Failing doesn’t hurt much

A valued commenter sent in a good question via e-mail:

Here in my state, we have a number of new names in the market, and I have no idea how to evaluate their offerings, or even if they will be around next year.  What happens to people whose insurer fails?

Actually this is two questions, and I’ll deal with the second one first right now and the first one later on this week.

What happens when an insurance company fails, especially a new insurance company?

There are a couple of types of failure.  The most common is a soft failure.  In other circumstances, this would just be an indication to get a prescription for a FYWP word, but in the insurance world, it means the company is still able to cover its medical expenses but can’t cover its overhead and administrative back-end.  In this case, the most common solution is for the failing company to sell its operating profitable businesses to a larger insurer and close out. 

In this case, members would see their policies transfer along with all of their pre-exisiting deductibles, co-pays and co-insurances.  The individual would be no worse off for a mid-year move to a new insurer than they would have been if their insurer had not changed.  Often times, there is a decent probability of some members being made slightly better off because of the conversion as translating histories between systems is a royal pain in the ass, and the default assumption is “don’t screw the member” as the state regulators really don’t like that, so ties go to members.

For instance, several, pre-PPACA, years ago, Mayhew Insurance absorbed a small regional insurer.  SRI had an odd set of plumbing regarding urgent care clinics.  Members paid 100% of the contracted rate for urgent care visits and this did not apply to deductible or out of pocket.  The goal was to drive members to PCP offices.  The SRI did not apply urgent care claims to deductibles and they way they did that was by matching Taxpayer ID, Place of Service code, NPI Type 2 and NPI taxonomy on the submitted claims to a white list that SRI maintained.    Mayhew Insurance does not require NPI taxonomy to be on the claim so we can’t tell if Dr. Bob at 123 Sesame Street is billing as a PCP office during regular business hours or if Dr. Bob is working at 123 Sesame Street Urgent Care during off-hours and weekends.  The decision was to take the backwards looking claims reconciliation and apply all potential urgent care claims to regular processing.  Members were seeing significant refund checks during the run-out period as it was cheaper for us to write checks than rebuild our claims logic. 

That is the easy type of failure.  It is a smooth transition and individuals should be at least made whole if not slightly better off. 

Now let’s look at a harder fail. 

The insurance company can’t cover its medical expenses with ongoing premium and investment revenue and there is no easy rescue via buy-out in place.  In this case, the state regulator is supposed to order the insurance company to stop writing new policies and begin a reasonably fast wind-down of operations.  Long term contracts may be sold to other insurers, and policies that are ending in the next couple of months will not be renewed when they expire.  Members are supposed to be made whole because insurance companies are supposed to maintain massive reserves to cover extremely low probability outcomes even if the insurance company is not taking in any premium revenue. 

Harvard Pilgrim maintains half a billion dollars in reserves in 2012. Kaiser Permante as a combined entity has $14 billion in net assets.  Aetna has $14 billion in net assets.  Maine Community Health Options, a new co-op, has $14 million in reserves.  The goal is to have sufficient assets on hand to pay out all claims if no further premiums are received for three to six months.  And if this fails, there are state level guarantee associations which is a combined group of all insurance companies in a state.  The responsibility of the association is to cover any losses from the failed health insurance company. [see Update #1]

So as long as someone goes to an insurer that is actually registered and regulated as an insurer, their claims will eventually get paid by someone even if the original insurer fails.

Update #1 from comments:

a Guarantee Association is a entity created by statue that assesses solvent carriers to cover claims of an insolvent carrier. There is also a Liquidator appointed to represent the Commissioner of Insurance of the State that the carrier is domiciled. Once a judge signs an Order of Insolvency, the Liquidator marshalls assets, manages the day to day operations, mails Proof of Claim notices to any party doing business (suppliers, reinsurers, etc) with the failed insurer, etc. Proof of claims that are returned to the Liquidator by the Bar Date (in the Order of Insolvency), the Liquidators team analyzes the claims, sorts them by priority class, and then send of Notices of Determination, informing the claimant of the allowed amount of their claim. This amount may not be what the claimant will actually receive, which is usually a percentage of the assets recovered by the Liquidator. The claimant has the right to object to the amount determined by the Liquidator. Eventually, the remaining assets are divided among the Guarantee Association and other claimants as determined in the Notice of Determination.






57 replies
  1. 1
    ulee says:

    Is this an auto-post or are you really here?

  2. 2
    WereBear says:

    But I thought we didn’t need any stinkin’ regulations!

    /libertarian

  3. 3
    ulee says:

    Bueller? Bueller? Now I’m realizing something I should have realized before.

  4. 4
    Richard Mayhew says:

    @ulee: what’s up? I was making a coffee and breakfast run.

  5. 5
    ulee says:

    @Richard Mayhew: Good to know. I heard rumors about auto posting.

  6. 6
    Omnes Omnibus says:

    @ulee: Dude, someone does the night-owls a favor by scheduling a late night post so that they are aren’t posting on the tail end of a 300+ thread and you want to bitch about it?

  7. 7
    ulee says:

    If you care about the topic you need to make us care. Now let me tell you what I know about the Negro.

  8. 8
    ulee says:

    @Omnes Omnibus: oh go bitch to yourself.

  9. 9
    ulee says:

    @Omnes Omnibus: And try something else instead of sitting in front of your computer your every waking hour.

  10. 10
    dmsilev says:

    @WereBear: No, no, the free market will solve issues of this sort. See, people will do their research, perform the proper due-diligence financial assessment, determine ahead of time which insurers are likely to under sometime in the next fiscal year, and of their own free will avoid signing up with that company.

    Really.

  11. 11
    Omnes Omnibus says:

    @dmsilev: And if they don’t they are really just moochers anyway, so fuck ’em.

  12. 12
    Steeplejack says:

    @ulee:

    Says the person who has been sitting in front of his computer all night.

  13. 13
    Mike Rydzewski says:

    Hi Richard, you may already know this, but a Guarantee Association is a entity created by statue that assesses solvent carriers to cover claims of an insolvent carrier. There is also a Liquidator appointed to represent the Commissioner of Insurance of the State that the carrier is domiciled. Once a judge signs an Order of Insolvency, the Liquidator marshalls assets, manages the day to day operations, mails Proof of Claim notices to any party doing business (suppliers, reinsurers, etc) with the failed insurer, etc. Proof of claims that are returned to the Liquidator by the Bar Date (in the Order of Insolvency), the Liquidators team analyzes the claims, sorts them by priority class, and then send of Notices of Determination, informing the claimant of the allowed amount of their claim. This amount may not be what the claimant will actually receive, which is usually a percentage of the assets recovered by the Liquidator. The claimant has the right to object to the amount determined by the Liquidator. Eventually, the remaining assets are divided among the Guarantee Association and other claimants as determined in the Notice of Determination. Thanks!

  14. 14
    ulee says:

    @Steeplejack: Hey, I’ve got a job. I work 56 hours a week.

  15. 15
    Schlemizel says:

    Man, tough crowd here this morning! Omnes, as someone who suffers occasional bouts of middle of the night awakeness I feel your pain. It is odd, if they can auto-post why not have an agreed upon schedule & have someone put something up in the middle of the night. On the rare occasion when our beloved host is stomping around as he often does he could big-foot a post but if its an open thread anyway whats the harm?

  16. 16
    mainmata says:

    Mr. Ulee needs an attitude adjustment, I think. Richard Mayhew is one of our bests FPers. So let’s climb back down from that hill you decided to make your fighting stand on.

  17. 17
    ulee says:

    @mainmata: I’ve got nothing against Mayhew. Let him defend himself is a defense is needed.

  18. 18
    Baud says:

    several, pre-PPACA, years ago, Mayhew Insurance absorbed a small regional insurer.

    Now you’re just trolling mcclaran.

  19. 19
    ulee says:

    yeah, I know, but I don’t suffer fools gladly.

  20. 20
    Belafon says:

    @Schlemizel: If they can autopost, then they should use the feature to prevent fpers from stomping on each other. This “oh it’s hard” spin is crap.

  21. 21
    NorthLeft12 says:

    @Baud: You beat me to it.

    I was just about to say that McLaran has been right all this time! Richard Mayhew is a CEO/owner of a large Health Care Insurance company.

    Your posts on this blog have been a subtly clever ploy to ensnare us all in the trap of private health care by turning against the single payer/public option of Obamacare! WOLVERINES!!!!

  22. 22
    ulee says:

    Auto posts are misleading. I thought Anne got up early. Turns out her robot gets up early.

  23. 23
    Richard Mayhew says:

    @Baud: Why not :)

  24. 24
    Yatsuno says:

    @Richard Mayhew: Hey everyone needs a hobby amirite?

    The health insurer my mom used to work for (a tiny regional that survives only by meeting Fed standards) went bankrupt about a decade ago. They’re still alive and kicking now, probably because again they can suck in sweet sweet federal dollars. But their network only covers a small part of Washington State. I wonder how ACA is affecting them and if Regence is breathing down their neck for acquisition.

  25. 25
    Richard Mayhew says:

    @Belafon: Once we start getting paid for posting, we’ll take that under consideration.

  26. 26
    raven says:

    Stop talking to this moron, it’s probably Ted and Helen.

  27. 27
    Richard Mayhew says:

    @ulee: And your problem is that people are giving you authentic free ice cream that caters to your schedule instead of their own?

  28. 28
    dmsilev says:

    @ulee:

    Auto posts are misleading. I thought Anne got up early. Turns out her robot gets up early.

    Seriously? _This_ is the hill that you plant your flag on, draw a line in the sand, and scream “This is Sparta!” for?

    Here’s a virtual nickel; go buy yourself a sense of proportion.

  29. 29
    Yatsuno says:

    @dmsilev: To be fair, he’s giving Richard a nice shiny new cat toy to play with. I’m dying to see how this ends.

  30. 30
    ulee says:

    @dmsilev: Yup, like I’m dying on this hill.

  31. 31
    ulee says:

    @Yatsuno: Well, Richard has shown he can’t kick his way through a screen door so far. But he’s working on it.

  32. 32
    Schlemizel says:

    @dmsilev:
    You forgot “I AM SPARTACUS!”

  33. 33
    Schlemizel says:

    Also, can anyone tell, is ulee attempting at humor and missing or is that just a really pathetic cry for help?

  34. 34
    ulee says:

    @Schlemizel: It’s a pathetic cry for help.

  35. 35
    a hip hop artist from Idaho (fka Bella Q) says:

    @Omnes Omnibus: Word. They do all seem to like you a lot, these late night performance artists.

    @raven: I see your point; that explains a lot.

  36. 36
    ulee says:

    @a hip hop artist from Idaho (fka Bella Q): Word? Are you kidding? You’re not being ironic, are you? Yikes.

  37. 37
    dedc79 says:

    NewsMax headline: Ulee: Auto-posting Dooms Balloon Juice

  38. 38
    ulee says:

    @dedc79: I just want the truth to come out. Anne Laurie doesn’t get up early. She sleeps in and has a robot pretend to be her. It’s a shocking development.

  39. 39
    CaseyL says:

    Richard, is it correct to assume there’s a statute preventing insurance companies from using those reserves for any use other than paying claims?

  40. 40
    wuzzat says:

    @ulee: Good for her and her robot assistant. It’s no summer house on the moon, but I’m glad at least one of us gets to live the futuristic Jetsons dream we were promised when we were kids.

  41. 41
    Gin & Tonic says:

    @CaseyL: I’m not Richard, but in an earlier phase of my life I knew a lot about loss reserves in the property-casualty insurance market. Loss reserves are subject to regulatory review, not necessarily statutory. But an insurance company doesn’t put money in a coffee can labeled “for paying claims only” — loss reserves are a portion of their invested capital, subject to certain liquidity requirements. While there are general accounting guidleines, insurance is a state-regulated business, so the details can vary, and the strength of regulation very definitely does vary.

  42. 42
    A Humble Lurker says:

    @ulee:

    It’s a pathetic cry for help attention.

    FTFY

  43. 43
    Violet says:

    Richard, is there a chance that insured peons would only get a percentage of their claims paid? Like in liquidation when claimants don’t get back all their money. And thus they could be on the hook “for anything not covered by your insurer”as the fine print reads when you sign your life away before seeing the doctor?

  44. 44
    ulee says:

    @A Humble Lurker: you got me.

  45. 45
    ulee says:

    Where is Anne Laurie? Suddenly she’s an apparition. She should be done with her early morning gardening by now.

  46. 46
    Jon Marcus says:

    Mr. Picky Proofreader sez you need to fix a typo in the update: “…Guarantee Association is a entity created by statue…” Pretty sure that should be “statute”?

  47. 47
    justawriter says:

    Richard, I received this notice from my employer and am wondering if you would look into the details … “As of May 1, our Blue Cross Blue Shield (of North Dakota) rates have gone up. On average BCBS rates went up statewide by 28 percent, but (name of business)’s only went up by 15 percent.” I calculated it out and my single person policy went from $380/month to 448/month.
    I am sure the 28 percent is going to be waved like the bloody shirt this fall as the fault of Obamacare. I’m wondering what the real story is. This is a big deal because ND is a virtual monopoly for BCBS with 85 percent of the insurance market.

  48. 48

    Thank you. I’m not sure I understand the answer entirely, though. In the “soft” scenarios, what happens to the provider? Does the new company take over the old provider network? And, “This amount may not be what the claimant will actually receive, which is usually a percentage of the assets recovered by the Liquidator.” Is the “claimaint” the insured in this or the provider? Does this mean that people’s medical bills may only be partially paid?

  49. 49
    Roger Moore says:

    @Schlemizel:

    It is odd, if they can auto-post why not have an agreed upon schedule & have someone put something up in the middle of the night.

    Because we’re liberals; we don’t do organization.

  50. 50
    Roger Moore says:

    @raven:

    Stop talking to this moron, it’s probably Ted and Helen.

    The behavior is much closer to Little Boots.

  51. 51
    scav says:

    @A Humble Lurker: Could be a mating call to Little Boots. Shades of David Attenborough or Wild Kingdom.

  52. 52
    raven says:

    @Roger Moore: you are right

  53. 53
    catclub says:

    @justawriter: So you have single payer but it is BCBS.

  54. 54
    wooflikeabear says:

    Hey Richard, question for you: Provider based billing seems like a hospital grift, especially for those of us with a high deductible plan. How do I go about finding doctors or a practice that does not do this double billing shenanigans?

  55. 55
    justawriter says:

    @catclub: Pretty much. Of course they would never let their market position lead to abuse because free market.

  56. 56
    justawriter says:

    Actually, I may have found the answer to my question, CEO fired for losing $80 million.
    http://www.kxnet.com/story/254.....-executive
    I guess I should have followed the old adage, never ascribe to malice what can be explained by incomptence.

  57. 57
    PST says:

    I don’t feel much anxiety about my health insurer going bust because not much time passes (by insurance standards) between treatment being rendered and the insurer paying. There have been many insurance insolvencies over the years, but mostly they involve life insurance and liability insurance, where you pay a premium now for a payment that may come decades from now. Some liability policies, for example, have what they call a “long tail” in the business. If my doctor fails to diagnose a grave disease tomorrow, it may be years before it manifests itself, more time before I reasonably know he is to blame, and four or five years for the lawsuit to wind its way through the courts here. It is difficult to predict what claims will cost in a decade, and thus to reserve soundly and set premiums. Health insurance is a piece of cake in comparison, except long-term care coverage in which today’s premium is for care in the distant future. It used to be a legitimate worry that if your company lost money and had to close, you might have a difficult time finding a replacement. At least that situation has improved. There is probably a way for a health insurer to fail so badly and so quickly that all claims are not paid — that BCBS in North Dakota, which is not insolvent, incurred most of its 2013 loss when a subsidiary screwed up implementation of the insurance exchange in Maryland — but the business is less vulnerable to that kind of thing than other forms of insurance.

Comments are closed.