STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CENTRAL STATES HEALTH AND )
LIFE COMPANY OF OMAHA, )
)
Petitioner, )
)
vs. ) Case Nos. 98-1562
) 98-1563
DEPARTMENT OF INSURANCE AND ) TREASURER, )
)
Respondent. )
)
RECOMMENDED ORDER
A formal hearing was held in these cases before Larry J. Sartin, a duly designated Administrative Law Judge of the Division of Administrative Hearings, on July 20-21 and September 30, 1998, in Tallahassee, Florida.
APPEARANCES
For Petitioner: R. Terry Rigsby, Esquire
Blank, Rigsby & Meenan, P.A. Post Office Box 11068 Tallahassee, Florida 32302-3068
For Respondent: Elizabeth G. Arthur, Esquire
David Hershel, Esquire Dennis Silverman, Esquire Division of Legal Services Department of Insurance and
Treasurer
612 Larson Building
200 East Gaines Street Tallahassee, Florida 32399-0333
STATEMENT OF THE ISSUE
The issue in these cases is whether individual and group Medicare supplement forms with a 39% increase in the rates
charged for those forms should be approved by the Department.
PRELIMINARY STATEMENT
On or about January 20, 1998, Petitioner filed requests for rate increases on individual and group Medicare supplement policy forms with Respondent. On or about March 6, 1998, Respondent notified Petitioner that both rate increase requests were denied. Respondent also notified Petitioner that, while the amount of the rate increases sought by Petitioner had been denied, a lower rate increase could be approved.
On March 24, 1998, Petitioner filed two Petitions for Formal Administrative Proceeding with Respondent. Petitioner requested a formal hearing to challenge the denial of its group Medicare supplement policy form rate increase in one petition and the denial of its individual Medicare supplement policy form rate increase in the other petition. Both petitions were filed with the Division of Administrative Hearings on April 2, 1998.
The Petition challenging the group rate increase request was designated Case Number 98-1562 by the Division of Administrative Hearings. The Petition challenging the individual rate increase request was designated Case Number 98-1563. Both cases were assigned to the undersigned.
On May 11, 1998, a Notice of Hearing was entered scheduling Case Numbers 98-1562 and 98-1563 for formal hearing on July 20 and 21, 1998.
On June 16, 1998, Petitioner filed a Petition to Determine Invalidity of Agency Statement Pursuant to Section 120.56(4),
Florida Statutes, with the Division of Administrative Hearings. In this petition it was alleged that Respondent had relied upon a policy statement developed and applied by Respondent in violation of Section 120.56(4), Florida Statutes, in denying Petitioner's rate increase requests. Petitioner requested in the Petition that the policy be declared an unpromulgated rule, that Respondent be precluded from applying the unpromulgated rule against Petitioner, and that the policy be declared an invalid exercise of delegated legislative authority.
Petitioner's Section 120.56(4), Florida Statutes, petition was designated Case Number 98-2767RU and was assigned to Administrative Law Judge Suzanne F. Hood by Order of Assignment entered June 19, 1998. Judge Hood scheduled a formal hearing in Case Number 98-2767RU for July 7, 1998, by Notice of Hearing entered June 22, 1998.
On July 7, 1998, an Order of Consolidation and Canceling Final Hearing in Case Number 98-2767RU was entered. Pursuant to this order Case Numbers 98-1562, 98-1563, and 98-2767RU were consolidated. The hearing scheduled for July 7, 1998, in Case Number 98-2767RU was cancelled and the parties were informed that the hearing in all three cases would be held on July 20 and 21, 1998, as provided in the Notice of Hearing entered in Case Numbers 98-1562 and 98-1563.
On June 25, 1998, Respondent filed a Motion for Summary
Order, Motion to Expedite and Motion for Attorney's Fees in Case Number 98-2767RU. Respondent argued that it had undertaken steps to adopt the challenged policy in Case Number 98-2767RU as a rule and, therefore, it was authorized to rely upon that policy for its agency decisions in Case Numbers 98-1562 and 98-1563 consistent with Section 120.56(4)(e), Florida Statutes (1997).
After a review of the pleadings it was concluded that it was not clear on the face of the pleadings that the policies Respondent was attempting to adopt by rule incorporated the policy statement being challenged in Case Number 98-2767RU. Therefore, a ruling on the motion was reserved. It was concluded in the Final Order entered simultaneously with this Recommended Order that Section 120.56(4)(e), Florida Statutes, is not an absolute defense to a challenged instituted pursuant to Section 120.56(4), Florida Statutes. Therefore, the Motion for Summary Order, Motion to Expedite and Motion for Attorney's Fees was denied in the Final Order.
At the formal hearing Petitioner presented the testimony of Dawn Enquist Helwig, Ira Nathan, and Frank Dino. Ms. Helwig and Mr. Nathan were accepted as expert actuaries. Petitioner offered twenty-two exhibits into evidence. All were accepted.
Petitioner's Exhibit 12 was accepted only to the extent ultimately determined relative. Petitioner's Exhibits 20, 21, and 22A, B, and C consisted of the deposition testimony of James Bracher, Mr. Dino, and Linda Patricia Ziegler, respectively.
Respondent presented the testimony of Mr. Nathan, Mr.
Bracher, Mr. Dino, and Ms. Ziegler. Mr. Dino and Ms. Ziegler were accepted as expert actuaries. Respondent offered fifteen exhibits into evidence. All were accepted. Respondent's Exhibits 12 and 15 consisted of the deposition testimony of Mr. Nathan and Ms. Helwig.
Official recognition of the following provisions was taken during the hearing: (1) Sections 627.410, 627.411, and 627.6745,
Florida Statutes; (2) Rule 4-156.011, Rule 5-159.012, and Chapter 4-149, Florida Administrative Code; (3) Notice of Proposed Rules, Volume 23, Number 45, Pages 6045-6068 of the Florida Administrative Weekly (November 7, 1997); and (4) a Notice of Change, Volume 24, Number 20, Pages 2689-2701, Florida
Administrative Weekly (May 15, 1998).
Subsequent to the conclusion of the formal hearing, Petitioner filed a Motion to Supplement the Record and for Official Recognition. Petitioner requested in the Motion that official recognition of a Second Notice of Change of Proposed Rule Chapter 4-149, Florida Administrative Code, issued after the formal hearing be taken and that the second notice be considered as part of the evidence in these cases.
Respondent filed a response to the motion arguing that the record should be reopened only if it were given an opportunity to introduce evidence concerning the second notice. Following a
motion hearing conducted by telephone on September 1, 1998, it was ordered that the record of these cases would be reopened to allow the parties to present additional evidence concerning the second notice of change on September 30, 1998.
On September 30, 1998, Petitioner presented the testimony of Ms. Helwig. Petitioner also offered two exhibits. Petitioner's Exhibits 23 and 24 were accepted into evidence. Petitioner's Exhibit 23 is the notice of change.
Respondent presented the testimony of Mr. Dino and Ms.
Ziegler. Respondent offered Respondent's Exhibit 16, which was accepted into evidence.
The last volume of the transcript of the formal hearing was filed on October 19, 1998. Proposed orders were, therefore, required to be filed on or before October 29, 1998. Both parties filed proposed orders on October 19, 1998. Those proposed orders and Petitioner's Summary of Argument have been fully considered in entering this Recommended Order.
A Final Order disposing of Case Number 98-2767RU is being entered simultaneously with this Recommended Order.
FINDINGS OF FACT
Introduction.
The Parties.
Petitioner, Central States Health and Life Company of Omaha (hereinafter referred to as "Central States"), is a
corporation domiciled in Nebraska.
Central States holds a certificate of authority issued by the Department which allows it to sell life and health insurance, including individual and group standardized Medicare supplement policies, in Florida.
Respondent, the Department of Insurance and Treasurer (hereinafter referred to as the "Department"), is an agency of the State of Florida. The Department is charged with the responsibility for, among other things, the review and approval of health insurance policy forms used in Florida.
General Requirements for Medicare Supplement Policy Forms in Florida.
No "basic insurance policy" may be delivered in Florida unless the "form" has first been approved by the Department. Section 627.410(1), Florida Statutes.
Section 627.410(6), Florida Statutes, additionally requires that a copy of the applicable rating manual or rating schedule included as part of a insurance policy form must be filed with the Department for approval before any "health insurance policy form" is delivered in Florida.
Pursuant to Section 627.410(7)(a), Florida Statutes, insurers required to file rating manuals or rating schedules pursuant to Section 627.410(6), Florida Statutes, must make an "annual filing" with the department.
The "annual filing" requirement of Section 627.410(7)(a), Florida Statutes, may be satisfied in two ways:
A "rate filing prepared by an actuary which contains documentation demonstrating the reasonableness of benefits in relation to premiums charged in accordance with the applicable rating laws and rules promulgated by the department." Section 627.410(7)(b)1, Florida Statutes; or
"If no rate change is proposed, a filing which consists of a certification by an actuary that benefits are reasonable in relation to premiums currently charged in accordance with applicable laws and rules promulgated by the department." Section 627.410(7)(b)2, Florida Statutes.
