Although $250 million might seem like a lot of money, Blue Cross & Blue Shield of Rhode Island officials say it’s not enough.
Blue Cross officials told Providence Business News last week that it finished 2002 with $250 million in its reserve fund. But the not-for-profit insurer would like to have a cushion of $387 million, or 22 percent of the $1.76 billion in total premiums that it took in during 2002. The reserve now equals 14.2 percent of those premiums.
Its present surplus is paltry when compared to its peers, Blue Cross maintains, despite nearly tripling its cash reserves during the past four years.
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“Some people like to look at us as the king of the hill, like we have so much money,” said Blue Cross spokesman Scott Fraser. “But in comparison to other Blue Cross & Blue Shield plans, we’re looked at as the weak sister.”
Fraser said the health insurer’s financial stability ranks 38th out of 42 Blue Cross plans nationally. A spokesman at the Blue Cross & Blue Shield Association in Chicago said he could not confirm that figure.
UnitedHealthcare of New England had a record-high surplus of $83 million at the end of 2002, according to its annual statement.
In 2001, two consulting firms – Tillinghast-Towers Perrin and Milliman USA – advised Blue Cross that its reserve level should be at least 20 to 30 percent of its total premiums. The recommendations came on the heels of a turbulent period from 1996 to 1998 in which Blue Cross lost $73.2 million.
State lawmakers also have taken steps in recent years to guard against health insurers going bankrupt, following the collapse of Harvard Pilgrim in 1999, which left more than 120,000 subscribers scrambling to find health coverage. The Legislature in 2000 passed a law requiring health plans to maintain a minimum surplus.
The “risk-based capital” model is a complex actuarial formula that takes into account a company’s underwriting risk, investments and a host of other financial data. The formula is the same one used by the National Association of Insurance Commissioners, which is made up of insurance regulators from all 50 states.
Blue Cross’s present $250-million reserve is nearly six times the minimum level of $44 million in surplus capital required by the state.
But state regulators are quick to point out that the minimum reserve level, called the “authorized control level,” does not represent a sufficient surplus. It simply denotes the point at which the state effectively could take control of an insurer to prevent a fiscal collapse.
“It’s always optimal to have reserves far in excess of the minimum required by the RBC (risk-based capital model),” said Joseph Torti III, superintendent of DBR’s division of insurance regulation.
The benchmarks HMOs effectively must meet are much higher. For instance, the first threshold that would “raise red flags” at the Department of Business Regulation is when an insurer’s surplus falls to 200 percent of that minimum – $88 million in the case of Blue Cross.
Indeed, if Blue Cross were to fall below that 200 percent mark, it risks losing its status as a Blue Cross plan, according to Chris Hamrick, a spokesman for the Blue Cross & Blue Shield Association.
But between that $88 million “red flag” level and Blue Cross’s target of $387 million, many employers and health-care providers see a vast gray area that has become a growing bone of contention.
Employers argue that some of the money could be used to curb the 15- to 20- percent spikes in premiums of the last few years. Meanwhile, providers say some of that money could be used to boost reimbursement rates to doctors and hospitals.
“Frankly we don’t want another insolvency here, and 22 percent (of premiums) may be a reasonable number,” said Newell Warde, executive director of the Rhode Island Medical Society. “But, given their market share, how rapidly do they have to get there?”
Blue Cross’s growing reserve works to perpetuate similar “monopoly” accusations that are often leveled at the insurer. Many businesses and providers argue that Blue Cross has no reason to use its reserves to curb spiking premium or boost reimbursement because there is limited competition in Rhode Island.
Even Gov. Don Carcieri, on a radio show on WPRO-AM earlier this month, said “there is not enough competition” in Rhode Island’s health-insurance market, citing Blue Cross’s market share of nearly 70 percent.
“It seems to me that when premiums are high and reimbursement to hospitals and doctors is low, that sounds like a good business,” Carcieri said.
But health premiums are rising at double-digit rates all over the country, not just in Rhode Island. And UnitedHealthcare’s customers are also seeing rate spikes.
Pete Evans, president of Evans Co., an East Providence manufacturer of metal components, offers a UnitedHealthcare plan to the company’s 50 full-time workers. Premiums have been rising 10 to 20 percent for the past several years, Evans said. He said he questions why some HMO reserves can’t be used to blunt price spikes that are weighing on manufacturers and other businesses.
“I think there needs to be someone to make a judgment call on whether those reserve levels are reasonable,” Evans said. While regulators are keeping closer tabs on the fiscal solvency of health insurers, there is no statutory mechanism in place to regulate whether companies are taking in too much money.
Max Powell, the former chief executive of UnitedHealthcare of New England, puts it this way: “A regulator is never going to wake up in the middle of the night screaming because a health plan has too much money in the bank.”
Marilyn Shannon McConaghy, director of the DBR, said the department’s role is to protect subscribers and payers from a health plan going bankrupt – not from rising health-care costs.
“Our job is to make sure providers and subscribers get what they have paid for,” McConaghy said.
She said the health-insurance underwriting cycle happens to be in an upward swing. But during a downturn in the mid-1990s, the combined reserves of Blue Cross and UnitedHealthcare were depleted by more than $100 million.
“They have to be cushioned enough to meet the downward part of that curve,” McConaghy said.
She also pointed out that, unlike Harvard Pilgrim, Blue Cross has no corporate parent to fall back on if it were to incur huge losses. When Harvard Pilgrim went belly up, its parent company in Massachusetts paid $15 million to cover claims – a luxury the state would not be afforded in the event of a Blue Cross bankruptcy.
“That’s not to say there would never be a time when we say ‘this is more than adequate, they’re never going to need all that money,’” McConaghy said. “But we haven’t seen it yet.”
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