Blue Shield of Maryland, Inc. v. Ward Machinery Co.

Thompson, J., delivered the opinion of the Court. This case presents two appeals from an order of the Baltimore City Court which affirmed in part and reversed in part an order of the Insurance Commissioner of the State of Maryland, directing Blue Cross of Maryland, Inc. and Blue Shield of Maryland, Inc. to distribute to their group subscribers $3,050,000 which had been accumulated during 1979 as surplus reserves. In the first appeal, Blue Cross is the appellant and the Insurance Commissioner is the appellee; the issue presented is the propriety of the Commis ²⁶⁰ sioner’s order directing distribution. In the second, Blue Cross, Blue Shield and the Commissioner are the appellants and the Ward Machinery Company (Ward) is the appellee; at issue is which group subscribers are to share in the distribution, if it occurs.

Md. Ann. Code, Art. 48A, § 355 (b) (6) (1957, 1979 Repl. Vol., 1980 Cum. Supp.) provides that nonprofit health service plans, such as Blue Cross and Blue Shield, "[Slhall maintain a minimum reserve equal to at least 3% of the subscription charges earned during the prior calendar year as shown on the annual statement filed in the office of the Commissioner. If the Commissioner determines after a hearing that the reserves are excessive in amount, he may order the corporation to submit a plan for distribution of the excess in a fair and equitable method, or in the event the corporation fails to submit such a plan within 60 days, he may compile a plan and order the corporation to implement it.

Reserves equal to 2 months of the nonprofit health service plan’s prior calendar year’s claims and operating expenses shall be considered reasonable provided they are in excess of minimum reserve requirements.” On April 11, 1980, Blue Cross and Blue Shield advised the Commissioner that, during 1979, they had accumulated reserves in excess of those required by law and presented a plan for the distribution of the surplus to their subscribers. Because of underwriting losses projected for 1980, which the companies claimed would extirpate the surplus before the end of the year, Blue Cross and Blue Shield proposed that the distribution be contingent upon the non-occurrence of the projected losses, i.e., if the reserves declined as expected, there would no distribution. Under the Blue Cross-Blue Shield proposal, if distribution did occur, the refunds would be made to the 1979 subscribers who had contributed to the surplus, provided that they had re-enrolled for 1980. A public hearing was held on the proposals on May 19,1980.

Ward, which had been a subscriber in 1979 but which had not ²⁶¹ re-enrolled in 1980, appeared at the hearing and opposed that portion of the plan which restricted refunds to 1980 subscribers; it argued that it was unfair to deny it a share in the surplus, to which it had contributed, because it had not re-enrolled. On June 12, 1980, the Commissioner rejected the proposed contingent distribution and ordered an immediate refund of $3,050,000; however, he accepted as not unreasonable that portion of the plan which limited participation in the distribution to current Blue Cross-Blue Shield subscribers. Blue Cross appealed to the Baltimore City Court from the order directing distribution and Ward appealed from the order that limited participation to current subscribers. The court below dismissed Blue Cross’ appeal, upholding the distribution order, but reversed that portion of the Commissioner’s order which limited participation, ordering that all 1979 group subscribers who contributed to the surplus share in its distribution, regardless of whether they had re-enrolled in 1980.

Appeals to this Court followed. I Blue Cross argues that the court below erred in affirming the Commissioner’s order requiring distribution of the surplus reserves because it "ignored” evidence that the company’s reserves would be reduced by losses in 1980 to less than the two month level referred to in Art. 48A, § 355 (b) (6). We believe that the court below adequately and correctly disposed of this contention in its opinion, where it stated as follows: "Blue Cross appeals from that part of the Commissioner’s order requiring it to refund $3,050,000 from its surplus reserves to certain group subscribers. In March, 1980 Blue Cross had submitted to the Commissioner a refund plan of $2,700,000 contingent upon favorable underwriting experience during the first six months of 1980. but at the 5/19/80 administrative hearing, it argued ²⁶² that the refund plan should be rejected or delayed because of underwriting losses during the first three months of 1980.

Md. Code, Article 48A. Sec. 355 (b) (6) requires nonprofit health service insurers (such as Blue Cross) to maintain a 'minimum reserve equal to at least 37c of the subscription charges earned during the prior calendar year’; if the Commissioner determines after a hearing that the reserves are 'excessive’, he can order the insurer to submit a distribution plan for the excess 'in a fair and equitable method,’ or he can order a distribution plan himself if the insurer fails to submit one; reserves 'equal to two months of the nonprofit health service plan’s prior calendar year’s claims and operating expenses shall be considered reasonable provided they are in excess of minimum reserve requirements.’ The $3 million plus refund ordered by the Commissioner in June, 1980 would still leave Blue Cross with reserves complying with the 37c of subscription charges requirement as well as the two months of the prior year’s claims and expenses requirement (which is about 167c of subscription charges). "Blue Cross presented evidence to show that if its first quarter experience in 1980 remained consistent through the rest of the year, then its reserves at the end of 1980 would be below the two month claims and expense figure for 1980. From this, Blue Cross contends that the Commissioner was wrong in ordering the refund now, since that would require a rate increase by the end of 1980.

