No. 12: The Expanded and Improved Medicare For All Act of 2013

On February 13, 2013, U.S. Representative John Conyers (D-MI) introduced H.R. 676, the "Expanded and Improved Medicare For All Act." The bill has 53 cosponsors (all Democrats) in the House of Representatives. On February 22, the bill was referred to the Subcommittee on Indian and Alaska Native Affairs of the Committee on Natural Resources. There has not been any other action on the bill. Here is the bill summary prepared by the Congressional Research Service:

Establishes the Medicare for All Program to provide all individuals residing in the United States and U.S. territories with free health care that includes all medically necessary care, such as primary care and prevention, dietary and nutritional therapies, prescription drugs, emergency care, long-term care, mental health services, dental services, and vision care.

Prohibits an institution from participating unless it is a public or nonprofit institution. Allows nonprofit health maintenance organizations (HMOs) that deliver care in their own facilities to participate.

Gives patients the freedom to choose from participating physicians and institutions.

Prohibits a private health insurer from selling health insurance coverage that duplicates the benefits provided under this Act. Allows such insurers to sell benefits that are not medically necessary, such as cosmetic surgery benefits.

Sets forth methods to pay institutional providers of care and health professionals for services. Prohibits financial incentives between HMOs and physicians based on utilization.

Establishes the Medicare for All Trust Fund to finance the Program with amounts deposited: (1) from existing sources of government revenues for health care, (2) by increasing personal income taxes on the top 5% income earners, (3) by instituting a modest and progressive excise tax on payroll and self-employment income, (4) by instituting a modest tax on unearned income, and (5) by instituting a small tax on stock and bond transactions. Transfers and appropriates to carry out this Act amounts that would have been appropriated for federal public health care programs, including Medicare, Medicaid, and the Children's Health Insurance Program (CHIP).

Requires the Medicare for All Program to give first priority in retraining and job placement and employment transition benefits to individuals whose jobs are eliminated due to reduced administration.

Requires creation of a confidential electronic patient record system.

Establishes a National Board of Universal Quality and Access to provide advice on quality, access, and affordability.

Requires the eventual integration of the Indian Health Service into the Program, and an evaluation of the continued independence of Department of Veterans Affairs (VA) health programs.

A Few Thoughts

During the 40 years of The Insurance Forum, I rarely wrote about the tragic situation of those in our great nation who have no insurance covering the cost of health care and those who have inadequate coverage. A few exceptions were articles contributed by Alan Press in our March 2008, June 2008, October 2009, and December 2009 issues, and my article in the June 2010 issue about the then recently enacted Patient Protection and Affordable Care Act (PPACA).

I have said on occasion that I support the concept of a single-payer system of universal health care. I have not embraced the PPACA, because I think it is a complex compromise that will not solve the problems we face. Also, I am pessimistic about the likelihood of enactment of a single-payer system, such as H.R. 676. Whenever anyone asks me why we do not have universal health care of the type found in every other advanced society in the world, my one-word answer is "Politics."

In my opinion, the enactment of Social Security in 1935 and Medicare in 1965 were the two greatest political achievements of the past century. Each occurred as the result of an extraordinary combination of events. I think it will require a similar combination of events for the U.S. to enact a system of universal health care, which thus far has eluded Presidents Theodore Roosevelt, Harry Truman, and Barack Obama.

No. 11: More on the Dilemma for Consumers When an Insurance Company Is Sold

In the December 2013 issue of The Insurance Forum, published November 7, I wrote about the dilemma faced by policyholders when an insurance company is sold by its parent company in such a way as to cause a downgrade in the insurance company's financial ratings. In the article I cited the recent divestitures of Aviva Life & Annuity Company by Aviva plc and Lincoln Benefit Life Company by Allstate Life Insurance Company. I suggested that the problem would be alleviated if rating firms assign stand-alone ratings to the subsidiary unless the parent company provides an unlimited, permanent, and unconditional parental guarantee to the subsidiary.

