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Blue Cross & Blue Shield of Rhode Island

Targeted Market Conduct Examination with regard to compliance with R. I. Gen. Laws §§ 27-50, et seq.,

Small Employer Health Insurance Availability Act

Final Report September 11, 2006

Hinckley, Allen & Tringale LP DeWeese Consulting, Inc.


Market Conduct Examination

TABLE OF CONTENTS Page Number

Salutation 1. Introduction 2. Executive Summary 3. Summary of Recommendations 4. Overview of Chapter 27-50 5. Examination Methodology 6. Changes in Chapter 27-50 7. Profile of Blue Cross Small Employer Business 8. Changes in Blue Cross Operations since the last Examination 9. Management Structure for Small Employer Business 10. Marketing to Small Employers 11. Rating Methodology for Small Employer plans 12. Underwriting Methodology for Small Employer plans 13. Review of Direct Pay Business 14. Review of Company Process for Responding to Complaints 15. Review of Contract and Forms 16. Medical Management 17. Carrier Concerns and Recommendations for change 18. Achievement of the Purposes of Chapter 27-50 19. Conclusions 20. Blue Cross's Initial Comments on the Report

Appendices

1. Glossary 2. Review of Recommendations from 2002 Report 3. Legislative History of Chapter 27-50 4. Blue Cross Statistical Supplement 5. Summary of Recertification Case Sample Analysis 6. Summary of Medical Underwriting case sample analysis 7. Summary of Complaint Log

Exhibits

2 3 4 14 16 18 20 23 29 30 30 44 60 78 83 86 93 95 100 103 104 117 121 132 136 147 148 149 152

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September 11, 2006

Honorable Christopher Koller Health Insurance Commissioner State of Rhode Island Dear Commissioner Koller: In accordance with your instructions and pursuant to statutes of the State of Rhode Island, a targeted Market Conduct Examination with regard to compliance with R. I. Gen. Laws §§ 27-50, et seq., the Small Employer Health Insurance Availability Act (“Chapter 27-50”) was conducted of:

Blue Cross & Blue Shield of Rhode Island (“Blue Cross”) Providence, Rhode Island

This examination was done to support the periodic market evaluation required by R.I.G.L. § 27-50-9. The examination was conducted by Hinckley, Allen & Tringale LP and DeWeese Consulting, Inc. (the “examiners”) of Boston, MA and Canton, CT. It was conducted in accordance with the standards contained in the NAIC Market Conduct Examiners Handbook. The examination involved extensive on site interviews and review and analysis of records at the offices of Blue Cross in Providence, RI. The results of the examination are reported here on a test basis.

Charles C. DeWeese, FSA, MAAA DeWeese Consulting, Inc.

Anthony J. van Werkhooven, PhD, FSA, MAAA DeWeese Consulting, Inc.

Elinor Socholitzky Hinckley, Allen & Tringale LP

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1. Introduction

R.I.G.L. §§ 27-50, et seq., the Small Employer Health Insurance Availability Act

(“Chapter 27-50”) requires that an independent actuarial study and report be prepared to

analyze the effectiveness of Chapter 27-50 in promoting rate stability, product

availability, and coverage affordability. The report may contain recommendations for

actions to improve the overall effectiveness, efficiency, and fairness of the small group

health insurance marketplace. The report shall address whether carriers and producers are

fairly and actively marketing or issuing health benefit plans to small employers in

fulfillment of the purposes of the chapter. The report may contain recommendations for

market conduct or other regulatory standards or action (R.I.G.L. § 27-50-9). The initial

report of this type was prepared as of June 30, 2002. Subsequent reports are required on

a scheduled basis. The Office of the Health Insurance Commissioner of Rhode Island

(“OHIC”) contracted with Hinckley, Allen & Tringale LP (“HAT”) to prepare this report.

In order to collect data in connection with the report and to determine compliance with

Chapter 27-50, OHIC directed that HAT and its actuarial subcontractor, DeWeese

Consulting, Inc. (“DCI”) perform targeted market conduct examinations of the companies

active in the small employer market. Those companies include Blue Cross & Blue Shield

of Rhode Island (“Blue Cross”) and UnitedHealthCare of New

England/UnitedHealthCare Insurance Company (collectively, “United”).

The examiners assigned to perform the targeted market conduct examination of Blue

Cross and to collect actuarial data to support the small employer market report were

Charles C. DeWeese, FSA, MAAA and Anthony J. van Werkhooven, PhD, FSA, MAAA

of DCI and Elinor Socholitzky of HAT.

