April 23: Pennsylvania’s piggy bank squeals

The lede:

Pennsylvania provides the latest insurance hijinks, with the state’s Commonwealth Court ordering the state to reimburse the $600 million or so it liberated from MCare, the state’s excess medical malpractice program. This is pretty serious stuff, as it blows a decent (2%) hole in the state’s $28 billion budget, or about $50 per Pennsylvanian. Naturally, the state plans an appeal.

This is another fun tale of a state government treating an insurance fund like a piggy bank, though it is a more subtle operation than the one in Wisconsin I wrote about a couple of weeks ago.

In Wisconsin, the state needed $200 million to balance the budget and just took it from the excess medmal insurer. A nasty lawsuit over that continues.

Pennsylvania’s saga begins in 2002, when the state had a malpractice crisis. Legislators passed several reforms, one of which created MCare’s excess medmal program. Medical care providers had to get primary coverage from the private market (or a JUA) and buy 500K/$1.5M excess from MCare. MCare does not charge an actuarially sound rate. It is pay as you go, charging just enough to recoup what was paid out the prior year in claims and expenses, plus a 10% surplus. That’s right – no IBNR provision. More on that later.

But MCare’s rates, even without an IBNR load, were too expensive. So the state created an abatement program – basically a rebate. Some physicans were supposed to get 100% back; most were slated for 50%. From 2003 to 2007 – the last year for the state authorized an abatement  – the state authorized $946 million in abatements and set up a special fund to hold the money. A quarter-per-pack cigarette tax was earmarked to the fund. More money came from a surcharge on traffic tickets.

Now things get tricky. That special abatement fund was not controlled by MCare. It was controlled by the Department of Public Welfare – a tactic legislators thought would help score some federal Medicaid funds. (It didn’t.) Of the $946 million for abatements, only $330 million actually made its way to MCare and hence to the health care providers. $616 million remained . . . unabated, if you will.

Flash forward to 2009. The abatement fund held $723 million – easily enough to pay the $616 million the state had promised to MCare. Only the state was short of money everywhere else, because of the recession. So the state reneged. It drained the abatement fund and said it owed MCare – and by extension, the state’s doctors and hospitals – nothing. Oh, and MCare had to transfer another $100 million into the state’s general fund. Naturally, the health care providers sued. The court took their side and ordered the state to pay MCare what it had promised.

I pause here to state the obvious – that an insurer that reneged on a rebate (basically a policyholder dividend) would pay a hefty fine, at the least.

But the health care providers may never receive that money, because MCare has another problem. It carries – remember? – no IBNR on its books. It has no case reserves, either. PwC estimates an unfunded liability of $1.6 billion as of 12/2009. MCare held a $61 million fund balance, meaning it really has a net worth around negative $1.5 billion, which health care providers will be dunned for sooner or later. So the Pennsylvania Medical Society has proposed putting MCare into runoff and using the abatement money to reduce the negative net worth under $1 billion.

The happy ending? The unfunded IBNR has been going down. The reason – claims are declining. All those medmal reforms passed while MCare was formed – they worked! You can see this in detail in PwC’s report, with an update here.

Elsewhere

Ouch: The case against Hank is “devastating” – according to the judge.

Florida’s HO mess: More solid reporting from the Sarasota Herald-Tribune here and here. The former dissects the fall of one of those undercapitalized companies Florida seems to specialize in. (The graphic at the top is interactive, BTW.) The latter article an insurer’s unusual business model. Rather than pay claims, it employs handymen full-time to fix damaged property. Not sure how that will work after the next big hurricane, when his hired handymen quit to become private contractors, but we’ll see.

Meanwhile, another insurer hits the skids.

This week, rather than bash the Florida Legislature, I will highlight a dollop of sanity: a proposal to deregulate rates. I know that rates already average $6,000 and will go higher, but the situation is really like the old Fram oil filter ads of my youth: pay me now or pay me later. Update: That proposal is dead.

To get non-insurance cosmic for a moment, I wonder if Florida’s economic model is broken. The state grew by offering cheap property to pensioners in a warm climate. Thanks to insurance, the property isn’t cheap, and the db pension is gone like Jimmy Hoffa. Weather’s still nice.

Pension problems: I don’t know enough details to comment on this actuary’s pension mistakes. I will note that some risk managers slipped up by handing consulting contracts to firms with no E&O cover.

Ratemaking seminar: Credit scoring was the big news at the CAS seminar. Personally, I think auto insurance will end up moving to a pay-by-mile system tied into a car’s computer. Those computers are remarkable, as they proved with last month’s runaway Prius.

Speaking of Toyota, here comes the big subro.

Cat bonds: Since January 2008, they’ve returned better than the S&P, according to Aon. If you’re interested, be sure to download the report.

State Farm vs. Texas: State DOI wants to publicize State Farm’s rate filings, and the insurer is fighting back. The filings were up when I checked late Thursday night, though obviously I wouldn’t know whether they include the redacted information alluded to in the article.

Rates: Soft market news here and here. Prosperity just around this corner.

Ninja vs. guru: Don’t know if this link works if you aren’t a linkedin member, but the article documents that the title ninja is ascendant and guru is in decline. So these days, be tough, not smart.

Strictly personal: My niece outbelts Streisand in her online Glee audition. Show her some love.

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