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D.C. Appleseed Center For Law and Justice, Inc v. District of Columbia Department of Insurance

September 13, 2012


On Petition for Review of a Decision of the District of Columbia Department of Insurance, Securities, and Banking MIE-007-09

The opinion of the court was delivered by: Ruiz, Senior Judge

(Argued June 9, 2011

Before FISHER and BLACKBURNE-RIGSBY, Associate Judges, and RUIZ, Senior Judge.*fn1

Petitioner D.C. Appleseed Center for Law and Justice, Inc. (Appleseed) seeks our review of the decision and order of the respondent, District of Columbia Department of Insurance, Securities, and Banking (Department or DISB), determining that the 2008 surplus of intervenor, Group Hospitalization and Medical Services, Inc. (GHMSI), was not "excessive" for purposes of the Hospital and Medical Services Corporation Regulatory Act of 1996, as amended by the Medical Insurance Empowerment Amendment Act of 2008, D.C. Act 17-704, 56 D.C. Reg. 1346 (2009), D.C. Code §§ 31-3501 to -3524 (2009 & Supp. 2010). Appleseed makes three principal arguments: (1) that the Commissioner incorrectly interpreted the relevant statutory language; (2) that the Commissioner failed to provide adequate reasons in support of the decision finding that the 2008 surplus was not excessive; and (3) that the Commissioner abused discretion in failing to order an immediate review of GHMSI's 2009 and 2010 surpluses. GHMSI opposes these arguments and, in addition, contends that Appleseed does not have standing to seek judicial review of the Commissioner's order. We conclude that Appleseed has standing to bring this petition. We also agree with Appleseed's first two contentions, but we reject the third. We therefore affirm the Commissioner's decision to defer review of GHMSI's 2009 and 2010 surpluses until July 31, 2012, but reverse the Commissioner's determination that GHMSI's 2008 surplus was not unreasonably large or excessive, and remand the matter to the Commissioner for further proceedings not inconsistent with this opinion.

I. Factual and Procedural History

GHMSI was created in 1939 by Congressional charter to provide health care services and medical insurance.*fn2 See Pub. L. No. 76-395, 53 Stat. 1412 (1939).*fn3 Organized as a "charitable and benevolent institution," id. § 8, 53 Stat. at 1414, GHMSI "shall not be conducted for profit, but shall be conducted for the benefit of [its] certificate holders." Id. § 3, 53 Stat. at 1413. Although initially "not subject to the provisions of the statutes regulating the business of insurance in the District of Columbia," id. § 7, 53 Stat. 1414, Congress amended the charter in 1993 to place GHMSI under the District's regulatory authority as a result of GHMSI's "deteriorating" financial condition. See Pub. L. No. 103-127 § 138, 107 Stat. 1336, 1349 (1993).*fn4 In 1997, GHMSI merged with Blue Cross/Blue Shield of Maryland to form CareFirst, Inc. See Grp. Hosp. & Med. Servs., Inc., No. A-HC-97-01 (Dep't of Ins. & Sec. Regulation, Dec. 23, 1997). Presently, GHMSI enrolls about one million subscribers in the District of Columbia, Maryland, and northern Virginia; approximately 30% of its policies (individual, group and self-insured) are issued in the District and 10% of its individual subscribers reside in the District. According to the Commissioner, approximately 69% of premiums and claims during the 1999--2008 period were attributable to policies issued in the District of Columbia.

A. Appleseed's Report and Action by the Council of the District of Columbia

In 2004, Appleseed issued a lengthy report, CareFirst: Meeting Its Charitable Obligation to Citizens of the National Capital Area, in which Appleseed concluded that "GHMSI has not been meeting [its] charitable obligation to citizens of the National Capital area" in violation of its "federally imposed charitable obligation." Asserting that "GHMSI is in effect owned by the public" and "[i]ts mission is to serve that public," the report argued that GHMSI was subject to regulatory oversight and that the D.C. Attorney General had authority to enforce its charitable mission. Appleseed urged GHMSI to engage in more charitable activities and at a higher rate. Specifically, the report recommended that GHMSI could spend "between 2 and 3 percent of its earned annual premiums [equaling $41 to $61 million] and still maintain its current pricing structure, its level of competitiveness, and a high level of surplus."*fn5 The report also included a legal analysis prepared by Covington & Burling LLP arguing that GHMSI had an obligation, pursuant to its federal charter and District law, to support public health initiatives beyond providing health plans to its current subscribers.

