Blue Shield Agrees To Limit Premiums

Under unprecedented pressure from the Department of Managed Health Care, Blue Shield of California will revisit some of its actuarial data for setting premiums for its individual, family and small group policies, and will forego at least one premium increase next year.

The San Francisco-based insurer quietly agreed to an extensive order issued by the DMHC on Oct. 5.

Specifically, Blue Shield has agreed to not impose any premium increases for its small group book of business during the second quarter of 2016. And for 2017, Blue Shield has also agreed to limit its premium increases for small group, individual and family plans in relation to capped profit margins. The caps are 1.41% for the individual and family plan business, and 1.67% for the small group book of business. Blue Shield had previously pledged to cap its profit margins at 2% or less.

“The DMHC has significant concerns with some of the plan’s projected trends and target profit levels. This warranted the department’s action to find a solution with the plan that will protect consumers and ensure rates are supported,”  said agency spokesperson Rodger Butler.

Blue Shield filed an average 2016 premium increase of 4.6% for this book of business, which covers some 570,000 enrollees, according to Blue Shield.

Blue Shield also agreed to revisit its calculations for its 2015 and 2016 medical loss ratios (MLR). Under the Affordable Care Act (ACA), MLRs are mandated to be at least 80%. But last year Blue Shield missed its MLR calculations for both its individual and small group businesses by 3.3%, prompting it to provide rebates late last month. Those rebates totaled $82.8 million, with 454,000 individual policyholders receiving an average rebate of $136 for $61.7 million while another 19,000 small group enrollees received $21.1 million, for an average rebate of $1,111.

Insurers paid out a total of $332 million rebates for not meeting its MLR projections last year, meaning Blue Shield accounted for nearly a quarter of all such payouts nationwide.

According to the order, Blue Shield will recalculate its MLR estimates for 2015 and 2016, and submit them to the DMHC by April 30 of next year. If it is determined that Blue Shield's calculations led to a lower than 80% MLR, it will be required to issue rebates to enrollees by July 31.

“This agreement is consistent with our commitment to the DMHC that we would confer with them about rate increases, and make a good faith effort to resolve any differences we had about them,” said Blue Shield spokesperson Steve Shivinsky.

DMHC Director Michelle Rouillard suggested in a memorandum that the order was necessary because Blue Shield's MLR projections “have been higher than estimates used by Blue Shield’s peers,” further noting that “if Blue Shield’s actual medical costs for the products fall below the Plan’s projections, the Plan’s profit levels will exceed what is reasonable within the industry, particularly in light of Blue Shield’s considerable reserves.”

Butler said it was the first time the DMHC had taken this type of action against an insurer.

According to Shivinsky, Blue Shield’s 2016 MLR was calculated at 85.7%; it missed its 2015 MLR by 3.3 percentage points.

The order, which has not been announced by either party but was posted on the DMHC website earlier this week, received moderate praise from Anthony Wright, executive director of Health Access California and a member of the Payers & Providers editorial board.

“It's always good to have some limit on growth for a short period of time,” he said.

Although Wright noted that a rebate to consumers is appropriate when MLRs are overestimated, he said it is better to keep premiums in check because they prompt competing insurers to keep their own rates lower. 

“Rebates are a corrective, but not as good as keeping premiums lower in the first place,” he said.

Both DMHC and Blue Shield officials said the recent approval of Blue Shield's impending acquisition of Medi-Cal insurer Care1st for $1.2 billion played no role in this action. Blue Shield agreed on Oct. 8 to a number of conditions imposed by the agency to ensure the deal was approved. They included a pledge of $200 million, consisting of $50 million to improve the Medi-Cal delivery system, $10 million to local consumer assistance programs, $140 million to charities, and the creation of initiatives to speed up and improve encounters between patients and providers, among other terms.

Blue Shield, which provides insurance for some 3 million Californians has annual revenue of more than $13 billion and about $4.3 billion in reserves – nearly nine times what the Blue Cross and Blue Shield Association requires its members have on hand to pay claims. 

The surplus and the way Blue Shield conducts business – its premiums tend to be on par with its for-profit competitors – have come under increasing scrutiny from regulators and consumer advocates. Last year, the California Franchise Tax Board revoked Blue Shield's exemption as a not-for-profit company. Blue Shield has also sparred with regulators over imposing premium increases – three such increases have been deemed unreasonable by either the DMHC or the California Department of Insurance in the past two years. Blue Shield did pare back some of the hikes, but neither agency has the authority to reject increases outright. A ballot initiative that would have given them more authority was defeated after Blue Shield spent some $10 million on opposition efforts.

The Los Angeles Times also reported last month that the insurer had boosted compensation to its executive suite by 64% in 2012, an increase of $24 million. Altogether, nearly five-dozen executives received compensation averaging nearly $1 million apiece.

Wright, who criticized the terms under which the DMHC approved the Care1st deal, hopes that the order issued by the agency regarding the MLR and premiums signals a shift in regulatory oversight.

“We hope it's a signal that the DMHC will be more aggressive with insurers, and that is a genuine step toward taking a more aggressive stance in terms of policing insurers both regarding their rates and practices,” he said. As the market consolidates, we will need all the oversight they can muster.”