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This case can also be found at 353 N.J. Super. 494 or 803 A.2d 639.
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NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-0566-98T1
IN THE MATTER OF THE NEW JERSEY
INDIVIDUAL HEALTH COVERAGE
PROGRAM'S READOPTION OF
N.J.A.C. 11:20-1 ET SEQ.
Argued November 14, 2001 - Decided May 24, 2002
Approved for Publication June 25, 2002
Before Judges Stern, Eichen and Parker.
On appeal from the New Jersey Individual
Health Coverage Program Board of Directors.
John M. Pellecchia argued the cause for
appellants CIGNA Health Care of Northern
New Jersey, Inc., 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;
Kris Ann Cappelluti, on the brief).
Eleanor Heck, Deputy Attorney General, argued
the cause for respondent New Jersey Individual
Health Coverage Program Board of Directors
(John J. Farmer, Jr., Attorney General,
attorney; Nancy Kaplen, Assistant Attorney
General, of counsel; Ms. Heck, on the brief).
Thomas P. Weidner 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; David F. Swerdlow and Angelo A.
Stio III, on the brief).
The opinion of the court was delivered by
STERN, P.J.A.D.
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").See footnote 11 We granted U.S. Life Insurance Company the right to
intervene.See footnote 22
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.
I.
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.See footnote 33
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.
II.
The IHCP was created pursuant to the Act, adopted in 1992,
see See footnote 44
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).See footnote 55 The plans shall be offered on an "open
enrollment, community rated basis," See footnote 66
[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 non-group persons required;
(b) by the end of calendar year 1994, it
has enrolled or insured at least 75% of the
minimum number of non-group persons required;
and
(c) by the end of calendar year 1995, it
has enrolled or insured 100% of the minimum
number of non-group persons required.
That phase-in ended in 1995, and as quoted above,
25 N.J.R. 4180-4274. These initial regulations were in force during
the Act's phase-in period during which a health insurer could
obtain a full exemption from the IHCP loss assessment by writing
the fixed percentage of the minimum required coverage. The
regulations also followed the Act's language governing pro rata
assessments for those who did not write their required amount of
individual coverage as then provided in
25 N.J.R. 4196;
26 N.J.R. 1296 (amending N.J.A.C. 11:20-9.5(b)
to N.J.A.C. 9.5(f)).]
In 1994, the Board adopted regulations regarding the
procedures for granting and denying exemptions, including a
regulation establishing the formula for assessing IHCP losses to
members.
26 N.J.R. 1507-09. Specifically, N.J.A.C. 11:20-2.17
provided:
(c) The Board shall determine each
member's assessment amount by multiplying the
member's market share, or adjusted market
share as applicable, by the total
reimbursable net paid losses for the
preceding calendar year, except that no
member shall be liable for an assessment
amount greater than 35 percent of the total
reimbursable net paid losses for that
calendar year.
1. . . . Members' market shares shall
be adjusted in consideration of the following
factors, if necessary:
i. A member that has been granted a
final exemption under N.J.A.C. 11:20-9.5
shall not be assessed for any portion of the
total reimbursable net paid losses.
ii. A member that has been granted a
pro rata exemption under N.J.A.C. 11:20-9.5
shall be liable for an assessment determined
by multiplying the total amount of
reimbursable losses (program losses) for the
preceding calendar year by the ratio of the
member's net earned premium to the net earned
premium of all members for the preceding
calendar year multiplied by a fraction, the
numerator of which is the difference between
the minimum number of non-group persons
allocated to the member by the Board and the
number of non-group persons actually enrolled
or insured by the member and the denominator
of which is the minimum number of non-group
persons allocated to the member by the Board.
[
26 N.J.R. 1508 (N.J.A.C. 11:20-2.17
(1994)).]
The regulation also established what became known as "the
second-tier assessment," to make up any shortfalls because of the
Act's declaration in
26 N.J.R. 1508 (N.J.A.C. 11:20-2.17
(1994)).]
In 1994, the Board also adopted N.J.A.C. 11:20-9.6 which
required members to submit a report to the Board detailing the
efforts they undertook to market and sell individual health
benefits plans in order for the Board to determine whether that
member made a good-faith effort to enroll the minimum number of
individuals.
26 N.J.R. 2737-38. Later in 1994, the Board
amended N.J.A.C. 11:20-9.6 by adding standards by which the Board
would review submissions of marketing reports for a determination
of whether the members had undertaken a good-faith marketing
effort.
