Ruling raises doubts about state budget

A Superior Court judge’s June 25 decision may throw a giant monkey wrench into New Hampshire’s recently approved state budget.

In her ruling, Belknap County Superior Court Kathleen McGuire disqualified the New Hampshire attorney general’s office from representing the New Hampshire Medical Malpractice Joint Underwriting Association, or JUA, in the class action suit filed by health-care providers to stop the state from taking $110 million in JUA funds to balance both the 2008-2009 and 2010-2011 state budgets.

Perhaps more significantly, McGuire’s order soundly rejected the attorney general’s characterization of the JUA as an agency of state government – a finding that would appear to weaken the state’s claim to the money. A hearing on the merits and other pending motions was scheduled for July 1.

Attorney Kevin Fitzgerald of NixonPeabody LLP, who represents the policyholders, said McGuire’s order changes the nature of the case. The JUA’s board of directors, he said, will have to engage independent counsel and weigh its options within the framework of its regulatory and contractual powers and duties.

It was on the strength of an opinion by the attorney general that Gov. John Lynch recommended using the funds earlier this year to help fill a gap in the 2008-2009 budget and help balance the 2010-2011 budget. The House and Senate readily concurred.

The first section of House Bill 2, the so-called companion bill to the budget, directs the JUA to transfer $65 million of the funds, which it describes as “surplus,” to the state general fund no later than July 31, to be applied against the deficit in the fiscal year that ended June 30.

The bill also directs the JUA to make two further transfers of $22.5 million each at the beginning of the next two fiscal years.

On June 17, just as lawmakers wrestled with the budget before coming up with their final package, more than 200 of the JUA’s policyholders filed suit, claiming that if there is a surplus, they, not the state, are entitled to it.

The plaintiffs’ pleadings included a motion to disqualify the attorney general’s office from representing the JUA.

Fitzgerald argued that the interests of the state in transferring the JUA’s surplus to the general fund is at odds with the fiduciary duty of its board of directors to the policyholders. Consequently, he said it would be “an irreconcilable conflict of interest” for the attorney general – one of the architects of the scheme to transfer the funds – to represent both the state and the JUA.

The attorney general’s office countered that the JUA is an agency of state government, created and supervised by the insurance commissioner by authority granted in statute. It also described the JUA board and administrator as officials of the state Insurance Department.

Whose ’surplus’?

The state created the JUA as a “mandatory risk-sharing plan” in 1975, when private insurers failed to offer malpractice coverage. The JUA counts approximately 900 policyholders, about half of them physicians, who represent about 30 percent of the state’s malpractice insurance market.

Also among those insured by the JUA is LRGHealthcare, which operates Lakes Region General and Franklin Regional hospitals, 20 nursing homes, home health agencies and individual nurses, physicians’ assistants, podiatrists, chiropractors and optometrists.

The JUA operates much like a mutual insurance company, meetings its claims and overhead from the premiums paid by policyholders, under rules drafted by the Insurance Department and approved by the Legislature.

The rules provide that if the JUA accumulates a surplus – when premiums “exceed the amount necessary to pay losses and expenses” – then its board of directors “shall … distribute such excess to those health care providers covered by the association… .“

The rule is mirrored in the so-called “assessable and participating” contracts between the JUA and its individual policyholders. The contracts provide that if the JUA suffers a financial shortfall, it can assess the policyholder for additional premiums.

After reviewing the responsibilities and operations of the JUA, together with its relationship to the Insurance Department, McGuire concluded that “given the quasi-private/public and voluntary nature of the JUA; the lack of any state funding to implement or support the JUA; the fact that the (Insurance) Department does not guarantee coverage to policyholders if the JUA were unable to do so; and the broad powers and responsibilities of the JUA board … the JUA is a separate entity from the Insurance Department and is not part of the executive branch of state government.“

She likened the JUA to the New Hampshire Retirement System, which as Fitzgerald had argued in court, the New Hampshire Supreme Court ruled as “an independent entity rather than an executive department or agency.“

In reaching this conclusion, McGuire noted that the justices cited the trustees’ authority granted by statute, fiduciary obligations to the members and autonomy in contractual dealings. All three, she found, also applied to the JUA. Moreover, McGuire referred to several past instances where the JUA was represented by private counsel before the Supreme Court, which she said was another indication that it is not a part of government.

At the same time, McGuire denied the attorney general’s motion to disqualify NixonPeabody LLP as counsel for the plaintiffs.

Associate Attorney General Anne Edwards had argued that NixonPeabody’s San Francisco office represented the Home Insurance Company, which is in liquidation under the supervision of New Hampshire Insurance Commissioner Roger Sevigny. She claimed that in effect NixonPeabody also represented Sevigny.

McGuire ruled that NixonPeabody has no attorney-client relationship with Sevigny either as commissioner or as liquidator and has not communicated with him in the liquidation proceedings.

Meanwhile, soon after the Legislature adopted HB 2, the plaintiffs petitioned the court to declare that the legislation violates both the state and federal constitutions and to stop the state government from implementing the bill by seizing the funds.

In their pleadings, the plaintiffs argue that HB 2 overrides the rights of the policyholders, making it retrospective legislation, which is expressly prohibited in the state Constitution.

Likewise, the plaintiffs note that in January 2009 – a month before Governor Lynch proposed transferring the surplus in his budget address – the rule authorizing the JUA board to distribute any surplus was amended to include “with review and approval” of the insurance commissioner. The plaintiffs claim that the amended rule, if applied to contracts concluded before the change was made, also is a retrospective law.

The plaintiffs also contend that HB 2 amounts to a taking of private property without just compensation and unwarranted interference with contractual obligation in violation of the state and federal constitutions.

Michael Kitch is a reporter for the Laconia Daily Sun, where this article originally appeared.