Column: Here’s why Californians with health coverage are being hit with surprise fees

Miriam Mandell, 96, has been paying for long-term care insurance for almost a quarter-century — and has watched as her premiums have steadily risen over the years.

So she assumed a recent letter from her insurer, CNA Financial, was notifying her that her costs were going up yet again. They were, but not because CNA was jacking up its rates.

The letter was confusing, but Mandell was able to suss out that a nearly $17 surcharge was being tacked on to her $838.75 in quarterly premiums because a Pennsylvania insurance company she’d never heard of had gone out of business.

The Reseda resident was being told she’d help foot the bill to protect that company’s policyholders.

“What does that have to do with me?” Mandell asked, not unreasonably.

That is, why is it her problem that Penn Treaty Network America Insurance Co. and its subsidiary, American Network Insurance Co., couldn’t deliver on their promises to customers?

“It doesn’t seem right that I have to pay more,” Mandell said.

And she’s not alone. While the total number of people affected isn’t being made public, numerous Californians with both healthcare and long-term care coverage are being hit with similar charges.

“It isn’t right,” said Bonnie Burns, a policy specialist with California Health Advocates, a Sacramento nonprofit organization.

“Consumers should not be financing the costs of failed companies,” she told me. “And that’s exactly what’s happening.”

Mandell’s situation offers a teachable moment about how insurance companies look out for one another, which isn’t necessarily a bad thing.

If a business goes bust, other insurers will step in to make sure policyholders aren’t left out in the cold. This is done by paying fees to state entities called life and health insurance guarantee associations, which cover at least a portion of the failed company’s outstanding claims.

Mandell’s higher bills also highlight how the California insurance industry lobbied to make sure it can stick customers with at least some of their financial obligations. More on that in a moment.

Penn Treaty went bust a couple of years ago. Like many long-term care insurers, the company failed to anticipate the scope of claims as baby boomers entered nursing homes. A private room in California can run nearly $300 a day.

Many long-term care insurers have dealt with poor forecasting by imposing hefty rate hikes on customers. I wrote last month about an 82-year-old Temecula woman whose monthly premium recently soared by 80%.

If higher premiums are insufficient to keep an insurer out of financial peril, the company often will be acquired by a rival firm. Only rarely will an insurance company go out of business.

That ended up being Penn Treaty’s fate, though, after Pennsylvania authorities rejected the company’s application for significantly higher premiums. After years of legal wrangling, the company was ordered by a judge in 2017 to enter liquidation proceedings.

“By the time Penn Treaty was ordered to liquidate, it was estimated that liabilities exceeded assets by $4 billion,” the Federal Reserve Bank of Chicago said in an analysis last year.

It noted that average rate increases of 300% would be required to keep the company afloat, and that premiums of this magnitude would “severely harm policyholders and would not be permitted by state regulators, leaving no alternative other than to place the companies into liquidation.”

Enter, stage right, the California Life and Health Insurance Guarantee Assn.

Guarantee (or “guaranty”) funds kick in after an insurer liquidates, with money coming from fees paid by other insurers. In most cases, these safety-net funds will cover only a portion of the failed insurer’s claims.

The Chicago Fed analysis observed that many states limit policyholder claims under the local guarantee association to $300,000. “It is estimated that half of all [Penn Treaty] policyholders will have claims in excess of what will be covered by guaranty associations,” it said.

Now here’s where Mandell and potentially numerous other Californians get involved.

Although health insurers in most other states write off their fees to state guarantee associations, thus receiving a tax benefit, in California they’re permitted to pass along these costs to policyholders.

“That’s just how we do it,” said Todd Thakar, executive director of the California Life and Health Insurance Gurantee Assn.

Thakar, who previously did consulting work on the Penn Treaty liquidation, told me that 288 health insurance providers licensed by the Department of Insurance to do business in California have shelled out $325 million in fees to cover Penn Treaty claims.

A spokeswoman for the Department of Insurance said most of the big health insurers are involved, including Anthem Blue Cross, Blue Shield and Health Net.

About a quarter of the $325 million in fees— or $81 million — is being recouped from policyholders through surcharges, Thakar said.

He declined to identify which insurance companies are passing along their costs and which ones are swallowing the expense.

It’s therefore up to individual policyholders to keep an eye on their bills to see if they’re among those paying the Penn Treaty tab.

The letter Mandell received from CNA estimates she’ll be paying an extra $17 or so every quarter for up to the next year and a half.

A CNA spokesman declined to comment.

California’s guarantee association is more generous than most. It announced after Penn Treaty went under that the company’s policyholders in the Golden State will be eligible for up to $560,929 in claims.

The amount of each policyholder’s surcharge will vary, depending on how much they pay in premiums. In Mandell’s case, she has to pay roughly 2% of her $838.75 quarterly premium to help cover CNA’s Penn Treaty fees.

A nursing home can cost more than $100,000 a year. Depending on your longevity, the $560,929 covered by the California guarantee association may not get you to the finish line.

“A lot of people are going to be tapped out,” predicted Robert Hunter, director of insurance for the Consumer Federation of America. “A lot of Penn Treaty policyholders will not get fully paid.”

A half-million bucks is better than nothing. And it should be a relief to all long-term care policyholders that a safety net exists for their coverage.

But I’m with Mandell. Why is it her problem that Penn Treaty customers are in jeopardy? Why are possibly many Californians who don’t even have long-term care coverage caught up in this?

A much more equitable way of handling Penn Treaty’s collapse is how other states do it — allowing insurers to write off their payments to guarantee associations.

Sure, that could shortchange the state government, but it wouldn’t be as consumer-unfriendly as going after individual policyholders.

CNA, Mandell’s insurer, reported $727 million in profit over the first nine months of the year.

And they’re sticking a 96-year-old woman with their bill for Penn Treaty?