COMMUNICATIONS WORKERS OF AMERICA, AFL-CIO v. STATE OF NEW JERSEY DEPARTMENT OF THE TREASURY STATE HEALTH BENEFITS COMMISSION

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2767-05T52767-05T5

COMMUNICATIONS WORKERS OF

AMERICA, AFL-CIO, CATHERINE

DANATOS, JOSEPH GOLOWSKI,

CHARLOTTE GORMAN, LAWRENCE

GUSTIN, NANCY HOLLERAN,

RODERICK LEWIS, THOMAS MILLER,

SUSAN NORRIS, THOMAS PALERMO,

JOHN POLK, DENNIS REITER,

RAE C. ROEDER, JOHN ROSE,

and MICHELE VICKERS,

Appellants,

v.

STATE OF NEW JERSEY,

DEPARTMENT OF THE TREASURY,

STATE HEALTH BENEFITS

COMMISSION,

Respondent.

 

NEW JERSEY EDUCATION A-2803-05T5

ASSOCIATION, JOYCE

AUERBACH, ARLINE FIELD,

CHARLES MOSES, MARYANN

BONALSKY, CATHY RAFFAELE,

CHRISTINE RICHARDS, SUSAN

STOLTE, and RONALD WINSETT,

Appellants,

v.

STATE OF NEW JERSEY,

DEPARTMENT OF THE TREASURY,

STATE HEALTH BENEFITS

COMMISSION,

Respondent.

 

NEW JERSEY EDUCATION A-0962-06T5

ASSOCIATION, JOYCE

AUERBACH, ARLINE FIELD,

CHARLES MOSES, MARYANN

BONALSKY, CATHY RAFFAELE,

CHRISTINE RICHARDS, SUSAN

STOLTE, and RONALD WINSETT,

Appellants,

v.

STATE OF NEW JERSEY,

DEPARTMENT OF THE TREASURY,

STATE HEALTH BENEFITS

COMMISSION,

Respondent.

__________________________________

 

Argued: December 5, 2007 - Decided:

Before Judges Cuff, Lisa and Simonelli.

On appeal from a Final Decision of the New Jersey Department of Treasury, State Health Benefits Commission.

Annmarie Pinarski argued the cause for appellant Communications Workers of America, AFL-CIO, and the individual appellants in A-2767-05 (Weissman & Mintz, LLC, attorneys; Ms. Pinarski, on the brief).

Richard A. Friedman argued the cause for appellant New Jersey Education Association and the individual appellants in A-2803-05 and A-0962-06 (Zazzali, Fagella, Nowak, Kleinbaum & Friedman, attorneys; Mr. Friedman, of counsel and on the brief; Edward M. Suarez, Jr., on the brief).

Eileen S. DenBleyker, Deputy Attorney General, argued the cause for respondent (Anne Milgram, Attorney General, attorney; Patrick DeAlmeida, Assistant Attorney General, of counsel; Christine Lucarelli, Deputy Attorney General, on the brief).

PER CURIAM

In these consolidated appeals, the Communications Workers of America (CWA), the New Jersey Education Association (NJEA) and several named appellants challenge a December 20, 2005 amendment made by the State Health Benefits Commission (SHBC) to the retiree prescription drug card pilot plan. The amendment increased the maximum out-of-pocket prescription drug expenditures paid by retirees and their eligible dependents in the State Health Benefits Program (SHBP) from a projected $626 in calendar year 2006 to $1000. On September 5, 2006, the SHBC adopted another subsequent resolution increasing the cap on out-of-pocket prescription drug expenditures to $1082. Appellants argue that the rule is invalid and unenforceable because it reduces post-retirement health care benefits, and that retirees are entitled to be restored to the status quo ante and to reimbursement of out-of-pocket prescription drug expenditures that exceed the cap in effect as of calendar year 2005. We hold that the rule allowing adjustment of the cap on out-of-pocket expenditures is consistent with statutory authority governing the prescription drug benefit plan and that the pilot plan, as adopted, is reasonable and necessary to preserve the fiscal integrity of the plan.

The SHBP was significantly modified by recent legislation. L. 2007, c. 103, effective June 28, 2007. The plans discussed in this opinion, the Traditional Plan and NJ Plus, are no longer offered to SHBP participants. The retiree prescription drug pilot program that is the subject of this appeal is governed by statutes in effect at the time of adoption and implementation of the program, and all statutory references are to the statutes in effect prior to the 2007 amendments.

