INSURANCE

DEPARTMENT OF BANKING AND INSURANCE

DIVISION OF INSURANCE

Adopted New Rules: N.J.A.C 11:4-1

Proposed: November 6, 2000 at 32 N.J.R. 3907(a)

Adopted: March 12, 2001 by Karen L. Suter, Commissioner, Department of Banking and Insurance

Filed: March 12, 2001 as R. 2001 d. 122 with substantive and technical changes not requiring additional public notice or comment (see N.J.A.C. 1:30-4.3).

Authority: N.J.S.A. 17:1-8.1; 17:1-15e; and 17B:32B-1 et seq.

Effective Date: April 2, 2001.

Expiration Date: November 30, 2005.

Summary of Public Comments and Agency Responses:

The Department of Banking and Insurance ("Department") received timely written comments from the New Jersey Hospital Association and Jorden Burt (on behalf of the New Jersey Association of Health Plans).

COMMENT: One commenter expressly supported the proposed new rules. The commenter believed that the standards governing relief from payment of assessments pursuant to N.J.SA. 17B:32B-9, and for the inclusion of assessments in a member health maintenance organization's ("HMO") schedule of rates or charges, is consistent with the statute, N.J.S.A. 17B:32B-1 et seq. (the "Act"), and as upheld in New Jersey Association of Health Plans v. Farmer, et al., Superior Court of New Jersey, Mercer County, Chancery Division, Docket No. C-00059-00. (November 14, 2000).

RESPONSE: The Department appreciates the support of its proposal.

COMMENT: One commenter expressed concern with N.J.A.C. 11:4-1.9(a), which governs the inclusion of assessments in an HMO's schedule of rates or charges, pursuant to N.J.S.A. 17B:32B-9h. The commenter objected to the requirement that a member HMO shall not be permitted to include the amount paid or to be paid as assessments in its schedule of rates or charges unless it first requested relief from payment of such assessment, and such request was denied pursuant to the subchapter. The commenter believed that this impermissibly imposes an additional requirement upon member organizations seeking to include assessments in their rates that is unnecessary, unfair, and unsupported in the Act. The commenter stated that under N.J.S.A. 17B:32B-9e, a member organization's assessment shall be exempted, abated or deferred (that is, relief shall be granted), if the Commissioner of Banking and Insurance ("Commissioner") determines that payment of the assessment would endanger the ability of the HMO to fulfill its contractual obligations or place the member organization in an unsafe or unsound financial condition. The commenter stated that many cases, including New Jersey Association of Health Plans v. Farmer et al., have acknowledged that this standard is equivalent to being "substantially threatened with insolvency." See New Jersey Association of Health Plans, Slip Op. at p. 16. By contrast, the commenter stated that the court noted that the standard in N.J.S.A. 17B:32B-9h is a "much less exacting standard for relief" and is "far less burdensome than the insolvency threshold." Id. at p. 16. The commenter stated that there will be situations where, although a member organization could not meet the standard for exemption, abatement or deferral under the statute, it would nonetheless be able to satisfy the standard for "pass-through" under N.J.S.A. 17B:32-9h. The commenter believed that in those situations it would "be a waste" of a member HMO's resources to submit a request for an exemption where the HMO could not meet the standard for exemption, and was submitting such a request solely as a prerequisite to obtaining relief under N.J.S.A. 17B:32B-9h.

In addition, the commenter stated that it would be both unfair and dangerous to require that this information be filed, because it would require a member to issue a public statement to the effect that it is on the brink of bankruptcy, when such statement would be untrue and made solely for the purpose of meeting conditions precedent for obtaining relief under N.J.S.A. 17B:32B-9h. The commenter believed that this could cause a "run on the bank." The commenter therefore suggested that the final sentence in N.J.A.C. 11:4-1.9(a) be deleted.

