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Pennsylvania Professional Liability Joint Underwriting Association v. Wolf

United States District Court, M.D. Pennsylvania

May 17, 2018

PENNSYLVANIA PROFESSIONAL LIABILITY JOINT UNDERWRITING ASSOCIATION, Plaintiff
v.
TOM WOLF, in his Official Capacity as Governor of the Commonwealth of Pennsylvania, Defendant

          MEMORANDUM

          CHRISTOPHER C. CONNER, CHIEF JUDGE

         On October 30, 2017, defendant Tom Wolf, in his capacity as Governor of the Commonwealth of Pennsylvania, signed into law Act 44 of 2017, P.L. 725, No. 44 (“Act 44”). The Act, inter alia, mandates that the Pennsylvania Professional Liability Joint Underwriting Association (“Joint Underwriting Association” or “Association”) transfer $200, 000, 000 of its “surplus” funds for deposit into the Commonwealth's General Fund by Friday, December 1, 2017. Act 44 includes a “sunset” provision purporting to abolish the Association should it fail to comply with its deadline. The Association seeks a declaration that Act 44 violates the United States Constitution.

         I. Factual Background & Procedural History[1]

         The Joint Underwriting Association is a nonprofit association organized under the laws of the Commonwealth of Pennsylvania. (See Doc. 60 ¶ 1; Doc. 72 ¶ 1; Doc. 74 ¶ 1). The General Assembly created the Association in 1975 in response to a “hard market”[2] for medical malpractice insurance in the Commonwealth. (See Doc. 63 ¶ 1; Doc. 65 ¶ 2). The Association was initially established and organized by the Pennsylvania Health Care Services Malpractice Act of 1975, P.L. 390, No. 111 (“Act 111”). The General Assembly repealed Act 111 on March 20, 2002, enacting in its place the Medical Care Availability and Reduction of Error Act (“MCARE Act”), 40 Pa. Stat. & Cons. Stat. Ann. § 1303.101 et seq.

         A. The MCARE Act and the Joint Underwriting Association

         The MCARE Act is a sweeping piece of legislation. The Act's overarching goal is to ensure a “comprehensive and high-quality health care system” for the citizens of the Commonwealth. Id. § 1303.102(1). In pursuit of this objective, the Act seeks to guarantee that medical professional liability insurance is “obtainable at an affordable and reasonable cost, ” to ensure prompt and fair resolution of medical negligence cases, and to reduce and eliminate medical errors. Id. § 1303.102(3)-(5). The Act includes patient safety rules and reporting obligations, see Id. §§ 1303.301-.315, establishes requirements relating to reduction and prevention of health care associated infections, see Id. §§ 1303.401-.411, and develops standards for medical professional liability litigation and compensation, see Id. §§ 1303.501-.516.

         The MCARE Act also establishes a Medical Care Availability and Reduction of Error Fund (“the MCARE Fund”). See Id. §§ 1303.711-.716. The General Assembly designed the MCARE Fund as a “special fund” within the state treasury to be administered by the Insurance Department of Pennsylvania (“the Department”). Id. §§ 1303.712(a), -.713(a). The Fund provides a secondary layer of medical professional liability coverage for physicians, hospitals, and other health care providers in the Commonwealth. See Id. § 1303.711(g). It is funded primarily by annual assessments (“MCARE assessments”) on health care providers as a condition of practicing in the Commonwealth. See Id. § 1303.712(d)(1).

         Additionally, the MCARE Act continues operation of the Joint Underwriting Association. Id. § 1303.731(a). Unlike the MCARE Fund, the General Assembly did not establish the Association as a “special fund” or a traditional agency within the Commonwealth's governmental structures. See id.; cf. Id. §§ 1303.712(a), -.713(a). Instead, the General Assembly “established” the Association as “a nonprofit joint underwriting association to be known as the Pennsylvania Professional Liability Joint Underwriting Association.” Id. § 1303.731(a). Like its predecessor, see Act 111, § 802, the MCARE Act mandates membership in the Association for insurers authorized to write medical professional liability insurance in the Commonwealth, 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(a). Currently, the Association has 621 member insurance companies. (Doc. 60 ¶ 43).

