Blue Cross and Blue Shield

Featured Health Business Daily Story Aug. 14, 2008

CareFirst Is Among Blues Plans Facing Renewed Scrutiny of Its Reserves and a New Threat of Oversight

Reprinted from The AIS Report on Blue Cross and Blue Shield Plans, a hard-hitting independent monthly newsletter on business strategies, products and markets, mergers and alliances, and financing of BC/BS plans.

CareFirst, Inc. in June found itself on the front lines of the longstanding conflict between insurers holding generous surpluses and community activists, regulators and politicians advocating for redirecting some of those funds to increase coverage or improve health status.

Analysts warn that such conflicts are likely to grow more common as states contend with squeezed budgets and empty coffers. Blue Cross Blue Shield of Michigan also found its surplus an issue in recent disputes over an acquisition and a proposed premium rate increase. And Washington state, New Jersey and Pennsylvania have been battlegrounds over Blues plans' allegedly excessive surpluses in recent years.

CareFirst and its Washington, D.C.-based subsidiary Group Hospitalization and Medical Services, Inc. (GHMSI) were sued June 24 by the District's interim attorney general, Peter Nickles. Meanwhile, D.C.'s city council voted to investigate the insurer's "compliance with its nonprofit mission," and gave Councilwoman Mary Cheh (D) the authority to issue subpoenas. Cheh scheduled a series of forums to solicit feedback from the community, starting July 17.

And in another example of enhanced scrutiny, Maryland's insurance commissioner cut in half the compensation package awarded to CareFirst's former CEO upon his departure from the company, citing the insurer's departure from its not-for-profit mission.

The CareFirst lawsuit and investigation "seem more politically motivated than a true regulatory threat," says Standard & Poor's financial analyst Shellie Stoddard. But, she adds, "there is a precedent [in states such as Pennsylvania] that politicians can make the claim that there's excess" as a means of requiring a certain level of charitable giving.

Stoddard predicts a "continuation of that trend" of state regulators and politicians targeting Blues plans' surpluses. She cites two drivers: state budgets and greater public awareness of health care issues. "There will be some states that are affected by the economic slowdown more than others, and perhaps that will be a rationale for raising this flag.…And there have been various state reforms and a lot of rhetoric in the presidential campaigns."

Political and regulatory scrutiny of Blues plans' surpluses has been an ongoing issue for the last three to five years, agrees A.M. Best analyst Sally Rosen, in states such as New Jersey and Washington state. "It has popped up more, particularly in light of the earnings that have been experienced in the last few years by most insurance companies," she says. "We could see some more of it as states are looking for money."

CareFirst Lawsuit Seeks Rehabilitation

Nickles' lawsuit alleges that "GHMSI built up a surplus fund for years, exceeding the level required for any legitimate charitable or nonprofit purpose." The lawsuit, filed in Washington, D.C., Superior Court, seeks a court-supervised rehabilitation of GHMSI to "rededicate the company's operations and surplus to nonprofit purposes and to its charitable, public health mission."

CareFirst responded in a prepared statement that "District residents make up only 4% of CareFirst's 3.2 million members. But our giving to and support of District-based organizations and programs is undeniably robust," the insurer contended.

And in reaction to the D.C. City Council vote, CareFirst said that given its "compliance with regulatory reporting requirements in the District, taking such a confrontational stance seems excessive and wasteful, especially since, if asked, CareFirst would supply any requested information."

Nickles contends that GHMSI's surplus level, as measured by its risk-based capital (RBC) ratio, is far too high. Regulators use the ratio to measure how much capital an insurer has relative to the requirements from underwriting, insurance, credit and other risks. The National Association of Insurance Commissioners recommends a ratio of at least 200%, while the Blue Cross and Blue Shield Association requires Blues plans to maintain a ratio of 375%, the complaint says. By contrast, GHMSI's RBC ratio was 916% at year-end 2007. And the CareFirst subsidiary's total adjusted RBC has risen from $159 million on Dec. 31, 1998, to $754 million on the same date in 2007, according to Nickles' complaint.

