IN RE: NEW YORK STATE CONFERENCE OF BLUE CROSS AND BLUE SHIELD PLANS et al., Respondents, v. Edward J. MUHL, as Superintendent of Insurance of the State of New York, et al., Appellants.
Appeal from a judgment of the Supreme Court (Torraca, J.), entered September 5, 1997 in Albany County, which granted petitioners' applications, in a proceeding pursuant to CPLR article 78, to annul a determination of respondent Superintendent of Insurance establishing, inter alia, the 1995-1996 policy year excess medical malpractice premium rates as set forth in 11 NYCRR 70.17(d).
In response to the rising costs of medical malpractice premiums which threatened the availability of health care in New York, the Legislature and the Governor adopted a comprehensive legislative package in 1985 and 1986. These enactments included medical and dental malpractice litigation reforms, hospital malpractice prevention programs, provisions that streamlined physician discipline processes, measures to stabilize malpractice premium rates and, at issue in this proceeding, a new mechanism to finance excess medical and dental malpractice insurance coverage for hospital-affiliated physicians and dentists (see, L.1985, ch. 294; L.1986, ch. 266). In an effort to restrain increases in malpractice premium rates which jeopardized consumer access to health care and contributed to escalating health care costs, this legislation sought to provide more affordable malpractice insurance coverage for physicians and dentists (see, Governor's Program Bill Mem., Senate Bill 6750, Bill Jacket, L.1985, ch. 294, 1985 N.Y. Legis.Ann. at 131). As part of the malpractice measures, Insurance Law § 5502 was amended to provide hospital-affiliated physicians and dentists with an additional layer of $1 million of insurance protection in the event of malpractice judgments which exceeded their primary level of malpractice coverage, at no cost to the practitioners (see, L.1985, ch. 294, § 18).1 The Legislature accomplished this excess coverage through the creation of the Hospital Liability Excess Pool (hereinafter the Pool) (see, L.1986, ch. 266, § 18). The Pool essentially collects premium payments from participating hospitals and purchases excess malpractice insurance for eligible doctors and dentists (see, L.1986, ch. 266, § 18).
Respondents Superintendent of Insurance and Commissioner of Health were designated to be responsible for the administration of the Pool. In 1986, the Superintendent designated respondent HANYS Services Inc. (hereinafter HANYS), a private corporation authorized to write excess medical malpractice insurance policies, as the Pool administrator.
The Superintendent, acting pursuant to authority under the program, promulgated regulations each year establishing premium rates for the excess malpractice policies purchased through the Pool (see, L.1986, ch. 266, § 40). These rates were formulated as a percentage of the primary coverage rates set for respondent Medical Malpractice Insurance Association (hereinafter MMIA), a nonprofit unincorporated association of insurance companies established by the Legislature in 1975. Any eligible physician or dentist was entitled to obtain excess coverage and MMIA therefore received premium payments for such coverage from the Pool. Funding of the Pool was derived from hospital in-patient discharge “add-on” fees (surcharges on hospital bills) authorized by the Commissioner (see, L.1986, ch. 266, § 18). Hospitals remitted the “add-on” charges to the Pool and recovered these costs through reimbursement from health insurers or uninsured patients. Certain third-party payors directly deposited their excess premium expense with the Pool.
After enactment of the 1985 and 1986 reforms, the Legislature modified the program to allow the Superintendent to determine whether the rates established for policies of excess malpractice coverage were projected to produce amounts greater than required to maintain solvency and “satisfy the standard that premiums shall be fixed at the lowest possible rates consistent with the maintenance of reasonable reserves and surplus therefore” (L.1997, ch. 161, § 2). If it is so determined, then the Superintendent “may direct any issuer of such policies to return to the purchasers all or a portion of such premium that is projected to be greater than required” (L.1991, ch. 266, § 4). Based on this statutory authorization, in 1991 the Superintendent directed MMIA to refund $155 million to the Pool, and, similarly, respondents HANYS Insurance Company and HANYS Member Hospital Self-Insurance Trust, as other providers of excess malpractice coverage, transferred $42 million and $13 million, respectively, to the Pool. The next two years the Legislature required MMIA to transfer $60 million and $150 million, respectively, to the State's general fund (see, L.1992, ch. 55, §§ 419, 420; L.1993, ch. 1, § 6). Apparently these transfers were effected, to some extent, to defray the State's Medicaid share of excess coverage costs (see, Dept. of Health Mem., Bill Jacket, L.1991, ch. 266). By similar statutory directive in 1996, MMIA transferred $481 million (see, L.1996, ch. 309, § 270).
Each year since its inception, the Legislature has renewed the excess medical and dental malpractice program and, in June 1995, the program was extended for an additional year for malpractice policies issued or renewed from July 1, 1995 through June 30, 1996. Exercising his rate-setting authority, the Superintendent promulgated premium rates for hospital excess policies at 26.2% of the premium rate for primary coverage established for MMIA.
