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Pennsylvania’s facility that insures high risk medical professionals is a public agency, not a private entity, the Third Circuit Court of Appeals recently ruled.

The ruling by a three-judge panel opens the door for the state to access the Pennsylvania Professional Liability Joint Underwriting Association’s (JUA) $300 million budget surplus, something lawmakers have sought to do for years. Regulators say the surplus is far in excess of what the JUA needs for reserves to cover potential claims and the state has the right to access the funds for the good of the public. The JUA had successfully thwarted the state’s attempts to access its funds for years.

The state created the JUA almost 50 years ago to act as a professional liability insurer of last resort for high-risk medical providers. It is funded by premiums paid by policyholders and investment returns on its funds. The JUA does not receive funding from its member companies or from the Commonwealth. All medical professional liability insurers writing in the state must join. The JUA has never paid any dividends or distributions to its policyholders; nor can it do so by law. Since its inception, it has amassed through investments a surplus of about $300 million.

In 2017, 2018, and again in 2019, the Commonwealth took legislative action trying either to transfer the JUA’s excess surplus to the general fund or to assume control of the JUA. Every year, the JUA has gone to court to block the Commonwealth by arguing that the JUA is a private entity and such moves by the state would be an unconstitutional taking.

Frustrated Legislature

The Pennsylvania Supreme Court declined to answer the question of whether the JUA is a public or private entity, saying the issue is “principally one of federal law.”

The state legislature has been frustrated in its attempts to access the JUA funds because the federal district court has sided with the JUA. The district court has ruled that state creation of an entity is not by itself determinative of whether the entity is public or private. The district court held that the JUA is a “private entity as a matter of law” because it is an insurance company comprised of private members, governed by a private board, and supported by private employees; subject to de minimis Commonwealth oversight; and is exclusively funded by private premiums, “the payment of which has no public end-use.”

The JUA had succeeded in blocking the state until the Third Circuit’s December 16 opinion which rejected much of the district court’s reasoning and concluded that the Commonwealth that created the JUA as part of its broader legislative scheme to maintain a high-quality health care system is the only one with an interest in the JUA.

“The primary issue before us in these appeals is whether the JUA is indeed a creature of the Commonwealth beholden only to the Commonwealth; in other words, whether it is a public entity rather than a private one. We hold that it is, because the Commonwealth delegated power to the JUA to support a public purpose within the state insurance market, and because only the Commonwealth has a legally protectable interest in the JUA,” states the Third Circuit opinion penned by Justice Kent Jordan.

The federal appeals court said that as a public entity, the JUA lacks the ability to maintain the constitutional claims it has asserted against the Commonwealth, its creator.

The appeals court noted that Pennsylvania established the JUA to serve an integral role in the insurance market and, consequently, in the health care market. In doing so, it imbued the JUA with the “coercive power of state government” to compel private insurance companies to take specific actions. The JUA’s funds “are the result of the Commonwealth’s enforced acquisition of funds to support those goals” and only the Commonwealth has a legally protectable interest in the JUA and its resources, the court wrote.

The JUA has the option of appealing the matter to the U.S. Supreme Court.

Four Issues

The Third Circuit centered its analysis on four issues.

First, the court asked whether the JUA’s organic act granted it political power. The court concluded that the JUA’s exercise of power on behalf of the Commonwealth for a public purpose suggests that it is a public entity. Although not a grant of political power in the traditional sense, the JUA has the coercive power of the state to require all medical professional liability insurers to take certain actions. Insurers have to become members of the JUA whether they like it or not, and the state’s organic act for the JUA required the members to share the initial costs of the organization’s operation among themselves. The JUA also exercises the Commonwealth’s power in requiring the member-companies to provide affordable insurance to those unable to conveniently obtain it in the ordinary insurance market.

Second, the court considered whether the JUA was created as a civil institution to be employed in the administration of government. The district court had concluded that the JUA was not created or employed as such. But the Third Circuit disagreed. While the JUA is not a state agency in the traditional sense, Pennsylvania established the entity in 1975 to ensure that health care providers could obtain insurance at a reasonable cost and that victims of medical negligence would promptly receive fair compensation. The Third Circuit found that the JUA is “integral to the Commonwealth’s administration of a highly regulated, safe, and accessible health care system” by ensuring that providers in high-risk specialties or reentering practice can obtain required insurance coverage that would otherwise be cost-prohibitive. The General Assembly thus employed the JUA to serve as a safety net for both medical providers and their patients.

The Third Court next asked whether the JUA’s funds are drawn from public property. The district court found that the JUA has “never been funded by or endowed with ‘public property’ and held that the JUA’s surplus is private property. But the Third Circuit found an essential piece missing from that reasoning: the JUA’s funds are not simply private money exchanged among private individuals and entities in a typical insurance market. The funds are the result of the Commonwealth’s acquisition of policyholders’ premium payments for a public purpose. The JUA’s funds exist only to support the goals of the Commonwealth to make available a comprehensive and high-quality health system. The court noted that to the extent the JUA’s surplus could be considered profits, the JUA must use the funds for its nonprofit purpose, which is to provide insurance. The JUA’s “obviously excessive surplus” provides no profits or dividends to anyone, and no private party risks damage to its bank account should that surplus be reduced to a reasonable level. That the premiums are augmented by investment returns does not change that, the court said.

Finally, the Third Circuit weighed whether anyone but the Commonwealth has an interest in the JUA. According to the district court, the JUA’s members have an interest because they may be assessed if the JUA suffers a deficit, although that has never happened and is not allowed under its current plan. The governor and insurance commissioner have noted that the JUA has no beneficiaries or donors. Were the JUA able to be sold, who besides the Commonwealth would be entitled to receive the profit from the sale? “As far as we can tell, the Commonwealth, which created the JUA as part of its broader legislative scheme to maintain a high-quality health care system, is the only one with an interest in the JUA,” the appeals court concluded.

Topics Pennsylvania