By Joe Forward, Legal Writer, State Bar of Wisconsin

July 20, 2010 – Wisconsin’s Department of Administration must return $200 million plus interest and lost earnings to a statutorily established fund supported by mandatory assessments on physicians, the Wisconsin Supreme Court has held.

In Wisconsin Medical Society, Inc. v. Morgan, 2010 WI 94 (July 20, 2010), the supreme court held (5-2) that transfers totaling $200 million by the Department of Administration from the Injured Patients and Families Compensation Fund (IPFC Fund) to the Medical Assistance Trust Fund (MA Trust Fund) was an unconstitutional taking of property without just compensation.

The court remanded the case for an order that will require the Department of Administration to replace $200 million, together with lost earnings and interest, and a permanent injunction order prohibiting future transfers from the IPFC Fund.

Facts and procedure

The Wisconsin Legislature established the IPFC Fund in 1975 to curb rising health care costs due to increased medical malpractice insurance premiums. As a condition of continued licensure in the state, health care providers pay yearly assessments to support the IPFC Fund.

The IPFC Fund pays the portion of any medical malpractice claims that are not covered by a physician’s malpractice insurance policy. Currently, health care providers are required to maintain coverage of $1 million per claim and $3 million for all claims in a policy year. As of year-end December 2009, the IPFC Fund had paid $770.8 million in claims over its lifetime.

Amended in 2003, Wis. Stat. section 655.27(6) states that the IPFC Fund “is held in irrevocable trust for the sole benefit of health care providers participating in the fund and proper claimants. Moneys in the fund may not be used for any other purpose of the state.”

For the 2007-09 biennial budget, Wisconsin Governor Jim Doyle proposed a transfer from the IPFC Fund, a provision the Assembly deleted.[1]  However, the provision was restored by the Conference Committee on the budget.[2] Thus, the final 2007-09 biennial budget (2007 Wis. Act 20) allowed transfers totaling $200 million from the IPFC Fund to the MA Trust Fund, which supports the Medical Assistance program.

Section 9225 of 2007 Wis. Act 20 instructed the transfers notwithstanding section 655.27(6), which established the IPFC Fund as an irrevocable trust for the sole benefit of health care providers and not to be used for any other state purpose.

In October 2007, the Department of Administration, under Morgan as Secretary, transferred $71.5 million from the IPFC Fund to the MA Trust Fund. The IPFC Fund had a net asset balance of $94.4 million as of June 2007, but did not have liquid assets available to cover the transfer. Morgan, the court explained, reallocated $51.3 million from another state fund, and charged the IPFC Fund interest to cover the shortfall. The remaining $128.5 million was transferred in July of 2008. After the transfers, the IPFC Fund reported a net asset deficit of $109 million.

The Medical Society, composed of 11,000 medical doctors, challenged the transfers by filing suit against Morgan in the Dane County Circuit Court. The circuit court granted summary judgment in favor of Morgan. The case was certified for supreme court review.

Majority

The supreme court – in a majority opinion written by Justice David Prosser – held that the transfer directed by 2007 Wis. Act. 20, section 9225 was unconstitutional because it authorized an unconstitutional taking of property without just compensation contrary to the Takings Clause of the Wisconsin Constitution.

Morgan argued, and the circuit court agreed, that the health care providers did not have a protectable property interest in the IPFC Fund, a fund established by statute.

But the supreme court disagreed, holding that the health care providers did indeed have a property interest in the IPFC Fund. That is, the court reasoned that “statute defines the Fund as an irrevocable trust, and the structure and purpose of the Fund satisfies all the elements necessary to establish a formal trust.”

The court relied heavily on Wis. Prof’l Police Ass’n v. Lightbourn, 2001 WI 59, 243 Wis. 2d 512, 627 N.W.2d 807, to conclude that property interests do not arise from contract rights alone. A property interest, the court wrote, may also arise from “specific statutory language setting out the nature and purpose of a trust fund and the security and integrity of an entire fund.”

Here, the court explained, the legislature established the IPFC Fund as a formal trust fund and the health care providers have an equitable interest in the fund as beneficiaries.

The equitable interest creates a right to the security and integrity of the fund, a right to realize investment earnings in the form of decreased assessments, and a right to payment of excess judgments to claimants from the IPFC Fund.  Thus, any improper removal of money from the IPFC Fund infringes on these rights and is an unconstitutional taking of property, the court held.

The court explained that a “failure on our part to recognize the property interests at stake in the Fund would be an open invitation to the legislature to take money from the Fund at will.”

The court remanded the case for an order that will require the state to return the $200 million with lost earnings and interest that has been charged against the IPFC Fund.

Dissent

Chief Justice Shirley S. Abrahamson filed a dissenting opinion, in which Justice Ann Walsh Bradley joined. Chief Justice Abrahamson disagreed with majority’s view that that the IPFC Fund was a formal trust, and concluded that “health care providers had no vested property interest in the $200 million which the legislature transferred.”

First, the health care providers had no intention to create a trust, and second, the health care providers are not “beneficiaries of the Fund in the private trust sense,” the Chief Justice wrote. The health care providers are akin to purchasers of insurance, and “do not have a vested property interest in the money they pay for insurance coverage.”

Chief Justice Abrahamson argued that the health care providers are entitled to excess insurance coverage, but do not have a property interests in the IPFC fund’s assets. “Well-settled principles of constitutional law, and of trust law, should not be distorted to accommodate a generalized sense of unfairness,” she wrote.

Attorneys

Cynthia Buchko and Thomas Pyper of Whyte Hirschboeck Dudek S.C., Madison, represented the Wisconsin Medical Society and David Hoffman, M.D. Assistant Attorney Generals Charlotte Gibson, Christopher Blythe, and Attorney General J.B. Van Hollen represented Michael Morgan.

Related Stories

Supreme Court hears oral argument to decide fate of $200 million transfer from medical malpractice insurance fund– April 22, 2010