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Blue Shield Of California Sets Profit Cap Other Insurers May Not Imitate

Jun 09, 2011

This story was produced in collaboration with wapo

Blue Shield of California’s surprising announcement that it will cap profits at 2 percent and issue millions in policyholder refunds sparked hopes that other health insurers would follow suit, but many experts said yesterday that was unlikely.

The company, which made the announcement Tuesday, is better positioned than most to make that move. For one thing, as a nonprofit, it has more leeway to cap profits than its for-profit cousins who have to meet Wall Street earnings targets, says Peter Kongstvedt, a managed care consultant in McLean, Va.

The insurer, a major force in the California market with more than 3 million policyholders, also has substantial reserves and posted a profit margin of 3.1 percent last year, including income derived from its investments.

That’s more than the typical 2 percent to 3 percent margin typical of nonprofit insurers, says Uwe Reinhardt, a health economist at Princeton University.

“It’s an unbelievably good public relations measure,” Reinhardt said of the company’s decision, which includes refunding $167 million to policyholders.

While most insurers won’t embrace such an overt cap on profits, some nonprofits may try to “step up and match these rebates” as a way of improving their public image and attract new business, said Sheryl Skolnick, a financial analyst for CRT Capital Group in Stamford, Conn.

Two of the larger nonprofit insurers that operate in Virginia, Maryland and the District -- CareFirst BlueCross BlueShield and Kaiser Permanente – declined to comment. Robert Zirkelbach, spokesman for the industry trade group America’s Health Insurance Plans, said insurers are “doing everything they can to keep coverage affordable,” but he did not speculate on whether others would join Blue Shield.

The announcement by Blue Shield comes as insurers nationwide are enjoying healthy profits, fueled in part by lower-than-expected use of medical services last year, as recession-stung consumers held off on seeking medical care.

At the same time, new rules are going into effect that put insurers’ profits and spending under closer scrutiny. The federal health overhaul law requires insurers to spend at least 80 percent of their revenue on medical care, leaving 20 percent for administrative costs, including profits. Insurers that don’t meet that target must issue rebates to policyholders next year.

And, starting in September, the law also requires government scrutiny of rate increases of 10 percent or more among policies sold to individuals and small businesses. 

It does not, however, grant federal or state regulators the power to reject such increases. That authority lies with the states, about half of which currently give regulators that power over some types of insurance.

In California, lawmakers are debating a proposal to give that authority to regulators, who currently review increases, but can’t block them. The legislation – opposed by many insurers and one of the state’s largest physician groups -- narrowly passed the Assembly, but its fate in the state’s Senate remains uncertain. Blue Shield’s announcement was immediately seized upon by supporters of the proposal, including Insurance Commissioner Dave Jones, who told reporters that it showed insurers are making excessive profits.

The nonprofit insurer has been in the news lately, both for premium increases and the $4.6 million salary it pays Bruce Bodaken, the firm’s chairman and chief executive.

The insurer will increase premiums for its small business policyholders 9 to 11 percent later this year. A plan to raise rates even more for some individuals in HMO plans was withdrawn earlier this year.

Under its rebate plan announced Tuesday, consumers will get credits ranging from $25 to $415, while business customers will see $110 to $130 per employee, according to a Blue Shield release.

Doug Heller, executive director of the left leaning Consumer Watchdog, was not impressed, saying the average policyholder saw rates jump about 30 percent in the past two years. “It doesn’t make you feel much better,” he said.

And capping profits is expected to have little effect on how much customers will pay in the future, because the biggest chunk of a premium increase is tied to underlying health costs, with profits a much smaller portion, economist Reinhardt said.

“I don’t think the average American realizes how small profits are as a percent of premium.”

jappleby@kff.org

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