STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
GUARANTEE TRUST LIFE INSURANCE ) COMPANY, )
)
Petitioner, )
)
vs. )
) OFFICE OF INSURANCE REGULATION, )
)
Respondent. )
Case No. 06-3305
)
RECOMMENDED ORDER
This cause came on for formal hearing before Robert S. Cohen, Administrative Law Judge with the Division of Administrative Hearings, on January 3 through 5, 2007, in Tallahassee, Florida.
APPEARANCES
For Petitioner: Daniel C. Brown, Esquire
Carlton Fields, P.A. Post Office Drawer 190
Tallahassee, Florida 32302-0190
For Respondent: James H. Harris, Esquire
Charlyne Khai Patterson, Esquire Office of Insurance Regulation
200 East Gaines Street Room 612, Larson Building
Tallahassee, Florida 32399-4206 STATEMENT OF THE ISSUE
The issue is whether Petitioner's application for a 25.75 percent increase for its individual long term care policy form,
number 93710(FL), filed on February 7, 2006, meets the applicable tests of Section 627.410, Florida Statutes,1 and Florida Administrative Code Rule 69O-149.005, and should be approved. Also at issue is whether Subsection 627.9407(7)(c), Florida Statutes (as amended by Section 9, Ch. 2006-254, Laws of Florida, effective July 1, 2007), applies in this case; and, if so, the propriety of Respondent's intended implementation of that amended statute to Petitioner's rate filing, and whether Petitioner's rate increase filing should be disapproved due to Respondent's implementation of that statute.
PRELIMINARY STATEMENT
Guarantee Trust Life Insurance Company ("Guarantee Trust") engaged in the sale of home health policies from 1994 through the end of 2001. This matter concerns premium rates to be charged on the home health policies remaining in effect. The policies provide for home health care benefits in stand-alone policies. This proceeding arises from rate request FLR-06-01514 submitted to the Office of Insurance Regulation ("OIR") by Guarantee Trust for a 25.75 percent rate increase for its home health policies. In a letter dated March 14, 2006, from Daniel Keating, the OIR's actuary assigned to review FLR-06-01514, two reasons were given for disapproval of the home health policies filing: "the company has not demonstrated that the policy benefits are reasonable in relation to the proposed premium
schedule for policy form 93710, as required by Rule 69O-149.005,
Specifically, based on the data provided and the credibility assigned to that data, no rate increase is justified. The use of a medical trend has not been justified."
Guarantee Trust's amended Petition challenging the OIR's disapproval was forwarded to the Division of Administrative Hearings on September 5, 2006. The final hearing was originally scheduled for December 13, 2006, in accordance with the parties' September 12, 2006, Joint Response to Initial Order. On November 21, 2006, Respondent moved to continue the final hearing on the basis that Respondent had retained an additional testifying expert witness, Mr. Robert Yee, on November 15, who had not yet finalized his opinions, and the unavailability of Respondent's counsel to depose Petitioner's retained actuarial witness, Ms. Dawn Helwig. Petitioner objected to the continuance in that any delay of the hearing would result in a delayed implementation of the rate increase. The continuance was granted until January 3, 2007.
In the Joint Pre-Hearing Stipulation, the OIR additionally alleged that Guarantee Trust's proposed premium rate increase must be disapproved because the proposed premium rate increase exceeds the new business premium rate as published by the OIR pursuant to Subsection 627.9407(7)(c), Florida Statutes.
Guarantee Trust filed a Motion to Strike a Portion of
Respondent's Statement of Position in Joint Pre-Hearing Stipulation and Motion in Limine. After hearing argument of counsel, the undersigned denied Guarantee Trust's motion.
Guarantee Trust was granted leave to depose the OIR's actuary, Daniel Keating, who prepared the published new business rates and applied those new rates to Guarantee Trust's rate filing FLR-06-01514.
At the hearing, Petitioner presented the testimony of Christine Jung, Petitioner's on-staff actuary who prepared the rate filing, and Dawn Helwig, Petitioner's retained consulting actuary. Petitioner offered Exhibits 1-6, 6A-19, 21, and 22, all of which were admitted into evidence (Exhibit 17 being demonstrative only). Respondent presented the testimony of Daniel Keating, Respondent's on-staff actuary, who reviewed the rate filing; and Robert Yee, a retained consulting actuary.
Respondent offered Exhibits 1-7, all of which were admitted into evidence (Exhibits 5-7 being demonstrative only).
After the final hearing, by Respondent's Notice of Filing, served January 12, 2007, Respondent tendered portions of the discovery depositions of Christine Jung, Dawn Helwig, and Daniel Keating, and requested that they be received into evidence.
Petitioner filed written objections to Respondent's tender on January 18, 2007. Petitioner's January 18 written objections are sustained. The portions of the discovery depositions of
Christine Jung, Dawn Helwig, and Daniel Keating that Petitioner objected to in its January 18 filing are not received into evidence.
The Transcript was filed on January 18, 2007.
Subsequently, Petitioner and Respondent filed Proposed Findings of Fact and Conclusions of Law, and Petitioner has renewed its Motion to Strike. After submittal by the parties of their Proposed Recommended Orders and the Post-Final Hearing Memorandum of Law filed by Respondent, Petitioner filed a Post- Final Hearing Rebuttal Memorandum on March 5, 2007. Respondent filed a Motion to Strike Petitioner's Post-Final Hearing Rebuttal Memorandum on March 6, 2007, and Petitioner filed a Reply to that dated March 13, 2007. Respondent's Motion to Strike is granted, and the Post-Final Hearing Rebuttal Memorandum shall not be considered in the preparation of this Recommended Order. Such post-hearing rebuttal submittals are not prescribed by the Uniform Rules of Procedure, specifically Florida Administrative Code Rule 28-106.307, and will not be
considered here.
FINDINGS OF FACT
Petitioner's rate increase application concerns policy form number 93710(FL), a stand-alone individual home health care policy form, which is a sub-line of long term care health insurance. The policy provides reimbursement for certain
medical care delivered outside the in-patient hospital or nursing home setting. The policy form and initial rates for the form were first approved in Florida in 1994. The policy has not been actively sold since 1998, and the existing policies constitute a closed block of business. Periodic rate increases for this policy form have been approved in the past: 30 percent in 1998, 20 percent in 1999, 20 percent in 2000, 50 percent in
2001, 30 percent in 2002, and 25 percent in 2003.
OIR has prior approval authority over the rate increase applied for by Petitioner.
Petitioner timely sought a formal administrative hearing in this matter.
Petitioner's rate filing seeks approval of a 25.75 percent rate increase.
Christine Jung, the actuary who submitted the rate filing, is a qualified actuary who meets the Qualification Standards for Prescribed Statements of Actuarial Opinion published by the American Academy of Actuaries ("AAA").
Mr. Yee's opinion that Ms. Jung is not a qualified actuary is not persuasive. He could point to no provision in the AAA's Qualification Standards for Prescribed Statements of Actuarial Opinion that did not meet Ms. Jung's education, training, and experience when she submitted the rate filing at issue in this case. Any objections to Ms. Jung's qualifications go to the
weight to be given her testimony when compared with the testimony given by the other actuarial experts in this matter.
The greater weight of the evidence supports the fact that a rate increase of 25.75 percent meets the tests prescribed for approval in Florida Administrative Code Rule 69O- 149.005(2)(b). Petitioner's evidence, which is the more persuasive evidence, establishes that the requested rate increase meets the tests of that rule when anticipated future experience is projected properly, in accordance with sound actuarial techniques and Actuarial Standards of Practice ("ASOPs").