Appleseed's report spurred activity by officials of the District of Columbia and by the Council of the District of Columbia. The following year, 2005, then-D.C. Attorney General Robert J. Spagnoletti issued a memorandum regarding GHMSI's charitable obligations. See Memorandum from Robert J. Spagnoletti, Attorney General, to Robert Bobb, City Administrator 8 (Mar. 4, 2005). The memorandum concurred with Appleseed's assessment that "GHMSI has an obligation to use its profits and excess surplus to serve the purpose of promoting health in its service areas," and agreed that the D.C. Attorney General has the authority to enforce GHMSI's obligations on behalf of the public. Id. at 8. Moreover, the D.C. Attorney General opined that GHMSI cannot fulfill its charitable mission "simply by allocating a specified percentage of premiums or earnings to distinctly 'charitable' activities. Rather, GHMSI is to devote its entire operations to serving, directly or indirectly, the purpose for which it was chartered." Id. at 2. The D.C. Attorney General's memorandum also concluded that it was up to GHMSI's Board to decide how it would do so, and that GHMSI could choose "to fulfill this obligation in various ways, such as devoting surplus resources to (1) improving the quality, benefits, affordability or accessibility of its non-profit health plans, (2) providing health plan benefits or other services to the poor at no charge, and/or (3) funding health-related activities that are conducted by other charitable organizations." Id. at 8. The D.C. Attorney General's Memorandum did not address whether GHMSI had "in fact been operating consistently with its charter." Id. at 2.*fn6

That same year, also in response to Appleseed's report, the Commissioner made inquiry into the matter. See Report of the District of Columbia Department of Insurance, Securities, and Banking in the Matter of: Inquiry into the Charitable Obligations of GHMSI/CareFirst in the District of Columbia (May 15, 2005). After a public hearing in which Appleseed and its report were prominent, the Commissioner agreed that GHMSI has a legal obligation to engage in charitable activities and that "as a strong and responsible provider of health care insurance in its service area, [GHMSI] can and should do more to promote and safeguard public health of the residents of the District of Columbia." Id. at 2.The Commissioner concluded that, although by providing nonprofit health insurance GHMSI could meet its legal charitable obligations, GHMSI "can and should engage in more charitable activity" in the District, id. at 10, finding thatit has the authority to do so in the area of public health, id. at 11-12, and that its ability "to do more for the community than it is doing currently is beyond doubt." Id. at 6-10. As a result, the Commissioner found that "GHMSI should be engaging in charitable activity significantly beyond its current activities," but rejected the level of charitable activity urged by Appleseed (between $41 and $61 million) as "unsound and potentially dangerous." Id. at 19. Because GHMSI testified that it proposed to reduce its surplus and engage in significant new health care initiatives in the District of Columbia, the Commissioner stopped short, however, of making a recommendation as to the proper level and nature of charitable activity that GHMSI should provide in the District, stating that it was for the GHMSI Board to make that determination in the first instance. Id. at 22.

B. The Medical Insurance Empowerment Amendment Act

Dissatisfied with the state of affairs,*fn7 on January 23, 2009, the Council of the District of Columbia passed the Medical Insurance Empowerment Amendment Act of 2008 (MIEAA), D.C. Law 17-369, which authorizes the Commissioner to determine whether a medical services corporation's surplus is "excessive" and to order that any excess surplus be reinvested in the community. See D.C. Act 17-704, 56 D.C. Reg. 1346 (2009), D.C. Code §§ 31-3501 to -3524 (2009).*fn8 In particular, the MIEAA created a new section, entitled "community health reinvestment," which provides that "[a] corporation shall engage in community health reinvestment to the maximum feasible extent consistent with financial soundness and efficiency." D.C. Code § 31-3505.01 (2009). The Act also added a new subsection to D.C. Code § 31-3506, which states in relevant part:

[T]he Commissioner shall review the portion of the surplus of the corporation that is attributable to the District and shall issue a determination as to whether the surplus is excessive. The surplus may be considered excessive only if:

(1) The surplus is greater than the appropriate risk-based capital requirements as determined by the Commissioner for the immediately preceding calendar year; and

(2) After a hearing, the Commissioner determines that the surplus is unreasonably large and inconsistent with the corporation's obligation under section 6 (a).

D.C. Code § 31-3506 (e) (2009).*fn9 The MIEAA became effective on March 25, 2009.

The Department published regulations pursuant to the MIEAA on November 13, 2009, establishing procedures for the determination of an excess surplus.*fn10 See 56 D.C. Reg. 8841 (2009). The regulations require all domestic hospital and medical services corporations licensed in the District to file an annual financial report with the Commission detailing "the company's surplus and examin[ing] whether the company's surplus is considered excessive." 26-A DCMR § 4601.1 (2009). If the Commissioner preliminarily determines that the company's surplus is excessive, the regulations compel a public hearing "to determine whether the company's surplus is excessive and unreasonably large." Id. § 4601.5.