The examination extended from November 1, 2005 to February 28, 2006. A substantial

portion of the examination took place on site at Blue Cross headquarters, where personnel

were interviewed and data requested, received and analyzed. This examination report

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addresses compliance with Chapter 27-50 on a test basis. It also addresses the profile of

Blue Cross’s small employer business and the effect on Blue Cross and its customers of

Chapter 27-50. During the course of the examination, a substantial amount of data was

obtained and analyzed to support the general overall report being prepared by HAT on

the small employer market in Rhode Island.

Blue Cross personnel have been given an opportunity to review this report. Their

comments are contained in the section titled “Blue Cross's Initial Comments on the Report”.

2. Executive Summary

The targeted market conduct examination of Blue Cross Blue Shield of Rhode Island

(“Blue Cross”) with regard to the Small Employer Health Insurance Availability Act

(R.I.G.L. §§ 27-50, et seq., or “Chapter 27-50”) and Regulation 82 was conducted on site

at Blue Cross from November 17, 2005 through January 12, 2006, with follow up data

requests and interviews through February 28, 2006.

Blue Cross provided office space to examination staff during the on-site portion of the

examination, and Blue Cross personnel and representatives provided information in

connection with the examination. Blue Cross was cooperative with regard to all aspects

of the examination and responded to information requests on a timely and complete basis.

Blue Cross data was collected to enable examination of compliance with Chapter 27-50

in the following areas:

• Verification that policy forms contain provisions that meet the requirements of

Chapter 27-50.

• Review of marketing practices and marketing materials to determine whether all

plans are being actively marketed to all eligible small employer groups.

• Review of sample files to evaluate medical underwriting practices and accuracy.

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• Review of sample files to evaluate the completeness and accuracy of processes to

determine eligibility of groups and to determine eligibility of individuals within a

group, including analysis and maintenance of waivers for eligible employees and

their dependents who choose not to enroll in the health benefit plan.

• Analysis of the rate manual, computer rating models, case pricing details and

actuarial certifications of rate compliance to determine whether rating

requirements of Chapter 27-50 are being implemented properly and accurately.

• Review of detailed expense allocation procedures.

The examination was undertaken in accordance with the standards contained in the NAIC

Market Examiners Handbook. This report contains results of the compliance audit on a

test basis. In addition, substantial data was collected and analyzed to enable the

development of an overview of Blue Cross’s small employer business and Blue Cross’s

rating structure. The resulting statistical data, when combined with that of the other

Rhode Island small employer carrier provides an overview of the small employer market.

Chapter 27-50 defines the small employer market and requirements of carriers in the

small employer market to promote access and availability of health care. Among the key

provisions of Chapter 27-50:

• The small employer market covers employer sponsored groups with at least one

and no more than 50 eligible employees. To be eligible, an employer must be

actively engaged in business and the majority of the employees must work in

Rhode Island.

• All permanent employees who work full-time are eligible. Full-time employment

is defined by §27-50-3(n) as working 30 or more hours per week, although the

employer has the right to consider a lesser number of hours as full-time, as long as

that number is at least 17.5 hours per week. Temporary employees are not

eligible, even if they are full-time.

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• All small employer groups are eligible for coverage, as long as they meet a

minimum participation requirement, which can be no higher than 75%.

• Insurers are required to verify the eligibility of each group on an annual basis, and

to maintain appropriate documentation.

• Rates must be determined on a four-tier composite basis.

• The only rating variables allowed from group to group are age, gender, family

composition and health status. Health status factors can vary by no more than +/-

10%. The combination of all rating variables is limited so that the highest rate

charged for a given plan of insurance and family composition type can be no

higher than four times the lowest rate (referred to as “4:1 compression”).

• Insurers must offer two statutory plans of insurance, known as the Standard and

Economy plans.

Blue Cross, headquartered in Providence, Rhode Island, offers insurance to small

employers in Rhode Island. Blue Cross products are primarily Preferred Provider

Organization (“PPO”) products, although they also offer indemnity and Point of Service

(“POS”) products. Prior to January 1, 2005, Blue Cross offered products designated as

HMO products through its wholly owned subsidiary, Coordinated Health Plans, Inc.

(“CHiP”). CHiP was dissolved as of January 1, 2005, at which time its HMO license was

surrendered and all its assets and liabilities were assumed by Blue Cross.