26 N.J.R. 4193-94. This regulation was also in effect
when
N.J.S.A. 17B:27A- was amended in 1997.
Relevant sections of the Act were amended in 1997. L. 1997,
c. 146. Therein, the Legislature (1) changed the assessment
cycle to a "two year calculation period" beginning on January 1,
1997, (2) removed the provisions concerning the "phase in"
compliance and the 35% limit on any carrier's share of IHCP
losses, and (3) deleted the relevant provisions of
30 N.J.R. 2581-2605 (July 20, 1998). On
July 10, 1998, the Board held a hearing on the proposal.
Appellants submitted a written objection challenging the Board's
status as a state agency and asserting "[t]he IHC Program lacks
the rule-making authority to adjudicate contested cases."
Appellants also challenged the Board's proposed procedures
governing the assessment of carriers for reimbursable losses and
the grant or denial of pro rata exemptions, including the Board's
requirement that members submit reports concerning their good-
faith marketing efforts.
On August 4, 1998 (filed August 7, 1998), the Board re-
adopted the regulations with amendments.
30 N.J.R. 3289.
Thereunder, N.J.A.C. 11:20-2.17 establishes a methodology for
imposing first or preliminary assessments and the second-tier
assessments, the latter of which is challenged on this appeal.
N.J.A.C. 11:20-2.17 provides:
Assessments for total reimbursable net paid
losses for two-year calculation periods
beginning with 1997 and 1998
(a) The IHC Program Board may assess
members for reimbursable net paid losses as
may be necessary, pursuant to its authority
under
N.J.S.A. 17B:27A-11a and according to
the procedures set forth in this Temporary
Plan.
(b) The IHC Program Board shall
determine the preliminary total reimbursable
net paid losses, if any, for the preceding
two-year calculation period based upon the
information submitted by members no later
than March 1 of the year immediately
following each two-year calculation
period. . . .
1. The total reimbursable net paid
losses of the preceding two-year calculation
period shall be the aggregate of the
reimbursable net paid losses for all members
reporting net paid losses for that two-year
calculation period.
2. Prior to receiving reimbursement for
net paid losses, a member must meet the
performance standards set forth at N.J.A.C.
11:20-10.
(c) The Board shall determine each
member's assessment amount by multiplying the
member's market share, or adjusted market
share as applicable, by the total
reimbursable net paid losses for the
preceding two-year calculation period. The
portion of assessment amounts forgiven to
those members granted a final (full or pro
rata) exemption shall be redistributed to
carriers not receiving a final (full or pro
rata) exemption as described in (c)3
below . . . .
1. The IHC Program Board shall determine
each member's market share by comparing the
member's net earned premium for all health
benefits plans for the preceding two-year
calculation period to the net earned premium
of all members for the preceding two-year
calculation period as reported by each
member . . . . Members' market shares shall
be adjusted in consideration of the following
factors, if necessary:
i. A member that has been granted a full
exemption under N.J.A.C. 11:20-9.5 shall not
be assessed for any portion of the total
reimbursable net paid losses.
ii. A member that has been granted a pro
rata exemption under N.J.A.C. 11:20-9.5 shall
be liable for an assessment determined by
multiplying the total amount of reimbursable
losses (program losses) for the preceding
two-year calculation period by the ratio of
the member's net earned premium to the net
earned premium of all members for the
preceding two-year calculation period
multiplied by a fraction, the numerator of
which is the difference between the minimum
number of non-group persons allocated to the
member by the Board and the number of
non-group persons actually enrolled or
insured by the member, taking into account
the limitations on counting Medicaid
recipients and Medicare cost and risk lives,
and the denominator of which is the minimum
number of non-group persons allocated to the
member by the Board. A carrier that has been
granted a pro rata exemption under N.J.A.C.
11:20-9.5 shall not be liable for that
portion of the loss assessment that is
reapportioned as a result of the granting of
final (full or pro rata) exemptions.
. . . .