By petition and amended petition, petitioners and intervenors, consisting of various Blue Cross and Blue Shield plans, health maintenance organizations, prepaid health services plans and insurance companies, commenced this CPLR article 78 proceeding seeking, inter alia, to annul the Superintendent's 1995-1996 excess medical malpractice rate determination as arbitrary and capricious. Petitioners essentially alleged that an enormous accumulation of unexpended excess medical malpractice reserves from prior years had created “redundant” or “surplus” reserves in the Pool which had not been adequately taken into account by the Superintendent when establishing the 1995-1996 premium year rates. Respondents moved to dismiss the amended petition, claiming that the Superintendent had acted reasonably and rationally in establishing the rates for the premium year in question, that the claims raised in the petition were barred by collateral estoppel and/or the Statute of Limitations, and that petitioners lacked standing. By stipulation, petitioners withdrew four causes of action and Supreme Court granted respondents' motion and dismissed the remaining causes of action in the amended petition as being time barred except for the claim challenging the Superintendent's 1995-1996 excess rate determination. Concluding that the Superintendent's rate determination was arbitrary and capricious, Supreme Court annulled the 1995-1996 premium assessment and directed that premiums paid for policy year 1995-1996 be refunded to the payors. Respondents now appeal.
Initially, we find that petitioners have standing to challenge the Superintendent's 1995-1996 rate determination. A party claiming that it has standing must demonstrate “that the interest or injury asserted fall within the zone of interests protected by the statute invoked” (Society of Plastics Indus. v. County of Suffolk, 77 N.Y.2d 761, 773, 570 N.Y.S.2d 778, 573 N.E.2d 1034; see, Matter of Dairylea Coop. v. Walkley, 38 N.Y.2d 6, 9, 377 N.Y.S.2d 451, 339 N.E.2d 865). Therefore, the injury asserted must fall within the “concerns sought to be promoted or protected by the statutory provision under which the agency has acted” (Society of Plastics Indus. v. County of Suffolk, supra, at 773, 570 N.Y.S.2d 778, 573 N.E.2d 1034). Here, the excess medical malpractice insurance program was enacted to stem rising health care costs associated with medical and dental malpractice insurance costs and to substantially enhance the reliability and predictability of medical malpractice insurance rate regulation (see, L.1986, ch. 266, § 1). We find that petitioners' claims are encompassed within the zone of interests protected by the statute and, therefore, as aggrieved parties they have a direct interest in reducing their expenses and system-wide health care costs as third-party payors of hospital services, including the excess malpractice surcharge, even though these costs may be passed on to their subscribers (see, New York State Conference of Blue Cross & Blue Shield Plans v. Axelrod, 145 Misc.2d 336, 338, 546 N.Y.S.2d 331; cf., Matter of Roosevelt Raceway v. County of Nassau, 18 N.Y.2d 30, 271 N.Y.S.2d 662, 218 N.E.2d 539).
It is well settled that the standard for review for an administrative regulation is whether the regulation was arbitrary or capricious (see, Matter of Consolation Nursing Home v. Commissioner of N.Y. State Dept. of Health, 85 N.Y.2d 326, 331, 624 N.Y.S.2d 563, 648 N.E.2d 1326). An administrative agency is to be accorded great deference in its decision-making powers, especially where the agency acts within its area of expertise (see, id., at 331, 624 N.Y.S.2d 563, 648 N.E.2d 1326; Matter of New York State Assn. of Counties v. Axelrod, 78 N.Y.2d 158, 166, 573 N.Y.S.2d 25, 577 N.E.2d 16). Therefore, in reviewing the Superintendent's rate determination, a court should not substitute its judgment for that of the Superintendent (see, Matter of Chemical Specialties Mfrs. Assn. v. Jorling, 85 N.Y.2d 382, 396, 626 N.Y.S.2d 1, 649 N.E.2d 1145); the Superintendent's expertise in setting insurance rate determinations should be provided substantial deference and not disturbed unless petitioners satisfy their heavy burden of demonstrating that the rate determination was irrational (see, Matter of Consolation Nursing Home v. Commissioner of N.Y. State Dept. of Health, supra, at 331-332, 624 N.Y.S.2d 563, 648 N.E.2d 1326; Matter of Medical Malpractice Ins. Assn. v. Superintendent of Ins. of State of N.Y., 72 N.Y.2d 753, 761-762, 537 N.Y.S.2d 1, 533 N.E.2d 1030; Matter of New York Univ. Med. Ctr. v. Axelrod, 188 A.D.2d 207, 210, 594 N.Y.S.2d 70, lv. denied 81 N.Y.2d 711, 600 N.Y.S.2d 442, 616 N.E.2d 1104). Based on our review of the entire record, we determine that petitioners have not met their burden and we find that the Superintendent's determination concerning the excess rates for policy year 1995-1996 was not irrational or arbitrary.
