Blues’ Critics Rip Rate, Surplus Insurer: Rates Cover Rising Costs, Surplus Covers Risk

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Wayne Scull never thought he would need to use his Blue Cross of Northeastern Pennsylvania health insurance, let alone rely upon it.

But after his 2004 diabetes diagnosis, Mr. Scull, 62, of West Pittston, depends on the coverage. He pays for it out-of-pocket since retiring in 2006 from a statistician job with GUARD Insurance Group in Wilkes-Barre.

The lifelong Blue Cross subscriber is upset his premium recently rose to $351 per month from $313, and his diabetes testing supplies are more expensive. The costs represent 35 percent of his $984 monthly Social Security income.

Though Mr. Scull said he pays for his care with his life savings, he is worried he will lose it all to health spending before he dies.

"When I was younger, I thought, ‘What a waste of money this (health insurance) is, you’re never going to die,’ " Mr. Scull said. "Now, I just have the house to lose to pay for my health care."

Mr. Scull wants the state’s Blue Cross and Blue Shield companies to use more of their savings — the state-mandated surpluses built from investments, company earnings and subscriber payments — to lower rates.

Critics of the nonprofit insurers — Blue Shield operator Highmark Inc. of Pittsburgh, Capital Blue Cross in Harrisburg, Independence Blue Cross in Philadelphia and Blue Cross of Northeastern Pennsylvania in Wilkes-Barre — agree.

And despite the state’s landmark 2005 decision to set maximum surplus levels, consumer advocates still complain Pennsylvania allowed the surpluses to grow to $6.2 billion in 2007 from nearly $4 billion in 2003.

Some fear premiums across Pennsylvania will increase even more if the state insurance commissioner allows a merger between IBC and Highmark, which owns a 40 percent stake in two BCNEPA subsidiaries. The commissioner’s decision on the deal could come as soon as Jan. 27.

Compounding complaints of consumer suffering, the state estimates 1 million Pennsylvanians are uninsured, including 87,731 — or more than one in 10 — residents in seven Northeast Pennsylvania counties.

"These surplus funds are explained as being necessary to protect against insolvency, and most state laws make them tax free," said Jerry Flanagan, health policy director at California-based Consumer Watchdog. "But they’ve become great
‘slush funds’ for companies to reap profits… while patients pay more out of pocket to fund excessive surpluses. When does playing it safe become feeding at the trough?"

The Blues’ leaders counter that shrewd investments, not subscriber dollars, have driven up the surpluses for decades.

"The sense is, ‘The way you got that surplus is you overcharged us,’ but that’s not the case," said Denise Cesare, BCNEPA’s president and CEO.

The four insurers’ executives say critics are misdirecting anger about rates at the companies’ savings, which are necessary to handle the insurers’ increased risks and liabilities as the Blues grow.

They contend the size and frequency of rate increases are spurred by a fragmented, inefficient and overused U.S. health care system.

Ms. Cesare recognizes much of the public doesn’t like or understand health insurers, even the nonprofit Blues. But she says her executives and board come from the region and care deeply about it.

"The public doesn’t trust health plans so, as soon as they hear ‘Blue Cross,’ they think we want to control the world and raise health care costs," Ms. Cesare said. "If there was one dying wish I had, it would be that the public trusted us
and knew that we’re working on their behalf."

Debate re-emerges

Other recent developments have re-energized the perennial debate about the Blues’ surpluses, rate hikes and the companies’ fulfillment of state-mandated social missions.

Last month marked two years since BCNEPA announced a plan to disburse $175 million to unite local doctors and hospitals in "a new regional health system."

Besides $25 million to help start a new medical school in Scranton, the contributions were to improve local hospitals’ services and infrastructure, which BCNEPA’s leaders say would spur better, more efficient care.

Yet, it now appears the insurer will only be able to fulfill 35 percent, or $61.7 million, of its original pledge for its "Building a Healthy Future Together" initiative. BCNEPA and some of the hospitals couldn’t reach terms for the contributions or get state regulators on board with part of the plan.

Such donations infuriate critics who want more relief from rising premiums.

From 1996 to 2006, the oldest and latest data for all Pennsylvania insurers, the average resident’s annual employer-sponsored health plan payments jumped nearly 114 percent to $4,277 from $1,999, according to the federal Medical-Expenditure Panel Survey. Premiums for the average employer-sponsored family plan increased 134 percent to $11,794 from $5,037.

Plus, the average individual plan nongroup subscriber in America saw a 114 percent annual rate increase to $4,704 from $2,196 between 1999 and 2008, according to the Kaiser Family Foundation.

The four Blues’ clout compounds rate-hike worries these days. Together, they cover an estimated 84 percent of insured Pennsylvanians, or 9.58 million people, according to Boston-based consultant CRA International, which was hired by Highmark competitor Capital Blue Cross. They employ 31,210.

And, with a roughly 30 percent market share, only Capital doesn’t serve more than 50 percent of its territory. BCNEPA insures 585,000, employs nearly 1,000 and has a 59 percent market share in its 13-county area.

Growing market shares

The fact the Depression-era Blue companies — generally Crosses pay hospitals and Shields reimburse doctors — were founded to offer affordable health insurance is at the heart of the surpluses and social missions debate.

The Chicago-based Blue Cross Blue Shield Association licenses the 39 mostly nonprofit Cross and Shield plans nationally, which have grown to cover one in three Americans.

Critics say the Blues are to be benevolent organizations, and the insurers must fulfill government-mandated social missions in exchange for state tax breaks.

To do so, some think the Blues should direct most of their surpluses to lowering health insurance rates.

