unreasoning." Worthington, supra, 88 N.J. at 204-05 (quoting Bayshore, supra, 122 N.J. Super. at 199). Protective's claimed hardship is a product of its failure to produce the necessary records. The other Program members should not be required to bear the consequence of Protective's unfortunate inability to obtain records due to the bankruptcy of its agent.
The record also demonstrates -- as we have taken pains to demonstrate in our lengthy discussion of the proceedings -- that the Board constantly warned Protective of its obligations and repeatedly provided Protective with opportunities to meet that obligation. The Board acted neither arbitrarily nor capriciously in the procedures adopted before reaching its final determination. In short, Protective failed to overcome the presumption of reasonableness that attaches to the Board's actions. Bergen Pines, supra, 96 N.J. at 477.
We find insufficient merit in Protective's other arguments to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).