The filing requirements of Section 627.410(6) and (7), Florida Statutes, apply to Medicare supplement forms.
Section 627.6745, Florida Statutes, limits the manner in which entities providing Medicare supplement policies may meet the annual filing requirement of Section 627.410(7), Florida Statutes. Section 627.6745, Florida Statutes, eliminates the use of the certification procedure described in Finding of Fact 7.b., supra, by Medicare supplement policy providers. Section 627.6745(2), Florida Statutes, requires that all providers of Medicare supplement policy forms:
. . . file annually its rates, rating schedules, and supporting documentation demonstrating that it is in compliance with the applicable loss ratio standards of this code. The filing of
rates and rating schedules shall demonstrate that the actual and expected losses in relations to premiums comply with the requirements of this section.
Rule 4-156.011(3), Florida Administrative Code, requires that issuers of Medicare supplement policies and certificates must file their rates annually "for approval by the Department in accordance with Section 627.410, Florida Statutes."
Section 627.6745, Florida Statutes, also provides limitations on the rates which may be charged for Medicare supplement policies:
Medicare supplement policies shall return the following to policyholders in the form of aggregate benefits under the policy, with respect to the lifetime of the policy, on the basis of earned premiums and on the basis of incurred claims experience . . . and in accordance with accepted actuarial principles and practices:
At least 75 percent of the aggregate amount of premiums earned in the case of group policies.
. . . for individual policies issued on or after July 1, 1989, at least 65 percent of the aggregate amount of premiums earned. . . .
Stated very simply, this provision requires that for every dollar of premiums earned, a minimum of 75 cents must be paid in claims for group policies and a minimum of 65 cents must be paid in claims for individual policies.
The grounds for disapproval of "any form filed under s. 627.410" are provided in Section 627.411, Florida Statutes. In pertinent part, Section 627.411(1), Florida Statutes, provides that a "form" may be disapproved if the form:
(a) Is in any respect in violation of, or does not comply with, this code.
. . . .
(e) Is for health insurance, and provides benefits which are unreasonable in relation to the premium charged, contains provisions which are unfair or inequitable or contrary to the public policy of this state or which encourage misrepresentation or which apply rating practices which result in premium escalations that are not viable for the policyholder market or result in unfair discrimination in sales practices.
The Department has adopted rules establishing general rate filing procedures. Rule 4-149.003, Florida Administrative Code. Rule 4-149.006, Florida Administrative Code, sets out the information an actuary must provide and the manner in which an actuary is to provide that information. The Department has also adopted rules providing the manner in which the reasonableness of benefits in relation to premiums will be determined. Rule 4- 149.005, Florida Administrative Code.
Central States' 1998 Medicare Supplement Form Filings.
Central States' Rate Increase Requests.
On or about January 20, 1998, Central States filed two requests for rate increase with the Department. One request sought a 39% increase for Individual Medicare supplement policy forms (hereinafter referred to as "Individual Medicare Forms") sold in Florida and the other sought a 39% increase for Group Medicare supplement policy forms (hereinafter referred to as "Group Medicare Forms") sold in Florida. For purposes of this
Recommended Order all Findings of Fact and Conclusions of Law apply equally to each type of rate increase request unless otherwise noted.
Both rate increase requests were accompanied by an actuarial memorandum certified by Dawn Helwig, an actuary retained by Central States.
The Department's Review and Disapproval of Central States' Filings.
The rate increase requests were reviewed by Linda Ziegler, an actuary employed by the Department. Following her review, Ms. Ziegler asked for additional information or explanation concerning several issues by letters dated February 10, 1998..
By letter dated February 18, 1998, Central States responded to Ms. Ziegler's letters. Each of the issues raised by Ms. Ziegler was addressed in the February 18, 1998, letter.
After review of Central States' rate increase requests, the Department informed Central States that the 39% rate increases it had requested were disapproved. Central States was informed of the denial by letter dated March 6, 1998.
The Department also informed Central States in the March 6, 1998, denial letter that rate increases of 9.6% were "APPROVED." Central States was requested to "provide revised rate pages reflecting the approved rate increase by March 20, 1998." Central States did not comply with this instruction.
The Department denied the 39% rate increase requests for three reasons:
The Department determined that the rate increases sought by Central States did not provide benefits which were reasonable in relation to the premium to be charged. Therefore, the Department denied the rate increase requests pursuant to Section 627.411(1)(e), Florida Statutes. This determination was based upon a finding that Central States' projected Anticipated Loss Ratio did not meet or exceed the weighted average of the Anticipated Loss Ratio *N (hereinafter referred to as the "*N Test"). "Anticipated Loss Ratio" is defined in Rule 4- 149.006(3)(b)20, Florida Administrative Code, as essentially the present value of future benefits (claims) divided by the present value of future premiums. The conclusion that Central States' projected Anticipated Loss Ratio did not meet or exceed the *N Test was based essentially upon four areas of disagreement with
Ms. Helwig's calculations in her actuarial memoranda;
The Department determined that Central States' "forms" were in violation of Chapter 627, Florida Statutes. Therefore, the Department denied the rate increase requests pursuant to Section 627.411(1)(a), Florida Statutes. This determination was based upon the Department's conclusion that Central States had failed to make annual rate filings as required by Section 627.410(7), Florida Statutes, and Rule 4-156.011, Florida Administrative Code; and
The Department determined that Central States' requested rates were not "viable." Therefore, the Department denied the rate increase requests pursuant to Section 627.411(1)(e), Florida Statutes. This determination was based upon the Department's conclusion that because Central States had failed to obtain annual approval of its Individual and Group Medicare Forms for several years the amount of the increases sought by Central States was not "viable."
The four areas of disagreement with Ms. Helwig's calculations are:
What Individual Medicare Forms should be considered to have been issued to individual customers after "6/1/94" for purposes of Rule 4-149.005(2), Florida Administrative Code. (This issue only impacted Central States' Individual Medicare Forms request);
Whether Central States should pool its experience with
its Individual and Group Medicare Forms;
Whether Central States should use its actual nationwide experience instead of its actual nationwide experience "adjusted to the Florida Rate basis"; and
Whether it was appropriate for Central States to assume that its premiums would be received and its claims incurred at the beginning of the year?
The Department concluded that 32.7% increases would meet the *N Test if the four areas of disagreement with Ms. Helwig were corrected by Central States.
The Department also concluded that even if Central States met the *N Test it would only be entitled to a one-year adjustment which it calculated to be 9.6%. (It is this determination that Central States challenged as the application of an unpromulgated rule in Case Number 98-2767RU).
Central States' Rate Increases do not Provide Benefits which are Reasonable in Relation to the Premium to be Charged.
Individual Policy Forms Issued After "6/1/94".
The Department has provided by rule that a rate filing will be determined to be reasonable in relation to the premium rates charged as required by Section 627.411(1)(e), Florida Statutes, if a premium schedule is "not excessive, not inadequate and not unfairly discriminatory." Rule 4-149.005(1), Florida
Administrative Code.
Rule 4-149.005(2), Florida Administrative Code, provides that a premium schedule is "not excessive" if certain tests are met. One of those tests requires that the anticipated loss ratio meet or exceed the greater of the loss ratio the insurer initially filed or the *N Test. What policies must be included in this calculation depends on when a "Policy Form" was approved or issued.
Both the Department and Central States agree that the determination of whether Central States' rate increases for its Individual and Group Medicare Forms are "not excessive" should be determined pursuant to Section 4.149.005(2), Florida Administrative Code. What they disagree on is how to determine when a Policy Form was "issued."
This dispute only applies to the Individual Medicare Forms. The parties agree that all of Central States' Group Medicare Forms were issued after the appropriate date and, therefore, no adjustment was made to Ms. Helwig's calculations on the appropriate rate increase for Group Medicare Forms due to this issue.
Rule 4-149.005(2)(b), Florida Administrative Code, requires the inclusion of any "Individual Policy Form approved on or after 2/1/94 or issued on or after 6/1/94."
Central States included only those individual Medicare supplement policies it had issued to individual customers after
6/1/94. Any individual Medicare supplement policy customer that purchased a policy prior to 6/1/94 was not included in its calculations. This resulted in a lower Anticipated Loss Ratio *N and, consequently, a higher non-excessive or justifiable rate increase. Central States' interpretation of Rule 4- 149.005(2)(b), Florida Administrative Code, is based upon its conclusion that a "Policy Form" is the individual proof of insurance provided to a customer.
The Department on the other hand concluded that if any individual policy is issued after 6/1/94, then an "Individual Policy Form" has been issued after that date and all of the policies must be included in the *N test. This position results in a higher Anticipated Loss Ratio *N and, consequently, a lower non-excessive or justifiable rate increase.
The Department's interpretation of Rule 4- 149.005(2)(b), Florida Administrative Code, is based upon its conclusion that the terms "Policy Form" in the rule mean the generic insurance "form" approved by the Department for issuance to any customer. Based upon this definition, the Department takes the position that if one copy of the approved "form" is issued after 6/1/94, all business attributable to that "Policy Form" must be included in the *N Test calculation.
