Acrimony and lawsuits have been conspicuously absent from contract negotiations during the past two years, and the provider community – once the most vocal critic of Blues’ dominance – has not been in the forefront of challenging the Blues, at least publicly. Instead, the Blues’ dominance has now come under attack from unexpected quarters, most recently including some powerful entities that have not traditionally been critical of the Blues:

· The Pa. Department of Insurance (DOI), which held public hearings two years ago on whether the Blues’ surpluses are excessive, has recently collected another round of public comments, during which powerful entities – including labor, the City of Philadelphia, and the national Consumers Union – have surfaced, adding new clout to critics of the Blues.

· Pa. legislators are attempting to impact the manner in which the Blues’ use their surpluses, meet their charitable obligations and contract with health care providers.

· Health plan competition in the state is increasing, as UnitedHealth – the nation’s largest managed care company – has declared a major commitment to expanding in Pa., while Aetna gains ground and two Blues plans have competed head-to-head for two years in central Pa.

The four Pa. Blue Cross companies have argued that their surpluses are necessary to continue to conduct stable and responsible business, while critics have argued that the Blues are holding excessive surpluses, which as public assets should be used to fund programs for the uninsured and underinsured.

Recent developments related to surplus and competition are related, inasmuch as large surpluses can be used to subsidize lower premiums and discourage other health plans from entering the market, as the Pennsylvania Medical Society (PMS) and others have argued. As the clout of surplus scrutinizers grows and health plan competition intensifies, Pa.’s Blues are now being pressured on both ends simultaneously.

While no one interviewed for this story believes that these developments are likely to turn Pa.’s highly concentrated health insurance markets into level playing fields overnight, the prospect of more tightly regulated Blues plans facing greater market competition throughout the state could eventually impact health care cost and access, as well as contracting choices by physicians and employers.

Regulatory Scrutiny Builds

At the outset of the Rendell Administration, the surpluses of the Blues plans had been targeted for taxation to fund MCARE relief, before a cigarette tax was ultimately tapped for that purpose.

Under Rendell’s term, the DOI has demanded an unprecedented level of accountability of the Blues, denying several premium increase requests by the state’s four Blue Cross insurers and adopting a skeptical stance regarding their surplus levels, which exceed $4 billion for the four plans combined.

Two years ago, the DOI held public hearings on the Blues’ surpluses that did not result in a determination of whether they were excessive or required a cap, while this January the DOI issued a directive requiring the Blues to apply for approval of their surplus levels and to submit specific information in connection with the application.

To determine what the appropriate maximum of surplus should be, the DOI said it will use a tool known as Risk-Based Capital (RBC), developed in 2000 by the National Association of Insurance Commissioners, which provides a formula to establish capital requirements for insurers while accounting for risks. The DOI said that a range of 350 to 650 percent of RBC might be an appropriate maximum surplus level for the Blues, and that more than 650 percent would likely be considered excessive, although it did not commit to a specific threshold, timetable or course of action if it ultimately deemed the Blues’ surplus figures to be excessive. The DOI did say that companies holding excess surplus would be required to submit a plan to "fairly and equitably" redistribute that money to ratepayers, the uninsured or the underinsured.

All four Blues plans argued in their informational filings that their surplus levels are not excessive, are necessary to continue to survive in the marketplace and to continue to fund a high level of charitable care. The Blues also noted that reducing the size of their surpluses would negatively affect their ability to compete with non-Blue insurers, which the Blues said have much easier access to capital as for-profit corporations.

Independence Blue Cross (IBC) believes the DOI has exclusive jurisdiction over the regulation of surplus for Pa.’s Blues, but argues that a "bright-line, inflexible limit on the surplus of a Blue, without discretionary room for movement based on foreseen and unforeseen business and operational conditions and developments, is unrealistic, unworkable and dangerous," according to IBC spokesman Butch Ward.

Highmark regards the DOI’s activity to investigate and possibly rein in the Blues’ surpluses as "very irresponsible," according to Michael Fiaschetti, senior vice president of Highmark Blue Shield. If the DOI tries to manage the surpluses, he warns, the Blues would be less able to fund charity care programs and would probably have to be more stringent on provider reimbursements, having less money to offer further increases.

