July 22, 2010 - In the past decade, nonprofit Blue Cross and Blue Shield (BCBS) health insurers set aside billions of dollars in surplus – essentially retained profits – even as they raised premiums for consumers by as high as 20 percent annually, according to a new report by Consumers Union, the nonprofit publisher of Consumer Reports magazine.
The report, entitled "How Much is Too Much," should prompt state insurance commissioners to take a hard look at the surpluses collected by nonprofit BCBS health plans and crack down on skyrocketing rate increases, said Sondra Roberto, Staff Attorney for Consumers Union.
"These Blue plans hit consumers with big premium hikes while they've built up enormous surpluses," Roberto said. "These rate hikes could have been reduced or avoided if companies applied just a portion of their surplus to rate stability, while leaving sufficient funds for solvency protection."
Surplus is the excess of an insurance company's assets over liabilities, which plans hold to protect the company and its members from financial losses. Nonprofit BCBS plans, including community-owned charitable plans and subscriber-owned mutual plans, held more than $32 billion in surplus at the end of 2008, according to A.M. Best.
Consumers Union reviewed ten diverse nonprofit BCBS plans, and found that 7 out of 10 of the plans held more than three times the amount of surplus that regulators consider to be the minimum amount needed for solvency protection.
These surplus funds are built primarily with consumers' premium dollars, and insurers typically include a targeted contribution to surplus in rate increases. Surplus can be used to moderate premium increases, yet Consumers Union found that some financially strong BCBS plans with large surpluses have continued to seek double-digit rate increases. The report cites several examples, including:
* Blue Cross Blue Shield of Arizona raised rates for its individual market customers between 14.5 percent and 19.4 percent in 2007, 13.1 percent and 15 percent in 2008, and 8.8 percent to 18.4 percent in 2009. During that time, the company's surplus grew from $648.3 million to $717.1 million, which is more than seven times the amount that regulators consider to be the minimum necessary for solvency protection.
* Health Care Service Corporation (HCSC), doing business as Blue Cross Blue Shield of Texas, Illinois, New Mexico and Oklahoma, raised rates in Texas on some individual and family plans multiple times in a year between 2007-2010. Some Blue Cross Blue Shield of Texas rate increases exceeded 20%. In Illinois, the company filed for rate increases of 10.2% in 2007, 18% in 2008, and 8.4% in 2009 for some customers, and in New Mexico, some customers faced annual increases of more than 20% since 2007. At the time of these increases, HCSC's surplus grew from $6.1 billion in 2007 to $6.7 billion in 2009, up from $4.3 billion just four years earlier in 2005. The company's surplus is five times the minimum required for solvency protection.
"Maintaining a healthy surplus is absolutely critical, but some of these insurers have large surpluses that go well beyond the minimums that states require," Roberto said. "Insurance premiums shouldn't keep going up year after year when insurers are hoarding such huge surpluses."
Based on its findings, Consumers Union is recommending state insurance commissioners examine these surpluses, develop appropriate ranges for minimum and maximum surplus, and disapprove or reduce rate increases, particularly on individual market plans, when the company has more surplus than is necessary for solvency protection.
The report notes a few states have started to reject rate increases on the grounds that previously accumulated surpluses were sufficient to absorb any potential underwriting losses and that it is appropriate to balance profit expectations against the financial hardship the increase would impose on policyholders. Consumers Union urges all states to analyze surplus as part of their review process for rate increases.
Companies found to hold excess surplus should use that extra money to:
* Set up a "rate stabilization fund" designed to moderate premium increases going forward; or
* Refund policyholders the amount that they "overpaid" in premiums that contributed to the excessive surplus; or
* Spend the money for charitable purposes like community health programs or affordable coverage initiatives.
Consumers Union also said policymakers, insurers, consumer advocates and other industry participants should reexamine the purpose of surplus and the formulas for establishing each insurer's appropriate surplus requirements. Minimum and maximum ranges of appropriate surplus should be developed for insurers based on prevailing and projected risks and other appropriate factors, including affordability for consumers.
The BCBS plans studied in the report are: Blue Cross Blue Shield of Alabama, Blue Cross Blue Shield of Arizona, Blue Cross Blue Shield of Massachusetts, Blue Cross Blue Shield of Michigan, Excellus Blue Cross Blue Shield (New York), Blue Cross Blue Shield of North Carolina, Regence Blue Cross Blue Shield of Oregon, Blue Cross of Northeastern Pennsylvania, Blue Cross Blue Shield of Tennessee, and Blue Cross Blue Shield of Wyoming.