"Credible Data" as Defined in Rule 4-149.006(4)(e), Florida Administrative Code; The Use of "Pooling" and Nationwide Experience Adjusted to a Florida Rate Base.
Rule 4-149.003(2)(b)4, Florida Administrative Code, requires that all rate filings include an "actuarial memorandum, completed as required by Rule 4-149.006 "
Rule 4-149.006(1), Florida Administrative Code, specifies that pricing assumptions in an actuarial memorandum must reflect the "insurer experience to the degree credible, and the industry experience where insurer experience is not credible, available or appropriate."
"Credible Data" is defined in Rule 4-149.006(4)(e), Florida Administrative Code, as follows:
If a policy form has 2000 or more policies in force, then full (100%) credibility is given to the experience; if fewer than 500 policies are inforce, then zero (0%) credibility is given.
Linear interpolation is used for inforce amounts between 500 and 2000. For group policy forms, the numbers in this definition refer to group certificates, not policies. A combination of Florida and nationwide data shall be used only if Florida-only data is not fully credible.
Central States had fewer than 500 Individual Medicare Forms policies in-force in Florida. It had approximately 1,065 Group Medicare Forms certificates in-force in Florida. Therefore, Central States' Florida data had zero credibility for Individual Medicare Forms policies and little credibility for Group Medicare Forms certificates under Rule 4-149.006(4)(e), Florida Administrative Code.
On a nationwide basis, Central States had a significant number of Individual Medicare Forms policies in effect (369 in
Florida plus 1,352 in other states) but very few Group Medicare Forms certificates (1,065 in Florida plus 40 in other states).
Due to the similarities between its Individual and Group Medicare Forms, Central States relied upon its nationwide experience for its Individual Medicare Forms policies (1,921) to justify the rate increases for both its Individual Medicare Forms and Group Medicare Forms.
The nationwide experience for Individual Medicare Forms policies relied upon by Central States was adjusted by Ms. Helwig to a projected "Florida rate experience." Ms. Helwig certified this adjusted "Florida rate experience" in the actuarial memorandum filed on behalf of Central States with its Individual Medicare Forms as its "credible data."
The Department made two adjustments to Central States' use of adjusted nationwide experience for Individual Medicare Forms for both rate increase requests.
First, the Department rejected Central States' use of its experience with Individual Medicare Forms as "credible data" that supported its Group Medicare Forms rate increase and its Individual Medicare Forms rate increase. The Department determined, however, that if Central States wanted to rely on its Individual Medicare Forms experience, it could do so if it "pooled" the Individual and Group Medicare Forms experience in
Florida and nationwide.
The Department's method of pooling the Individual and Group Medicare Forms experience and relying on the resulting number for both the Individual Medicare Forms and Group Medicare Forms review results in a higher justifiable rate increase for Central States. Therefore, Central States has indicated its willingness to accept the Department's determination in this regard.
Secondly, the Department rejected Ms. Helwig's adjustment of Central States' actual nationwide experience to determine "Florida rate level." The Department made its calculations solely on Central States' actual Florida and nationwide experience, without adjustment, for its Individual and Group Medicare Forms combined.
Central States' Florida experience is 62.3% credible. This data was combined with actual nationwide data to achieve 100% credible data. The Department's calculations were premised upon the requirements of Rules 4-149.006(3)(b)23 and 4- 149.006(4)(e), Florida Administrative Code.
Central States presented evidence to prove that its treatment of the nationwide data was actuarially sound. The issue, however, is whether Florida law allows the treatment of nationwide data in the manner utilized by Central States.
45. Rules 4-149.006(3)(b)23 and 4-149.006(4)(e), Florida
Administrative Code, both require that an actuarial memorandum report "experience." Rule 4-149.006(3)(b)23, Florida Administrative Code, also requires that the actuarial memorandum display "actual experience" and the experience "expected for the future." While this provision might suggest that "experience" and "actual experience" require different information, the use of "actual" to modify "experience" is only meant to distinguish between an insurer's "experience" and projected future experience.
The common definition of the term "experience" contemplates "actual" results:
1a : direct observation of or participation in events as a basis of knowledge b : the fact or state of having been affected by or gained knowledge through direct observation or participation.
a : practical knowledge, skill, or practice derived from direct observation of or
participation in events or in a particular activity b : the length of such participation has
<10 years experience in the job>.
a : the conscious events that make up an individual life b : the events that make up the conscious past of a community or nation or mankind generally.
4: something personally encountered, undergone, or lived through.
5: the act or process of directly perceiving events or reality.
WWWebster Dictionary, Http://www.m-w.com/dictionary.
The Timing of Premiums and Claims.
Central States assumed for purposes of the *N Test that it would receive premiums and incur claims at the beginning of the year. The Department rejected this assumption and assumed that premiums would be received at the beginning of the year and that claims would be incurred in the middle of the year.
Central States' assumptions concerning premiums and claims did not improve its *N Test results. Central States' proved that its treatment was consistent with actuarial principles.
The evidence in this case, however, failed to prove what impact the acceptance of Central States' assumption concerning premiums and claims would have on the amount of rate increases that will meet the *N Test.
The Rate Increases Which Will Meet the *N Test.
The Department's ultimate determination which it
reported to Central States concerning the *N Test was that 39% rate increases did not result in an Anticipated Loss Ratio that met or exceeded the weighted average of the loss ratio *N. Therefore, the requested rate increases failed to meet Section 627.411(1)(e), Florida Statutes, and Rule 4-149.005(2)(b)1, Florida Administrative Code.
Using data provided by Central States and accepting the assumptions provided to the Department by Central States, the Department was unable to recreate Central States' projections. The Department, therefore, pooled Central States' actual nationwide experience, projected Central States' future experience, took a weighted average of the nationwide data and compared the future projected loss ratio submitted with Central States' rate requests with its future expected loss ratio under the original pricing assumptions of the *N Test. These calculations resulted in a finding that rate increases of 32.7% would satisfy the *N Test.
Based upon information provided by Central States during the formal hearing of these cases, the Department performed the *N Test, adjusted to take into account the time that had passed since the Department's initial decision. Based upon Central States' assumptions and actual data for its nationwide experience, it was determined that the weighted average anticipated loss ratio was 77.1%. This amount did not
meet or exceed the *N Test loss ratio which was determined to be 78.3%.
Central States has not filed a request for, or an actuary memorandum supporting, a rate increase of 32.7% for its Individual Medicare Forms or Group Medicare Forms.
Central States' Individual and Group Medicare Forms do not Violate Chapter 627, Florida Statutes.
In addition to determining that Central States' rate increases should be denied because the rate increases would result in policies which provided benefits which were not reasonable in relation to the premium to be charged, the Department determined that Central States' Individual and Group Medicare Forms requested violated Chapter 627, Florida Statutes. Therefore, the Department denied the rate increases pursuant to Section 627.411(1)(a), Florida Statutes.
It is the Department's position that the failure of an insurer to annually gain approval of its rates constitutes a violation of Chapter 627, Florida Statutes, for which a future rate increase may be denied pursuant to Section 627.411(1)(a), Florida Statutes. In these cases, the Department determined that Central States had failed to obtain such approval for its Individual Medicare Forms for almost five years and for its Group Medicare Forms for almost three years.
Section 627.411(1)(a), Florida Statutes, specifically allows the Department to disapprove "any form filed under s. 627.410" if "the form" is in violation of Chapter 627, Florida Statutes.
Central States' initial filing of its Individual Medicare Forms was made in 1991. The rate sought by Central States in that initial filing was lower than the rate ultimately
approved by the Department, but it was in compliance with Chapter 627, Florida Statutes. Since the approval of Central States' initial filing of its Individual Medicare Forms, the following is the history of Central States' Individual Medicare Forms filings with the Department:
Central States' sought a 15% decrease in its existing approved rate on May 3, 1993. The rate was denied as inadequate. Central States challenged the denial and was ultimately granted an decrease of 7.5% through a settlement of the dispute.
No rate filing was made by Central States in 1994.
In 1995 Central States filed an annual rate certification. It did not request approval of its rates. The certification was rejected by the Department due to an inadequate actuary memorandum.
In May 1996 Central States requested a modification of its Individual Medicare Forms but did not include a rate filing. The Department requested a rate filing from Central States, but Central States did not comply with this request. The Department ultimately disapproved the form modification request.
In December 1996 Central States sought a 20% rate increase. The Department requested additional information concerning the rate increase. The Department also asked Central States why it had not made annual rate filings since 1993. On January 14, 1997, the Department disapproved the requested rate
increase. The Department informed Central States that it was denying the rate increase, in part, because of the failure to provide projections for future experience and the resulting lifetime loss ratios and because of the failure to explain why Central States had failed to comply with the annual rate filing requirements.
In the Spring of 1997 Central States requested a 17% rate increase. After the Department requested further information, Central States amended its request to a 25% increase. The Department denied the requested rate increase by letter dated July 9, 1997. In the denial letter the Department also informed Central States that a rate increase of 11.4% would be justifiable if the findings of the Department were accepted and if Central States submitted a new filing seeking an 11.4% increase. Central States did not resubmit a request for the 11.4% increase.
Since 1993 the Department has not approved any rate increase sought by Central States for its Individual Medicare Forms.