Blue Cross insured approximately 12,300 active groups as of October 1, 2005. The

groups had a total of 47,000 enrolled subscribers and 92,000 members. This contrasts

with 13,800 groups as of January 1, 2003, with 58,000 subscribers and 115,000 total

members.

This represents a decline in groups of 11% and of subscribers of 20%, and a decline in

the average group size from 4.2 contracts to 3.8. Blue Cross covers approximately 82%

of insured small employer groups in Rhode Island and about 78% of insured subscribers

in small employer groups. At the time of the last small employer market conduct report,

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Blue Cross had a market share of approximately 90%.UnitedHealthCare (“United”) is the

other major carrier offering small employer group insurance in Rhode Island, and they

insure the remaining market share.

Forty-two percent (42%) of Blue Cross’s groups have only one enrolled subscriber.

These are not all necessarily groups with only one eligible employee, however, since

some may have more than one eligible employee, with one or more waiving coverage

because of other insurance. Groups with one enrolled subscriber represent 11% of Blue

Cross’s small employer subscribers.

Blue Cross’s most popular plan is HealthMate Coast-to-Coast (“HMC2C”). It is a PPO

plan that relies on copayments to help manage utilization. The benefit summary Blue

Cross provides to customers shows ten different HMC2C options, with primary care

physician (“PCP”) copayments ranging from $10 to $20, specialty care copayments

ranging from $10 to $25, emergency room copayments ranging from $25 to $100 and in-

network calendar year deductibles ranging from $0 to $1,000. HMC2C plans cover

approximately 76% of Blue Cross small group subscribers, with the overwhelming

majority selecting the richest HMC2C option. That option is paired with a prescription

drug plan that has a $7/$25/$40 copayment structure.

Blue Cross also still offers a variety of plans designated as “Blue CHiP” or “CHiP” to

small employer groups. These plans require the selection of a PCP and a PCP referral to

receive additional services. As mentioned above, Blue Cross considers these to be POS

plans. The plans have similar copayment options to the HMC2C plans. Most of the CHiP

plans do not have an in-network calendar year deductible. Approximately 22% of small

employer subscribers are enrolled in CHiP plans.

Blue Cross also offers its “Classic” indemnity program (with approximately 2% of total

small employer subscribers enrolled), and the statutorily required Essential Care 4 and 5

(described in Chapter 27-50 as “Standard” and “Economy” plans). According to the Blue

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Cross 2004 quarterly enrollment reports, fewer than 70 subscribers were enrolled in the

statutory plans. However, based on the database reviewed by the examiners, as of

October 2005, 114 subscribers were enrolled in the statutory plans.

Although not required to do so by Chapter 27-50, Blue Cross permits any small employer

group to enroll some of its employees in one product (a HMC2C variation, for example)

and others in another product (a Blue CHiP variation, for example). About 11% of Blue

Cross small employer groups offer multiple options to their employees. Because these

tend to be the larger groups, they represent 25% of Blue Cross subscribers. Among

groups with two options, the average size group was approximately 8.5 subscribers, while

among the relatively few groups (about 50) with three options, the average size was

slightly over 14 subscribers.

In its rate manual, Blue Cross assigns a value of 1.00 to the richest HMC2C benefit plan.

The average plan of benefits sold in the small group market during 2004 had a benefit

value of approximately .96 as compared to the richest HMC2C plan. In general, the trend

in plan design seems to be toward slightly less rich plans, but the difference is not great.

Blue Cross’s rates vary by average age/gender factor for a group, by health status

adjustment and by family composition. These factors are all permitted by Chapter 27-50.

As required by Chapter 27-50, variation in rates due to age/gender and health status is

managed within a 4:1 compression ratio.

Blue Cross utilizes multiple marketing channels to obtain its business. Some business is

sold directly. All brokerage business is channeled through a general agent, who is

compensated based on inforce business. Various independent Chambers of Commerce

(“Chambers”) offer their members the opportunity to purchase group health insurance

coverage through Blue Cross, and provide certain administrative services to make the

enrollment, billing and related functions run smoothly. Blue Cross has contracted with

three intermediaries who market its small employer plans and provide administrative

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services. The intermediaries are limited by their agreements with Blue Cross to serving

the one to nine employee segment of the market.