Ms. Jung concluded that a rate increase of 25.75 percent was actuarially appropriate based on her actuarial analysis.
Ms. Dawn Helwig is a highly qualified health insurance actuary who specializes in rate analysis and rating of long term care insurance, including home health care insurance. Her testimony is persuasive. She evaluated Petitioner's rate filing and its component data, and performed an actuarial analysis using generally accepted actuarial techniques, and in accordance with the ASOPs and actuarial principles. Ms. Helwig concluded, and it is so found, that Petitioner's rate increase request of
25.75 percent is actuarially justified, will yield premiums that are not excessive in relation to the benefits offered under
policy form number 93710(FL), and satisfies the tests for approval set forth in Florida Administrative Code Rule 69O- 149.005(2)(b)1.a. and b.
Ms. Helwig concluded that a rate increase of 37.4 percent to 39.9 percent (depending upon whether industry medical trend is used in the first year of the rate projection) is actuarially justified based upon Petitioner's claims and premium experience reflected in the rate filing. By comparison,
Ms. Jung's rate indication of 25.75 percent was conservative. Ms. Jung used an un-trended average of historical loss ratios to arrive at her starting loss ratio value (or current loss ratio) from which to project forward to determine Petitioner's rate need. Had Ms. Jung trended the claims costs in the three years of Petitioner's historical experience that she used to determine her starting loss ratio, her rate indication would have been higher than the 25.75 percent rate increase for which Petitioner applied.
At the hearing, OIR offered three independent grounds for disapproving Petitioner's rate filing: 1) that the proposed rate increase was not based upon a "credible body of past data," which must have occurred over the lesser period of the past five years or at least 1,000 claims; 2) that the use of a medical trend has not been justified; and 3) that the rate increase would result in a rate higher than the OIR's published new
business rate pursuant to Subsection 627.9407(7)(c), Florida Statutes.
OIR did not assert, as a basis for denial, that Petitioner's requested rate increase would result in inadequate premium rates under Florida Administrative Code Rule 69O- 149.005(1), and no evidence was offered at the hearing that the requested rate increase would result in inadequate rates. Accordingly, it is found that Petitioner's requested rate increase would not result in inadequate rates.
OIR did not assert, as a basis for denial, that Petitioner's requested rate increase would result in unfair discriminatory premium rates under Florida Administrative Code Rule 69O-149.005(1), and no evidence was offered at the hearing that Petitioner's requested rate increase would result in unfair discriminatory rates. Accordingly, it is found that Petitioner's requested rate increase would not result in unfair discriminatory rates.
Mr. Keating interprets Florida Administrative Code Rule 69O-149.0025(6) to mean that, in developing the Florida and nationwide rate indications called for in Florida Administrative Code Rule 69O-149.0025(6), the actuary must use the five years of historical data that the Rule prescribes for weighing the separate Florida and nationwide rate indications for credibility. Ms. Jung derived her separate Florida and
nationwide rate indications from the three most recent full years of Petitioner's data. Mr. Keating, therefore, asserted that Petitioner's requested rate increase is not supported by sufficiently credible experience data.
The more persuasive evidence does not support
Mr. Keating's opinion that the experience data Petitioner used to develop its rate request is not sufficiently credible.
Mr. Keating's interpretation of Florida Administrative Code Rule 69O-149.006(3)(b)23.b.(II) is not borne out by the Rule's language. With reference to projecting rate need based on in-force experience, the portion of the Rule states as follows:
The experience period shall reflect the most
current data available, generally the most recent 12 months for coverage subject to medical inflation, or the period of time to determine the credible data pursuant to subsection 69O-149.0025(6), F.A.C. (emphasis supplied)
That provision is disjunctive, and its use of the word "generally" connotes that its disjunctive indicators for experience periods are examples, not requirements. As
Mr. Keating conceded at the hearing, neither that rule passage nor other related rules equate "the most current data available" with "the period of time to determine credible data pursuant to subsection 69O-149.0025(6), F.A.C." The rules thus leave to actuarial judgment the decision concerning "the most current
data available" on which to develop the separate Florida and nationwide rate indications called for in the rules. The rules do not mandate that the actuary use five full years of data to develop the separate Florida and nationwide rate indications.
The rules do require that, once those separate Florida and nationwide rate indications are developed, they are to be credibility-weighted using five years of data under Florida Administrative Code Rule 69O-149.0025(6) to arrive at the ultimate rate indication. This is what Ms. Jung did.
OIR has not consistently required use of the five years of data as the experience period for making the separate Florida and nationwide rate indications. One of Respondent's exhibits, a Guarantee Trust Life rate filing for this same policy form, was approved by consent order, dated December 23, 2003. It used only the most recent calendar year's loss ratio as the starting value for projection, though there were fewer than 1,000 claims in that calendar year.
The more persuasive evidence shows that Mr. Keating's interpretation would double-count the credibility factor in the rules. Moreover, the more persuasive evidence shows that applying Mr. Keating's interpretation of the credibility weighting method set forth in Florida Administrative Code
Rule 69O-149.0025(6)(e)3. as "equivalent to" the alternative methods described in Florida Administrative Code
Rule 69O-149.0025(6)(e)2. would, in fact, not yield equivalent results for the same data set, as a matter of mathematics.
Ms. Jung developed a rate indication based on Petitioner's Florida experience under policy form 93710(FL), and a separate rate indication based on Petitioner's nationwide data on that policy form. She used the most recent three full years of experience on the policy form (2002-2004) which she found to be appropriate current data for developing Florida and nationwide rate indications. After separately deriving an indicated rate increase from Florida data and a rate increase indicated by total nationwide data, consistent with Florida Administrative Code Rule 69O-149.0025(6)(e)3., she then weighed the two separate rate indications for credibility by weighting the resulting rate changes from each district analysis by the credibility of each distinct component assigned by that rule. Her analysis resulted in a 25.79 percent rate increase need, which she rounded down to 25.75 percent.
Florida Administrative Code Rule 69O-149.0025(6) establishes the acceptable range for credible data (the number of claims needed for making rate projections) and the procedures for weighting the data for credibility when the claims frequency used in rate projections falls between the Rule's upper and lower bounds of acceptability. A frequency of at least 1,000 claims over the five years preceding the rate filing is given
100 percent, or full, credibility. Two hundred claims or fewer are given no (zero percent) credibility. Claim frequency counts falling between 200 and 1,000 receive a proportionate credibility weight under the formulae in Florida Administrative Code Rule 69O-149.0025(6)(e), which provides, in pertinent part:
(b)1. For policy forms . . . such as accident and long term care, at least 1,000 claims, over a period not to exceed the most recent 5-year period, shall be assigned 100 percent credibility; 200 claims shall be assigned 0 percent credibility.
* * *
(e)1. Florida only experience shall be used if it is 100 percent credible.
2.a. If Florida experience is not 100 percent credible, a combination of Florida and nationwide experience shall be used.
The Florida data shall be given the weight of the ratio of the Florida credibility to the nationwide credibility. For example, if Florida data is 10 percent credible and nationwide is 40 percent credible, the Florida data will be given the weight of [10%/40%] 25 percent.
The nationwide data shall be given the weight of the ratio of the nationwide credibility less the Florida credibility to the nationwide credibility. In the above example, the nationwide data will be given the weight of [(40%-10%)/40%] 75 percent.
