Senate Health Policy Committee

1
Senate Health Policy Committee

• Coalition for Access and Affordability
• Testimony
• January 30, 2008
• Joseph T. Aoun, Esq.
• Nuyen, Tomtishen and Aoun, P.C.
• Northville, MI

2
High Risk Pools Insurers of Last Resort

• Approaches to Address the Difficult to Insure

3
Coalition for Access Affordability in Michigan

• CAAM is a group of private insurers who value
  promoting health care reform in Michigan
• CAAM believes in Health Insurance Reform that
• Assures Affordable Health Care
• Increases Access to Health Care
• Provides for Competition and Choice
• Provides for Transparency
• Promotes Accountability, Health and Wellness

4
High Risk Pools and Insurer of Last Resort

• Two options
• Each represent a different approach to addressing
  the problem of covering the uninsurables
• Mutually exclusive
• Option One Michigan can create a high risk pool
  and eliminate the role of BCBSM as insurer of
  last resort.
• Option Two Michigan can continue current
  approachBCBSM as insurer of last resort.

5
High Risk Pools and Insurer of Last Resort

• Both Option One and Option Two involve important
  tax policy considerations
• Option One/High Risk Pools need broad based
  financing
• Assessing insurers or providers to fund the pool
  is essentially a tax
• Option Two/Insurer of Last Resort
• Obligation is part of quid pro quo for state and
  local tax-exemption
• Option One and Option Two have significantly
  different public policy aims
• Focus of High Risk Pool is covering uninsurables
• Insurer of Last Resort obligations is part of a
  broader state policy to improve access and
  quality and lower costs for all state residents

6
High Risk Pools and Insurer of Last Resort

• PA 350 It is the purpose of and intent of this
  act, and the policy of the legislature, to
  promote an appropriate distribution of health
  care services for all residents of this state, to
  promote the progress of the science and art of
  health care in this state, and to assure for
  nongroup and group subscribers, reasonable access
  to, and reasonable cost and quality of, health
  care services, in recognition that the health
  care financing system is an essential part of the
  general health, safety, and welfare of the people
  of this state. Each corporation subject to this
  act is declared to be a charitable and benevolent
  institution and its funds and property shall be
  exempt from taxation by this state or any
  political subdivision of this state.

7
High Risk Pools and Insurer of Last Resort

• Choosing Option One/High Risk Pools entails
• Developing a broad based financing mechanism
• Insurer assessments, provider taxes/surcharges
• Determining the extent to which assessments will
  affect Michigan business tax liability of
  insurers and providers
• Establishing an effective governing body
• Developing criteria for eligibility
• Changing HIPAA designations

8
High Risk Pools and Insurer of Last Resort

• Choosing Option One/High Risk Pools entails
• Determining the extent to which BCBSM should be
  subject to state and local (property) taxation
• If subject to taxation, should it remain
  nonprofit or be converted to for-profit?
• Would the state benefit from a for-profit
  conversion and sale?
• BCBSM Surplus belongs to the residents of the
  state of Michigan (nearly 3.0 billion). A
  sale would involve a considerable multiple of
  that amount
• The experience of other states
• Blue Cross plan is subject to state taxation
  where there is a high risk pool
• Blue Cross conversions and funding of trusts to
  provide or finance health care coverage

9
High Risk Pools and Insurer of Last Resort

• Choosing Option Two/Insurer of Last Resort
  entails
• Evaluating the benefits of the tax-exemption in
  light of the burden of being insurer of last
  resort
• Determining whether to strengthen the social
  mission focus of BCBSM in light of PA 350
  objectives regarding cost, quality and access
• The experience of other states
• PennsylvaniaEnsuring assets directed to health
  coverage for the uninsured
• Community Health Reinvestment Agreement

10
Common Considerations under Option One and Option
Two Individual Market Dynamics

• Not everyone who buys individual coverage is
  sick or has above average health care costs
• Not everyone who selects the Insurer of Last
  Resort is uninsurable
• If the Insurer of Last Resort offers an
  attractive product in terms of pricing, benefits
  and participating providers, it will attract
  good risk
• In contrast, the High Risk Pool only insures
  unfavorable risk

11
Common Considerations under Option One and Option
Two Market Shares

• Approximately 388,000 people insured,
  approximately 35 with BCBSM and its HMO
  affiliates (BCN and M-Care).
• HMOs cover approximately 1.7
• Commercial insurers cover approximately 63.3
• BCS Life Insurance Company, in which BCBSM has an
  indirect ownership interest, insured
  approximately 19.5 of the market
• No other commercial insurer had more than a 6
  market share

Source OFIS Form 0322 filed by all carriers
(2006)
12
Commercial Market Share of BCBSM and Affiliates
(Individuals Groups)

• 12/31/06 Market Share
• Total Residents per Census Bureau 9.9 million
• Less Medicare beneficiaries per CMS (1.5
  million)
• Less Medicaid recipients under age 65
  (estimated) (1.3 million)
• Commercial Population 7.1 million
• Less Uninsured (per Census Bureau) (1.0
  million)
• Insured Commercial Population
  6.1 million
• Blue Cross, BCN and M-Care Commercial Enrollment
  4.3 million
• Market share of Insured Commercial
  Population 70.5

