Tufts Health Plan had a tough first half of the year, with a reported net loss of $40.4 million on revenues of $1.3 billion for the six months ending June 30, including an operating loss of $51.6 million, partly offset by investment income of $11.3 million.
Almost two-thirds of the operating loss came from putting $32.1 million in a “premium deficiency reserve” as Tufts – and other Massachusetts insurers – battled with regulators who denied rate hikes they deemed excessive, newly empowered by an order from the governor.
James Roosevelt Jr., president and CEO of Tufts, answered questions about the company’s finances, the regulatory climate in the Bay State, and business in Rhode Island, where Tufts now covers about 25,000 people (out of about 737,400 companywide).
PBN: What is behind the substantial operating loss for the first half of 2010? The reserve is part of it, but premiums didn’t keep up with ongoing expenses, either.
ROOSEVELT: Our mid-year results reflect the effect of rate regulation. The market disruption caused by the Mass. Division of Insurance’s arbitrary rate capping of premiums for the small-business sector was significant. Although we settled our dispute with the DOI, the lost revenues had a direct effect on our overall results.
Fundamentally, the rates, which were held at 2009 levels, did not cover medical expense; it is medical expense that continues to be the primary driver of rising health care costs. This resulted in a loss in revenue of approximately $10 million. In addition, we recorded a premium deficiency reserve of $32 million in anticipation of the future impact of rate regulation.
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PBN: Clearly rate regulation has been a big issue for you. Do you feel your recent agreement with the state solved that problem?
ROOSEVELT: We are pleased to put the dispute behind us, but continue to believe that it was not good public policy and achieved only short-term relief. Having said that, I am optimistic by nature and it is my belief that the issue of unsustainable rising health care costs is now front and center, which is a good thing. I continue to advocate for provider collaboration so that we may achieve long-term rate relief. Until rising medical expense is addressed, however, there can be no meaningful solution.
PBN: How much are your expenses growing, and what are the main factors?
ROOSEVELT: As I said, whether in Massachusetts or Rhode Island, rising medical expense is the main factor in escalating health care costs. It is a national concern. As to our administrative expense, overall, we take a very disciplined approach. In addition, we continually benchmark our administrative spending with other plans in New England to ensure that we remain competitive, and to identify potential opportunities for cost savings.
It requires a deliberate and constant calibration to maintain administrative discipline while simultaneously making investments in the company that improve customer service, support our leadership position in quality, and fulfill regulatory obligations brought about by the implementation of national health care reform. Nevertheless, diligent oversight is our responsibility to our members.
PBN: Massachusetts just approved a small-business health insurance bill that’s a sort of hybrid of multiple bills, including legislation that Tufts had strongly supported. What do you think will be the impact of that legislation on Tufts and on your subscribers?
ROOSEVELT: In its final days of this year’s session, the Massachusetts legislature did pass a bill that addressed rising health care costs for small business. It is a first step, but it is premature at this time to speculate on its effects on mitigating rising health care costs.
PBN: How has the Rhode Island market worked out for you so far? It seems like you’ve had a hard time really growing your membership here.
ROOSEVELT: I must disagree with your characterization. We have exceeded expectations for our growth in Rhode Island. Our early goals are deliberately modest in order to achieve controlled growth. Our position as the highest-quality plan in the state is attractive to the market, and we are finding that people are responding to our quality message.
In fact, we are in the process of organizing a thought leadership panel discussion for the business community on the role of quality in reducing health care costs, because this is a relevant topic. We hope to have details in place later this month.
[Comparing] Massachusetts and Rhode Island, I would have to say that each state is unique, but our experience has been consistent. Both states are dominated by small business. Our challenge in Rhode Island, of course, is being the most recent entry into the state’s health insurance market. Therefore, we understand that the onus is on us to demonstrate our value, especially in an economy that is particularly hard on small business. That is one reason why, at this time, we have made a commitment to zero profit margin in Rhode Island. We want to make it easy for people to do business with us.
