PM: The rationale is very simple and straightforward. Each Pennsylvania Blue Plan is a non-profit corporation. As such, in exchange for tax exempt status, they must fulfill a charitable mission. I believe their charitable mission should be to provide the lowest cost health insurance to as many people as possible. The articles of incorporation of each respective Blue Plan, consistent with the Pennsylvania Non-Profit Law, disavow the generation of any profit. Pennsylvania Blue Plans, therefore, cannot accumulate unlimited amounts of surplus. I believe a strong argument can be made that the respective Blue Plans may accumulate surplus only to the extent necessary to comply with applicable Pennsylvania law concerning the amount of surplus required to be maintained by a Blue Cross/Blue Shield Plan. The excess surplus varies for each Blue but, for example, the surplus carried by Blue Cross of Northeastern PA at the end of 2002 was roughly five times that required by the Insurance Department. It was $303 million more than the minimum requirement.

PM: I first became interested through a Philadelphia Inquirer article on the subject. I was not satisfied with the answers to questions I asked the Insurance Department about it. It concerned me then that the surplus seemed so large at the same time that my constituents were seeing double digit rate increases and, with every increase, more people were losing insurance coverage. The more uninsured people, the more uncompensated care that hospitals are forced to subsidize and the higher the rates for every individual and employer who pays for health insurance.

I later became aware that a series of class action lawsuits were brought by policyholders and subscribers of the respective Pennsylvania Blue Plans in the Courts of Common Pleas of Lackawanna, Bucks and York counties by, among others, the Philadelphia law firm of Miller, Alfano & Raspanti, P.C. In general, the lawsuits allege that, in violation of the Pennsylvania Non-Profit Corporation Law, each Blue Plan has generated excessive profits, also known as excess surplus. The lawsuits made public, and created a much-needed debate over, a significant issue for all citizens, namely, affordable health care. After reviewing the lawsuits and researching the matter, it became clear that the lawsuits had merit and action had to be taken to remedy the problem of excess surplus by these non-profit corporations.

PM: I believe it is extremely significant. After years of limited or no action, under Governor Rendell’s leadership, the administration is finally taking a long-needed hard look at the business practices of the Blue Plans. In fact, the Administration, through the Department, is taking even more significant action to require the Blues to finally justify their surplus levels. The Department has just published (I’m told it will appear in the January 17 Pennsylvania Bulletin) a directive requiring each Blue to submit an application for approval of its reserve and surplus. The Department’s letter to me indicates that they believe an appropriate Risk Based Capital (RBC) ratio range for the Blues Plans to be between 350% to 650%. The letter also states that the Department of Insurance believes "additional tools and reporting requirements are necessary" to assess the extent to which the surplus is excessive and whether it is being properly used to benefit Blues Plan members and to carry out their social mission.

PM: The Insurance Department’s action represents an extraordinarily proactive approach to the excess surplus issue. For the first time in history, the Blues will be required to provide a justification for their excess surplus levels. Clearly, this is a welcome and needed development.

As to the adequacy of the caps, I believe there will need to be a significant showing by any Blue Plan to justify needing an RBC percentage of 650%. As the lower end of the proposed range (350% of RBC) is itself one and a half times the amount required for solvency purposes, 350% of RBC should probably be more than sufficient protection to ensure against insolvency. Further, none of the historical financial information that I have seen provided by the Blues justifies a need for an amount significantly higher than this amount of surplus. For example, some of the Blues had increased surpluses for over a decade. If there never was a need to tap into the surpluses, continued accumulation or retention of excess surplus is simply unnecessary.

The implementation of caps certainly should have an immediate effect on the rate payers as any excess will be immediately returned. As to future premiums, if the Blues are prohibited from accumulating unlimited amounts of surplus, that prohibition should also favorably impact premiums as well. Finally, I think the nature of this announcement clearly signals a different and positive approach toward the Blues.

PM: I certainly hope so. With the change in administration, I think we have seen the first significant steps toward a more proactive approach toward the regulation of health insurers. While it is true that the recent rate increase denial was limited to very few individual policies, it does appear to me that the Rendell Administration is serious about making sure that the Blues Plans will, in the future, carry out their mission as it was originally intended.

PM: To be frank, I am unaware of the last time there was an outright and complete denial of a requested rate increase by a Pennsylvania Plan. It should be noted, however, that the denials help only a small portion of the Blues’ subscribers. For group plans - the overwhelming majority of the Blue Plans business - large rate increases have continued unabated.