"Sec. 355 (b) (6), however, does not mandate that the insurer’s reserves at all times be at least equal to the two month claim and expense figure. All the statute requires is that the reserves remaining after the refund be at least equal to the two month claim and expense figure as of the end of the year preceding the refund. The 37c of subscription charge figure must always be maintained, but that is not ²⁶³ true of the two month figure. Sec. 355 (b) (6) contemplates a cut-off date for determining the propriety of a refund of an excess surplus, which in this case was the end of calendar 1979.

As of that time, excess surplus reserves existed to warrant a refund. The Commissioner can consider projected losses in 1980 in determining whether to order a refund based on 1979 figures, but he is not required to do so. Therefore, the Commissioner’s order did not place Blue Cross below the mandated minimums of Sec. 355 (b) (6). (Blue Cross concedes that the 3% reserve requirement is not jeopardized by the refund order.) "Whether it was prudent for the Commissioner to order the refund of excessive surplus in light of Blue Cross’ pessimistic projections for 1980 is not reviewable on this appeal, since the Court may not substitute its judgment for that of the Commissioner who acted within the statutory standards.

Md. Fire UW v. Insur. Comm’r., 260 Md. 258 (1971). In any event, the Commissioner found that Blue Cross’ testimony as to the possible deterioration of its surplus position in 1980 was not sufficiently convincing to require withholding the proposed refund. This conclusion is amply supported by the evidence, since (i) a Blue Cross witness testified that the first quarter underwriting loss is usually greater than that for the second quarter; and (ii) Blue Cross’ investment earnings more than offset its underwriting loss in the first quarter, which resulted in a net increase in Blue Cross’ surplus position for the first quarter of 1980.

The net effect of this evidence is that the Commissioner could reasonably conclude that Blue Cross would be able to meet the two month surplus figure by the end of 1980 (a result not mandated by law) or come close enough to it so as not to deter a refund. There was sufficient evidence to justify the Commissioner’s rejection of Blue Cross’ Doomsday predictions.” ²⁶⁴ Blue Cross also asserts that the court below erred in affirming the Commissioner’s order because the Commissioner did not comply with the procedure required under Art. 48A, § 355 (b) (6), which provides that: "If the Commissioner determines after a hearing that the reserves are excessive in amount, he may order a corporation to submit a plan for distribution of the excess . .. .” The Company’s objection is that, while a hearing was held by the Commissioner, consideration was allegedly given only to the question of whether the distribution should be immediate or deferred and not to the question of whether reserves were or were not excessive. We are satisfied that the issue as to excessive reserves was properly determined by the Commissioner. Blue Cross had but one argument to make in support of its proposition that its concededly excessive reserves should not be immediately distributed, i.e., that the surplus could be expected to be diminished by year’s end.

The Commissioner held a hearing, considered the argument, and rejected it. There is ample evidence in the record to support the Commissioner’s determination that the amount of the surplus was $3,050,000. We see no error. II In the second appeal, Blue Cross, Blue Shield, and the Commissioner seek reversal of that portion of the lower court’s order which held in favor of Ward and directed that 1979 subscribers who had contributed to the surplus were to be included in the distribution regardless of whether they had enrolled in 1980.

Their initial argument is that Ward had no right to appeal the decision of the Commissioner. Md. Ann. Code Art. 48A, § 361B provides that judicial review of decisions by the Commissioner involving nonprofit health insurance organizations shall be in accordance with Art. 48A, 8 242B, which provides as follows: "(1) Hearing before Commissioner. — Any insurer or rating organization aggrieved by any ²⁶⁵ order or decision of the Commissioner under this subtitle made without a hearing, may within thirty (30) days after notice of the order to the insurer or organization, make written request to the Commissioner for a hearing thereon. The Commissioner shall hear such party or parties within twenty (20) days, after receipt of such request and shall give not less than ten (10) days’ written notice of the time and place of the hearing. The hearing shall be concluded within fifteen (15) days from the commencement thereof; provided, however, that the Commissioner, upon application with notice to the interested parties and for good cause shown, may grant additional time, not exceeding fifteen (15) days.

Within twenty (20) days after the conclusion of such hearing the Commissioner shall' affirm, reverse or modify his previous action, specifying his reason therefor, and shall give a copy of such order or decision to all interested parties. In the event of the Commissioner’s failure to hold or complete the hearing or to render his order or decision within the period specified herein, the filing or