Thursday, August 25, 2016

No. 176: Annuity Churning Leads to Federal Prison Time for an Agent

On September 14, 2016, Gary Edward Hibbing, a former insurance agent, will report to a federal prison to begin serving a sentence for actions related to the churning of annuities. The federal charges to which he pleaded guilty are wire fraud and unlawful monetary transactions, but his insurance license had been revoked earlier for, among other things, annuity replacements described as "twisting." Where the apparent sole motive for replacements is to generate agent commissions, I have used the securities industry's word "churning" instead.

The State Charges
On March 4, 2013, the Oklahoma insurance commissioner issued an order revoking the insurance licenses of Hibbing and his wife. According to the order, the respondents had sold replacement annuities to one particular senior citizen in 2007, 2008, 2009, and 2010, and to another senior citizen in 2010. The order said the respondents had provided false information not only to the senior citizens but also to the insurance companies that had issued the annuities. The order described the scheme as "a deliberate and concerted effort to receive exorbitant upfront commissions each year at the financial expense of senior citizens." The order also said the respondents had violated various Oklahoma statutes, including the prohibition against twisting.

The Federal Charges
On February 4, 2015, a U.S. Attorney in Oklahoma filed a 24-count grand jury indictment against Hibbing. It consisted of 15 counts of wire fraud, four counts of unlawful monetary transactions, and five counts of aggravated identity theft. (See U.S.A. v. Hibbing, U.S. District Court, Northern District of Oklahoma, Case No. 15-cr-29.)

Among the companies mentioned in the indictment are Allianz Life Insurance Company of North America, PHL Variable Insurance Company, Security Benefit Life Insurance Company, Aviva Life and Annuity Company of New York, Forethought Life Insurance Company, and National Western Life Insurance Company. Among the allegations in the indictment is that Hibbing had continued to engage in his scheme even after the Oklahoma insurance commissioner had suspended his license.

On April 4, 2016, Hibbing pleaded guilty to two counts of wire fraud and two counts of unlawful monetary transactions. In exchange, the government agreed to dismiss the other 20 counts in the indictment.

On August 18, 2016, the judge sentenced Hibbing to 27 months in federal prison, followed by three years of supervised release. The judge also ordered him to pay restitution of $356,000 divided among 16 clients and $129,000 to Allianz. Hibbing waived appeal and the case was closed.

The Plea Agreement
Hibbing's plea agreement includes the statement that "The sentence imposed in federal court is without parole." By signing the agreement, he expressed his understanding of that fact.

One of the attachments to the plea agreement is Hibbing's "statement of facts." Here are paragraphs 6 and 7 of the statement:
6. Between October 2007 and March 2013, I formulated and executed a scheme to defraud and to obtain money and property from the insurance companies I represented and from my clients by making various material false representations to them:
  • I caused some clients to buy multiple annuities, year after year, by telling them falsely that doing so was to their financial advantage when actually it was not.
  • I intentionally withheld important information from some clients about the surrender fees they would have to pay to terminate one annuity contract early and invest in the next.
  • I made material false representations to the insurance companies by submitting documents that incorrectly stated my clients' reasons for terminating annuities, that my clients understood the financial costs to themselves, and that the funds being used to buy the annuities were not derived from the termination of previous annuities.
  • I intentionally hid from the insurance companies the movement of clients' funds among annuity products by using different insurance companies and by fraudulently representing that some of the products were sold by my wife, who was an insurance agent, when in fact she had nothing to do with the transactions.
7. I caused the insurance companies to send my clients the proceeds of their surrendered annuities in the form of checks. Then I caused those clients to deposit their checks into their bank accounts, as opposed to having the funds sent directly to the insurance companies issuing the new annuities. By doing so, I fraudulently masked the movement of funds among annuities from the insurance companies.
General Observations
It is not often that we hear of an insurance agent going to prison for something other than felony theft. In this case, however, the churning activity was so brazen and extensive that it warranted the involvement of federal prosecutors. The extent of churning activity in the annuity market is not known, but I fear it is widespread.

Available Material
I am offering a 28-page complimentary PDF consisting of the Oklahoma insurance commissioner's order (6 pages), the federal grand jury indictment (11 pages), Hibbing's full statement of facts in his plea agreement (5 pages), and the judge's sentencing order (6 pages). Send an email to and ask for the August 2016 package relating to the Hibbing case.


Thursday, August 18, 2016

No. 175: Long-Term Care Insurance—A Follow-Up and a Correction

In No. 174 (posted August 11, 2016) I said I have long expressed the opinion that the problem of financing long-term care (LTC) cannot be solved through the mechanism of private insurance. I offered a complimentary package that included some of my articles explaining the reasons for my opinion. Some readers asked how I think the problem of financing LTC should be addressed. Although some of the articles in the package provide hints about my answer to the question, they do not spell it out adequately. Here I undertake to answer the question more fully. Before doing so, however, I will correct something I said in No. 174 and add additional information about matters discussed there.

A Correction
In No. 174, in the discussion of "The Conseco Separation," I said incorrectly that Beechwood Re is an affiliate of CNO Financial Group. I should have said that Beechwood and CNO have a reinsurance relationship. In December 2013, subsidiaries of CNO—Washington National Insurance Company and Bankers Conseco Life Insurance Company—ceded about $500 million of LTC insurance reserve liabilities to Beechwood. See, for example, page 16 of CNO's 2015 10-K report as filed with the Securities and Exchange Commission (SEC) on February 19, 2016.

Additional Information about Beechwood
In the same section of No. 174 I mentioned Beechwood's ties to Platinum Partners, a $1.25 billion hedge fund. According to a front-page article by Rob Copeland in The Wall Street Journal on July 26, 2016, Platinum and individuals associated with it are under investigation by the SEC and federal prosecutors. Details about those ties are in an 8-K (significant event) report that CNO filed with the SEC on August 1, 2016.