PM: The rationales and explanations of the Blue Plans for their levels of surplus consistently shift. For example, we never heard of the Blue Cross Blue Shield Association’s recommended levels until the issue was made public by press accounts of the class action lawsuits challenging the surplus levels. Then, the Blues even sought to take refuge behind 9/11 as a rationale for their surpluses ignoring, of course, that their surpluses were excessive even prior to 9/11. Also significant is that, in their statutory financial statements, these issues are never identified, and none of the Pennsylvania Blue Plans represents that it needs every dollar of its surplus for these ever-shifting arguments. In fact, these same statutory statements continually state that losses were less than expected and, therefore, less reserves are needed. The arguments about keeping premiums low might have some credence if Pennsylvanians enjoyed relatively low insurance premiums; but that is not remotely the case. And I have yet to hear how Pennsylvania is so unique that its Blue Plans carry almost $4 billion in surplus when the Blues in other states have many more subscribers and much more in claims payments yet do not carry nearly as much in excess surplus. Quite simply, the arguments seem like attempted justifications for unjustifiable conduct.

PM: I am not an expert on competition but I know enough to see that there are no viable, long-term competitors for the Pennsylvania Blue Plans. I think that if the Blue Plans are regulated more carefully, other Plans will have the ability to enter the market and compete.

PM: The Governor’s proposal was a plan to provide a source of funding to assist physicians with their medical malpractice insurance payments. I certainly cannot speak for the Governor or the Administration, but it’s my understanding that when the Governor approached the Blues for their cooperation he was refused. Frankly, the difficulty in getting legislation passed to require them to turn over some of the surplus, along with the litigation that would inevitably have ensued, made that approach seem insurmountable to me.

PM: These issues have created a climate of more scrutiny, which is a good thing. I believe that greater public scrutiny of the Blue Plans will inevitably lessen their political influence. The constituent feedback I have received from my advocacy on this issue has been overwhelmingly positive. The lawsuits challenging the activities of the non-profit Blues have shined a spotlight on the activities of the Blues. That spotlight has illuminated practices that have fostered much closer attention to what the Blue Plans are doing. While such large corporations undoubtedly will have influence in the state, such a significant issue as non-profit corporations acting with a for-profit motive, especially when it involves an issue as critical as health care, makes it difficult to go back to business as usual. Also, the critical importance of adequate health care mandates that every effort be made, regardless of political views or affiliations, to ensure that Pennsylvania citizens have access to affordable health care.

PM: Nationwide, there have been serious issues relating to the consolidation of Blue Plans and conversion to for-profit status. Pennsylvania’s laws do not provide a statutory framework to guard against consolidation or conversion that would protect the citizens of the Commonwealth and prevent a financial windfall to the non-profit corporations. I worry that these Blue Plans will convert to for-profit status and the almost $4 billion in surplus will be taken from its rightful owners.

PM: In my view, the Blues have not remotely fulfilled their unique statutory role as legislatively declared charitable and benevolent institutions. We get back to my belief that their charitable mission is to provide low cost health insurance for as many people as possible. Blue Cross of Northeastern PA, for example, believes that its mission is to use subscriber premiums (and the investment income from it) to establish grant programs and "other worthwhile community initiatives." I question whether Blue Cross should be using subscriber premiums for charitable giving, however worthy the recipients may be. Even with this charitable giving their excess surplus is huge. And despite their ever increasing surplus, the amount of social mission contributions of Highmark and Independence Blue Cross have decreased from prior years.

PM: Last year, I introduced, with many of my colleagues, legislation that specifically addressed the surplus issue as well as the conversion issue. My bill (HB 202) would, in simple terms, require a reserve in the amount necessary to pay three months worth of claims and return the rest to ratepayers. My conversion bill (HB 208) sets up a legal process the Blues would have to undergo to convert from non-profit to for-profit. When I introduced these bills (I originally introduced them last session) in early 2003 there were no Republican co-sponsors on HB 202 and only two on HB 208. Although, since the recent media attention to this issue and a flushing out of the details, several Republican members have expressed their support. When I introduced the surplus bill, I did so to offer a concept. I am not an actuarial or insurance expert by any means. I cannot determine an appropriate level of surplus for these companies to remain strong. My goal has always been to get the Insurance Department to serve the public by regulating these Plans the way they should. It appears that, with Governor Rendell at the helm and with all the public support that’s been generated, I have succeeded. I certainly hope that’s the case.

PM: To be honest, I have yet to see any other significant legislation proposed to address these issues. However, my House colleagues have been watching the positive reaction to the Insurance Department’s recent actions and have been very supportive of my efforts.