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Read Making a Killing

home / healthcare / in the media

BestWire
May 24, 2005

by Fran Matso Lysiak, Senior Associate Editor

CALIFORNIA REGULATORS NOW LOOKING INTO BLUE CROSS OF CALIFORNIA'S RESERVES

SACRAMENTO, Calif. (BestWire) - The California Department of Managed Health Care, which already was looking into Blue Cross of California's recent rate increases on its individual policyholders, now is examining the health insurer's reserves, or "tangible net equity" -- about $1.4 billion more than what is legally required, a department spokeswoman says.

As of March 31, Blue Cross of California's tangible net equity was about $1.7 billion, while the amount required by law for Blue Cross was about $307.3 million, said Lynn Randolph, the department spokeswoman.

What prompted the department's latest inquiry into Blue Cross is that it, as well as California's other health plans, recently submitted quarterly financial statements, she said. "Now that we do see that (Blue Cross') level of reserves is high, we'd like to just get an explanation from them," Randolph said, adding that the department wants to know whether Blue Cross' reserves are "tied into" its recent merger.

Last November, the $16.5 billion merger of Indianapolis-based Anthem Inc. and Thousand Oaks, Calif.-based WellPoint Health Networks Inc. was completed, forming the new company, WellPoint Inc. (NYSE:WLP), the nation's largest health insurance company based on membership. Anthem, the corporate parent, was renamed WellPoint in the merger.

Recently, the department, which isn't authorized to set premium rates, called a May 13 meeting in Sacramento to determine whether Blue Cross "violated its promise" to the department that premiums wouldn't rise to finance its change in control.

Blue Cross had filed for a 13% "average" rate increase for Blue Cross individual and family policies with both the California Department of Insurance and the Department of Managed Health Care. The rate increases took effect March 1 (Best Wire, May 11, 2005). Blue Cross spokespeople have said the rate increases have "nothing to do with the merger or merger-related costs" but instead are driven by rising health-care costs.

In April, the Foundation for Taxpayer and Consumer Rights, a Santa Monica, Calif.-based consumer group, asked the state to investigate "double-digit rate increases" on Blue Cross customers. In a letter to state officials, the foundation cited "legally binding commitments" WellPoint made to state regulators, before receiving regulatory clearance for the merger, that an
estimated $265 million in cash bonuses for company executives and $4 billion in financing costs wouldn't be passed on via premium hikes. Blue Cross customers received rate increases of 20% to 50% this year, the foundation says.

Regarding the department's latest inquiry, Michael Chee, a spokesman for Blue Cross of California, said Blue Cross wasn't aware the department was looking into its reserves. But reserves are needed to help Blue Cross protect against unforeseeable circumstances that could affect its ability to pay claims, he said.

Blue Cross insures about 7.6 million members in California. "Roughly 8% of them consumes 75 cents of every dollar we spend in claims," Chee said. "If we were to have any significant spike in utilization... that would result in enormous claims volume and expenses."

And Blue Cross can't predict when its members may need more health-care services, he said. A natural disaster, epidemic or other "major health care crisis" could affect a large number of people at one time, he said.

Finally, Blue Cross' tangible net equity is "a very clear indicator of our long-term financial stability," Chee said. "It contributes significantly to our credit ratings, not just how investors view the company...but corporations that buy health insurance...also look toward those ratings as a form of stability."

But the foundation contends that Blue Cross, as well as Kaiser, the "two largest and most profitable" insurers, "have enough excess reserves to pay for health insurance for half of the state's uninsured residents for an entire year."

Estimating that the cost of insuring an individual for one year to be $3,000, the combined Blue Cross and Kaiser reserve is enough to provide coverage for 52%, or about 3.6 million, of California's roughly 7 million uninsured for a year, the group in a May 18 statement.

Blue Cross "does not put a lot of merit in statements by the foundation because it is rarely ever backed up or supported by facts," Chee said.

The foundation's analysis reviewed the quarterly filings of California's seven largest health plans.

The nonprofit Blue Cross and Kaiser have a combined tangible net equity of nearly $11 billion, the foundation said. State law allows the managed health care department to require that a health plan maintain a minimum level of reserves to ensure a company will remain solvent, but the department has no authority to cap the "upper amount," the foundation said. The group is
urging the department to adopt new rules requiring companies to justify overhead costs, including reserves, and to provide refunds to patients for rate increases.

The department isn't looking into any other California health insurers' reserves at this time, the department's Randolph said.

Separately, the foundation is urging California Attorney General Bill Lockyer to investigate Kaiser's nonprofit status, contending that the health insurer's reserves are $9.5 billion more than the required amount.

Attempts to reach Kaiser spokespeople weren't successful.

Blue Cross of California currently has a Best's Financial Strength Rating of A (Excellent).
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Contact the author at: fran.lysiak@ambest.com


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