The data is combined using the indicated weights (in the example above, the experience data would be weighted 25%/75%). The combination of the two weights will always equal 100 percent. A rate change is determined from the blended data.
3. The analysis in subparagraph 2. above is equivalent to determining the indicated rate increase from the Florida only data and the total nationwide data separately, and then weighting the resulting rate changes from each distinct analysis by the credibility of each distinct component.
Ms. Jung's separate Florida and nationwide rate indications were based on claim counts that fall within the credibility range posted by Florida Administrative Code Rule 69O-149.0025(6)b.1. The number of claims in the last three years of data from which Ms. Jung derived her Florida and nationwide rate indications exceeded 200 claims, in each case.
Ms. Jung applied five full years of company claims data to combine her Florida and nationwide rate projections, that is, to separate rate indications for credibility in arriving at the ultimate indicated rate need of 25.75 percent. She did so properly, in accordance with the provisions of Florida Administrative Code Rule 69O-149.0025(6)(e)3.
Moreover, in her actuarial projections of Florida and nationwide rate indications, Ms. Helwig, Petitioner's consulting actuary, used the five years of Petitioner's historical experience data that Mr. Keating believes should be used.
Ms. Helwig concluded that a rate increase of at least 25.75 percent was actuarially justified, and that the full five years
of data would support an increase of up to 39.9 percent in her opinion.
Mr. Yee, Respondent's actuarial expert, testified that in his opinion neither Ms. Jung's analysis nor Ms. Helwig's analysis is based on a sufficient number of claims to be regarded as adequately credible.
The premise for Mr. Yee's opinion is his personal, subjective standard for "fully credible" long term care ("LTC") data. Mr. Yee's full-credibility standard contradicts the full- credibility standards for LTC ratemaking prescribed by Florida in Florida Administrative Code Rule 69O-149.0025(6). Florida Administrative Code Rule 69O-149.0026(6)(b)1. provides that for LTC forms, "at least 1,000 claims, over a period not to exceed the most recent 5-year period, shall be assigned 100 percent credibility; 200 claims shall be assigned 0 percent credibility." The Rule thus prescribes that 1,000 LTC claims over five years are to be considered fully credible; that 200 claims is the credibility floor; and it establishes methods for weighting the credibility value of claim counts falling between 200 and 1,000.
Contrary to the Florida rule, Mr. Yee holds the view that at least 3,246 LTC claims are required for "full credibility." Based upon his "full credibility" premise, he believes that at least 649 claims are needed to consider LTC
data credible enough for making a rate projection. He arrives at his 649-claim credibility minimum by noting that since 200 claims in the Rule (the credibility floor) is 20 percent of the 1,000 claims assigned full credibility by that Rule, 649 is the minimum number of claims required for making a LTC rate projection (20 percent of 3,246). Since Petitioner's data contains 621 claims for the most recent five-year period, less than the 649 claim floor, Mr. Yee concludes that Petitioner's data is not credible, and, therefore, should not be used for making a rate projection. He, therefore, concludes that the rate increase is not justified by either Ms. Jung's or
Ms. Helwig's actuarial analysis.
However, Mr. Yee's data credibility opinion directly conflicts with Florida Administrative Code Rule 69O-149.0025(6). The Rule is clear that 1,000 claims or more shall be accorded full credibility for LTC ratemaking and that claim counts falling between 200 and 1,000 are to be credibility-weighted as set forth in the Rule. Mr. Yee concedes that his "full credibility" standard, the foundation of his no-credibility opinion, is a subjective standard that he and four other actuaries recommended in a report to the National Association of Insurance Commissioners on the subject of LTC data credibility. He further concedes that his "full credibility" standard has not been adopted by any regulatory body or embraced by AAA. It has
not even been circulated for comment to the AAA membership. Mr. Keating testified that a claims frequency of 1,000 claims should be regarded as fully credible for LTC ratemaking under the Florida rules.
Mr. Yee's opinion, while interesting and apparently well-intended, is, therefore, not credited. The more persuasive evidence shows that Petitioner's data is adequately credible under Florida's adopted standards, and was properly used by Petitioner's actuaries in developing the rate indications supporting Petitioner's requested rate increase.
Although in its interrogatory responses OIR stated that Petitioner failed to adjust earned premium on a current rate basis, Mr. Keating testified at hearing that Petitioner had, in fact, provided earned premium on a current rate basis. Therefore, this asserted reason for denial of Petitioner's rate increase is not supported by the evidence.
The actuaries who testified agreed that putting both historical premiums and losses (claim costs) on a "current basis" or a "current rate basis" is actuarially appropriate in order to arrive at the correct starting point for a rate projection (whether that starting point is expressed as a loss ratio on a current basis or claim costs on a current basis), and that an accurate current starting point is centrally important in making and evaluating rates.
However, neither the phrase "earned premium on a current rate basis" nor the terms "current rate basis" or "current basis" is defined in Section 617.410, Florida Statutes, or in Florida Administrative Code Rule 69O-149, Part I. Moreover, the statutes and rules do not prescribe how to arrive at a "current rate basis" starting value for rate projection.
The propriety of a "current rate basis" technique, therefore, must be judged by whether it comports with the ASOPs and accepted actuarial principles.
The major point of contention among the actuaries who testified was on the question of the appropriate "current rate basis" methodology for determining the starting value for future projection (the correct starting loss ratio on a current rate basis or the correct starting claims cost on a current basis).
Mr. Keating made what he refers to as a "current rate basis" adjustment to Petitioner's historical data. He testified that, based on his current rate basis adjustment, he estimated the "current rate basis" Actual-to-Expected (A/E) ratio for Petitioner's historic Florida experience to be 95.41 percent, which he testified results in a current-rate-basis starting loss ratio value of 74.34 percent for making a rate projection.
Mr. Keating applied that 74.34 percent starting-point value, and restructured Petitioner's rate projection, culminating in his estimate of a future A/E ratio for Florida of 96.66 percent.
Since, according to his restructuring, the future A/E ratio is less than 1.0, he concluded that Petitioner failed to meet the "Anticipated Loss Ratio" test of Florida Administrative Code Rule 69O-149.005(2)(b)1.a. He performed the same analysis, using the same "current rate basis" method on Petitioner's nationwide data, and reached the same conclusion.
The more persuasive evidence, however, shows that the "current rate basis" adjustment Mr. Keating made to Petitioner's data does not comport with the ASOPs and the Florida rules. His "current rate basis" analysis yields starting values for projecting Petitioner's need (his starting loss ratio of 74.34 percent for Florida data and 76.66 percent for nationwide data), which do not match Petitioner's recent experience, and which, in fact, Petitioner has not experienced since 2002, even when Petitioner's historical experience is adjusted by earned premium on a current rate basis. Under Mr. Keating's starting loss ratio of 74.34 percent, and the corresponding number of claims implied by that loss ratio, Ms. Helwig demonstrated that if
Mr. Keating's starting loss ratio were correct (if it were the true mean loss ratio), then the probability of Petitioner experiencing the actual number of claims it has in fact experienced in the two- to three-year period before 2005 is less than one percent. ASOP 25, which instructs that the methods an actuary uses should produce a starting value with less than a
one percent probability of occurrence, is not found to be reasonable. ASOP 8 instructs that the actuary is to adjust past experience, specifically historical loss ratios, for trends in morbidity in a way that reasonably matches claim experience to exposure. Mr. Keating's current rate basis method did not do so.