The following is a summary of the history of Central States' Group Medicare Forms filings:
Central States first filed its Group Medicare Forms in 1995. Those forms were approved by the Department.
A rate filing made in December 1996 was disapproved by the Department on January 17, 1997.
A rate filing made in 1997 was also disapproved by the Department.
Since 1995 the Department has not approved any rate increase sought by Central States for its Group Medicare Forms.
The only "forms" which the Department may disapprove in these cases is the Individual and Group Medicare Forms, which include the 39% rate increases filed by Central States. These "forms" are not, however, in violation of Section 627.410, Florida Statutes.
The only "forms" that may be in violation of Section 627.410, Florida Statutes, due to Central States' failure to get approval of the rate charged for the forms on an annual basis, are forms which Central States has issued in prior years. Central States is not, however, seeking approval of the rates charged in those forms.
"Viability."
In addition to determining that Central States' rate increases should be denied because the rate increases would result in policies which provided benefits which were not reasonable in relation to the premium to be charged; and because Central States' Individual and Group Medicare Forms violate Chapter 627, Florida Statutes, the Department also determined that the rate increases requested should be denied because they would result in premium escalations that were not "viable" for
the policyholder market. Therefore, the Department denied the rate increase requests pursuant to Section 627.411(1)(e), Florida Statutes.
The Department concluded that the requirement that rates be "viable" necessitates that an insurer seek steady, progressive rate changes on an annual basis so that policyholders can plan and budget for their insurance needs.
Whether a rate increase is viable depends in part on the amount of the rate increase. The greater the amount of the rate increase, the greater the likelihood that the increase will not be viable.
Whether a rate increase is "viable" also depends upon a consideration of the period of time since the insurer sought a rate increase.
Finally, whether a rate increase is "viable" will depend upon how the increased rate compares to the rates charged by other insurers for the same policy.
The Department's concern over viability is based in part on the concept of "shock lapse." Actuaries are required to take into consideration projected terminations of policies in making their projections. Only terminations that normally occur due to death or other normal consequences are to be considered. "Shock lapse" is the extra-ordinary termination of policies due to some occurrence that causes a larger than normally expected number of people to terminate their policies. Where a rate increase is limited to essentially "medical trend" or the normal inflationary increase in the cost of medical care, it is assumed that there will be no shock lapse. See, Rule 4- 149.006(3)(b)18.a, Florida Administrative Code. In this matter, medical trend was just over 7% for Central States' rate requests. The greater the amount of an increase in rates over medical
trend, the greater the shock lapse. The greater the shock lapse, the greater the number of policy terminations.
The Department's determination that Central States' requested rates were not viable was based almost entirely upon the fact that Central States had not obtained approval of rates for its policies on an annual basis as required by Chapter 627, Florida Statutes. The Department emphasized the fact that Central States had requested approved rate reductions in the past and had not obtained any rate increases since it began selling Individual and Group Medicare Forms in Florida. The Department failed to take into account, however, whether Central States' proposed rates were too high and whether the proposed rates are comparable to the rates charged by other insurers of Medicare supplement policies.
Even with a 39% increase in its rates, Central States' Individual Medicare Forms rate would be 6% lower than the market average for identical coverage and its Group Medicare Forms rate would be 8% lower than the market average for identical coverage.
The Department also failed to take into account the fact that Central States' existing policy holders have saved money over the past years when they were not subjected to an annual rate increase and that the proposed increases will not make up that savings.
Federal law requires that Medicare supplement forms be standardized. Benefits are, therefore, identical regardless of
what insurer may sell a form. As a consequence, policyholders will be able to easily compare a Central States' policy with a 32.7% increase to similar products offered by other insurers. Such a comparison should reduce the amount of shock lapse because Central States' rates, even with a 32.7% increase, will still be below market average.
The evidence proved that Central States is not pricing its Medicare forms low in order to give it an unfair advantage in the market. Since Central States entered the Florida market its share of the market has remained at a relatively low share of less than 1%.
The Department has not undertaken any analysis of what types of rate increases will actually be viable in Florida. The Department simply relied upon phone call complaints about increases in policies in general.
The Challenged Policy.
The Challenged Policy is an Unpromulgated Rule.
In addition to determining that the rate increases requested were denied, the Department also informed Central States that rate increases of 9.6% were approved based upon the fact that Central States had not obtained annual approval of its rates for the Individual or Group Medicare Forms and the application of a Department policy that only an annual rate increase may be allowed where annual approval has not been obtained by an insurer of the insurer's rates.
The Department's policy allowing only an annual rate increase was challenged by Central States in Case Number 98- 2767RU. The specific statement or statement description challenged by Central States in Case Number 98-2767RU as an unpromulgated rule was as follows:
If during its review of a rate change filing, DOI determines an insurer is not in compliance with the annual rate filing requirements of section 627.410(7), Florida Statutes, and if the filing involves a Medicare Supplement form, section 627.6745, Florida Statutes, then DOI will only approve an "annual portion" as a percentage of the rate change requested based on the elapsed time period since the last approved rate filing.
(The foregoing statement of policy will be referred to as the "Challenged Policy").
The Challenged Policy is actually more than one policy. First, the Challenged Policy includes a policy of the Department that it will not allow a rate increase for Individual or Group Medicare supplement forms attributable to more than a one year period if an insurer fails to comply with the annual filing requirement of Section 627.410(7)(b), Florida Statutes. This policy is based upon the Department's conclusion that the failure to obtain annual approval means that any future "form" filed by an insurer is in violation of Chapter 627, Florida Statutes, and its conclusion that any future rate increase will not be viable.
Secondly, the Challenged Policy includes a policy of the Department that, if the annual filing requirement has not been met, it will only approve an "annual portion" as a
percentage of the rate change requested based on the elapsed time period since the last approved rate filing.
The evidence in these cases proved that the first part of the Challenged Policy formed a large part of the basis for the Department's denial of Central States' applications for rate increases. The evidence also proved that the second part of the Challenged Policy was relied upon by the Department in determining that increases of 9.6% would be acceptable.
It has been concluded in the Final Order that the Challenged Policy constitutes a "rule" as that term is defined in Section 120.52(15), Florida Statutes, and that the Challenged Policy had not been adopted by the rulemaking procedure provided in Section 120.54, Florida Statutes, at the time of its application to Central States.
Based upon the Final Order, the Department may not rely upon the Challenged Policy in these cases, unless the provisions of Section 120.56(4)(e), Florida Statutes, apply.
The Department's Effort to Adopt the Challenged Policy.
The Challenged Policy was proposed for adoption as a rule by the Department prior to the filing of the petition in these cases. On November 7, 1997, the Department caused notice of its intent to adopt proposed rules to be published. Volume 23, Number 45, Pages 6045-6068 of the Florida Administrative Weekly (November 7, 1997)(hereinafter referred to as the "Proposed Rules"). Pursuant to this notice the Department
indicated its intent to repeal Chapter 4-149, Florida Administrative Code, and replace it with a new Chapter 4-149. The Proposed Rules establish the specific criteria for determining whether a rate filing should be approved as did the rules the Department has proposed to repeal.
The Department also included newly proposed rule 4- 149.108(14) in the Proposed Rules:
(14) If an insurer has not made an annual rate filing or certification stating the reasonableness of benefits in relation to the premiums charged as required by section 627.410(7), Florida Statutes, other than when the department approved a lower increase than what was requested, the current rate increase request shall be limited to the current year's increase. The current year's increase is defined as the maximum level average annual increase permitted by this part, determined assuming that the insurer had implemented level annual rate increase for the period where no filing or certification had been made.
(Hereinafter referred to as the "First Proposed Policy"). Volume 23, Number 45, Pages 6045-6068 of the Florida Administrative Weekly (November 7, 1997)(hereinafter referred to as the "Proposed Rules").
The First Proposed Policy includes the policy of the Department contained in the Challenged Policy that a rate increase will not be allowed for Individual or Group Medicare supplement forms attributable to more than a one-year period if an insurer fails to comply with the annual filing requirement of Section 627.410(7)(b), Florida Statutes. The First Proposed Policy also includes the policy of the Department contained in
the Challenged Policy that if the annual filing requirement has not been met it will only approve an "annual portion" as a percentage of the rate change requested based on the elapsed time period since the last approved rate filing.
The manner in which the annual portion is calculated pursuant to the First Proposed Policy entails a determination of the amount of lapsed time over which the insurer has not obtained a rate increase, followed by the division of the rate of increase that would otherwise meet the *N Test by the weighted average of that lapsed time period.
The Proposed Rules also continue certain prohibited practices listed in existing Rule 4-149.005(10), Florida Administrative Code. Rule 4-149.005(10), Florida Administrative Code, provides the following concerning the concept of viability and unfair discrimination in sales practices:
(10) Prohibitions. The Department has determined that certain rating activities are against the public policy of this state and are therefore prohibited because the activities may result in premium escalations which are not viable for the policyholder or in unfair discrimination in sales practices, an example of which is inappropriate risk selection criteria.
