In an unusual rebuke for Pennsylvania's insurance regulator, a Commonwealth Court judge has refused the state's request to liquidate two troubled Allentown long-term-care insurance companies, and has instead ordered insurance commissioner Michael F. Consedine to draw up a "rehabilitation" plan that would allow big rate increases for Penn Treaty Network America Insurance Co. and American Network Insurance Co. 

The reversal, after a 30-day trial, is "an unprecedented decision of significant national consequence," Eugene J. Woznicki, the Texas-based chairman of the group that owns the two companies, said in a statement. A team of Ballard Spahr LLP lawyers headed by Douglas Y. Christian represented the owners on the winning side of the case.
Woznicki told me he's "looking forward to working" with Consedine on a plan to change policies "so the companies can stay in business. We have 300 people employed at this company in Allentown. It can be viable." 

Asked how much policy rates will have to increase, Woznicki told me he expects some of the policyholders likely to be affected, whose average age is 77, may be willing to accept "reduced coverage" instead of price increases. 

The companies, with policies and assets worth $1 billion, have been under state control since 2009, when they were declared insolvent by the insurance department. At the time, then-insurance commissioner Joel Ario said, "the companies do not have the ability to pay future claims without significant rate increases that would have to be requested and approved in all 50 states. In the current circumstances, those rate increases simply would not be fair to policyholders.”

The owners' actuarial expert, Karl Volkmar, "projected that 300% rate increases" -- or 4x current premiums, which average $2,200 a year for the affected policyholders -- "would be necessary to allow the companies to meet their obligations, according to the findings of the Court," spokeswoman Rosanne Placey told me. (The opinion refers to a possible 40% increase in the first year, and 10% increases in future years, aggregating to as much as 300% over the decades-long life of a policy.)
The state's rehabilitation office projects "that even higher rate increases would be required, on average, to generate sufficient funds to allow the companies to meet their obligations." But Placey says the decision does not insure such big increases; that will depend on a rehabilitation plan.
The state petitioned the court to sell off the companies' assets. Any losses not paid by Penn Treaty assets would be passed along to other insurers, and eventually to policyholders or owners of rival companies through the state guaranty fund system. 
But Consedine's department "has not undertaken a meaningful effort to rehabilitate the Companies," as required for court-ordered liquidiations, "and, to the contrary, has acted to frustrate rehabilitation" by refusing to authorize insurance increases on policies more than 10 years old, which were sold at unsustainably low prices, wrote Commonwealth Court Judge Mary Hannah Leavitt - who was the department's chief counsel in the 1980s.
Penn Treaty had promised not to raise rates if customers' health got worse - but the company says that guarantee didn't apply if its own costs rose.

The state has been "fixated" on the companies' financial surpluses, instead of focusing on their current and future ability to actually pay claims, the judge added.

"I've never heard of a request for an insurance company termination to be turned down," said Delaware- and New York-based investor Gary Hindes, Penn Treaty's former chairman and largest shareholder. "But the facts are egregious. You had an insurance department that frankly was lazy. They were shirking their statutory responsibility to give this company rate increases. This company has no debt, it's cash-flow positive, it's at least ten or twelve years before it runs out of money," even at current rates. He said he hopes Penn Treaty and its affiates "could be writing new business within a year." 
"We are reviewing the opinion and looking at our options regarding our appeal rights," department spokeswoman Rosanne Placey said in a statement. She noted the company is currently paying its claims. "Policyholder protection is still our number one priority." she added.