3. Assessment amounts for members granted
a final (full or pro rata) exemption by the
Board shall be redistributed to the other
members not receiving a final (full or pro
rata) exemption. The distribution shall be
based on an adjusted market share of the
members not receiving a final (full or pro
rata) exemption. This adjusted market share
shall be the ratio of the member's net earned
premium to the net earned premium of all
members not receiving a final (full or pro
rata) exemption for the preceding two-year
calculation period. This additional
redistributed portion of the assessment shall
be determined by multiplying the total amount
of redistributed reimbursable losses from
those carriers receiving a final (full or pro
rata) exemption for the preceding two-year
calculation period by the carrier's market
share as adjusted by this paragraph.
[N.J.A.C. 11:20-2.17 (emphasis added).]
As we understand the regulations, all carriers are
responsible for the first or preliminary assessment unless they
have been granted a full exemption. Carriers that write less
than their full minimum requirement are responsible for a pro
rata assessment. Any shortfall in collections to be used for the
reimbursement of IHCP losses, when established, is to be
collected and distributed through a "second-tier" assessment.
However, any carrier that received either a full or pro rata
exemption from the first or preliminary assessment is not subject
to the second-tier assessment.
The methodology and procedures for granting final (full or
pro rata) exemptions from the initial assessment are found in
N.J.A.C. 11:20-9.5:
Procedures for granting or denying final
(full or pro rata) exemptions
(a) A member granted a conditional
exemption shall be granted a full exemption
from assessments for reimbursements for
losses for the two-year calculation period in
which the conditional exemption was granted
if the Board determines that the information
filed by the member pursuant to (b) below
evidences that the member has enrolled or
insured 100 percent of the minimum number of
non-group persons allocated to it by the
Board for that two-year calculation period.
(b) So that the Board can determine
whether the member has satisfied its minimum
enrollment share, members seeking final (full
or pro rata) exemptions shall report to the
Board, on or before March 1 of the year
following each two-year calculation period,
the number of non-group persons covered by
that member on the last day of each calendar
quarter of the preceding two-year calculation
period . . . .
. . . .
(f) Members receiving full exemptions
from the Board shall not be liable for any
portion of any assessments for reimbursements
for losses for the two-year calculation
period for which the full exemption is
granted. The Board shall determine, in
writing, whether the member is granted a
final (full or pro rata) exemption on or
before the date that the Board issues bills
for assessments for reimbursements for losses
for that two-year calculation period.
1. A member granted a conditional
exemption that enrolls or insures fewer than
the minimum number of non-group persons
allocated to it by the Board, but has
enrolled or insured at least 50 percent of
the minimum number of non-group persons
allocated to it by the Board, shall be
granted a pro rata exemption from assessments
for reimbursements for losses based upon the
percentage of the minimum number of non-group
persons actually enrolled or insured by the
member.
2. A member granted a conditional
exemption that enrolls or insures fewer than
50 percent of the minimum number of non-group
persons allocated to it by the Board must
demonstrate in writing, pursuant to N.J.A.C.
11:20-9.6, that the member has made a good
faith effort to enroll or insure the minimum
number of non-group persons allocated to it
by the Board. The member shall be granted a
pro rata exemption from assessments for
reimbursements for losses based upon the
percentage of the minimum number of non-group
persons actually enrolled or insured by the
member only if the Board finds that the
member has made a good faith effort to enroll
or insure its minimum number of non-group
persons. The Board shall not grant a pro
rata exemption to the member if it finds that
the member has not made a good faith effort
to enroll its minimum share, and the Board
shall notify the member in writing as to its
reasons for not granting the member a pro
rata exemption on or before the date that the
Board issues bills for assessments for
reimbursements for losses for that two- year
calculation period.
(g) Members denied a pro rata exemption
from assessments for reimbursements for
losses may, within 20 days of the date of the
Board's ruling, appeal the Board's
determination and request a hearing pursuant
to the procedures set forth at N.J.A.C.
11:20-20.2.
(h) A member requesting a hearing by
the Board shall remain liable for the full
amount of any assessments for reimbursements
for losses issued to it by the Board, until
and unless the Board makes a finding that the
member is liable for a pro rata assessment
only, including any interest that may accrue.
The effect of the regulations, as we understand them, is to
grant a full exemption from assessment to carriers that enroll or
insure 100 percent of the minimum number of individuals allocated
to them by the Board. Pro rata exemptions are granted to all
members that insure at least fifty percent of the minimum number
of individuals allocated to them. Members that insure less than
fifty percent of their target amount may also obtain a pro rata
exemption, but they must meet the Board's good-faith-marketing
requirements, which provide in N.J.A.C. 11:20-9.6:
Good Faith Marketing Report
(a) In order for the Board to determine
whether a carrier has made a good faith
marketing effort as required by N.J.A.C.
