Insurance execs sit on bags of money, while policyholders feel the pinch

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By Consumers Union on Friday, March 5th, 2010

While Wellpoint, Inc. is taking a lot of heat for its attempt to jack up California individual plan rates as much as 39%, people insured by cash-rich Healthcare Service Corporation (HCSC) are also facing sticker shock, even though the company calls itself “the most financially secure health insurer in the United States.” The company raised individual rates as much as 20% last year, even though it is sitting on $6.7 billion dollars in surplus funds, about five times what regulators require for solvency.

Thanks to that huge pile of money, the company was able to pay its CEO $10.6 million in salary and bonuses in 2008, almost one million more than Wellpoint paid its embattled chief, according to the AIS Report of BCBS Plans. HCSC does business in four states as Blue Cross and Blue Shield of Illinois, Texas, New Mexico and Oklahoma. The company covers more than 12.4 million people, including about 1.1 million people who purchase their products in the individual market, according to A.M. Best, making it the fourth largest U.S. health insurer.

HCSC is a mutual insurance company; therefore, it is not owned by shareholders and does not need to earn high profits to keep investors happy. A mutual insurer technically is owned by its policyholders, or as HCSC says on its website: “We are customer-owned. That means our ‘investors’ are our policyholders. We answer to them and will always make their best interest our top priority.”

In light of the suffering they’ve caused those same policyholders, many of whom no doubt couldn’t afford the rate increase and had to drop or reduce coverage, that statement seems like a stretch.

The Illinois Department of Insurance reported March 3 that HCSC raised base rates on most individual policies about 8.4% in 2009, on top of 18% increases on many HCSC policies in 2008. And those with HMO plans saw even higher 19.8% increases in 2009. The base rate is the premium charged before the company adjusts the premiums based on risk factors. For those renewing their policies with HCSC, these increases may have been higher based on their age or geographic location.

These increases raise red flags, not only because HCSC is financially strong, with profits of $515 million in 2009 and $743 million in 2008 (down from recent highs of almost $1.2 billion in 2005 and 2006), but also because of the excessive surplus reported in HCSC’s 2009 annual financial statement.

Surplus is, in simplified terms, the amount that a company’s assets exceed its liabilities. State laws require insurers to hold a minimum amount of surplus as a sort of rainy day reserve fund to protect their customers in the event that premiums don’t cover all medical claims, or if the company risks insolvency.

For non-profit and mutual insurers, surplus essentially is their accumulated “profit” – it’s the amount they’ve made on premiums and investments in excess of medical and administrative costs. In recent years, many insurers, especially several non-profit and mutual Blue Cross Blue Shield plans, have built their surplus well beyond state-required minimums. The $6.7 billion that HCSC holds in surplus is more than five times the minimum amount generally required by states before triggering heightened regulatory oversight due to solvency concerns.

Consumers are being denied health insurance coverage or are being priced out of the market by premium increases. Indeed, the states where HCSC does business had almost 9 million uninsured residents in 2007-2008. In Texas, 25.2 percent of residents –more than 6 million people – were uninsured during that time, according to the Kaiser Family Foundation.

So the big question for HCSC, other health insurers, and our regulators is: Why should insurers continue to increase premiums for individuals when their profits are strong, their salaries are fat, and they have more than enough back-up funds available to protect them in the event that premiums fall short?

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