Hospital & Healthsystem Association of Pennsylvania, Pennsylvania Medical Society and Pennsylvania Podiatric Medical Association, Petitioners
Insurance Commissioner, Respondent
Argued: March 13, 2012.
BEFORE: HONORABLE DAN PELLEGRINI, President Judge HONORABLE BERNARD L. McGINLEY, Judge HONORABLE BONNIE BRIGANCE LEADBETTER, Judge HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge.
LEAVITT, JUDGE 
Petitioners are health care providers and trade associations that have petitioned for review of an adjudication of the Insurance Commissioner that denied their challenge to the assessments imposed upon them by the Medical Care Availability and Reduction of Error (MCARE) Fund for the years 2009, 2010 and 2011. These assessments provide the monies used by the MCARE Fund to pay medical malpractice claims in excess of what the health care provider's primary insurer pays. Petitioners assert that their assessments were excessive because they resulted in a collection of more monies than were needed by the MCARE Fund to pay claims for one year and provide a 10% reserve. We agree and reverse.
Since 1975, the Commonwealth has been directly involved in providing medical malpractice insurance to health care providers in Pennsylvania. The Health Care Services Malpractice Act, Act of October 15, 1975, P.L. 390, as amended, formerly 40 P.S. §§1301.101 – 1301.1006,  was enacted to confront the "medical malpractice crisis, " i.e., the unavailability and costliness of medical malpractice insurance, that existed here and in many other jurisdictions at the time. See McCoy v. Board of Medical Education and Licensure, 391 A.2d 723, 725 (Pa. Cmwlth. 1978). The General Assembly addressed this crisis by establishing a mandatory medical malpractice insurance system and a mandatory arbitration system. Mandatory arbitration was held to be unconstitutional, and that part of the statute was rendered ineffective and unenforceable. Mattos v. Thompson, 491 Pa. 385, 421 A.2d 190 (1980). However, the statutory mandate that health care providers purchase medical malpractice insurance withstood a constitutional challenge. McCoy, 391 A.2d at 727 (holding that a physician, even one who had practiced 40 years without a claim of malpractice, could be forced to make this purchase for the first time in his professional life). A health care provider's refusal to purchase malpractice insurance coverage in 1975 was, and continues to be, sanctioned by the provider's loss of his professional license. Id. at 728.
Under the 1975 insurance system, each health care provider, physician or hospital, was required to purchase an annual policy of medical malpractice insurance that provided coverage in the amount of $100, 000 per occurrence and $300, 000 in the aggregate. Section 701(a) of the Health Care Services Malpractice Act, formerly 40 P.S. §1301.701. Where a health care provider was unable to purchase this primary policy in the private insurance marketplace, the purchase could be made through the assistance of the Joint Underwriting Association. Section 801(a) of the Health Care Services Malpractice Act, formerly 40 P.S. §1301.801. In addition, each health care provider was required to purchase excess coverage in the amount of $1, 000, 000 per claim from the "Medical Professional Liability Catastrophe Loss Fund, " a special fund in the Pennsylvania Treasury set up to provide excess coverage above the provider's primary coverage. This fund became known as the "CAT Fund." It paid, annually, up to $1, 000, 000 per occurrence and up to $3, 000, 000 in the aggregate for each health care provider. Section 701(c) of the Health Care Services Malpractice Act, formerly 40 P.S. §1301.701(c). The CAT Fund was funded by a surcharge upon the premium the provider paid for the primary coverage; the surcharge was set at 10% of the health care provider's annual premium for the primary coverage or $100, whichever was greater. Section 701(d) of the Health Care Services Malpractice Act, formerly 40 P.S. §1301.701(d).
Over time, the legislature enacted many amendments to the Health Care Services Malpractice Act. Those amendments, inter alia, reduced the level of excess coverage provided by the CAT Fund and increased the level of primary coverage required to be purchased by the health care provider. For example, the 1996 amendments made the individual health care provider responsible for primary coverage in the amount of $300, 000 per occurrence and $900, 000 in the aggregate; the CAT Fund paid the next $900, 000 for each occurrence and $2, 700, 000 in the aggregate. The 1996 amendment also called for continued future increases in the level of primary coverage and decreases in the excess coverage provided by the CAT Fund. See Section 3 of the Act of November 26, 1996, P.L. 776. Changes were also made to the CAT Fund surcharge, its amount and calculation. Id.