The more persuasive evidence shows that Mr. Keating's "current rate basis" analysis does not comport with ASOP 8, which provides that when past experience is used to project future results, both past premium rates and morbidity (claims experience) should be adjusted to reflect changes and trends. Mr. Keating did not recognize or take into account the claims trend in the company's historical experience when coming to his "current rate basis" A/E ratios and his starting values for the restated projections he made from Petitioner's data.
To derive the "current rate basis" A/E ratios of 95.41 percent (Florida) and 98.53 percent (nationwide), which he then used to develop starting loss ratios of 74.34 percent based on Florida data and 76.66 percent based on nationwide data,
Mr. Keating simply took a weighted average of 4.75 years of Petitioner's historical A/E ratios (each year's A/E ratio, as adjusted by earned premium on a current rate basis).
Mr. Keating did not trend Petitioner's historical data to arrive at his current basis A/E ratios and his starting-point loss ratio values.
To derive the "current rate basis" starting point A/E ratios, Mr. Keating used an average of Petitioner's historic yearly A/E ratios, and did not trend the yearly A/E ratios, based upon this rationale: In his view, only medical (utilization) trend should be used to trend historical data, since he believes that "aging" trend should be pre-funded in the initially approved premium for any long term care product. Since he believed that Petitioner had not sufficiently identified medical "utilization" trend separately from the "aging" trend in the historical data, Mr. Keating, therefore, averaged Petitioner's historical experience and did not apply any trends in the company's claims experience when arriving at his starting loss ratio.
The actuaries, four of whom testified at hearing, disagreed about whether, in the context of making projections of future anticipated experience from a current-basis starting- point value, Petitioner's actuaries properly isolated medical (utilization) trend from "aging" trend, and whether, therefore, utilization trends should be used in projecting forward. The more persuasive trend, as discussed more fully below, shows that utilization trend over and above aging trend is adequately
identified in the company's data, and was appropriately used for projecting forward. That debate, however, is separate from the issue of whether an actuary may ignore trend in a company's historical data to develop the current-basis starting-point for projecting into the future.
The more persuasive evidence is that the ASOPs require the actuary to take trend in the company's historical data into account in coming to a starting-point value for future projection (the current basis loss ratio or current basis claims cost), regardless of whether the historical trend is categorized as "medical," "aging," or otherwise. The more persuasive evidence is that, if the actuary fails to recognize and take into account historical trend in evaluating the starting point for a future projection, the starting-point value will be actuarially incorrect, thus making the future projection incorrect, regardless of whether, for purposes of the future projection, the actuary includes a medical trend assumption or excludes it.
The persuasive evidence on this point is reinforced by the language of Florida Administrative Code Rule 69O- 149.006(3)(b)18. That Rule passage calls for differentiating between medical (utilization) trend and insurance (aging) trend in making "trend assumptions." "Assumptions" about medical trend or aging trend denotes something the actuary assumes to be
the case for future periods, not something that is an observable past fact. In contrast, a company's historical claims experience, which must be taken into account in arriving at the starting value for a rate projection, is a directly observable fact, not an assumption. Likewise, the trend in a company's past experience is a directly observable fact, not an assumption. According to the more persuasive evidence and the applicable ASOPs, an actuary may not disregard such observed historical claims trend in arriving at a "current basis" starting point to make future projections.
Mr. Keating arrived at his starting-point values without considering and accounting for trend in Petitioner's historical data. His methodology was, therefore, actuarially flawed. If Mr. Keating had properly accounted for historical trend in his evaluation, his starting-point loss ratio values would have been approximately 113 percent, which compares closely with Ms. Helwig's starting value of 107 percent. His projection would, therefore, have resulted in a future A/E ration of 148 percent, which calls for approval of Petitioner's rate request under the "Anticipated Loss Ratio" test of Florida Administrative Code Rule 69O-149.005(2)(b)1.a.
Ms. Helwig properly took historical trend into account in reaching the starting value for her future projections, and concluded that the appropriate starting value was a loss ratio
of 107 percent. Her projections show that Petitioner's rate increase application meets the approval tests of Florida Administrative Code Rule 69O-149.005(2)(b)1.
Ms. Jung used a 10 percent medical trend assumption, for one year only, in her projection forward of anticipated experience, appropriately weighted under Florida Administrative Code Rule 69O-149.0025(6).
Ms. Helwig also assumed medical trend, likewise for one year only, in her projection of anticipated experience, appropriately weighted under Florida Administrative Code Rule 69O-149.0025(6).
The more persuasive evidence shows that using medical (utilization) trend in projecting forward in this case is appropriate, and the medical trend values used by Petitioner's actuaries for projection are reasonable and appropriate.
Florida Administrative Code Rule 69O-149.006(3)(b)18. provides that, when making future projections, medical trend (which includes "utilization" trend) may be used, but "aging" trend may not be included. The Rule directs the actuary to "make appropriate adjustments to claims data to isolate the effects of medical trend."
The evidence demonstrates that Ms. Helwig appropriately adjusted Petitioner's claims data to isolate the
effects of the medical (utilization) trend, and properly included utilization trend in her projections.
"Aging" trend refers to the expected increase in frequency of claims as policyholders' ages increase after policies are originally issued. As Ms. Helwig persuasively testified, companies filing original rates for long term care policies make an actuarial assumption about what the expected increase in claim frequency due to aging will be over the life of the policies, which is commonly understood by health actuaries to be aging trend. The aging trend assumption is incorporated into the durational loss ratio curve (or table) for the policy form, approved by Respondent when the policy form and its original rates are approved. The originally approved premium rate is intended to cover increases in claims frequency assumed in the durational loss ratio curve, that is, increase over time in claim frequency from aging, assumed in the durational loss ratio curve, is pre-funded by the originally- approved premium rates.
As Ms. Helwig persuasively testified, increases in claims frequency, over and above the aging trend originally assumed in the durational loss ratio curve, is utilization trend, which is properly included in medical trend. It is an experienced trend in claims frequency that exceeds the trend
which was originally assumed, and that exceeds what was assumed to be pre-funded in the originally approved premium rate.
Ms. Helwig testified, without contradiction that, in Petitioner's five years of experience, she evaluated that a clear, observable trend exists in the frequency of claims that exceeds the frequency trend assumed in Petitioner's approved durational loss ratio curve, and that this excess claims frequency trend was not pre-funded in the original approved premium rate. She, therefore, subtracted the aging trend assumed in the durational loss ratio curve from the average observed total trend, and properly included the excess utilization trend as medical trend in evaluating the propriety of Petitioner's requested rate increase. She properly isolated the effects of medical trend, and properly included the medical trend, so derived, in her experience projections.
Mr. Keating's and Mr. Yee's opinions on the use or non-use of medical trend to make projections in this case, under Florida Administrative Code Rule 69O-149.006(3)(b)18., are not persuasive.
Both Mr. Keating and Mr. Yee testified that Petitioner had not "separately identified" (isolated) medical trend, in their opinion, and thus use of medical trend in projecting future experience to derive rates for Petitioner's policy is not justified.
However, both of Respondent's actuaries based their opinions on the assumption that all utilization increases were intended to be pre-funded in the rates originally submitted and approved for this particular policy form (i.e., that all claims frequency increases were intended to be subsumed in the aging trend originally included in the durational loss ratio curve when the initial premium rate for this policy form was proposed and approved). They, therefore, assumed that all frequency increases under this policy form must be aging trend, and, therefore, that no utilization increase in the company's experience can be treated as part of medical trend for this product.
