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.
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.