Seeking Business, States Loosen Insurance Rules

Today, all it takes is a trip to Vermont.

Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.

Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.

Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

In other big transactions, companies including MetLife, the Hartford Financial Services Group, Swiss Reinsurance, Genworth Financial and the American International Group, among others, have refinanced life, disability and long-term-care insurance policies, as well as annuities.

For the states, attracting these insurance deals promotes business travel and creates jobs for lawyers, actuaries and other white-collar workers, who pay taxes. States have also found that they can impose modest taxes on the premiums collected by captives.

For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

And as changes to the nation’s health systems are phased in, such innovations might even help hold down the cost of insurance for consumers, much as selling pooled mortgages to investors has made buying a home less expensive.

The downside, though, is that the states are offering a refuge from other states’ insurance rules, especially the all-important ones requiring companies to have sufficient reserves. California, for one, has already chosen not to try to lure such businesses. “We are concerned about systems that usher in less robust financial security and oversight,” said Dave Jones, the California insurance commissioner.

While saying that he wanted to remain open to innovation, Mr. Jones added, “We need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

The cost of some of the deals has been considerable. In 2008, MetLife used a subsidiary in Vermont to handle a crucial $3.5 billion letter of credit, with help from Deutsche Bank, because the subsidiary was not subject to the same collateral requirements as in New York. The trade immediately bolstered MetLife’s balance sheet, helping the company to endure that year’s market turmoil without government assistance. But MetLife agreed to pay Deutsche Bank $3.5 million a year for 15 years, according to internal documents obtained by The New York Times — locking itself into high costs for years.

MetLife said its transaction was in keeping with industry rules and norms, and Deutsche Bank declined to comment.

Another issue is public oversight. State regulators normally require insurance companies to make available reams of detailed information. A policyholder can find every asset in an insurer’s investment portfolio, for instance, or the company the carrier turns to for reinsurance. But not if the insurer relies on a captive. The new state laws make the audited financial statements of the captives confidential.

 

New Federal Crackdown Confounds States That Allow Medical Marijuana

As some states seek to increase regulation but also further protect and institutionalize medical marijuana, federal prosecutors are suddenly asserting themselves, authorizing raids and sending strongly worded letters that have cast new uncertainty on an issue that has long brimmed with tension between federal and state law.

How can a drug that federal drug law says is criminal be considered medicine under state law?

“It’s weird,” said Kevin Griffin, co-founder of West Coast Wellness, a medical marijuana dispensary that opened here in February. “We’re not a pharmacy. We spent a lot of time gathering information, and this is what we came up with as the most responsible, legal way.”

Posters featuring Pink Floyd and Tupac Shakur lined the white walls of the office, in the back of a bland building just inside Seattle’s northern boundary. Glass pipes decorated a shelf. And then there was the medicine, available by “donation only,” which included less expensive “medibles” like lollipops and “pot” pies and the traditional smoked dosages at about $280 an ounce. Questions? Just ask the “budtender” — while you still can.

“I’m worried,” Mr. Griffin said. “We might lose something we put a lot of money into.”

West Coast Wellness, one of scores of new dispensaries in the state, opened just as Washington appeared ready to approve one of the nation’s most expansive medical marijuana policies, broadening its original 1998 law to include licensing growers and dispensaries. The Legislature passed the measure last month. Yet while Gov. Christine Gregoire had initially expressed support, she instead vetoed most of the bill, specifically citing new concerns about federal opposition.

“The landscape has changed,” said the governor, a Democrat.

Letters so far have gone out to governors in Arizona, Colorado, Montana, Rhode Island, Vermont and Washington, prompting some states — including Rhode Island and Montana, in addition to Washington — to revise or back away from plans to make the medical marijuana industry more mainstream.

In Washington, Ms. Gregoire asked for guidance from the state’s two United States attorneys, Mike Ormsby and Jenny Durkan. In a reply to the governor last month, they said the federal government would prosecute “vigorously against individuals and organizations that participate in unlawful manufacturing and distribution activity involving marijuana, even if such activities are permitted under state law.”

The changes have angered supporters of medical marijuana, who say the federal government is sending mixed signals, even as they argue that it has not technically changed its position.