For all long term care policy forms and other Policy Forms under which more than fifty percent (50%) of the policies/certificates are issued to persons age 65 or older, Attained Age Premium Structures, as defined in Rule 4- 149.006(4)(c) are prohibited. Only premium structures which pre-fund the aging component of future claim costs are allowed.
Select and Ultimate Premium Schedules, as defined in Rule 4-149.006(4)(p), are prohibited.
Attained age premium schedules where the slope by age is substantially different from the slope of the ultimate claim cost curve are prohibited.
Two of the three prohibitions listed in Rule 4-149.005(10), Florida Administrative Code, were already specifically prohibited by Section 627.410(6)(d), Florida Statutes, independently of the requirement that a form be "viable."
The Proposed Rules clarify that the prohibited acts of Rule 4-149.005(10), Florida Administrative Code, relate to unfair discrimination in sales practices or the specific prohibitions of Section 627.410(6)(d), Florida Statutes, and not viability. See proposed rule 4-149.108(11), (12), and (13).
Neither party disputes the fact that the Challenged Policy is included in the First Proposed Policy. Nor do the parties dispute the fact that the Department applied the policies of the First Proposed Policy to Central States in March 1998 in
denying it's requested rate increases and approving a 9.6% rate increase.
Based upon the foregoing, the Department published proposed rules pursuant to Section 120.54(3)(a), Florida Statutes, addressing the Challenged Policy prior to the entry of the Final Order as required by Section 120.56(4)(e), Florida Statutes.
The Department's Continuing Rulemaking Efforts.
A copy of the Proposed Rules was mailed by the Department to Florida licensed health insurers, including Central States.
On December 15, 1997, the Proposed Rules were challenged pursuant to Section 120.56(2), Florida Statutes, by Health Insurance Association of America, an association to which Central States belongs. As a consequence, Chapter 4-149, Florida Administrative Code, continues to be part of the existing, valid rules of the Department.
On May 15, 1998, the Department caused to be published a "Notice of Change" modifying the Proposed Rules. Volume 24, Number 20, Pages 2689-2701 (May 15, 1998)(hereinafter referred to as the "May Notice of Change").
Pursuant to the May Notice of Change, the Department specifically deleted the First Proposed Policy of proposed rule 4-149.108(14).
In place of the First Proposed Policy, the Department has indicted its intention to adopt the following proposed rule 4-149.108(9)(a):
(9)(a) Notwithstanding the above, the minimum anticipated loss ratio or lifetime loss ratio for the form will be increased to at least equal the anticipated loss ratio or lifetime loss ratio certified as being reasonable in the most recent ARC filed with the Department. The expected claims and associated durational loss ratios shall also be increased to reflect this higher standard. If no filing has been made, in violation of section 627.410(7), Florida Statutes, or rule 4-156.012, the increased loss ratio will be determined based on the company
experience for the period when a filing was due as if an ARC had been made [Emphasis
added].
(Hereinafter referred to as the "Second Proposed Policy").
The Second Proposed Policy continues to set out the Department's policy that it will not allow a rate increase for individual or group Medicare supplement forms attributable to more than a one-year period if an insurer fails to comply with the annual filing requirement of Section 627.410(7)(b), Florida Statutes.
The Second Proposed Policy also includes the second part of the policy of the Challenged Policy and the First Proposed Policy that if the annual filing requirement has not been met the Department will only approve an "annual portion" as a percentage of the rate change requested based on the elapsed time period since the last approved rate filing.
The manner in which the annual portion is determined pursuant to the Second Proposed Policy has changed from simply dividing the rate increase which meets the *N Test by the weighted average of the lapsed period of time to an adjustment to the insurer's loss ratio standards by "ratcheting." An insurer's projected loss ratio with a proposed rate increase taken into account must meet or exceed the minimum anticipated and lifetime loss ratios. An upward or ratcheted adjustment in the minimum anticipated or lifetime loss ratio reduces the amount of rate
increase for which the projected loss ratio will meet or exceed these loss ratios.
On July 31, 1998, the Department caused to be published a Second Notice of Change modifying the Proposed Rules for a second time. Volume 24, Number 31, Pages 3973-3993 (July 31, 1998)(hereinafter referred to as the "July Notice of Change").
The July Notice of Change did not significantly modify the Second Proposed Policy:
(9)(a) Notwithstanding the above, the minimum anticipated loss ratio and lifetime loss ratio for the form will be increased to at least equal the anticipated loss ratio and lifetime loss ratio certified as being reasonable in the most recent ARC filed with the Department. The expected claims and associated durational loss ratios shall also be increased to reflect this higher standard. If no filing has been made, in violation of section 627.410(7), Florida Statutes, or rule 4-156.012, the increased loss ratio will be determined based on the company experience for the period when a filing was due as if an ARC had been made. [Emphasis added to reflect that the word "or" was replaced with the word "and"].
The May and July Notices of Change also contain other modifications of the Proposed Rules, some of which specifically relate to the consequences of failing to obtain approval of annual rate increase requests. Those modifications do not, however, impact the application of the Challenged Policy to Central States. Those changes relate to circumstances that are not involved in these cases.
For example, the May Notice of Change allows some insurers to have two rates if certain circumstances are met,
provides four circumstances where a loss ratio standard adjustment will not be made, and includes changes relating to "credibility." None of these provisions applies to Central States' current dispute with the Department.
Examples of modifications included in the July Notice of Change which have no application to Central States include the modification of the circumstances under which the loss ratio standard adjustment will not be made, the addition of a safe harbor provision, and the addition of a provision defining "insurer misconduct." None of these provisions has any application to Central States' dispute in these cases either.
The modification to the Challenged Policy in the May and July Notice of Change which do relate directly to the Department's denial of Central States' rate increase requests embodies essentially the same concepts and constitutes "substantially similar statements" as the Challenged Policy.
Those concepts are generally that an insurer that has not obtained approval of rate filings annually as required by Chapter 627, Florida Statutes, and Chapters 4-149 and 4-156, Florida Administrative Code, were satisfied that its rates were appropriate and satisfactory. When the insurer later decides to seek an increase in its rates, it is assumed that only a one-year rate is necessary, since its rates in prior years were appropriate and satisfactory.
The First Proposed Policy and the modifications of the May and July Notices of Change all provide for a limitation to a one-year increase in rates where an insurer has not complied with filing requirements. The only thing that changed from the First Proposed Policy to the July Notice of Change was the manner in which the one-year increase is calculated.
The First Proposed Policy provides for a calculation of the approvable rate increase based on a loss ratio standard where an average of the insurer's loss ratio is determined over the period of non-compliance with rate filing requirements. The Second Proposed Policy provides for a calculation of the approvable rate increase based on a loss ratio standard where the annual increase is determined based upon the most recent one-year period, adjusted to reflect that the insurer's rate for the period of non-compliance prior to that one-year period was assumed to be appropriate.
Based upon an application of the Second Proposed Policy contained in the July Notice of Change to these cases, Central States would be entitled to rate increases of 10% rather than 9.6%.
Based upon the foregoing, it is concluded that the Department has been proceeding expeditiously and in good faith to adopt rules which address the Challenged Policy or a substantially similar statement to the Challenged Policy.
Are the First and Second Proposed Policies Valid?
The final requirement of Section 120.56(4)(e), Florida Statutes, which must be met in order for the Department to apply the Challenged Policy is that the Challenged Policy must meet the requirements of Section 120.57(1)(e)2, Florida Statutes. Section 120.57(1)(e)2, Florida Statutes, requires that any agency which wishes to rely on an unadopted rule must demonstrate that the unadopted rule:
Is within the powers, functions, and duties delegated by the Legislature . . .;
Does not enlarge, modify, or contravene the specific provisions of law implemented;
Is not vague, establishes adequate standards for agency decisions, or does not vest unbridled discretion in the agency;
Is not arbitrary or capricious;
Is not being applied to the substantially affected party without due notice;
Is supported by competent and substantial evidence; and
Does not impose excessive regulatory costs on the regulated person, county, or city.
Powers, Functions, and Duties Delegated by the Legislature and Specific Laws Implemented by the Proposed Rules.
The specific authority cited by the Department for the Proposed Rules is Section 624.308, Florida Statutes, which provides, in part, the following:
(1) The department may adopt reasonable rules necessary to effect any of the statutory duties of the department. Such rules shall not extend, modify, or conflict with any law of this state or the reasonable implications of such laws.
The specific laws implemented by the portion of the Proposed Rules which establish the First and Second Proposed Policies are Sections 627.410(7)(b) and 627.411(1)(e), Florida Statutes. These provisions require that annual approval of rates for Medicare supplement policies be obtained by insurers and that rates be "viable."
The difficulty with the Department's implementation of the statutory requirement that annual approval of rates be obtained and that those rates must be viable is that the Department's First and Second Proposed Policies assume that any failure to obtain approval of an annual rate will result in a rate that is not viable. This determination, at least for purposes of these cases, was based only on telephone complaints that the Department has received about rate increases. Telephone complaints do not necessarily mean that a rate is not viable.
The Department's policy concerning the failure to obtain approval of Medicare supplement policy rates annually as a ground for denial of a rate increase pursuant to Section 627.411(1)(a), Florida Statutes, is also not supported by that provision.