All retirees who participate in the SHBP administered by the SHBC receive prescription drug coverage under the medical plans in which they enroll upon retirement. Effective March 20, 2000, the SHBC implemented the retiree prescription drug plan (the Drug Plan) as a pilot program for retired members enrolled in the Traditional Plan and the NJ Plus Plan. N.J.A.C. 17:9-6.10. Prior to the adoption of the Drug Plan, retirees who chose the Traditional or the NJ Plus plans were required to pay the full cost of prescriptions at a retail pharmacy and then would receive reimbursement from the plan administrator subject to an annual deductible and co-insurance amounts.

Most retirees were enrolled in the Traditional Plan in which they paid an annual major deductible of $100 per participant and co-insurance of twenty percent on their next $2000 of eligible medical and prescription drug costs. When a participant satisfied the deductible and co-insurance amounts, the Traditional Plan reimbursed the retiree in full for eligible medical and prescription drug expenditures. The out-of-pocket maximum for medical and prescription drug expenditures per participant at that time was $500.

The Drug Plan adopted in March 2000 was designed "to improve retiree access to prescription drugs by making them more affordable by reducing the up-front cost to retirees" and "to provide more cost-effective management of future costs." The Drug Plan contained a three-tiered cost-sharing requirement that provided participants with financial inducements to use lower cost generic drugs and mail order pharmacy options, and an annual maximum cap on cost-sharing expenditures by the Drug Plan participants. Once a Drug Plan participant reached an annual dollar amount of out-of-pocket cost-sharing expenses on covered drug prescriptions, all further prescriptions filled by the Drug Plan participant for the remainder of the calendar year would be free.

When the Drug Plan was first implemented in 2000, the annual cap on out-of-pocket co-payments for prescription drugs was $300. At the time, this represented a significant reduction in the annual out-of-pocket costs for the majority of participants. Pursuant to the terms of the Drug Plan, beginning in the third year and every year thereafter, the annual cap would be recalculated according to an inflation/Consumer Price Index adjustment formula specified at N.J.A.C. 17:9-6.10(h). By 2005, and consistent with this annual adjustment formula, the maximum out-of-pocket co-payment for calendar year 2006 was set to increase from $552 to $626.

On June 20, 2005, the SHBC issued a proposed amendment to the Drug Plan which would have eliminated entirely the annual cap on out-of-pocket co-payments for Drug Plan participants, as well as remove the reference to it as a "pilot program." After a public hearing, the SHBC issued a re-proposed amendment to N.J.A.C. 17:9-6.10.

The revised proposal retained the annual cap on out-of-pocket costs, but increased the ceiling to $1000 for calendar year 2006. Thereafter, the cap would rise annually pursuant to the inflation/index adjustment formula set forth in N.J.A.C. 17:9-6.10(h). The re-proposed amendment also proposed extending the pilot program status of the Drug Plan until December 31, 2007, in order to "provide staff and consultants with time to study the impact on the purchasing behavior of retirees enrolled in the [Drug] Plan."

The re-proposed amendment was enacted on December 20, 2005. N.J.A.C. 17:9-6.10 provided that:

(b) As a pilot program from March 20, 2000 to December 31, 2007, payment for eligible prescription drug expenses of retired members of the State Health Benefits Program and their eligible dependents who participate in the Traditional Plan or NJ PLUS shall be provided under the prescription drug plan. Payment for prescription drug expenses or the co-payments required under the prescription drug plan shall not be made under the major medical portion of the Traditional Plan or NJ PLUS. There shall be no annual deductible amount that retired members or their eligible dependents shall satisfy before eligibility for payment of prescription drug expenses under the prescription drug plan.

. . . .

(l) For calendar year 2006 (January 1, 2006 through December 31, 2006), the out-of-pocket maximum expense limit shall be equivalent to $1,000. For each calendar year thereafter the out-of-pocket maximum expense limit shall be recalculated pursuant to the provisions of (h) above.

