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Blue Shield of CA Says Will Cap Earnings

Source: Anna Wilde Matthews

Posted on 08 Jun 2011

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Amid public pressure to control health costs, Blue Shield of California said it would limit how much of its earnings it keeps.

The nonprofit said it would cap its annual net income at 2% of revenue, a pledge that could put pressure on other insurers at a time when the industry's profits have been strong.

The insurer said that, in an attempt to make health coverage more affordable, it plans to distribute $180 million worth of earnings from 2010, nearly all to customers in the form of credits against their premiums. Last year, Blue Shield said it had net income of $315 million on $10.1 billion in revenue.

It is the third-largest health insurer in California by enrollment, with 3.3 million people.

"It represents a paradigm shift for a health plan," said Bruce Bodaken, Blue Shield's chief executive. "We are setting an example that may challenge others to consider what changes they can make."

Over the past few years, California has been a crucible for much of the high-profile debate over health-insurance rates. Blue Shield's new move will likely create renewed pressure on health plans there and elsewhere, particularly the nonprofits, to provide financial relief for consumers. In the U.S., Blues insure nearly 100 million Americans. Of the 39 companies, 37 are nonprofits, while the major exception is WellPoint Inc., the for-profit owner of 14 Blue plans.

Consumer advocates had already been taking aim at nonprofits, noting that their results have been buoyed by the same trends that have fattened the income of the for-profit industry—primarily consumers' damped use of medical care such as doctor visits and surgeries. The Blue Shield of California move is "a step in the right direction, and we think all nonprofit companies should look at their surplus, reserves and overall profitability and act more like nonprofits in this way," said Sondra Roberto, a staff attorney at Consumers Union.

Because they are often the largest plans in their markets, any effort by Blues to trim rates can have a significant impact on competitors. There are signs that the nonprofit Blues have begun easing rates this year a bit, according to a new report from Carl McDonald of Citigroup Investment Research, but so far there isn't major discounting. Their margins last year averaged around 4%, he said, and the new Blue Shield effort "does put pressure on the other Blues around the country to give back some of the profit they have earned over the last five quarters."

In past years Blue Shield's goal for margins has varied and sometimes been as high as 5%. Actual net income has averaged around 3.5% of revenue over the past decade, company officials said.

Generally, not-for-profit health plans plow their earnings into reserve funds that they hold largely to ensure they can cover claims. They also invest in improvements such as information technology.

Blue Shield's announcement came as it and other California insurers are facing intense scrutiny over rates. After criticism from state insurance commissioner Dave Jones, Blue Shield in March withdrew a planned rate increase on individual plans that the regulator said averaged 6.5% and was as high as 17.2% on some people.

The rise also would have come after two other recent increases. Last week, the state Assembly passed a bill that would require insurers to get approval from regulators for rate increases. The bill hasn't yet passed the Senate.

Mr. Jones said Blue Shield's initiative "simply underscores the need for the legislation." His office said Blue Shield's reserves, which amount to $3.58 billion, are far larger than what state regulators require.

Mr. Bodaken of Blue Shield said the company's announcement isn't related to the legislation or to recent rate moves and has been under discussion since last summer. It needs its reserves for purposes including maintaining a good credit rating, he said. Blue Shield has in the past split from its competitors to support laws aimed at broadening coverage, including the national health overhaul, and it has said its rates are driven by the cost of medical care.

That federal law will require all health insurers to spend a certain percentage of premiums on consumers' care, but Blue Shield officials said their 2% goal is more stringent than the earnings they could retain under the federal guideline.

In a statement, Kathleen Sebelius, the Obama administration's Secretary of Health and Human Services, called the Blue Shield move "a great step forward in lowering costs."