However, Mr. Keating's and Mr. Yee's assumption on this point is contradicted by the evidence. The actuarial memorandum for the original 1994 rate filing (which Respondent approved) clearly noted that the initial premium rate for this particular policy form was not intended to fully pre-fund all expected utilization increases, and that utilization increases in excess of what is pre-funded in the original premium rate would be funded by periodic rate increases. Mr. Keating and Mr. Yee did not consult the original rate filing and the original actuarial memorandum in forming their opinions.
As Ms. Helwig testified, and it is concluded here, it is consistent with how the premium rate for this particular
policy form was initially filed and approved to classify, as medical trend, the utilization trend in the company's experience that exceeds the utilization frequency assumed in the durational loss ratio curve.
Mr. Yee and Mr. Keating additionally offered the opinion that medical trend was not justified because Petitioner's data was insufficiently credible. These opinions are not credited. Petitioner's actuaries used adequately credible data in their analyses under the standards set forth in the Florida rules, as discussed above.
Respondent disagreed at hearing with Ms. Helwig's use of industry medical trend in her projections. However, the more persuasive evidence shows that Ms. Helwig properly used industry medical trend. The industry medical trend value she used was derived from the Milliman Claim Cost Guidelines, adjusted to Petitioner's benefit structure and in-force business. The Milliman Claim Cost Guidelines are the type of data health actuaries reasonably rely upon in reaching professional opinions in their field. Ms. Helwig gave appropriate credibility weight to the industry medical trend she used in her projections, in accordance with Florida Administrative Code Rule 69O- 149.0025(6). Moreover, she testified without contradiction that, even if industry medical trend were excluded from her projections, the indicated rate need from her analysis would
still meet or exceed the 25.75 percent rate increase for which Petitioner has applied.
Mr. Keating and Mr. Yee testified that Petitioner's rate increase application should not be approved because Petitioner should have filed a new durational loss ratio curve for approval, and phased-in the resultant rate increase over time, rather than making a periodic rate increase filing, as Petitioner chose to do. Respondent did not assert this as a basis for denial in its denial letter, in its interrogatory responses, or otherwise before hearing.
Petitioner chose to present evidence on this issue, and on the more persuasive evidence, Mr. Keating's and Mr. Yee's opinions that Petitioner was required to file a new durational loss ratio curve are not found to be persuasive.
Both of Respondent's actuaries rest their opinion upon their interpretation of two provisions in Florida Administrative Code Chapter 69O-149, Part I. Their interpretation does not comport with the plain language of the rules they rely upon.
Respondent's actuaries testified that Florida Administrative Code Rule 69O-149.006(3)(b)20. requires Petitioner to file a new durational loss ratio curve (or table), rather than seek a periodic rate increase, when company experience shows utilization exceeding what was assumed in the
existing loss ratio curve. That subsection reads, in pertinent part, as follows:
[The actuarial memorandum for a rate increase] shall also include the current approved durational loss ratio table for the form.
If a revised durational loss ratio table is being proposed, the proposed table, together with a justification for the new table, shall be provided.
The proposed new table shall be consistent with the claim projections contained in the new filing.
If approved, the new table will be used in filings made subsequent to the one in which it is being proposed.
(V)(A) When the slope of the shape of the durational loss ratio table is changed . . . from those used in the last approved rate filing, any rate increase due to the change shall be uniformly implemented over a 3 year period.
Contrary to Mr. Keating's and Mr. Yee's views, the plain language of this Rule does not require Petitioner to propose a revised curve. The Rule prescribes a particular course of conduct if a revised curve is proposed, but that does not require that the rate filer propose a new curve.
Mr. Keating and Mr. Yee also testified that Florida Administrative Code Rule 69O-149.0025(7)(a) required Petitioner to file a new durational loss ratio curve. These opinions are
inconsistent with the plain language of that Rule, as well. That Rule provides, in pertinent part:
(a)1.a. The company shall adjust the durational loss ratio table when the average annual premium at the time of filing results in a loss ratio standard pursuant to the provisions of subsection 69O-149.005(4), F.A.C., that is changed by at least .5 percent from the current lifetime loss ratio standard for the form.
b. Each loss ratio in the durational loss ratio table shall be increased by the ratio of the loss ratio standard determined from the current average annual premium divided by the prior lifetime loss ratio
standard . . . .
This Rule refers to Florida Administrative Code Rule 69O- 149.005(4). Florida Administrative Code Rule 69O-149.005(4), in turn, contains tables setting out minimum loss ratio standards (and formulas for revising minimum loss ratio standards in those tables) for some types of health insurance policies: policy forms whose loss ratio standards are subject to change based on the average annual premium at the time of the rate filing.
Florida Administrative Code Rule 69O-149.005(4), however, explicitly excludes long term care policies. It provides:
These tables are not applicable to Medicare Supplement or Long-Term Care Policy Forms. The minimum loss ratios for those policy forms are found in Rule Chapters 69O-156 and 69O-157, respectively.
Florida Administrative Code Rule 69O-149.005(4) excludes long term care policies because, unlike the types of policies
governed by Florida Administrative Code Rule 69O-149.005(4), the minimum loss ratio standard for long term care policies does not change when the average annual premium changes. The minimum loss ratio standard for long term care policies is a constant value, as stated in Florida Administrative Code Rule 69O- 157.022.
Florida Administrative Code Rule 69O-149.0025(7) only requires a revised durational loss ratio curve to be submitted for policy forms whose minimum loss ratio standards are subject to change under Florida Administrative Code Rule 69O-149.005(4). As noted, that is not true of long term care policies. Accordingly, Mr. Keating's and Mr. Yee's opinions that this rule required Petitioner to submit a new durational loss ratio curve are not persuasive.
Both Mr. Keating and Mr. Yee further suggested that Petitioner should file a new durational loss ratio curve, rather than seek a periodic rate increase, because of their assumption that all utilization (frequency) increases for long term care policies should have been pre-funded in the rates originally submitted and approved for the product. In other words, they opine, all claim frequency increases should be included in the aging assumption of the original durational loss ratio curve for a long term care policy.
Whatever the accuracy of that assumption may be as to the rate structure of long term care products in general, the evidence shows it is factually incorrect as to this particular product. The actuarial memorandum for the initial, approved rate filing for this particular policy form clearly noted that the initial premium rates were not intended to fully pre-fund all expected utilization increases. The rate structure approved by Respondent for this product expressly contemplated that utilization increases, in excess of the utilization trend assumed in the initial durational loss ratio curve, would be funded by future periodic rate increases. Consistent with that approved rate structure, Respondent has approved several periodic rate increases for this product (most recently by consent order in 2003), and did not previously take the position that Petitioner should file a revised durational loss ratio curve. Respondent's actuaries' opinions on this point are contradicted by the evidence and are not persuasive.
Mr. Yee opined that annual variation or volatility in Petitioner's claim reserves may mean that the claim reserves in Petitioner's data may not actually reflect the company's true experience. He thus concluded that a rate increase was not justified.
Respondent did not assert this as a basis for denial in its denial letter, responses to interrogatories, or otherwise
prior to the hearing. Nevertheless, Petitioner presented evidence on the issue, and on the more persuasive evidence Mr. Yee's opinion is not persuasive. Mr. Keating did not
testify that annual variation in Petitioner's claim reserves was cause to deny the rate increase, and did not mention any concern over annual claim reserve variation as a basis to deny the rate increase. Mr. Yee admitted that trending and averaging of the data smoothes claim reserve year-to-year volatility. Ms. Helwig persuasively testified that the observed claim reserve variations correspond closely with observed annual fluctuations in claim frequency, and that averaging Petitioner's claims history (as both she and Ms. Jung did) smoothes year-to-year data variability. The more persuasive evidence does not support Mr. Yee's opinion on this point.
