Addressing a long-running controversy, Pennsylvania insurance regulators have moved to cap the amount of cash the state's four not-for-profit Blue Cross and Blue Shield plans can stash away for a rainy day.
The state insurance department this month issued a notice directing Capital Blue Cross, Independence Blue Cross, Highmark and Blue Cross of Northeastern Pennsylvania to submit detailed information about their surplus levels. Companies found to be holding excess amounts will be required to submit a plan to "fairly and equitably" refund the money to members or help subsidize coverage for the uninsured.
All states have long had some type of minimum reserve requirement to ensure that health plans remain solvent. How high those reserves must be varies by insurer depending on its revenue and other factors. But until now, only Minnesota and North Dakota had set a surplus "ceiling" that not-for-profit insurers could not exceed.
"We are seeking to use our statutory authority ... to balance the twin goals of the long-term financial health of the Blues and the Blues' social mission as charitable and benevolent institutions," said Rosanne Placey, press secretary for the Pennsylvania Insurance Department.
The action follows a fracas in which critics have accused Blues plans of stockpiling massive reserves while premiums have climbed at double-digit rates and 1.4 million Pennsylvanians remain uninsured (Sept. 9, 2002, p. 30). All four plans-which hold a combined surplus of about $3.6 billion-face class-action lawsuits accusing them of ignoring their charitable missions and asking them to "disgorge" their surpluses. Last month, regulators denied the plans' requests to raise rates for individual members by up to 20%, saying the Blues hadn't adequately demonstrated how they were using their surpluses to temper premiums.
The insurers, however, have long argued that maintaining substantial surpluses is crucial to assuring providers and members that money will be available to pay claims. Together, the four plans cover 7.2 million members, or 58% of the state's population.
A number of states have begun to scrutinize health plans' reserves in recent years as insurers have continued to hike premiums even as their profits have soared. Combined earnings at the nation's 42 Blues plans-the bulk of which are still not-for-profit-climbed 43% in 2002 to $4 billion, after a 40% jump in profits to $2.8 billion a year earlier. And HMOs nationwide enjoyed a combined profit of $2.3 billion in the first quarter of 2003, up 60% from the same period a year earlier, according to a report released last week by Weiss Ratings.
In Pennsylvania, insurance regulators will use a "risk-based capital" scoring method to examine the Blues' reserves. The formula helps establish an insurer's capital requirements by taking into account the risks associated with its specific operations.
Under the new rule, Pennsylvania's Blues plans have until April 15 to disclose their reserve level and the rationale behind it. The companies also will have to detail how much of their reserves they spent for charitable purposes over the past two years, and how they plan to use their reserves charitably through 2006.
For Independence, the rule came as a welcome vindication. Philadelphia-based Independence, the state's largest insurer with 3.6 million members, recently reported a risk-based capital ratio of 380%, at the low end of regulators' recommended range. Its surplus stood at $707 million at the end of 2002.
The rule could force continued changes at Blue Cross of Northeastern Pennsylvania, Wilkes-Barre, which still has a risk-based capital ratio of about 900%, well above the recommended range. Since voluntarily launching a "long-term surplus management plan" in 2001, the 600,000-member insurer has reduced its reserves by about $100 million, with most of the money used to hold down premium increases, said company spokesman Gerry Snyder.
Harrisburg-based Capital Blue Cross has also reduced its reserves by about $100 million. Its cash reserves now stand at about $500 million, but its risk-based capital ratio is still "somewhat above" 650%, said Capital President and Chief Executive Officer James Mead. He said that while a risk-based capital range makes sense, 650% seemed too low for a maximum, given the volatility of the insurance industry.