As this appeal centers on the issue of GHMSI's surplus, we pause to provide some background information. GHMSI, like all insurance companies, is required to maintain a surplus of capital to cover the company's projected risk, development costs, and growth. The National Association of Insurance Carriers (NAIC) has developed risk-based capital (RBC) formulas "as a standardized approach to developing minimum solvency indicators." *fn11 These formulas have been adopted by most states, the District of Columbia, and the Blue Cross/Blue Shield Association (BCBSA), of which GHMSI is an affiliate. The District of Columbia has adopted statutory minimum requirements for surplus levels, expressed as a RBC-ACL ratio. See D.C. Code §§ 31-2001 to -2013. Regulatory action by the District is triggered when an insurer falls below 200% RBC-ACL ratio, at which point the insurer must submit a plan to the Department identifying the problematic conditions and proposing corrective actions. See id. §§ 31-2001 (13), -2003. If an insurer falls below lower RBC-ACL levels, i.e. 150%, 100%, and 70%, increasingly corrective regulatory actions are taken by the Department. See id. §§ 31-2004, -2005, -2006. In addition, the regulations obligate the Commissioner, in determining whether a surplus is excessive, to consider the RBC requirements of the NAIC and the capital requirements of the BCBSA.*fn12 16-A

DCMR § 4601.4; see note34 infra.

C. GHMSI's Surplus Hearing

The DISB Commissioner*fn13 preliminarily determined that GHMSI's surplus as of December 2008 was "greater than [the] appropriate risk-based capital requirements" and ordered a public hearing. On July 24, 2009, the Department published a notice of public hearing "to determine whether the portion of the surplus of [GHMSI] attributable to the District is unreasonably large and inconsistent with GHMSI's community health reinvestment obligations." See 56 D.C. Reg. 5967 (2009).

Before the hearing, GHMSI submitted two reports, each enclosing an analysis from Milliman, Inc., an actuarial firm, on GHMSI's surplus, as well as a report from The Lewin Group, another actuarial firm, analyzing both Milliman reports. Appleseed also submitted a report that included a legal analysis of the relevant provisions of the MIEAA, an assessment of GHMSI's surplus from a third actuarial firm, Actuarial Risk Management (ARM), and a statement from Deborah Chollet, a Senior Fellow at Mathematica Policy Research, Inc. At the hearing, conducted on September 10 and 11, 2009, the Commissioner*fn14 received oral and written testimony from GHMSI, Milliman, Lewin, ARM, the Commissioner of the Maryland Insurance Administration (MIA), Appleseed, Senior Fellow Chollet, and other interested parties. The Commissioner also retained an actuarial firm, Rector & Associates, Inc. (Rector), to participate in the proceedings and to question witnesses. After the hearing, the Commissioner received supplemental reports and filings from GHMSI, Milliman, Lewin, and Appleseed, as well as additional submissions from interested members of the community. The Commissioner also received a report authored by the Invotex Group, an actuarial firm retained by the MIA for the proceedings against CareFirst in Maryland, and a report authored by Rector. The hearing record was closed on July 21, 2010.

D. DISB Commissioner's Decision and Order

On August 6, 2010, the DISB Commissioner issued an initial decision and order. The Commissioner found that GHMSI's surplus level as of the end of 2008 was approximately $687 million and its RBC-ACL ratio was 845%.*fn15 In surveying the actuarial reports, the Commissioner noted that Milliman concluded that GHMSI's "optimal" surplus range was between 750--1050% RBC-ACL ratio; Lewin determined that an "appropriate" range was between 750--1000% RBC-ACL ratio; ARM determined that the appropriate range was between 400--525% RBC-ACL ratio; Invotex concluded that an "appropriate" range under Maryland law was between 700--900% RBC-ACL ratio; and Rector, the Commission's expert, did not provide a range, but estimated that a 600% RBC-ACL ratio would be required to not fall below a 200% RBC-ACL at a 99% confidence level, and 850% RBC-ACL ratio to not fall below 375% RBC-ACL ratio at a 95% confidence level. The Commissioner also found that in 2008, GHMSI paid approximately $7.1 million in premium taxes to the District of Columbia, contributed the equivalent of $3 million to the District's Open Enrollment program, and made contributions of approximately $2.9 million in the District for corporate health-related sponsorships, and various forms of targeted, programmatic, and catalytic giving. The Commissioner additionally took notice of the recently-enacted federal health care reform legislation ("Affordable Care Act"),*fn16 the impact of which would be "unprecedented, extremely significant, and . . . not fully known."