Sources U.S. Census Bureau Centers for
Medicare and Medicaid Services Michigan
Department of Human Services BCBSM and
affiliates filings with OFIS.
13
Common Considerations under Option One and Option
Two Regulation

• Guaranteed issue
• BCBSM unique under state law (Insurer of Last
  Resort) and HIPAA (alternative mechanism)
• HMOs have a guaranteed issue obligation subject
  to certain limits
• Guaranteed renewal and group conversion
• All companies treated the same
• Premium rating
• Community rating by BCBSM and HMOs
• Age rating by BCBSM
• Health status by commercial carriers
• Pre-existing condition limitations
• BCBSM must waive for HIPAA eligibles otherwise 6
  month limit
• HMOs 6 month limit commercial carriers 12 month
  limit

14
Common Considerations under Option One and Option
Two Financial Burden

• While having to insure all comers presents a
  risk of adverse selection and losses, this burden
  is mitigated in the case of BCBSM due to
• Tax-exemption
• Lower provider rates of payment
• Large enrollmentnearly 5 million
  individualsthus improving ability to spread risk
  and initiate successful care management programs
• Group profits
• Over the past five years, BCBSM has earned more
  than 1.0 billion in commercial business
  underwriting profits

Source BCBSM Annual Statements 2002--2006
15
Common Considerations under Option One and Option
Two Financial Burden

• In 2006, BCBSM covered approximately 124,000
  individuals, more than half of whom were group
  conversion members
• As noted above, group conversion obligations are
  the same among all carriers many carriers
  experience losses in this segment
• In the nongroup or classic individual market,
  BCBSM projected a loss of 6.5 million for 2006.
• Substantially less than value of tax-exemption
• De minimus in relation to overall profitability
  of BCBSM
• The loss would be even less after taking into
  account investment income and subsidiary income

Sources BCBSM Nongroup Rate Filing, dated
October 24, 2006 BCBSM Medicare Supplement Rate
Filing, dated February 8, 2007.
16
Common Considerations under Option One and Option
Two Financial Burden

• From 2002 through 2006, Blue Cross has made 1.85
  billion (pre-tax), more than one million dollars
  a day
• Consolidated Net Income (GAAP)
• (before federal income taxes)
• 2006 279.6 M
• 2005 337.3
• 2004 497.5
• 2003 440.0
• 2002 292.9

Sources BCBSM 2002 2006 Audited Financial
Statements
17
Capital and Surplus/Fund Balance Growth
18
Individual Market Reform Challenges and
Considerations

• Michigan statistics show that 73 of households
  with an uninsured member include at least one
  full-time working adult.
• An estimated 60,000 Michigan households have a
  worker eligible for employer-provided insurance
  who fails to take-up coverage. Over 65 of the
  time, such workers fail to take-up coverage
  because they cannot afford their share of the
  cost of coverage

Source Michigan State Planning Project for the
Uninsured, Report dated August 2006.
19
Individual Market Reform Challenges and
Considerations

• The challenge in the individual market is to
  improve affordability, not to change the
  mechanism for covering the uninsurables
• The financial impact associated with the
  uninsurables is considerably less than the
  financial impact associated with the uninsured
• Less than 1 of the states population is
  uninsurable, yet more than 10 of the states
  population is uninsured
• Families USA estimated that, in 2005, the cost of
  the uninsured in Michigan was 1.1 billion, and
  that private health insurers picked up two thirds
  of this cost

Source Paying a Premium The Added Cost of Care
for the Uninsured, Families USA, June 2005.
20
Individual Market Reform Challenges and
Considerations

• Competition lowers costs, and the Michigan
  individual market is fairly competitive
• BCBSMs market share (about 35) is the largest,
  but it is half of its overall commercial market
  share (about 70)
• The largest factor driving premiums is claims
  cost
• Risk of higher utilization can be mitigated by
  lower provider rates (BCBSM)
• Risk of higher provider rates can be mitigated by
  favorable utilization (HMOs and commercial
  insurers)

21
Individual Market Reform Challenges and
Considerations

• In assessing the position that reform is
  necessary to level the playing field
• Is regulatory consistency appropriate where
  BCBSM, HMOs and commercial insurers all have
  different statutory objectives and mandates?
• Even if there was regulatory consistency, will
  that truly level the playing field where there
  are important other differences, such as
• Provider payment rates
• Tax benefits/burdens

22
Individual Market Reform Challenges and
Considerations

• In assessing the position that the individual
  market losses undermine BCBSM financial strength
• Are the losses substantial and can they be
  mitigated through proper management?
• How much is due to Insurer of Last Resort
  obligation?
• Not all individuals buying coverage from BCBSM
  are doing so because they cannot get coverage
  elsewhere
• Do other carriers have similar losses, e.g.,
  conversion coverage?
• How much is due to business decisions?
• What is BCBSMs capital and surplus level and is
  it excessive?
• Has BCBSM deployed its capital and surplus in a
  manner to promote lower cost coverage to all
  residents?