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.
Insurance company failures are rare, but when they happen, other companies are responsible to help pay off the company's claims and protect policyholders through groups known as state guarantee associations. Those industry assessments are typically based on market share, so larger insurers 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.
Penn Treaty's liquidation poses a "potential shock to the health marketplace" as the losses pile up, according to the A.M. Best credit rating firm. Industry analysts estimate the parent company 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 prepared by Long Term Care Group for the National Organization of Life & Health Insurance Guaranty Associations. Florida is next at $360.4 million, followed by Pennsylvania at $269.9 million, Virginia at $197 million and New Jersey, with projected liabilities of $144.6 million.
Health insurers can pass along those unforeseen costs by imposing premium surcharges on customers, 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.
Insurers have recently begun revealing their initial cost estimates, often buried deep in company securities filings and financial statements.
Anthem Inc., the nation's second-largest health insurer, estimates it will pay $253.8 million to cover its portion of Penn Treaty claims. In a securities filing last month, Anthem said, "payment of the assessments will be largely recovered through premium billing surcharges and premium tax credits over future years."
Aetna, the industry's third-largest insurer, expects to pay $231 million. And San Francisco-based insurer 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 in benefits for each Penn Treaty policyholder who files a claim, but the limits vary by state. In California, for instance, the coverage extends to about $560,000. Penn Treaty's insurance units have about 73,000 policyholders nationwide.
The expenses related to Penn Treaty may be small compared to the underlying medical costs that continue to drive up Americans' health insurance premiums. Still, some insurers may impose surcharges of up to 2 percent annually over several years to cover Penn Treaty assessments -- one more unwelcome charge tacked onto the country's growing health tab.
The demise of Penn Treaty is yet another black eye for the long-term care industry. For years, long-term care 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 for existing customers.
In California, more than 130,000 people who bought long-term care policies from the state workers' retirement system received 85 percent rate hikes in recent years. A consumer lawsuit against the California Public Employees' Retirement System over the legality of those rate increases won class-action status last year.
The state agency has defended the rate hikes as necessary and proper.
Penn Treaty's financial troubles date to 2009. Years of legal wrangling culminated in a Pennsylvania judge's ruling in March that the company was insolvent. She ordered the insurance commissioner there to liquidate the firm.
"After a long and difficult eight-year legal process, the court's decision to approve the liquidation recognizes the companies' financial difficulties are too great to be remedied," Pennsylvania Insurance Commissioner Teresa Miller said following the judge's ruling.
Some health insurers, such as UnitedHealth and Aetna, have challenged the assessment process, arguing that long-term care is more like life insurance. Looking beyond Penn Treaty, Belth said, health insurers are concerned about other long-term care companies going under and saddling them with even more losses.
"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."