“How they’re obviously coming across is saber rattling,” said Alison Holcomb, director of drug policy for the American Civil Liberties Union of Washington. “If there has been a shift, then somebody needs to own up to that. We have a very clear memo from 2009.”

In October 2009, the Justice Department said in a memorandum drafted by David W. Ogden, then the deputy attorney general, that it would not focus on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”

The memo did not allow farms and dispensaries or the buying and selling of marijuana. In many states that allow medical marijuana, state law does not specify that dispensaries are also legal. The Washington State Department of Health’s Web site specifically says that dispensaries are illegal, as is buying and selling marijuana. It says that people who qualify for medical marijuana are allowed to grow their own.

Yet with some states and even the federal government appearing to look the other way, farming collectives and dispensaries flourished. And law enforcement officials at various levels took notice. In Spokane, Wash., federal agents recently conducted searches of seven dispensaries, though no one was arrested.

“There didn’t seem to be a recognition that the use and sale of marijuana is against federal law,” said Mr. Ormsby, the United States attorney for the Eastern District of Washington.

When the Legislature was drafting the bill it passed in its most recent regular session, Mr. Ormsby said, “No one consulted with me about what I thought of what they were going to do and did I think it ran afoul of federal law.”

Of the state’s current medical marijuana law, he added, “We believe, of course, under federal law no part of the state law is legal.”

Mr. Ormsby and other prosecutors say they agree that the federal position has not changed, and they say they have been given no new directive from the Justice Department (Mr. Ormsby’s and Ms. Durkan’s letter to Ms. Gregoire said they had “consulted with the attorney general,” Eric H. Holder Jr.).

A spokeswoman for the Justice Department, Jessica Smith, said: “This is not a change in policy. It’s a reiteration of the guidance that was handed down in 2009 by the deputy attorney general.”

Ms. Smith noted that the 2009 memo “says definitively that distribution continues to be a federal offense.”

Some federal prosecutors say states have simply let medical marijuana get out of hand. Many supporters of medical marijuana agree.

“Seeing storefront dispensaries advertise with neon pot leaves is inconsistent with the idea most people have of medical marijuana,” said Ms. Holcomb, of the A.C.L.U. “But until you let states regulate these dispensaries, you have no way to control that.”

Some people on each side say the issue could quickly be solved if the federal government reclassified marijuana from a Schedule 1 drug, a category that includes heroin and cocaine, to a Schedule 2 drug, which includes medicines that can be prescribed.

“I think the onus is on the federal government,” said State Senator Jeanne Kohl-Welles, a Democrat from Seattle who sponsored the bill that Ms. Gregoire vetoed. “Whether the Obama administration is signaling that it’s going to be more aggressive or back off from what’s in that Ogden memo, I don’t know.”

Noting that Ms. Gregoire cited concerns that state employees could face legal action for licensing growers and dispensaries, and that prosecutors had insisted that state employees “would not be immune” from prosecution, Ms. Kohl-Welles said: “I keep trying to visualize federal agents going into a state building, the Department of Health, and hauling people off.”

She continued, “I can’t conceptualize that.”

View the original article here

The Texas Tribune: State’s Top Universities Offer New Opportunity

It laid the groundwork for a new option for high school students eager to head to college before their graduation. If students demonstrate sufficient competency in English, math, science, a social science and a foreign language on tests like the Advanced Placement exam, they can receive a certificate that can be traded for a diploma at any time.

The kinks in this new system are currently being worked out in 16 districts and the KIPP charter schools, but it is expected to become available statewide this fall.

“Kids who are ready to move on — a lot of times, unfortunately, in the current system, those kids get bored,” said Reece Blincoe, superintendent of the Brownwood I.S.D. “They are bored out of their mind. Sometimes that can even lead them going the wrong direction instead of the right direction.”

What’s striking about this new initiative is the willingness of administrators at Texas’ top public universities to work together. The criteria used to evaluate students who want to leave high school early are controlled by the University of Texas and Texas A&M University. An early departing student may earn a certificate, which does not guarantee admission to either university, but it verifies that the recipient has met the standards for a top-tier research university.