Moody's Special Comment

On November 20, Moody's Investors Service, a major rating firm, issued a six-page "Special Comment" entitled "US Life Insurance: Recent Divestitures Raise Questions about Parental Commitment." Moody's cited five recent divestitures in addition to the two I cited: Sun Life Assurance Company of Canada US by Sun Life Financial, MONY Life Insurance Company and MONY Life Insurance Company of America by AXA Financial, and Commonwealth Annuity & Life Insurance Company and First Allmerica Life Insurance Company by Goldman Sachs Group. Here is the opening paragraph of the special comment:

Insurance subsidiaries' creditworthiness often benefits from implied support stemming from a unit's strategic importance to a stronger parent and/or group of other operating subsidiaries that are managed as a tightly integrated group. This implied support has been validated in practice over time and is typically reflected in higher ratings for those subsidiaries than they would merit on their own. However, recent subsidiary dispositions, most prominently in the US life insurance sector, raise new questions about the reliability of this implied support over time as parent strategies change.

An Interesting Table

The special comment includes an interesting table listing eleven U.S. life insurance companies that receive "rating uplift" from their parent companies. Here are the companies, with the number of "notches of rating uplift" in parentheses: Allianz Life Insurance Company of North America (1), Allstate Life Insurance Company (2), AXA Equitable Life Insurance Company (2), Combined Insurance Company of America (1), Great-West Life & Annuity Insurance Company (1), Hartford Life Insurance Company (1), HCC Life Insurance Company (1), Jackson National Life Insurance Company (1), John Hancock Life Insurance Company USA (1), USAA Life Insurance Company (1), and Zurich American Life Insurance Company (2).

Conclusion

In the concluding section of the special comment, Moody's says "implicit support may lack permanence" and "shifts in strategic importance of subsidiaries can result in rating transitions." However, Moody's does not mention the possibility of a subsidiary obtaining an unlimited, permanent, and unconditional guarantee from its parent. I will provide the special comment in the form of a complimentary PDF. Just send me an e-mail request for Moody's special comment on recent divestitures.

No. 10: The Danger of Announcing Dividend Interest Rates

I have expressed the opinion that announcing dividend interest rates associated with traditional participating life insurance policies is a deceptive sales practice. Also, I have expressed the opinion that announcing gross interest rates associated with universal life policies is a deceptive sales practice. For example, see "How Not To Advertise Universal Life" in the May 1984 issue of The Insurance Forum.

MassMutual's Press Release

On November 4, 2013, MassMutual issued a two-page, seven-paragraph press release entitled "MassMutual Approves Record $1.49 Billion Dividend Payout for Policyowners." The release contains three footnotes and some descriptive material entitled "About MassMutual." The lead paragraph of the release reads:

Massachusetts Mutual Life Insurance Company (MassMutual) announced today that its Board of Directors has approved the company's largest dividend payout ever in the company's history for 2014: a record payout estimated at $1.49 billion to eligible participating policyowners. The dividends to be paid in 2014 reflect a dividend interest rate¹ of 7.10 percent for eligible participating permanent life and annuity blocks of business, an increase over last year's rate of 7.00 percent.

A footnote is indicated after the words "dividend interest rate" in the above lead paragraph. The footnote reads:

The dividend interest rate is not the rate of return on the policy. Dividends consist of an investment component, a mortality component and an expense component. Therefore, dividend interest rates should not be the sole basis for comparing insurers or policy performance. Additionally, dividends for a given policy are influenced by such factors as policy series, issue age, gender, underwriting class, policy year and policy loan rate, as well as changes in experience.

The footnote says what the dividend interest rate is not, but does not say what it is. Further, saying dividend interest rates should not be the sole basis for comparisons implies they are a basis for comparisons.

A Brokerage E-mail

On November 5, a MassMutual brokerage office in Georgia sent an e-mail to producers. The subject is "MassMutual Announces 2014 Dividend." The title, in large boldface type, is "7.10% Dividend Announced." Here is the full text, except for contact information:

MassMutual has officially announced our 2014 dividend. We will payout [sic] a record $1.49 Billion. The dividend interest rate is 7.10%. Please see attachment for official news release.

The full press release, including its three footnotes, was attached to the e-mail. A recipient of the e-mail shared it with me.

