SHIP’s rehab challenged by 3 states who wonder, given rate issues, if a liquidation is more equitable

Dec. 2, 2020 — State insurance regulators from three states said in a court filing that they aren’t receiving information they need to evaluate the rehabilitation plan of the now-insolvent Senior Health Insurance Company of Pennsylvania, or SHIP.

The three states intervening in the rehabilitation proceedings before the Commonwealth Court of Pennsylvania are Maine, Massachusetts and Washington State.

Specifically, the states have unsuccessfully sought full detailed prepared reports with actuarial models concerning the impact of the now-amended plan and its impact on policyholders generally and from their states, particularly in how these would stack up for policyholders against an actual liquidation of failed long-term care insurer, SHIP.

The three state insurance regulators are concerned that the “differing treatment of policyholders in different States,” based on factors such as previous rate approvals, which are dispensed uniquely state-by-state, will leave some policyholders less well off than they might be in a liquidation, which they argue violates legal precedent of a constitutional standard.

The detailed actuarial “information and modeling is critical to an understanding of the plan and to any evaluation of whether it comports with applicable legal and constitutional standards,” the three intervening states wrote in a Nov. 30 filing in which they were to introduce witnesses for their pleadings.

SHIP has a funding shortfall of more than $1 billion. The rehabilitation plan is designed to take help decrease that gap with its assortment of options, various combination of cuts in benefits and increases in premiums for now-elderly policyholders. But Maine, Massachusetts and Washington State regulators argued that the rehabilitation plan is crafted “on the backs of current policyholders” with anticipated dramatic and costly changes to their expected way of extensive late-life care.

The states also told the court they cannot sufficiently prepare their testimony and exhibits because neither the plan as outlined nor the rehabilitator have shared the detailed analysis and information on actual outcomes for policyholders, theirs included.

“The Rehabilitator, as the proponent of the Amended Plan, has the burden of showing that the Plan satisfies the standards for approval … To date, the State Insurance Regulators have not been apprised of how the Rehabilitator intends to sustain that burden,” they wrote.

“Washington state doesn’t have enough information to be in favor of either rehabilitation or liquidation. Our point is the rehabilitator has the burden to prove that policyholders would be better off under the rehabilitation plan rather than liquidation. Based on the information we have been given to date, that has not yet been proven,” said a spokeswoman for the Office of the Insurance Commissioner for Washington.

The rehabilitator is the insurance commissioner in Pennsylvania, Jessica Altman, along with a special deputy team who oversees the process with necessary actuarial outsourcing.

The goal of the rehabilitation is to prevent a liquidation, which would send SHIP into the hands the state guaranty funds for life and health insurance. It would be the life and health insurers who would then pick up the tab for the shortfall in a liquidation– but only up to the statutory limits for each state. The rehabilaitors feel their plan is better than na liquidation for most of the policyholders most of the time, even with reductions in benefits and price increases.

The only certainty is that someone must pay more than they anticipated to at least partially cover the old promises of the former Conseco Senior Health Insurance Co. — it will be either the policyholders or the industry.

These limits are about $300,000, on average, while many LTC policies are a lot richer in benefits. The annual cost of a private room at a nursing home now exceeds $100,000, while semi-private room nears that amount, according to Genworth Financial‘s annual cost of care survey, released Dec. 2. Assisted living facility annual rates jumped by 6.15% this year to a national median cost of $51,600, it stated. The median cost of a home health aide in the U.S. is $54,912.

“As the scale of the deficit suggests (a deficit of $915 million on liabilities of $2.8 billion is a shortfall of approximately 33%), the revenue increases or benefit cuts that need to be made are large, and the consequences for policyholders are likely to be severe,” the state regulators stated.

U.S. states have historically approached premium increase requests from LTC insurers in a fashion that strove to balance the needs of their consistencies, both the insured and the insurers, as well as public perception. The solvency concerns of these insurers has grown, often direly, due to the grave errors in assumptions at the time the policies were written coupled with modern interest rate environments.

Although the National Association of Insurance Commissioners has undertaken a uniform approach to timely and appropriate rate increases for LTC insurers, the rehabilitation plan for an already insolvent insurer will not benefit from it.

The intervening jurisdictions noted that Altman and her team have chosen to address this cross-state rate “subsidy problem.” They oppose it, argue it is unfair and say it would be applicable not only to SHIP but to “all other national insurers writing types of insurance that are subject to state rate approval.”

“The imposition of different, and much greater, rate increases and benefit cuts in some States than in others will deprive policyholders in the burdened States of contractual benefits at a greater percentage than those in other States. All policyholders, however, paid the premiums they were obligated to pay under the policies and are entitled to receive as much as possible of their contractual benefits,” the states wrote.

“A liquidator takes the policies as she finds them, determines applicable benefits, and … all policyholders nationwide would receive the same distribution percentage, as the statute specifically prohibits subclasses within a priority class,” the states argued after looking at the general menu of benefit cuts and premium hikes the amended rehabilitation plan offered policyholders.

The plan of the rehabilitator though, they said, would “impose different burdens on policyholders in the different States.”

A representative for the rehabilitator did not comment, nor would they in general during legal proceedings, as the court must weigh this filing along with a number of other intervening parties’ narratives of witness testimony and exhibits, all of which were due Nov. 30. However, the rehabilitation team added provisions in the Amended Plan provisions to address many of the state concerns and have shared a lot of detailed information with regulators, according to sources. Most insurance departments throughout the U.S. appear to be on board with the plan.  

The SHIP situation is very serious, said one person with knowledge of the insolvency.

Timeline for SHIP’s insolvency thus far:

Jan. 23, 2020, Pennsylvania Insurance Commissioner Altman filed a petition for an order placing SHIP into rehabilitation.

Jan. 29, 2020 — the Commonwealth Court granted the Petition for rehabilitation and SHIP was placed into rehabilitation.

April 22, 2020 — Commissioner Altman filed the proposed rehabilitation plan.

Oct. 21, 2020– Commissioner Altman filed the amended rehabilitation plan.

This article was updated with comment from Washington State.

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