Brokers and intermediaries were compensated by Blue Cross on a percent of premium

basis through December 31, 2004. Effective January 1, 2005, Blue Cross changed its

compensation structure to a per contract per month (“PCPM”) basis. Brokers are paid

$18 PCPM for new and renewal business. General Agents (“GAs”) were previously paid

on a percentage basis (generally 2% of premium, but graded by size), but as of January 1,

2006, there is only one GA, who is now paid $8 PCPM. Since GAs are involved in all

brokered business, the total compensation for brokered cases is now $26 PCPM.

Intermediaries are paid $21 PCPM. Compensation to all outside distribution channels,

when averaged over the entire book of small employer business, cost in excess of $10 per

member per month. Blue Cross is required to obtain approval for all brokerage

commission rates and programs from OHIC1, including the ones mentioned in this report

by the provisions of R.I.G.L. §27-19-10 and §27-20-10, which statutes govern non-profit

hospital and medical service corporations, of which Blue Cross is the only one. Blue

Cross has provided the examiners copies of commission plans and approvals verifying

that it has filed and obtained approval for all brokerage commission rates and programs

used in the small employer market.

Small employers are not required to use brokers or intermediaries to obtain coverage

through Blue Cross. R.I.G.L. § 27-50-12 requires that a carrier actively market to all

eligible small employers on an equal basis. Therefore, if Blue Cross accepts brokered

business for its larger small employer customers, it must permit its smallest small

employer customers to use brokers as well. Approximately 35% of groups including

about 55% of subscribers are represented by brokers. 30% of groups and 15% of

subscribers are represented by intermediaries, while the remaining 35% of groups and

30% of subscribers contract directly with Blue Cross. Eighteen percent (18%) of groups

1 Prior to the creation of OHIC, the Rhode Island Department of Business Regulation (“DBR”) was the regulatory authority.

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with one enrolled employee are represented by brokers, while 75% of groups with more

than ten enrolled employees are represented by brokers.

Blue Cross also has a marketing relationship with the Rhode Island Builders Association

(the “Builders Association”). The Builders Association markets Blue Cross small

employer plans to its members and provides billing and other administrative services.

Blue Cross pays compensation to the Builders Association based on enrollment.

Blue Cross also offers Direct Pay health benefit products to individuals in Rhode Island

who are not eligible for small employer health insurance, and is the only carrier to do so.

It offers Direct Pay on a guaranteed issue basis (Pool I) and an underwritten basis (Pool

II). Direct Pay benefits available are less rich than small employer plans and require

greater cost sharing on the part of the insured. Pool II subscribers are generally younger

and healthier on average than small employer subscribers, and pay lower average rates.

Pool I subscribers are older and less healthy than small employer subscribers, and

generally pay higher rates, although Pool I rates are community rated and do not vary by

age.

When Blue Cross strengthened its eligibility verification procedures after the last small

employer insurance market conduct examination, a number of groups were found not to

be eligible for small employer coverage. Blue Cross reported over 1,100 groups that

were terminated in 2003 because they could not demonstrate that they met small

employer insurance eligibility standards. An additional 400 groups were terminated in

2004 for the same reasons. Blue Cross believes that many of these groups subsequently

enrolled in Direct Pay.

Approximately 57% of Blue Cross small employer subscribers purchase single coverage,

while the remaining subscribers purchase one of the family options. Blue Cross

subscriber contracts cover, on average, two members.

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At the time of the prior market conduct examination, Coordinated Health Partners

(“CHiP” or “Blue CHiP”) was a wholly owned subsidiary of Blue Cross. On January 1,

2005 the assets and liabilities of CHiP were transferred into Blue Cross and CHiP ceased

to exist as a corporate entity. The consolidation did not have an important effect on Blue

Cross’s small employer business.

Blue Cross does not have a separate management structure for the small employer

business. Instead, Blue Cross’s organization is functional and the small employer

business is one of the responsibilities of people who are also responsible for other lines of

business. Within certain departments there are specialists assigned to the small employer

business, including the marketing, underwriting, eligibility certification and actuarial

areas.

Small employer health insurance rates are not required to be filed with the Department of

Business Regulation or the Office of the Health Insurance Commissioner. There are two

annual reports that are required to be filed, however. One of these is the Actuarial

Certification, which is a demonstration that Blue Cross has audited its rating and

underwriting practices and found them to be accurate and in compliance with Chapter 27-

50. The other is a report of enrollment required by Regulation 82-10-G(1). Blue Cross

has filed each of these reports on a timely basis since the implementation of Chapter 27-

50. The examiners reviewed each of these reports and noted no errors or incompleteness,

except for omission of necessary reliance statements from the Actuarial Certifications.

