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Insurance Division approved Blue Cross rate hike without documentation of claimed losses
Blue Cross Blue Shield of New Mexico did not provide the state Insurance Division with documentation for financial losses and expense figures cited as justification for last month’s controversial health insurance rate hike, Public Regulatory Commission (PRC) records show.
The company’s defense for failing to back up their figures with supporting evidence? Regulators did not ask for any.
Insurance Division staff have not required Blue Cross Blue Shield NM, or other health insurers, to submit documentation supporting rate increase requests, Blue Cross Blue Shield officials said, leading PRC Commissioner Jason Marks to describe the Division’s regulatory culture as “insufficiently skeptical.”
Rate hike application ‘not properly documented’
When the Attorney General’s office hired award-winning insurance rate analyst and former New Jersey insurance regulator Allan I. Schwartz as an independent expert to review Blue Cross Blue Shield’s rate hike filing, he reported that supporting documentation for most of the figures cited by the company was missing. And what little data was available, Schwartz concluded, contradicted the company’s claims.
The company’s requested rate hike was not justified, he concluded.
“The BCBSNM rate filing was not properly documented and supported,” Schwartz said in testimony to the Insurance Division March 2. “The filing did not provide sufficient documentation regarding numerous aspects of the BCBSNM rate calculation … Hence, the filing does not provide reasonable actuarial support for the proposed rate changes.”
Approving the rate hike would “continue a pattern of large rate increases for New Mexico health insurance consumers,” Schwartz cautioned, making it “increasingly difficult” for New Mexicans to afford individual health insurance.
The company presented numerous complex economic expense and loss indicators — variables such as “duration adjustments,” “deterioration adjustments,” and “annual deductible leverage.”
These figures were used to calculate an “Indicated Rate Change.”
Data presented contradicted BCBS claims
But the figures may have been smoke and mirrors, Schwartz suggested.
“The problem with the BCBSNM filing is that none of these various components … were documented or supported,” he said.
Where data was available, it contradicted Blue Cross Blue Shield’s claims, Schwartz found.
The “annual base trend” is an estimate of past financial losses. It is used to adjust projected future revenues from individual insurance policy premiums.
Schwartz calculated the company’s actual yearly loss trends on individual-market insurance policies over the past seven years and found they had varied between 4 and 8 percent — well below the 10 percent a year claimed by Blue Cross Blue Shield.
“Based upon this analysis, the loss values used in the BCBSNM rate filing are inflated and result in an excessive rate indication,” Schwartz said.
The Insurance Division and Attorney General’s office staff nevertheless negotiated a weekend rate settlement deal to raise Blue Cross Blue Shield rates by 21.3 percent for approximately 40,000 New Mexicans, without a public hearing that had been ordered by PRC commissioners. Former state insurance superintendent Morris “Mo” Chavez resigned in the face of outrage over the deal expressed by policyholders and PRC commissioners. Interim superintendent Tom Rushton, who helped negotiate the deal, subsequently resigned after PRC commissioners voted to direct him to vacate Chavez’s approval of the rate hike.
Parent company had surplus of $6.7 billion
Last month’s rate hike was just the latest of many, The Independent found. The Insurance Division had approved Blue Cross Blue Shield rate hikes every year since 2004, PRC documents show.
Blue Cross Blue Shield NM officials and former state insurance superintendent Morris “Mo” Chavez repeatedly raised the specter of the insurer’s solvency and financial losses. But asked about the financial condition of the insurer’s parent company, Health Care Service Corporation, Schwartz painted a very different picture, testifying the firm “has a strong financial position.”
“At year-end 2009, Health Care Services Corporation had a surplus of about $6.7 billion,” Schwartz testified, citing the corporation’s annual report.
In each year since 2004, the Insurance Division approved Blue Cross Blue Shield NM rate hikes. But for each year since 2005, Schwartz found, Health Care Service Corporation had a net income of at least $500 million, for a total net income of $4.4 billion.
Health Care Services Corporation’s net income last year exceeded $740 million, according to a May 25 online company profile.
Health Care Services Corporation’s annual report also showed “a much lower level of expenses” than Blue Cross Blue Shield NM claimed to the Insurance Division, Schwartz noted.
Blue Cross Blue Shield told state regulators that 26 percent of insurance premium revenues go to corporate expenses, but the parent company’s annual statement shows an 11 percent expense ratio, Schwartz said.
“While there may be an explanation for the dramatic difference in the expense ratios shown for Health Care Services Corporation as a whole and the values BCBSNM included in its filing, BCBSNM has not provided such an explanation,” Schwartz said.
Nor did the company include in their projected future losses, the savings resulting from disease prevention and wellness programs, Schwartz noted — even though those programs had explicitly been adopted to reduce policyholders’ medical claims costs.
Regulators did not request supporting documentation
Blue Cross Blue Shield did not provide supporting documentation for its claims because they were never asked to do so, according to company officials.
The Blue Cross Blue Shield rate increase filings included “everything required by the New Mexico Insurance Division,” Director of Actuarial and Underwriting Department Kevin Carr testified April 9, citing a Division checklist for rate increase filings. “We are not required by the NMID (Insurance Division) to include all of this documentation in our rate filing.”
“Based on my discussions and correspondence with the (Insurance Division) staff, they felt that our assumptions, including trend, were reasonable,” Carr testified.
Rate increase filings in New Mexico “generally do not include all of the underlying data”, Carr said. “In fact, based on my review of rate filings of other insurers in New Mexico, we generally provide much more information in our filings than most of the other insurers.”
Insurance Division staffers take insurers’ figures at face value, Carr’s testimony suggested.
For example, the 10 percent “annual base trend” figure Schwartz found to be inflated had been accepted by Insurance Division staffers even without the underlying data, Carr claimed.
“The 10 percent assumption for the annual base trend was specifically reviewed by and discussed with (Insurance Division) staff as part of the rate increase process, and they agreed that it was a reasonable assumption,” Carr said.
Insurance Division staff did not question the other figures, Carr said.
“The (regulatory) culture is insufficiently skeptical,” PRC Commissioner Jason Marks said. “On health care, the assumption is costs are just a national disaster and nothing can be done about it … that it’s unavoidable. But rates are rising faster than needed. There needs to be more skepticism, and related to that I’d like to see a different orientation. The regulator has a responsibility to make sure every penny passed on (to consumers) is required by law.”
Marks had described last month’s weekend rate hike settlement as “a back room deal,” a reference to the Insurance Division’s failure to hold public hearings.
The Division has a responsibility to confirm insurers have prudently incurred the expenses cited in rate change filings, Marks said.
“Just because there’s a cost in your accounting system doesn’t mean you accrued it responsibly and can pass it on to consumers,” Marks said.