Following through on its threats, the New Jersey Association of Health Plans filed suit last week against the state of New Jersey in Mercer County Superior Court over a law that is forcing health plans to pay for the failures of two HMOs.
The association said the measure, signed into law by Gov. Christine Todd Whitman in April, amounts to an unconstitutional taking of property.
NJAHP President Paul Langevin Jr. has made no secret of the fact that he has been shopping for an attorney to handle the case since the $100 million HMO bailout package became law.
The legislation requires health plans to give $50 million to the fund that was established to help compensate providers hurt by the 1998 bankruptcies of HIP Health Plan of New Jersey and American Preferred Provider Plan. The other half will come from tobacco settlement funds.
"We don't keep $50 million in a bank account ready to pay unexpected expenses," Langevin said.
State officials said they expect the legal challenge to fail, and they don't buy the health insurers' claims of financial hardship.
"These are issues that have already been ruled upon in the department's favor," said Bill Heine, a spokesman for the state Department of Banking and Insurance, citing a similar case in the early 1990s involving auto insurers, in which the state prevailed.
Langevin's group, which represents nine plans operating in the state--seven of which are affected by the law--claims that in the year ended 1998 the New Jersey HMO industry as a whole suffered a before-tax net operating loss of $22 million.
Heine agreed that both 1997 and 1998 were bad years for health insurers in New Jersey, but he said things picked up in 1999 when the industry tallied an after-tax profit of $45 million.
Langevin countered that before-tax profits in 1999 are only $33 million, according to statements filed by 16 plans contributing to the guaranty fund.
Though not surprised by the lawsuit, the New Jersey Hospital Association said the legal challenge could throw a grenade into ongoing peace talks the health plan and hospital industries initiated last fall.
"This kind of questions their whole sincerity on the working relationship they say they want to have with us," said Peter Lillo, vice president of legislative affairs for the NJHA.
Under the bailout program, the affected health plans have three years to spread out their payments and will contribute according to their market share.
State officials say the first year's assessment--roughly $17 million--amounts to less than 1% of the commercial written premiums for the 18 plans doing $4.5 billion worth of business in New Jersey.
Providers argue that they have already contributed their fair share to the guaranty fund by absorbing the loss of one-third of an estimated $150 million in unpaid claims left by the two bankrupt plans.
Langevin takes exception. He says state officials have never given him an accounting of more than $30 million in HIP Health Plan assets that have already been paid to doctors and hospitals. State officials say the money was only a down payment for providers who agreed to continue caring for HIP subscribers during a 90-day rehabilitation period in early 1999 when the state insurance department ran the failing health plan.
"We think that $30 million should offset the costs," Langevin said. "We're supposed to go find $50 million to pay hospitals and doctors, and the public is being told they are taking a one-third cut. It's kind of like getting paid one-third of your salary under the table."
In a related matter, the state of New Jersey last week sued the owner and officers of American Preferred Provider Plan, holding them responsible for the insolvency of the defunct HMO.
The lawsuit, filed in the same court, alleges that Magdy Elamir, M.D., chairman and sole shareholder of the 44,000-enrollee plan, and three high-level associates drained the plan's assets for personal purposes. The lawsuit seeks to recoup more than $16.7 million.
Trial dates have not been set in either case.