11:20-9.5(f)2, members that have received
conditional exemptions from assessments for
reimbursable losses and have enrolled less
than 50 percent of the minimum number of non-
group persons determined by the Board shall
submit to the Board a marketing report on or
before July 1 of the year immediately
following the two-year calculation period to
which the conditional exemption applies
containing the following information
pertaining to advertising, marketing and
promotion efforts in direct support of sales
of standard individual health benefits plans
in New Jersey during the two-year calculation
period and the calendar quarter immediately
preceding the two-year calculation period to
which the conditional exemption applies
provided such efforts were directed toward
sales during the two-year calculation period
to which the exemption applies:
1. With respect to print media, the
names of newspapers, magazines or other print
media, including billboards, in which
advertising was placed; the number of times
an advertisement appeared in each; the dates
those advertisements appeared; the size of
the advertisements in each; copies of such
advertisements; the total cost of print media
advertising;
2. With respect to broadcast media, the
names of television stations, radio stations,
or cable television franchises over which
commercial advertising appeared; the number
of times a commercial advertisement was
broadcast or played, the time of day and the
duration of each; audio or video tapes of
such commercial advertisements; the total
cost of such broadcast media advertising;
3. With respect to direct marketing by
mail or telephone, the number of mailings
distributed or calls placed; the approximate
dates of the mailings or telephone calls; the
geographic areas to which the mailings or
calls were addressed; copies of the mailing
or scripts of the telephone calls; the total
cost of direct marketing through mail or
telephone solicitation;
4. With respect to sales through
producers licensed by the State of New
Jersey, details of efforts to recruit and
educate producers to sell standard health
benefits plans; the number of producers
through whom such sales were made; the total
cost of commissions and other incentives paid
to producers for sales of standard health
benefits plans;
5. With respect to other forms of
marketing or promotion of standard health
benefits plans, describe the methods of media
used; the frequency of use; the total cost of
such efforts;
. . . .
(c) The Board will review the marketing
reports submitted and determine that a
carrier has made a good faith marketing
effort as required by N.J.A.C. 11:20-9.5(f)2
if the carrier has demonstrated that it has
either:
1. Undertaken a significant media
advertising or other marketing campaign, in
proportion to its minimum enrollment share,
in direct support of sales of standard
individual health benefits plans in New
Jersey; or
2. Undertaken significant efforts, in
proportion to its minimum enrollment share,
to educate licensed insurance producers about
its standard individual health benefits plans
in New Jersey and offered to pay competitive
commission schedules for sales of such plans
and competitive rates.
(d) A member's failure to file the
marketing report described in (a) may result
in the Board's denial of a final exemption
from assessment for reimbursable losses.
III.
Appellants contend that the Board had no authority to
promulgate any regulations because the IHCP is merely an
association of private health insurers and not a state agency.
Specifically, appellants argue that the Board cannot exercise the
powers of a state agency because it has broad proprietary powers
of a private insurance company, including the powers to enter
into contracts, and to hire employees and consultants, to sue and
to be sued, to borrow money independently of the State, and have
those debts carried on the books of the loaning carriers.
N.J.S.A. 17B:27A-11. Appellants also emphasize that the IHCP is
funded exclusively by the assessment of its carrier members and
not from state funds. Appellants further claim that the Board is
not a state agency as defined by the Administrative Procedure Act
("APA") in
124 N.J. 32, 50 (1991), "a participant in a
highly regulated industry must anticipate that its profit levels
can be capped or even reduced by changes in government
regulation." In fact, in concluding that the "'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 insurance coverage," In re Indiv. Health
Coverage, supra, 302 N.J. Super. at 369, Judge Kimmelman cited In
re American Reliance Ins. Co.,
251 N.J. Super. 541 (App. Div.
1991), certif. denied,
127 N.J. 556 (1992), which rejected a
constitutional attack on the assessment of automobile insurers
"in order to create a funding mechanism to cover losses incurred
with respect to coverage provided for high-risk drivers." The
formula, which involved "a concept not too dissimilar from the
'pay or play' scheme written into the IHC Act," id. at 370, was
known to the Legislature and upheld in American Reliance before
this Act was adopted. Compare Aetna Ins. Co. v. Trans Am.
