Blue Cross surplus not excessive

Four insurance carriers hold $4 billion in combined surplus

Thursday, February 10, 2005



By Pamela Gaynor, Pittsburgh Post-Gazette



More than two years after beginning an investigation, state Insurance Commissioner M. Diane Koken said yesterday that she had determined that the $4 billion in combined financial surpluses held by the state's four Blue Cross carriers was not excessive.



The announcement came just two days after Gov. Ed Rendell unveiled an agreement under which the Blues, including Pittsburgh-based Highmark Inc., would fund $1 billion worth of charitable activity over the next six years, mostly to expand coverage for the uninsured.



Highmark holds $2.2 billion of the Blues' combined surplus, according to state Insurance Department documents.



Koken insisted that the governor's agreement and her decision were unrelated, despite critics who had suggested they were linked and even though some of the insurers' individual surpluses at the end of 2003 exceeded levels the Insurance Department had earlier signaled would "likely" be deemed excessive.



"Our analysis of these surplus levels was extremely thorough and truly unprecedented in its scope," Koken said, adding that the agreement Rendell struck with the Blues "had no bearing on our decision."



"I do realize," she conceded, "that many will be disappointed in hearing that there is no excess surplus."



A little more than a year ago when the Insurance Department ordered the Blues to disclose their surpluses, it had indicated that any amounts above 650 percent of risk-based capital probably would be deemed excessive.



Risk-based capital essentially represents money that insurers keep in reserve to protect against unforeseen losses beyond that which they keep on hand to pay ordinary claims.



Yesterday, Koken said the complicated determination would cap the Blues surpluses at 750 percent of risk-based capital for Highmark and Philadelphia's Independence Blue Cross, and at 950 percent of risk-based capital for Harrisburg's Capital Blue Cross, and Blue Cross of Northeastern Pennsylvania.



Koken said the decision to raise the caps above 650 percent was made after reviewing what other states had done. She said the only state the Insurance Department found to have set a cap on risk-based capital was Michigan, at 1,000 percent.



Critics had said that even 650 percent of risk-based capital was too much surplus. They pointed to findings from the National Association of Insurance Commissioners, a trade group that Koken serves as president, that surpluses could be as little as 250 percent of risk-based capital before there was cause for concern.



Koken said yesterday that that level and other thresholds bandied about represented either hazard levels or other minimums. "We're not looking to have our Blues in financially hazardous condition."



Under Koken's determination, carriers would be required to submit plans for distributing surpluses that exceeded the ceilings.



Koken's determination also set ranges under which the carriers' surpluses would be deemed "sufficient" and said carriers whose surpluses were within those ranges would not be permitted to factor monetary allowances for certain risks into their requests for premium increases when their surpluses were within those ranges.



Koken said the Insurance Department was legally prohibited from disclosing the risk-based capital levels of the individual Blues, but that it would review them annually.



Highmark, which reported last year that its 2003 surplus represented 645 percent of risk-based capital, said Koken's findings validated the insurer's contention that its surplus was appropriate, but added that the company was disappointed that the insurance commissioner had not set its ceiling at 950 percent of risk-based capital.



Highmark had requested the 950 percent level when it disclosed its surplus to the Insurance Department last year. The carrier said it still had not yet weighed what effect Koken's determination would have on its business and said it would examine its options after doing so.



However, some business interests and social activists said that while they were still examining the particulars of Koken's determination, they had little difficulty concluding it was related to the Blues' agreement to help fund Rendell's plan for expanding coverage for the uninsured.



"If the governor could have put that kind of fix in for the Super Bowl, the Eagles would have won," said Cliff Shannon, executive director of SMC Small Business Councils.



"They didn't even feel the need to put a decent interval of time between the $1 billion 'payoff' and the announcement that everything is all OK with the surplus. It's just not right."



Beth McConnell, director of Pennsylvania Public Interest Research Group, also said she was dubious of claims that the two state decisions were unrelated.