Months before the parent company of Blue Cross Blue Shield of Texas sought to raise rates and shed coverage plans for hundreds of thousands of customers across its divisions, the Chicago-based nonprofit was sitting on a $9.9 billion surplus.
Health Care Service Corp. also had topped its previous year’s revenue by 22 percent, bringing it to $27.7 billion, and had given its CEO a $10 million bonus, according to its 2014 year-end financial statements and other documents.
A former executive of a nonprofit insurer in California described the HCSC surplus as “absolutely massive” and said the point of such a reserve fund, especially for a nonprofit, is to carry companies through difficult economic periods without making policyholders suffer.
HCSC, the largest customer-owned insurer in the nation, has countered that it already
operates on “thin margins” and recorded a nearly $282 million net loss for 2014 — although full details are not delineated.
Executives with HCSC said raising rates, dropping certain plans and narrowing networks for 2016 were necessary because losses in its individual plans are “unsustainable” and ultimately would put the company in financial peril.
And, they say, dipping into the surplus is not an option to balance those losses.
“Our reserves serve a different purpose, and that is to remain in place to protect our nearly 15 million HCSC members and ensure anticipated and unanticipated claims by our members,” said Carl McDonald, the company’s divisional senior vice president of treasury and business development.
Still, the company’s elimination of individual plans has thrown many of its members into confusion and rage. Some in the midst of complex medical treatments say the in the midst of complex medical treatments say they specifically selected — and paid more for — preferred provider organization plans offered by Blue Cross and Blue Shield of Texas to get coverage at renowned Houston hospitals.
Meanwhile, industry insiders are skeptical of HCSC’s strategy to cut programs without tapping reserves.
“That’s why companies have reserves, for a rainy day. Well, guess what? It’s raining,” said John Rowe, a health policy professor at Columbia University Mailman School of Public Health and former CEO of Aetna Inc. He acknowledged that these were difficult times for the insurance industry and that most companies have sustained losses amid the growing pains of the Affordable Care Act, which now requires coverage of those with pre-existing conditions.
“But none of that has to do with having a $9.9 billion reserve,” he said, adding that the amount of money HCSC had as a cushion was “unusually aggressive for a nonprofit.”
Michael Johnson, once the director of public policy for nonprofit Blue Shield of California, also was surprised by its assets. “Of course, they can’t sell at a loss over time. But they have an absolutely massive surplus,” he said.
After 12 years with the insurer, Johnson quit last year, turning whistleblower. He accused the nonprofit of hoarding billions in surpluses, enriching executives, pushing for large rate increases and being untruthful with regulators.
He now is being sued by his former company for allegedly disclosing confidential information. But he said his public criticism echoes the concerns raised by California officials who stripped Blue Shield of its tax-exempt status.
Executive pay criticized
The line between profit and nonprofit insurance companies can be murky.
HCSC, founded in 1936, holds an independent license from Blue Cross and Blue Shield Association and operates as a “mutual legal reserve company.” That means it pays taxes like a for-profit company. It is structured as a type of nonprofit answerable to policyholders.
A lawsuit making its way through the Illinois court system alleges that HCSC has far exceeded the nonprofit boundaries and broken its promise to “operate on a nonprofit basis for the mutual benefit of its members.”
The case, Babbitt Municipalities Inc. vs. Health Care Service Corp., offers a glimpse into the financial workings of a company that has risen to the nation’s fourth-largest in members and fifth-largest in revenue.
One of the strongest criticisms in the lawsuit focuses on executive pay.
Instead of lowering premiums or expanding coverage, the company rewarded top executives with $100 million between 2011 and 2013 for keeping profits high, according to plaintiff documents.
And in 2014, CEO Patricia Hemingway Hall earned roughly $11.7 million, including more than $10 million in bonuses, confirmed Atlantic Information Services, a health care industry publishing and information company.
Hall, who was set to retire as of Thursday, outearned other multistate nonprofits or mutual Blue Cross and Blue Shield plans nearly four times over. Hers was the sixth-highest compensation in 2014 among insurance executives in the nation. The only ones earning more headed for-profit companies, the AIS survey shows.
“The more money HCSC accumulates, the more money its executives got paid. This has resulted in a perverse incentive system that favors the continued accumulations of excess profits and expansion of HCSC’s business operations at the expense of its policy-holder members,” the lawsuit alleges.
Such a practice is in conflict with its own by-laws, the plaintiff claims, which state: “no person or entity shall receive, directly or indirectly, any profits from the corporation.”
According to the lawsuit, HCSC’s total net income between 2009 and 2013 was about $4.5 billion. In 2013, it had dropped to $684 million before registering a loss in 2014.
But the surplus has remained strong throughout, rising to $10.27 billion in 2013. Even the slightly lower amount in 2014 is much higher than many industry standards, according to the lawsuit.
“I wish I could tell you the reason they were hoarding money was because they saw the Affordable Care Act on the horizon,” said David Senoff, a Philadelphia co-counsel in the lawsuit who has brought numerous class action lawsuits against BCBS companies.
The Chicago lawsuit has been dismissed twice at the lower court level and is now before the Illinois Appellate Court. But in the circuit court judge’s ruling, the financial facts revealed in the case seem not to be in dispute.
Officials at HCSC declined to comment on pending litigation. Company officials also weren’t made available for interview, though representatives did take questions by email.
But in a statement, they said HCSC “remains strongly committed to a not-for-profit structure.”
“We do not measure success by how much money we make. Instead, we set our sights on meeting the health care needs of our members and facilitating their use of the health care system,” the statement said.
Top-tier care excluded
Blue Cross and Blue Shield of Texas has been granted a near 20 percent rate increase. The increase and elimination of its PPO plans take effect this month.
The latter touched off a firestorm of criticism when the individual markets opened on the national health exchange Nov. 1.
Customers not only lost PPO coverage, but the replacement health maintenance organization plans exclude in-network coverage at some of the biggest names in Houston’s Texas Medical Center, including the University of Texas M.D. Anderson Cancer Center, Texas Children’s Hospital, Memorial Hermann and Houston Methodist, as well as hundreds of affiliated doctors.
Dr. Robert Morrow, a family physician who is now president of Blue Cross and Blue Shield of Texas’ Houston and Southeast Texas Region, called the elimination “a difficult decision but the right decision.”
He added that his company is the only insurer to serve every county in Texas and that anyone affected by the loss of plans would be guided to providers “in network” to keep their care seamless.
Morrow and others at HCSC have said the problem lies with health care providers unwilling to negotiate lower reimbursement rates.
Plans pulled in other states
Elsewhere, another division of HCSC, Blue Cross and Blue Shield of New Mexico, pulled all its individual plans from that state’s 2016 exchange after it failed to receive a 51.6 percent rate increase requested from the state.
The company said it had lost $19.2 million, according to published reports.
Another division, Blue Cross and Blue Shield of Illinois, eliminated its broadest-coverage PPO plan from that state’s exchange, which removed in-network access to about half the state’s hospitals, including some of its most prestigious research and teaching facilities, the Chicago Tribune reported.
HCSC said the losses, such as $400 million widely reported in Texas, were mostly absorbed by the company but still contributed to its overall net lost in 2014.
Johnson, the whistleblower, said the issue boils down to the difference between for-profit and nonprofit behavior.
“A (health insurance) nonprofit exists, not to make money, but to make health care affordable,” he said. “It should use its reserves to smooth out the ups and downs.”
