New rules would protect the JUA

Today, it is rare to hear about government programs that truly work to benefit the public. But such programs exist, and one of these is the New Hampshire Medical Malpractice Joint Underwriting Association.In 1975, facing growing concerns over the availability of insurance from private companies, rising medical malpractice insurance premiums and the loss of health-care services, the Insurance Department used authority granted by the Legislature under state law to establish the JUA. For the past 35 years, the JUA has successfully offered medical liability insurance to health-care providers at market rates, even to those high risk providers who are refused coverage by the private insurance market.On May 24, 2010, the Insurance Department announced amendments to rules that govern the structure and operation of the JUA — rules that the department has amended many times over the last 35 years. Past rule amendments have not been newsworthy, but due to recent controversy involving the JUA, there may be greater interest in these proposed rule changes.Why have we proposed amendments to the rules at this time? First, during the litigation that led to the January 2010 New Hampshire Supreme Court ruling that the state could not withdraw funds held by the JUA, it became clear that the current rules leave many important questions unanswered.Immediately after this decision, the Insurance Department commenced an examination to consider the impacts of the Supreme Court’s decision on the operation of the JUA. We identified provisions in the current rules that needed clarification and improvement.Consistent with my responsibility as commissioner, I am proposing these changes as amendments to the current rules.In addition, our examination has focused on preserving the JUA’s exemption from federal income tax. Since 1975, the JUA has not paid federal income tax. Under federal tax law, programs that are “integral parts of a state government” and operate for public purposes are not subject to federal income tax. In a 1976 letter, the Internal Revenue Service confirmed the tax-exempt status of the JUA program because it “is an integral part of the state government.”

Why is this tax issue so important? Because in recent litigation three policyholders seeking a monetary distribution from the JUA questioned the JUA’s status as a state program, thus calling into question whether the JUA is tax-exempt.

They argued that the JUA is not a public program but instead is a private enterprise for the financial benefit of private parties — not the public. If this view were correct, the JUA would not be exempt from federal tax. If the JUA is not tax-exempt, then the IRS could assert that the JUA should have been filing tax returns for the last 35 years.

Our preliminary analysis indicates that the IRS could seek all 35 years of past taxes, along with interest, in excess of $100 million.

The Supreme Court, in its January decision, wisely declined to adopt the argument that the JUA is not a state program. However, in order to ensure the continued successful operation of the JUA, it is critical that I take very deliberate steps to protect the JUA from potential federal tax liability.

The first of those steps is to clarify the rules governing the JUA in order to confirm the JUA’s status as an integral part of the state, operating for the public benefit.

The rule changes I propose are necessary to ensure the JUA can continue to provide necessary and affordable medical malpractice coverage into the future.These changes will clarify and improve the operation of the JUA, and will confirm that the JUA owes no back taxes to the IRS and is tax exempt.

These changes are all consistent with the Supreme Court’s recent decision. I am confident that the rule that is proposed will protect this successful public program that helps to ensure that New Hampshire citizens have access to quality health-care providers.

Roger A. Sevigny is commissioner of New Hampshire Department of Insurance.