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May 18, 2005

CONTACT: Jerry Flanagan, (310) 392-0522 ext. 319

Kaiser and Blue Cross Excess Reserves Enough to Provide Health Care for Half of CA's Uninsured for An Entire Year

Santa Monica, CA -- Documents filed by state health plans this week show that the two largest and most profitable insurers, Kaiser and Blue Cross, have enough excess reserves to pay for health insurance for half of the state's uninsured residents for an entire year, according to the Foundation for Taxpayer and Consumer Rights (FTCR). Blue Cross is currently under investigation by state regulators for dramatically raising rates following a recent merger, and FTCR called on the Attorney General today to investigate Kaiser's non-profit status given that the company is holding such excessive reserves.

"It is standard practice for insurers to wallow in huge cash reserves to please their Wall Street bosses and deep pocket investors. Blue Cross' and Kaiser's excessive reserves and unnecessary premium increases are symptomatic of an unregulated and uncompetitive health care market," said Jerry Flanagan of FTCR. "Regulators should require all health insurers to justify their overhead costs and premium increases like auto and home insurers already do."

Blue Cross and Kaiser have a combined excess reserve, known as Tangible Net Equity (TNE), of nearly $11 billion. State law allows the California Department of Managed Health Care (DMHC) to require that a health plan maintain a minimum level of reserve (to ensure the company will remain solvent), but the department currently has no authority to cap the upper amount. FTCR called on DMHC to adopt new rules requiring companies to justify overhead costs including reserves and to provide refunds to patients for excessive rate increases.

The analysis by FTCR reviewed quarter filings of California's 7 largest health plans (Cigna, Aetna, Blue Cross, Kaiser, Blue Shield, PacifiCare, and Health Net) which provide health coverage for over 80% of the privately insured market in California. The analysis is available at:

Estimating that the cost of insuring an individual for one year to be $3000, the combined Blue Cross and Kaiser excess reserve is sufficient to provide coverage for 52%, or 3,648,611, of the state's approximately 7 million uninsured for an entire year.

The two non-profit health plans among the big 7, Kaiser and Blue Shield, currently have reserves 13 and 5 times, respectively, their required levels. Kaiser has the largest reserve of all state health plans -- $9.5 billion more than the required amount.

"Attorney General Bill Lockyer should investigate Kaiser and Blue Shield and consider revoking their special tax status unless the companies start behaving more like non-profits," said Flanagan.

Blue Cross Merger

Prior to receiving regulatory clearance for its recent merger, Blue Cross' parent company, WellPoint, made legally binding commitments to state regulators not raise rates to pay for merger expenses which include at least $265 million in cash bonuses for company executives and $4 billion in financing costs.

The Department of Managed Health Care (DMHC) held a hearing in Sacramento last Friday to investigate rate increases following a request made by FTCR. In a letter to the DMHC sent on April 18th calling for the investigation, FTCR cited widespread complaints of rate increases of 20%-30% and more.

At the hearing, an executive for WellPoint testified that the reason the company maintains such excessive reserves is to win positive reviews from market analysts, which in turn drives up stock value.

Oversight of Rate Increases

As a result of skyrocketing profits, excessive reserves, executive salaries, administration and advertising, health insurance overhead costs have become the fastest growing component of health care spending. Recent mergers have resulted in an uncompetitive health insurance market which provides no incentives for efficiency. In California 7 companies insure over 80% of the population -- many insurers have regional monopolies.

Auto and property/casualty insurers have been required to justify rate increases to the elected Insurance Commissioner since Proposition 103 was approved by voters in 1988. Under Prop 103, the Insurance Commissioner must deny unfair, excessive or discriminatory rate increases. Though 26 states require some oversight of health insurance rate increases, no such requirements exist in California. However, the Blue Cross merger agreement gives explicit authority to the DMHC to assure that merger related costs have not been passed on enrollees.

"The Blue Cross merger provides an historic opportunity to pull the plug on unjustified rate increases -- but it should not stop here, all health insurers should required to get approval before issuing rate increases like auto and home insurers already do," said Flanagan.

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The Foundation for Taxpayer and Consumer Rights (FTCR) is California's leading nonpartisan consumer advocacy organization.

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