The emerging regulatory battleground over long-term care insurance rate increases

As class action lawsuits challenging premium rate increases on long-term care (LTC) insurance have faced dismissal in recent years, policyholders have become increasingly active on the administrative front, filing grievances with regulators to protest approved rate increases through the administrative hearing process and making efforts to sway regulators to preempt or limit rate increase approvals.

Background

A relatively new product that gained traction in the late 1980s, LTC insurance pays for some or all of the costs of nursing homes, assisted-living facilities and home health care. When insurers first began pricing LTC policy blocks, they had little comparable experience to draw on. Over time and with the benefit of hindsight, it has become clear that the LTC industry as a whole missed the mark in their initial pricing assumptions and underestimated factors such as the number of policies that would lapse, the longevity of policyholders, and rising health care costs. As a result, LTC insurers set premiums too low for those older blocks of business and have since sought regulatory approval for rate increases. Not surprisingly, policyholders have fought back.

The rise and fall of LTC rate increase litigation

Beginning in the late 1990s, insurers have been faced with class action lawsuits challenging LTC rate increases. A common argument has been that LTC insurers defrauded consumers through a “low-ball pricing” or “bait and switch” scheme intended to deceive customers into buying insurance policies at artificially low rates only to increase rates later, leaving policyholders with no choice but to pay up or forfeit their policies. Although causes of action vary from case to case, policyholders have typically brought claims for fraud, unfair or deceptive trade practices, and/or breach of contract. Yet, despite some initial successes, policyholder class actions to challenge LTC insurance rate increases have faltered in recent years.

In 2008, two federal court decisions signaled a sea change in the judicial response to such claims. InRakes v. Life Investors, the United States Court of Appeals for the Eighth Circuit affirmed a district court’s grant of summary judgment to the LTC insurer, finding that policyholders had been duly warned about the possibility of rate increases “on the first page of its policies, in boldface, capital letters.” 582 F.3d 886, 894 (8th Cir. 2008).  As such, plaintiffs could not plausibly claim that the insurer had fraudulently misrepresented that policyholders should expect level premiums. Id. Similarly, in Alvarez v. Ins. Co. of N. Am., the United States Court of Appeals for the Third Circuit rejected the policyholders’ argument that “guaranteed renewable” language in the policy somehow implied level premiums.  Rather, the court held that the policies explicitly warned that rates could increase and therefore only “guaranteed the right to renew the policy, not the financial ability to renew the policy.” 2008 WL 647784, at *3 (3d Cir. 2008).

Then, in 2011, a pair of court decisions applied the “filed rate doctrine” to dismiss claims challenging LTC rate increases. See, Armour v. Transamerica, 2012 WL 234032, at *3 (D. Kan. Jan. 25, 2012); see also Flint v. MetLife, 2011 WL 7463938, at *2 (6th Cir. Dec. 12, 2011). In deference to the unique expertise of state regulators who evaluate and approve insurance premium rates, the filed rate doctrine bars policyholders from challenging insurers over premium rates that have been filed with a state regulatory body.

The precedent set by these recent decisions have proven to be a powerful defense against rate increase challenges.

Administrative proceedings: The new battleground?

As policyholders have failed to prevail against insurers in the courtroom, some have instead petitioned for administrative review of the state’s decision to approve rate increases. These administrative proceedings typically have the hallmarks of a litigation, and although the state insurance department is typically the focus, insurers may also get caught in the cross-fire.

For example, in 2009, an insurer’s intervention was instrumental in defending the Kentucky Department of Insurance’s work when a retired teachers association sought a hearing to challenge Kentucky’s approval of LTC rate increases. After discovery, pre-/post-trial briefing, and a four-day trial with fact and expert witnesses, the administrative judge ultimately upheld the rate increases. Similar to a trial, the administrative process subjected the state (and the insurer) to intense scrutiny, resulting in a 60-page opinion analyzing the Department’s rationale for approval, including a detailed discussion of whether the Department had applied the proper loss ratio test, whether the insurer supplied accurate data and reasonable projections, and whether the Department had fully complied with all statutory requirements prior to approving the rate increase.

