Pennsylvania insurer’s demise to cost California

Among all the reasons for rising health insurance premiums, this one might be the most obscure: A long-term care insurer in Pennsylvania just went belly-up.

Health insurers across the country are on the hook for hundreds of millions of dollars in losses stemming from the recent insolvency of Penn Treaty American Corp., of Allentown, Pa., and its two subsidiaries.

Such failures are rare, but when they happen, other companies are responsible to help pay claims and protect policyholders through groups known as state guarantee associations. Larger insurers typically pay more.

In these situations, long-term care coverage is treated as health insurance, so health insurers are liable for the payments — and some are disputing that.

Industry analysts estimate that Penn Treaty has long-term claims liabilities approaching $4 billion, but only about $700 million in assets.

This is one of the largest insurance failures in U.S. history, and “the impact of this situation on the insurance industry is huge,” said Joseph

Belth, a professor emeritus of insurance at Indiana University. “Companies will try to pass it on in some fashion to policyholders.”

California may be hardest hit. Its guarantee association faces a liability of $400.6 million, according to estimates from Long Term Care Group for the National Organization of Life & Health Insurance Guaranty Associations. Florida is next, at $360.4 million.

Health insurers can pass along those costs by imposing premium surcharges, or they can shift the burden to taxpayers by paying less in state premium taxes. The rules vary by state. In California, insurers can levy a surcharge on policyholders.

Anthem, the nation’s secondlargest health insurer, estimates it will pay $253.8 million to cover its portion of claims. It plans to recover that cost through premium surcharges and tax credits, it said in a securities filing last month.

Aetna, the industry’s thirdlargest insurer, expects to pay $231 million. And Blue Shield of California has booked a loss of nearly $41 million. Those numbers may rise as Penn Treaty’s policyholders collect on their benefits.

Most state guarantee associations will provide up to $300,000 for each policyholder who files a claim, but the limits vary by state. In California, the coverage extends to about $560,000. Penn Treaty has about 73,000 policyholders nationwide.

Some insurers may impose surcharges of up to 2 percent annually over several years to cover Penn Treaty assessments.

The demise of Penn Treaty is yet another black eye for the long-term care industry. For years, insurers have been hit by higher-than-expected claims, low investment returns and poor pricing. As a result, many companies left the business or began sharply raising premiums.

In California, more than 130,000 people who bought long-term care policies from the state workers’ retirement system received 85 percent rate increases in recent years. A lawsuit against the California Public Employees’ Retirement System over those increases won classaction status last year.

The state agency has defended the rate increases as necessary and proper.

Penn Treaty’s financial troubles date to 2009. A Pennsylvania judge ruled in March that the company was insolvent. She ordered the insurance commissioner there to liquidate the firm.

Some health insurers, including UnitedHealth and Aetna, have challenged the assessment process, arguing that long-term care is more like life insurance. Belth said they are concerned about other longterm care companies going under.

“Virtually all of the health insurance companies, especially the big ones, have never sold long-term care insurance,” Belth said, “so they are not appreciative of being assessed.”

Chad Terhune is a senior correspondent with California Healthline, an editorially independent service of the California Health Care Foundation produced by Kaiser Health News (which is not affiliated with Kaiser Permanente). Email: cterhune@ kff.org