The CWA, NJEA and several named individuals filed separate timely appeals challenging the validity of the rule amendment. On September 5, 2006, the SHBC adopted a subsequent resolution increasing the $1000 cap on prescription co-payments to $1082. Appellants filed timely appeals from the second increase in the cap. We consolidated the appeals by order dated February 6, 2007.

CWA and NJEA argue that the 2005 amendment to N.J.A.C. 17:9-6.10 is impermissible because the cap on out-of-pocket prescription drug expenditures is a health benefit and compensation for services rendered. Therefore, retirees have a property interest in the preservation of this benefit. CWA also argues that a retiree's vested interest in a retirement benefit may be rescinded only if the action is reasonable, such as for the purpose of preserving the fiscal integrity of the system. It insists that there is no evidence that the 2005 and 2006 amendments are necessary to preserve the fiscal integrity of the Drug Plan.

The operation of the SHBP is governed by the New Jersey State Health Benefits Program Act (the Act), N.J.S.A. 52:14-17.25 to -17.45. The Act states that the SHBC may set forth limitations and exclusions as it finds necessary to administer the SHBP:

Benefits under the contract or contracts purchased as authorized by this act may be subject to such limitations, exclusions, or waiting periods as the commission finds to be necessary or desirable to avoid inequity, unnecessary utilization, duplication of services or benefits otherwise available

. . . .

[N.J.S.A. 52:14-17.29(D).]

The Act further provides that any contract for basic benefits, extended basic benefits, and major medical benefits must be equal to or exceed the level of benefits provided for in the October 1, 1988 contract, unless modified by a collective bargaining agreement made on behalf of the State:

Notwithstanding the provisions of any other law to the contrary, the commission shall not enter into a contract under the "New Jersey State Health Benefits Program Act," P.L. 1961, c. 49 (C. 52:14-17.25 et seq.) for the benefits provided pursuant to the contract in effect on October 1, 1988, including, but not limited to, basic benefits, extended basic benefits, and major medical benefits unless the level of benefits provided under the contract entered into is equal to or exceeds the level of benefits provided for in the contract in effect on October 1, 1988, or unless the benefits in effect on October 1, 1988 are modified by an authorized collective bargaining agreement made on behalf of the State.

[N.J.S.A. 52:14-17.28a.]

N.J.S.A. 52:14-17.29 sets forth the benefits to be included in the SHBP. Subsection (H) specifically addresses prescription drug benefits.

The commission may purchase a contract or contracts to provide drug prescription and other health care benefits or authorize the purchase of a contract or contracts to provide drug prescription and other health care benefits as may be required to implement a duly executed collective negotiations agreement or as may be required to implement a determination by a public employer to provide such benefit or benefits to employees not included in collective negotiations units.

[N.J.S.A. 52:14-17.29(H).]

The purpose of the SHBP and the express terms of the statutes governing health benefits, and particularly the prescription drug benefit, belie the notion that the SHBC lacks the authority to modify the cap on out-of-pocket expenses incurred to purchase prescription drugs. The SHBP was enacted in 1961 for the purpose of providing affordable health care coverage for public employees on a cost effective basis. N.J.S.A. 52:14-17.25 to -17.45 (L. 1961, c. 49); Heaton v. State Health Benefits Comm'n, 264 N.J. Super. 141, 151 (App. Div. 1993). To that end, the Legislature has bestowed considerable discretion on the SHBC to define benefit limits and exclusions from coverage. Micheletti v. State Health Benefits Comm'n, 389 N.J. Super. 510, 522 (App. Div. 2007). The SHBC must exercise that discretion in accordance with the authority given to it by the Legislature. Id. at 522-23.

The prescription drug benefit was introduced for participants in the SHBP in 1982. At that time, the Legislature authorized the SHBC to purchase a contract or contracts to provide drug prescription benefits. N.J.S.A. 52:14-17.29(H). As with other health benefit coverage, the SHBC has the authority to set limitations and exclusions of coverage and to modify the coverage, N.J.S.A. 52:14-17.29(B), except that the benefits provided must be equal to or in excess of the level of benefits provided in the collective negotiations agreement in effect on October 1, 1988. N.J.S.A. 52:14-17.28a. No party alleges that the 2005 amendment transgresses this limitation. In short, the SHBC has the authority to modify the prescription drug program.