Capital Blue Cross and Blue Cross of Northeastern Pennsylvania had obtained a court injunction to prevent the DOI from moving forward with its effort to make Pa.’s four Blues insurers disclose and justify their surpluses, but the Pa. Commonwealth Court lifted the injunction in late July, enabling the DOI to make all of the Blues’ surplus applications available for public comment, which it called "a valuable and necessary part of the Department’s analysis." The Court did agree, however, that sensitive information related to business plans should be kept private, and allowed flexibility in how the Blues plans could calculate their RBC.

During the public comment period, which ended in late September, many Blues critics who had testified two years ago at the DOI hearing over the Blues surplus again submitted comments, including the physician and hospital communities.

The PMS said, among other things, that:

· DOI oversight of Blues’ surpluses was appropriate and the use of Blues’ assets is subject to Attorney General and Court of Common Pleas oversight.

· The Pa. Legislature should adopt clarifying legislation to affirm the requirement that Blues’ assets be held for public rather than private purposes.

· The DOI should study and adopt more efficient mechanisms for protecting against the risks identified by the Blues as the basis for their retention of their surpluses, such as pooling in an independent nonprofit health insurer guarantee fund, or requiring the Blues to pay into the Pennsylvania Insurance Guarantee fund.

· Once freeing up substantial public assets held by the Blues, those assets should be used for improving access to medical care on the part of Medicaid patients by improving funding of Pa.’s adultBasic and CHIP programs, or by bringing Medicaid provider payment up to Medicare norms.

To substantiate the latter recommendation, the PMS said that the state’s fee-for-service Medicaid program pays physicians at rates equal to 60 to 70 percent of Medicare rates for the same or similar procedures, that there has been no overall change in Pa.’s Medicaid physician payment levels since 1988, and that reductions in other payor reimbursements and increases in practice costs threaten the continued participation of physicians in the Medicaid program.

In its filed comments, the Hospital & Healthsystem Association of Pennsylvania (HAP) told the DOI that it is difficult to distinguish the extent to which Pa.’s four Blues plans use their surplus strategies for product line and subscriber needs from their use of surpluses to retain market presence and dominance, that the Blues’ for-profit subsidiaries blur a clear appraisal of the companies’ finances and charitable obligations, and that lack of consistency in reporting requirements for the plans makes appraising these issues problematic.

New clout has been injected into the proceedings on the side of physician and hospital interests. A 13-member coalition of nonprofit organizations and trade unions – with the backing of the of City of Philadelphia, the national Consumers Union, and the Service Employees International Union (SEIU) – commissioned a report on the Pa. Blues’ surpluses by Lawrence Kirsch and IMR Health Economics LLC, which was filed with the coalition’s comments to the DOI.

The coalition alleges that the Pa. Blues have failed in their commitment to facilitate charitable contributions, in part because the DOI has failed to set standards concerning what constitutes the proper amount of charitable health care commitment, that the Blues’ surpluses are significantly in excess, and that they should be redistributed to enhance Pennsylvanians’ access to health care.

The group criticizes the manner in which the DOI conducted its inquiry into the Blues’ surpluses, arguing that it was biased at the outset in favor of the Blues by precluding parties from cross examining the Blues on their surplus application documents, and by inappropriately prejudging the issue by volunteering a suggested range of RBC thresholds, which the Kirsch analysis found to be far in excess of what was justified by data in the Blues’ filings, according to Jonathan M. Stein, Esq., general counsel for Community Legal Services of Philadelphia, which filed comments with the DOI on the coalition’s behalf.

The coalition’s filing repeats one of HAPs’ criticisms: that a significant portion of the Blues’ assets are tied up in for-profit subsidiaries, allowing them to undercount their surplus by focusing on assets of the parent company instead of the subsidiaries, and insulating subsidiary assets from regulators, says Stein. "The Pennsylvania Medical Society for ten years has been trying to trace the Blues’ subsidiary money, and the Insurance Department is not able to find out where that money is going, which would point to the true nature of the surplus," adds Stein.

The coalition is calling for concrete definitions and thresholds for the Blues’ charitable care obligations, including a close investigation into whether Highmark is meeting its obligation to provide a level of charity care at least equal to 1.25 percent of its premiums, which Highmark agreed to do as a condition of state approval in 1996 of the merger between Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield.

