07/28/2010 11:08 am ET Updated May 25, 2011

How Much is Too Much?

How can some nonprofit health insurers justify hiking premiums year after year when they are sitting on a mountain of surplus funds?

Over the last ten years, nonprofit Blue Cross and Blue Shield (BCBS) health insurers across the country have set aside billions of dollars in surpluses. At the same time, some these health plans raised insurance premiums for consumers by as much as 20 percent a year.

At Consumers Union, the nonprofit publisher of Consumer Reports, we have a new report called "How Much is Too Much." Based on what we have documented, we think state insurance commissioners need to take a hard look at the surpluses collected by nonprofit BCBS health plans and do more to rein in these skyrocketing rate increases.

We examined how Blue nonprofits have hit consumers with big premium hikes while they built up enormous reserves. These rate hikes could have been reduced or avoided if companies had taken just a part of their surplus and put it toward rate stability, while leaving sufficient funds to ensure financial solvency.

First, some background: Surplus is the excess of an insurance company's assets over liabilities. Health plans hold surpluses to protect the company and its members from financial losses. That's a good thing. But when we reviewed ten different nonprofit BCBS plans, we found seven of them held more than three times the amount of surplus that regulators typically require as the minimum needed for solvency protection.

These surplus funds come primarily from consumers' pockets. Insurers typically include a targeted contribution to surplus in rate increases. While surpluses can be used to moderate premium increases, some financially strong BCBS plans with large surpluses keep rolling out double-digit rate increases. We found several examples:

  • Blue Cross Blue Shield of Arizona raised rates for its individual market customers between 14.5 percent and 19.4 percent in 2007, 13.1 percent and 15 percent in 2008, and 8.8 percent to 18.4 percent in 2009. During that time, the company's surplus grew from648.3 million to717.1 million, which is more than seven times the amount that regulators consider to be the minimum necessary for solvency protection.
  • Health Care Service Corporation (HCSC), doing business as Blue Cross Blue Shield of Texas, Illinois, New Mexico and Oklahoma, raised rates in Texas on some individual and family plans multiple times in a year between 2007-2010. Some Blue Cross Blue Shield of Texas rate increases exceeded 20%. In Illinois, the company filed for rate increases of 10.2% in 2007, 18% in 2008, and 8.4% in 2009 for some customers, and in New Mexico, some customers faced annual increases of more than 20% since 2007. At the time of these increases, HCSC's surplus grew from6.1 billion in 2007 to6.7 billion in 2009, up from4.3 billion just four years earlier in 2005. The company's surplus is five times the minimum required for solvency protection.
Consumers depend on state insurance commissioners to ensure that insurers are financially strong, but they're also counting on regulators to help make sure that coverage is affordable. The new health reform law requires the Department of Health and Human Services to define and states to review "unreasonable" rate increases. It also mandates how much of a premium must be spent for health care and how much for administrative overhead (also called the "medical-loss ratio"). We're urging state insurance commissioners to develop standards for minimum and maximum surplus that is appropriate for insurers to hold. We're also encouraging all state commissioners to consider rejecting or reducing rate increases, particularly on individual market plans, when the company has more surplus than is necessary for solvency protection. Maintaining a healthy surplus is absolutely critical, but health insurance premiums shouldn't keep going up year after year when some of these insurers are accumulating such huge surpluses. It's time for regulators to look into these surpluses and crack down on bloated surpluses to help keep runaway premiums in check.