Mr. Yee testified that he believed there was a discrepancy between current premiums on this book of policies and "active life reserves" displayed in Ms. Jung's actuarial memorandum supporting the filing. Mr. Yee characterized the discrepancy as "alarming," but did not offer an objective basis for that characterization. He testified that, because Ms. Jung did not explain the active life reserves in her actuarial memorandum, he concluded that she was not qualified to make the filing, and it should, therefore, be disapproved.
Respondent did not assert this as a basis for denial in its denial letter, its interrogatory responses, or otherwise before hearing. Nevertheless, Petitioner presented evidence on the issue, and on the more persuasive evidence Mr. Yee's opinion is not persuasive. On cross-examination, Mr. Yee testified that a rate filing actuarial memorandum is not intended to be a reserve opinion by the actuary, and that annual reserve opinions are separately made. Mr. Yee also testified that companies often pool active life reserves across policy forms, and he does not know whether Petitioner's reported active life reserves are the result of such multi-policy-form pooling, or pertain exclusively to policy form 93710(FL). He admitted he had no personal knowledge concerning the accuracy of Petitioner's life reserves displayed in Ms. Jung's actuarial memorandum. He, therefore, has no factual basis to question them. He further conceded that neither Florida Administrative Code Rule 69O- 149.006, nor applicable ASOPs place any obligation on Petitioner or its actuaries to provide explanation in the rate filing actuarial memorandum concerning the reported life reserves.
Mr. Keating did not request any further explanation from Petitioner concerning its reported life reserves, did not list a deficiency of explanation concerning life reserves as a basis for denial, and did not testify that he asked for more explanation concerning life reserves, or found the absence of
explanation a reason for disapproving Petitioner's rate increase filing.
Ms. Helwig testified that active life reserves play no role in evaluating the appropriateness of a proposed rate for a home health care product. Consistent with her testimony, Florida Administrative Code Rule 69O-149.006(3)(b)17. expressly provides: "Because these [active life] reserves do not represent claim payments, but provide for timing differences, they shall not be included in any benefit and loss ratio calculations." The Rule expressly acknowledges that active life reserves are not material to evaluating whether the benefit/premium relationship, often expressed in terms of loss ratios, meets the rules' tests for approval of the requested rate.
Mr. Keating testified that certain data inconsistencies in Ms. Jung's actuarial memorandum supporting the rate increase filing were not significant, and did not affect his review or his conclusions. Respondent did not cite these minor data discrepancies as a basis for denial. Ms. Jung testified that the data discrepancies were immaterial, and did not affect her rate analysis. It is found that the data inconsistencies are immaterial to the issues to be decided in this case, and are not a basis to deny Petitioner's requested rate increase.
As noted in the Preliminary Statement above, before the final hearing, Petitioner made a Motion to Strike and Motion in Limine, directed to Respondent's assertion that amended Subsection 627.9407(7)(c), Florida Statutes, would serve as an additional basis for the disapproval of Petitioner's rate increase. Respondent asserted this additional basis for the first time in its statement of position in the Pre-Hearing Stipulation filed in this matter. Petitioner's Motion was denied at the time it was made in order to hear evidence as to how Respondent intended to implement and apply the amended statute to Petitioner's rate filing. Numerous facts were elicited at hearing that bear on the applicability of Subsection 627.9407(7)(c), Florida Statutes.
Section 9, Chapter 2006-254, Laws of Florida, amended Subsection 627.9407(7), Florida Statutes, in June 2006, after this rate filing was made and disapproved.
Section 9 (creating Subsection 627.9407(7)(c), Florida Statutes) provides, in part, and Section 11, Chapter 2006-254, Laws of Florida, provides in pertinent part:
(c) Any premium increase for existing insureds shall not result in a premium charged to the insureds that would exceed the premium charged on a newly issued insurance policy, except to reflect benefit differences. If the insurer is not currently issuing new coverage, the new business rate shall be as published by the office at the rate representing the new
business rate of insurers representing 80 percent of the carriers currently issuing policies with similar coverage as determined by the prior calendar year earned premium.
Section 11. This act shall apply to long- term care insurance policies issued or renewed on or after July 1, 2006.
Petitioner is not issuing new coverage under this policy form.
Amended Subsection 627.9407(7)(c), Florida Statutes, is not self-executing in its application to insurers, such as Petitioner, that are not issuing new coverage. As to Petitioner (and similarly situated insurers), Respondent implemented amended Subsection 627.9407(7)(c), Florida Statutes, by publishing benchmark charges, developed by Respondent, to which Petitioner's rates were compared. In developing its published benchmarks, Respondent made a number of policy decisions, which are discussed below.
Respondent posted its benchmark charges on its website in late September of 2006.
Well before hearing, while a meaningful opportunity for discovery still was available to Petitioner, Respondent had ample opportunity to notify Petitioner that it would be asserting its benchmarks as additional grounds for the disapproval of Petitioner's rate increase filing. Respondent
could have done so by amending the denial letter or by amending its interrogatory responses. Respondent failed to do so.
Respondent asked to continue the final hearing scheduled for November 21, 2006, which was granted, and never asserted as a basis for the continuance that it intended to assert a new basis for denial of Petitioner's rate increase filing, namely, the implementation of the amended statute.
Respondent did not even assert the amended statute as a further basis for denial at a deposition taken by Petitioner of its actuary and designated agency representative,
Mr. Keating, on November 30, 2006. Mr. Keating was specifically asked at that deposition whether Respondent intended to assert any additional bases for disapproval of Petitioner's rate filing. Mr. Keating responded that Respondent had no such intention.
Had Respondent given timely advance notice, Petitioner would have had a fair opportunity to take discovery on the issue, to amend its Petition, or both.
Prior approval of Petitioner's rate increase is an authorization required by law before it can implement the rate pursuant to Subsection 120.52(15) and Section 627.410, Florida Statutes.
Respondent did not assert this additional basis for disapproval until December 22, 2006, after discovery had been
completed. In light of this late date and the intervening holidays, Respondent's delay deprived Petitioner of a fair and meaningful opportunity to take discovery and prepare to defend Respondent's assertion at the final hearing beginning January 3, 2007.
Since Petitioner could not implement the new rate unless and until the proceedings were completed and it received approval, additional continuances and delays would only have served to further prejudice Petitioner's position.
Additionally, Respondent's proposed implementation and application of amended Subsection 627.9407(7)(c), Florida Statutes, constitutes agency action that determines Petitioner's substantial interests on the basis of non-rule policy. Numerous facts support this finding.
Amended Subsection 627.9407(7)(c), Florida Statutes, is not self-executing to insurers like Petitioner that are not issuing new coverage. Respondent made policy decisions on several matters to implement the statute and to apply it to Petitioner, including: 1) What constitutes "similar coverage;"
2) Which insurers comprise 80 percent of carriers currently issuing policies "with similar coverage" for purposes of developing the benchmarks; 3) Within that 80 percent of carriers, whether the charges of each carrier are to be given equal weight in developing the benchmark charges, or instead,
will be weighted according to each carrier's percentage of the previous year's earned long term care premium; 4) Since the carriers whose charges are used in developing benchmarks offer multiple home health care policy forms and various benefit levels and correspondingly varying premium charges, which particular charges by those carriers will be used in developing the benchmark charges; 5) What information, if any, other than the published benchmark charges will be used in making the comparison called for by the statute; and 6) What claims experience adjustments, if any, to the published benchmark charges will be used to make the comparison.