RESPONSE: Upon review of the commenter's suggestion, the Department has determined not to change this provision. The purpose of the Act is to provide for the payment of eligible claims, subject to certain limitations, for covered individuals and providers, related to the failure or inability of HIP Health Plan of New Jersey, Inc. and American Preferred Provider Plan, Inc. to perform certain contractual obligations due to their insolvency. Payments of these covered claims are to be made from the New Jersey Insolvent Health Maintenance Organization Assistance Fund ("Fund"), created by the Act. The Fund consists of an aggregate amount of not more than $100,000,000, consisting of: (1) $50 million obtained from the State pursuant to N.J.S.A. 17B:32B-16; and (2) $50 million collected through assessments on member HMO's pursuant to N.J.S.A. 17B:32B-9. In addition, as a condition for receiving payment from the Fund, a provider must agree to forgive one-third of the unpaid contractual obligation incurred prior to the insolvency, pursuant to N.J.S.A. 17B:32B-15.

Accordingly, the Legislature intended that payments for covered claims be derived from assessments on HMO's, certain monies from the State, and by providers forgiving one-third of the obligations owed. Thus, under the Act, providers, the State, and HMO’s each bear a proportionate obligation to pay covered claims. Both relief from payment of the assessments and "pass-through" of assessments paid by HMOs to subscribers, which shifts an HMO’s obligation to pay its proportionate share to other member HMOs or subscribers, are measures that should only be granted where the HMO demonstrates that it satisfies the standards set forth in the statute and rules. This ensures the Legislature's intent that all member organizations pay their proportionate share of the obligations under the Act. The rules do not require, as the commenter asserts, that the HMO file an application for relief "merely for the sake of filing the application" or make a statement that it is "on the brink of bankruptcy." N.J.S.A. 17B:32B-9h specifically requires a "separate filing" for a request by an HMO to include assessments in rates or charges. The Department has determined that the information required for a request for relief is identical to the information required to determine whether assessments may be included in an HMO's rates or charges. Therefore, contrary to the commenter's position, the rules provide for one set of filings for both relief and "pass-through," not a "superfluous" filing. Moreover, the Department believes that it is reasonable and appropriate that an entity apply for relief first because if an entity is entitled to relief, the question of whether assessments should be reflected in rates or charges, and therefore having the member's obligations paid by subscribers, essentially is moot. The Department believes that the Legislature did not intend that subscribers pay the HMO's obligations under the Act, except in those limited circumstances set forth in the Act. However, to address the commenter’s concerns, the rules have been revised to eliminate the requirement that a formal application for relief be filed and the request must be denied as a condition to filing an application to reflect assessments in the filer’s rates or charges, provided, however, that the Department will nevertheless review the information filed to determine whether the filer would qualify for relief. In light of the Legislative framework as outlined above, if the payment of an assessment would endanger the ability of the member organization to fulfill its contractual obligations or place the member organization in an unsafe or unsound financial condition, it would be inappropriate and unfair to permit "pass-through" of assessments to the HMO’s subscribers where other relief is available and warranted.

For these reasons, the Department believes that the rules are reasonable, appropriate, and consistent with the statute, as upheld in New Jersey Association of Health Plans v. Farmer et al.

COMMENT: One commenter objected to the requirement in N.J.A.C. 11:4-1.9(a), which provides that no member organization shall include in its schedule of rates or charges the amount paid or to be paid as assessments under the Act, unless the Commissioner specifically determines that exclusion of those assessments will significantly and adversely affect the organization by precluding it from earning a constitutionally adequate rate of return. The commenter stated that by referring to the "constitutionally adequate rate of return," the Department has adopted a considerably more restrictive standard than the Department defines in N.J.A.C. 11:4-1.9(b). That subsection provides that an HMO's schedule of charges or rates will be deemed to "significantly and adversely affect" the organization if the organization can show that either: (1) it is unable to earn a constitutionally adequate rate of return after paying the assessment, or (2) its net worth will be below that required by N.J.A.C. 8:38-11.1 after paying the assessment, and for the three year period immediately following payment of the assessment, if the assessment is not included in the HMO's schedule of charges or rates. The commenter stated that the HMO could satisfy the standard for "pass-through" under the net worth requirement and still not be eligible for pass-through of the assessment under N.J.A.C. 11:4-1.9(a) because it was not "significantly and adversely" affected by being precluded "from earning a constitutionally adequate rate of return." The commenter did not believe the Department intended this result. The commenter stated that by limiting the ability to include assessments in rates to only those instances where an HMO is being precluded from earning a constitutionally adequate rate of return, the Department utilizes a standard more limited than that decided upon by the Legislature and by the Department itself in N.JA.C. 11:4-1.9(b).

