INSURANCE

DIVISION OF INSURANCE

Actuarial Services

Group Life, Group Health and Blanket Insurance: General Standards for Contract Provisions

Prohibition on Subrogation/Third Party Liability Provisions

Proposed Repeal and New Rule: N.J.A.C. 11:4-42.10

Authorized By: Donald Bryan, Acting Commissioner, Department of Banking and Insurance.

Authority: N.J.S.A. 17:1-8.1, 17:1-15e and 17B:25-18.2.

Calendar Reference: See Summary below for explanation of exception to calendar requirement.

Proposal Number: PRN 2002-66

Submit comments by April 5, 2002 to:

Karen Garfing, Assistant Commissioner

Department of Banking and Insurance

Regulatory Affairs

20 West State Street

PO Box 325

Trenton, NJ 08625-0325

FAX: (609) 292-0896

Email: Legsregs@dobi.state.nj.us

The agency proposal follows:

Summary

On June 26, 2001, the New Jersey Supreme Court issued a decision in Perreira v. Rediger, et al., 169 N.J. 399 (2001), holding that the collateral source rule contained in N.J.S.A. 2A:15-97 bars health carriers that expend funds on behalf of covered persons from recouping such payments through subrogation or contract reimbursement. "Health carriers" includes health insurance companies, health maintenance organizations, health service corporations, hospital service corporations and medical service corporations. The Court ruled that health carriers have no common law right to subrogation; the enactment of N.J.S.A. 2A:15-97 continued to leave health carriers with no right to recover paid benefits; and the rules adopted by the Department of Banking and Insurance (DoBI) allowing reimbursement and subrogation provisions in contract forms (N.J.A.C. 11:4-42.10), must be narrowly interpreted to apply only in cases that do not involve the collateral source rule (for example, those in which New Jersey law is not applicable).

The Court's decision cited only to DoBI's rules that permit subrogation and third party recovery provisions in contracts of health insurers and service corporations. However, similar provisions are also contained in the rules of the Department of Health and Senior Services with respect to subrogation and third party recovery provisions in contracts issued by HMOs (N.J.A.C. 8:38-11.9) and HMO group health benefits plans that are not standard plans subject to the Small Employer Health Benefits Program Act (N.J.S.A. 17B:27A-17 et seq.) or the Individual Health Coverage Program Act (N.J.S.A. 17B:27A-2 et seq.). Those rules are also affected by the Court's decision.

In response to the Court's decision, on July 5, 2001, DoBI issued Bulletin No. 01-11 to all New Jersey licensed health carriers directing them immediately to cease all subrogation and recovery efforts against persons covered by group or individual contracts or policies issued in New Jersey, except to the extent permitted by N.J.S.A. 2A:15-97, regardless of whether these contracts include subrogation or reimbursement provisions.

This Department proposes to repeal and replace its existing rule at N.J.A.C. 11:4-42.10, which contains standards for subrogation and repayment of benefits provisions in group health policy and contract forms. The proposed new rule prohibits all group health insurance policies and contracts from limiting or excluding health benefits in cases where the covered person has sustained a loss attributable to the actions of a third party, and further requires insurers to file endorsements with the Commissioner removing any subrogation and third party recovery provisions contained in their forms.

As the Department has provided a 60-day comment period on this notice of proposal, this notice is excepted from the rulemaking calendar requirement pursuant to N.J.A.C. 1:30-3.3(a)5.

Social Impact

The proposed repeal and new rule will have a favorable impact on insureds under a group health carrier contract who also prevail in a tort judgment action because their right to keep their health insurance proceeds and their full tort judgment will be maintained. On the other hand, health carriers will be unfavorably impacted because they will no longer be permitted to include reimbursement and subrogation provisions in their policies and contracts.

Economic Impact

This proposed repeal and new rule will have a favorable impact on insureds under a group health carrier contract who also prevail in a tort judgment action because they will be permitted to continue to recoup medical payments from their health carrier in addition to keeping their full tort judgment.

This proposed new rule will have an indirect unfavorable impact on health carriers because the new rule merely implements the Perreira Court's decision prohibiting subrogation and other third party recovery actions. Health carriers will be prohibited from recouping payments made to an insured in those cases where the insured also obtained payment from a collateral source. Nevertheless, a carrier's plans are not priced based on the possibility that some monies may be recovered from collateral sources. Accordingly, revocation of a health carrier's subrogation right should have no impact on rates.

Federal Standards Statement

A Federal standards analysis is not required because this proposed repeal and new rule is not subject to any Federal standards or requirements.

Jobs Impact

The Department does not anticipate that this proposed repeal and new rule will result in the generation or loss of jobs.

Agriculture Industry Impact

This proposed repeal and new rule has no impact on the agriculture industry.

Regulatory Flexibility Analysis

This proposed repeal and new rule may apply to some insurers that constitute "small businesses" as that term is defined in the Regulatory Flexibility Act at N.J.S.A. 52:14B-l6 et seq. The new rule requires group health carriers to remove from their policy, contract and certificate forms any language that would limit or exclude benefits paid by the carrier in cases where the covered person has sustained a loss attributable to the actions of a third party, and further requires those insurers to file endorsements with the Commissioner removing any subrogation and third party recovery provisions from their existing forms. While it is unlikely that affected carriers will need to seek outside professional services in order to comply with these requirements, they will be required to bear any administrative costs related to compliance. Nevertheless, the New Jersey Supreme Court's Perreira decision applies to all health carriers, and small business carriers are not exempt from following its mandate. Because this repeal and new rule merely conforms the Department's rules to the Court's decision, no exemption can be made for small business health carriers.

Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

11:4-42.10 [Provisions for subrogation and repayment of benefits] Prohibition on subrogation/third party liability provisions

[ (a) Group policies and certificates providing health insurance may contain subrogation provisions or provisions that require the return to the insurer by a covered person of benefits paid for illness or injury up to the amount a covered person receives from a third party through settlement, a satisfied judgment or other means, as compensation for the medical costs of such illness or injury, subject to the following:

1. Repayment of benefits shall be required only where the amount received for the third party through settlement, judgment or other means are specifically identified as amounts paid for health benefit which have been paid by the insurer under the group policy or certificate.

2. The repayment shall not exceed the amount of benefits paid by the insurer under the group policy or certificate for the particular illness or injury.

3. The group policy and certificate shall allow the covered person to deduct from the repayment to the insurer the reasonable pro-rata expenses incurred in effecting the third party payment.

(b) Group policies and certificates providing health insurance may exclude or reduce the health benefits payable to or on behalf of a covered person to the extent that the covered person has already received payment from a third party for past or future health care costs for an illness or injury resulting from the negligence or intentional act of such third party.

(c) Except as set forth in (b) above, no policy or certificate providing group health insurance shall limit or exclude health benefits as the result of the covered person's sustaining a loss attributable to the actions of a third party.

(d) Notwithstanding (a) or (b) above, disability income, long term care and accidental loss benefits and blanket insurance shall not be subject to subrogation or repayment of benefits received.

(e) Subrogation shall only be applicable when third party liability benefits may exist, subject to the restrictions set forth above.]

(a) No policy or certificate providing group health insurance shall limit or exclude health benefits as the result of the covered person's sustaining a loss attributable to the actions of a third party.

(b) Insurers shall file with the Commissioner no later than July 1, 2002, endorsements that remove any subrogation and third party recovery provisions contained in previously filed contract, policy or certificate forms.