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Insurers blame rate increase cap for losses topping $150 million

By Robert Weisman
Globe Staff / May 18, 2010

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The four major Massachusetts health insurers yesterday posted first-quarter losses totaling more than $150 million, with three of them blaming the bulk of the losses on the Patrick administration’s decision to cap rate increases for individuals and small businesses.

The carriers attributed $116 million of their $152 million in losses to the April 1 ruling by the state Division of Insurance to deny most proposed premium increases for the so-called small-group market. That category covers 800,000 residents who are self-insured or employed by companies with 50 or fewer employees.

Yesterday’s financial reports renewed the dispute between state officials, who say they are protecting consumers from excessive rate hikes, and the health insurance industry, which complains it is being unfairly blamed for surging medical costs and being forced to sell policies at rates that cause them to lose money.

“The health plans are not collecting enough premiums to cover their costs,’’ said Lora Pellegrini, president and chief executive of the Massachusetts Association of Health Plans. “These results support what we’ve said: that the plans would lose millions of dollars from this scheme and it would do nothing to control underlying health care costs.’’

Barbara Anthony, undersecretary of the state Office of Consumer Affairs and Business Regulation, which oversees the insurance division, said insurers continue to enjoy large financial surpluses. A state report released May 2 showed eight health insurers in Massachusetts had a total surplus of $2.5 billion in 2008, the latest data available.

“The real issue in health care is the skyrocketing increases that are drowning small businesses and working families, who do not have billions of dollars in reserves to fall back on,’’ Anthony said. She said regulators are working to make sure insurers remain solvent while state officials try to engage insurers, hospitals, and doctors to tackle the issue of costs.

That effort got a fresh boost yesterday from another state report that disclosed that many of the state’s biggest health providers are sitting on large reserve funds, some in excess of $1 billion. At the same time, the state Senate is preparing to vote on a proposal that would require many hospitals to make one-time contributions totaling $100 million to help small businesses pay for health insurance.

Despite the losses, most of the largest Massachusetts health plans remain well capitalized and able to withstand the impact of the cap on small-group premiums with the help of other businesses, said Nancy C. Turnbull, associate dean for educational programs at the Harvard School of Public Health.

“I don’t have immediate concerns about solvency,’’ Turnbull said. “In the long term, we need to find ways to deal with the underlying increase in medical costs, which lead to higher insurance premiums.’’

Blue Cross Blue Shield of Massachusetts, the state’s largest health insurance carrier, reported a $65.2 million net loss for the three months ending March 31. Its operating loss was even steeper, $95.5 million. The company drew $55 million from its reserve to cover anticipated losses from the state’s premium cap, accounting for the majority of its operating loss. Although the cap wasn’t imposed until after the first quarter, Blue Cross-Blue Shield executives said accounting rules required their reports to reflect adverse “subsequent events’’ that occur after the quarter closes but before they post financial results.

The net loss for Blue Cross-Blue Shield was partly offset by $26.7 million in investment income in the first quarter. In the same January-to-March period last year, the insurer had a net loss of $36.6 million and generated investment income of $13.7 million.

“We are locked into inadequate premiums, and we’re locked in for a year,’’ said Allen P. Maltz, executive vice president and chief financial officer of Blue Cross-Blue Shield.

Harvard Pilgrim Health Care posted a quarterly net loss of $27 million and an operating loss of $28.6 million, siphoning $21 million from its reserve because of the state action on rates. During last year’s first quarter, it had a $3 million net loss and a $6.9 million operating loss.

James DuCharme, Harvard Pilgrim’s chief financial officer, said the first quarter is traditionally tough for insurers because health care provider rate increases take effect Jan. 1 while insurer hikes are typically phased in quarterly. This year’s denial of rate hikes, DuCharme said, “is unprecedented in its magnitude in the uncertainty it creates.’’

Tufts Health Plan reported a net loss of $51.9 million and an operating loss of $59 million for the quarter. That included $40 million drawn from its loss reserve. For the same period last year, Tufts had a $13.1 million net loss and a $16.5 million operating loss.

The only large carrier that didn’t tap into its reserve in the first quarter was Fallon Community Health Plan, which posted a net loss of $8.5 million and an operating loss of $10.8 million compared with net income of $976,163 and an operating loss of $1.3 million last year.

Health insurers in March proposed rate increases averaging 8 to 32 percent for the small-group market for policies that came up for renewal in the April-to-June period. Because of the insurance division denial, they are obliged to continue using rates from a year ago. The companies are challenging the decision in administrative hearings and through a lawsuit.

Robert Weisman can be reached at weisman@globe.com.