Trucking Serv., Inc.,
261 N.J. Super. 316, 320 n.4 (App. Div.
1993) (Compensation Rating and Inspection Bureau, "CRIB," was not
a governmental agency because its member insurance companies
choose CRIB's officers, committee members, and employees as
representatives of the insurance industry). While four of the
IHCP Board members are selected by IHCP member carriers and
represent the industry, the Commissioner of Banking and Insurance
must approve the selection, and a majority of the Board is
composed of the Commissioner, or her designee, and four public
members chosen by the Governor, with the advice and consent of
the Senate. N.J.S.A. 17B:27A-10(b).See footnote 77
Accordingly, the Board was created as a public entity
administered by representatives of the public to assure that the
public interest is best servedSee footnote 88 and protected.
Both the case law relating to control of an entity and the
legislative history of the IHCP require us to reject appellants'
claims that the Board was not created as a state agency for rule
making purposes.
When the Act was first enacted in 1992, the Legislature
expressly provided that "[t]he board shall, pursuant to the
provision of the 'Administrative Procedure Act,' P.L. 1968, c.
410 (C.52:14B-1 et seq.) promulgate rules and regulations
necessary to effectuate the provisions of sections 1 through 15,
inclusive of this act." L. 1992, c. 161, § 16. Although the
following year the Legislature repealed this particular
provision, L. 1993, c. 164, § 12, it continued the Board's rule
making authority by inserting
N.J.S.A. 52:14B-5 which deals with rule making. In addition,
the 1997 amendment to See footnote 99
An agency may enforce a statutory provision without
promulgating a rule pursuant to the provisions of the APA, if
there is an adequate statutory standard for the guidance of the
administrative agency. Airwork Serv. Div. v. Dir., Div. of
Taxation,
97 N.J. 290, 300-01 (1984), cert. denied,
471 U.S. 1127,
105 S. Ct. 2662,
86 L. Ed.2d 278 (1985). In such a case,
the policy will not be held invalid for failure to meet rule
making procedural requirements. Id. at 301.
89 N.J. 540,
545-46 (1982). Here, the Legislature had substantial time in
which to declare that the Board does not have the status of a
state agency or the jurisdiction to exercise rule making power.
Appellants next claim that the Board is not a state agency
because it was not established "in" a specific department of the
Executive. The Legislature's intent was to place the Board "in,
but not of" the Department of Banking and Insurance. See N.J.
Const. art. V, § 4, ¶ 1 ("[a]ll executive and administrative
offices . . . shall be allocated among and within" principal
departments in state government). See also N.J. Executive Com'n
on Ethical Standards v. Byrne,
238 N.J. Super. 84, 89-90 (App.
Div. 1990) (discussing "in, but not of"); In re Executive Com'n
on Ethical Standards Re: Appearance of Rutgers Attorneys,
222 N.J. Super. 482, 485-86 (App. Div. 1988) (explaining the origin
of "in, but not of"), rev'd on other grounds,
116 N.J. 216
(1989). In fact, the Commissioner or her designee is required to
"serve as an ex officio member on the board", See footnote 1010 To the contrary, the Board has the express
regulatory and adjudicatory authority to, among other things, (1)
assess member carriers their share of program losses and
administrative expenses,
N.J.S.A. 17B:27A-16.1 and the
Administrative Procedure Act ("APA"),
N.J.S.A. 52:14B-1 to -15.
Specifically, appellants argue that the Board "den[ied] the
public a fair opportunity to comment on proposed rules or
regulations" because the proposed regulations were not published
in the New Jersey Register until ten days after both the public
hearing was held and the public comment period had expired.
N.J.S.A. 17B:27A-16.1 embodies an independent, expedited
rule making procedure. In order to use that procedure,
30 N.J.R. 3289 (Sept. 8, 1998).
As the Legislature, in
N.J.S.A. 17B:27A-16.1, established a
specific mechanism for adopting or re-adopting the IHCP
regulations incident to the 1997 legislation and the Board
adhered to that procedure, we must reject appellants' contention
that the Board violated the authorized procedure for adopting or
amending its regulations.
V.
The specific challenges to two of the regulations pose
different issues and one of them has merit.
A.
Appellants contend that the good-faith marketing
requirements in N.J.A.C. 11:20-9.5(f)(2) and 11:20-9.6
(1) exceed the Board's rule making authority; (2) are arbitrary,
capricious and unreasonable; and (3) lack appropriate standards.
