Blue Shield of California, one of the largest insurers in the state, says it has enacted a new rule that will allow it to pay back its customers $180 million in excess profit.
The new rule limits its annual income to 2% of revenue and requires any profit in excess of that to be returned to customers and the community.
The rule is being implemented retroactively to 2010 when the insurer earned $315 million in profit and $10 billion in revenue.
The company had come under attack earlier this year after it said it planned to raise some of its premiums by 59%. But now, with the new rule in effect, policyholders have some real money coming back to them.
Blue Shield's customers include individual policyholders and those covered by its small and large group insurance plans.
Individual customers will receive a 30% premium credit — about $80 for individual customers and $250 for a family of four — to their October 2011 bill.
For businesses with fewer than 50 employees, the credit will be $125 for one person and about $340 for a family of four.
The insurer said employers who pay part of the premium will decide how the credit is distributed to employees.
Blue Shield said it will also give $10 million in funding to California hospitals and physician groups and the remaining $3 million to the Blue Shield of California Foundation, which provides grants to nonprofit organizations providing health care to low-income Californians.
The insurer also promised that the initiative isn't a one-time deal.
If at the end of any year, the company winds up with net income above that 2% cap — either because of lower-than-expected medical costs or higher investment income — it will return the excess income to its 3.3 million customers.
"We applaud Blue Shield of California's decision to limit their profits and give $180 million back to policyholders, physicians and hospitals. This is a great step forward in lowering costs for the people of California," Said Health and Human Services Secretary Kathleen Sebelius in a statement.
"We are pleased that Blue Shield is committed to providing better care at prices that better reflect underlying medical costs," she said.
However Blue Shield's move drew criticism from California's insurance commissioner and consumer advocacy groups.
"Why does a non-profit insurer get to decide how much excess profit it returns to customers?" said Commissioner Dave Jones. "This move is an admission of excessive profit taking by a non-profit."
Jamie Court, president of Consumer Watchdog, agreed. He said that this move was intended to show state lawmakers that insurers can self regulate.
California lawmakers are currently debating a bill that would give regulators authority to approve or deny rate hikes following Blue Shield's proposed rate hike of as much as 59% for some of its customers.
After intense backlash from customers and consumer advocacy groups, the company quickly backed away from that proposal.
Blue Shield explained its flip-flop on the proposed rate hike by saying that it was becoming a major distraction.
Blue Shield raked in about $1 billion in revenue from its individual insurance market plans and a total of about $10 billion annually from all of its insurance products last year.
"Despite the current image of health plans as culprits behind the healthcare crisis, Blue Shield is working hard on many fronts to be part of the solution," Blue Shield of California CEO Bruce Bodaken, said in a statement.
"We can't be an effective partner in the fight to make healthcare affordable, if you think we're in it to maximize profits," he said. "Blue Shield wants the same thing you do — affordable coverage for very man, woman and child in the United States."