N.H. high court halts state raid on liability fund

The state's plan to use $110 million for health expansions violated the rights of physicians who paid into the insurance fund for coverage, justices said.

By Amy Lynn Sorrel — Posted Feb. 22, 2010

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The New Hampshire Supreme Court handed a victory to physicians fighting against the state government's attempts to solve budget shortfalls by tapping into a state-created medical liability insurance fund.

Experts said the ruling could send a message to other states, such as Wisconsin and Pennsylvania, where physicians are engaged in similar legal battles over state authorities' grabs at liability pools.

In New Hampshire, the high court on Jan. 28 found unconstitutional a state law authorizing the transfer of $110 million from the Medical Malpractice Joint Underwriting Assn. to the state's general fund. The money was to be used to expand state health care programs for underserved populations. In his 2010-11 budget, Gov. John Lynch had approved this transfer of what lawmakers considered to be a surplus in the fund.

The state created the JUA in 1975 as an alternative source of affordable liability insurance, which is funded through the annual premiums physicians, hospitals and other health care entities pay to purchase coverage. Justices found that physicians who contracted with the insurer had a "vested right" in how any excess JUA funds could be used and that the state's seizure of the money violated those rights.

The governor had argued that because the insurance pool was created by the state, lawmakers could use any surplus money to fund projects that served a greater public need.

But even such legitimate goals did not justify the state's interference with policyholders' contract rights, justices said. The court noted that the state would not be held responsible for any shortfalls in the JUA reserves. State law also gave the insurer, not the state, the authority to determine if any surplus existed -- and if so, whether the money should cover any outstanding debts or be returned to policyholders.

If upheld, the transfer had potentially adverse consequences not just for JUA policyholders, but also for doctors and health care professionals statewide, said attorney Martin P. Honigberg. He helped file a friend-of-the-court brief in the case on behalf of the New Hampshire Medical Society and the Litigation Center of the American Medical Association and State Medical Societies.

"At the end of the day, [doctors'] interest is in the integrity of the fund," Honigberg said. "The first place the JUA would go if it has any shortfalls is to its members, who are other insurance companies. And if they get dinged, guess where they are going to recover? The rest of the providers in the state" who are insured by those firms.

State regulations also permit the JUA to tax nonmembers' premiums, and doctors and other health care professionals already helped bail out the fund once before, when shortfalls resulted in a 15% annual assessment for several years, according to the NHMS.

Hands off

Doctors say they hope the ruling will prompt policymakers in New Hampshire and elsewhere to think twice before dipping into funds that don't belong to them.

"What you have here and playing out in a number of states is legislative and executive attention being paid to these various pools as states look for solutions to their fiscal problems," said Kevin M. Fitzgerald. He represented a coalition of physicians and other health care professionals who brought the case as JUA policyholders.

"Physicians and other health care providers depend on [the liability funds] to honor the contractual promises they make, and this decision confirms that no government can take property that belongs to private citizens in an effort to solve its public budget problems, no matter how well-intentioned the legislation may be," Fitzgerald said.

The governor expressed disappointment in the ruling and asked the state Supreme Court to rehear the case, according to court records. Still, the state counted on using only about $22 million a year for the 2010 and 2011 budgets, or less than 1% of the state's general budget, Lynch said in a statement. "Even without the JUA funds, we will continue to responsibly manage the state budget," Lynch said. The legislation had proposed to use the remaining $65 million to balance the books for 2009.

Lynch also pointed to a dissenting opinion in the case to underscore what he called a misapplication of the law. Dissenting justices said the majority ruling contradicted the budget legislation's specific authorization of the use of any surplus JUA funds to benefit overall access to care, while creating "a potential $110 million windfall" for physicians and others insured by the fund.

The money transfer still "leaves intact the very purpose for which the policyholders entered into their contracts -- to obtain otherwise difficult or impossible to obtain coverage for medical malpractice claims," the dissenting opinion states.

But the majority said the law retroactively changed the original purpose of the JUA and noted that the insurer never determined whether a surplus existed.

"The Legislature by magic said, 'We've determined this money is not needed' " by the JUA, Fitzgerald said, adding that the ruling likely will prompt the insurer to analyze its reserves. Because plaintiffs secured an earlier court victory blocking the state seizure while the litigation was pending, the money never moved, he said.

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Up for grabs?

Physicians in at least three states have turned to the courts to prevent cash-strapped state governments from dipping into various medical liability funds to fill budget holes.

New Hampshire: The New Hampshire Supreme Court blocked Gov. John Lynch and lawmakers from taking $110 million from a state-created medical liability insurer to pay for health program expansions. The court said policyholders who contracted with the Medical Malpractice Joint Underwriting Assn. had a vested right to any surplus money.

Pennsylvania: The Pennsylvania Medical Society and other organizations are challenging Gov. Edward G. Rendell's diversion of $700 million from the Medical Care Availability and Reduction of Error Fund -- a medical liability pool that subsidizes physicians' insurance premiums -- and a separate Mcare funding account to balance the state's 2009-10 budget. The cases are pending in a trial court.

Wisconsin: The Wisconsin Medical Society has sued to recoup $200 million that Gov. Jim Doyle and lawmakers withdrew from a state compensation fund for injured patients to balance the state's budgets from 2007-09. Physicians and others contribute annually to the fund, which covers a portion of any medical liability judgments. The case is pending before the Wisconsin Supreme Court.

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