While our conclusion may be debatable, we reject these
contentions.
Appellants argue that there is no specific authority in the
Act for the Board to impose a good-faith marketing requirement in
order for a carrier to receive a pro rata exemption. They
contend that the Board lacked the authority to establish the
good-faith marketing requirement and argue that N.J.A.C. 11:20-
9.5(f)(2) and 11:20-9.6 are, in any event, inconsistent with the
requirements of law.See footnote 1111
The Act requires the "fair, reasonable and equitable"
sharing of program losses in a "proportionate" manner.
158 N.J. 211, 222 (1999),
Mayflower Securities Co., Inc. v. Bureau of Securities,
64 N.J. 85, 92-93 (1973), we conclude that the Board did not exceed its
authority by imposing the good-faith marketing requirements. The
Legislature's goal was to increase the availability of individual
health insurance coverage, spread the cost of insuring high-risk
individuals among New Jersey's entire health insurance industry,
reduce the cost of individual health care coverage, and increase
profitability of the health care market. In re Indiv. Health
Coverage, supra, 302 N.J. Super. at 363-65, 369-70; Health Maint.
Org. of N.J., Inc. v. Whitman, supra, 72 F.
3d at 1123-26.
Therefore, the Board's development of a program that gives
incentives and requires carriers to prove that they made a good-
faith effort to enroll their target amount of individual or non-
group policyholders during a given calculation period is
consistent with the Legislature's intent in establishing the Act
and a legitimate component in the determination of the "minimum
number" of persons to be covered by each carrier. Stated in
"plain language," we have already upheld the "pay or play"
program; a carrier must "pay" unless it "plays," and we see no
reason in the statute why it cannot be required to show that it
really "played," or tried to "play," when it fell more than 50%
short.
Indeed, the Board adopted the good-faith marketing
requirement in 1994, which was well before the Legislature
amended
N.J.S.A. 17B:27A-12 in 1997. Accordingly, the
Legislature could have ended or changed that policy in 1997, but
chose not to do so, and "an agency's construction of a statute
over a period of years without legislative interference will
under appropriate circumstances [particularly when the statute is
otherwise revised] be granted great weight as evidence of its
conformity with the legislative intent." Malone v. Fender,
80 N.J. 129, 137 (1979). See also Body-Rite Repair Co. v. Director,
Div. Taxation, supra, 89 N.J. at 545-46. Thus, despite the
reference to pro rata assessments in
152 N.J. 137, 149 (1997). See also N.J. League of
Municipalities, supra, 158 N.J. at 222 (presumption of validity).
Indeed, "[a] finding that an agency acted in an ultra vires
fashion in adopting regulations is generally disfavored.
Particularly, in the field of insurance, the expertise and
judgment of the [agency head] may be given great weight." New
Jersey Coalition of Health Care Prof'ls, Inc. v. New Jersey Dep't
of Banking and Ins.,
323 N.J. Super. 207, 229 (App. Div.)
(citations omitted), certif. denied,
162 N.J. 485 (1999).
Consistent with this principle, the Supreme Court has also held
that "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 that the courts should
readily imply such incidental powers as are necessary to
effectuate fully the legislative intent." New Jersey Guild of
Hearing Aid Dispensers v. Long,
75 N.J. 544, 562 (1978). On the
other hand, we are not bound by an agency's interpretation of its
governing statute or other resolution of a purely legal issue,
and we cannot sustain a regulation inconsistent with the
legislative will. Greenwood v. State Police Training Center,
127 N.J. 500, 513 (1992); Mayflower Securities, supra.
As we previously developed, when the IHCP was first adopted
in 1992, it contemplated that all carriers would be liable for
any assessments required to make up any shortfall due to the fact
that no carrier could be liable for an assessment which exceeded
35% of the aggregate net paid losses of all carriers. See footnote 1212 See footnote 1313 In this connection, we also note that in deleting
See footnote 1414
By allowing carriers with pro-rata exemptions to completely
avoid the second-tier assessment, the shortfall that was
initially created by the Board's granting of exemptions in the
first place is magnified among only those carriers that are
already paying without any exemption, and only those carriers.
However, the Act does not authorize the Board to further penalize
carriers who are not entitled to any exemption. The Act
penalizes them by prohibiting an exemption but does not require
them to underwrite the entire program.
