HARRISBURG — Pennsylvania’s cash-strapped state government has lost round one in its effort to shut down a state-created medical malpractice insurer of last resort if it does not hand over $200 million in reserves by Dec. 1.
U.S. District Judge Christopher Conner this week granted a request sought by the Pennsylvania Professional Liability Joint Underwriting Association, suspending the state’s deadline until the association’s lawsuit can go to trial.
Conner has not scheduled a trial date on the association’s Nov. 14 lawsuit but said in court papers that he’s prepared to expedite a trial. In its lawsuit, the association characterized the state’s attempt to take most of its reserves as an unconstitutional nationalization of a nonprofit organization that would “seriously imperil” its ability to make good on its coverage obligations to policy holders.
Lawyers for Democratic Gov. Tom Wolf and the Legislature did not immediately respond to requests for comment Friday about whether they would appeal Conner’s decision.
In his decision Wednesday, Conner poured cold water on claims that the association’s reserves belong to the state.
For instance, state lawyers argued that the association’s governing plan establishes that the money ultimately belongs to the state if it shuts down. But Conner wrote that that argument “misinterprets” the plan’s wording that says the association’s board will decide how to distribute its assets, subject to the approval of the state insurance commissioner, who is appointed by the governor.
Conner also found that the association would be saddled with irreparable harm, such as an estimated $20 million in transaction fees to liquidate investments to pay the $200 million. The state cannot be held liable for those costs should its demand for the $200 million later be found to be unconstitutional, Conner wrote.
Wolf and lawmakers had sought the cash from the association to help stabilize the state’s deficit-ridden finances and set the deadline in legislation signed last month by Wolf. In court filings, the Pennsylvania attorney general’s office has said the state created the association and can dissolve it. It also maintained that the association’s reserves are excessive — $268 million as of last Dec. 31 — and do not belong to it.
However, the association has said in court papers that its reserves were generated from premiums and investment income and that taxpayer money has never funded any of the association’s operations. The state has no right to the money and no regulator, such as the state insurance commissioner, has deemed the association’s reserves to be excessive, it said.
Permanently blocking the state’s demand presumably would blow a $200 million hole in a $32 billion state budget that already relies heavily on borrowing and an expansion of gambling, a package preferred by anti-tax Republicans who control the Legislature.
The association, created by the state in 1975 amid a medical malpractice crisis, provides coverage to more than 600 health care providers. The Pennsylvania Medical Society is backing it in the lawsuit.