Based upon the foregoing, it is concluded that the Challenged Policy and the First and Second Proposed Policies enlarge, modify, or contravene the specific provisions of law implemented.
The Challenged Policy's Standards.
The Challenged Policy has been proposed as the First and Second Proposed Policies. Those proposed Policies are understandable to those actuaries and insurers who would be required to comply with the Proposed Rules.
The Challenged Policies leave little discretion in the hands of the Department. If an insurer fails to obtain annual approval of its rates, it will be denied any increase other than an annual rate increase regardless of whether its proposed rates are viable.
The Challenged Policy and the First and Second Proposed Policies are not vague, they establish adequate standards for Department decisions, and they do not vest unbridled discretion in the Department.
The Reasonableness of the Challenged Policy.
The terms "arbitrary" and "capricious" have been defined as follows:
A capricious action is one which is taken without thought or reason or irrationally. An arbitrary decision is one not supported by facts or logic, or despotic.
Agrico Chemical Company v. Department of Environmental Regulation, 365 So. 2d 759 (Fla. 1st DCA 1979).
While it may reasonable for the Department to disapprove rates that are not "viable," the Challenged Policy provides that any rate will be treated as not being "viable" regardless of the facts simply if an insurer has not obtained annual approval of its rates.
The Challenged Policy and the First and Second Proposed Policies are arbitrary and capricious.
Notice of the Department's Intent to Apply the First Proposed Policy to Central States.
The Department put Central States on notice of its intent to adopt the First Proposed Policy prior to its application of the Challenged Policy to Central States. The Department did not, however, specifically notify Central States of its intent to actually apply the First Proposed Policy to Central States.
While Central States was not informed that the Department intended to specifically apply the Proposed Rules or, more specifically, the First Proposed Policy to it, Central States was aware that the Department would likely apply the Challenged Policy to it. In a memorandum of December 31, 1997 (Respondent's Exhibit 1), Ms. Helwig informed Ira Nathan of Central States of the following:
. . . the DOI has tried to take the position that, if rate increase efforts in past years were not successful, then it was the company's fault, and the part year's trend increases are "forfeited" unless justified by credible experience (1-year trend would be only 7.1%) . .
. .
The Department also informed Central States in the Department's denial letter of its intent to apply the Challenged Policy to Central States in denying its 39% rate increases and approving 9.6% rate increases.
Evidence in Support of the Challenged Policy.
The facts which supported a finding that the Challenged Policy and the First and Second Proposed Policies are not consistent with the law implemented and are arbitrary and capricious also support a finding that the Challenged Policy and the First and Second Proposed Policies are not supported by competent substantial evidence.
Administrative Costs.
The Challenged Policy does not impose any regulatory costs on insurers.
The Existing Rules.
Chapter 4.149, Florida Administrative Code (hereinafter referred to as the "Existing Rules"), includes rules adopted by the Department to implement Chapter 627, Florida Statutes, and other pertinent statutes. Although the Proposed Rules provide for the repeal of the Existing Rules, that repeal is not yet effective.
Central States' rate increase requests were reviewed and denied based upon the Existing Rules, except to the extent that the Challenged Policy was applied by the Department.
The Existing Rules, while referring to the "viability" concept, do not require the determination of an annual rate increase where an insurer has not obtained approval of its rates in past years. Nor do the Existing Rules specifically require denial of a rate increase if annual rate filings have not been
made.
The Challenged Policy did not exist until the Proposed Rules were being developed during the Fall of 1997. The Challenged Policy did, however, exist prior to the filing of the instant rate increase requests.
Because the Existing Rules were silent as to how a form should be treated where annual rate approvals have not been obtained by an insurer, the Challenged Policy is not in conflict with the provisions of the Existing Rules.
The Characterization of the Challenged Policy as a Penalty.
Section 627.411(1)(e), Florida Statutes, authorizes the denial of a rate increase if the rate increase is not "viable." Whether such a result is characterized as a "penalty" is of no consequence.
Calculation of the Annual Portion.
The Department's reduction of the 32.7% rate increases to 9.6% rate increases was based upon the First Proposed Policy.
The Department first determined the period of time since Central States had not obtained a rate approval. For Central States' Individual Medicare Forms that period ran from August 5, 1993 to January 20, 1998. That constitutes 4.6 years.
For Central States' Group Medicare Forms that period ran from August 9, 1995, to January 20, 1998, or a period of 2.5 years.
The weighted average of the two periods of time was calculated to be 3.08. The Department then applied the number to the 32.7% rate increase and determined that the unacceptable rate increase was 9.6%.
The Department's determination of the period of time for which no rate approval was obtained is called "tail to tail." The First Proposed Policy provides that the rate increase is determined from the insurer's experience at the end of the
twelve-month period of the last approved rate filing through the end of the twelve-month period of the current filing.
CONCLUSIONS OF LAW
Jurisdiction.
The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, this proceeding. Sections 120.569 and 120.57, Florida Statutes (1997).
Standing.
Section 120.569, Florida Statues, allows any person whose "substantial interests" is determined by an agency to institute a proceeding to challenge the agency's proposed action in a proceeding under Section 120.57(1), Florida Statutes, if the matter involves a disputed issue of material fact.
The evidence in these cases proved that Central States' substantial interests were determined by the Department. Central States, therefore, had standing to institute this proceeding.
Burden of Proof.
The burden of proof, absent a statutory directive to the contrary, is on the party asserting the affirmative of the issue in a Chapter 120, Florida Statutes, proceeding. Antel v. Department of Professional Regulation, 522 So. 2d 1056 (Fla. 5th DCA 1988); Department of Transportation v. J.W.C. Co., Inc., 396 So. 2d 778 (Fla. 1st DCA 1981); and Balino v. Department of Health and Rehabilitative Services, 348 So. 2d 249 (Fla. 1st DCA 1977).
Central States requested approval from the Department for increases in the rates for its Individual and Group Medicare Forms of 39%. Central States was, therefore, required to prove that it was entitled to the requested rate increases. To meet it's burden, Central States was required to prove that its rate increase requests met the requirements of Chapter 627, Florida Statutes and the Department's rules. In particular, Central States was required to prove that its rate increases should not be denied pursuant to Sections 627.411(1)(a) and (e), Florida Statutes.
Pursuant to Sections 120.56(4)(e), Florida Statutes, the Department was required to prove that it published notice
pursuant to Section 120.54(3)(a), Florida Statutes, of its intent to adopt the Challenged Policy and that it has been proceeding expeditiously and in good faith to adopt the Challenged Policy or a substantially similar Challenged Policy.
141. Sections 120.56(4)(e) and 120.57(1)(e)2, Florida States, also place the burden of proving that the Challenged Policy was valid on the Department in order for the Department to rely upon the Challenged Policy in these cases. In particular, the Department was required to prove that annual rate increases of 9.6% are all that Central States should be allowed.
Grounds for Denial of Central States' Rate Increase Requests.
Section 627.411 authorizes the Department to disapprove any "form" filed pursuant to Section 627.410, Florida Statutes, that:
Is in any respect in violation of, or does not comply with, this Code.
. . . .
(e) Is for health insurance, and provides benefits which are unreasonable in relation to the premium charged, contains provisions which are unfair or inequitable or contrary to the public policy of this state or which encourage misrepresentation or which apply rating practices which result in premium escalations that are not viable for the policyholder market or result in unfair discrimination in sales practices.
The Department determined that Central States' rate increase requests should be denied pursuant to Sections 627.411(1)(a) and (e), Florida Statutes.
The Department determined that rate increases of 39% were unreasonable in relation to the premium charged based upon an application of Rule 4-149.005, Florida Administrative Code. Therefore, the Department denied the 39% rate increase requests pursuant to Section 627.411(1)(e), Florida Statutes.
The Department also determined as a matter of policy that the rate increases should be denied because Central States had not obtained approval of its rates on an annual basis. Pursuant to the Department's policy, Central States' failure to obtain annual approval of its rates caused its "forms" to be out of compliance with Chapter 627, Florida Statutes, and its requested rates to not be viable. Therefore, the Department determined that the rate increases should be denied pursuant to Sections 627.411(1)(a) and (e), Florida Statutes.
Finally, the Department determined as a matter of policy that Central States was entitled to rate increases of 9.6% due to its failure to obtain annual approval of its rates.
Section 627.411, Florida Statutes, Applies to Rate Increase Requests.
Section 627.411, Florida Statutes, may be relied upon by the Department to disapprove any "form" filed for approval pursuant to Section 626.410, Florida Statutes.
Pursuant to Section 627.6745, Florida Statutes, and Rule 4-156.011(3), Florida Administrative Code, an insurer must file its Medicare supplement form rates annually for approval by the Department in accordance with Section 627.410, Florida Statutes.
Section 627.410, Florida Statutes, in turn treats rate filings as part of a "form" filing. The approval of a rate is considered to be part of the approval of the entire form. Without the approval of an insurer's rates, the form is not considered approved.
Section 627.411(1)(e), Florida Statues, specifically authorizes the disapproval of a "form" where the rate included in that form is not acceptable. This provision supports a conclusion that the term "form" as used in Section 627.411, Florida Statutes, contemplates that a form may be filed where an insurer is seeking only a modification of the form to the extent of the rates and rate schedules of the form.
