SHIP Long-Term Care Policyholders Face Reduced Benefits, Big Premium Hikes

A Pennsylvania court has approved a rehabilitation plan for the insolvent long-term care insurer Senior Health Insurance Company of Pennsylvania (SHIP). The plan gives SHIP's 39,000-plus policyholders an array of choices and will likely mean higher premiums, reduced benefits, or both. If you're a SHIP policyholder, here is what you need to know.

Court Approves a Three-Phase Plan for SHIP

The Commonwealth Court of Pennsylvania approved the rehabilitation plan for the insolvent company on Aug. 24 in an attempt to stave off liquidation. Liquidations give rise to a host of other issues and can severely curtail benefits, which are capped by states under their guaranty fund associations.

Judge Mary Hannah Leavitt pointed out in her approval of the plan, submitted as an amended concept from the initial submission last October and subjected to hearings in May, that it would give existing policyholders the most choice they could get considering the dire financial state of the company. 

SHIP has a deficit of about $1.2 billion, with $1.4 billion in assets and $2.6 billion in liabilities. It once had  645,000 long-term care (LTC) policies in 46 states when it was licensed. About  13% of SHIP's LTC policyholders are on claim, but the rehabilitator expects that number to rise to 32% by 2050. The rehabilitator is the Pennsylvania Insurance Department.

"As is true of many similar LTCI blocks in the market, many of SHIP's policies have historically been substantially underpriced and policyholders have not been asked to pay the premium that would be necessary to assure that those benefits will be available when needed," the rehabilitator stated.

Depending on the policy, the benefits may include services provided in nursing homes and assisted living facilities, as well as home-based health care services and adult day care.

The rehabilitation plan consists of three phases:

• Phase one will involve the financial evaluation and modification of policies.
• Phase two will involve setting premiums that can sustain the benefits while trying to eliminate any funding gaps not already addressed to prevent a liquidation of the insurer. 
• Phase three will be the completion of the runoff of the LTCI business in force. Runoff refers to the process by which an insurance company handles its existing future liabilities (in this case policyholder claims) while not taking on new business. If SHIP is unable to pay its remaining liabilities in full it may be placed in liquidation and the state's guaranty association may be called on for financial help.
  

The Four Choices Policyholders Will Face

The plan offers four initial options for policyholders. At one end of the spectrum, they can pay the rate increases required to keep their full benefits, priced unrealistically decades ago during a time when interest rates were higher and longevity expectations lower. At the other end, they can choose to reduce their benefits and keep their premiums the same—at least at the outset.   

An older policyholder could, for example, reduce their maximum coverage period from 10 to five years instead of paying the premium required for a policy with a 10-year period of coverage, Judge Leavitt observed.

"For every policyholder there will always be two competing considerations: the anticipated need for LTC benefits and the cost of maintaining coverage for those benefits," the plan notes.

For policyholders who cannot afford any rate hikes, option one, maintaining current their rates and reducing their benefits could be the best option for the first phase of the rehabilitation plan. However, those benefits might be insufficient, and the policyholder could still face premium increases and further benefit reductions during the second phase of the rehabilitation.

As an alternative, option two would modify the existing policy to offer a "reasonable" combination of benefits and premiums, while insulating policyholders to some extent from large rate increases and benefit reductions in the second phase of the plan.

The third option offers a policy with modest benefits but for which no more premiums would ever be required, even if the company were placed in liquidation.

With option four, policyholders would be able to keep the comprehensive benefits in their original policies—with a much bigger bump in premiums. However, even those policyholders could face substantial rate increases or benefit reductions in the second phase. 

Such is the plight of many consumers holding LTC policies as even solvent insurance companies seek to raise rates and perhaps reduce benefits, while working with state regulators on balancing their solvency needs and old promises to policyholders.

SHIP filed an initial application for rehabilitation back in January 2020.