         The Association is charged by statute with offering medical professional liability insurance to health care providers and entities who “cannot conveniently obtain medical professional liability insurance through ordinary methods at rates not in excess of those applicable to [those] similarly situated.” 40 Pa. Stat. & Cons. Stat. Ann § 1303.732(a). The MCARE Act sets forth broad parameters for achieving this objective, to wit:

         The [Joint Underwriting Association] shall ensure that the medical professional liability insurance it offers does all of the following:

(1) Is conveniently and expeditiously available to all health care providers required to be insured under section 711.
(2) Is subject only to the payment or provisions for payment of the premium.
(3) Provides reasonable means for the health care providers it insures to transfer to the ordinary insurance market.
(4) Provides sufficient coverage for a health care provider to satisfy its insurance requirements under section 711 on reasonable and not unfairly discriminatory terms.
(5) Permits a health care provider to finance its premium or allows installment payment of premiums subject to customary terms and conditions.

Id. § 1303.732(b)(1)-(5). The Association insures “all comers” who certify that they cannot obtain coverage at competitive rates. (P.I. Hr'g Tr. 11:3-13:8; Doc. 60 ¶ 42). According to the Association, its insureds generally fall into four categories: (1) providers with a history of malpractice occurrences, (2) providers practicing high-risk specialties, (3) providers who have gaps in coverage, or (4) providers reentering the medical profession after loss or suspension of license or voluntary withdrawal from practice. (Doc. 60 ¶ 42).

         The Association, like other insurers in the Commonwealth, is “supervised” by the Department through the Insurance Commissioner (“Commissioner”). 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(a); see, e.g., Id. §§ 221.1-a to -.15-a, 1181-99. The MCARE Act prescribes four “duties” to the Association. Id. § 1303.731(b). It requires the Association to submit a plan of operations to the Commissioner for approval. Id. § 1303.731(b)(1). It tasks the Association to submit rates and any rate modifications for Department approval. Id. § 1303.731(b)(2) (incorporating 40 Pa. Stat. & Cons. Stat. Ann. §§ 1181-99). It requires the Association to “[o]ffer medical professional liability insurance to health care providers” as described above. See Id. § 1303.731(b)(3). And it directs the Association to file its schedule of occurrence rates with the Commissioner, which she uses to set a “prevailing primary premium” for calculating the annual MCARE assessments for all health care providers in the Commonwealth. Id. § 1303.731(b)(4) (incorporating 40 Pa. Stat. & Cons. Stat. Ann. § 1303.712(f)). The Act insulates the Commonwealth from the Association's debts and liabilities. Id. § 1303.731(c).

         The MCARE Act provides that all “powers and duties” of the Association “shall be vested in and exercised by a board of directors.” Id. § 1303.731(a). The board's composition, and all of the Association's operative principles, are set forth in a plan of operations developed by the Association with Department assistance and approval. (Doc. 60 ¶ 44; Doc. 63 ¶¶ 13-16); see also 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(b)(1). The plan establishes a 14-member board of directors, which consists of the current Association president; eight representatives of member companies chosen by member voting; one agent or broker elected by members; and four health care provider or general public representatives who may be nominated by anyone and are appointed by the Commissioner. (Doc. 60 ¶ 45). Under the plan, the Association may be dissolved (1) “by operation of law, ” or (2) at the request of its members, subject to Commissioner approval. (Id. ¶ 46). The plan provides that, “[u]pon dissolution, all assets of the Association, from whatever source, shall be distributed in such manner as the Board may determine subject to the approval of the Commissioner.” (Id. ¶ 47).

         The Joint Underwriting Association writes insurance policies directly to its insured health care providers. (See Doc. 63 ¶ 27; Doc. 65 ¶ 19). Policyholders pay premiums directly to the Association. (See Doc. 60 ¶ 65). The Association is funded exclusively by policyholder premiums and investment income. (Id. ¶ 54). It is not and has never been funded by the Commonwealth, and it holds all premiums and investment funds in private accounts in its own name. (Id. ¶¶ 51, 54, 65-69). The Association currently insures approximately 250 policyholders. (Doc. 63 ¶ 26; Doc. 65 ¶ 20). The typical medical professional liability policy issued by the Association covers a one-year period, with a limit of $500, 000 per claim and aggregate limits of $1, 500, 000 for individuals and $2, 500, 000 for hospitals. (Doc. 63 ¶ 27).

