One of California's biggest health insurers will cap its earnings and credit some policyholders if it exceeds the limit as part of an emphasis on policy affordability over company profits.
Blue Shield of California Chairman and CEO Bruce Bodaken called on others in the health care system, including doctors, drug companies and insurers, to focus more on affordability as he detailed on Tuesday his company's goal to generate no more than 2 cents in profit for every dollar in revenue.
"Everyone is going to have to do the kind of soul searching we've done over the past year to make this decision," he said.
The move will likely have little impact on the main thing customers care about – the premiums they pay for coverage – said Robert Laszewski, an industry consultant and former insurance executive.
"I think it's great public relations because it sort of states what they have been doing anyway," he said.
The San Francisco-based insurer said it will start its new policy based on its performance last year, and that means it will return $167 million to policyholders. Blue Shield earned about $315 million last year on roughly $10.1 billion in revenue. That resulted in a 3.1 percent profit margin, which is above its 2 percent limit.
The money will be returned in October in the form of a premium credit. Blue Shield has about 3.3 million members, and about 56 percent of those customers will receive the credits.
Customers with individual insurance policies can expect credits of about $80 for a single policy and $250 for one that covers a family of four. People with employer-sponsored group coverage can expect credits of between $110 and $130 per employee. The insurer also will give some money to hospitals, doctors and not-for-profit groups.
Bodaken said Blue Shield will remain committed to the cap as long as it stays financially solvent and can make investments to remain competitive.
Health insurers, especially those serving California residents, have taken heat in recent years for imposing big premium hikes on people who buy individual insurance. Blue Shield competitor Anthem Blue Cross, California's largest insurer, attracted national attention early last year for plans to raise rates as much as 39 percent for some customers.
Anthem Blue Cross is a subsidiary of WellPoint Inc., the largest health insurer based on enrollment. Criticism of those planned hikes, which the Indianapolis insurer later dropped, helped reignite a stalled health care overhaul debate in Congress.
Blue Shield faced scrutiny from state regulators earlier this year for proposed double-digit rate hikes for individual health insurance policyholders. It also withdrew the proposed increases.
Insurers have said their rates are rising in part because health care costs are climbing.
Bodaken said the cap has nothing to do with their rate increases or a bill pending in the California state legislature that would give regulators the power to reject rate hikes deemed excessive. He called it a "long-term strategic decision" they thought about for nearly a year.
Insurers have been helped in the past few quarters by slower-than-expected growth in health care use. Several publicly traded companies have reported profits that trumped expectations and started returning cash to shareholders in the form of quarterly dividends.
Whether other insurers will consider a similar profit cap remains to be seen. They are already required to offer rebates to consumers thanks to a new health care overhaul element that essentially requires them to spend minimum percentages of their premiums on health care.
Blue Shield is a not-for-profit company. It makes a profit so it can reinvest in its business and maintain reserves, not to reward shareholders or investors.
Laszewski said these companies tend to generate profit margins of around 2 percent and give excess profits back to customers in the form of rate reductions or freezes, so the cap isn't all that different from how a not-for-profit already operates. For-profit insurers like WellPoint have shareholders to answer to, which makes the possibility of them offering a similar cap unlikely.
"Shareholders are going to expect maximization of profits and aren't going to go for something like that," he said.
WellPoint representatives did not return calls seeking comment from The Associated Press.
Associated Press writer Adam Weintraub contributed to this report from Sacramento, Calif.