The Department's Application of Rule 4-149.005 of the Existing Rules.
The parties agreed and the evidence proved that Rule 4-149.005 of the Existing Rules provides the manner of determining whether the requested rate increases may be denied pursuant to Section 627.411(1)(e), Florida Statutes.
Rule 4-149.005(2)(b) of the Existing Rules establishes the precise test Central States was required to meet. This test
requires that an insurer's Anticipated Loss Ratio must equal or exceed its initially filed loss ratio and the weighted averge of the Anticipated Loss Ratio *N or the *N Test.
While the parties agreed to the basic test that must be met by Central States in order for its rate increases to be approved, they disagreed in essentially three particulars as to how Rule 4-149.005 of the Existing Rules should be applied to Central States.
Central States had the burden of proving that it is entitled to the rate increases pursuant to Rule 4-149.005 of the Existing Rules. It failed to meet that burden.
The first issue between the parties concerns the proper interpretation of Rule 4-149.005(2) of the Existing Rules. Rule 4-149.005(2)(b), Florida Administrative Code, applies to any "Individual Policy Form approved on or after 2/1/94 or issued on or after 6/1/94."
Central States included only those individual Medicare supplement policies it had issued to individual customers after 6/1/94. Central States' interpretation of Rule 4-149.005(2)(b) of the Existing Rules is based upon its conclusion that a "Policy Forms" is the individual proof of insurance provided to each customer.
The Department on the other hand concluded that if any individual policy was issued after 6/1/94, then an "Individual
Policy Form" had been issued after that date and all of the policies should be included in the *N test.
The Department's interpretation of Rule 4- 149.005(2)(b) of the Existing Rules is based upon its conclusion that the terms "Policy Form" in the rule mean the generic insurance "form" approved by the Department for issuance to any customer. Based upon this definition, the Department takes the position that if one copy of the approved "form" is issued after 6/1/94, all business attributable to that "Policy Form" must be included in the *N calculation.
Based upon the evidence presented in these cases, it is concluded that the Department's interpretation of Rule 4- 149.005(2)(b) of the Existing Rules is reasonable.
The second issue raised by the Department concerns what constitutes "credible" data. In applying the test of Rule 4-149.005(2)(b)1 of the Existing Rules, the Department requires that data relied upon by an insurer be "credible" as defined in Rule 4-149.006(4)(e) of the Existing Rules. Whether data is credible depends upon the insurer's "experience" in Florida and on a nationwide basis.
The parties agreed that Central States did not have sufficient experience in Florida or on a nationwide basis for both its Individual and Group Medicare Forms. Therefore, the Department pooled the Florida and nationwide experience for Central States' Individual and Group Medicare Forms and used that
experience for its review of both the Individual and Group Medicare Forms. Central States has accepted this modification.
The Department and Central States disagree, however, over whether the nationwide experience of Central States should be adjusted to a "Florida rate basis."
While Central States proved that its adjustment to nationwide experience may be actuarially sound, such an adjustment is not allowed under the Existing Rules.
The Existing Rules require that an insurer report and take into account its "experience," actual and projected, in requesting a rate increase. The common definition of "experience" contemplates actual results obtained by Central States either on a Florida or nationwide basis and not its results as adjusted by Ms. Helwig.
Finally, the last issue raised by the Department concerns the assumptions made by the Department as to when premiums are received and claims are incurred. The evidence proved that Central States' assumptions were appropriate under the Existing Rules. The evidence, however, failed to prove what impact this conclusion would have on the rate of increases which would meet the *N Tests.
Based upon the foregoing Conclusions of Law, Central States has failed to prove that a 39% increase in the rate for its Individual and Group Medicare Forms should not be denied pursuant to Section 627.411(1)(e), Florida Statutes, due to its
failure to meet the requirements of Rule 4-149.005(2)(b) of the Existing Rules.
The evidence did prove, however, that the rate of increases which would meet the *N Test for both Individual and Group Medicare Forms based upon the Department's review of Central States' filings is 32.7%. Central States has not, however, requested such a rate or filed an actuary memorandum that supports such an increase as required by the Existing Rules.
Therefore, even though this is a de novo proceeding, Central States has failed to prove that it should receive an increase of 32.7% for it's forms without further compliance with the Existing Rules.
Compliance of Central States' Forms with Chapter 627, Florida Statutes.
In addition to determining that Central States' rate increases failed to meet the *N Test, the Department also denied the increases based upon a conclusion that it's Individual and Group Medicare Forms are not in compliance with Chapter 627, Florida Statutes. This determination was based upon the Department's conclusion that Central States has not obtained approval of its rates on an annual basis and, therefore, its "forms" were not in compliance with Chapter 627, Florida Statutes.
Section 627.411(1)(a), Florida Statutes, authorizes the Department to "disapprove any form" but "only if the form" is
determined to be "in any respect in violation of, or does not comply with, this code."
While the evidence proved that Central States has not complied with the requirement of Chapter 627, Florida Statutes, that it obtain approval of its rates annually, the "forms" which Central States are attempting to obtain approval of are not in violation of those requirements. It is only past forms utilized by Central States that may have been in violation of Chapter 627, Florida Statutes.
Based upon the Department's application of Section 627.411(1)(a), Florida Statutes, in these cases to Central States, Central States would never be able to obtain approval of a rate increase, because its forms will always be in violation of Chapter 627, Florida Statutes. Such a result would lead to an absurd interpretation of Section 627.411(1)(a), Florida Statutes.
The evidence failed to prove that Department's policy supports a conclusion that Central States' Individual and Group Medicare Forms are in violation of, or not in compliance with, Chapter 627, Florida Statutes.
Viability of the Central States' Rate Increases.
In addition to determining that Central States' rate increases failed to meet the *N Test, the Department also denied the increases because of its conclusion that the increases were not "viable" as required by Section 627.411(1)(e), Florida Statutes.
Whether a rate increase is "viable" or "capable of working" depends upon the amount of the rate increase, the length of time since the last rate increase, and how the increased rate compares with the rates charged in the market.
The evidence in these cases proved that the 32.7% rate increases which meet the *N Test are considerably higher than medical trend (7.1%). This fact supports a conclusion that 32.7% rate increases would not be viable.
The evidence also proved that it has been almost 5 years since Central States increased it's Individual Medicare Forms rates and almost 3 years since it increased the rates for it's Group Medicare Forms. These facts support a conclusion that a 32.7% rate increase may be considered viable since policyholders would reasonably be expected to realize they have not had an increase in their rates for a number of years.
Finally, the evidence proved that, even with 39% rate increases, Central States' rates would be below the market average. This fact supports a conclusion that 32.7% rate increases would be viable.
Although the Department's experts opined that 39% rate increases would not be viable, those opinions were only supported by testimony of a general nature that the Department gets telephone calls from policyholders when rates are substantially increased. This testimony was not sufficient to overcome the testimony concerning viability presented by Central States.
The Department's Right to Rely on the Challenged Policy.
Central States attached the Challenged Policy in Case Number 98-2767RU as an unpromulgated rule.
In the Final Order entered in Case Number 98-2767RU it was concluded that the Challenged Policy is a statement in violation of Section 120.54(1)(a), Florida Statutes.
Pursuant to Section 120.56(4)(d), Florida Statutes, if a final order is entered finding all or part of a policy to violate Section 120.54(1)(a), Florida Statutes, the agency is required to "immediately discontinue all reliance upon the statement or any substantially similar statement as a basis for agency action." Pursuant to this provision, any person to whom an agency attempts to apply a statement found to be an unpromulgated rule by Final Order may rely upon the Final Order in a Section 120.57(1), Florida Statutes, proceeding to avoid application of the policy.
Section 120.56(4)(d), Florida Statutes, is self- executing. It does not require any order of the Administrative Law Judge other than the order the Administrative Law Judge is called upon in Section 120.56(4)(c), Florida Statutes, to make: an order declaring "whether all or part of a statement violates s 120.54(1)(a)."
Section 120.56(4)(e), Florida Statutes, provides an exception to the consequences of Section 120.56(4)(d), Florida Statutes. Pursuant to Section 120.56(4)(e), Florida Statutes, an
agency may rely upon a policy despite a determination that the policy is an unpromulgated rule in violation of Section 120.54(1)(a), Florida Statutes, if the following conditions are met:
Prior to the entry of the final order, the agency publishes, pursuant to s. 120.54(3)(a), proposed rules which address the statement;
The agency proceeds expeditiously and in good faith to adopt rules which address the statement; and
The statement or a substantially similar statement meets the requirements of s. 120.57(1)(e).
The evidence in these cases proved that the Department proposed the adoption of the Challenged Policy as a rule prior to entry of the Final Order in Case Number 98-2767RU. The Challenged Policy was specifically proposed for adoption as proposed rule 4-149.108(14).
The evidence also proved that the Department has been proceeding expeditiously and in good faith to adopt rules addressing the Challenged Policy or a substantially similar Challenged Policy despite the fact that the Department has modified the Proposed Rules twice.
