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New Jersey Supreme Court Holds Individual Health Coverage Program Regulations Were Invalid

 
 

HLD, v. 32, n. 7 (July 2004)

New Jersey Supreme Court Holds Individual Health Coverage Program Regulations Were Invalid

In 1992, the New Jersey Legislature enacted the Individual Health Insurance Reform Act (Act), which requires all health insurance carriers to offer individual health insurance policies through the Individual Health Coverage Program (IHCP). Prior to passage of the Act, insurance carriers were reluctant to offer individual health insurance policies because they are considered high risk. The IHCP was intended to create incentives for insurance carriers to provide individual policies, and the Act delegated to the IHCP Board of Directors (Board) the authority to establish an equitable loss-sharing program. The Act imposes an assessment on an insurance carrier that does not issue a minimum number of individual policies, which the Board determines based on the insurance carrier's market share. In 1994, the Board adopted regulations establishing a pro rata assessment scheme for insurance carriers that failed to meet the required number of policies, a procedure for granting and denying exemptions, a formula for assessing program losses, and a second-tier assessment for program shortfalls. In 1998, when the regulations were due to expire, CIGNA Health Care of Northern New Jersey (CIGNA) objected to the proposed readoption of the regulations, but the Board readopted the regulations.

The regulations provide that an insurance carrier that meets its target receives an exemption from the assessment, an insurance carrier that meets 50% or more of its target receives a pro rata exemption, and an insurance carrier that meets less than 50% of its target but makes a good faith effort to market individual policies also receives a pro rata exemption. An insurance carrier that meets less than 50% of the target and does not meet the good faith marketing test receives no exemption. Only insurance carriers that receive no exemption are also liable for a second-tier assessment to recover shortfalls for insurance carriers that receive exemptions.

CIGNA appealed the Board's decision to the Appellate Division, which held that the regulations applying the second-tier assessment only to the insurance carriers that did not receive exemptions were invalid. The Appellate Division also upheld the good faith marketing exemption scheme, and rejected the argument that the Board had exceeded its rulemaking authority. The Board appealed the Appellate Division's decision invalidating the second-tier assessment, and CIGNA appealed the part of the decision upholding the good faith marketing requirement.

The Supreme Court of New Jersey affirmed the part of the decision striking down the second-tier assessment, and reversed on the issue of the good faith marketing requirement on the ground it exceeded the Board's authority. The high court first examined the language of the Act, and determined that the Board has the authority to establish procedures for an equitable sharing of the losses from the program. The high court agreed with the appellate division that the second-tier assessment regulation was invalid because it placed a disproportionate share of the program losses only on insurance carriers that did not meet the 50% target and did not meet the good faith marketing requirement. Under the regulations, insurance carriers who meet 50% of the target are exempt from the second-tier assessment while insurance carriers who meet 49% of the target are not exempt if they do not also meet the good faith marketing requirement. The scheme, said the high court, is not in line with the Act's requirement that the losses be equitably divided. The scheme also violates the legislative mandate to achieve 100% of the target by allowing as little as 50% compliance to exempt an insurance carrier from the second-tier assessment, and the high court affirmed the appellate division's judgment on that issue.

The high court then addressed the appellate division's holding that the good faith marketing regulation was valid. The Board argued, and the appellate division agreed, that the good faith marketing regulation served the legislative purpose of increasing marketing efforts for individual coverage. The high court disagreed, however, and held the good faith marketing regulation did not serve the Act's requirement that the losses be shared equitably. In practice, the good faith marketing regulation allows an insurance carrier that meets as little as 10% of its target to avoid the second-tier assessment as long as it has made the good faith marketing effort, which contravenes the legislature's intent. Assessments can only be determined by the number of policies written, said the high court, and the good faith marketing regulation is not authorized by the Act. Therefore, the high court reversed the appellate division's judgment upholding the good faith marketing regulation.

In re New Jersey Individual Health Coverage Programs Readoption of N.J.A.C. 11:20-1 et seq., 2004 WL 1051064 (N.J. May 10, 2004).

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