The Commissioner understood the term an "unreasonably large surplus," as defined in 26-A DCMR § 4699.4, to be "any amount in excess of RBC-ACL level that is necessary for the corporation to meet its expected and unanticipated contingencies, assuming the RBC-ACL level is at or above the NAIC and Blue Cross and Blue Shield Association RBC-ACL requirements." In comparing the four credited reports, the Commissioner found that "all four reports overlap substantially" in that "all four ranges determined by the experts include[d] . . . the RBC-ACL range of 750% to 850% as a subset."*fn17 However, the Commissioner deferred making a final determination, finding it necessary to obtain and consider information about how the Affordable Care Act would affect GHMSI. The Commissioner ordered the record to be reopened for that purpose.

Subsequently, in response to the Commissioner's order reopening the record, GHMSI submitted a supplemental report on September 3, 2010, which included estimates by Milliman and Lewin on the likely impact of the Affordable Care Act on GHMSI's future financial obligations and consequent need for an additional 100-200% RBC-ACL. Rector filed a report rebutting GHMSI's submission. Appleseed also submitted a supplemental report. GHMSI filed a submission rebutting Appleseed's and Rector's reports.

The Commissioner's final decision and order was issued on October 29, 2010. In the order, the Commissioner summarized the reports submitted by the parties and adhered to the findings of fact and credibility determinations set forth in the initial decision. The Commissioner first noted that the Affordable Care Act would "likely . . . require GHMSI to maintain additional surplus," but that the "precise financial impact" of the legislation was uncertain. With this consideration in mind, and "tak[ing] into account all expert reports and submissions accepted into the record," the Commissioner determined that GHMSI's surplus was not excessive. Specifically, the Commissioner found that while the experts disagreed on certain assumptions and calculations, they all agreed on using actuarial modeling methods to predict GHMSI's future capital needs. Further, the Commissioner observed that their findings had "significant overlap with regard to the surplus necessary for GHMSI's operations":

According to [Milliman]'s calculations, an "optimal surplus target range" for GHMSI as of December 31, 2008 is a 750-1050% RBC-ACL ratio. The other expert reports corroborate that maintaining an 850% RBC-ACL ratio would result in an extremely high degree of likelihood that GHMSI would not fall below a 200% RBC-ACL ratio as of December 31, 2008. Thus, all four experts - including the two experts engaged by GHMSI - agree that an 850% RBC-ACL ratio would give GHMSI an extremely high degree of likelihood of not dropping below a 200% RBC-ACL ratio as of December 31, 2008. The work performed by Milliman and the Commissioner's Experts also leads to the conclusion that an 850% RBC-ACL would provide a very high degree of likelihood that GHMSI would not drop below a 375% RBC-ACL ratio as of December 31, 2008. Further, the work performed by Lewin and Invotex Group does not contradict this conclusion.

The Commissioner declined to incorporate any increase to the RBC-ACL ratio to account for the new health care regulations because it found the increases suggested by GHMSI's experts, Milliman and Lewin, were "arbitrary and unsupported by actuarial data." The Commissioner stated that the "amount of surplus necessary for GHMSI to meet its expected and unanticipated contingencies as of December 31, 2008, is the surplus necessary to maintain an 850% RBC-ACL ratio." Therefore, because GHMSI's surplus as of December 31, 2008, yielded a 845% RBC-ACL ratio, the Commissioner concluded that it was "neither unreasonably large nor excessive." The Commissioner also determined that the portion of the surplus attributable to the District need not be calculated because it likewise was not excessive. The Commissioner further commented that GHMSI's surplus for 2009, $761 million, equated a 902% RBC-ACL ratio, which it would have deemed "unreasonably large . . . if all the assumptions underlying this review were to remain the same." Yet, finding a future review to be necessary due to changing assumptions caused by the new Affordable Care Act, the Commissioner felt it appropriate to make a de novo review of the surplus at a later date. The Commissioner thus ordered a subsequent review of GHMSI's surplus to occur "by July 31, 2012, with the benefit of the ongoing implementation of the Federal Health Care Reform Acts and the enactment and implementation of companion legislation in the District."*fn18

Appleseed filed a petition for review of the Commissioner's order with this court on November 24, 2010. Appleseed then filed a consent motion to "confirm jurisdiction" of this court.*fn19 By order dated March 22, 2011, the motion was denied and the parties were directed to address the questions of the court's jurisdiction and Appleseed's standing in their briefs.

We address first the issues of jurisdiction and standing referred by the motions division and then turn to the ...

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