In addition, the cap on out-of-pocket prescription drug expenditures is part of a recently expired pilot program that was not a permanent part of retiree health care coverage. Notably, no retiree challenged the pilot program when initially adopted, although the prospect of future adjustments to the cap was an element of the Drug Plan. N.J.A.C. 17:9-6.10(h). By its terms, there was never a guarantee that the cap on out-of-pocket prescription expenses would remain static. As a pilot program, an active employee approaching retirement had no expectation that the original terms of the cap would continue throughout the term of the pilot program and thus could have no reasonable expectation that any aspect of the pilot program was intended as compensation for extended tenure as a public employee.

The CWA and NJEA primarily rely on two cases in support of their argument that the 2005 amendment to N.J.A.C. 17:9-6.10 impermissibly reduces the post-retirement health care benefits of retirees: Gauer v. Essex County Division of Welfare, 108 N.J. 140 (1987), and Bonzella v. Monroe Township, 367 N.J. Super. 581 (App. Div. 2004). In Gauer, supra, the Supreme Court addressed the narrow issue of "the statutory authority of Essex County to terminate the retirement benefits previously granted to the subject employees on the basis that N.J.S.A. 40A:10-23 mandates that all retirees of the county receive uniform treatment." 108 N.J. at 143.

The plaintiff in Gauer was employed by the Essex County Welfare Board when it adopted a resolution authorizing the Welfare Board to reimburse employees retiring with at least twenty-five years of service for their health insurance and Medicare Part B premiums upon retirement. Ibid. At that time the Welfare Board was an autonomous agency expressly designated as a corporate entity by N.J.S.A. 44:7-7. Ibid. Several years later, Essex County reorganized its form of government, the Welfare Board was abolished as an autonomous body, its functions assumed by the Essex County Division of Welfare, and its employees transferred to county employment. Ibid.

The plaintiff retired from county employment and received reimbursed premium costs for health insurance and Part B Medicare as part of his retirement benefits. Id. at 144. The county later decided to discontinue this reimbursement, based upon its belief that it was statutorily required to distribute benefits uniformly among employees. Ibid.

The Court first determined that the statute at issue, N.J.S.A. 40A:10-23, did not bar the continued payment of the retirement benefits in question. Id. at 148. Noting that the statute provided that if an employer assumed the cost of health insurance coverage for retired employees, it had to provide the coverage under uniform conditions; the Court examined whether any group of county employees was uniquely situated so that they could be given particularized treatment without violating the uniformity standard. Id. at 147. The Court found that the employees who worked for the former Board were hired under a particular compensation scheme governing their employment, and thus stood on a "distinctively different footing from any employees who were thereafter hired or continued to be employed up to the point of retirement under a different compensation/benefit scheme." Id. at 148.

The Court also examined whether the retirement benefits were compensatory in nature. Id. at 148-49. Noting case law that emphasized the compensatory nature of pension benefits, see, e.g., Uricoli v. Board of Trustees, Police & Firemen's Retirement System, 91 N.J. 62, 72 (1982); Masse v. Board of Trustees, Public Employees Retirement System, 87 N.J. 252, 260 (1981); Geller v. Department of the Treasury, 53 N.J. 591, 597 (1969); the Court held that "the reimbursement of health insurance premiums to long-standing employees was intended at least in part as compensation for extended tenure." Id. at 149-50.

The Court noted that while it has been held that

pension benefits can be modified in the interest of assuring the integrity of the pension system despite the compensatory aspect of their nature, . . . they cannot not be rescinded unilaterally when the underlying motivation is not preservation of the integrity of the benefit system but the erroneous belief that the benefits must be discontinued.

[Id. at 150.]

The Court further noted that it rested its decision on "the narrow, wholly statutory ground that the uniform application requirement of N.J.S.A. 40A:10-23 neither requires nor justifies terminating benefits afforded to the plaintiff by a predecessor autonomous agency pursuant to state regulations." Id. at 151. Thus, "[i]n the absence of such a justification, and given the compensatory nature of the benefits involved," the Court held that "the rescission of [the] plaintiff's retirement benefits was not authorized." Ibid.