This year, a new proceeding is underway to challenge the LTC rate increases in July 2015. The policyholder has requested a hearing to determine whether the rate increase approval should “be set aside as legally unfounded and unenforceable,” and more specifically whether the Commissioner considered the insurer’s past and prospective loss experience in Washington or other similar states. Discovery is now underway and a hearing is set for June 2016.

State agency’s responses to policyholder activism

As policyholder outcry grows with each LTC rate increase, state insurance regulators have reacted in myriad ways.

First, the NAIC has been active in developing model language for the states that is designed to account for the interests of both policyholders and insurers, such as the NAIC Long-Term Care Insurance Model Act, Model Regulation, and Model Bulletin. For example, the Model Bulletin, adopted by the NAIC in 2013, suggests more stringent loss ratio tests to be applied in evaluating rate increase applications on older “pre-rate stability” policies, and provides guidance for mitigating the impact of approved rate increases on policyholders.  Many states have adopted portions of the NAIC’s model language, both formally and informally. For example, in 2015, Virginia enacted new rules that, in part, incorporate recent revisions to the NAIC’s Model LTC Regulation regarding long-term care premium rate increases.  Other states are using, as one metric in the rate increase review process, the new “dual loss ratio” framework in the Model Bulletin, even without formally adopting that Bulletin. 

Second, commissioners in several states are holding public hearings before making decisions on large rate increase requests. In August 2015, in large part due to the volume and magnitude of rate increase applications being filed in that state, Minnesota held a “fact-finding” hearing to gather information from consumers and insurers on how to appropriately evaluate the long-term care industry. This month, the Pennsylvania Insurance Department plans to hold a public hearing on March 10, 2016, in part to explain its process in reviewing and approving LTC rate requests. The Pennsylvania Insurance Department explained that the magnitude of the latest requests—which range from 100 to 130 percent—calls for transparency by having four specific LTC insurers “publicly explain why they are asking for large increases.”

Third, some states are instituting formal rate caps on annual LTC rate increases. In February 2015, New Hampshire adopted rules capping the size and frequency of rate increases based on policyholders’ ages. See N.H. R.S.A. Ins. §§ 3601.03(b)(1); 3601.08(e); 3601.19; 3601.27. In February 2016, Oklahoma announced that it would cap LTC rate increases at 10 percent annually, and, this year, Maryland intends to hold a public hearing on the possibility of instituting a 15 percent LTC rate increase cap. Other states may be using informal “desk drawer rules” to limit rate increases.

Finally, at least one state appears to be uniformly denying rate increases based on their interpretation of whether the increases are “unfair,” “excessive,” or “affordable” pursuant to state statutory bases for disapproval. According to recent news articles, Vermont has uniformly denied all LTC rate increase requests on closed blocks of business, taking the position that it is “unfair” to pass along the costs of inaccurate actuarial assumptions to consumers even if those assumptions were reasonable at the time.

Conclusion

As LTC insurers have struggled with rate adequacy on their older blocks of business, rate increase requests on those policy blocks have been commonplace for nearly two decades. Regulatory and policyholder pushback has only increased over time, and is now at a boiling point.  However, regulatory action to severely limit increases may have unintended consequences.  Some carriers have elected to stop new sales in states that have been unwilling to approve necessary rate increases. Other carriers are discontinuing new business altogether in light of the challenging regulatory environment.  As a result, senior citizens in some states may find themselves with fewer LTC options, and states may ultimately be shouldering more of the cost of providing LTC services to their aging populations.

ICYMI...

Noteworthy links from the past two weeks

General

Health

  • US News reported that the Affordable Care Act has not dramatically reduced ER visits [U.S. News & World Report]
  • The federal Office of Inspector General issued an exhaustive report on the initial failures and subsequent recovery of Healthcare.gov [Law360]
  • Membership in "health sharing ministries" (which are exempt from the Affordable Care Act) has grown [U.S. News & World Report]
  • Congress grilled CMS officials over the failure of several Affordable Care Act co-ops and the health of those that remain [Modern Healthcare]

Property and Casualty

International

  • Fitch Ratings agency opined on the proposed Insurance Capital Standard for Global Systemically Important Insurers [Reuters]
     
  • The US and EU met to sketch the broad outlines of a potential "covered agreement" governing transatlantic insurance regulation [Law360The Wall Street Journal]