Health Plans’ Surplus

Background on Surplus

All health insurance companies set aside money for purposes that may include paying claims, covering unexpected losses, and financing new initiatives. One category of funds held by a company is called “reserves,” also referred to as “claims unpaid.” Reserves represent a health insurance company’s best estimate of the funds it will need to pay for claims that have been incurred but not yet paid. These are among the company’s liabilities. Another category, called “surplus,” represents what a company holds in capital after all liabilities have been deducted from assets. While health insurance companies need some minimum amount of surplus in order to reduce the likelihood of plan insolvency and to ensure that unforeseen contingencies do not render a company unable to meet its obligations to its policyholders, how large this minimum surplus should be is a subject of debate.

The National Association of Insurance Commissioners’ (NAIC) model policy, first developed and adopted in the early 1990’s, recommends a minimum surplus of 200% of the company’s risk-based capital (RBC). Risk-based capital (RBC) is a metric developed to measure the adequacy of capital held by the insurer in light of its business operations, size and individualized risk profile. Minimum RBC standards are used to trigger regulatory monitoring and financial compliance measures in the interest of policyholders, vendors, and the public against chances of solvency.

A 200% surplus provides a more adequate level today than when it was first developed. Significant changes in the health insurance industry and financial environment have caused the baseline modeling assumptions to be overly conservative. (See Larry Kirsch, Report to the Pennsylvania Insurance Department (PDF).) The Blue Cross and Blue Shield Association, the trade association for Blue Cross and Blue Shield companies, requires its member plans to hold at least 375% RBC in surplus.

Both these standards focus on the minimum level of surplus, but there is currently no accepted standard to determine at what level a health insurer’s surplus becomes excessive. This question becomes especially salient when the plan is both holding a growing amount of surplus AND raising insurance premiums at exceedingly high rates.

Surge in Surplus

Over the last few years, there has been a striking increase in the amount of surplus held by nonprofit Blue Cross and Blue Shield health insurers throughout the country. As of December 2003, the 38 nonprofit Blue Cross and Blue Shield insurers in the US retained approximately $20 billion in surplus, a growth rate of 30%, from 2002.* A highly conspicuous example of significant surplus accumulation is in Pennsylvania where, by one estimate, as of 2004 the state’s four nonprofit Blues and their for-profit subsidiaries held over $6 billion in surplus. (Nonprofits can have for-profit subsidiaries but the nonprofit mission of the parent controls the entire corporation. Therefore, any profit from the subsidiaries should be directed back into the parent and the mission.) High surpluses in Blues plans have also recently been reported and drawn the attention of advocates in Delaware, District of Columbia, Hawaii, Maryland, Michigan, Montana, New Jersey, New York, North Carolina, Rhode Island, South Carolina.

* Key Financial Data, Not-for-Profit Blue Cross Blue Shield Plans – 2002 to second quarter 2004, AM Best, Dec. 2004.

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