Another Brokerage E-mail

On November 12, a MassMutual brokerage office in Indiana sent an e-mail to producers. The subject is "2014 Dividend Announcement," and there is no title. The third paragraph of the five-paragraph text includes this sentence: "Additionally, a 7.10% dividend interest rate¹ represents a 10 basis point increase for all participating permanent life and annuity blocks of business (from 7.00% to 7.10%)." [The boldface type is in the original.] Footnote 1 is shown at the bottom of the e-mail in exactly the form shown in the company's press release. A recipient of the e-mail shared it with me.

A Newspaper Article

On November 4, an article appeared in The Republican, a newspaper in MassMutual's home city of Springfield, based on the press release. The title is "MassMutual announces record dividend estimated at $1.49 billion." Here are the first two sentences of the text:

MassMutual Financial Group has approved the insurer's largest dividend payout in history for 2014. The record payout to eligible policy holders is estimated at $1.49 billion. The dividends to be paid in 2014 reflect a dividend interest rate of 7.1 percent for eligible policy holders, an increase over last year's rate of 7 percent flat.

The article does not mention anything that appears in footnote 1 of the press release. Thus it does not warn the reader against drawing the inference that 7.1 percent is a policy rate of return or that the figure may be used for comparison purposes.

My Inquiry and MassMutual's Statement
I contacted a MassMutual spokesman, explained my concerns, said I was planning to post an article, and requested a statement from the company to include in the article. In response, the company said:

Based on the information you shared, the initial e-mail message that you forwarded is accurate and links through appropriately to our news release with full disclosures. Regarding your latter question on a news story, although our release cited full disclosures, we cannot dictate what a news organization includes in its coverage.

Conclusion
I am more concerned about what producers say to policyholders and prospects than what MassMutual says to producers. I think producers, in their sales work, and especially in the current environment of low market interest rates, will emphasize the 7.10 percent dividend interest rate in such a way as to imply that it is the rate of return on the policy, and that it may be used for comparison purposes. Thus I think the figure will be used in such a way as to constitute a deceptive sales practice. For these reasons, it is my opinion that companies should not announce dividend interest rates, even with cautionary footnotes.

I have long argued for a rigorous system of disclosure to life insurance consumers. Among other things, the system includes information about yearly rates of return on the savings component of cash-value life insurance, and reflects the combined effect of interest, mortality, and expenses. My most complete description of the system is in the December 1975 issue of the Drake Law Review. I am making the 26-page article available as a complimentary PDF. Just e-mail me a request for the Drake Law Review article.

No. 9: The Unsealing of Some Phoenix Court Documents

I have written extensively about cost-of-insurance (COI) increases that subsidiaries of Phoenix Companies, Inc. imposed on owners of universal life policies of the type used in stranger-originated life insurance transactions. I discussed five federal court lawsuits. I also discussed investigations of the "2010 increase" by what is now the New York State Department of Financial Services (DFS), the California Department of Insurance (CDI), and the Wisconsin Office of the Commissioner of Insurance (OCI).

Phoenix rescinded the 2010 increase imposed on New York policyholders after DFS ordered the company to do so. Phoenix later imposed the "2011 increase" on New York policyholders, apparently without objection by DFS. Numerous important court documents relating to the COI increases have been sealed or heavily redacted, but I am continuing my efforts to obtain them. My June 2012 public records request to DFS remains pending. Although my public records request to CDI was denied, I obtained some documents through a public records request to OCI. See the October 2012, December 2012, and November 2013 issues of The Insurance Forum. 

The September 2011 DFS Letter to Phoenix

On September 6, 2011, Michael Maffei, chief of the life bureau of DFS, sent a three-page letter to Kathleen McGah, vice president and counsel of Phoenix. He described the results of the DFS investigation into the 2010 increase and alleged that Phoenix committed five violations of New York insurance laws. He ordered Phoenix to reduce the COI rates to the rates used prior to the 2010 increase; credit the difference, with interest, to policy values; and refrain in the future from using the "funding ratio" (the ratio of a policy's accumulated value to the policy's face amount) as a basis for COI increases. The Maffei letter remains sealed in court files, but I obtained it through my August 2013 public records request to OCI. I am making the letter available as a complimentary PDF. Just e-mail me a request for the Maffei letter. 

The Mills Reports

Robert Mills is an economist and director at Micronomics, Inc., an economic research and consulting firm. The plaintiffs' attorneys retained him to calculate damages in the event Phoenix is found liable for breach of contract as alleged in court complaints.

