SYLLABUS

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

IMO Individual Health Coverage Program (A-46-02/A-30-03)

Argued September 22, 2003 -- Decided May 10, 2004

ALBIN, J., writing for a unanimous Court.

The issue in this appeal is 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.

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. The purpose of the 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. N.J.S.A. 17B: 27A-4a. In order to achieve that aim, the IHCP created incentives for all carriers to write individual policies and authorized the IHCP Board of Directors (the Board) 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 Act imposes an assessment ("pay or play") on all carriers that fail to issue a minimum number of individual policies based on the carrier's proportional share of the overall state health insurance market. A carrier that writes its minimum number of individual policies is entitled to a full exemption from the assessment. A carrier that falls short of its target number is subject to an assessment on a "pro rata basis" pursuant to the statutory formula. N.J.S.A. 17B: 27A-12(d)(5), (6).

In 1993, IHCP Board regulations introduced the good-faith marketing requirement as a means of obtaining a pro rata assessment. In 1994, the Board adopted regulations establishing 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. When the Board moved to readopt the regulations six years later, 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 Board rejected CIGNA's challenge and readopted the regulations on August 4, 1999. Pursuant to those regulations, a carrier is entitled either to a full exemption, a pro rata exemption, or no exemption, depending on whether they meet their goal or demonstrate a good faith effort. In addition, the regulations created 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. 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.

CIGNA appealed the Board's adoption of the regulations to the Appellate Division. The panel determined that the second-tier assessment was contrary to the Reform Act and therefore invalid. 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. Nevertheless, the panel acknowledged that there was a colorable claim that the Board had exceeded its authority by permitting pro rata exemptions for carriers that received the good-faith marketing credit.

The Supreme Court granted the IHCP Board's petition for certification to review the appellate panel's decision to void the second-tier assessment. In addition, the Court granted CIGNA's cross-petition for certification challenging the legality of the good-faith marketing requirement upheld by the panel.

HELD: We affirm the Appellate Division's opinion striking down the second-tier assessment regulation based on its present methodology. We conclude, however, that the good-faith marketing provision in N.J.A.C. 11:20-9.5(f)(2) and -9.6 exceeds the Board's regulatory authority and, accordingly, reverse that limited portion of the appellate panel's decision.

1. An agency regulation, like a legislative act, 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. The 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. When an agency, in promulgating a regulation, arrogates to itself a power that has not been delegated to it by the Legislature, it has acted arbitrarily and capriciously. (Pp. 10-11)

2. We agree with the appellate panel's thorough analysis of the infirmity of the second-tier regulation. 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. N.J.S.A. 17B: 27A-12a(2) requires an assessment of "every member" that has not written its required coverage. 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. See N.J.S.A. 17B: 27A-12. The regulation is completely at odds with the statutory pro rata assessment scheme and the legislative policy of spreading losses among the entire insurance industry. Our decision is limited, however, to the present methodology that restricts the class of carriers subject to the second-tier assessment in a manner contrary to the Reform Act. (Pp. 12-15)

3. The analysis that compels us to invalidate the second-tier assessment regulation applies with equal force to the regulation that gives credit to a carrier for its good-faith marketing efforts. Unlike the appellate panel, we cannot conclude that the good-faith marketing regulation is consistent with the assessment scheme of the Reform Act. Though well-intentioned, the Board acted beyond its delegated authority because the good-faith marketing regulation alters the terms of the Reform Act by allowing insurers to receive a pro rata assessment based on factors other than their actual participation in the market. The Board cannot change the statutory formula for the sharing of losses under the guise of administrative interpretation. Although the Reform Act is far from a model of clarity, the goal of the Act is not ambiguous. The Act intended each carrier to write its targeted number of individual policies or bear the assessment on a pro rata basis. Thus, the Board's good-faith marketing regulation is contrary to equitable loss-sharing considerations at the core of the IHCP and the "pay or play" policy codified by the Reform Act. (Pp. 16-19)

We AFFIRM the judgment of the Appellate Division invalidating the second-tier assessment regulation as presently written and REVERSE its judgment upholding the good-faith marketing regulation.

CHIEF JUSTICE PORITZ and JUSTICES LONG, VERNIERO, ZAZZALI and WALLACE join in Justice ALBIN's opinion. JUSTICE LaVECCHIA did not participate.

SUPREME COURT OF NEW JERSEY

A- 46 September Term 2002

A- 30 September Term 2003

IN THE MATTER OF THE NEW JERSEY INDIVIDUAL HEALTH COVERAGE PROGRAM'S READOPTION OF N.J.A.C. 11:20-1 ET SEQ.

Argued September 22, 2003 - Decided May 10, 2004

On certification to the Superior Court, Appellate Division, whose opinion is reported at 353 N.J. Super. 494 (2002).

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 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 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. Orders Nos. 96-01 and 96-02, 302 N.J. Super. 360, 363-64 (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 (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 (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 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. 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.