9 Lessons From John Hancock's $26M LTCI Settlement

To make up for early cancellation of benefits payments for 156 holders of New York State Partnership for Long Term Care policies, John Hancock agreed last week to pay a total of $26.3 million.

The settlement includes a $21.6 million in extra benefits to policyholders and beneficiaries, a $2.5 million penalty to the New York State Department of Financial Services, and a $2.2 million payment to the New York state Medicaid program.

When the holders of those policies used less than the full daily benefit amount on a given day, John Hancock failed to roll the unused amount of benefits forward, as described by the policy.

Longtime LTCI sales and marketing specialist Jesse Slome said he had never heard of a similar problem coming to light before. But Slome, executive director of the Westlake Village, California-based American Association for Long-Term Care Insurance, said it’s possible that other insurers had made similar mistakes without anyone noticing.

“Traditional long-term care insurance is one of the most complicated (and thus costly) products for an insurer to administer,” he said.

Hans Hug, owner of The LTC Insurance Group, an LTCI broker based in Exeter, New Hampshire, found news of the mistake surprising. If similar problems have occurred before without being discovered, one factor might be confusing “explanation of benefits” statements, or EOBs, he said.

“Bad EOB designs are not common,” Hug said, “but, when they do show up, problems begin.”

Here are nine issues with LTCI policies and coverage emerging from the John Hancock case that insurance agents, financial advisors, clients and other parties should consider, according to these two specialists:

1. Details vary widely, especially on older policies.

Slome said policy provisions varied especially widely before 2010, when the Interstate Insurance Product Regulation Commission began setting LTCI policy standards for participating states.

John Hancock, for example, began selling New York State Partnership policies in the 1990s. It needed an administration system for New York State Partnership policies that was different from its system for other New York state policies, and that was different from its systems for California or Iowa policies.

Other policy administration system challenges include changes in computer technology, staffing constraints and moves to have other companies handle policy administration, Slome said.

2. LTCI clients have different levels of sophistication.

The ability of Hug’s LTCI clients to file claims varies.

“Some are all over it and get it, while others give me the deer-in-the-headlights stare,” he said.

3. While most LTCI clients don’t use up their benefits, it does happen.

One question is whether John Hancock had problems with calculations partly because situations in which policyholders run out of benefits are relatively uncommon.

Hug estimated that only about 20% of his own LTCI clients use up their benefits.

4. Keeping track of LTCI benefits is tricky.

Typical LTCI policyholders have a hard time monitoring benefits payments on their own, Hug said.

To know whether they have received the full benefits owed, they need to understand the mechanics of their policies and read their annual statements.

Once the insureds are on claim, the policyholders need to read to the insurers’ explanation of benefits statements closely, he said.

“If they have that understanding, then, yes they could determine themselves what was left in the coverage,” he said. “If they don’t have that understanding they will need help.”

5. Policyholders need professional guidance.

Hug helps his clients with their claims, and he believes an experienced writing agent is the ideal source of help with tracking LTCI claims.

“I am deeply involved in the claim file for the entire period, and I walk [clients] through everything they need to know, one of which is explaining the reimbursement model (or indemnity [model]), so they are well aware of how it works and can tell if they get shorted,” he said. “If the writing agent is not willing and available to do so, for whatever reason, that’s where the problems begin. Not that they cannot be figured out, but the process can seem daunting.”

Financial planners and accountants with an interest in the topic could help many insureds, he said.

6. EOB statements should be readable, and policyholders should read them regularly.

The key to detecting problems with LTCI benefits payments is to start with well-designed EOB statements from insurers and read them carefully each month, Hug said.

Many policyholders have LTCI policies that require an insured to need long-term care for a certain number of days before getting LTCI benefit payments.

Hug said a good benefits statement for LTCI coverage should show a simple accounting of the expenses in, the payments out and other key variables, including:

• The number of days left in the exclusion period.
• The current daily benefit amount.
• A day-by-day accounting of each expense submitted, the daily benefit amount available to pay that expense, and the provider of the care described by each expense line item.
• The amount of money left over from the daily benefit amount after the insurer has paid the expenses submitted.
• The reasons the insurer has denied any claims for an expense, in part or in whole.
• The value of the remaining pool of money.

7. Policy administrators need to understand the reality on the ground.

Insurers that handle policy administration in-house tend to administer policies in a similar, smooth way, but some insurers hire outside administration firms that take a less efficient or more aggressive approach, Hug reported.

He recalled working with a woman in her 80s who was crying in her kitchen about her husband’s hard-to-resolve LTCI claim problems. Hug asked for her permission to videotape her crying.

Hug told the claim administration firm rep that he could send the video to the rep, and to top executives of the insurer that issued the LTCI policy, to help them understand the client’s situation.

After the rep heard about the video, the firm resolved the claim problem, Hug said.

8. A regulatory crackdown could be counterproductive.

Slome suggested that a punitive regulatory approach to addressing errors could backfire.

John Hancock seems to have worked hard to find and correct mistakes in New York state, Slome said.

“The state chose to punish the company to the tune of $968 for each of the unpaid claim days uncovered by the company,” Slome said. “Why would an insurer agree to a $26 million settlement? Simply because it could cost that and more to litigate a case, and no elected or state official has ever lost an election because they were too hard on an insurance company. Dragging them through the press has a greater impact on the corporate image, so they settle (and states know it).”

The $2.2 million payment to New York’s Medicaid program in connection with the consent agreement is small compared with what the program could save if LTCI issuers liked selling Partnership coverage in New York, and more residents used the coverage to avoid signing up for Medicaid.

9. Consistent EOB formats would go a long way.

Hug said one way insurance regulators could help is to move insurers and policy administrators toward adopting the same carefully thought out EOB statement standards.

“Simply put, design it better,” Hug said.

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