The coalition also wants the Blues to be required to redirect unfulfilled charitable obligations to programs to help the uninsured, such as adultBasic, notes Stein.

The group is also calling for the creation of the state-level position of independent public advocate for insurance, similar to the one the state has for public utilities, in which the advocate could protect health care consumers and providers by scrutinizing health plan surpluses and premium increase requests, and who could hire experts to perform analyses of those issues, says Stein.

While medical groups have weighed in before on issues of Blues dominance, Stein believes that the organized effort and allied interest of the groups in this coalition will have a much broader public appeal than individualized actions by provider groups, which can be perceived by the public as bids to increase their reimbursements.

The coalition carries the clout of the SEIU, which has 58,000 members in Pa., over 20,000 of whom are health care workers, according to Jeff Hunsicker, legislative director for SEIU Pennsylvania State Council. The union has been studying health care access and affordability for some time and regards them as priority issues both in Pa. and nationally, he adds, noting that bargaining for contracts that provide adequate health coverage and reflect cost of living increases has become increasingly difficult, resulting in bitter battles and strikes.

By weighing in on the Blues surplus issue, the SEIU hopes to leverage credible data to find solutions to the problems of health care access and affordability. "We haven’t had the kind of public debate and actual data to coalesce people around viable solutions," says Hunsicker, who believes those solutions will require much broader action than single regulatory and legislative actions. The ultimate goal, he maintains, is universal health care coverage in Pa., and the SEIU is looking at the current DOI inquiry as an incremental step toward that goal as a more politically viable solution down the road.

While Hunsicker expresses frustration over the DOI’s historical track record minimally regulating the Blues, and says that the SEIU was disappointed at the reappointment of Insurance Commissioner Diane Koken when Rendell took office, he notes that Koken indicated at her confirmation hearing that she supports doing things under the new administration that other administrations were not committed to doing, and that SEIU is giving Koken and the Rendell Administration the benefit of the doubt that they are serious about effecting change.

The City of Philadelphia for the first time has taken a publicly critical stance toward the Blues, as part of the coalition that funded the Kirsch report, and by filing comments of its own to the DOI, according to Lance Haver, director of the city’s Office of Consumer Affairs. Haver says the city took these actions out of concern for the health of its citizens; rising health care costs for city workers, school teachers and public transportation workers; and the prospect of high health care costs dissuading employers from locating in the region.

Specifically, the city wants the DOI to hold a public hearing in Philadelphia over the Blues surpluses and give city officials the right to cross-examine Blues officials, and is calling for the DOI to appoint an independent public advocate to represent consumers in its review of financial surpluses for IBC – a position which ideally would become permanent within the attorney general’s office and expand to cover all regulated insurance lines, says Haver.

Haver points to the success that Philadelphia had in lowering the cost of automobile insurance under the limited tort option, and he believes that the broad-based coalition of Blues critics of which the city is a part will eventually be successful in achieving its objectives as more people begin to understand the issues involved.

Haver regards SEIU’s decision to publicly criticize the Blues as a significant development, particularly given the large number of labor leaders on the Blues’ boards, and he expects labor’s critical involvement to broaden as the coalition achieves some of its objectives.

The Consumers Union, the national organization that published Consumer Reports magazine, supported the coalition’s comments to the DOI, offered expertise to several organizations in the coalition and helped fund the Kirsch report. Consumers Union is concerned that charitable assets of nonprofit Blue Cross plans be spent on coverage for the uninsured and underinsured, and the organization has done a lot of monitoring nationwide of conversions by Blues plans to for-profit entities, as well as redistribution of assets of nonprofit Blues to for-profit subsidiaries, according to Mark Savage, Esq. a senior attorney with Consumers Union.

The next layer of investigation in Consumer Union’s national work on health care, he adds, is on the question, "What if an insurer has charitable assets, but doesn’t spend it?" The inquiry by Pennsylvania’s DOI into the matter caught the attention of Consumers Union, which is now exploring the issue and educating insurance departments and the public on it nationwide, notes Savage. While the surplus issue has come up in other states, and Blues plans in New Jersey, Rhode Island and Tennessee have entered voluntary agreements to return excess surpluses to subscribers in advance of any order by regulators, Consumers Union believes that regulatory activity in Pa. could serve as a national test case with precedent value on the questions of what constitutes excessive surplus and what should it be spent on, says Savage.

