Guarding their treasure: Health plans try to hold on to financial reserves

Nonprofit health plans across the country continue to face questions as their surpluses grow to historically high levels.

By Emily Berry — Posted Oct. 27, 2008

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As nonprofit health plans holding billions of dollars in surplus ask regulators to help them, some in organized medicine have joined the call for those insurers to at least account for why their reserves need to be so high.

"They've had certain nonprofit tax exemptions, they've been allowed to accumulate money, and we feel some of this money could be put to better use for the public," said Michael Sandler, MD, president of the Michigan State Medical Society.

Michigan is among the states where the debate has been especially heated because health plans have made requests to state government to help them out. While Michigan plans have sought favorable insurance regulations, plans in Pennsylvania have asked for permission to merge and New Jersey plans have sought permission to convert to for-profit status.

Opponents of those proposals, including doctors' organizations, have pointed to these plans' multibillion-dollar reserves as evidence that they aren't working in the public interest and don't need government help.

Goldman Sachs health care industry analyst Matthew Borsch estimates the 30 largest nonprofit Blues have a collective $37.5 billion in reserves, $20.3 billion higher than required by the BlueCross BlueShield Assn. According to state filings compiled by Borsch, those 30 Blues plans more than doubled reserves from $16 billion in 2002 to $36.2 billion in 2007.

"Surplus builds up, in part, because reimbursement to physicians falls," said William Custer, PhD, director of the Center for Health Services Research at Georgia State University. But "if you try to squeeze the insurer too much, they may not be able to stay in business."

That has been health plans' argument for amassing large reserves. But critics question how likely it is that the large nonprofits would ever lose their market dominance, much less go out of business.

In most states that have a nonprofit Blues plan, that plan holds the top market share, according to the American Medical Association.

Blue Cross Blue Shield of Michigan has been trying to win support for changes to the state's market for individual insurance -- changes its competitors say would give the Blues an unfair advantage. The MSMS has joined those who want an explanation of why it needs changes to boost its bottom line, considering the plan's $2.4 billion in reserves.

However, the Michigan Blues say no explanation is needed. In a separate hearing, the plan received state approval for rate increases this year, successfully arguing that its reserves were reasonable because they fell below a state-mandated maximum.

Mid-Atlantic Blues plan CareFirst BlueCross BlueShield has a long history of having to defend its reserves, which according to filings with the National Assn. of Insurance Commissioners, sit at $1.7 billion.

Regulators and lawmakers railed against CareFirst for building up reserves when the plan was attempting to convert to a for-profit in 2003, and have since questioned the plan's adherence to its charter, which requires it to contribute to the public good.

The Maryland insurance commissioner in July cited the rapid buildup of CareFirst's reserves as one of several reasons he cut former CareFirst CEO William Jews' severance pay in half, from $18 million to $9 million.

In June the Washington, D.C., attorney general sued the plan over its failure to fulfill charitable obligations. The district council is considering a bill that would give it district authority to define reasonable reserve levels and require a nonprofit hospital or health plan to donate anything above that to the community.

CareFirst responded to the proposal in September with a statement that said in part, "The tumultuous state of the economy and the events of the last few days painfully demonstrate the importance of ensuring that companies are financially solvent."

The company argued that the surplus it holds was built mostly by premiums from members outside the district, and any requirement that the insurer diminish its reserves would be an unfair tax. The district council was set to vote on the bill in October.

There is also a history of controversy over two Blues reserves in Pennsylvania, including a 2004 court battle over whether the plans' reserve levels were public information. The court sided with the state, making those figures public.

That was followed by an agreement with the state that required each Blues plan to give some of its surplus back to the community each year through 2010, and called for a series of hearings and resulting new guidelines for what were reasonable reserves.

Now that Pennsylvania Blues plans Highmark Inc. and Independence BlueCross BlueShield are seeking a merger, opponents, including the AMA, have pointed to the two plans' combined surplus of $5 billion as evidence the plans don't need to consolidate to remain competitive.

However, company executives in public hearings have noted that the state reviewed their surpluses in 2005 and concluded they were not excessive. They said those reserves have allowed the companies to operate at a lower margin that they would have to otherwise.

Meanwhile, this year in New Jersey, where Horizon BlueCross BlueShield has applied to become a for-profit company, the plan's $1.65 billion reserves have provided ammunition for opponents.

As in Pennsylvania, scrutiny over the plan's reserves has been ongoing for several years. In 2005, some state legislators accused Horizon of hoarding money, and proposed legislation that would have pulled funds from the plan's reserves to balance the state budget.

Instead, the state Legislature passed a new premium tax that pulled $30 million from Horizon annually. The tax is among the reasons Horizon now claims it needs to convert to for-profit status. Horizon, in financial documents, called its reserve level "appropriate" to protects its members.

As Horizon's conversion, the Pennsylvania Blues' merger and CareFirst's discussions with District of Columbia government continue, the size of those plans' financial reserves is likely to come up.

"The concern is: Are we getting our money's worth from the tax advantages for nonprofits?" Custer said. "The problem is there are multiple answers that are correct."

How much is too much?