In 2002, the General Assembly repealed the Health Care Services Malpractice Act and started over with new legislation: the Medical Care Availability and Reduction of Error (MCARE) Act. The MCARE Act addressed a newly perceived crisis, i.e., the cost of medical malpractice insurance. There was concern that the cost of medical malpractice insurance in Pennsylvania had increased to the point that physicians educated and trained in Pennsylvania were leaving to set up practice in other states where the costs of this insurance were lower.
Relevant to this case, the MCARE Act abolished the CAT Fund and replaced it with the MCARE Fund. Monies in the CAT Fund were transferred to the MCARE Fund along with the CAT Fund's liabilities. Section 712(b) of the MCARE Act, 40 P.S. §1303.712(b). Like its predecessor, the MCARE Fund was set up to provide insurance coverage in excess of the mandatory levels of primary medical malpractice coverage. See Section 712(a) of the MCARE Act, 40 P.S. §1303.712(a). For policies issued or renewed in 2002, the first year of the MCARE Act, physicians were required to purchase primary coverage in the amount of $500, 000 per occurrence and $1, 500, 000 in the aggregate; hospitals had to purchase $500, 000 per occurrence and $2, 500, 000 annual aggregate coverage. Section 711(d)(l) of the MCARE Act, 40 P.S. §1303.711(d)(l). The corresponding coverage from the MCARE Fund for calendar year 2002 for each provider and each hospital was $700, 000 per occurrence and $2, 100, 000 per annual aggregate. Section 712(c)(1) of the MCARE Act, 40 P.S. §1303.712(c)(1). In 2003, this coverage available from the MCARE Fund dropped to $500, 000 per occurrence and $1, 500, 000 per annual aggregate. Section 712(c)(2)(i) of the MCARE Act, 40 P.S. §1303.712(c)(2)(i).
The MCARE Fund is scheduled for termination. To that end, the MCARE Act has established a schedule for continued increases in the amount of primary coverage that must be purchased by health care providers and continued decreases in the amount of excess coverage that will be available from the MCARE Fund. For example, for policies issued in 2006, the mandatory level of primary medical malpractice coverage was scheduled to increase to $750, 000/$2, 250, 000, and the amount of excess coverage provided by the MCARE Fund was scheduled to drop to $250, 000 per occurrence and $750, 000 in the aggregate. Sections 711(d)(3)(i), 712(c)(2)(ii) of the MCARE Act, 40 P.S. §§1303.711(d)(3)(i), 1303.712(c)(2)(ii). In this way, the MCARE Act provides for a gradual transfer of all medical malpractice insurance coverage, primary and excess, to the private insurance market.
MCARE Fund Assessments
The MCARE Fund obtains its funding from an annual assessment levied on health care providers. See Section 712(d) of the MCARE Act, 40 P.S. §1303.712(d). Petitioners assert that their MCARE Fund assessments for 2009, 2010 and 2011 were not calculated in accordance with Section 712(d) and, thus, they filed an administrative appeal with the Insurance Commissioner pursuant to Section 712(d)(3) of the MCARE Act, 40 P.S. §1303.712(d)(3). The evidentiary record was made by stipulation of the parties.
The stipulation describes the MCARE Fund as a "pay-as-you-go" program of insurance. Unlike a private insurance company, it does not establish reserves to cover injuries that occur in the assessment year but do not become adjudicated awards for several years thereafter. See Joint Stipulation of Facts, ¶8; Reproduced Record at 10a (R.R. __). See also Hospital & Healthsystem Association of Pennsylvania v. Commonwealth, 997 A.2d 392, 394 (Pa. Cmwlth. 2010), appeal filed and probable jurisdiction noted at 20 MAP 2010. Instead, the MCARE Fund is set up to raise only those funds necessary to "cover claims and expenses for the assessment year." Id. The MCARE Fund projects its annual expected claim payments on the basis of the prior year's payments. Pennsylvania Medical Society v. Department of Public Welfare, 614 Pa. 574, ___, 39 A.3d 267, 272 (2012). This means that the amount collected from health care providers in a given year may be more, or less, than what is actually needed to pay the MCARE Fund's claims and expenses for that year.
