Why Health-Insurance Premiums Rise While Insurers Sit on Piles of Cash

Not-for-profit Blue Cross and Blue Shield plans are maintaining cash reserves that are more than three times what states require while continuing to raise health-insurance premiums by double-digit amounts, according to a Consumers Union report. That's not surprising, considering how much investment income these reserves undoubtedly generate.

Nonprofit plans don't file financial reports with the SEC, but they operate quite similarly to for-profit insurance companies. So the for-profit carriers' financial statements are probably a good guide to how much money carriers can make by keeping their reserves artificially high:

WellPoint (WLP), which includes 14 for-profit Blues plans across the country, reported that, during the first quarter of 2010, it had net investment gains of $28.7 million before taxes. As of March 31, 2010, the company had a "net unrealized gain position" of $839 million on fixed maturity and equity securities. Its reserve levels exceeded state regulatory levels by $6.6 billion and Blue Cross and Blue Shield Association (BCBSA) requirements by $3.7 billion.
UnitedHealth Group (UNH) reported that for the second quarter of 2010, its "investment and other" income totaled $149 million, down slightly from $153 million in the prior year period. For the first six months of the year, investment and other income rose to $322 million from $311 million a year earlier.
Humana (HUM) posted $85.4 million in investment income in the first quarter, up from $69.5 million in the prior-year period. For all of 2010, Humana expects investment income to be in the range of $325 million to $340 million.
Aetna (AET) did especially well in the first quarter of this year, raking in investment income of $275 million, 10 percent higher than in the prior-year period. If the company continues on that trajectory, it could realize a gain of more than $1 billion this year from investments alone.

So how much are insurers plowing into reserves to pad their pockets? To be fair, Blues plans, whether for-profit or not-for-profit, must meet the reserve requirements of the Blue Cross and Blue Shield Association, which are substantially higher than those of state regulators. So CU's criticism is probably excessive, at least where those plans are concerned. But the National Association of Insurance Commissioners (NAIC) is also skeptical about the insurers' tendency to keep stuffing away cash in their reserves.

In comments to the Department of Health and Human Services about new healthcare-reform rules that would limit insurer spending on administrative overhead and thus presumably funnel more money to patient care, NAIC said that the plans should not try to shovel extra funds into reserves to evade the caps. (To make sense of its comment, recall that insurers charmingly refer to money spent providing medical care as "medical losses.")

It is important that reserves are not overstated.... Reserves should not be based on unrealistic assumptions that would inflate the loss ratio.... Excessive reserves could result in significantly higher MLRs [medical loss ratios] for several years [by increasing the amount of reserves linked to medical costs in the calculation].

There's no indication that most health plans are doing this or that they are raising the size of their reserves beyond what they maintained in previous years. Still, Consumers Union cites some egregious examples:

Blue Cross Blue Shield of Arizona raised its reserves from $648 million in 2007 to $717 million in 2009 -- more than seven times the amount required in that state. During that time, individual policy rates jumped about 40 percent.
Health Care Services Corp., which includes Blues plans in Texas, Illinois, New Mexico and Oklahoma, built up its surplus from $6.1 billion in 2007 to $6.7 billion in 2009, five times the minimum in those states. Meanwhile, its plans' rates rose by up to 20 percent a year.

What all of this says is that insurers, whether for-profit or not-for-profit, will try to maximize their margins in any way they can. And when they're sitting on a pile of cash, they're going to invest it. It would be nice if they would rebate some of their surpluses to policyholders, as some auto insurance companies do. But, short of a federal mandate, that's unlikely to happen.

Image supplied courtesy of Wikimedia Commons. Related:

Ken Terry

Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.

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