Consumer Federation of California

Health insurer Blue Shield of California wants to raise rates as much as 20% for some individual policyholders, prompting calls for the nonprofit to use some of its record-high reserve of $3.9 billion to hold down premiums.

In filings with state regulators, Blue Shield is seeking an average rate increase of 12% for more than 300,000 customers, effective in March, with a maximum increase of 20%.

Some consumer advocates and healthcare economists say Blue Shield shouldn’t be raising rates that high when it has stockpiled so much cash. The company’s surplus is nearly three times as much as the Blue Cross and Blue Shield Assn. requires its member insurers to hold to cover future claims.

"Blue Shield is sitting on a huge surplus that is beyond what is required or necessary," said Laurie Sobel, a senior attorney for Consumers Union in San Francisco. "It should be used to hold down rate increases when it hits these extraordinary levels."

California officials can take into account an insurer’s amount of surplus, among many other factors, when determining whether they think a rate increase is reasonable. Both the California insurance commissioner and the state Department of Managed Health Care are reviewing the company’s proposed premiums, but neither agency has the authority to reject changes in rates.

Some other states limit how much surplus can be held by nonprofit health plans. Other regulators press nonprofit insurers to return more money to consumers and the community overall since their stated mission is to serve the public good. Washington’s insurance commissioner has said the two big nonprofit Blue Cross and Blue Shield plans there hold enough surplus to allow a portion of it to be used to reduce rates.

At Blue Shield of California, based in San Francisco, reserves have jumped 77% since 2006 from $2.2 billion to $3.9 billion in September. That has outpaced the company’s 19% growth in annual revenue since 2006.

Blue Shield said its reserves have nothing to do with rate increases, and that money has been put aside for the future benefit of its policyholders.

"Reserves are needed to ensure our members’ claims can be paid no matter what," said Blue Shield spokeswoman Lindy Wagner. "We need them to protect against uncertainties like a pandemic or another crisis."

The company also expects higher costs from an influx of new customers under the federal healthcare law in 2014.

"It’s a once-in-a-lifetime change in the healthcare market that will bring a lot of volatility, and we need higher reserves for that," Wagner said.

Even with these proposed rate increases, Blue Shield said, it expects to lose money in the individual insurance market in 2013.

The insurer said its medical costs for this segment of the business grew 10.6% and what it actually pays is rising 12.5% after adjusting for its portion after customer deductibles. The state’s largest for-profit health insurer, Anthem Blue Cross, cited a similar jump in medical costs in seeking rate hikes as high as 25% for some individual policyholders, effective in February.

California regulators expect to finish their reviews of various company rate filings in the coming weeks.

The Department of Managed Health Care requires the health plans it oversees to maintain a minimum amount of reserves to cover claims. For Blue Shield, that minimum threshold was $218 million as of Sept. 30.

Insurers strive to be comfortably above any government threshold to avoid any concerns and to maintain the confidence of credit-rating firms.

Carl McDonald, a managed-care analyst at Citigroup, said reserves at nonprofit Blues plans across the country reached record levels last year and remain robust thanks to lower medical claims and stock market gains. By one measure, he estimated that Blue Shield of California had a risk-based capital ratio of 1,092% in 2011.

For comparison, the Blue Cross and Blue Shield Assn. requires its member insurers to hold reserves of at least 375% of risk-based capital. Nationwide, state regulators generally intervene if reserves dip below 200%.

McDonald said nonprofit health plans tend to amass more cash because they can’t issue stock like their for-profit rivals and they have limited access to the debt markets. "But it’s quite debatable whether Blues need to hold more than twice as much capital as is required," McDonald said in a recent report.

Blue Shield said its reserve has grown at a slower pace since its pledge last year to limit profits to 2% of annual revenue and return millions of dollars to customers. The company announced that move after a consumer backlash to a bid to raise rates as much as 59% in 2011 that was later dropped.

Overall, the company said it has returned about $520 million to customers over the last three years because of the 2% limit on profits.

Kaiser Permanente, the state’s largest nonprofit health plan, reported $16.3 billion in reserve on Sept. 30 in state filings. But Kaiser said that figure includes the value of buildings and equipment in its large network of hospitals and other medical facilities as well as reserves for that side of its business.

The Kaiser health plan is seeking to raise rates an average of 9% for 220,000 individual policyholders and dependents next month.

Larry Kirsch, a healthcare economist in Portland, Ore., who has studied surpluses at other Blue Cross and Blue Shield plans, said not enough regulators nationwide require nonprofit plans to justify their rationale for hoarding so much cash at a time when many consumers and small businesses are struggling to afford health benefits.

"There ought to be a reasoned analysis for when is enough," Kirsch said. "There always seems to be a ‘sky is falling’ story. I say prove it to me."