Unless intervening states win a stay pending appeal
UPDATE Nov. 18: A total of 12 states have opted out and a number of other states, likely about 10, have raised objections to the opt in/opt out question itself and are keeping open their legal options when and if the rehab plan is triggered
Nov. 11, 2021 — U.S. states have until Nov. 15th to decide whether to opt out of rate-setting provisions in the rehabilitation plan of insolvent long-term care insurer Senior Health Insurance Co. of Pennsylvania (SHIP) unless the Pennsylvania Supreme Court grants a stay pending appeal of the trial court’s approval of the plan.
Absent such a stay, the rehabilitators of SHIP –the Pennsylvania Insurance Commissioner Jessica Altman and special deputy rehabilitator Patrick Cantilo — will file rate increase applications with the opt-out states and then start by year-end 2021 sending SHIP policyholders their packet of five choices for coverage under two phases of the plan. These choices entail a combination of reduced benefits and coverages and/or higher premiums designed for different scenarios and have different coverage and cost outcomes.
Policyholders in the jurisdictions that do opt out and don’t allow the plan’s new rates will see their benefits cut.
The rehabilitator is arranging for video tutorials online to guide the policyholder through the election forms that will come with their packets, according to court documents. Decisions by policyholders among the options in the rehabilitation plan will be requested by mid-March 2022, with the rehabilaition plan going into effect for policyholders in April.
SHIP was licensed in 46 states as well as the District of Columbia and the Virgin Islands. According to legal documents, the states with the most policyholders are Texas, Florida and Pennsylvania, where SHIP is domiciled, followed by California and Illinois. Its rehabilitation plan, amended twice, was approved by the Commonwealth Court in late August.
The states of Maine, Massachusetts and Washington, who have strenuously opposed the rehabilitation plan in all its interactions, applied for a stay pending appeal with the state’s high court Nov. 8 after a stay attempt at the court which oversaw the rehabilitation proceedings. The Commonwealth Court of Pennsylvania rejected an expedited request from the three states Nov. 4th.
These three states’ insurance commissioners or superintendents allege that the plan is unfair to policyholders and defies insurance law and legal precedent and is unconstitutional.
The rehabilitation plan “places the entire $1.2 billion burden of the insolvency on 30,000 of SHIP’s remaining policyholders through benefit cuts and premium increases even though, in a liquidation, based on the rehabilitator’s comparison analysis, the policyholders would only bear a loss of $397 million, the stay request argues.
These three states argue instead for a liquidation of SHIP, under which state insurance GAs would provide over $837 million of additional support to policyholders, many of whom are elderly –the average policyholder age is 86 — and facing dire choices. They see a SHIP liquidation down the road as inevitable and worry about policyholders being locked into lower coverage choices should that happen.
The average and mean limits of the GAs in the states is $300,000, with a few outliers, some of which are as high as $500,000 (California). Under a liquidation, there could also be rate increases, at the discretion of the state guaranty association.
The legal argument for the intervening states claims that the policyholders’ best financial interest must be protected in an insolvency and that isn’t happening in most instances of the rehabilitation plan. They also argue that state regulators should control rates in their states, not an outside party.
The three states argue that the rehab plan is not feasible, that it won’t return SHIP to solvency, and is “an abuse of discretion and error of law because it violates the legal preened of Neblett v. Carpenter, which requires that policyholders are at least as good a position in rehabilaition as the would be in a liquidation. The three state intervenors also allege that the plan violates the”Full Faith and Credit Clause” of the U.S. condition by allowing one state’s regulatory authority over other states.
The rehabilitation team claims to bring policyholders choices not offered in liquidation by the state insurance guaranty associations, although their national organization argues that the GA system does indeed entail choices well. GAs have “flexibility in designing rate increase programs and offering benefit modifications to policyholders in the alternative—and have exercised that flexibility,” the National Organization of Life and Health Insurance Guaranty Associations argued in late June as an intervenor in the case.
The rehabilitates countered in court documents that the guaranty associations can’t offer options that maintain benefits above GA coverage limits, and some policyholders will still want such options.
