In an eleventh hour attempt to re-open the State of New Jersey (shutdown ordered by Governor Christie at midnight on Friday, June 30), both the New Jersey Senate and General Assembly adopted legislation substantially reforming regulation of health service corporations, i.e., Horizon Blue Cross Blue Shield of New Jersey (Horizon). The budget stalemate centered on Christie's desire for legislation to reform Horizon, which covers 3.8 million people in the state. The legislation calls for annual audits of the nonprofit’s reserve level, sets a range for reserves and requires excess to be spent on policyholders. The bill also requires financial transparency with respect to all carriers (as defined in the Health Care Quality Act, N.J.S.A. 26:25-1 et seq.) who are authorized to issue health benefit plans in New Jersey. See Senate Bill No. 2 (introduced July 4, 2017) at Section 5.
The bill, sponsored by Senator Joseph F. Vitale and Assemblyman Vincent Prieto of Middlesex and Bergen and Hudson Counties respectively, makes various revisions to the regulation of a health service corporation, which is by statute an entity not established or organized for pecuniary profit, as follows:
- Clarifies the role of health service corporations, requiring on an annual basis, the filing with the New Jersey Department of Banking and Insurance (Department) information relating to health service corporation’s operations, including but not limited to its mission, activities, revenue, expenses, assets, liabilities, and total compensation provided to directors, officers, trustees and the five other most highly compensated employees who are not an officer, director or trustee, for posting on the Department’s website.
- Requires that on or before June 30, 2019 and annually thereafter, the Commissioner of the Department report to the Governor and the legislature on the compliance of the health service corporation with the provisions of the legislation.
- Revises membership of the health service corporation’s board of directors, increasing the board size to 17 and requiring appointments by both the Senate President and the Speaker of the General Assembly.
- Regulates the health service corporation’s surplus and requires a reduction of surplus in excess of a risk based capital (RBC) ratio exceeding a range of 550% to 725%, in which case the Department shall notify the health service corporation, which shall, within 30 days of notice from the Commissioner, file a report with the Commissioner to reduce surplus to be within the stated range. The report must include a plan to benefit subscribers, which itself must include but not be limited to proposals to lessen potential rate increases in the future.
- Enhances the Department’s annual audit of the financial statements of the health service corporation to verify its surplus and RBC ratios.
In summary, the legislation reinforces the mission of the health service corporation, which is to “ensure that it provides affordable and accessible health insurance to its subscribers, promotes the integration of the healthcare system to meet the needs of its subscribers, and develops goals, objectives and strategies for carrying out its statutory mission.”
The new legislation also impacts other health insurance carriers and HMOs and supplements the Health Care Quality Act to require the Department to publish on the Department’s website the annual financial statement for each “carrier,”1 in the form adopted by the National Association of Insurance Commissioners (NAIC) and in use at the time the statement is due, within 30 days of the receipt of that statement. See Section 4 of the legislation at the link above.
While the new legislation will take effect immediately, Section 4, requiring the Commissioner on an annual basis to examine the health service corporation’s annual regulatory filings and requiring a plan to return excess surplus if the stated RBC ratio is exceeded, will take effect for the next regulatory annual filings with the Department after January 1, 2018.
Unquestionably the legislation encourages transparency in the financial condition of insurance carriers authorized to issue health benefit plans in New Jersey and reinforces the non-profit nature of a health service corporation. However, it does not appear to contemplate or address whether an RBC ratio outside the stated range would necessarily mean that the health service corporation is solvent. Indeed, RBC ratios are merely one of many tools to aid state regulators in evaluating insurer solvency. RBC requirements were a method developed by the NAIC to determine the minimum amount of capital required of an insurer to support its operations and write coverage, all in consideration of the entity’s size and risk profile. Under those circumstances, a return of so-called excess surplus theoretically could impair the health service corporation’s solvency, and ultimately trigger protection from the New Jersey Life and Health Insurance Guaranty Association (Guaranty Association) (which is, to date, the only state guaranty association which provides an unlimited health benefit in the event of insurer insolvency). The Guaranty Association is funded by member company assessment by line of business. This means that the burden of any insurer or health service corporation insolvency initially falls upon others writing health insurance in the New Jersey marketplace2 and ultimately upon the consumers through rates.
1The Health Care Quality Act at N.J.S.A. 26:25-2 defines “carrier” to include an insurance company, health services corporation, hospital service corporation, medical service corporation or health maintenance organization (“HMO”) authorized to issue health benefit plans in New Jersey.
2HMOs are not “member insurers” of the Guaranty Association and thus are not subject to assessment. Similarly, their members/subscribers will not benefit from Guaranty Association protection. See N.J.S.A. 17B:32A-4 (definition of “member insurers” to exclude HMOs.