On September 16, 2013, Mills submitted a report based on data provided by Phoenix. On September 30, he submitted a supplemental report based on additional data provided by Phoenix. The reports were sealed pursuant to a protective order. On November 6, they were unsealed. The figures below are from the supplemental report.

Mills focused on the 2011 increase Phoenix imposed on New York policyholders. He said owners of 87 policies were affected by the 2011 increase, and 55 of them remained in force as of June 30, 2013. The total estimated COI overcharges for the 55 policies was $1,517,849 through August 30, 2013, and that figure will increase over time. Mills also estimated prejudgment interest (through March 31, 2014 on estimated overcharges through August 30, 2013) of $172,277 at a 9 percent interest rate (the statutory rate in New York) or $76,568 at a 4 percent interest rate (the rate Phoenix argues should be used).

Mills discussed 22 policies that lapsed between notification of the 2011 increase and June 30, 2013. He estimated that $7.95 million in premiums were paid into those policies. He also gave some lower damages figures based on the assumption that a small percentage of the policies lapsed for reasons other than the 2011 increase.

Two Important Unanswered Questions

After their investigations, CDI and OCI ordered Phoenix to rescind the 2010 increase imposed on policyholders in those states, but Phoenix refused to do so. Question: Why did Phoenix refuse to comply with the CDI and OCI orders to rescind the 2010 increase imposed on California and Wisconsin policyholders after having complied with the DFS order to rescind the 2010 increase imposed on New York policyholders? OCI began an administrative proceeding, the results of which will not be known for some months. To my knowledge, CDI has done nothing further.

Although DFS ordered Phoenix to rescind the 2010 increase, DFS apparently did not object to the 2011 increase. Question: How did Phoenix implement the 2011 increase on New York policyholders in such a way as to avoid the problems that caused DFS to order rescission of the 2010 increase? Hopefully the question will be answered when further court documents are unsealed or DFS complies with my public records request.

Other Documents

Numerous court documents relating to Phoenix's COI increases remain sealed, and I still await numerous documents in response to my public records request to DFS. When more documents become available, I will report on them.

No. 8: More on the Reversal of the Neasham Conviction

In No. 6, I discussed the reversal of the conviction of Glenn Neasham, a California agent who sold an Allianz annuity to Fran Schuber in 2008, just before her 84th birthday. An important issue was whether Schuber was suffering from dementia at the time of the sale. A reader expressed some thoughts about my posting, and we engaged in further correspondence. The exchange prompts me to elaborate on three points.

The $14,000 Commission

The first point relates to Neasham's $14,000 commission, which I view as an appropriation of Schuber's funds to Neasham's use. The reader asked whether I am opposed to commissions. I said I am not. I have often said commissions are essential in situations where financial services are sold rather than bought. The consumer's tendency is to procrastinate, and someone must perform what I call the "anti-procrastination function." A person has to be paid to perform that function, and commissions are a reasonable form of compensation. I have often said many people die without wills because no one is paid to perform the anti-procrastination function.

I failed to make sufficiently clear in my previous posting that the annuity in question was not a single-premium annuity, but rather a flexible-premium annuity in which the first premium was large and no further premiums were contemplated. The first-year commission rate on a flexible-premium annuity is significantly higher than the commission rate on a single-premium annuity. In other words, I think the annuity sold in this case generated an excessive commission.

Jochim's Financial Interest

The second point relates to the financial interest of Louis Jochim, Schuber's 82-year-old live-in boyfriend, who precipitated the sale by bringing Schuber to Neasham's office. The reader said the question of Jochim's financial interest in the sale had nothing to do with Neasham. In response, I said it had everything to do with Neasham. In my opinion, the purpose of the sale was to allow Jochim--rather than Schuber's son Ted--to take eventual control of Schuber's property.

As described in my June 2012 article, Jochim's plan was thwarted. After Neasham's conviction, and after Allianz refunded the entire annuity premium to Schuber with interest, Ted obtained a court order. It designated Ted the conservator of Schuber's person and property. Jochim moved out of Schuber's house, and Ted moved her to the memory loss unit of an assisted living facility.