In light of the Superintendent's authority to supervise the insurance industry and to promulgate regulations (see, Blue Cross & Blue Shield of Cent. N.Y. v. McCall, 89 N.Y.2d 160, 163, 652 N.Y.S.2d 218, 674 N.E.2d 1124), the Legislature expanded the powers vested in the Superintendent to include the establishment of excess medical malpractice insurance premium rates (see, L.1986, ch. 266, § 40). The Superintendent must take into account several requirements in setting premium rates which “shall not be excessive, inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of the insurers” (Insurance Law § 2303) or “otherwise unreasonable” (Insurance Law § 2305[b] ). Consideration shall be “given to past and prospective loss experience * * * to past and prospective expenses * * * and * * * unabsorbed premium deposits allowed or returned to policyholders, members or subscribers” (Insurance Law § 2304 [a]; see, Insurance Law § 5505[a] ) in arriving at premiums at the lowest possible cost consistent with maintaining solvency and reasonable reserves and surpluses (see, Insurance Law § 5505[b] ). Additionally, all rates must be based on a sound actuarial basis (see, Insurance Law § 5505[b] ). Actuarial predictions are further complicated by the long period of time needed to accumulate data and claims experience regarding malpractice cases, especially in light of the fact that some claims are not paid for more than 10 years after the occurrence.
Here, in establishing the 1995-1996 excess rate, the Superintendent indicated that he reviewed reports, took into account the statutory factors and evaluated the financial condition of the insurers issuing medical malpractice insurance policies. Although the medical malpractice program amassed a huge accumulation in its reserves as evidenced by the transfers exceeding $500 million authorized by statute prior to the policy year at issue, nothing in the record indicates that the Superintendent failed to consider any of the appropriate statutory factors in setting the 1995-1996 excess medical malpractice premiums. A careful examination of the record reveals that the actuarial experts found the Superintendent's rate determination soundly based in actuarial principles and in compliance with the requirements of the applicable statutes. Although the Superintendent did not specifically set forth the standards in his rate determination, it is not sine qua non that the Superintendent did not follow the statutory rate-setting requirements.
Petitioners claim that the accumulation of excess premium reserves from prior periods creates an unnecessary surplus which demonstrates that the Superintendent failed to follow the statutory directive of considering past loss experience in setting the 1995-1996 excess premium rates. They also rely on more recent action by the Legislature, i.e., the $481 million appropriation by the State in 1996 (see, L.1996, ch. 309, § 270) and the enactment of chapter 161 of the Laws of 1997 which allows the Superintendent to use surplus reserves to fund the premium expense for the 1997-1998 policy year (see, L.1997, ch. 161, § 2), as evidence of the Superintendent's acknowledgment of surplus reserves. This argument, however, does not necessarily establish that the Superintendent's rate determination was arbitrary or capricious (see, Matter of Consolation Nursing Home v. Commissioner of N.Y. State Dept. of Health, 85 N.Y.2d 326, 331-332, 624 N.Y.S.2d 563, 648 N.E.2d 1326, supra). This retrospective examination fails to provide a manifestation of whether the 1995-1996 rates were inadequate according to statutory standards. Notably, all parties acknowledged that not all of the malpractice claims have been paid, even those claims for the early premium years of the program, and, in furtherance of the legislative objective to expand the availability of excess coverage, new insurers who entered the market prior to 1995 had not yet accumulated sufficient reserves.
Moreover, respondents' actuarial expert testified that the prior rate levels had no bearing on the 1995-1996 rate determination because rate-making is a prospective process and to make such a determination otherwise would conflict with basic tenets of insurance rate-making. Although petitioners' expert came to a contrary result, “[a] disagreement among actuaries * * * is not evidence that the Superintendent's acceptance of one set of conclusions was arbitrary” (Matter of Medical Malpractice Ins. Assn. v. Superintendent of Ins. of State of N.Y., 72 N.Y.2d 753, 763, 537 N.Y.S.2d 1, 533 N.E.2d 1030, supra). Although we acknowledge that the Superintendent is required to examine past loss experience (see, Insurance Law § 2304[a] ), we also recognize the Superintendent has discretion to assign appropriate emphasis to each of the rate-setting factors. Therefore, it is not irrational or unreasonable for the Superintendent to accord less weight to past loss experience, which is but one of various factors considered in developing a prospective excess rate, especially in consideration of the relatively limited duration and experience with excess medical malpractice insurance and the inherent risk associated with such claims. Significantly, excess malpractice premiums have been on a consistent decline to the extent that the 1995-1996 rate level was 50% of the 1988-1989 policy year rate.
We conclude that Supreme Court's determination was erroneous since it cannot be said as a matter of law that the Superintendent's rate determination for 1995-1996 was arbitrary or capricious. Therefore, petitioners have not satisfied their burden of demonstrating that the Superintendent's excess medical malpractice premium for 1995-1996 was unreasonable or irrational. Based on the foregoing, Supreme Court improperly annulled the Superintendent's 1995-1996 rate determination.
ORDERED that the judgment is reversed, on the law, without costs, determination confirmed and petition dismissed.
1. Primary malpractice coverage is generally $1 million per claim and $3 million for all claims per policy year.
CARDONA, P.J., MERCURE, SPAIN and CARPINELLO, JJ., concur.