Posted on Sun, Feb. 24, 2002
Cash-rich insurers sit on billions in surplus
Three big Blue Cross firms in Pa. have enormous reserves but keep raising rates. Now they are being sued.
By L. Stuart Ditzen
Inquirer Staff Writer
Three giant Blue Cross and Blue Shield companies that provide health insurance to more than half the population of Pennsylvania have stockpiled huge cash surpluses in recent years while charging subscribers higher and higher premium rates.
The companies, all nonprofit organizations, have far in excess of legal requirements. Those surpluses could have been reduced by $2.2 billion last year and still would have met minimum reserve levels set by the Pennsylvania Insurance Department.
The companies - Independence Blue Cross of Philadelphia, Highmark of Camp Hill and Pittsburgh, and Capital Blue Cross of Harrisburg - have been accused in a series of class-action lawsuits of violating their nonprofit charters in building up the surpluses. The law puts no limit on how large the surpluses can grow.
"They basically say, 'We're going to accumulate as much as we want,' " said Gregg W. Mackuse, a lawyer suing Independence Blue Cross. "How does that fit with the word nonprofit?"
The Blues say building their surpluses is a sound business practice. As medical costs rise, the companies say, large surpluses assure subscribers that their medical claims will be paid.
At issue is whether the Blues, as the companies are known, should be using excess surpluses to reduce subscriber premiums and provide low-cost health coverage for the uninsured. More than 1.1 million Pennsylvanians have no health insurance at all.
Collectively, the three Blues provide health insurance to 6.6 million Pennsylvanians, or 54 percent of the state's 12.2 million population.
Lawsuits pending against the Blues in Bucks and York Counties contend that the companies have amassed their surpluses at the expense of their subscribers.
The three companies have raised annual premium rates an average of 10 to 15 percent in recent years, said Geoff Dunaway, director of the Insurance Department's accident and health insurance bureau.
More increases are expected this year. The Blues' premium increases have followed a national trend as Americans have sought more and more health service and the cost of treatment and drugs has gone up.
Ann S. Torregrossa, executive director of the Pennsylvania Health Law Project, which serves low-income clients, said her organization frequently is contacted by people with serious illnesses, including some with cancer, who can't get treatment because they are uninsured.
"It is a very, very legitimate question," Torregrossa said, "as to why these surpluses are not being used to reduce the cost of health care."
Independence Blue Cross issued a statement last week saying it was proud that its reserves had increased 14 years in a row.
"Our reserve position is the barometer of our financial stability," the company said. "This gives our 2.9 million members in Southeastern Pennsylvania confidence in our ability to pay for their medical bills in the event of an economic downturn."
Critics say Independence and the other Blues have a different reason for building surpluses: to engage in acquisitions, mergers, and possible conversion to for-profit status.
Independence and Highmark especially have taken on the appearance of big businesses in recent years, expanding onto new turf, buying for-profit subsidiaries, paying $1 million-plus salaries to top executives and hoarding cash. The Blues were established in the 1930s to provide affordable health insurance to people struggling through the Great Depression. On paper, that mission - to be "charitable and benevolent" institutions - remains unchanged.
But lawsuits filed last summer accuse the three companies of abandoning their original mission.
The companies firmly deny that charge and insist that they remain health insurers of "last resort" to people in need.
A dozen lawyers in Philadelphia and other cities around the state filed the suits in a quest to disgorge excess surpluses.
One suit, pending before Bucks County Common Pleas Court Judge Alan M. Rubenstein, seeks a court order forcing Independence Blue Cross to rebate money to subscribers and to provide subsidized health coverage for the uninsured.
The action was filed in behalf of a Bensalem appliance store owner, Jules Ciamaichelo, who buys insurance from Independence for himself and his employees. Similar subscriber suits are pending against Highmark and Capital Blue Cross in York County.
Lawyers for the Blues have petitioned in both counties to have the suits dismissed. The companies contend the litigation amounts to a rate dispute and thus falls within the domain of the Insurance Department.
The department sets minimum reserve levels for insurance companies to assure that money will be on hand to pay claims when the need arises. The minimums vary depending on the assets, liabilities and other factors in each company's financial statement.
Using the department's guidelines, here is a picture of the Blues' surpluses taken from their 2000 financial statements (Statements for 2001 are due next month and are expected to show that surpluses have grown larger than 2000 levels.):
Independence Blue Cross was required to have $365 million on reserve. The company had $248 million or 68 percent more than that, a total surplus of $613 million.
Highmark's reserve of $2 billion was four times larger than its required minimum of $499 million. That amounted to $1.5 billion more than the amount needed under Insurance Department rules.
Capital Blue Cross had nearly eight times more than its requirement. The company needed to have $67.8 million on reserve. Its surplus was $536 million.
Chris Cashman, a spokesman for Independence Blue Cross, said his company's surplus had grown from $613 million to about $700 million, an increase of 14 percent in the last year.
"Our reserves are adequate, but they're not excessive," Cashman said. "They're reasonable."
Highmark issued a statement last week saying its surplus was a testament to the company's financial stability. Spokesman Brian Herrmann said the company stands ready to pay all claims "regardless of economic changes or catastrophic circumstances."
Joseph Butera, a spokesman for Capital Blue Cross, said in a statement that his company made "no apologies for pursuing a conservative business plan" that included large surpluses.
Butera said Capital's surplus had grown to $589 million in the first nine months of last year, an increase of $53 million, or 10 percent.
Some of the income earned from that pool, Butera said, had been used to put "downward pressure" on recent rate hikes. Jason H. Herman, a plaintiff in the class-action suit against Capital Blue Cross, said he would like to see a lot more downward pressure on Capital's health-insurance rates. "The amount we pay for insurance is just unbelievable," said Herman, who manages a group of chiropractic clinics with 18 employees in Central Pennsylvania.
Herman said his firm, Nachas Inc., had been hit with a 66 percent increase in health-insurance premiums since 1997, with the rate for a single employee rising from $167 a month to $278.
While subscribers complain of soaring premiums, doctors grouse that the Blues skimp on reimbursements.
The insurers recently have raised doctor-reimbursement rates, but the Pennsylvania Medical Society holds that the rates are still comparatively low.
Stephen Foreman, an economist for the medical society, contends that the Blues have been able to salt away huge surpluses because they have attained monopolistic dominance in their markets.
"They are maximizing profits to beat the band," Foreman said. "Why would they raise premiums at a time when their profits are excellent? When did the antitrust laws get repealed? Why do these companies need to be this big?"
Torregrossa of the health law project said her office recently received a call from a woman who had been diagnosed with a brain tumor at a Philadelphia health clinic. The woman had no insurance and could not find a doctor or a hospital to treat her.
Torregrossa said her organization receives similar calls regularly. People in such desperate situations, she said, are the ones the Blues should be helping. The health law project seeks help for its clients through doctors and hospitals willing to take charity cases. Torregrossa said treatment had been arranged for the woman with the brain tumor.
"You match up those stories with $2 billion in excess surplus," said Mackuse, the lawyer suing Independence Blue Cross. "When is enough enough? Is there ever a point when there's too much?"
L. Stuart Ditzen's e-mail address is email@example.com