The Suitability Issue

The third point relates to suitability of the annuity. As I said in No. 6, the fact that the California Department of Insurance had approved the annuity contract form for sale to persons up to age 85 does not mean it is necessarily suitable. The reader said he sees no problem with an annuity that provides a period certain. In my view, when a person selects an annuity consisting of a period certain and a deferred life annuity, the arrangement would not be suitable for a person in poor health because the portion of the funds going to the purchase of the deferred life annuity would be forfeited entirely if the person dies during the period certain.

No. 7: John Grisham Strikes Again

John Grisham, one of our most popular novelists, has done it again. His latest book is Sycamore Row (Doubleday, 2013). It is set in 1988 in the fictional Mississippi town of Clanton. It involves many of the characters in his first book, A Time to Kill, which was set in 1985.

Seth Hubbard, a white man in his 60s, is dying of lung cancer and commits suicide by hanging himself from an old sycamore tree. He leaves a suicide note containing instructions about his funeral, a letter to Jake Brigance, the attorney hero of Grisham's first book, and a handwritten will executed the day before he committed suicide.

The handwritten will revokes Hubbard's previous will, which was of the usual type prepared by a law firm. The handwritten will disinherits Hubbard's two adult children, their children, and his two ex-wives. It leaves the bulk of his estate, which turned out to be large, to his black housekeeper, with relatively small bequests to a church and a long lost brother. The housekeeper had been with Hubbard for three years and had cared for him during his difficult final days. The handwritten will names the executor and instructs him to appoint Jake the attorney for the estate. The letter to Jake instructs him to carry out the terms of the handwritten will "at all costs," and warns there will be a big fight. The letter to Jake includes these sentences: "The doctors have given me only weeks to live and I'm tired of the pain.... If you smoke cigarettes, take the advice of a dead man and stop immediately."

Hubbard was correct about the fight. All through the book I wondered whether the second word of the title was "row," rhyming with "grow," or whether it was "row," rhyming with "brow." At the end of the book we learn there was a row (rhyming with grow) of sycamore trees of which the hanging tree was a remnant. However, the legal war that ensued certainly qualified as a row (rhyming with brow).

I have read all of Grisham's books, and I think this one may be his best yet. It is 447 pages but is a page-turner.

No. 6: Reversal of the Neasham Conviction and Some Lessons To Be Learned from the Case

I devoted the entire eight-page June 2012 issue of The Insurance Forum to the conviction of Glenn Neasham, a California agent who sold an annuity to Fran Schuber in February 2008, shortly before her 84th birthday. The annuity was a "MasterDex 10 Annuity" or "Flexible Premium Deferred Annuity Policy with an Index Benefit" issued by Allianz Life Insurance Company of North America. An important issue in the case was whether Schuber was suffering from dementia at the time of the sale.

The Sale

The sale of the annuity occurred three days after Louis Jochim, Schuber's 82-year-old boyfriend, brought her to Neasham's office. Jochim was living with Schuber in her home, and he had bought such an annuity from Neasham several years earlier. Jochim was named the primary beneficiary of Schuber's annuity, and Jochim's daughter was named the contingent beneficiary. Schuber's son, who Jochim claimed was estranged from Schuber, was not named a beneficiary. The first-year premium for the annuity was $175,000, and no further premiums were contemplated. The funds were taken from a maturing certificate of deposit owned by Schuber.

When Jochim brought Schuber to the bank to obtain a check payable to Allianz for the $175,000 premium, bank employees were concerned that Schuber did not understand what she was doing. They issued the check, but filed a report of possible elder financial abuse. The report led to investigations by the Lake County Adult Protective Services, the California Department of Insurance (CDI), and the Lake County District Attorney.

The Trial and the Appeal

In December 2010, criminal charges were filed against Neasham and he was arrested. In October 2011, after a ten-day trial in the Lake County Superior Court, the jury found Neasham guilty of felony theft with respect to the property of an elder and dependent adult. Neasham was sentenced to 90 days in the Lake County jail. The sentence was stayed pending appeal.

Neasham appealed his conviction to the California Court of Appeal. On October 8, 2013, a three-judge panel reversed the conviction. Justice Stuart Pollak wrote the opinion. Justices William McGuiness and Matthew Jenkins concurred. (The People v. Neasham, Court of Appeal, State of California, First Appellate District, Division Three, Case No. A134873.)

