In Re New Jersey IHCP

• Decision Date: 10 May 2004
• Citation: 179 N.J. 570,847 A.2d 552
• Parties: In the Matter of the NEW JERSEY INDIVIDUAL HEALTH COVERAGE PROGRAM'S READOPTION OF N.J.A.C. 11:20-1 et seq.
• Court: New Jersey Supreme Court

847 A.2d 552

179 N.J. 570

In the Matter of the NEW JERSEY INDIVIDUAL HEALTH COVERAGE PROGRAM'S READOPTION OF N.J.A.C. 11:20-1 et seq.

Supreme Court of New Jersey.

Argued September 22, 2003.

Decided May 10, 2004.

Eleanor Heck, Deputy Attorney General, argued the cause for appellant and cross-respondent, Individual Health Care Coverage Program Board of Directors (Edward M. Neafsey, Acting Attorney General of New Jersey, attorney; Nancy Kaplen, Assistant Attorney General, of counsel).

John M. Pellecchia, Morristown, argued the cause for respondents and cross-appellants CIGNA Health Care of Northern New Jersey, CIGNA Health Care of New Jersey, Inc., and Connecticut General Life Insurance Company (Riker, Danzig, Scherer, Hyland & Perretti, attorneys; Mr. Pellecchia and Mary Kathryn Roberts, of counsel; Richard Edward Hamilton, on the briefs).

Thomas P. Weidner, Princeton, argued the cause for intervenor-respondent, The United States Life Insurance Company (Windels Marx Lane & Mittendorf, attorneys; Mr. Weidner and Samuel G. Destito, of counsel; Mr. Weidner and David F. Swerdlow, on the brief).

Justice ALBIN delivered the opinion of the Court.

In this case, we must decide whether the Board of Directors of the Individual Health Coverage Program (IHCP) exceeded its authority by promulgating regulations in conflict with the legislation that gave rise to the IHCP.

I.

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. In re Individual Health Coverage Program Final Admin. Order Nos. 96-01 and 96-22, 302 N.J.Super. 360, 363-64, 695 A.2d 371 (App.Div.1997) (citing Health Maint. Org. of N.J., Inc. v. Whitman, 72 F.3d 1123, 1124-26 (3d Cir.1995)). 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. See Health Maint. Org., supra,72 F.3d at 1125. 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). Id. at 1124-25. 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, In re Blue Cross and Blue Shield of N.J., 239 N.J.Super. 434, 438, 571 A.2d 985 (App.Div.1990), 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. Health Maint. Org., supra,72 F.3d at 1125.

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. Individual Health Coverage Program, supra, 302 N.J.Super. at 363, 695 A.2d 371 (citing Health Maint. Org., supra, 72 F.3d at 1124-25). 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. N.J.S.A. 17B:27A-4a. 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. Health Maint. Org., supra, 72 F.3d at 1125. In order to achieve that aim, the IHCP creates incentives for all carriers to write individual policies.

The Reform Act vests the IHCP Board of Directors (the Board or IHCP Board) with the 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. 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-10b. The Act presents insurance carriers with two choices: "pay or play." Health Maint. Org., supra,72 F.3d at 1125. To encourage insurance carriers to enter the individual health care market, the Act imposes an assessment on all carriers that fail to issue a minimum number of individual policies. See N.J.S.A. 17B:27A-12a(2); Health Maint. Org., supra,72 F.3d at 1125. The Board determines the minimum number of individual policies a carrier must issue based on its calculation of a carrier's proportional share of the overall state health insurance market.¹ A carrier that writes its minimum number of individual policies is entitled to a full exemption from the assessment. N.J.S.A. 17B:27A-12d(6).² A carrier must first apply for the initial exemption. N.J.S.A. 17B:27A-12d. If a carrier meets 100 percent of its target goal, it receives a total exemption; if it falls short of its target number, the carrier is subject to an assessment pursuant to the statutory formula. N.J.S.A. 17B:27A-12d(5), (6). A carrier that fails to issue its designated number of individual policies is assessed "on a pro rata basis for any differential between the minimum number established by the board and the actual number covered by the carrier." N.J.S.A. 17B:27A-12d(5). The purpose of the assessment is to "reimburse carriers issuing individual health benefits plans" for the losses they sustained in the previous two years. N.J.S.A. 17B:27A-12a(2).