Savage notes that Consumers Union is beginning to formulate broader positions on the issues of surplus levels and obligations of nonprofit Blues plans and may write a report on the issue after it concludes its investigation, which would be available to the public and also be used in CU’s lobbying efforts.

Legislators Weigh In

Several Pa. legislators are also attempting to impact the manner in which the Blues use their surpluses, meet their charitable obligations and contract with health care providers.

Pa. Rep. Phyllis Mundy (D-Luzerne) has been actively critical of the Blues’ surplus levels for the past few years, and has introduced a House bill to require the Blues to use their excess surplus to lower health insurance premiums.

If the DOI determines that the Blues are holding excess surplus, a bill introduced by Pa. Rep. Thomas Tangretti (D-Westmoreland) would require the excess to be used to help Pennsylvanians on the waiting list for the adultBasic program – nearly 100,000 currently – to obtain coverage.

Rep Mario Civera, Jr. (R-Delaware) has introduced a House Resolution requiring the Legislative Budget and Finance Committee to study the reserves and surpluses of the state’s health insurers and to report its findings and recommendations to the House by next summer.

In comments submitted to the DOI, Pa. Sen. Richard Kasunic (D-Fayette) criticized the Blues for providing "no data to support their assertions" that they are subsidizing the state’s CHIP and adultBasic programs, called upon the DOI to provide greater clarity on what is considered charitable actions, and asked the DOI to adopt increased enforcement action.

Kasunic’s comments also claimed that Highmark has not produced evidence that it is complying with the 1996 court order requiring the insurer to provide a level of charity care at least equal to 1.25 percent of its premiums. "Mr. Kirsch and others believe that there has not been compliance with this Order – nor has there been any enforcement and remedial action taken by the Insurance Department," wrote Kasunic. "In light of the eight years of non-compliance with the Order," Kasunic wrote, "I think it may be appropriate to reconsider the 1.25 percent and consider a sizeable upward adjustment for Highmark. Also, the same standard should be set for the three other Plans in Pennsylvania."

Highmark maintains that it is in full compliance with the Order.

Capital Blue Cross President and CEO Anita M. Smith says she has no objections to elected representatives speaking out on the surplus issue and believes that there is an important public policy conversation that is being circumvented by the DOI’s process: the larger question of how best to contain rapidly rising health care costs. Smith maintains that this larger question cannot be answered or solved by narrowly focusing on the Blue’s surplus and that, if the process of establishing a level of surplus is to be performed, it can only be accomplished through legislative action.

Legislative remedies to Blues dominance are also being sought on another issue – contractual inequities between physicians and health plans. About six years ago, the PMS promoted a bill to remove antitrust prohibitions against private physicians banding together in joint negotiations with health plans over reimbursement and contracting issues, under the supervision of the Pa. attorney general’s office. It has since abandoned that approach because similar bills passed in other states have not done much to level the contract negotiation playing field for physicians, and because the Federal Trade Commission and Department of Justice released a report in July critical of the state action doctrine upon which the approach is based, says Dennis Olmstead, PMSvice president and chief economist.

The PMS is now pursuing contracting equity for physicians through contract reform legislation in the Pa. General Assembly, which Olmstead says is more comprehensive than previous versions, which focused solely on striking out all-products clauses from physician contracts. According to Olmstead, bills to restrict egregious practices by health plans, such as claims downcoding and bundling, and payment denials and delays, have been introduced by Pa. Rep. Thomas Gannon (R-Delaware) and Sen. Joseph Scarnati (R-Jefferson).

Competition Intensifies

In the midst of regulatory and legislative pressures on the Pa. Blues plans, competitive pressure is also mounting. UnitedHealth – serving more than 55 million individuals nationwide – has set its sights on all Pa. counties for expansion, while Aetna is also gaining ground, and central Pa. continues to be the most competitive health insurance market in the state.

In the past year or two, Pa. has seen more competition among health insurers than it has in the past ten years, says Olmstead. The PMS holds as one of its major tenets that increased competition will lower premiums, increase reimbursements to physicians and eliminate "coding games" that insurers play with physicians, although Olmstead notes that it is too early to tell if those effects have begun.