In response to the recommendations contained in the prior report, Blue Cross has

expended a great deal of effort to comply fully with the provisions of Chapter 27-50 and

of Regulation 82. A number of recommendations contained in the prior market conduct

examination report pertained to inadequacies in the processes Blue Cross had in place to

ensure compliance with respect to group and subscriber eligibility. Blue Cross has

established the Recertification Department and invested considerable resources in

developing the various educational materials, policies and procedures, form letters, and

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systems support required to implement these recommendations. The recertification

process they have developed is thorough, and while it has been effective in identifying

groups that are not eligible for small employer coverage, it has been perceived as onerous

by brokers and employers. Blue Cross has made multiple affirmative efforts, through

discussions with DBR and/or OHIC and the examiners and retooling of its procedures

since 2002 to develop the current procedure, which it believes to be the least onerous

fully compliant procedure.

Blue Cross maintains a rate manual, consistent with the requirements of Chapter 27-50.

It updates its rate manual quarterly. It rates all groups using an age, gender and family

composition formula that is adjusted to an average value of 1.00 across its block of

business. The formula is based on the age and gender of single employees, and the age

only of employees with the various kinds of family coverage. Blue Cross’s rate structure

rates the various tiers of family coverage at a direct multiple of the individual rate. The

multipliers used by Blue Cross are based on the expected cost of each family composition

type, and are the same for all groups. Blue Cross has not changed the factors during the

time period covered by the examination.

Blue Cross also assigns rating factors to its small employer groups on the basis of health

status. In order to determine health status, Blue Cross collects health forms from new

groups, and supplements the health forms with analysis of Blue Cross claim records for

members with prior Blue Cross coverage. At renewal, Blue Cross relies on its own claim

records to update health status factors. The process is relatively labor intensive,

involving a staff of seven full time medical underwriters, at an allocated cost of

approximately $.50 PMPM. The factors assigned range from .92 to 1.10, consistent with

the limitations imposed by Chapter 27-50.

The examiners verified the rating factors for a sample of Blue Cross groups and found no

discrepancies.

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Blue Cross’s small employer health insurance revenue for 2005 was approximately

$341.5 million. Blue Cross’s small employer health insurance base rate increases in the

last three years have averaged 19% for new business and renewals in 2003, 9% in 2004

and 7% in 2005. Rate increases experienced by individual groups vary from the

increases in the base rates because of group specific demographic changes from year to

year. The trend in base rates corresponds to the average increases groups would have

seen in those years, since rates are normalized to the base rate.

Blue Cross’s rates generate approximately an 84% loss ratio. Approximately 11% covers

administrative costs, 3% commissions and producer incentive payments, and 2% is built

in for contribution to reserves. The administrative expense charges are similar to those

charged to large employer groups and direct pay. Commissions are relatively higher than

for large employer groups, and are not charged to direct pay customers.

The examiners reviewed Blue Cross’s complaint log. The process for resolving

complaints is adequate and properly documented. Only one issue found in the complaint

log has resulted in a recommendation for change. Apparently one of the intermediaries

has, at least in some instances, charged small employer groups a fee of $15 per contract

per month. As a result of investigation connected with the examination, Blue Cross has

begun an audit of its intermediaries to ensure that they are complying with their

agreements with Blue Cross and with the requirements of Chapter 27-50.

The examiners reviewed a number of the forms Blue Cross uses in connection with its

small employer health insurance business. With a relatively few minor exceptions noted

in the report, these forms provide adequate information to policyholders, allow Blue

Cross to collect necessary information from small employer groups and members, and

comply with the requirements of Chapter 27-50.

During the course of the examination, Blue Cross presented recommendations for

changes to Chapter 27-50. Included in these recommendations were the following:

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• Expansion of rate variable variation to include

o Rating by size of group

o Health status bands expanded to +/- 25%

o Rate differences by age and health status expanded to 6:1 compression

from the currently permitted 4:1 compression

• Removal of groups with one eligible employee from the requirements of Chapter

27-50, and insuring these groups instead through the Direct Pay product.

• Exploration of additional funding for Direct Pay, through expanding the number

of insurers, or a reinsurance subsidy, or some other means.

• Standardization of administrative forms related to eligibility recertification.

• Clarification of whether Rhode Island groups that are affiliates of out-of-state

organizations can be insured under Chapter 27-50.

• Clarification of what business should and should not be considered affiliated in

determining eligible employers for the purposes of R.I.G.L. 27-50-3(c).

The examination staff notes that Blue Cross’s recommendations related to rating would

all act to diminish the community rating effects of Chapter 27-50. In general, Blue Cross

believes that implementation of their recommendations would lead to increasing the total

number of enrolled members and reducing the number of the uninsured.

Generally, Blue Cross has a full understanding of Chapter 27-50, and the examiners

found no substantial areas of non-compliance. A number of relatively minor problems

were identified in the course of the examination. These problems have been identified to

Blue Cross and recommendations for resolution are contained in the report.

3. Summary of Recommendations

1. It is recommended that Blue Cross investigate whether intermediaries are adding

a monthly fee to the premiums charged by Blue Cross and, if so, require that

intermediaries cease the practice.

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2. It is recommended that Blue Cross create a listing that indicates for each small

employer the amount of fees, if any, the small employer paid to intermediaries

since October 1, 2001.

3. It is recommended that Blue Cross review its agreements with the intermediaries

and determine if the fees described are received by the Chambers or the

participating small employer. If Blue Cross determines that the payments are

received by the Chambers, Blue Cross should determine if the receipt of such

payments results in any benefit to the participating small employers. If the

payments made by Blue Cross result in a benefit that accrues to the small

employer it is recommended that Blue Cross determine the amounts paid for each

such small employer since May 1, 2003.

4. It is recommended that Blue Cross establish a plan to periodically audit those

third party entities that collect and remit premiums on behalf of Blue Cross.

5. It is recommended that Blue Cross include in its rate manual a description of the

methodology used to allocate operating expenses to the lines of business.

6. It is recommended that Blue Cross include, as part of its Actuarial Certifications,

statements from all persons on whom the actuary signing the Certification relied.

These statements should include a description of information that the signing

actuary relied upon and that further indicates the accuracy and completeness of

that information.

7. It is recommended that Blue Cross review its policies related to documentation of

out-of-state employers and the treatment of employees of employers who go out

of business.

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8. It is recommended that Blue Cross amend its Sales Agreement to reflect actual

practice with respect to the right of a small employer to terminate.

9. It is recommended that Blue Cross review its documentation (including

electronic) to ensure that it includes groups of one eligible employee within the

criteria for eligible small employer in all its marketing contexts and public

communications.

10. It is recommended that Blue Cross modify the disclosure form to reflect its actual

practice as it relates to the development of rates for individuals over age 65.

11. It is recommended that Blue Cross modify the disclosure form to reflect its actual

practice as it relates to the calculation of the participation level.

4. Overview of Chapter 27-50

Chapter 27-50 defines the small employer market and requirements of carriers in the

small employer market to promote access and availability of health care. Among the key

provisions of Chapter 27-50:

• The small employer market is defined as containing all employer sponsored

groups with at least one and no more than 50 employees eligible for health

insurance. To be eligible, an employer must be actively engaged in business and

the majority of the employees must work in Rhode Island.

• All permanent employees who work full-time (at least 30 hours per week) are

eligible, with the ability, at the employer’s option, to cover employees who work

at least 17.5 hours per week. Temporary employees are not eligible, even if they

work full-time.

• All small employer groups are eligible for coverage, as long as they meet a

minimum participation requirement. The minimum participation requirement can

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be no higher than 75%. No groups or individual employees within those groups

can be denied coverage or terminated for reasons other than non-payment of

premiums, failure to meet minimum participation standards, or fraud or

intentional misrepresentation of material facts.

• There are rules to govern the continuance of small employer eligibility for groups

that become larger than 50 eligible employees.

• Insurers are required to verify the eligibility of each group on an annual basis, and

to maintain documentation of waivers of coverage for eligible employees and

their dependents who choose not to enroll. Small employer carriers are required

to obtain appropriate supporting documentation and terminate or non-renew any

small employer that fails or refuses to provide it, as provided by Reg. 82(6)(B)

and Insurance Bulletin 2002-5.

• Rates must be determined on a four-tier composite basis. That is, there must be

separate rates for each family composition type. The four family composition

types are single coverage, employee plus spouse, employee plus child or children,

and employee plus spouse and children. Rates must be determined on a

composite basis by group, such that each employee within a group with the same

family status will pay the same rate.

