How Much is Too Much Ado About Nothing Much??

Consumers' Union recently published a report entitled "How Much is Too Much?"

I've read the CU report carefully. I think it's much ado about nothing much.

The CU report questions the surplus accumulated by not-for–profit Blue Cross and Blue Shield plans ("Plans"). CU clearly believes it’s a good idea to drain this surplus down to some level much closer to the minimum amounts regulators thought was necessary 20 years ago. CU does not suggest what level of surplus may be the right amount. But it is apparently convinced that the present surpluses are too high. CU suggests reducing these surpluses by using a large chunk of them for "rate stabilization" implying that rates might actually level out. In fact, leveling of rates is not likely.

I think the main flaws in the report are

(a) CU ignores or glosses over significant changes in the insurance business over the last 20 years that have increased risk (e.g., the huge growth in medical costs, expanded federal and state regulation, more litigation, consumerism, et al),
(b) after misreading insurance business conditions, CU argues that the financial risks of underwriting losses, insurance business reversals, or even insolvency are in fact much lower today compared with 20 years ago, and
(c) CU believes that taking surplus amounts from the Plans is a practical means to achieve "rate stabilization" without harming the Plans' financial strength.

OK, let's look at "rate stabilization".

1. CU states that America’s Blue Cross plans together hold “more than $32 billion in surplus as of the end of 2008.” (p.5). The reader is given no information to compare the $32 billion to anything but regulatory minimums. This ginormous number is intended, I suppose, to make us gasp and check our wits at the door.

So Table 1 on page 8 compares the surplus of several Plans to the regulatory minimums. CU presents this information as evidence that the Plans are holding too much surplus.

2. But look at more meaningful comparison - surplus to revenues. [I could find revenues for 4 of the plans -a bit surprising how difficult it is to find this information.] The 4 plans I looked at are Alabama, Arizona, Michigan, and North Carolina. Together the 2008 revenues for these plans were $38 billion. The combined accumulated surplus for these 4 plans at the end of 2008 was $4.8 billion. In other words, the total accumulated surplus for these plans was about 12% of current revenues. OK, so how much of this might be used for "rate stabilization"? CU estimates the non-solvency portion of total surplus as 15% -25% of total surplus. (p.12). That seems like a pure guess, but let's play along. Using the top of this range, the Plans would hold 75% of their accumulated surplus for insolvency. That leaves 25% of the surplus for other purposes. That’s the part of the surplus that CU is complaining about. Using CU's method of averaging Plan results together, 25% of the 12% accumulated surplus is about 3% of revenue. So if these 4 Blue plans reduced their accumulated surplus by the amount CU suggests, the impact on rates would be . . . about 3% . . . for one year.

Why only one year? Because the Plans can't spend the same dollars more than once.

3. Now let’s suppose your family insurance rate with a not-for-profit Plan is $1,800 per month. Using the surplus CU says is excess, your Plan might allow 3% subsidy in Year 1, which would reduce your rate to $1,746 per month. That would save you about $650 for the year. Keep in mind medical costs increase by about 10% a year. So "rate stabilization" might mean your rate increase for Year 1 was only 7%. Unfortunately, that’s not the whole story. Your rate would still rise to $1,980 = $1,800 x 110% for Year 2. Why? Because medical costs continue to increase at 10% per year, and the rate needed for Year 2 will the same as if there had been no subsidy in Year 1. So for Year 2 your rate increases from $1,746 to $1,980, or more than 13%. An increase of 7% followed by increase of 13%. That's "rate stabilization".

4. But that’s still not the whole story. The 13% rate increase for year 2 is larger than the 10% rise in medical costs. Your Plan's ability to keep and grow membership has been weakened vs. other insurance companies whose rates go up by a lesser amount. The higher rate increase may attract the attention of someone like HHS Secretary Sebelius who has no interest in keeping your Plan strong. Also, because your Plan spent down its surplus it is less financially able to withstand further underwriting losses - or to absorb some truly significant loss that might even threaten the Plan’s solvency. So your Plan's financial risk is now greater than before, while its premiums are lower than before. (Think about it: as your Plan’s risk grows, yours does, too.) Your Plan may also find that borrowing money to finance new products or update its systems is more costly if its surplus is thin. These outcomes are ultimately costly to you and to the Plan and all are avoidable.

5. CU states that surplus used to "stabilize rates" could be replenished “in periods when rate pressure was relatively modest”. (p.14)

CU does not cite any period in which this actually happened. I can’t think of any such period, either. Competitive and regulatory pressures on premium rates have steadily increased, not diminished. This makes it more difficult to raise rates, not less. Maybe when pigs fly to a hockey game in hell, rate pressures might become “relatively modest” for some short period of time. Maybe.

Would you bet your own money that will happen? I think CU fails to make a case for betting Blue Cross’ money on it.

No matter how we might wish it to be otherwise, tinkering with the amount of premiums simply has no effect on the continuing rise in the cost of medical care.

6. In sum, CU advocates an increase to regulatory authority, in order to force not-for-profits to bear greater business risks and, at the same time, reduce their contingency reserves to some undefined bare minimum.

What could possibly go wrong?