A state agency’s recent ruling denying Blue Cross & Blue Shield of Rhode Island’s request for an average 16.9-percent rate increase for its direct-pay subscribers sets new rate-making standards that could force Blue Cross to change how it does business.
The decision, issued by the Department of Business Regulation on Nov. 24, says Blue Cross can no longer set its individual rates as commercial insurers do – based on actuarial calculations. Instead, it must also seek to make insurance “affordable” and “accessible.”
Beyond Cash Donations: How New Forms of Giving Are Transforming Not-for-Profit Accounting
Evolving Funding Landscape for Not-for-Profits Not-for-profit organizations are being asked to do more with less,…
Learn More
The DBR based its ruling on a new state law that defined Blue Cross’s mission as, among other things, “to provide affordable and accessible health insurance to … business owners, employees and unemployed individuals.”
The law also requires Blue Cross, as a nonprofit medical service corporation, to “employ pricing strategies that enhance the affordability of health care coverage.”
At three public hearings last month, Blue Cross officials said the direct-pay line was already running a $1.8-million deficit, and another $6.5 million would be lost next year if the rate hike was denied. Under a compromise proposed by Asst. Atty. Gen. Genevieve M. Martin, who acts as a consumer advocate on insurance, Blue Cross agreed to take a smaller rate hike, 15.8 percent, that it said would result in a $419,000 loss for 2005.
Under the compromise, effective Jan. 1, subscribers would have paid monthly rates averaging about $318 per person – from a low of $110.79 for a healthy man under 25 with the cheapest plan, BlueCHip, to a high of $852.70 for a person over 65 with the best plan.
But from the start, DBR hearing officer Elizabeth Kelleher Dwyer asked Blue Cross why the new law shouldn’t be read to require much broader concessions, which company officials vehemently denied. In fact, they argued, if they held down direct-pay rates at group customers’ expense, they’d become uncompetitive and actually reduce access to health care.
Dwyer and co-hearing officer G. Rollin Bartlett didn’t buy those arguments. Instead, they ruled that the new law precludes Blue Cross from basing its rates on “traditional insurance principles” – which would’ve just required them to be actuarily justified.
“The legislature has declared that this is not consistent with its mission,” they wrote. “Blue Cross must alter its business practices to meet the mission clearly set forth by the legislature” in the new law.
Blue Cross spokesman Scott A. Fraser said the company was “disappointed” by the ruling and was considering whether to appeal (it has until Dec. 24). Governor Donald L. Carcieri, on the other hand, praised the ruling, and notified the press as soon as it came out. Legislators, many of whom had petitioned DBR to deny the hike, also hailed the department’s action.
“I am very pleased reading the decision,” said Senate Majority Leader M. Teresa Paiva-Weed. “I think the hearing officers have well articulated the intent of the legislature to focus on the affordability issue.” Blue Cross “has not adequately addressed” that part of its mission, she added – “they haven’t done anything” about it.
The ruling cites testimony from acting Blue Cross CEO James E. Purcell that the company has aimed to make direct-pay coverage “available” to all Rhode Islanders, and “as affordable as possible – while recognizing that this is an issue which Blue Cross cannot resolve alone.” But since the new law was passed, the ruling notes, Blue Cross has taken no additional steps to enhance those products’ affordability.
The question is what qualifies as “affordable,” Martin said.
“The law, when you read, it doesn’t define what affordability is, and the DBR’s decision doesn’t say how you get there or how you know when it’s been achieved,” the insurance advocate noted. Like the DBR, she had interpreted the law as raising the bar for Blue Cross, but she had not seen it as grounds for rejecting the rate hike if it was well-justified by cost figures, as she said it was.
The DBR ruling would add “a new overlay” to the review process for which there’s no precedent and no clear standards, Martin said. “When you start talking about what it means for something to be affordable, it’s kind of a large concept to get your arms around.”
The ruling does give examples of what “affordable” is not: premiums that amount to 18 to 20 percent of a person’s gross income, as one woman described her situation; paying $7,000 a year for a plan with a $2,000 deductible, to be left with only $150 per month from a pension and Social Security; paying $312.90 per month on a $1,000 monthly salary; even paying 14 percent of one’s gross income, as state Rep. Steven M. Costantino testified in a letter to the DBR objecting to the premium hike.
Conversely, the ruling limits how far Blue Cross would have to cut back: In a footnote, it says “if evidence were produced” of a “threat to financial solvency,” it would “have to be seriously considered in conjunction with the issue of ‘affordability’” to ensure the public interest is ultimately served. The same would hold true if subsidizing direct-pay rates pushed Blue Cross’s overall corporate reserves below the one month’s supply required by state law.
And if Blue Cross could provide “substantive proof” – not “theoretical” arguments – that subsidizing direct-pay rates would “harm its ability to continue to offer group products,” the ruling says, that would also be considered.
But given that direct-pay subscribers make up just over 2 percent of Blue Cross’s clientele, and the company has more than two months’ worth of reserves, meeting those standards would likely not be easy.
Dwyer and Bartlett also pressed Blue Cross to change how it allocates administrative costs, which the insurer said made up 9.4 percent of the total $51.98 million in premiums it would collect if the requested hike was approved. Administrative costs are a particularly sore subject, they noted, because of the $2.1-million severance package given to former CEO Ronald Battista, which was “the most common complaint” at the public hearings. Blue Cross has said none of that expense was applied to the direct-pay rates, but the hearing officers argued that if the money hadn’t been spent on Battista, it “could have been used to offset costs.”
The ruling touches only briefly, on the other hand, on what Blue Cross said was the biggest factor in its request for a rate hike: dramatic increases in claims costs. Of the extra $7.53 million that the hike would generate, a lawyer for the insurer said $2.8 million was attributable to hospital reimbursements, $1.5 million to medical and surgical costs, $1.3 million to prescriptions, and $1.3 million to “other” costs, including a rise in the use of very high-cost services. Only $625,000 of the requested hike was said to be for administration.
Dwyer and Bartlett wrote that to get approval for a rate hike, Blue Cross would have to do better in documenting how various cost drivers contributed to the requested hike. They also suggested a few other measures:
Until Blue Cross has tried much harder to lower its rates, the DBR officers made it clear, it shouldn’t bother asking for another hike.
“In order to satisfy its burden of proof,” they wrote, “Blue Cross must prove that it has taken all steps to offer individual products at rates that are ‘affordable.’”
