True to its name, Blue Cross and Blue Shield of Maryland has left some of its largest group subscribers singing the blues to the tune of nearly $11 million.
For almost two years, major corporate and government policy holders have been waiting to collect a refund that the insurer does not want to pay. Claiming that operating expenses have diminished its cash reserves, Blue Cross and Blue Shield appeared before the state insurance commission last Tuesday to ask that it be excused from paying the $10.8 million refund.
On July 1, 1980, Insurance Commissioner Edward Birrane ordered the nonprofit health insurer to return $10.8 million in excess profit the company earned in 1979. Litigation held up payment of the refund.
At last week's hearing, Assistant Insurance Commissioner Thomas P. Raimondi ordered Blue Cross to refund the money. He said he was "particularly upset" that Blue Cross felt it had enough money to buy a financially troubled health maintenance organization last March but claimed to lack sufficient reserves to pay the refund.
Blue Cross purchased the Columbia Medical Plan for $2.8 million on March 1 and set up a holding company to operate it. Blue Cross then loaned the holding company an additional $2.2 million to aid in operations, bringing the total outlay to $5 million.
The insurance commission will decide later this week both when the refund must be paid and whether Blue Cross and Blue Shield will be forced to share any of the approximately $3.5 million it earned since 1979 by investing the excess profits.
But the battle is not expected to end when the payment orders are issued. Insurance commission officials believe Blue Cross will appeal once more, this time in Baltimore City Court.
Blue Cross and Blue Shield officials also have hinted that they will ask for a rate increase if they are forced to pay the refund. Insurance commission officials said last week, however, that the refund is not sufficient justification for a rate increase.
As nonprofit organizations, Blue Cross and Blue Shield are not permitted to retain surpluses. One of the key issues surrounding this controversy is what level of contingency reserves the insurer needs to guarantee safe operations.
Contingency reserves are used to pay claims and operating expenses in the event of unforeseen circumstances.
Blue Cross contends that since reserve levels have dipped to the 1.5-month level, it should not be forced to pay the refund. In 1979, when the insurer earned the excess profit, reserves soared to 2.71 months.
The chief actuary for the state insurance commission believes that 1.5 months is a safe level of reserves. To complicate matters further, the state legislature recently passed a vaguely worded statute that says two months of reserves is a "reasonable level."
Two months of contingency reserves, about a sixth of claims costs last year, is the level recommended by the Blue Cross organizations nationwide.
Since 1979, combined Blue Cross and Blue Shield reserves in Maryland have fallen from $90 million to $80 million.
Blue Cross and Blue Shield "said Blue Cross reserves will fall from 1.56 months to 1.4 months if they pay the refund and that drop amounts to only three days," said Raimondi. "We don't see how three days of contingency reserves is going to cripple a giant nonprofit company."
Blue Shield's reserves would not be reduced at all by the refund since its money for the refund has been placed in a special account.
A Maryland law requires insurance companies to maintain reserves of at least 3 percent of the prior year's claims and operating expenses. Blue Cross and Blue Shield currently maintain more than five times that amount, or about 16.5 percent. If Blue Cross and Blue Shield reduced their reserve to the 3 percent minimum set by the law, they would be far below the 1.5-month level. Although Blue Cross and Blue Shield will not reveal publicly which subscribers would receive the disputed refund, insurance commission officials indicated that the city of Baltimore and the state of Maryland are two of the insurance combination's biggest clients.
Rising claims coupled with declining interest rates that have reduced investment income have left Maryland's biggest insurer operating in the red for the past two years. Last year, Blue Cross and Blue Shield had combined operating losses of almost $19 million, although more than $17 million in investment income reduced the net loss to $1.5 million.
Unaudited interim first quarter results for 1982 show Blue Cross had underwriting losses of $3 million offset by $2.9 million in investment income for a net loss of $100,000. Blue Shield reported $2.7 million in underwriting gains and $1.4 million in investment income, bringing the net gain for the quarter to $4.1 million.
The substantial operating losses suffered in Maryland are part of a national trend. Collectively, 111 Blue Cross and Blue Shield plans lost $463.3 million last year on premium revenues of $30.4 billion. These losses topped the $426.6 million lost on revenues of $26.5 billion the year before.
Maryland Blue Cross and Blue Shield have subscribers throughout the state with the exception of Prince George's and Montgomery counties, which are covered by a Washington-based plan.
The litigation that initially held up payment of the $10.8 million refund involved Ward Machinery Co. Ward asked that it be granted a refund even though it dropped its employe's Blue Cross-Blue Shield coverage before the 1980 order and, as such, was not scheduled to receive one.
Under the terms of the order, only those companies which continue to be Blue Cross-Blue Shield subscribers are eligible to receive a refund. Ward reached a $35,000 out of court settlement with Blue Cross last February which the insurer has refused to pay because of its diminished reserve position.
State insurance commission officials in Maryland said that if Blue Cross and Blue Shield request a rate hike based on the $10.8 million refund, they will retaliate by "scrutinizing the reimbursement procedures used to pay doctors in the state." The system now in use is being challenged in the state court of special appeals.
"The Blue Shield reimbursement system has an escalating quality to it that enables doctors to constantly raise their fees and this leads to increases in subscriber rates," said assistant insurance commissioner Raimondi. "The doctors are in control of their own rate schedules and fees are rising 3 percent more than the Consumer Price Index each year."
"The Blue Shield reimbursement system has held doctors' fees below all available economic indicators such as the CPI," countered Nicholas Greaves, spokesman for Blue Shield. "If the state wants to challenge our procedures, that's their privilige."
Assistant Attorney General Michael Cohen thinks it is critical that the insurer be forced to pay the refund. "If they get off this time, they'll litigate every order."