A.

Following passage of the Reform Act, the regulations adopted in 1993 introduced the good-faith marketing requirement as a means of obtaining a pro rata assessment. 25 N.J.R. 4196. In 1994, the Board adopted regulations implementing the pro rata assessment scheme for those carriers that failed to write their required minimum number of individual policies. Those regulations established a procedure for granting and denying exemptions, a formula for assessing program losses, and a so-called second-tier assessment to recover shortfalls in the program. 25 N.J.R. 4196;-26 N.J.R. 1507-09; N.J.A.C. 11:20-9.5, 2.17.³ Six years later, the IHCP Board moved to readopt the regulations, which were set to expire in 1998. 26 N.J.R. 1507; 30 N.J.R. 3289, 3304-05. CIGNA Health Care of Northern New Jersey, CIGNA Health Care of New Jersey Inc., and Connecticut General Life Insurance Company (collectively, CIGNA) filed a written objection to the proposed regulations, which included amendments to the exemption methodology. The IHCP Board rejected CIGNA's challenge and readopted the regulations on August 4, 1998.

Pursuant to those regulations, a carrier is entitled either to a full exemption, a pro rata exemption, or no exemption. N.J.A.C. 11:20-9.5. A carrier that meets 100 percent of its target goal of individual policies receives a full exemption from the assessment. N.J.S.A. 17B:27A-12d(6); N.J.A.C. 11:20-9.5(a).⁴ A carrier that meets fifty percent or more of its target goal receives a pro rata exemption, meaning it will be assessed pro rata "based upon the percentage of the minimum number of non-group persons actually enrolled or insured by the member." N.J.A.C. 11:20-9.5(f)(1). A carrier that meets less than fifty percent of its goal, but convinces the Board that it has attempted to market individual policies in good faith,⁵ also receives a pro rata exemption. N.J.A.C. 11:20-9.5(f)(2). Finally, a carrier that fails to pass the Board's good-faith marketing test and meets less than fifty percent of its target goal receives no exemption at all. Ibid. To enable the Board to determine whether a carrier is entitled to a pro rata exemption because it has made a good-faith marketing effort, the carrier must submit a comprehensive report describing its efforts.⁶N.J.A.C. 11:20-9.6.

The regulations also create a so-called second-tier assessment, an additional assessment through which to recover shortfalls in the program created by the granting of full and pro rata exemptions.⁷ N.J.A.C. 11:20-2.17(c). The second-tier assessment regulation applies only to those carriers that fail to receive a full or pro rata exemption from the initial assessment. Ibid. Carriers that receive a pro rata exemption at the first level are not subject to the additional assessment. N.J.A.C. 11:20-2.17(c)(1)(ii).⁸ Accordingly, only those carriers that have insured less than fifty percent of their allocated share of individual policies and fail to meet the Board's good-faith marketing scrutiny are subject to the second-tier assessment.

B.

CIGNA appealed the Board's adoption of the regulations to the Appellate Division. The appellate panel first rejected the carriers' broad-based challenge to the Board's rule-making authority under the Reform Act in which CIGNA claimed that the regulations were promulgated in violation of the Administrative Procedure Act. Individual Health Coverage Program, supra, 353 N.J.Super. at 512-20, 803 A.2d 639. The panel then found that the regulation restricting the second-tier assessment solely to those carriers that failed to receive full or partial exemptions was contrary to the Reform Act, and, therefore, invalid. Id. at 523-26, 803 A.2d 639. Last, the panel upheld the good-faith marketing credit of N.J.A.C. 11:20-9.5(f)(2) and -9.6, reasoning that the credit furthered the legislative intent underlying the Reform Act by creating an incentive for carriers to market greater numbers of individual policies. Id. at 520-23, 803 A.2d 639. Nevertheless, the panel acknowledged that there was a colorable claim that...