The evidence failed to prove, however, that the Challenged Policy or the First and Second Proposed Policies meet the requirements of Section 120.57(1)(e), Florida Statutes.
The Department failed to prove that the Challenged Policy or the First and Second Proposed Policies do not enlarge, modify, or contravene the specific provisions of law implemented. The Department failed to prove that a form filed by an insurer seeking a rate increase where the insurer has failed in the past to obtain annual approval of its Medicare supplement rates means that the currently filed form constitutes a violation of Chapter 627, Florida Statutes, for which an increase in rates may be denied pursuant to Section 627.411(1)(a), Florida Statutes. The evidence also failed to prove that the mere failure to obtain annual approval of Medicare supplement rates means that an insurer's requested rate increase is not viable pursuant to Section 627.411(1)(e), Florida Statutes. For the same reasons, the Department failed to prove that the Challenged Policy or the First and Second Proposed Policies are supported by competent and substantial evidence and are not arbitrary and capricious.
Adoption of the May and July Notices of Change.
Section 120.54(3), Florida Statutes, sets out certain procedures which must be followed by an agency in adopting rules. Central States has suggested that the Department's May and July Notices of Change are inconsistent with those procedures.
Because of this alleged violation of the rule adoption procedures, Central States has argued that the Department is not proceeding expeditiously and good faith to adopt the Challenged Policy.
Central States' argument is without merit. First, these cases involve the application of an "unpromulgated rule." Therefore, this is not the proper forum to determine whether the Department's rulemaking efforts are in compliance with the rulemaking procedures of Section 120.54, Florida Statutes.
More importantly, even if it were to be determined in the challenge to the Proposed Rules that the May and July Notices of Change were not properly adopted, such a finding would not necessarily mean that the Department is not still proceeding expeditiously and in good faith to adopt the Challenged Policy or a substantially similar Challenged Policy.
The Challenged Policy is Not Inconsistent with the Existing Rules.
Central States has argued in its proposed orders that the Challenged Policy is inconsistent with the Existing Rules. Central States, therefore, argues that use of the Challenged Policy violates Section 120.54(3)(d)5, Florida Statutes.
Section 120.54(3)(d)5, Florida Statutes, provides in pertinent part, that after a rule has been adopted "it may be repealed or amended only through the rulemaking procedures specified in this chapter." Central States argues that the Existing Rules have not yet been repealed by the Department and
that the Department's use of the Challenged Policy is an attempt to circumvent Section 120.54(3)(d)5, Florida Statutes.
Central States' argument is premised upon its conclusion that the Challenged Policy is inconsistent with the Existing Rules. The evidence in these cases failed to support this contention.
The evidence proved that the Existing Rules are silent as to how viability is to be determined and the impact of such a determination. The Existing Rules are also silent as to how to treat a rate increase request where an insurer has not sought annual approval of its rates for Medicare supplement policies.
Based on the foregoing Findings of Fact and Conclusions of Law, it is
RECOMMENDED that the Department of Insurance and Treasurer enter a Final Order denying Central States' requested 39% rate increases for its Individual and Group Medicare Forms. It is further
RECOMMENDED that the Department and Treasurer approve rate increases of 32.7% for Central States Individual and Group Medicare Forms provided revised rate pages reflecting the approved rate increases are filed by Central States.
DONE AND ENTERED this 1st day of December, 1998, in Tallahassee, Leon County, Florida.
LARRY J. SARTIN
Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675 SUNCOM 278-9675
Fax Filing (850) 921-6847
Filed with the Clerk of the Division of Administrative Hearings this 1st day of December, 1998.
COPIES FURNISHED:
R. Terry Rigsby, Esquire Timothy J. Meenan, Esquire
A. Kenneth Levine, Esquire Blank, Rigsby & Meenan, P.A. Post Office Drawer 11068 Tallahassee, Florida 32302-3068
Elizabeth G. Arthur, Senior Attorney Division of Legal Services Department of Insurance
200 East Gaines Street Tallahassee, Florida 32399-0333
Bill Nelson
State Treasurer and Insurance Commissioner
The Capitol, Plaza Level Tallahassee, Florida 32399-0300
Daniel Y. Sumner, General Counsel Department of Insurance
The Capitol, Lower Level 26 Tallahassee, Florida 32399-0300
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions within 15 days from the date of this recommended order. Any exceptions to this recommended order should be filed with the agency that will issue the final order in this case.
| Issue Date | Proceedings |
|---|---|
| Apr. 06, 1999 | Order Denying Motion to Set Aside Final Order sent out. |
| Dec. 02, 1998 | Case 98-2767RU |
| Dec. 01, 1998 | Recommended Order sent out. CASE CLOSED. Hearing held 07/20-21/98 and 09/30/98. |
| Oct. 29, 1998 | (Respondent) Proposed Recommended Order and Proposed Final Order filed. |
| Oct. 29, 1998 | (Petitioner) Certificate of Service; (Petitioner) Indexed and Tabbed Submission filed. |
| Oct. 29, 1998 | (Petitioner) Summary of the Argument; (Petitioner) Certificate of Service; Cover Letter filed. |
| Oct. 29, 1998 | Petitioner`s Proposed Final Order filed. |
| Oct. 29, 1998 | Petitioner`s Proposed Recommended Order (for judge signature) filed. |
| Oct. 19, 1998 | Notice of Filing; (Volume 5 of 5) DOAH Court Reporter Final Hearing Transcript filed. |
| Oct. 16, 1998 | Letter to M. Whiddon from R. Rigsby Re: Scrivener`s errors in transcript filed. |
| Sep. 25, 1998 | Subpoena Duces Tecum (R. Rigsby) filed. |
| Sep. 09, 1998 | Order Granting Motion to Supplement the Record and for Official Recognition; Notice of Hearing sent out. (hearing to reconvene on 9/30/98; 9:30am; Tallahassee) |
| Sep. 08, 1998 | Notice of Taking Deposition Duces Tecum of Non-Parties (Respondent) filed. |
| Sep. 04, 1998 | (Petitioner) Amended Notice of Taking Deposition Duces Tecum filed. |
| Sep. 01, 1998 | (Petitioner) Notice of Taking Deposition Duces Tecum filed. |
| Aug. 28, 1998 | Respondent`s Reply to Petitioner`s Reply to Respondent`s Response to Petitioner`s Motion to Supplement the Record and for Official Recognition (filed via facsimile). |
| Aug. 20, 1998 | Petitioner`s Reply to Respondent`s Response to Its Motion to Supplement the Record and for Official Recognition filed. |
| Aug. 19, 1998 | Respondent`s Response to Petitioner`s Motion to Supplement the Record and for Official Recognition filed. |
| Aug. 18, 1998 | (Petitioner) Motion to Supplement the Record and for Official Recognition filed. |
| Aug. 05, 1998 | Notice of Filing; (Volumes 1-4 of 4) DOAH Court Reporter Final Hearing Transcript filed. |
| Jul. 20, 1998 | CASE STATUS: Hearing Held. |
| Jul. 16, 1998 | Order on Motion for Summary Final Order, Motion to Expedite and Motion for attorney`s Fees sent out. |
| Jul. 16, 1998 | (Petitioner) Response to Respondent`s Request for Production of Documents; Notice of Serving Answers to Department of Insurance and Treasurer`s Interrogatories filed. |
| Jul. 08, 1998 | Notice of Taking Deposition Duces Tecum filed. |
| Jul. 08, 1998 | (Respondent) (2) Motion to Withdraw Request for Prehearing Conference; (2) First Amended Notice of Taking Deposition Duces Tecum filed. |
| Jul. 07, 1998 | Order of Consolidation and Cancelling Final Hearing in Case Number 98-2767RU sent out. (Consolidated cases are: 98-1562, 98-1563 & 98-002767RU) |
| Jul. 06, 1998 | (Respondent) Notice of Taking Deposition Duces Tecum filed. |
| Jul. 02, 1998 | (Respondent) Notice of Taking Deposition Duces Tecum of Non Parties filed. |
| Jul. 02, 1998 | (Respondent) Motion for Prehearing Conference filed. |
| Jun. 17, 1998 | (Petitioner) Notice of Taking Depositions Duces Tecum filed. |
| Jun. 17, 1998 | Notice of Service of Respondent`s First Set of Interrogatories to Petitioner; Request for Production of Documents filed. |
| Jun. 10, 1998 | (R. Rigsby) Notice of Appearance filed. |
| May 29, 1998 | (Petitioner) Notice of Taking Depositions Duces Tecum filed. |
| May 11, 1998 | Notice of Hearing sent out. (hearing set for July 20-21, 1998; 9:00am; Tallahassee) |
| Apr. 17, 1998 | Joint Response to Initial Order filed. |
| Apr. 07, 1998 | Initial Order issued. |
| Apr. 02, 1998 | Agency Referral Letter; Petition for Formal Administrative Proceeding (exhibits); Agency Action Letter filed. |
| Issue Date | Document | Summary |
|---|---|---|
| Dec. 01, 1998 | Recommended Order | Petitioner proved entitlement to 32.7 percent rate increases but not 39 percent rate increases. |
