District regulators are considering whether CareFirst BlueCross BlueShield should be required to spend as much as $500 million on community health needs, reigniting a decade-long battle over the cash holdings of the Washington region’s largest health insurer.
The District’s acting insurance commissioner will hear testimony this month on whether CareFirst’s holdings are too large. If the commissioner, Chester A. McPherson, finds that they are, he is empowered under city law to force the insurer to come up with a plan to spend the excess funds for the public benefit.
The new review is the latest round in a fight that has been led by the D.C. Appleseed Center for Law and Justice. The nonprofit group has argued that CareFirst has improperly hoarded policyholders’ premiums, building financial reserves well beyond those necessary to protect against even the most unlikely losses.
According to a recent regulatory filing, CareFirst reported a surplus of $865 million as of March 31 for the subsidiary in question. The company reported serving about 772,000 members in the District, Maryland and Northern Virginia.
Appleseed successfully lobbied city lawmakers to require periodic reviews of CareFirst’s surplus and won a series of rulings from the District’s highest court in 2012. The organization now hopes that regulators will take money from the insurer’s coffers — funds that could be used to build community clinics, pay for public wellness programs or otherwise improve health-care access.
“We are in the end game,” said Walter Smith, Appleseed’s executive director. “These are public assets. . . . This is money beyond their reserves that they’d like to have in addition to their reserves.”
CareFirst has been specifically targeted because, unlike for-profit insurers, its subsidiary operating in the District — known as Group Hospitalization and Medical Services Inc., or GHMSI — is a not-for-profit entity chartered by Congress in 1939 as a “charitable and benevolent institution.”
Appleseed and its allies have argued that an excessive surplus conflicts with that mission, and the D.C. Council passed a law at the group’s behest in 2009 requiring regular examinations. The excess, the law says, must be used for “community health reinvestment.”
“The question is how to strike the balance, and in our view they have not struck the balance appropriately,” Smith said.
CareFirst chief executive Chet Burrell told insurance regulators in a 2009 proceeding that the surplus is “an essential requirement that represents amounts held for the protection of subscribers to assure that, come what may, their claims will be paid.” The company has noted that its surplus might seem large, but dwindles against the amount of claims it pays — well over $3 billion in 2013.
A CareFirst spokeswoman declined to comment on the most recent attempt to force the company to spend down its surplus. But in its filing this week, it renewed long-standing defenses, saying the holdings are justified, given the risks the company must manage.
The company, according to the filing, “works to strike the right balance with its surplus, holding only a prudent amount that accounts for all of the risks faced by the Company.” Under a policy adopted by the firm’s board of trustees, it continued, it “strives to hold surplus in an optimal range and increases or decreases premium rates as needed to keep surplus in that range.”
CareFirst has also defended its level of corporate giving. In its filings this week, it reported spending $22.5 million on community benefits and paying another $15.4 million in District taxes in 2013.
In considering the pre-hearing filings and testimony set to be delivered June 25, McPherson will have to sort through competing claims as to what level of surplus is adequate.
Appleseed argues in its filings that no more than about $530 million, and perhaps as little as $385 million, is necessary to keep CareFirst in sound financial condition. But CareFirst argues that it should carry surplus equal to 10 to 13 times its “authorized control level” — a reserve minimum below which regulators can take control of the company. That calculation would permit a surplus of more than $1.4 billion.
Insurance regulators commissioned their own analysis of the CareFirst surplus last year, which concluded that the company should target a surplus level of $925 million. Appleseed has aggressively questioned that study, noting that the firm that did the analysis — Rector & Associates — concluded in 2009 that CareFirst’s adequate surplus was more than $400 million less.
Hanging over the analysis is the Affordable Care Act. CareFirst argues that the federal health-care law has significantly increased its business risks in the past five years, creating “dramatic market changes . . . which will act to drive surplus down and prevent rebuilding of surplus once lost.” The company notes that its surplus has declined in recent years — due, it says, to the costs of implementing the law.
Smith said that CareFirst has inflated the risks posted by health-care reform and that the assumptions made by both Rector and the company are unjustifiably conservative. “They have conceived remote, improbable, extreme adverse events all happening at once,” he said.
It is unclear how quickly after the June 25 hearing McPherson might rule. Kathryn Hartig, a spokeswoman for the D.C. insurance department, said there is no set timeline.