The Board urges us to apply any holding invalidating a
regulation prospectively. Since the appeal challenges only the
1998 re-adoption 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." We are told by
appellants that actual assessments have not yet been made under
the 1998 regulations. In any event, we do not address the impact
of our decision on any carrier that has already paid a second-
tier assessment under the invalidated regulation. Nor do we
address how the Board may endeavor to collect any "short fall"
which may flow from this decision. We leave initial
consideration of the impact of our decision to the Board incident
to its revision of the regulation.
VI.
We find no need to address any further contentions in this
written opinion. R. 2:11-3(e)(1)(D),(E). Except as provided
herein with respect to the second-tier assessment embodied in
N.J.A.C. 11:20-2.17, the regulations promulgated by the IHCP
Board are upheld.
Footnote: 1 1There were other revisions in 1998. We address only the
regulations attacked on this appeal.
Footnote: 2 2The challenge to the re-adoption of the regulations
followed the denial, after a hearing, of CIGNA's challenge to its
Individual Health Care Board's 1996 loss assessment. On this
appeal, however, we do not address that assessment or any other
issue concerning contested facts including the impact of our
decision on any assessment which may have been imposed under the
new regulations. We leave to appellants and the intervenor the
right to address these issues to the Board in light of our
conclusion that the Board has jurisdiction to hear those issues.
Footnote: 3 3Portions of the Act, including
N.J.S.A. 17B:27A-12, were
amended in 1997 by L. 1997, c. 146. Unless otherwise noted, all
references are to the Act in its current form.
Footnote: 4 4Neither
N.J.S.A. 17B:27-10 nor
N.J.S.A. 17B:27-11 was
amended in 1997.
Footnote: 5 5The carrier "shall offer . . . a choice of five individual
health benefit plans" as detailed in the Act. Footnote: 6 6Among other things, the sentence commencing "[p]ursuant to
regulations adopted by the board" was added by the 1997
legislation, L. 1997, c. 146, § 6.
Footnote: 7 7Footnote: 8 8The intervenor notes that the industry representatives have
a financial conflict of interest in granting and denying pro rata
exemptions based on "good-faith marketing" because they may
represent competitor entities. Intervenor claims that Board
members use their influence to pick and choose which carriers
will receive such exemptions in order to change the distribution
of losses. There may be some merit to the contention, see, e.g.,
In re Appeal of Progressive Cas. Ins. Co.,
307 N.J. Super. 93
(App. Div. 1997), but in light of our holding regarding the
powers of the Board and the carrier's resulting ability to
challenge a specific assessment or denial of exemption on a case
specific basis, including the ability to assert a specific
conflict of one or more Board members in a given case, we cannot
void the regulations on that ground. We also note that the
Commissioner must "assure that all members of the program are
fairly represented" on the Board, Footnote: 9 9We bypass consideration of whether the separate or
alternative expedited procedure supports the Board's claim that
the Legislature intended to supplement and enhance the Board's
authority on behalf of the State.
Footnote: 10 10We do not have to pass upon the scope of the Board's
adjudicatory authority in this opinion which deals with the
promulgation of regulations. We merely conclude that the
definition of "action" in Footnote: 11 11There is no challenge to the specific criteria, including
the fifty percent trigger to the "good-faith" requirement of
N.J.A.C. 11:20-9.5(f)(2), -9.6, if it is otherwise valid. Nor
does this appeal involve a challenge to the denial of appellants'
request for a good-faith exemption or their 1996 assessment based
on the denial of the exemption. In light of our prior holding
concerning the Board's powers, those subjects are reserved for
consideration in the proper forum. We note, however, that our
holding, infra, regarding the second-tier assessment may also
affect appellants' overall attack on the regulations even if
rules of prospectivity do not grant them relief for any
assessment before 1998 or its two year calculation period.
Footnote: 12 12Carriers that issue individual benefit plans must report
their earned premiums, claims paid and administrative expenses to
the Board, and if the claims paid and administrative expenses
exceed the premiums collected and investment income thereon, the
excess constitutes the carrier's "net paid loss." N.J.S.A.
17B:27A-12(a)(1)(b).
Footnote: 13 13It is also inconsistent with the limited pro rata
assessment embodied in N.J.S.A. 17B:27A-12(d)(5).
Footnote: 14 14We do not preclude the Board's consideration of granting a
pro rata exemption on the second-tier.
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