The commenter also stated that the "version" of the proposed rules originally promulgated by the Department and submitted to the New Jersey Superior Court as part of the litigation in New Jersey Association of Health Plans v. Farmer et al., did not include the phrase "by precluding it from earning a constitutionally adequate rate of return." Accordingly, the commenter requested that this phrase be deleted from the first sentence of N.J.A.C. 11:4-1.9(a).

RESPONSE: Initially, the Department notes that the standard of "constitutionally adequate rate of return" is consistent with the statute as recognized in New Jersey Association of Health Plans v. Farmer et al. One of the arguments in that case was that the statute resulted in an unconstitutional taking of property. The Court, relying on, among other cases, State Farm v. State, 124 N.J. 32 (1991), noted that the statute does not preclude HMO's from realizing a "fair and reasonable rate of return." Indeed, the Court expressly stated that the Act "permits HMO insurers to earn a constitutionally adequate rate of return." New Jersey Association of Health Plans v. Farmer et al., Slip Op. at p. 15. The Act does not permit payment of assessments paid to be reflected in the HMO’s rates, except where failure to do so will significantly and adversely affect the HMO. This is recognized as where failure to include assessments in the rates would result in the HMO failing to earn a constitutionally adequate rate of return. This is not a "new standard," different from the draft of the rules submitted as part of the Department's brief. Indeed, this standard was recognized in the proposal Summary as submitted in the Department's brief.

Nevertheless, upon review, the Department agrees that the language in N.J.A.C. 11:4-1.9(a) and (b) may be confusing. The reference in N.J.A.C. 11:4-1.9(a) was not intended to negate the standard set forth in N.J.A.C. 11:4-1.9(b) (recodified as (c) upon adoption). Accordingly, the Department has revised the first sentence in N.J.A.C. 11:4-1.9(a) on adoption to add the phrase "or as otherwise set forth in (c) below." This should eliminate any confusion and ensure consistency in the language set forth in N.J.A.C. 11:4-1.9(a) and (b).

A Federal standards analysis is not required because the adopted new rules are not subject to any Federal requirements or standards.

Full text of the adoption follows (additions to proposal indicated in boldface with asterisks *thus*; deletions from proposal indicated in brackets with asterisks *[thus]*):

11:4-1.6 Informational filing requirements

(a) When requesting relief, the applicant shall provide with its request the following information in a clear, concise and complete manner:

i.-ii. (No change from proposal.)

iii. A statement of facts relied upon as the basis under which relief is sought, including the specific factor(s) upon which the Commissioner may find that the payment of the assessment would endanger the *[abilities]* *ability* of applicant to fulfill its contractual obligations, or place the applicant in a hazardous financial condition; *or that the failure to include assessments in the applicant’s schedule of charges or rates would significantly and adversely affect the applicant as set forth at N.J.A.C 11:4-1.9, as applicable;* and

iv. (No change from proposal.)

2.-12. (No change from proposal.)

(b)-(c) (No change from proposal.)

11:4-1.9 Rates

(a) In determining its schedule of charges or rates filed with the Commissioner pursuant to N.J.S.A. 26:2J-8b, or filed in accordance with any other law requiring such filing, no member organization shall include the amount paid or to be paid as assessments under N.J.S.A. 17B:32B-1 et seq., or any portion of that amount, unless the Commissioner specifically determines that exclusion of those assessments in determining its schedule of charges or rates will significantly and adversely affect the organization by precluding it from earning a constitutionally adequate rate of return *, or as otherwise set forth in (c) below*. Each member organization shall annually file a certification to the Commissioner that the member organization has not included any amounts assessed in its schedule of charges or rates, unless permitted to do so pursuant to this section.

*(b)* No member organization shall be permitted to include the amount paid or to be paid as assessments unless it first requested relief from payment of such assessment, and such request was denied, pursuant to this subchapter. *However, a request for relief shall not be required provided the filer files a request to include assessments paid in its schedule of charges or rates that includes the information set forth at N.J.A.C. 11:4-1.6 in the format of N.J.A.C. 11:4-1.5, wherein the filer recognizes that the Department shall review the information filed to determine whether relief is warranted pursuant to N.J.A.C. 11:4-1.8.*

*[(b)]* *(c)* (No change in text from proposal.)