         The Association maintains contingency funds-its “reserves” and its “surplus”-which allow the Association to fulfill its insurance obligations in the event of greater-than-anticipated claims or losses. (See Doc. 60 ¶¶ 108-12). An insurer's “reserves” are the “best estimate of funds . . . need[ed] to pay for claims that have been incurred but not yet paid.” (Id. ¶ 109). Its “surplus” represents “capital after all liabilities have been deducted from assets.” (Id. ¶ 111). The surplus operates as a “backstop” to ensure that unforeseen events do not impede an insurer's ability to meet obligations to its insureds. (Id. ¶ 112). As of December 31, 2016, the Joint Underwriting Association maintained a surplus of approximately $268, 124, 500. (See Id. ¶ 115; Doc. 63 ¶ 32; Doc. 65 ¶¶ 23, 30).

         B. Act 85 of 2016

         On July 13, 2016, Governor Wolf signed into law Act 85 of 2016, P.L. 664, No. 85 (“Act 85”). Act 85 is wide-ranging in scope, but its principal effect was to amend the General Appropriation Act of 2016 and balance the Commonwealth's budget. Act 85, § 1. Among other things, Act 85 provides for certain transfers to the Commonwealth's General Fund. See Id. § 1(7). Pertinent sub judice, Section 18 of Act 85 amends the Commonwealth's Fiscal Code to require a $200, 000, 000 transfer to the General Fund from the Joint Underwriting Association The relevant language states:

Notwithstanding Subchapter C of Chapter 7 of [the MCARE Act] the sum of $200, 000, 000 shall be transferred from the unappropriated surplus of the Pennsylvania Professional Liability Joint Underwriting Association to the General Fund The sum transferred under this section shall be repaid to the Pennsylvania Professional Liability Joint Underwriting Association over a five-year period commencing July 1, 2018. An annual payment amount shall be included in the budget submission required under Section 613 of the Act of April 9, 1929 (P.L. 177 No. 175) known as the Administrative Code of 1929.

Id. § 18 (codified prior to repeal at 72 Pa Stat & Cons Stat Ann § 1726-C).

         The Association did not transfer funds to the Commonwealth pursuant to Act 85 (Doc 60 ¶ 96) On May 18 2017 the Association commenced a lawsuit-also pending before the undersigned-challenging the constitutionality of Act 85 See Pa Prof'l Liab Joint Underwriting Ass'n v Albright No. 1:17-CV-886 Doc 1 (M.D. Pa.). The lawsuit names as the sole defendant Randy Albright in his capacity as the Commonwealth's Secretary of the Budget Id. Doc. 12 Secretary Albright moved to dismiss the Association's complaint on August 22, 2017. Id. Doc 14 That motion is held in abeyance pending resolution of the Association's claims herein

         C. Act 44 of 2017

         Governor Wolf signed Act 44 into law on October 30, 2017 in another attempt to bring balance to the state budget Act 44 § 1 Therein the General Assembly expressly repeals Act 85 Id. § 13 Act 44 inter alia amends the Fiscal Code to include certain “findings” concerning the Joint Underwriting Association's relationship to the Commonwealth and the nature of its unappropriated surplus. Id. § 1.3. The General Assembly in Act 44 specifically “finds” as follows:

(1) As a result of a decline in the need in this Commonwealth for the medical professional liability insurance policies offered by the joint underwriting association under Subchapter B of Chapter 7 of the MCARE Act, and a decline in the nature and amounts of claims paid out by the joint underwriting association under the policies, the joint underwriting association has money in excess of the amount reasonably required to fulfill its statutory mandate.
(2) Funds under the control of the joint underwriting association consist of premiums paid on the policies issued under Subchapter B of Chapter 7 of the MCARE Act and income from investment. The funds do not belong to any of the members of the joint underwriting association nor any of the insureds covered by the policies issued.
(3) The joint underwriting association is an instrumentality of the Commonwealth. Money under the control of the joint underwriting association belongs to the Commonwealth.
(4) At a time when revenue receipts are down and the economy is still recovering, the Commonwealth is in need of revenue from all possible sources in order to continue to balance its budget and provide for the health, ...

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