A highlight of freshly mounting competition is the recent announcement by UnitedHealth that it is targeting Pennsylvania as part of a regional growth strategy, which recently added some 3.5 million members to the insurance giant with the acquisition of several health plans, including Oxford Health Plans, in the mid-Atlantic region, spanning New York, New Jersey, Maryland, Virginia, and Washington D.C., according to Alan Glenesk, executive vice president of UnitedHealthcare Pennsylvania. With over one million UnitedHealth members also in Ohio, he adds, "Pennsylvania was in the middle. Clearly, we saw an opportunity here."

At the start of 2004, UnitedHealth had 222,000 covered lives in Pa., a number which has since grown by 19 percent "organically" – without any marketing efforts by the company – to 265,000 members, says Glenesk, who notes that the company has just started to market its products in Pa. and is now the third largest insurer in southeastern Pa., after IBC and Aetna.

The company has contracts with 75 percent of the hospitals in the Pittsburgh region, including six out of the 12 UPMC hospitals, and has contracts with 3,200 physicians in Allegheny County. Glenesk says the company has made a commitment to cover all Pa. counties, and it has a new presence in places like Erie, Johnstown, Lancaster, Allentown and Reading.

UnitedHealth has initially targeted large employer groups in Pa. with whom the insurer already has national accounts, but has recently deployed a sales staff to begin marketing to smaller employers, says Glenesk, who notes that about half of all potential commercial insureds are with companies with fewer than 100 employees. Glenesk adds that UnitedHealth was invited to the Pa. marketplace by insurance brokers.

UnitedHealth has added about 8,000 Pa. physicians to its network since the beginning of 2004, bringing its total to 19,000 physicians, according to Glenesk. The company sets its physician recruitment targets at the county level, by specialty, using a 50 percent market share assumption to define its panel needs, he adds.

The company touts its ability to bring more patient volume to providers in its network, at a lower administrative cost than employers and providers may be accustomed to. Glenesk notes that UnitedHealth back in 1999 pioneered the managed care movement away from hard medical management requirements such as physician referrals and company preauthorizations. He says the company spent $2 billion on information technology in the past four years to simplify administration for employers, physicians and hospitals.

By eliminating overhead costs associated with medical management, Glenesk says UnitedHealth has more latitude to compete with other health plans on premiums.

Glenesk says UnitedHealth is also making accommodations for the malpractice cost burden on physicians by reimbursing three high-risk specialties – ob/gyns, orthopedic surgeons and neurosurgeons – at a higher percentage of Medicare rates than other specialties. This spring, the company made rate adjustments to its physician fee schedule to make it more competitive, and now has 74 percent of its physicians on the new fee schedule, says Glenesk.

As Pa.’s employers, labor unions and local governments scramble to find affordable alternatives to their current health plans, Aetna is also capitalizing on the opportunity to bring those alternatives to the marketplace. Aetna has grown its membership in Pa. by 10 percent in the past year, to nearly one million subscribers statewide, with most of the growth occurring in southeastern Pa., according to Russ Dickhart, Aenta’s regional head of national accounts. While Dickhart notes that premium pricing is an important component to staying competitive in the marketplace, he says that much of the company’s success is a function of offering a full suite of product and service choices. Accordingly, Aetna has accelerated its rollout of new products with varying benefits, co-payments and deductibles – including health savings accounts and health reimbursement accounts – to satisfy the needs of different employers. "We have done better this past year than we have in the past three or four years," says Dickhart.

Aetna has recently won contracts with major new clients, including Wawa Inc., AFSCME, Comcast and Bayer, notes Dickhart.

Aetna also touts its online support technology, its ability to offer multiple products – e.g., medical, life and dental – through one channel, its ability to cover employees of large national companies in all 50 states, and its improved customer and provider relations after its recent turnaround efforts.

Another level of competition available to commercial insurers like Aetna and UnitedHealth is the ability to use medical underwriting – setting premiums according to the health status of individuals – which permits them to be more precise in pricing and to reward healthier groups with lower rates. Dickhart says the ability to use that approach has allowed them to offer more affordable plans.