When Respondent first gave notice, on December 22, 2006, that it would assert benchmarks under Subsection 627.9407(7)(c), Florida Statutes, Petitioner promptly put Respondent on notice that it believed the benchmarks to be non- rule policy assertions by the agency, by filing its Motion to Strike and Motion in Limine on December 27, 2006.
Respondent did not in any manner publish the benchmarks it actually used to make the Subsection 627.9407(7)(c) comparison to Petitioner.
The benchmarks Respondent published were developed for benefit configurations that are materially different from the benefit configurations in Petitioner's policy. Mr. Keating made a number of adjustments to the published benchmarks in making
his comparison with Petitioner. However, none of these adjusted benchmarks were published in any manner, and Mr. Keating could not recall details of the methods by which the adjustments were made.
Respondent compared Petitioner's rate filing to unpublished information, contrary to the plain language of Subsection 627.9407(7)(c), Florida Statutes.
Respondent was aware of 20-25 insurers who would be affected by the published benchmarks, yet did not serve any affected insurer, including Petitioner, with a copy of the benchmarks published; and did not offer any of them a point of entry to proceedings in which to explore and test the adequacy or validity of Respondent's benchmarks.
The published benchmarks developed by Mr. Keating for Respondent gave more than 92 percent weight to just one company-
-Bankers Life. Two other companies' charges were also used, but Mr. Keating gave less than five percent combined weight to them.
Mr. Keating did not give equal weight to the selected charges of the three insurers chosen as benchmark companies. Instead, he gave greater weight based upon the companies' prior year earned premium. He offered no actuarial basis for this decision. He also offered no testimony about the other companies' charges and what the posted benchmark values would be had he given equal weight to all three companies' charges.
Respondent offered no point of entry for proceedings to question the decision.
Mr. Keating also selected the lowest Bankers Life charges to develop the published benchmarks. He gave no actuarial basis for that decision, and no point of entry was given for affected insurers to question the decision.
The benefit configurations in Petitioner's policy differ significantly from those in the Bankers Life policy from which Mr. Keating developed the published benchmarks. The differences in benefit configurations are material to the Subsection 627.9407(7)(c) comparison that Mr. Keating undertook. Mr. Keating used unpublished information in performing the comparison, and he could not recall the underlying methods and assumptions in making the comparisons. Therefore, some doubt was cast as to their validity. Further, no affected insurers were given a point of entry to question the comparisons or their underlying assumptions.
The greater weight of the evidence shows that the policy decisions made by Respondent in implementing and applying Subsection 627.9407(7)(c), Florida Statutes, in many respects are not supported by logic or critical facts.
Petitioner offered facts to demonstrate that Respondent's intended implementation and application of amended Subsection 627.9407(7)(c), Florida Statutes, would impair
Petitioner's existing contracts, and would violate due process of law. The factual findings in this regard are set forth below.
Petitioner's existing contracts were entered into at least nine years before amended Subsection 627.9407(7)(c), Florida Statutes, was proposed and became law, and before Respondent proposed to apply its benchmark charges to Petitioner.
Petitioner's contracts are guaranteed-renewable contracts. Petitioner must continue to renew them indefinitely.
When Petitioner entered into these contracts, the Laws of Florida, which were incorporated into the contracts, provided that Petitioner had the right to receive premiums for such guaranteed-renewable policies at rates actuarially justified under the provisions of Section 627.410, Florida Statutes, and the tests in Florida Administrative Code Rule 69O- 149.005(2)(b)1. Petitioner has demonstrated that the proposed rates in question are actuarially justified and meet those
tests.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the subject matter of and the parties to this proceeding. §§ 120.569 and 120.57(1), Fla. Stat.
Section 627.410, Florida Statutes, and Florida Administrative Code Chapter 69O-149, Part I, apply to the rating issues presented in this case.
Subsection 627.411(1)(a), Florida Statutes, provides:
The office shall disapprove any form filed under s. 627.410, or withdraw any previous approval thereof, only if the form:
(a) Is in any respect in violation of, or does not comply with, this code.
Subsection 627.410(6), Florida Statutes, provides:
An insurer shall not deliver or issue for delivery or renew in this state any health insurance policy form until it has filed with the office a copy of every applicable rating manual, rating schedule, change in the rating manual, and change in rating schedule; if rating manuals and rating schedules are not applicable, the insurer must file with the office applicable premium rates and any change in applicable premium rates.
The commission may establish by rule, for each type of health insurance form, procedures to be used in ascertaining the reasonableness of benefits in relation to premium rates . . . .
Accordingly, Florida Administrative Code Chapter 69O- 149, Part I, specifies the applicable rules for rate filings of health insurance policies and is applicable to the home health policies at issue here.
Florida Administrative Code Rule 69O-149.005 specifies the basic test of "reasonableness of benefits in relation to premium rates":
Benefits will be determined to be reasonable in relation to the premium rates charged if the premium schedule is not excessive, not inadequate and not unfairly discriminatory. In determining whether the premium schedule satisfies these requirements, the office will consider all items presented in the filing with special emphasis placed on the information included in the actuarial memorandum.
A premium schedule is not excessive if the following are true:
* * *
(b)1. For individual forms, and group policy forms other than annually rated group policy forms, approved on or after 2/1/94 or issued on or after 6/1/94, the Premium Schedule satisfies the following:
An Anticipated Loss Ratio test such that the present value of projected claims is not less than the present value of expected claims over the entire future lifetime of the form. This is equivalent to the present value of the future A/E ratio not being less than 1.0; and
The current lifetime loss ratio, as defined in subparagraph 69O-
149.006(3)(b)24., F.A.C., is not less than the initial filed loss ratio for the form as may be subsequently amended and approved pursuant to this rule chapter.
Florida Administrative Code Rule 69O-149.0025(1) specifies:
(1)(a) Actual-to-Expected (A/E) ratio: The ratio of actual incurred claims under the policy form divided by expected claims.
This is equivalent to the actual annual loss ratio divided by the applicable durational loss ratio table.
For projected periods, the A/E ratio is the ratio of the projected claims divided by the expected claims.
Both the year-by-year pattern of the A/E ratios and the aggregate past, future, and lifetime ratios shall be presented.
The term "expected claims" is defined by Florida Administrative Code Rule 69O-149.0025(10)(a) as follows:
The actual earned premium or, for projected periods the projected premium, times the applicable policy durational loss ratio from the approved durational loss ratio table which was in effect for the time period covered by the premiums.
Florida Administrative Code Rule 69O- 149.006(3)(b)23.b.(II) instructs the insurer how to display and project future period data when based on actual in force policy experience, as was done by Petitioner in this home health policies rate increase filing.
Florida Administrative Code Rule 69O- 149.006(3)(b)23.b.(II) requires Petitioner to use "credible data" as defined by Florida Administrative Code Rule 69O- 149.0025(6)(b)1. to determine the experience period on which a projection of future values is to be based.
