Supremes uphold McGuire in JUA case

By a split decision the New Hampshire Supreme Court yesterday upheld the earlier ruling by Justice Kathleen McGuire of Belknap County Superior Court that the state cannot drain $110-million from a medical malpractice insurance fund — of which LRGHealthcare of Laconia is the largest contributor — to balance its budget.

In a prepared statement Governor John Lynch called the decision "very disappointing" and added that "we believe the strongly worded opinion of the dissenting justices correctly highlights the majority's misapplication of the law."

Lynch used $65-million of the total to help bring the 2008-2009 state budget into balance but, just last week, his administration got lawmakers to agree they had to withdraw $80-million of the $90-million in the state's "rainy day" fund to accomplish the task. The balance of $110-million was used to present balanced budgets for the following two fiscal years and that money will now have to be replaced, or the spending plans will have to be reduced.

The majority opinion was written by Justice Carol Ann Conboy and joined by Chief Justice John Broderick and Justice Gary Hicks while Justices Linda Dalianis and James Duggan dissented.

The litigation began last June shortly before the Legislature enacted House Bill 2, the so-called companion bill to the 2010-2011 state budget, which transferred the $110-million surplus of the New Hampshire Medical Malpractice Joint Underwriting Association (JUA) to the general fund. Nearly a third of the 900 policyholders of the JUA — including LRGHeathcare, which pays more than $1-million in annual premiums — disputed the state's claim to the money.

The policyholders argued that the operating rules of the JUA and the terms of their insurance policies with it grant them a vested right them to funds in excess of funds required to defray pending and projected claims and to pay expenses. By transferring the funds, they said, the state was impairing their contractual rights and taking their private property in violation of the state and federal constitutions.

The state denied that either the rules of the JUA or the terms of its contracts conferred vested rights to any surplus funds and therefore, transferring the money represented neither interference with the policyholder's contracts nor a taking of their property.

The JUA was established in 1975 under a statute (RSA 404-C) authorizing the insurance commissioner to create so-called "mandatory risk sharing plans" to provide any form of liability insurance for which there is no private or voluntary market. It is managed by a board of directors according to rules written by the Insurance Department and approved by the Joint Legislative Committee on Administrative Rules. The JUA meets its losses and pays its expenses from the premiums paid by policyholders. The state neither funds nor guarantees its liabilities or expenses. 
The operating rules provide if there is a surplus, that is if premiums "exceed the amount necessary to pay losses and expenses," the rules provide either that assessments will be refunded to members or that "the board shall . . . distribute such excess to those health care providers covered by the association, in such a manner as is just and equitable." 
The rule is mirrored in the so-called "assessable and participating" policies between the JUA and its policyholders. The policies provide that if the JUA is in deficit, it can assess the policyholders for additional premiums while if it posts earnings "the named insured shall participate in the earnings of the company, to such extent and upon such conditions as shall be determined by the board of directors in accordance with law."

Writing for the majority, Conboy held that "the language of the policies and regulations, taken together, confers upon the policyholders a vested contractual right in the treatment of any excess surplus." However, the justices stopped short of ruling that the policyholders are entitled to a distribution of the funds. "The question of whether the JUA board should make distributions of any excess surplus is not before us, and we express no opinion on that issue," Conboy wrote.

Nevertheless, the majority found that by taking the money, the state would impair the policyholder's rights rights two ways. First, it would "dramatically reduce, if not eliminate" their right to a share of the surplus. Second, it would threaten the financial integrity of the JUA, which without sufficient assets to meet its obligation would be bound to levy assessments against the policyholders. The majority noted that "it is not clear that the $110-million in fact represents excess surplus."

The governor and others have insinuated the policyholders filed suit seeking a windfall. But, Henry Lipman, senior vice-president and chief financial officer of LRGHealthcare who played a major role in the litigation, said after the decision was announced, "We never asked for a windfall or expected a windfall and we didn't get it. We didn't hit the jackpot, " he remarked. "We sought to ensure a strong JUA able to provide effective coverage at stable rates," he explained. "That is a benefit to healthcare providers and the state as a whole."

Likewise, Georgia Tuttle, a dermatologist from Lebanon and former director of the JUA who is the named plaintiff in the suit, said yesterday that she acted to protect the JUA. She recalled that she opened her practice in the 1980s, when the JUA became insolvent. "I was assessed for eight years and the total amount of my assessments were more than the loan I took out to open my practice," she said. "I could just see that happening again, with everyone getting slapped with a bill because the state took money that didn't belong to it."

The justices also dismissed the state's contention that the surplus would be put to better use by funding programs for the medically underserved than remaining "trapped" in the JUA or distributed to policyholders. They noted that there is nothing to suggest that the Legislature acted to address an emergency or that "other avenues of funding . . . have been exhausted, or even considered."

"I'm thrilled," Tuttle said. "The court understood our contracts and ruled that the state can't take private property without due process. What they were doing to us was wrong and should not happen to us or to anyone else."

Echoing Tuttle, Lipman said that "we're pleased that the decision confirmed the contractual rights. In any situation, you would hope to be able to rely on the plain language of contracts."

In their dissent Justices Dalianis and Duggan charged that the majority erred in concluding that the policyholders enjoy a vested right to the surplus and consequently, has no grounds for finding that transferring the funds would breach the constitutional protections of their contracts and property.

At the same time, they maintain that providing "affordable healthcare for underserved populations" is "a basic societal interest" and the Legislature's decision to serve this interest by transferring the funds "instead of retaining them in the JUA's coffers" is reasonable. They claimed that there is no evidence that transferring the funds would place the JUA at risk of insolvency.

While the majority argued that funds "generated by premiums paid by a discrete class of private parties" should not be applied to a broad public need, the dissenters countered that in addition to premiums, the surplus accumulated from investment income. Moreover, unlike private insurers, the JUA is exempt from federal income tax and state premium tax as well as other state business levies and assessments.

Calling the decision "erroneous as a matter of law," they said that by failing to defer to the Legislature's judgment that transferring the funds "is a reasonable and necessary measure to further an indisputably legitimate public purpose, the majority encroaches upon legislative decision-making."

The dissent closed by noting that the decision raised but failed to resolve several issues, perhaps most importantly what becomes of the $110-million. If the funds are distributed, they ask who will be entitled to them, noting that the majority found that only "current policyholders" have legitimate claims. The dissenting justices also suggested that the decision also cast doubt on the JUA's tax exempt status.

McGuire rejected the state's argument that the JUA is a state entity, on which its exemption from federal taxation hinges. But, the majority found no need to address the issue.