A divided Pennsylvania Supreme Court has ordered the Commonwealth Court to determine whether some or all of the $100 million the state transferred from the Medical Care Availability and Reduction of Error Fund to the general fund was surplus money.

The justices said determination is critical to deciding whether the transfer was illegal.

The court ruled 4-2 in the consolidated cases of Hospital & Healthsystem Association of Pennsylvania v. Commonwealth and Pennsylvania Medical Society v. Insurance Commissioner to reverse an en banc Commonwealth Court panel’s grant of summary relief to the plaintiff health care providers.

The Commonwealth Court had found that the $100 million transfer, which was authorized by the Act of October 9, 2009, known as Act 50, violated the plaintiffs’ vested rights by diverting funds away from the intended purpose of providing insurance coverage to health care providers and ultimately preventing those funds from being reimbursed to the providers when the MCARE Fund is eventually terminated.

Justice Thomas G. Saylor, writing for the majority, said the question of whether the $100 million constituted a surplus at the time Act 50 was passed is essential to deciding whether the health care providers had a vested right to see that money used solely for MCARE purposes.

If the $100 million was a surplus, Saylor said, the state legislature had the authority to redirect the funds to serve another governmental purpose, particularly since some of that money originated from sources other than the health care providers, such as cigarette taxes and motor vehicle violation surcharges.

If it was not a surplus, however, the health care providers were entitled to have that money used solely to satisfy medical malpractice judgments against them.

Saylor said that pursuant to the California Supreme Court’s 1934 ruling in Daugherty v. Riley, Pennsylvania’s MCARE Fund, despite being labeled a “special fund,” is actually more like a trust fund in which money is held for a specific, statutorily designated purpose.

“Since that purpose involved satisfying judgments against the health care providers, such providers retained a vested entitlement under the due process clause to have the money utilized in the manner directed by statute,” Saylor said.

But Saylor, joined by Chief Justice Ronald D. Castille and Justices J. Michael Eakin and Seamus P. McCaffery, agreed with the state’s assertion that the Commonwealth Court’s ruling had been based, at least in part, on the assumptions that the $100 million transfer jeopardized future MCARE Fund obligations and left a deficit health care providers may be forced to make up.

“The evidentiary record, however, is not entirely clear on this point and, moreover, includes a declaration by the insurance commissioner explaining that, due to the manner in which the fund makes payments and obtains funds, it will have enough money to fulfill all of its obligations in spite of the $100 million transfer,” Saylor said.

Saylor directed the lower court to address the issue of how to determine when a surplus exists in the MCARE Fund and identified at least two factors that he said would be relevant to the Commonwealth Court’s inquiry.

“First, the annual assessment formula does not expressly take into account the size of the reserves already present,” Saylor said. “This militates in favor of the concept that the diverted monies were surplus funds, unless the formula implicitly accounts for extant reserves.”

Saylor acknowledged in a footnote the Commonwealth Court’s recent finding in Hospital & Healthsystem Association of Pennsylvania v. Insurance Commissioner that the express statutory language of the MCARE Act requires the MCARE Fund to factor any leftover money from the previous year into its assessments for the current year.

“How this affects the determination as to the existence and size of a surplus is to be considered in the first instance by the Commonwealth Court on remand,” Saylor said in the footnote.

That case, decided by the Commonwealth Court in August, is now pending on appeal to the Supreme Court.

Justice Debra Todd filed a dissenting opinion, saying the justices should hold off on ruling whether the transfer was unlawful until the issue in that case is resolved.

Todd said there was no reason to remand the case for a determination of whether the $100 million transfer was from a surplus in the MCARE Fund because “that court has already decided that the assessment formula leaves no surplus.”

Todd said she agreed with the health care providers that if the Commonwealth Court’s ruling in that casewas correct,the increased assessment health care providers received as a result of the $100 million transfer the previous year constituted a general revenue tax.

But Saylor said that argument alone was not enough to warrant an affirmance of the Commonwealth Court’s grant of summary relief to the health care providers because a determination that the $100 million were surplus funds would be enough to find that the state’s transfer was lawful.

Justice Max Baer filed a separate dissenting opinion arguing that he would uphold the Commonwealth Court’s summary relief grant because, regardless of whether the $100 million were surplus funds, transferring them out of the MCARE Fund impaired the health care providers’ vested rights in having that money used to satisfy judgments against them.

“While the legislature may be able to amend the MCARE Act prospectively, it cannot retrospectively seize money already in the MCARE Fund at the time of the 2009 budget legislation,” Baer said, citing Daugherty as standing for the principle that the legislature must pay back any money it transfers to its general fund out of a special fund’s surplus.

But Saylor said in a footnote that Daugherty did not preclude such a transfer where the money was no longer needed by the special fund or the transfer would not interfere with the special fund’s objectives.

The case drew amicus curiae briefs from the state Senate, the state House of Representatives, the House Republican Caucus and the American Medical Association.

Counsel for plaintiffs Hospital & Healthsystem Association of Pennsylvania, Geisinger Health System, St. Vincent Health Center and Abington Memorial Hospital, David E. Loder of Duane Morris in Philadelphia, could not be reached at press time.

Counsel for plaintiffs Dr. Martin Trichtinger, Dr. Peter Daloni, Dr. Karen Rizzo and the Pennsylvania Medical Society, Kevin J. McKeon of Hawke, McKeon & Sniscak in Harrisburg, also could not be reached.

Dr. C. Richard Schott, president of the Pennsylvania Medical Society, said in a press release that his organization was “encouraged by most of the majority opinion, as well as Justice Baer’s dissent.”

“It appears that the litigation has been narrowed to one key issue — whether health care providers were harmed by the $100 million diversion,” Schott said in the release. “We believe there was clear harm.”

A spokesman for the state Office of General Counsel did not return a request for comment.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.

(Copies of the 53-page opinion in the consolidated cases of Hospital & Healthsystem Association of Pennsylvania v. Commonwealth and Pennsylvania Medical Society v. Insurance Commissioner, PICS No. 13-2812, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •