Public to pay: In biggest insurer failure ever, Pa. liquidates $4.6B long-term-care firm

After eight years of legal struggle among state regulators, investors, and policyholders, Commonwealth Court Judge Hannah Leavitt signed off on a plan Wednesday to liquidate Penn Treaty Network America Insurance Co. and its affiliate, American Network Insurance Co. of Allentown.

The decision leaves solvent insurers, their owners, and customers to pick up the cost for more than 70 percent of the up to $4.6 billion in projected long-term-care claims expected for 76,000 aging Penn Treaty customers nationwide.

Independence Blue Cross and other U.S. health insurers will have to fund an annual premium surcharge of up to 2 percent a year, with costs ultimately borne by customers, through higher health insurance prices, or by company owners.

"Our projection is the guaranty funds will cover $3.3 billion," said Ron Ruman, a spokesman for the Pennsylvania Insurance Department.

That cost will be the largest ever for a health-insurance company failure, according to data from the National Organization of Life and Health Guaranty Associations.

A separate $500 million should be covered by Penn Treaty's remaining assets, Ruman said. The company was declared insolvent and put into "rehabilitation" by state officials in 2009, after the death of Penn Treaty founder Irving Levit.

Judge Leavitt ruled in 2012 that the department should consider "actuarially justified" premium increases, among other options, so the company could stay in business and keep paying escalating claims for nursing-home and end-of-life care. State insurance officials had resisted increases, arguing that Penn Treaty and American Network should be liquidated.

Any money not covered by state insurance guaranty funds or Penn Treaty's remaining assets should be partly covered by continuing customer payments,  Ruman said.

"Anyone who has a policy should continue paying," he said, noting customers with valid policies can still file claims and collect.

Once they take over Penn Treaty customers in each state, guaranty funds may seek to boost customer premiums, Ruman added.  About 9,000 Penn Treaty customers live in Pennsylvania.

"The companies' financial difficulties are too great to be remedied, and consumers are best protected through the state guaranty association system,"  Pennsylvania Insurance Commissioner Teresa Miller said in a statement. The state blamed "incorrect assumptions" on how many Penn Treaty customers would drop the policies, and how much they would need.  

More in my Oct. 16 story here.