These surpluses represent the difference between the insurers’ total assets — premiums collected and investment earnings — and their total liabilities, or the claims and other bills they must pay.

The four Blues’ executives say they already fulfill their social missions with generous donations, including rate subsidies, and by serving as the insurers of last resort for the state.

The companies’ leaders emphasize they run businesses, not charities.

"’Nonprofit’ doesn’t mean you’re not going to make any profit, it means your mission is not guided by profit," said Gary St. Hilaire, Capital Blue Cross’ chief financial officer.

The Blues’ leaders also say their companies pay federal and some state taxes, and the millions of dollars they donate annually dwarfs state tax exemptions.

For example, BCNEPA paid roughly $26.6 million in federal taxes and $2.3 million in state premium taxes in 2007. While the insurer’s state tax exemptions last year — for premium and sales taxes on BCNEPA’s indemnity and managed-care businesses — equaled $12.3 million.

Yet, BCNEPA donated $17.4 million last year — or 40 percent more than its state tax exemptions.

Contributions included $5.2 million in community investments such as the state’s affordable adultBasic insurance program and $12.2 million to subsidize the insurer’s individual health plans.

The Blues say competitors, big private insurers such as Aetna, aren’t expected to subsidize rates. Nor are they statutorily required to fulfill social missions.

But they also don’t build multimillion-dollar surpluses. Shareholders get profits.

State reviews Blues

In 2002, with the economy soft and health premiums climbing, consumer advocates began pushing the state to question the size of the Blues’ surpluses.

The nonprofits say the savings give them access to capital they can’t get on Wall Street and protect them in downturns and disasters like Hurricane Katrina. The reserves also hedge against missed rate-setting estimates and backstop the
Blues in strings of down years.

Former state insurance commissioner Diane Koken affirmed that reasoning in her February 2005 ruling that the surpluses aren’t excessive.

She also defined maximum ranges for the surpluses, ruled each insurer must disclose its year-end surplus total every March and pare its surpluses if they grow too high.

At the end of 2007, the most recent figures, Highmark held $3.5 billion out of the state’s maximum range of $2.62 billion to $3.57 billion. Capital’s $798 million fell between its required levels of $691 million to $875 million.

Two years ago, BCNEPA’s maximum surplus ranges were between $425 million and $539 million, and its surplus was $462 million. But the insurer’s surplus has since fallen to $381 million as of October.

Back in February 2005, Pennsylvania officials also reached an unprecedented benevolent agreement with the four nonprofits to donate nearly $1 billion between 2005 and 2010 to their communities and the state health plan adultBasic.

Only Michigan and Hawaii have maximum surplus levels, according to a 2005 report by the Lewin Group consulting firm of California. And other states’ regulators say they look to Pennsylvania as a model for examining their Blues’ surpluses and setting social mission requirements.

Consumer advocates, however, still say the commonwealth allowed the Blues to keep too much in savings even as pay for their leaders’ compensation grew and subscribers endured annual rate hikes.

For example, Capital Blue Cross and BCNEPA are allowed to retain up to two-and-half times the minimum surplus levels the Blue Cross Blue Shield Association requires for licensing.

At the same time, the total compensation of Ms. Cesare, BCNEPA’s leader, is dramatically lower than other for-profit and nonprofit insurers’ chiefs, and her pay even fell $64,000 between 2006 and 2007, according to state filings. But as the insurer grew and prospered, her compensation rose 80 percent to $386,909 last year from $214,814 in 2001.

Meanwhile, BCNEPA asked the state permission in August to charge $6.7 million more for 49,000 individual plan subscribers. The request mirrors the insurer’s January 2008 double-digit percentage point rate hikes for nongroup members including students, seniors and those who earn too much for government health plans.

BCNEPA’s leaders counter they will spend more than $60 million from 2003 to 2009 to keep individual-plan subscribers’ rates from rising as quickly. Plus, the insurer contributed more than $118 million from 2001 to 2006 to blunt rate increases for those in employer-sponsored plans.

And — although comparing BCNEPA’s surplus to nonprofit Geisinger Health Plan’s savings is tricky because they are very different companies with varied risks — The Times-Tribune found the insurers have similar-sized surpluses.

Geisinger Health Plan insures 200,000 subscribers, or a third as many as BCNEPA, and a $117 million surplus as of 2007 — roughly one-third that of the local Blue’s current surplus.

Nonetheless, the Blues’ executives say the real point is their surpluses may seem large, but each insurer’s savings is reasonable because their respective surpluses cover just two to four months worth of claims.

After all the debate, Joel Ario, D.D., the state insurance commissioner who soon will decide whether to let Highmark and IBC merge, said consumers have a right to be angry about rising premiums.

Dr. Ario, however, thinks there’s plenty of blame to go around for unaffordable rates. He thinks they’re skyrocketing because the U.S. health system can’t control its underlying costs, from new technology to Americans’ increasing use of care.

Yet, Dr. Ario said, insurers "are a key leverage point in the system" to help keep costs down through methods such as not paying hospitals for follow-up care for unnecessary infections and mistakes.

Ultimately, the new president, along with federal and state lawmakers, must address the problems surrounding health care on a systemic level, Dr. Ario said.

Until then, state regulators are caught between subscribers desperate for relief and the Blues, who say they retain surpluses for solvency while increasing rates to cover rising costs.

"I spend most of my time thinking of how to keep prices for consumers, and the surpluses, down, but I also spend time worrying about keeping the companies financially solvent," Dr. Ario said. "There is a balance to be struck."

Contact the writer: [email protected]

Consumer Watchdog
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