Health Care Service Corp., a mutual legal reserve company that operates Blues plans in Illinois, New Mexico, Oklahoma and Texas, had more than $6.4 billion in reserves as of June 30, spokesman Mark Lane said. A mutual legal reserve operates without a profit in the traditional sense. It is owned by its members and nominally operates for their benefit.

"Without any knowledge of the costs of medical products and treatments -- and in light of the increasing number of members that HCSC now covers -- it is easy to be misled by the size of the company's surplus," he said in a written statement. HCSC's surplus is equal to about $500 for each of its members, or enough to pay normal claims and expenses for less than three months, he said.

The surplus allows the company to invest in new technology and to maintain and improve its service to both doctors and its 12.5 million members, he said.

Although none match Health Care Service Corp., other nonprofits also have billion-dollar reserves. According to filings with the NAIC, Kaiser Permanente, which does business on both coasts and is the country's largest nonprofit health plan by membership, had $1.2 billion in reserves. The Regence Group, which own Blues plans in the Northwest, reported holding close to $2 billion.

Raw numbers can be misleading, said Howard Berman, former CEO of Lifetime Healthcare Cos., parent company of Rochester, N.Y.-based Excellus BlueCross BlueShield.

Berman is chair for the Alliance for Advancing Nonprofit Healthcare, a trade group of nonprofit health plans and hospitals.

"The bigger the plan, the greater the risk," he said. "We're seeing right now around the country, in the case of the banks, what happens when you don't have enough capital in reserve."

State regulators, industry analysts and the BlueCross BlueShield Assn. use a measurement called risk-based capital ratio to judge what a plan needs in reserve.

The RBC ratio is calculated by a formula that takes into account the size of the insurer and the level of risk the company assumes. The Blues association requires its members to keep a minimum 375% of RBC in reserve.

For example, Highmark says its reserve varies year to year between 500% to 750% of RBC, a common range for large Blues plans.

State statutes vary in what RBC ratio is required for insurers to do business, but most large nonprofits now far exceed the minimum reserves set by the association or by individual states, and they have much more in reserve than they did even five or six years ago.

However, some individual plans have reported those numbers falling. The Michigan Blues says its reserves have fallen from 850% in 2005 to 688% of RBC in 2007 because of premium prices that have not kept up with costs.

Limiting reserves

Where reserves are deemed too high, a few states have taken steps to limit nonprofit health plans' reserves, either by blocking premium increases or mandating rebates to members and spending on improving health care.

Many more states have seen proposals to limit or garnish health plan reserves fail to win enough support from state lawmakers, only to emerge again in a few years.

While Michigan has a state-mandated maximum 1,000% RBC for health plans, a few states, including Minnesota and Rhode Island, have abandoned statutory limits on reserves.

This year, Colorado lawmakers changed rules to allow the state insurance commissioner to decline a plan's request for a premium increase if a plan's reserves are deemed too large.

And the discussion continues: Massachusetts lawmakers just passed a bill calling for a study of health plan reserves, due back to the Legislature by July 2009.

Berman said he would advise anyone leading a nonprofit health plan to expect persistent questions about its reserves.

"When you look at it, it's a big number," he said. "If reserves were $1, we wouldn't have this problem."

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Stockpiling money

Though growth in health plan surpluses has slowed, reserves for 30 nonprofit Blues plans are at a record high and exceed the minimum risk-based capital ratio of 375% that the BlueCross BlueShield Assn. requires. Dollar amounts are in billions.

Capital required Actual capital RBC ratio
2002 $10.5 $16.0 569%
2003 $11.7 $20.7 662%
2004 $12.8 $25.0 735%
2005 $13.4 $28.5 795%
2006 $15.2 $33.1 815%
2007 $16.5 $36.2 824%
2008 estimate $17.2 $37.5 818%

Source: Matthew Borsch, financial analyst, Goldman Sachs

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Giving up a surplus

One of the first things to cross Marcy Morrison's desk when she became Colorado's insurance commissioner in 2007 was an application from the state's Kaiser Permanente plan, asking for continued permission to send its surplus back to its California-based parent for investing.

Morrison didn't like that idea, particularly after looking at some of the figures involved -- the company's reserves were approaching $500 million.

So began a yearlong negotiation that ended in June, with Kaiser agreeing to give its subscribers credits toward premiums in 2009 and 2010 and to invest in new facilities in Colorado. All in all, it will cost Kaiser $155 million.

"We determined, after a number of months, that that reserve was probably too large," Morrison said. She said it was a deliberate choice to be "assertive" with Kaiser, because, as a nonprofit, it has an obligation to work for the common good.

Donna Lynne, DrPH, president of Kaiser Permanente Colorado, said it was the first settlement of its kind for the insurer. She said reserves devoted to Colorado always stayed segregated from other Kaiser divisions, even though the money was in California.

"Those assets cannot be touched by my parent," she said. "What happened was we had a new governor and a new insurance commissioner, and we needed a renewal of this agreement to have California invest that money and return it to us ... that began a series of discussions we had about where we were geographically as a company, what rates we charge -- we didn't start down this path we arrived at. It was almost a year of conversations with the insurance department."

Morrison said she was unaware of any like it in other states. Colorado law on health plan reserves gives the insurance commissioner greater authority than in many other states, Morrison said.

While this agreement was unusual in its form and scope, state regulators have forced other health plans to give back excess surplus.

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