In Bonzella, supra, the plaintiffs were a husband and wife who were municipal employees who retired with twenty-five years of service, thus qualifying them for paid health benefits in retirement. 367 N.J. Super. at 584. When the plaintiffs married, they each had an individual health policy and were covered by the other's policy as a dependent. Id. at 585. When they needed medical care, any amount not covered by one policy, such as co-payments and deductibles, could be covered by the other policy with a maximum benefit of 100% of the medical cost. Ibid.

The wife eventually took advantage of an "opt-out" provision provided by the municipal employer, in which her employer paid her $200 a month instead of providing a separate health insurance policy. Ibid. Just before retiring she expressed interest in discontinuing her participation in the "opt-out" program and enrolling in a health insurance plan offered by the municipality, while continuing to be covered as a dependent under her husband's policy. Id. at 586. Her employer advised her that she had to choose between coverage under an individual plan, or coverage as a dependent spouse under her husband's plan. Ibid.

This court held that because the couple had each worked for the municipal employer for twenty-five years, they had a contractual right to the health benefits, which were guaranteed under a municipal resolution. Id. at 589. Citing Gauer, we held that the coverage was part of their compensation. Ibid.

Gauer and Bonzella are distinguishable from this case. The issue in Gauer involved uniform treatment of local employers' retirees and employees under a specific statute not at issue in this case. In addition, Gauer involved complete termination of the payment of premiums for basic health benefits coverage which the employees had been promised before retirement. In contrast, the pilot program at issue did not rescind benefits, actually provided additional prescription drug benefits to certain retirees who had not previously had separate prescription drug coverage, and simply adjusted the terms of the benefit.

Bonzella is also distinguishable because it involved basic health benefits coverage for which the employees had worked for a certain length of time. The issue in Bonzella was whether an employee was entitled to cross-coverage under her husband's health insurance policy when both the husband and wife had worked the requisite time and thus met the requirements for individual coverage. Here, instead of involving basic health care coverage, the benefit at issue involves an increase to a cap on out-of-pocket prescription drug expenditures that is part of a pilot program that was not in existence during the retirees' employment. They had no expectation that the cap would be a certain amount.

The CWA and NJEA also rely on a host of out-of-state cases. We find none of these authorities persuasive as they concern different statutory benefit schemes.

Moreover, the specific action taken by the SHBC was a reasonable agency action. Even benefits in which the retiree has a property interest may be modified if the underlying motivation for the modification is the preservation of the integrity of the benefit system. Gauer, supra, 108 N.J. at 150. The summary of the agency proposal for the amendment to N.J.A.C. 17:9-6.10 details the reasons why respondent felt that increasing the cap was necessary. See 37 N.J.R. 3947 (Oct. 17, 2005).

Generally, the SHBC noted that statistics provided by the Drug Plan administrators consistently indicated that the Drug Plan participants who reach the cap on annual out-of-pocket expenses are less likely to use less expensive generic and mail-order options than the Drug Plan participants who pay co-payments throughout the year:

For example, in calendar year 2003, the majority of retired members with the prescription drug card plan (70 percent) never reached the annual out-of-pocket maximum and, therefore, continued to pay the applicable co-payment throughout the year for any prescription drug received. In this population, those using the card plan elected to receive 23 percent of their prescriptions through mail order and had a generic drug utilization rate of 41 percent. Their cost-share as a group was 17 percent of the overall cost of their prescriptions with the plan paying the remaining 83 percent of the costs. They accounted for only 27 percent of the total claims expenditure in 2003.

 
In contrast, the remaining 30 percent of retired members who utilized the card plan and reached the annual out-of-pocket maximum in 2003, accounted for 73 percent of the total claims dollars. Their use of mail order was markedly less (11 percent before reaching the maximum and six percent thereafter) and their rate of generic substitution was also considerably lower at 34 percent. Prescription drug purchasing by these members also accelerated once they reached the point where no further co-payments were required for the year. Because of the impact of $0 co-payments when the out-of-pocket maximum was reached, as a group, their cost-share for their prescription drug expenditure was only nine percent (compared to 17 percent for all other participants).

