The insurer’s surplus draws ire of hospital industry
Blue Cross & Blue Shield of Rhode Island posted a net surplus of $55.9 million in 2001, boosting its total capital reserves to $197 million – the highest level in the company’s history.
The insurer’s net was roughly the same as 2000, according to the state Department of Business Regulation, which received the insurer’s annual filing earlier this month. Last year’s gain marks the third straight year that Blue Cross has made money, following a three-year skid in the late 1990s when it lost $73.2 million.
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Despite the record reserves, Blue Cross President Ronald A. Battista said the company will continue socking money away to protect itself from events that could trigger another string of losses. For example, Battista said that without reserves to fall back on, Blue Cross could not have handled the influx of new members sparked by the closure of the Harvard-Pilgrim health plan in 1999.
Battista said the company’s goal is to have capital reserves equal to 22 percent of premiums, a figure arrived at following an analysis done for Blue Cross two years ago by two independent actuaries, Tillinghast-Towers Perrin and Milliman USA.
The current rese-rve of $197 million totals about 15 percent of the $1.3 billion in premiums Blue Cross took in last year, which means the company would like to see reserves of upwards of $300 million.
"We’ve grown our reserves, but we still have a way to go to reach the level that two independent consultants have told us we need to be financially stable," Battista said. He said Blue Cross would like to put away $45 million to $55 million a year in order to hit that 22 percent mark in 2006.
"Even if we get there, that still would only put us in the middle of the pack in terms of Blue Cross plans in other states," he said, adding that the Rhode Island plan ranks 35th out of 44 Blue Cross plans nationally for financial stability.
Company officials contend that the managed-care business is cyclical, marked by sharp fluctuations, and that future losses are inevitable. In its 63-year history in Rhode Island, Blue Cross has never posted more than six consecutive years of financial gains.
Meanwhile, UnitedHealth-care’s net income went from about $16 million in 2000 to nearly $22 million last year, despite a roughly 20 percent drop in enrollment. Its total capital reserves stood at $60 million at the end of 2001, up from just $6.5 million in 1999, according to DBR.
Officials from UnitedHealth-care could not be reached for comment.
Tom Gauthier, principle insurance analyst at DBR, said each insurer appears to be in its best financial shape ever. But because the business is cyclical, there always is room to add to capital reserves.
"The greater surplus a company has the better, we feel, because we know there is going to be a downturn in the cycle," Gauthier said. "We would like to see them capitalized as best as possible. But obviously there will be people who see it differently."
Indeed, health-care provider groups in the state say that some of the money piling up could go toward better reimbursement rates. And employers say it could be used to curb the double-digit percentage increases in health premiums that most businesses in the state face each year.
Steven R. DeToy, director of public and government affairs for the Rhode Island Medical Society, said physicians and other providers get hit on both ends: They see sharp annual increases in insurance premiums for their employees, but reimbursement rates have stayed flat for years. Meanwhile, other costs, from new technologies to malpractice insurance, continue to escalate.
"When your costs continue to go up but your reimbursement doesn’t, that really hurts," DeToy said. "You would think the health plans would be able to flatten out their premiums and use their reserves to soften the blow on small businesses."
DeToy also questions Blue Cross’s capital-reserve target of 22 percent of premiums. "We’ve never been able to get any justification or rationale for that reserve level," he said.
Edward J. Quinlan, president of the Hospital Association of Rhode Island, said he understands the need for insurers to build capital reserves. "But if your higher standard is a stronger health-care delivery system in Rhode Island, you need to look at the other components of the system.
"We’re simply asking for recognition that hospitals and other health-care providers need to be financially viable," Quinlan said. "It would make no more sense for the hospitals to be robust while the insurance plans struggle."
Rhode Island’s hospital industry has been losing money for four straight years, most recently posting a $30 million loss for fiscal 2001. While much of that has been blamed on deep cuts in Medicare reimbursement payments from the federal government, hospital administrators say the rates paid to hospitals by private insurers are too low.
A report released last year by a Congressional advisory committee shows that hospitals in Rhode Island are reimbursed by private health insurers at the lowest rate in the country, covering just 92.4 percent of the cost of providing care.
But Battista said Blue Cross has vastly improved its efficiency so that as much money as possible can be used to pay providers for services. He said just 10 percent of revenues go toward administrative expenses and only 3 percent is used to build reserves. The balance, or 87 percent, is paid to providers.
"Hospitals and providers of all types have to say, ‘Maybe I should change the way I deliver care, or maybe I can do things more efficiently,’" Battista said. "We don’t have a lot of that going on in this state."
Meanwhile, businesses continue to see health premiums escalate. Although Blue Cross said premiums went up slightly less than 10 percent on average last year, officials say they will crack the double-digit mark for 2002.
"This is a system that is completely out of control," said Scott Young, president of Precision Industries Inc. a Providence manufacturer of cutting tools for the machine-tool industry. Young said health premiums for the company’s employees have climbed 18 to 25 percent annually over the past three years. He said he now pays more than $10,000 for a single employee’s family health plan.
"We have close to a monopoly in the state when it comes to health insurance," he said. "Unless the state can bring in more competition, nothing is going to change."