Despite shrinking budgets, and a propensity of many flagship universities across the country to separate themselves from the demands of other educational institutions in their state, administrators at U.T. and A&M say they are actively involved in all aspects of the state’s education problems. But their efforts to engage in and even drive fundamental changes — like the new certificate program — are often overlooked in the state’s ongoing debate about higher education reforms.

“We collaborate with U.T. and others on these sorts of efforts regularly,” said R. Bowen Loftin, president of Texas A&M.

Representative Mike Villarreal, Democrat of San Antonio, who in the last legislative session added the amendment to the bill by Representative Rob Eissler, Republican of The Woodlands, said the involvement of U.T. and A&M was an important piece of the plan.

“That really sets the tone for the program,” Mr. Villarreal said. “It’s not about rushing students through high school. It’s really about excellence in education.”

Harrison Keller, the vice provost for higher education policy at U.T., who has quietly steered the new certificate initiative, said it was the first program of its kind in the country. “What you don’t have anywhere else is that it’s not just aligned with but it’s governed by the expectations of your two flagship universities,” Mr. Keller said.

Three weeks ago, at a meeting of the Association of American Universities, an elite group of research universities, William Powers Jr., president of the University of Texas, met with a handful of other presidents to discuss how higher-education leaders around the country could initiate similar efforts to address the faltering education pipeline.

“Education is in the news all the time,” Mr. Powers said later. “Leading institutions of higher education — A.A.U.-type universities — ought to be part of the solutions.”

In Austin, the Texas higher-education community has been locked in a debate over how to go about reforming higher education. The focus has largely centered around the reluctance of the U.T. system to embrace certain changes in higher education tied to accountability and productivity that have been championed by Gov. Rick Perry and the Texas Public Policy Foundation, a conservative research organization.

Mr. Powers said that the perception that his institution is in a defensive position when it comes to change, “is inaccurate and I’d even say ironic.”

He does take some of the responsibility for that erroneous impression. “If you take it in the aggregate,” Mr. Powers said, “the flagship universities have not been successful in projecting that innovation in higher education is taking place at these major public flagship universities.”

David Guenthner, a spokesman for the public-policy group, said he has recently been encouraged by comments from Mr. Powers and Mr. Loftin that signal an agreement about the need for reform in higher education.

“We just need to have a discussion about what exactly that looks like and what the objectives ought to be and the path to get there,” Mr. Guenthner said.

Many of the concerns of Mr. Guenthner and the policy foundation focus more on accountability and transparency than on college readiness in secondary education, although Mr. Guenthner said he supported efforts to speed the time to get a degree. Currently, 53 percent of U.T. freshmen get a degree in four years; the figure at A&M is slightly above 50 percent.

“My view is that ‘we’ve got to thoughtfully change’ has been a hallmark of my administration,” Mr. Powers said.

Mr. Powers noted that college readiness efforts increased productivity because the university could do its job at less cost when it had better-prepared students.

U.T. and A&M are also collaborating with high schools and community colleges to develop curriculum for secondary education that will pair with the new flagship-approved certificate. “We’re saying that if you want to make dramatic progress, we need to work on these issues before the kids get to us,” Mr. Keller said.

Mr. Blincoe, the Brownwood superintendent, said he is excited about the potential of the early readiness program.

“If it catches on, I think it would have far-reaching repercussions,” he said. “You could see us in 10 years moving more toward a competency-based model instead of seat-time.”

Its potential, Mr. Blincoe said, is enhanced by the participation of the flagship universities. Still, even though the initiative is barely off the ground, it is feeling the sting of the state’s fiscal woes. As part of the Legislature’s efforts to close the state’s multibillion-dollar budget shortfall, financing for an existing scholarship for students who graduate from high school early through traditional means has been zeroed out for at least the next two years.

A bill by Mr. Villarreal to create a similar financial incentive for students who take advantage of the new “Doogie Howser” program — financed by the money school districts save by no longer having to take care of them for a full four years — also appears stymied by concern over the budget.

Such problems have a way of bringing about new solutions, Mr. Villarreal said. “We are experiencing very tight times,” he said, “and so we’re having to question assumptions about how we do business.”