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New JUA rules pose power shift

Last modified: 5/25/2010 12:00:00 AM
The state Insurance Department yesterday released a set of proposed new rules for the Joint Underwriting Association's medical malpractice fund that would expand the power of the insurance commissioner while making it easier for the state to access any surplus JUA money.

Under the proposed rules, any extra money in the JUA fund would not be distributed to the fund's future policyholders. The new rules leave open the possibility of future surplus money going into the state's general fund.

'The state would determine legislatively' what happens to any surplus, said Deputy Commissioner Alex Feldvebel.

Colin Manning, spokesman for Gov. John Lynch, acknowledged that the rules could help the state take the money in the future - getting around a Supreme Court ruling invalidating the state's attempt to take money this year.

'These rules preserve the state's option to access surplus funds to promote access to health care, which is consistent with the Supreme Court's decision,' Manning said.

Attorney Scott O'Connell, who represents the policyholders, said if the rules become law, the policyholders will challenge them in court.

'It's changing the rules 23 years after you're in a game to get the outcome you want,' O'Connell said. 'It's theft, pure and simple.'

The fund's policyholders yesterday submitted a petition to the Supreme Court against Lynch, Attorney General Michael Delaney and Insurance Commissioner Roger Sevigny, asking the court to stop the state officials from impairing their rights to the fund's surplus money.

The new rules, which must still go through two public hearings and be approved by the Joint Legislative Committee on Administrative Rules, are the latest step in a year-long skirmish between the state and the JUA policyholders.

In the current budget, passed last June, Lynch and the Legislature approved taking $110 million in surplus money from the state-created medical malpractice fund. The state Supreme Court in January rejected the state's claim to the money. The court found that any surplus money must be either distributed to policyholders or held against future shortfalls.

During the lawsuit, a superior court judge ruled that the JUA is a separate entity from the executive branch of government. The Supreme Court did not rule on that issue.

The Insurance Department now says the superior court ruling may have threatened the JUA's federal tax-exempt status. The status depends on a 1976 letter from the Internal Revenue Service saying that the JUA is exempt because it 'is an integral part of the state government.' If the JUA is not exempt, the Insurance Department claims it could owe more than $100 million in back taxes for the past 35 years.

The Insurance Department recently launched a financial examination of the JUA, using a tax attorney from Rath, Young and Pignatelli to evaluate the JUA's tax status and confirm it with the IRS. The examination will also determine if there is any surplus money in the fund. Although the state had claimed there was $110 million in surplus when it formed its budget, no official surplus was ever declared - which must be done before it can be distributed.

Sevigny said he will not authorize any distribution or transfer of funds from the JUA until after the examination is completed and the tax issue has been resolved. Sevigny stressed that the purpose of the fund is to guarantee the availability of market-rate medical malpractice insurance - not to distribute money to private doctors.

The final results of the examination may not be available for more than six months. But Sevigny said the tax examiner made several recommendations for rule changes. Sevigny said the new rules are necessary to protect the tax-exempt status of the fund.

'They make it categorically clear the plan is an integral part of the state,' Sevigny said.

O'Connell said the policyholders already commissioned accountants, who said there was likely no tax liability.

'The tax issue should be resolved,' O'Connell said. 'And the commissioner has no authority to do it.'

New rules

The new rules would only apply to those doctors buying new policies or renewing their policies after the law goes into effect. (Doctors must renew their policies annually.)

The new rules would lay out the Insurance Commissioner's authority to direct, supervise and approve the board of directors. The rules state that any determination of excess reserves be made by the commissioner, with the advice of the board and an actuary. Sevigny said he is not taking any more power for the commissioner but clarifying the power that already exists.

'It makes it more clear that the commissioner has full authority over operations of the JUA board,' Sevigny said. 'It's always operated that way.'

But according to a draft of the rules, there would be several major areas where the commissioner would increase his power: The rules would give the commissioner a seat on the board of directors, would allow the commissioner to remove a board member at will, would give the commissioner authority over all the activities of the board, and would give the commissioner 'full power and authority to amend or rescind any provision of the plan.'

The rules would also allow the commissioner to terminate the medical malpractice plan altogether if he determines medical malpractice insurance is available publicly or if it is 'otherwise in the public interest' to terminate the plan. The assets of the plan would go to either a successor fund established by the state or the state's general fund.

'It's amazing how despotic this is,' O'Connell said. 'How it fundamentally changes the role of the JUA board and inserts the commissioner into all sorts of roles he doesn't currently have.'

Another major impact would be in changing policies relating to assessments and distributions. Under the rule change, policyholders would not be eligible for distributions if the fund has extra money.

'Any distributions could jeopardize its tax exemption,' Sevigny said, since a private individual cannot profit from earnings of a public program. He added that even distributing the surplus already in the account could hurt the JUA's tax standing.

The JUA previously made distributions in 1999 and 2000. The state called these payments 'distributions' in its court filings in the recent Supreme Court case, and those payments did not change the JUA's tax status. But Sevigny and Feldvebel yesterday claimed they were not actually distributions, but 'premium adjustments.'

'Policyholders got premium holidays,' Sevigny said.

O'Connell said the state is trying to change the rules mid-game, if it distributes any money that is already in the account.

'It's a sad state of affairs when taxpayers have to sue the governor again to protect the rights it already sued the state to preserve,' O'Connell said.

The rules also change who is responsible if the JUA has a shortfall. Since the plan was established in 1975, that happened just once, with medical providers paying a surcharge from 1986 to 1993 to cover pre-1986 claims. That money went into a separate account, which still has $8 million and which is used to pay claims from pre-1986 policies.

Under current rules, if the JUA fund has a shortfall, the extra money could be raised by a surcharge on any doctor buying medical malpractice insurance and any consumer buying homeowner, car or property insurance. Under the new rules, the charge would be paid by insurance companies that write liability insurance policies.

Although the Supreme Court said the state could not take money from the fund retroactively because it would be a breach of contract, the court opened the door for the state to change policies going forward. Accordingly, Sevigny said the rule is consistent with the court's decision.

The rule changes do not specify what happens to any existing surplus or any future surplus. Asked what happens to surplus going forward, Sevigny responded, 'It's got nothing to do with what my job is.'

Sevigny said his job is to ensure there are enough assets to protect customers, not to distribute excess money.

Lawsuit

Meanwhile, the policyholders are asking the Supreme Court to compel the governor, attorney general and insurance commissioner 'to take reasonable actions to prevent impairing the vested contractual rights of JUA policyholders.' The suit was filed before the proposed rules were made public, but it addresses some of the same issues.

'Utilizing the pretense of a self-creating tax issue, the Department of Insurance is prepared to propound new regulations which would have the effect of dismantling the JUA in its present form and transferring control to the Department of Insurance,' Kevin Fitzgerald, an attorney for the policyholders, wrote in the petition. Fitzgerald wrote that the intent of the rules would be to let the commissioner control any surplus funds, in violation of the rights of the policyholders.

Fitzgerald also wrote that the attorney general should be precluded from representing both the JUA and the state because of an earlier superior court ruling that found a conflict of interest.

Sevigny said he believes the petition 'has no correlation' with the new rules, since the rules would only affect policies going forward.


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