Meanwhile, Maryland Insurance Commissioner Ralph Tyler on July 14 ordered that CareFirst cut in half its payment to former CEO William Jews when he left the company. The insurer's board had awarded Jews nearly $18 million, but Tyler cut that payment down to $9 million and ordered the company to deduct any payments already made. In explaining his decision, Tyler cited, among other reasons, "the inconsistency between the company's statutory nonprofit mission and its proposal to pay its departing CEO $18 million."

One advocacy group thinks the payout to Washington, D.C., from intensified scrutiny of GHMSI could be big. Walter Smith, executive director of the DC Appleseed Center for Law and Justice, which has long advocated for more community support by CareFirst, likens the situation to a similar investigation of Blues plans in Pennsylvania. In that case, the state's four Blues plans underwent a 29-month review by the Pennsylvania insurance department of their allegedly "excessive" surplus and reserve levels.

The review ended in early 2005 after the governor unveiled a commitment from the four Blues plans to make annual "community reinvestments" of almost $150 million. Each insurer agreed to commit 1.3% of commercial premium revenue and 1% of Medicare and Medicaid premium revenue reported for each calendar year, minus premium taxes.

The department ultimately deemed the Blues plan's surpluses to be sufficient. Recognizing the differences among the Blues plans, the department set a different target range for each insurer's RBC ratio. The sufficient range for Highmark Inc. and Independence Blue Cross was set at 550% to 750%, and for Capital BlueCross and Blue Cross of Northeastern Pennsylvania the ratio is 750% to 950%.

Stoddard notes that despite the rulings in Pennsylvania, the ultimate effect was simply to formalize the current level of charitable giving by that state's Blues plans rather than require lower surpluses or higher levels of donation.

She adds that it could become problematic for states to require charitable giving based on revenues rather than net profits. "What's important to think about is whether they have to do that off the top line as opposed to the bottom line," she says. "In a year where they [i.e., the insurers] have very good earnings, that's certainly not a problem — but it's going to be more onerous to companies down the road if they have losses and then have to continue to finance programs." Still, Stoddard concedes, "there aren't too many Blues out there right now that don't have excess surplus."

Michigan Blues' Surplus Is at Issue

Michigan Attorney General Mike Cox (R) made the Michigan Blues plan's surplus an issue in his July 2 lawsuit against the company over its acquisition of CompWest Insurance Co. Cox alleged that the insurer illegally transferred $125 million to purchase CompWest.

In his statement, Cox alleged that "consumers, the sick and the elderly have paid higher premiums because funds that could have been used to lower their costs were diverted for this purchase," according to a prepared statement. Cox went on to say that the insurer is "a tax-exempt, charitable and benevolent institution," but that its "surplus has more than doubled in value from 2001 to 2006, increasing from $1.3 billion to $2.8 billion."

The Michigan Blues plan responded that the transaction was fully legal and that the subsidiary "obtained prior regulatory approval" for the deal. The insurer added that its "subsidiaries are a stabilizing influence on BCBSM health insurance rates…[and] help BCBSM operate on a financial margin of one-tenth of 1% on its health care business."

The insurer's surplus also became an issue in a recent rate increase request. Although Michigan's Office of Financial and Insurance Regulation ultimately denied the proposed premium increase of 24% to 42% for individual products, Insurance Commissioner Ken Ross refused to take the company's surpluses into account in his decision.

In his ruling, Ross noted that "a major issue presented in this case is the role that BCBSM['s] surplus plays in rate determinations." The policyholder who challenged the proposed rate increase asked Ross to establish a premium rate increase only after determining whether the Michigan Blues plan's surplus was excessive. Ross wrote that he does not have authority to order the insurer to use a surplus generated from profitable lines of business to subsidize the individual plans.

He added that Michigan law defines a surplus as excessive if it is five times the 200% threshold of RBC established by the National Association of Insurance Commissioners. "The record shows that BCBSM['s] surplus is considerably less [than that level]," he wrote.

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