Additional Information about the FIO Roundtable
In No. 174 I mentioned the "Long Term Care Insurance Roundtable" convened on August 4 by the Federal Insurance Office (FIO). I have tried unsuccessfully to obtain the statements made by any of the presenters. Some of them said it was a "closed" or "off-the-record" meeting, perhaps to encourage participants to speak freely. I have seen the July 11 email in which organizations were "invited to attend," but it did not mention the meeting being closed. I question the idea of a closed meeting on a subject of such importance to the public.

The Enactment of Medicare
In the years leading up to the enactment of Medicare in 1965, it became clear there was no way for private insurance to solve the problem of financing the medical expenses of the elderly. I have seen extensive discussions of how President Lyndon Johnson accomplished passage of the Civil Rights Act and the Voting Rights Act, but I have not seen extensive discussions of how he accomplished passage of Medicare. I have always considered enactment of Medicare a political miracle. What happened prior to 1965 with the financing of medical expenses for the elderly is precisely what is happening today with the financing of LTC. It has become clear that private insurance cannot solve the problem of financing LTC.

The Latest Newspaper Article
On August 14, 2016, a lengthy article entitled "When Your Life Insurance Gets Sick," by reporters Julie Creswell and Mary Williams Walsh, appeared on the front page of the business section of the print edition of The New York Times. The article appeared online the day before under the title "Why Some Life Insurance Premiums Are Skyrocketing."

The article focuses on low interest rates as the primary culprit in the sharp cost-of-insurance increases on many universal life policies and mentions use of "various financial maneuvers." Low interest rates are certainly an important contributor to the problem, but there are other important contributors as well. For example, the article makes no mention of the impact of stranger-originated life insurance.

Near the end of the article is a discussion of premium increases on LTC insurance. While low interest rates are certainly a problem for LTC insurance companies, there are many other serious problems. Some of them are discussed on pages 58-61 in the July 2008 issue of The Insurance Forum.

In April 2010, following enactment of the Patient Protection and Affordable Care Act (PPACA), the Kaiser Family Foundation (KFF) issued a report describing "a national voluntary insurance program known as the Community Living Assistance Services and Supports program" (CLASS Act). The CLASS Act was part of the PPACA. The program would have allowed working adults to make voluntary contributions through payroll deductions or directly. Adults with multiple functional limitations or cognitive impairments would have been eligible for benefits after paying premiums for at least five years. With the CLASS Act, the federal government "put its toe in the water" on financing LTC. The voluntary nature of the program was a major problem, because the only way to address the problem adequately is through a mandatory program. The CLASS Act was never launched, and Congress later repealed it.

General Observations
It should come as no surprise to readers of this blog and my other writings that I favor a single-payer mandatory system of universal health insurance, or what is sometimes called "Medicare for All." See, for example, No. 12 (posted December 4, 2013) and Chapter 17 of my 2015 book entitled The Insurance Forum: A Memoir.

One suggestion would be to expand the current Medicare program to include the financing of LTC. Another suggestion would be to enact a universal health insurance program that would include the financing of LTC. I recognize that neither of these suggestions can be implemented under current political conditions. However, anyone who wonders about my suggestions for addressing the problem of financing LTC now knows where I stand.

In the absence of implementation of one of the above suggestions, I have one recommendation for consumers. I think they should embark on a savings program, such as that described in the concluding section of the July 2008 Forum article.

Available Material
I am offering a 22-page complimentary PDF consisting of the invitation to the FIO roundtable (1 page), the agenda for the FIO roundtable (8 pages), the KFF report on the CLASS Act (4 pages), the July 2008 Forum article (5 pages), and the CNO 8-K report filed August 1, 2016 (4 pages, without exhibits). Email and ask for our August 2016 FIO/KFF/Belth/CNO package.


Thursday, August 11, 2016

No. 174: Long-Term Care Insurance—Another Nail in the Coffin

For 25 years I have expressed the opinion that the financing of long-term care (LTC) is a problem that cannot be solved through the mechanism of private insurance. During that period, many nails have been driven into the coffin of LTC insurance, but in recent years the number has been increasing. Here I provide background on the subject, describe a few recent developments, and discuss a July 2016 shocker and its aftermath.

An Offer from Union Fidelity Life
In 1987 I received in the mail questionable promotional material from Union Fidelity Life Insurance Company about its offer of LTC insurance. I wrote to a company spokesman expressing concern. A company executive responded by saying the insurance was in the developmental stage. He invited me to serve as a consultant, but I declined the offer. I wrote about the incident in the February 1988 issue of The Insurance Forum. That was my first article about LTC insurance.

A Study by Consumer Reports
The June 1991 issue of Consumer Reports, the monthly magazine of Consumers Union, contained a study critical of LTC insurance marketing practices and policy provisions. The study did not rate any LTC insurance policies as "excellent" or "very good." In the August 1991 issue of the Forum I explained the reasons for the policy provisions and why there can never be "excellent" or "very good" LTC insurance policies. I said the LTC exposure violates certain principles necessary for the proper functioning of private insurance, and the troublesome policy provisions are an effort to address those violations. I expressed the opinion that the problem of financing LTC cannot be solved through private insurance.

An Offer from a Genworth Predecessor
In 1997 I received in the mail a questionable promotional letter about guaranteed renewable LTC insurance offered by General Electric Capital Assurance Company, a predecessor of Genworth Financial. The letter contained this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes in your health." I wrote to the company expressing concern that the sentence, although technically correct, was deceptive. I said the letter should make clear that the company has the right to increase premiums on a class basis. The company officer who had signed the letter defended it by saying, among other things, that the company had never raised rates on existing policyholders and had an "internal commitment to rate stability." The comments are ironic in view of Genworth's huge premium increases in recent years. Later, without telling me, the company quietly removed the sentence from its promotional letters. The first of my two articles about the incident was in the May 1997 issue of the Forum.

Policy Transfers
Over the years most of the companies selling LTC insurance have gotten out of the business. In 2003, for example, Teachers Insurance and Annuity Association of America (TIAA), which caters primarily to the academic market, stopped selling LTC insurance and transferred its 46,000 existing policies to Metropolitan Life Insurance Company. Many of my academic colleagues, who had bought LTC insurance from TIAA because of its stellar reputation, were furious. The first of my three articles about the transfer was in the March/April 2004 issue of the Forum.

A California LTC Insurance Sales Letter
In 2007 California mailed a sales letter to six million citizens of the state urging them to buy LTC insurance. A front-page story in The Wall Street Journal, which discussed the sales letter, prompted me to write on the subject. The sales letter was on California stationery showing the state seal and the name of then-Governor Arnold Schwarzenegger. A private lead-development company drafted the letter, and it was accompanied by a postage-paid reply card. The lead-development company sold the reply cards to LTC insurance agents.

My article was in the July 2008 issue of the Forum. I explained, in more detail than in my August 1991 article, the reasons why the financing of LTC cannot be handled through private insurance.

The Conseco Separation
In 2008 Indiana-based Conseco, Inc., which is now CNO Financial Corp., announced a plan to separate itself from Pennsylvania-domiciled Conseco Senior Health Insurance Company (CSHI), a financially troubled LTC insurance subsidiary. Over a period of 11 years, Conseco had poured $915 million of capital into CSHI to keep the company solvent.

The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer CSHI to the trust, and rename the company Senior Health Insurance Company of Pennsylvania (SHIP). The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. Later, when he was a former commissioner, he testified during a court proceeding in the Penn Treaty case (discussed below) that he had approved the plan because Conseco had threatened to allow CSHI to become insolvent if he did not approve the plan. In other words, the commissioner handed off the CSHI problem to later commissioners. The first of my three articles about the separation was in the November 2008 issue of the Forum.

Today SHIP continues to run off the LTC business; that is, SHIP is not selling new LTC insurance policies. In February 2015, in a sign of financial trouble, and with the approval of another Pennsylvania insurance commissioner, SHIP borrowed $50 million by issuing a five-year surplus note, on which interest and principal payments must be approved in advance by the commissioner. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based CNO affiliate.

SHIP needed the infusion to bring its risk-based capital above regulatory action level. However, it is not clear how a capital-starved company in runoff can afford to pay interest and principal on a surplus note. Indeed, it appears SHIP has yet to make an interest payment. In other words, SHIP remains a problem for CNO despite the separation. Whether SHIP will remain solvent until all its business runs off remains to be seen. (Beechwood Re was mentioned in a front-page story in The Wall Street Journal on July 26, 2016, because of ties to Platinum Partners, a $1.25 billion hedge fund that is under investigation by the Securities and Exchange Commission and two sets of federal prosecutors.)

The Rehabilitation of Penn Treaty
In 2009 Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance company, became insolvent. The Pennsylvania insurance commissioner filed in state court a preliminary rehabilitation plan and said he intended to file a formal rehabilitation plan later. Instead, he filed a petition to liquidate the company. Penn Treaty's parent company intervened and opposed the liquidation petition. The case led to a bench trial, after which the judge denied the liquidation petition and ordered the commissioner to develop a rehabilitation plan. The commissioner filed an amended rehabilitation plan and later a second amended plan. Most recently the commissioner filed a liquidation petition. If approved, it would trigger coverage by state guaranty associations and assessments against other insurance companies. I wrote about the Penn Treaty case in the August 2012 issue of the Forum.

Claims Practices at Ability Insurance
Several companies in the LTC insurance business, after getting out of the business, transferred their existing LTC insurance policies to Nebraska-domiciled Ability Insurance Company. The company became the defendant in a lawsuit in federal court. The plaintiff alleged that the company's claims practices were outrageous. In April 2012, after a jury trial, the company was hit with a $12.3 million judgment, including $10 million of punitive damages. In December 2012 the Nebraska director of insurance placed the company under a supervision order. In January 2013 a private equity firm acquired the company.

I wrote about Ability in the May 2013 issue of the Forum. In the process I learned of a claims practice I had never seen before. The company tried—over the telephone on recorded calls—to persuade elderly persons who had filed claims to withdraw their claims. An investigatory firm retained by the Nebraska director discovered the practice and the recordings. The callers often provided deceptive and even false information in the calls. What was even more astounding was that callers often made their pitches to persons who did not have the claimant's power of attorney.

A Recent Development at Genworth
In February 2016 Genworth Financial announced a "strategic update" that included actions "aimed at separating and isolating" the company's LTC insurance business. One action was a "destacking plan" that would transfer ownership of a life insurance and annuity company (Genworth Life and Annuity Insurance Company, or GLAIC) from the LTC company (Genworth Life Insurance Company, or GLIC) to a holding company. Genworth said the destacking plan was subject to regulatory approvals. I discussed this and related matters in three posts—Nos. 144 (2/16/16), 154 (4/7/16), and 155 (4/13/16).

On page 97 of its 10-Q quarterly report filed with the Securities and Exchange Commission on August 3, 2016, Genworth mentioned the destacking plan. The company said:
We originally targeted to complete these actions by the middle of 2017. However, after discussions with regulators, we believe as a first step, we may only be able to distribute a portion of GLAIC to the holding company, which we expect to complete by the end of the first half of 2017. In addition, we anticipate that a further reduction in GLIC's ownership of GLAIC may occur in the future if GLIC's operating results improve.
The July 2016 Shocker
The federal Long-Term Care Security Act of 2000 requires the U.S. Office of Personnel Management (OPM) to make it possible for federal employees to buy LTC insurance that is paid for entirely by the employees. OPM created the Federal Long Term Care Insurance Program (FLTCIP). In 2002, after competitive bidding, OPM awarded a seven-year contract to a consortium of John Hancock Life & Health Insurance Company and Metropolitan Life Insurance Company. The two companies formed Long Term Care Partners (LTCP) to administer the program. In 2009, after competitive bidding, OPM awarded the second seven-year contract to Hancock alone, and LTCP became a subsidiary of Hancock. In July 2016 OPM awarded the third seven-year contract to Hancock, which was the only bidder and one of the few major companies still selling LTC insurance. OPM then announced huge premium increases.

The National Active and Retired Federal Employees Association expressed outrage, saying: "This massive, 83 percent premium increase will come as a shock to the more than 274,000 federal employees and annuitants and their spouses enrolled in the FLTCIP." The association said participants face an average premium increase of more than $1,300 per year. However, participants have options, including benefit reductions instead of premium increases.

The FIO LTC Insurance Roundtable
On August 4, 2016, in the wake of the July 2016 shocker, the Federal Insurance Office (FIO) in the U.S. Department of the Treasury convened a three-hour "Long Term Care Insurance Roundtable." I think it was a by-invitation-only session. Among the "participants" were insurance companies (Ameriprise, CNA, CNO Financial, Genworth, Guardian Life, Health Care Service Corp., John Hancock, LifeSecure, Massachusetts Mutual, New York Life, Northwestern Mutual, RiverSource, Transamerica, and UnitedHealth), insurance trade and professional organizations (American Academy of Actuaries, American Council of Life Insurers, America's Health Insurance Plans, National Association of Insurance Commissioners, and National Organization of Life and Health Guaranty Associations), state insurance regulators (Connecticut, Florida, Maryland, New York, and Pennsylvania), federal agencies (Department of the Treasury, Department of Health and Human Services, Federal Reserve Board of Governors, Office of Management and Budget, and White House National Economic Council), and nonprofit organizations (AARP, Alzheimer's Association, Bipartisan Policy Center, California Health Advocates, Center for Economic Justice, and National Council on Aging). The agenda had five parts:
  1. Welcome and Opening Remarks from Senior Officials of the U.S. Department of the Treasury. (15 minutes)
  2. Private long-term care insurance and retirement security. Presenters were from Treasury and HHS. (30 minutes)
  3. Cost shift resulting from reduction in private long-term care insurance market. Presenters were from ACLI and AHIP. (1 hour)
  4. State regulation and impact on availability of private long-term care insurance. Presenters were the Connecticut and Pennsylvania insurance commissioners and the president of NOLHGA. (1 hour)
  5. Next steps at the Federal level. The two subtitles were "Further developments of Federal policy in support of private long-term care insurance" and "Follow-up meetings." (15 minutes)
General Observations
State insurance regulators, who approve premium increases on LTC insurance policies, face a dilemma. When they approve increases requested by the companies, policyholders are furious because of the financial burden placed on them. On the other hand, when the regulators deny requested increases, companies may be forced into insolvency. Regulators often compromise by allowing part but not all of the increases, and require companies to offer policyholders the option of benefit reductions instead of increased premiums.

Several state insurance regulators and Congressional committees have held hearings on LTC insurance. I am aware of no one who has publicly expressed agreement with me that the problem of financing LTC cannot be solved by private insurance. The agenda of the August 4 FIO roundtable mentions the need to help private LTC insurance companies but fails to mention the futility of the effort.

It is not clear what would happen to the FLTCIP if, in the bidding for a fourth seven-year contract in 2023, there are no bidders because Hancock has withdrawn from the LTC insurance business and there are no other major companies still engaged in the business. In that event, I think Hancock would run off its LTC business, including the FLTCIP business, and it would no longer be possible to accept enrollment from new federal employees or old federal employees who had not enrolled previously.

Available Material
I am offering a complimentary 36-page PDF containing the documents released at the FIO roundtable (8 pages) and eight Forum articles mentioned in this post (28 pages). Email and ask for the August 2016 package relating to LTC insurance.


Monday, August 1, 2016

No. 173: Health Insurance Megamergers and the U.S. Department of Justice

On July 21, 2016, the Antitrust Division of the U.S. Department of Justice (DOJ) filed, in federal court, complaints asking the court to block two proposed health insurance megamergers. One is Anthem's acquisition of Cigna. The other is Aetna's acquisition of Humana. The complaints allege that the mergers would "substantially lessen competition" and thereby violate Section 7 of the Clayton Act. DOJ did not demand a jury trial in either case. (See U.S. v. Anthem and U.S. v. Aetna, U.S. District Court, District of Columbia, Case Nos. 1:16-cv-1493 and 1494.)

The Plaintiffs
The complaint against Anthem includes as plaintiffs the District of Columbia and 11 states: California, Colorado, Connecticut, Georgia, Iowa, Maine, Maryland, New Hampshire, New York, Tennessee, and Virginia. The complaint against Aetna includes as plaintiffs the District of Columbia and eight states: Delaware, Florida, Georgia, Illinois, Iowa, Ohio, Pennsylvania, and Virginia.

The Attorneys
DOJ is represented by attorneys in the Antitrust Division. The states are represented by their attorneys general. Anthem is represented by attorneys at White & Case. Cigna is represented by attorneys at Cadwalader, Wickersham & Taft. Aetna is represented by attorneys at Jones Day. Humana is represented by attorneys at Crowell & Moring.

The Judge
Both cases were assigned to Senior U.S. District Judge John D. Bates. President George W. Bush nominated him exactly one week before 9/11. The Senate confirmed him in December 2001. He took senior status in October 2014.

The Complaint against Anthem
The complaint against Anthem is divided into 11 parts: (1) Introduction, (2) The Defendants and the Merger, (3) Background on Commercial Health Insurance, (4) This Merger Likely Would Substantially Lessen Competition for the Sale of Health Insurance to National Accounts, (5) This Merger Likely Would Substantially Lessen Competition for the Sale of Health Insurance to Large-Group Employers, (6) This Merger Likely Would Substantially Lessen Competition in the Sale of Health Insurance on the Public Exchanges, (7) This Merger Likely Would Substantially Lessen Competition for the Purchase of Healthcare Services, (8) Absence of Countervailing Factors, (9) The Defendants Have Not Proposed a Remedy That Would Fix the Merger's Anticompetitive Effects, (10) Violation Alleged, and (11) Request for Relief. Here are the first and last paragraphs of the complaint:
1. Anthem's proposed $54 billion acquisition of Cigna would be the largest merger in the history of the health-insurance industry. It would combine two of the few remaining commercial health-insurance options for businesses and individuals in markets throughout the country. And in doing so, it would substantially lessen competition, harming millions of American consumers, as well as doctors and hospitals.
86. Plaintiffs request: (a) that Anthem's proposed acquisition of Cigna be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; (b) that the Defendants be permanently enjoined and restrained from carrying out the planned acquisition or any other transaction that would combine the two companies; (c) that Plaintiffs be awarded their costs of this action, including attorneys' fees to Plaintiff States; and (d) that Plaintiffs be awarded such other relief as the Court may deem just and proper.
The Answer by Anthem
On July 26, Anthem filed a paragraph-by-paragraph answer to the complaint. Anthem admits some points, denies some points, and in some instances "lacks knowledge or information sufficient to form a belief." Here is Anthem's answer to the first and last paragraphs of the complaint (paragraph numbers cited within the answers are those in the complaint):
1. Anthem, an insurance holding company, admits that it is proposing to acquire Cigna, another insurance holding company, valued at approximately $54.2 billion, a valuation based on the pre-announcement closing price of Anthem's common stock on the New York Stock Exchange on May 28, 2015. Anthem denies the remaining allegations in Paragraph 1. Anthem avers that the acquisition will increase competition and result in cost savings, efficiencies, and other benefits that will make healthcare more affordable and accessible to consumers. Indeed, the Complaint itself admits that Anthem today generally obtains lower rates from healthcare providers than Cigna does (Compl. ¶¶ 45, 50), and that the combined firm likely will be able to "reduce the rates" (Compl. ¶ 71) that healthcare providers charge to Anthem and Cigna customers. The Complaint also admits that "[m]ost large employers buy self-insured plans" and that each such employer retains "the risk of its employees' healthcare costs" (Compl. ¶ 16), meaning that the lower rates obtained by the combined firm will automatically flow to consumers.
86. Anthem denies that any of the requested relief is permitted or appropriate. Anthem asserts the following [seven affirmative] defenses without assuming the burden of proof on such defenses that would otherwise rest with Plaintiffs: [1] The Complaint fails to state a claim upon which relief can be granted. [2] The pricing and other aspects of the sale of insurance are regulated and overseen by federal and state laws and regulatory bodies, including, but not limited to, the Affordable Care Act and state filed rate regimes. These regulatory conditions ensure that competition will not be substantially lessened but will remain robust post-acquisition. [3] Granting the relief sought is contrary to the public interest. [4] The proposed acquisition is procompetitive. The acquisition will result in substantial efficiencies and other procompetitive effects that will directly benefit consumers in greater access to affordable healthcare. These benefits outweigh any alleged anticompetitive effects. [5] The complaint fails to adequately allege any relevant product markets or relevant geographic markets. [6] New and rapid entry, as well as expansion, by competitors will ensure that there will be no harm to competition, consumers, or consumer welfare. [7] Anthem reserves the right to assert any other defenses as they become known to Anthem. WHEREFORE, Defendant Anthem, Inc. respectfully requests that this Court deny the Plaintiffs' requested relief, dismiss this action with prejudice [permanently], and grant such other and further relief as may be proper and just.
The Complaint against Aetna
The complaint against Aetna is divided into eight parts: (1) Introduction, (2) The Defendants and the Merger, (3) This Merger Likely Would Substantially Lessen Competition for the Sale of Medicare Advantage Plans, (4) This Merger Likely Would Substantially Lessen Competition for the Sale of Health Insurance on the Public Exchanges, (5) Absence of Countervailing Factors, (6) Aetna's Proposed Remedy Will Not Fix the Merger's Anticompetitive Effects, (7) Violation Alleged, and (8) Request for Relief. Here are the first and last paragraphs of the complaint:
1. Aetna's proposed $37 billion merger with Humana would lead to higher health-insurance prices, reduced benefits, less innovation, and worse service for over a million Americans.
69. Plaintiffs request: (a) that Aetna's proposed acquisition of Humana be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; (b) that the Defendants be permanently enjoined and restrained from carrying out the planned acquisition or any other transaction that would combine the two companies; (c) that Plaintiffs be awarded their costs of this action, including attorneys' fees to Plaintiff States; and (d) that Plaintiffs be awarded such other relief as the Court may deem just and proper.
The Joint Press Release by Aetna and Humana
As of July 29, when I ended work on this post, Aetna had not yet filed in court an answer to the complaint. However, on July 21, Aetna and Humana issued a joint press release entitled "Aetna and Humana To Vigorously Defend Their Pending Transaction" and subtitled "Combined Company Would Improve Affordability, Quality and Consumer Choice." The final sentence of the first paragraph says: "A combined company is in the best interest of consumers, particularly seniors seeking affordable, high-quality Medicare Advantage plans."

The Status Conference
On July 29, Judge Bates issued an order granting Anthem's July 25 motion for an expedited status conference, and scheduling it for August 4. He also ordered that the conference be held jointly with the parties in the Aetna case, and that the parties file, by August 2, "explanations of their positions as to the timing of proceedings and whether proceedings should or should not be conducted jointly with those in [the Aetna case], up to and including trial." After the status conference, the judge probably will issue an order laying out a preliminary schedule for both cases.

General Observations
The complaints are strong. They say the four companies are among the "big five" in health insurance. The other is UnitedHealthcare. If both mergers are consummated, we would have the "big three." Sprinkled through the complaints are expressions such as "presumptively unlawful," "lessen competition," "increase concentration," "monopolist," and "monopsonist." One thing I consider worrisome is the possibility that the combined companies would have the power to negotiate reduced payments to healthcare providers. This could have the effect of making it more difficult for consumers to have access to providers, especially physicians.

The complaint against Anthem, with reference to large-group employers, has a U.S. map in paragraph 41 showing 35 metropolitan areas where more than 65 million people live. The complaint against Aetna, with reference to Medicare Advantage plans, includes an appendix listing 364 counties in 21 states where the loss of competition would be acute.

The lists of plaintiff states are interesting. Only the District of Columbia, Georgia, Iowa, and Virginia are plaintiffs in both cases. Connecticut, home of Aetna and Cigna, is a plaintiff only in the Aetna case. Indiana, home of Anthem, is not a plaintiff in either case. Kentucky, home of Humana, is not a plaintiff in either case.

Available Material
I am making available two complimentary PDFs. One is a 65-page package containing the 43-page complaint against Anthem and the 22-page answer by Anthem. The other is a 43-page package containing the 39-page complaint against Aetna and the 4-page press release by Aetna and Humana. Email Ask for the August 2016 package about Anthem and/or the August 2016 package about Aetna.


Tuesday, July 26, 2016

No. 172: Herbalife, the Federal Trade Commission, and a Wake-up Call for Primerica

Herbalife International of America, Inc. and its affiliates sell nutrition supplements and other products through a "multilevel marketing organization" of the type that is sometimes referred to as a "pyramid scheme." Herbalife's multilevel marketing organization is similar in many respects to the multilevel marketing organization that Primerica, Inc. uses to sell life insurance policies and other financial products. The Federal Trade Commission (FTC) recently completed a major investigation of Herbalife's multilevel marketing organization. I think the results of the investigation are a wake-up call for Primerica.

The FTC Complaint
On July 15, 2016, in federal court in Los Angeles, the FTC filed a "Complaint for Permanent Injunction and Other Equitable Relief" against Herbalife. The complaint alleges that Herbalife has been using deceptive acts and practices in violation of Section 5(a) of the FTC Act, which prohibits "unfair or deceptive acts or practices in or affecting commerce." (See FTC v. Herbalife, U.S. District Court, Central District of California, Case No. 2:16-cv-5217.)

The complaint has four counts: "unfair practices" (relating primarily to the compensation structure), "income misrepresentations" (primarily the advertising of substantial income opportunities), "false or unsubstantiated claims of income from retail sales," and "means and instrumentalities" (false and misleading representations). Here is the five-paragraph concluding section of the complaint:
145. In sum, Defendants' compensation structure incentivizes Distributors to purchase thousands of dollars of product to receive recruiting-based rewards and to recruit new participants who will do the same.
146. This results in the over-recruitment of participants and the oversupply of Defendants' products and exacerbates participants' difficulty in selling Herbalife products for a profit.
147. Participants in a business opportunity should have some reasonable prospect of earning profits from reselling products to consumers. However, most Herbalife participants earn little or no profit, or even lose money, from retailing Herbalife products.
148. In the absence of a viable retail-based opportunity, recruiting, rather than sales, is the natural focus of successful participants in Defendants' business opportunity.
149. Thus, participants' wholesale purchases from Herbalife are primarily a payment to participate in a business opportunity that rewards recruiting at the expense of retail sales.
The Proposed Settlement
Also on July 15 the FTC filed a "Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment" containing a proposed settlement that is subject to court approval. It is common practice for an agency to file a complaint and a proposed settlement simultaneously.

The proposed settlement provides for numerous and significant changes in the operations of Herbalife. It also provides for Herbalife to pay a $200 million monetary penalty to the FTC.

The case was assigned to U.S. District Judge Christina A. Snyder, who was nominated in 1997 by President Bill Clinton and confirmed by the Senate that year. The FTC is represented by three of its attorneys in Washington, DC, one in Seattle, and one in Los Angeles. Herbalife is represented by two attorneys associated with Sidley Austin LLP.

On the same day the FTC issued a statement and a press release about the case. The press release is entitled "Herbalife Will Restructure Its Multilevel Marketing Operations and Pay $200 Million for Consumer Redress to Settle FTC Charges." The press release is subtitled "Company Must Tie Distributor Rewards to Verifiable Retail Product Sales and Stop Misleading Consumers about Potential Earnings." Also on the same day Herbalife filed with the Securities and Exchange Commission an 8-K (significant event) report. Major media outlets reported the settlement online the same day and in print the next day.

The Ackman/Icahn Struggle
Bill Ackman is a prominent short seller. He has long described Herbalife as a pyramid scheme that is headed for collapse. Carl Icahn is a prominent investor who has a large holding of Herbalife shares, and several of his associates are on Herbalife's board of directors.

For years Ackman and Icahn have been engaged in a public dispute about Herbalife. When the proposed settlement was announced, Icahn declared victory and Herbalife shares rose sharply. Those reactions probably stemmed from the fact that the FTC decided to enter into a proposed settlement rather than try to shut down the company.

I think the question of whether the proposed settlement is a victory for Herbalife and Icahn is yet to be determined. The settlement provides for complex and extensive revisions in Herbalife's business model. I think it is too early to tell whether Herbalife would be able to maintain its current level of profitability if the settlement is approved and if Herbalife makes the major revisions that are required in the settlement.

The Primerica Angle
Primerica, Inc., the successor to the A. L. Williams organization (ALW), sells life insurance policies and other financial products through a multilevel marketing organization that ALW developed in the late 1970s. Primerica's multilevel marketing organization resembles that of Herbalife in many respects and differs in some respects.

I think the biggest difference between Herbalife and Primerica is that the FTC has been barred by statute for more than three decades from doing anything about insurance companies. Indeed, the FTC is barred by statute from even investigating insurance companies without a formal request from a Congressional committee. Here is the current language of the statute:
The Commission may exercise such authority [to conduct studies and prepare reports relating to the business of insurance] only upon receiving a request which is agreed to by a majority of the members of the Committee on Commerce, Science, and Transportation of the Senate or the Committee on Energy and Commerce of the House of Representatives. The authority to conduct any such study shall expire at the end of the Congress during which the request for such study was made. [15 U.S. Code, Section 46—Additional powers of Commission.]
In addition, the Consumer Financial Protection Bureau, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is barred from doing anything about insurance companies. See my post No. 137 dated January 4, 2016.

On the other hand, another section of the Dodd-Frank Act established the Financial Stability Oversight Council (FSOC). That section does not bar the FSOC from investigating insurance companies. Indeed, it provides for the FSOC to investigate "nonbank insurance companies." The FSOC has designated three major U.S. insurance organizations—American International Group, MetLife, and Prudential Financial—as "nonbank systemically important financial institutions." MetLife filed a lawsuit against the FSOC, a federal judge rescinded the designation, and the FSOC's appeal is ongoing. See my post No. 170 dated July 15, 2016.

Thus it appears that state insurance regulators are the only source of protection for insurance consumers against potential wrongdoing through multilevel marketing organizations in the insurance business. It remains to be seen whether the recent developments involving the FTC and Herbalife will have any influence on state insurance regulators. As far as the past is concerned, with a few minor exceptions, I am not aware of state insurance regulators showing significant concern about the potential anti-consumer aspects of the multilevel marketing organization that Primerica and its predecessor have used for many years.

Available Material
I am offering a complimentary 77-page PDF consisting of the 42-page FTC complaint against Herbalife, the 31-page settlement between the FTC and Herbalife, the three-page FTC press release about the case, and the one-page FTC statement about the case. Email and ask for the FTC/Herbalife July 2016 package.


Monday, July 11, 2016

No. 171: Cost-of-Insurance Increases—Additional Secret Information from AXA Equitable Life Becomes Public

In No. 143 (February 15, 2016) and No. 169 (June 28, 2016), I discussed a cost-of-insurance (COI) class action lawsuit that Brach Family Foundation filed against AXA Equitable Life Insurance Company on February 1, 2016. The complaint alleged breach of contract when AXA singled out certain policyholders for substantial COI increases. The case was assigned to U.S. District Judge Jesse M. Furman. (See Brach Family Foundation v. AXA Equitable Life, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)

The Amended Complaint
On May 2, as described in No. 169, a Brach attorney filed an amended complaint with secret information redacted (blacked out). On May 16, as mentioned, Judge Furman ordered the Brach attorney to refile the amended complaint without the redactions. In this follow-up I discuss additional secret information from AXA that has become public.

Opposition to the Motion to Dismiss
On May 27, as indicated in No. 169, an AXA attorney filed a motion to dismiss the amended complaint, together with supporting documents. On June 23, a Brach attorney filed an opposition to the motion to dismiss consisting of a memorandum of law and a declaration by the attorney. Both documents contained redactions. As he did earlier with the amended complaint, the Brach attorney asked Judge Furman for permission to file the documents under seal. The judge allowed the documents to be filed under seal temporarily and said this (citations omitted):
If Defendant believes that the unredacted memorandum, declaration, and exhibits should remain under seal, it shall file a letter no later than June 29, 2016, explaining why the redactions are consistent with the presumption in favor of public access to judicial documents. The Court notes again that "the mere fact that information is subject to a confidentiality agreement between litigants is not a valid basis to overcome the presumption in favor of public access to judicial documents." If Defendant does not file a letter by June 29, 2016, Plaintiff shall file the unredacted memorandum, declaration, and exhibits by June 30, 2016.
On June 30, after obtaining a one-day extension, an AXA attorney submitted a letter to Judge Furman saying: "Defendant does not request continued sealing of the unredacted documents...." On July 1, in view of the AXA attorney's letter, the judge ordered Brach to file the unredacted documents in the public court file. The Brach attorney did so that day.

The Memorandum of Law
The redactions in the memorandum of law were in one paragraph near the end of the 31-page document. Here is that paragraph, in which I show the redactions in boldface type, with italics that are in the original, with brackets that are my insertions, and with some citations omitted:
In the alternative, if for any reason the Court were to adopt AXA's proposed construction (which it should not), pursuant to FRCP 15, leave to amend should be granted. On May 13, 2016, after Plaintiff filed its [amended complaint], AXA produced a document it submitted to the NYDFS [New York Department of Financial Services] entitled "NGE Policy and Implementation Process" which provides that "The following documents AXA's policy on assessing the need for actions with respect to Non-Guaranteed Elements (NGE) for [life insurance] policies and the implementation process for such actions." The COI rate is one such NGE. This document is therefore also part of the "procedures and standards on file" with an insurance regulator that AXA's COI increase violated, even under AXA's proposed construction of that term. AXA's procedures and standards state "[w]e will not make any NGE actions to recoup past losses" and then lists certain documents by which it is clear that "recoup past losses" means that AXA's profit objective must be fixed at issuance and cannot be changed during the lifetime of the product. See NGE Policy [on page] 2 ("we will not make any changes to NGEs for any policies based upon changes in profit objectives"). The [amended complaint] already alleges that AXA has used the [COI] increase to increase its profit objectives on some policies, see, e.g., [amended complaint] ¶¶ 50-52, 74-76, and to the extent those allegations do not already suffice for Rule 8 purposes, leave to amend should be granted so that specific reference to this AXA procedure and standard document just produced by AXA, and breach thereof, should be granted.
The Declaration
The redactions in the declaration as originally filed by the Brach attorney were in four of the six paragraphs of the four-page text of the declaration. Exhibits A and B, which are attached to the declaration, originally were redacted in their entirety.

General Observations
AXA probably decided to allow public court filing of the additional secret material discussed here in order to avoid another defeat on the issue. In other words, AXA probably concluded that Judge Furman likely would order the public court filing of the unredacted material irrespective of what AXA might have said in an effort to keep the material secret.

The latest released material is extremely interesting, especially Exhibit A to the Brach attorney's declaration. The exhibit describes in detail "AXA's policy on assessing the need for actions with respect to Non-Guaranteed Elements [NGE] for [life insurance] policies and the implementation process for such actions." Each page of the exhibit is marked "Trade Secret" and "Highly Confidential." It is significant that such a document is now in the public court file.

Available Material
I am offering a complimentary 53-page PDF consisting of the two pages of the memorandum of law containing redactions, the 31-page unredacted memorandum of law, the two pages of the text of the declaration containing redactions, the four-page unredacted text of the declaration, the 11-page unredacted Exhibit A to the declaration, and the three-page unredacted Exhibit B to the declaration. Email and ask for the July 2016 Brach/AXA package.


Tuesday, July 5, 2016

No. 170: MetLife and the Financial Stability Oversight Council—The Dispute over the Company's Designation as a Nonbank Systemically Important Financial Institution

On December 18, 2014, the Financial Stability Oversight Council (FSOC) designated MetLife, Inc. a nonbank systemically important financial institution (SIFI). FSOC, a unit of the U.S. Department of the Treasury, was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The MetLife Lawsuit
On January 13, 2015, MetLife filed a lawsuit against FSOC challenging the designation of the company as a nonbank SIFI. The case was assigned to U.S. District Judge Rosemary M. Collyer. (President George W. Bush nominated her in August 2002, the Senate confirmed her in November 2002, and she assumed senior status in May 2016.)

On March 30, 2016, Judge Collyer ruled that FSOC's nonbank SIFI designation of MetLife was "arbitrary and capricious," and she rescinded the designation. The ruling raised questions about FSOC's ability to carry out its duties under the Dodd-Frank Act. (See MetLife v. FSOC, U.S. District Court for the District of Columbia, Case No. 1:15-cv-45.)

The Appellate Case
On June 16 FSOC appealed the ruling by filing an appellate brief. MetLife's reply brief is due August 15, and FSOC's answer to the reply brief is due September 9. The makeup of the panel that will hear the appeal is not yet known. (See MetLife v. FSOC, U.S. Court of Appeals for the District of Columbia Circuit, Case No. 16-5086.)

The Amicus Briefs
In the district court, several amicus briefs were filed on behalf of the parties. Among those filing amicus briefs on behalf of MetLife were the National Association of Insurance Commissioners (NAIC), the American Council of Life Insurers, and the U.S. Chamber of Commerce. Among those filing amicus briefs on behalf of FSOC were a group of professors of economics, a group of professors of administrative law, and a group of professors who specialize in insurance and financial regulation.

In the appellate court, among those filing amicus briefs on behalf of FSOC were Ben S. Bernanke and Paul A. Volcker, a group of professors of administrative law, and a group of professors who specialize in insurance and financial regulation. I am not aware of any amicus briefs filed in the appellate court on behalf of MetLife.

The NAIC Amicus Brief
On September 28, 2015, the NAIC filed its amicus brief in the district court on behalf of MetLife. Here are the NAIC's three arguments:
A. FSOC failed to adequately consider the full range of regulatory tools available to state regulators at the individual entity and group level.
B. FSOC failed to assess the risk of asset liquidation against existing regulatory authority to actively prevent a "run on the bank" scenario, including early warning through risk-based capital requirements and stays on surrender activity.
C. FSOC failed to assess the risk of MetLife's ultimate failure against the deliberate, incremental process that applies to troubled companies supervised by state insurance commissioners.
In its conclusion, the NAIC said that "FSOC acted in an arbitrary and capricious manner." The NAIC also said that FSOC "misunderstood, misconstrued, and dismissed the state regulatory system."

The Bernanke/Volcker Amicus Brief
Bernanke is Distinguished Fellow in Residence with the Economic Studies Program at the Brookings Institution. Prior to his government service, Bernanke held academic positions at Princeton University, Stanford Graduate School of Business, Massachusetts Institute of Technology, and New York University. He served as a member of the Federal Reserve Board of Governors from 2002 to 2005, Chairman of the Council of Economic Advisors in 2005, and Chairman of the Federal Reserve Board of Governors from 2006 to 2014. He is a renowned expert on the Great Depression. He played a key role in dealing with the 2007-2009 financial crisis, and described the experience in The Courage to Act, A Memoir of a Crisis and Its Aftermath (2015).

Volcker is Chairman of Volcker Alliance, Inc., a nonprofit charitable corporation launched in 2012. Its mission is to address the challenge of effective execution of public policies and to rebuild public trust in government. He served as Undersecretary of the Treasury from 1969 to 1974, President of the Federal Reserve Bank of New York from 1975 to 1979, Chairman of the Federal Reserve Board of Governors from 1979 to 1987, and Chairman of the President's Economic Recovery Advisory Board from 2009 to 2011.

On June 23, 2016, Bernanke and Volcker filed their amicus brief in the appellate court on behalf of FSOC. They laid out the situation succinctly in this paragraph:
The District Court's decision rests on three grounds. First, the court held that FSOC was required to assess the likelihood of MetLife's distress before determining whether its distress could threaten financial stability. Second, the court held that FSOC was obligated to project estimated losses of counterparties and other market participants in the event of MetLife's distress. Third, the court held that FSOC was required to conduct a cost-benefit analysis, taking into account the costs of enhanced prudential standards on MetLife. Strikingly, not a single one of these purported requirements is enshrined in the Dodd-Frank Act, or anywhere else in statute; each is inconsistent with FSOC's interpretations of its own rules and guidance; and each defies the compelling logic behind the designation process contemplated by Congress when it established FSOC.
Bernanke and Volcker then discuss each of those three points in some detail. Here is their conclusion:
Amici respectfully submit the foregoing analysis and argument for the consideration of the Court. To accept the limitation on its authority inherent in the District Court rescission decision would in practice undermine both the letter of the relevant authorizing documents and the intent of the designation process embodied in the law.
General Observations
If the appellate court affirms the district court ruling, it would be frightening to contemplate the future of our financial system. I think it is imperative that the appellate court reverse the district court ruling.

Available Material
I am offering a complimentary 46-page PDF consisting of the 19-page Bernanke/Volcker amicus brief filed in the appellate court on behalf of FSOC, and the 27-page NAIC amicus brief filed in the district court on behalf of MetLife. Email and ask for the July 2016 package relating to the MetLife/FSOC case.