The Commonwealth Court agreed with the rehabilitation team that since the SHIP’s policies were chronically underpriced –as most LTC policies have been since their inception — that historic liabilities and states’ patchwork of wildly varied LTC rate increases over the years, or lack thereof, must be right-sized to some extent, with policyholders taking a haircut on benefits and the value of their policy.
The rehab plan’s language to other insurance commissioners for the opt-out option states that calculations for reductions in benefits and rate increases “are performed individually for each long-term care policy.” The rehabilitator says that this”a key component of the Plan’s mechanism for eliminating discriminatory or inequitable premium rates and policyholder subsidization prospectively. In determining whether or not to “opt out” a state should carefully consider its ability to address the circumstances of each policy individually,” because the rehabilitator is already is doing this, too.
About 10 states through the MidAtlantic and the Midwest are expected to file amicus briefs on appeal if the state Supreme Court takes the case, even if it does not stay the rehabilaition itself, according to those familiar with the ongoing rehabilitation process.
Last year, two other state insurance commissioners sued the Pennsylvania insurance regulator as rehabilitation. Louisiana’s case has recently been dismissed. South Carolina’s case, brought Dec. 10, 2020, is now pending in U.S. District Court for the District of South Carolina. They argued that the plan wouldn’t protect the protect the contractual rights of policyholders of LTC policies in their states and that the imposition of the plan’s rates violates state insurance law and their jurisdictional authority to set and approve premiums.
Despite the fact that South Carolina gave SHIP requested rate increases over the past decade, some of its policyholders may face rate increases of over 400% in phase one of the rehabilitation and perhaps face additional increases in phase two, the insurance commissioner’s brief said.
Both Louisiana Insurance Commission Jim Donelon and South Carolina Insurance Commissioner Ray Farmer are former presidents of the National Association of Insurance Commissioners, as was intervenor Eric Cioppa, the Maine insurance superintendent.
Cioppa was instrumental in starting an executive level task force at the NAIC during his 2019 tenure as leader to address all the past, long-entrenched and current woes of the LTC industry and its future through various subcommittees and action strategies. Washington State Insurance Commissioner Mike Kreidler, who, like Donelon, holds elected office, is the longest-serving insurance commissioner in history, having been elected to a sixth term in 2020, 20 years after he was first elected to that office.
These three commissioners got letters of support filed in the docket from commissioners from Connecticut, Louisiana, Maryland, Mississippi, New Jersey, South Carolina, Vermont and Wisconsin earlier in the court case.
Sources indicate that a fair number of states are interested in the approved rehabilitation plan.
SHIP was placed into into rehabilitation in late January 2020 by the Pennsylvania insurance commissioner.
The Commonwealth Court judge, in her decision to approve the amended plan, said its aim is to increase revenues and reduce liabilities so as to narrow or eliminate the $1.2 billion funding gap through adjusting or modifying the 39,000 policies in force.
The judge reiterated that it is structured to”maximize policyholder choice, based on each person’s individual circumstances and preferences. ” Of interest, she noted that many policyholders have costly policies that provide far more coverage than the policyholders are reasonably likely to require, according to the rehabilitation, so part of the plan allows policyholders to remove coverages that are not essential or seen as necessary to cover reasonable expenses, cutting costs for both policyholder and the plan.
The average cost of a semi-private and a private room in a nursing home is a little under and a little above $100,000 annually accordign to Genworth Financial’s annual cost of care report. Homemaker serves, home health aides and assisted living facilities are roughly have that per year, according to the 2020 report.
SHIP was founded in 1887 as the Home Beneficial Society. Prior to the filing for rehabilitation in January 2020, it was licensed to do business by state regulators. It has not sold new policies since 2003 and was once part of Conseco Senior Health Insurance Co.
Other significant dates are below:
Sept. 30, 2021: Approved Rehabilitation Plan
May 3, 2021: Second Amended Rehabilitation Plan
Below are a few sample policyholder options presented in the exhibits in the second amended SHIP rehab plan.
They are three of 12 examples used by the plan to show how the various options would work for real-life policies. Following that is an exhibit from the three state insurance regulators as intervenors, asserting that under four of the five options, with the fifth one beinghigher premiums to keep present benefits, policyholders would be better off under liquidation.
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