My Observations

I agree with the appellate panel's finding that one of the trial court judge's jury instructions was incorrect. The instruction failed to make clear that the jury had to find not only that the defendant committed theft but also that the defendant intended to commit theft. However, I doubt the jury verdict would have been different if the instruction had been correct.

I disagree with--and am surprised by--at least six of the appellate panel's findings. First, the panel said "there was no evidence that [Neasham] appropriated [Schuber's] funds to his own use or to the benefit of anyone other than [Schuber]." Although the panel mentioned Neasham's 8 percent commission (amounting to $14,000), the panel did not consider it an appropriation of Schuber's funds to Neasham's benefit. I disagree. Also, although the panel mentioned surrender charges generally, the panel did not mention the first-year surrender charge of $19,578.

Second, the panel said there was no evidence that Neasham "made any misrepresentations or used any artifice in connection with the sale." The panel ignored the "Annuity vs. CD" form the CDI had found misleading. For a detailed description of the form, see my June 2012 article.

Third, the panel found persuasive the fact that the CDI had approved the annuity contract form for sale to persons up to age 85. Yet the fact that a contract form is approved by a regulator does not mean it is suitable. I am reminded of a case where a woman with advanced emphysema converted her $1.3 million retirement accumulation, virtually her entire estate, to a straight life annuity with no refund. Her illness resulted in her death six months later. The annuity was an approved contract form but surely was not suitable. See "An Unsuitable Life Annuity from TIAA" in the January 2010 issue of The Insurance Forum.

Fourth, the panel accepted the idea that it was appropriate for Jochim to be the primary beneficiary of the annuity and for his daughter to be the contingent beneficiary. The panel also referred to Schuber's son as "largely estranged," a characterization Jochim used. Yet Jochim had a strong financial interest in promoting the so-called estrangement.

Fifth, the panel said there was "conflicting evidence as to [Schuber's] ability to understand the nature of the transaction." Jochim and Neasham's office assistant said Schuber knew what she was doing, but I think the panel should have given much more weight to comments by the bank employees, the various investigators, and Schuber's son.

Sixth, the panel gave significant weight to the "CYA" letter Neasham had handwritten. I think the letter should have been given no weight. Although Schuber and Jochim signed it, no one else witnessed it.

Lessons To Be Learned

It is natural for insurance agents to feel relieved by the reversal of Neasham's conviction. The case attracted so much attention that the Society of Financial Service Professionals submitted an amicus brief to the appellate court on Neasham's behalf. Yet the case ruined Neasham: the CDI revoked his agent's license, the legal expenses were enormous, and he was forced to accept financial help from friends. Moreover, the case provides important lessons for agents and insurance companies who deal with elderly prospects.

First, it is important to examine a prospect's estate planning documents, such as a will, a power of attorney (POA), a living will, and the appointment of a health care representative. For example, if there had been a POA in this case, it would have been appropriate to consult with the holder of the POA. As I said in my June 2012 article, Schuber had asked a lawyer to prepare a POA years before the purchase of the annuity. However, the lawyer felt Schuber was not legally competent to execute a POA and therefore refused the assignment.

Second, it is important for the agent to be diligent about whether the prospect is cognitively impaired. It requires neither medical training nor rocket science to ask the prospect to count backward from 20 or to ask a few routine questions: What year is this? What day of the week is this? What are the names of your brothers and sisters? What is your spouse's name? What are the names of your children? How many grandchildren do you have? Who is the President of the United States? In the Schuber case, nine months after the sale, she told an investigator her husband had bought the annuity, when in fact her husband had died in the 1980s.

Third, it is important for the agent to bring the prospect's family into the picture. In this case, Jochim, who was not a family member and was not a disinterested party, seemed to be the only one present and seemed to answer all the questions for Schuber in discussions with Neasham, with the bank employees, and later with the investigators.

In short, an agent should not make a sale unless the agent is convinced that the product is suitable for the prospect. Further, the agent should not sell an annuity with life contingencies unless the agent is convinced that the prospect is not suffering from a cognitive impairment or other major illness affecting life expectancy. To sell an unsuitable product or deal with a cognitively impaired prospect is asking for trouble.