The stipulation provides that the MCARE Fund set the 2009 aggregate assessment total at $204, 223, 545, i.e., the total amount to be collected from all health care providers to fund one year of operations. This figure was reached by adding together: (1) claims payments for 2008 in the amount of $173, 892, 874; (2) expenses for the 2008 claim year in the amount of $11, 764, 894; and (3) 10% of the sum of the preceding two figures, or $18, 565, 777. Joint Stipulation of Facts, ¶14; R.R. 11a. If the claims in 2008 had emptied the MCARE Fund's coffers, it could have borrowed what was needed to cover the shortfall. Section 713(c) of the MCARE Act, 40 P.S. §1303.713(c). In that case, the 2009 assessment would have been larger because it would also have added the amount of principal and interest payments owing on those loans to the aggregate of 2008 claims and expenses, i.e., $185, 657, 768. Section 712(d)(1)(iii) of the MCARE Act, 40 P.S. §1303.712(d)(l)(iii).
In making its calculation for 2009, the MCARE Fund ignored its 2008 accrued unspent balance of approximately $104 million. Joint Stipulation of Facts, ¶15; R.R. 11a. Likewise, PricewaterhouseCoopers, which sets the annual assessment total, did not consider the MCARE Fund's unspent balance when it calculated the assessment totals for 2010 and 2011. Had it done so, the assessments would have been significantly lower. Instead, in 2009, $100 million was transferred out of the MCARE Fund into the Commonwealth's General Fund for the purpose of funding the operations of state government. Section 1717.1-K of the Act of April 9, 1929, P.L. 343 (Fiscal Code), as amended, added by the Act of October 9, 2009, P.L. 537, 72 P.S. §1717.1-K. This Court held that this transfer of funds was illegal. Hospital & Healthsystem Association, 997 A.2d at 403. A petition for allowance of appeal of this Court's decision is presently pending before our Supreme Court, with probable jurisdiction noted at 20 MAP 2010.
Petitioners appealed their 2009, 2010 and 2011 assessments on the theory that the MCARE Fund's year-end balance should have been included in the aggregate assessment calculation for 2009 and the following years. The Insurance Commissioner found in favor of the MCARE Fund, concluding that unspent balances in the MCARE Fund were irrelevant to the calculation of the aggregate annual assessment. Petitioners then petitioned for this Court's review.
On appeal,  Petitioners argue that the Insurance Commissioner's adjudication cannot be reconciled with the plain language of Section 712(d)(1) of the MCARE Act. They contend that ignoring an unspent balance in the MCARE Fund produces a reserve far in excess of the 10% level set by statute. The dollar amount of the MCARE Fund's reserve will change from year to year but, Petitioners argue, should not exceed 10% of the prior year's claims and expenses. The aggregate assessment must be calculated to achieve that goal.
Section 712(d)(1) of the MCARE Act
At issue is the meaning of Section 712(d)(l) of the MCARE Act, which establishes the formula by which the MCARE Fund calculates the funds it will need for the following year. It states, in relevant part, as follows:
For calendar year 2003 and for each year thereafter, the fund shall be funded by an assessment on each participating health care provider. Assessments shall be levied by the department on or after January 1 of each year. The assessment shall be based on the prevailing primary premium for each participating health care provider and shall, in the aggregate, produce an amount sufficient to do all of the following:
(i) Reimburse the fund for the payment of reported claims which became final during the preceding claims period.
(ii) Pay expenses of the fund incurred during the preceding claims period.
(iii) Pay principal and interest on moneys transferred into the fund in accordance with section 713(c) [authorizing the Governor to make loans to the Fund].
(iv) Provide a reserve that shall be 10% of the sum of subparagraphs (i), (ii) and (iii).
40 P.S. §1303.712(d)(1) (emphasis added). Simply, the aggregate assessment must be "sufficient" to produce a balance sheet that replaces what was spent in the prior year and provides a reserve of 10%. The dollar amount of the 10% reserve changes from year to year, depending on the prior year's claims and expenses.
The MCARE Fund has construed Section 712(d)(1) to mean that 110% of the prior year's expenditures must be collected each year from health care providers, regardless of the starting balance. Adjudication and Order at 17. This exercise means that unspent balances will accumulate even as claims decline, consistent with the MCARE Fund's scheduled termination, or as earnings on the 10% reserve increase.
Petitioners assert that this is error because, inevitably, this interpretation will lead to an accumulation of unspent balances that is inconsistent with a pay-as-you-go system that was supposed to reduce the cost of medical malpractice insurance in Pennsylvania. Most importantly, the MCARE Fund's ...