 
 
This pattern of behavior continued in 2004. Again, the majority of retired members enrolled in the pilot plan (67 percent) never reached the annual out-of-pocket maximum. Voluntary mail-order participation for those members who used the card plan rose from 23 percent to 26 percent, and their generic drug utilization rate improved slightly to 42 percent. Their cost-share as a group was maintained at 17 percent of the overall cost of their prescriptions with the plan paying the remaining 83 percent of costs. They accounted for only 28 percent of the total claims expenditure for the plan (the experience of the prior year was 27 percent). That year 38 percent of members who utilized the card plan exceeded the annual out-of-pocket cap of $474.00. Their claims accounted for 72 percent of total claims dollars for the year and 69 percent of the prescriptions filled. Their use of mail-order remained unchanged (11 percent before reaching the cap and six percent thereafter) and their rate of generic substitution was only 35 percent. As a group, their cost-share for their prescription drug expenditure was nine percent (compared to 17 percent for all other participants).

[ 37 N.J.R. 3947-48 (Oct. 17, 2005).]

The SHBC then explained why it believed raising the cap on out-of-pocket prescription drug expenditures was necessary to slow down the increasing cost of providing prescription drug coverage:

While it was hoped that the use of mail-order and generic drug options would improve over time, this has not materialized among participants with high prescription drug utilization who can anticipate reaching the annual out-of-pocket maximum. Unless participants who account for the vast majority of the prescription drug claims expenditure can be induced to purchase their prescription drugs in a more cost-effective manner, the Commission will continue to be severely hampered in its efforts to slow the increase in prescription drug plan costs, thus jeopardizing the future of this valuable benefit for retired members. The evidence suggests that unless retired members have a continued financial stake in the cost of their prescription drugs, they are far less likely to engage in cost-effective purchasing behavior. The Commission, therefore, proposes to modify the current Plan by increasing the annual out-of-pocket maximum effective January 1, 2006 from $626.00 to $1,000 instead of eliminating the out-of-pocket maximum as originally proposed. This increase should provide a financial incentive to encourage more participants to engage in cost-effective purchasing behavior while still protecting those with the highest prescription drug expenditures.

 
 
In calendar year 2003, total claims expenditure for the plan was approximately $282 million. Spending rose by 18 percent to $333 million in 2004. The cost of the plan will reach $399 million in 2005 (a 20 percent increase), and is projected to rise to $430 million by 2006 if the plan design remains unchanged. Approximately 208,000 participants (retirees and their dependents, all medical plans) receive prescription drug coverage under the SHBP. Of this number, approximately 51,100, or 25 percent of the total population enrolled in the SHBP retired group, are expected to exceed the out-of-pocket maximum of $552.00 for calendar year 2005. The remaining 73 percent of retired SHBP participants include NJ PLUS and Traditional Plan members whose prescription drug purchases did not exceed the annual maximum, as well as those that have elected coverage in the SHBP's five HMOs, which do not have a limit on out-of-pocket prescription drug expenditures. If the annual out-of-pocket expense limit is not modified or eliminated, in calendar year 2006 it would increase to $626.00 pursuant to the provisions of N.J.A.C. 17:9-6.10(h).
 
The Commission anticipates savings of approximately $16 million in the first year with the proposed increase to the out-of-pocket maximum. These savings represent about four percent of the projected total expenditure if the plan remains unchanged. The savings would accrue to the State and local employers that pay for the cost of post-retirement medical coverage as well as to participants who must pay for the cost of coverage in order to participate in the SHBP. This is a conservative figure that does not take into account changes in purchasing behavior that should occur in the population that consumes the majority of prescription drugs and plan dollars.

[ 37 N.J.R. 3948 (Oct. 17, 2005).]

The information provided by the SHBC more than adequately demonstrates that raising the cap is a reasonable step for it to take, and that its underlying motivation in proposing this modification was the integrity of a critical element of the retirement health benefit system. SHBP statistics demonstrate that Drug Plan participants who met the cap on out-of-pocket expenditures had a lower usage rate of mail-order and generic substitution. Such participants also accelerated their purchase of prescription drugs once the cap was reached. Given the rising cost of prescription drug coverage and the acceleration of those costs from year-to-year, raising the cap on out-of-pocket prescription drug expenditures in order to control expenses was reasonable.

We, therefore, affirm the 2005 amendment to N.J.A.C. 17:9-6.10(h) and the 2006 resolution adopted in accordance with this amendment that increased the cap on out-of-pocket expenditures for prescription drugs.

Affirmed.

(continued)

(continued)

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A-2767-05T5

August 1, 2008