The Blues, as nonprofit insurers, are prohibited from using medical underwriting, and until recently have priced their products by pooling risk and cost using a community-wide rating. The Blues now use a demographic rating method to price their products, which takes into account additional risk and cost factors such as age and gender, but they are still prohibited from fine-tuning their pricing according to health status of individual subscribers. Bills to eliminate the use of medical underwriting by health insurance companies have been publicly backed by IBC and remain in committee in the Pa. General Assembly.

Some Blues have increased physician fees in recent years, although it is not clear whether competition played a significant role in that decision. Highmark increased physician reimbursement by a statewide aggregate of three percent over the past two years, as part of its annual payment schedule review, says Fiaschetti. Next year, Highmark also plans to roll out a pay-for-quality incentive program for physicians, he adds.

IBC increased its standard fee schedule rates for physicians by an average of 22 percent between August 2001 and March 2003, and enhanced other physician reimbursement schedules and programs to yield a combined reimbursement increase of more than $300 million annually since the first changes were introduced in 2001, according to Ward, who says the increases were implemented because IBC was aware of the impact of escalating malpractice insurance premiums and other administrative expense increases on provider practices.

A microcosm of enhanced health plan competition can be seen in central Pa., where Highmark and Capital Blue Cross have competed for two years. The results have thus far impacted market share, but have not yet shown definitive impacts on premiums or physician reimbursement. Before Pennsylvania Blue Shield split from Capital in April 2002, the companies shared 1.1 million members in the central Pa. region, according to Fiaschetti. Highmark now has about 400,000 members to Capital’s 320,000, while HealthAmerica has 200,000 and Aetna has 100,000 members in the region, according to recent figures collated by the Central Penn Business Journal.

Competition has not significantly driven down premiums, as neither the cost of health care delivered per provider, nor the utilization of health care services per health plan subscriber has gone down, says Fiaschetti. "If we dug a very deep hole through underpricing while medical costs are going up, we would need a large ladder to climb out of it," as even a two to three percent error in price projections could lose either insurer a lot of money, says Fiaschetti.

Fiaschetti concedes that Highmark did lose some business because the competition had a lower price, but notes that Highmark didn’t want to do a "bait and switch" with its customers by lowering prices, then raising them later. He also notes that Highmark and Capital are not on a level playing field with other commercial carriers who can medically underwrite healthier patients and offer lower prices on some small group plans.

Central Pa. was already the most competitive region in the state before the Highmark-Capital split, as HealthAmerica had tripled its statewide membership in five years, much of the growth appearing in central region of the state, according to Stephen Foreman, J.D., Ph.D., MPA, associate professor of Health Administration and Economics at Robert Morris University. Rather than engage in strong economic competition, however, insurers in central Pa. may be focusing on strategic marketing – whereby Captial Blue Cross sells to employers by emphasizing loyalty rooted in a long-term presence in the region and other insurers sell on their array of product choices and services, according to Foreman.

As the cost of hospital outpatient services increases at an annual rate of about 20 percent, Foreman believes that the insurers have a strong incentive to keep the status quo on premiums and provider reimbursements to avoid a damaging price war. "Health care cost inflation may be the most significant damper on any competition effects," he adds.

A region in which competing insurers have demonstrated an ability to gain market share and are reluctant to engage in price competition makes a rational target for other insurers – like a UnitedHealth – to enter without fear of losing on operating margins, Foreman believes.

Even with several health plans competing in such a market, however, no physician reimbursement increases are foreseeable in the near term, says Foreman, because any escalating price competition would occur at the premium level to grow market share, giving insurers incentive to minimize costs elswhere, and leaving physicians with the incentive to join new health plan panels simply to keep the patients who are covered under different plans.

When a new health insurance competitor cracks into a market, the amount of leverage it has with providers is relatively low, as the Blues already give the best discounts to large hospitals and health systems, according to Martin Arrick, director of the public finance department at Standard & Poor’s. A new health plan needs membership to attract providers, he says, and only after the newcomer builds a book of business and market share, which is a multi-year process, does competitive pressure on provider rate schedules come.

Competition among health insurance companies in Pa. is still in its infancy, Foreman says. While UnitedHealth’s foray into the state, Aetna’s resurgence and HealthAmerica’s continued growth are all healthy developments, none of them are capable of seriously challenging the structure of the markets as of yet, he adds.