Since the home health policies were forms with low expected claims frequency, Florida Administrative Code Rules 69O-149.006(3)(b)23.b.(II) and 69O-149.0025(6) require that Petitioner project forward expected claims based on a period not
to exceed five years of actual home health policies experience. Respondent reads this to require the actuary to use five years of historical data. Petitioner derived the separate Florida and nationwide data from the three most recent full years of its data. Petitioner's methodology comports with Florida Administrative Code Rule 69O-149.0025(6). Moreover, Florida Administrative Code Rule 69O-149.006(3)(b)23.b.(II) allows the actuary to use the most recent 12 months data for coverage subject to medical inflation or the "credible data" test from Florida Administrative Code Rule 69O-149.0025(6). Petitioner exercised sound actuarial judgment in using the most current data available, which took into account the credibility weighting factors under Florida Administrative Code Rule 69O- 149.0025(6), when less than five years' data is available.
Petitioner's approach is reasonable and supports the sought after rate increase of 25.75 percent.
Respondent's strenuous objections to the use of a "medical trend" analysis by Petitioner, similarly, were unfounded. Petitioner did not seek, at hearing, to make a "new" rate filing, as suggested by Respondent. Even a de novo hearing does not provide an applicant for a rate increase the opportunity to make a new or amended filing. Petitioner, through the testimony of its well-qualified actuary, Ms. Helwig, sought only to justify the 25.75 percent increase requested by
the company. Ms. Helwig's use of industry medical trend in her projections was adequately supported by sound actuarial principles and based upon credible data gathered from the Milliman Claim Cost Guidelines. While her testimony supported a rate increase for Petitioner far in excess of the 25.75 percent sought (up to 39.9 percent), she noted that the 25.75 percent increase for which Petitioner applied was justified, even without the use of the industry medical trend. Ms. Helwig's testimony was credible and more persuasive on this point than that offered by Respondent's actuaries. By justifying its use of medical trend in its analysis of the rate increase sought, Petitioner demonstrated the "reasonableness of benefits in relation to premium rates," pursuant to Florida Administrative Code Rule 69O-149.005(1).
Respondent's argument that Petitioner's use of three years' claims (296) violates Florida Administrative Code Rules 69O-149.006(3)(b) 23.b.(II) and 69O-149.0025(6), is misplaced. The rules do not require that a full five-year period be used; only that "credible data," as defined by rule, be employed. Appropriately, Ms. Jung, the company actuary, credibly weighted the data at her disposal in order to arrive at her ultimate rate indication of 25.79 percent, which she rounded down to 25.75 percent for her filing. Ms. Jung's separate Florida and nationwide rate indications were based upon claims counts
falling within the credibility range set forth in Florida Administrative Code Rule 69O-149.0025(6)b.1. Ms. Helwig, the consulting actuary for Petitioner, used the five years of historical data Mr. Keating testified should be used. Her use of the Milliman data was appropriate and supported by the greater weight of the evidence produced at hearing. The combined efforts of Petitioner's actuaries fully support the rate increase sought.
Petitioner's use of medical trend was reasonable and appropriate, and further supports its request for the rate increase. Respondent's claims that allowing Ms. Helwig to testify as to her post-submittal analysis of Petitioner's rate filing are misplaced. Respondent has attempted to transform Ms. Helwig's reasonableness testing of Ms. Jung's original rate filing into a new rate filing. Ms. Helwig did not testify at hearing, as argued by Respondent, that she was trying to amend Petitioner's rate filing due to the fact that this was a de novo proceeding, pursuant to Subsection 120.57(1)(e), Florida Statutes. Ms. Helwig's testimony was appropriate analysis for this hearing concerning the reasonableness of Ms. Jung's projections. Respondent's argument that Ms. Helwig's testimony should be deemed inadmissible is without factual or legal basis and is hereby denied.
Petitioner's use of aging and medical trend was appropriate and further supports its requested rate increase of
25.75 percent. Moreover, Petitioner was not required to file a new durational loss ratio curve in order to justify its rate increase as suggested by Respondent.
Respondent offered as its final reason for denying the rate increase sought by Petitioner the fact that a newly- created statute, Subsection 627.9407(7)(c), Florida Statutes, must be applied to Petitioner's rate filing. As stated previously, the statute became effective on July 1, 2006, and was not asserted by respondent as a basis for the disapproval of Petitioner's rate increase until December 22, 2006, in its Statement of Position in the Pre-Hearing Stipulation filed in this matter. As to Petitioner (and similarly situated insurers), Respondent implemented amended Subsection 627.9407(7)(c), Florida Statutes, by publishing benchmark charges, which were developed by Respondent, to which Petitioner's rates were compared.
As explained above, these benchmark charges were adopted without public input, a point of entry for substantially affected persons, or any formal publication required by
Chapter 120, Florida Statutes, as part of the rulemaking process. The benchmarks appeared on Respondent's website without fanfare or notice. Respondent gave no reason for its
not asserting the new statute as a basis for disapproval of Petitioner's rate increase prior to December 22, 2006, 12 days before the hearing, other than the fact that the statute was on the books and, therefore, applies in a de novo proceeding. Even setting aside the notice issue to Petitioner concerning the application of the statute and the benchmarks, the new statute cannot be applied here because the benchmarks are too heavily weighted to one insurer, Bankers Life, which has material differences in benefit configurations when compared with Petitioner. Moreover, Respondent's own actuary testified that he used unpublished information in performing the comparison of the benchmarks with Petitioner, and that he could not recall the underlying methods and assumptions used in making the comparisons. Applying benchmarks to Petitioner that are as unsupported by facts and evidence as these would not only deny Petitioner due process, but carry so little weight as to render them inadmissible as evidence to be applied against Petitioner as grounds for denial of its rate filing.
Additionally, facts were presented by Petitioner at the hearing that would call into question the constitutionality of Respondent's actions concerning the implementation of Subsection 627.9407(7)(c), Florida Statutes. Since it is outside the province of an administrative law judge to rule on the constitutionality of a statute or, generally, its
unconstitutional application, those facts will remain in this Recommended Order as findings, but no conclusions of law will be made relative to them.
Based upon the overwhelming evidence in this matter, Petitioner has fully justified its entitlement to a rate increase of 25.75 percent for its home health care policies. Respondent's attempts to discredit the strong testimony of Petitioner's actuaries, as well as the proposed implementation of Subsection 627.9407(7)(c), Florida Statutes, to this case fall far short of justification for disapproving Petitioner's rate increase. Accordingly, Petitioner's increase of 25.75 percent is reasonable and not excessive, and should be approved.
Based upon the foregoing Findings of Fact and Conclusions of Law, it is
RECOMMENDED that Respondent issue a final order approving Petitioner's rate increase request of 25.75 percent.
DONE AND ENTERED this 8th day of June, 2007, in Tallahassee, Leon County, Florida.
S
ROBERT S. COHEN
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 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 8th day of June, 2007.
ENDNOTE
1/ References to statutes are to Florida Statutes (2006) unless otherwise noted.
COPIES FURNISHED:
Daniel C. Brown, Esquire Carlton Fields, P.A. Post Office Box 190
Tallahassee, Florida 32302-0190
Charlyne Khai Patterson, Esquire Office of Insurance Regulation
200 East Gaines Street 612 Larson Building
Tallahassee, Florida 32399-4206
Kevin M. McCarty, Commissioner Office of Insurance Regulation
200 East Gaines Street Tallahassee, Florida 32399-0305
Steve Parton, General Counsel Office of Insurance Regulation
200 East Gaines Street Tallahassee, Florida 32399-0305
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 | Document | Summary |
|---|---|---|
| Jun. 08, 2007 | Recommended Order | Petitioner demonstrated that its application for a 25.75 percent increase in its home health care rates meets the applicable statutory and rule criteria and should be approved. |
