Blues plans' reserves reach billions of dollars

A Consumers Union report highlights nonprofit plans that have large reserves but continue to ask for big rate increases.

By Emily Berry — Posted Aug. 9, 2010

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BlueCross BlueShield Assn.-affiliated plans set aside billions of dollars -- sometimes far more than required by regulators -- yet still seek double-digit percentage increases in premiums for customers, according to a report released in July by Consumers Union.

The report, "How Much is Too Much?" discusses precisely that question, particularly in light of the substantial premium increases some Blues have asked for from subscribers in recent years, and efforts by the federal government to temper those increases.

Consumers Union is the nonprofit publisher of Consumer Reports.

State insurance commissioners set minimum thresholds for health plan reserves, as does the BlueCross BlueShield Assn. Those guidelines are meant to ensure that the plans remain financially healthy. The rules, as noted in the report, were prompted in part by the insolvency of West Virginia's Blues plan two decades ago.

Given some of the plans' ostensibly charitable mission, the report was meant to bring attention to the possibility that some Blues plans may not be doing what's truly best for members, said Sondra Roberto, a Consumers Union attorney and co-author of the report.

Nonprofit Blues plans collectively held more than $32 billion in surplus at the end of 2008, according to figures from A.M. Best cited in the Consumers Union report.

Company filings with state regulators compiled by Goldman Sachs health care investment analyst Matthew Borsch showed that the nonprofit Blues plans together held $38.3 billion in reserve during the first quarter of 2010.

Collectively, according to Borsch's figures, the plans added nearly $4 billion in reserves in 2009 and have more than made up billions of dollars in losses in 2008.

Consumers Union isn't the first to raise the issue: Insurance commissioners, policymakers and some in organized medicine have pointed to health insurers' reserves as evidence that plans don't need to raise rates as much as they claim to.

The Consumers Union report examined reserves held by 10 plans and found that seven held more than three times the minimum solvency reserves set by the National Assn. of Insurance Commissioners.

For example, Blue Cross Blue Shield of Arizona's surplus grew from $648.3 million to $717.1 million, which according to the report is more than seven times the minimum set by the NAIC. In the meantime, the company raised premiums between 14.5% and 19.4% in 2007, 13.1% and 15% in 2008, and 8.8% to 18.4% in 2009. In a statement, the Arizona Blues said it sets its reserve level to meet six months' worth of members' health expenses.

Meanwhile, the report noted, Chicago-based Health Care Service Corp., which operates Blues plans in Illinois, New Mexico, Oklahoma and Texas, raised rates on its plans' individual customers in the four states, as its surplus grew from $6.1 billion in 2007 to $6.7 billion in 2009. The company's surplus is five times the minimum required for solvency protection, according to the report.

As those reserves grew, according to the report, HCSC raised rates on some BlueCross BlueShield of Texas members by more than 20%. In Illinois, the company raised rates by 10.2% in 2007, 18% in 2008, and 8.4% in 2009 for some customers, and in New Mexico, some customers faced annual increases of more than 20% since 2007.

HCSC is a mutual, not a nonprofit in the traditional sense -- it is customer-owned, so proceeds are supposed to benefit policyholders.

"Although sometimes called 'surplus' for accounting purposes, reserves are by no means extra cash or 'profits' that can be used for any purpose a company chooses," said an HCSC statement released in response to the report. "To the contrary, reserves are funds specifically set aside to cover risks and obligations for our member-owners."

Using reserves to mitigate needed premium increases is a bad idea, according to HCSC, because it would leave members vulnerable when a health emergency arose.

But not all regulators agree. In April, Oregon became the first state to allow its insurance commissioner to consider reserves when faced with a proposed rate increase. Portland, Ore.-based Regence, which operates Blues plans in Oregon, Idaho, Utah and Washington, had $1.7 billion in reserve as of the first quarter of 2010, according to Borsch's data.

The Oregon Insurance Division lowered a requested 19% rate increase that would have affected 79,000 subscribers in Oregon, instead approving a 14.7% increase. Regence's filing said that 1.9% of the increase would feed its surplus, something the division said was part of its decision to lower the rate hike. Individual subscribers saw rates go up 26% in 2008, but Regence said it still lost money on the individual market that year.

Roberto said the plans should keep healthy reserves, sufficient to cover the plans' obligations in case of a crisis -- but what constitutes reasonable reserves is still an open question.

"Can we come up with a standard that balances the need for solvency protection against the needs of consumers?" she said.

Bob Kolodgy, chief financial officer at the BlueCross BlueShield Assn., said in a statement that health plans' reserves are especially important to subscribers now.

"To suggest that reserves should be reduced now, at a time when health care reform has created an untested and uncertain environment, would be reckless," he said.

But Roberto said perhaps reform is a good reason for everyone to ask whether Blues are putting their money in the right place. "We hope that some of these new standards where more money is supposed to be going to medical claims or quality will put some restraint on surplus growth," she said.

Bruce McPherson, president and CEO of the Alliance for Advancing Nonprofit Health Care, an advocacy group based in Washington, D.C., that works on behalf of nonprofit health insurers, said it doesn't make sense to set a maximum reserve level. Too many variables go into figuring out the best reserve amount for a given health plan, and capping reserves doesn't make sense, he said. "Clearly some plans have greater needs at particular times."

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