• The only rating variables allowed from group to group are age, gender, family

composition and health status. Health status factors can vary by no more than +/-

10% from the adjusted community or average rate. The combination of age,

gender and health status is limited so that the highest rate charged for a given plan

of insurance and family composition type can be no higher than four times the

lowest rate.

• In addition to any other plans of insurance they offer, insurers must offer two

statutory plans of insurance, known as the Standard and Economy plans.

• Small employer carriers must actively market all plans.

• Chapter 27-50 applies to all small employer groups, except that groups that

purchase insurance through the Rhode Island Builders Association are exempt

from R.I.G.L. § 27-50-5 (the rating provisions of Chapter 27-50).

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Subsequent to the period covered by the examination, Chapter 27-50 was amended by the

legislature. Among other changes, the requirement to sell the Standard and Economy

plans has been removed, and the provision allowing carriers to impose a 100%

participation requirement for the smallest groups effective October 1, 2006 has been

removed.

5. Examination Methodology

A preliminary list of data requests was transmitted to Blue Cross on November 1, 2005.

The examiners were provided office space at Blue Cross headquarters, and were on site at

Blue Cross from November 17, 2005 through January 12, 2006, interviewing personnel

and requesting, receiving and analyzing data and other responses.

During the course of the examination, a number of Blue Cross personnel were

interviewed. The primary person at Blue Cross responsible for coordinating data

responses and directing questions to the proper Blue Cross personnel was George Loens,

Senior Actuarial Analyst of the Actuarial Department.

Other Blue Cross personnel who were interviewed or provided responses to questions and

data requests were:

Thelma Bennett, Team Leader, Small Group Underwriting

Paul Brodeur, Manager, Operations Support and PEG Rating

Alan Brown, Business Consultant, Small Group Underwriting

Lauren Cherry, Team Leader, Direct Marketing

James Daly, Cost Accounting Department

Keith Demty, Assistant Vice President, Underwriting

Tim Dyl, Manager, Budgets and Cost Analysis

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Dave Fogerty, Assistant Vice President, Budget Department

Mary Hickey, Assistant Vice President, Medical Management Operations

Brad Johnson, Manager, Direct Marketing

John Lynch, Chief Actuary, Actuarial Department

Augustine Manocchia, M.D., Senior Medical Director

Cathy Mitchell, Senior Actuarial Analyst

Kathi Robbins, Manager, Small Group Underwriting Recertification and

Administrative Units

Robert Wells, Manager, Actuarial Department

In addition to the above named individuals, numerous responses to inquiries were

received from Blue Cross’s outside counsel, Kimberly McCarthy, Esq. of Partridge,

Snow & Hahn, LLP.

All Blue Cross representatives who assisted the examiners were very helpful and

accommodating to our many requests for data and further information. Mr. Loens in

particular was diligent and thorough in researching examiner requests and providing

responses to numerous questions on a variety of subjects, as well as organizing the

responses of all areas to the extensive data requests.

Blue Cross data was collected to enable examination of compliance with Chapter 27-50

in the following areas:

• Verification that policy forms contain provisions that meet the requirements of

Chapter 27-50.

• Review of marketing practices and marketing materials to determine whether all

plans are being actively marketed to all eligible small employer groups.

• Review of sample files to evaluate medical underwriting practices and accuracy.

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• Review of sample files to evaluate the completeness and accuracy of processes to

determine eligibility of groups and to determine eligibility of individuals within a

group, including analysis and maintenance of waivers for eligible employees and

their dependents who choose not to enroll in the health benefit plan.

• Analysis of the rate manual, computer rating models, case pricing details and

actuarial certifications of rate compliance to determine whether rating

requirements of Chapter 27-50 are being implemented properly and accurately.

This report contains results of the compliance audit on a test basis.

In addition, substantial data was collected and analyzed to enable the development of an

overview of Blue Cross’s small employer business and Blue Cross’s rating structure. The

resulting statistical data, when combined with that of all Rhode Island small employer

carriers provides an overview of the small employer market.

6. Changes in Chapter 27-50

Chapter 27-50 was first effective July 13, 2000. In order to give the carriers time to

comply with the rating provisions of Chapter 27-50, R.I.G.L. § 27-50-5(i) specified that

the effective date of the rating provisions of Chapter 27-50, as described in R.I.G.L. § 27-

50-5, was October 1, 2000.

Chapter 27-50 as originally effective required that all small employers be charged

premium rates based on the claim experience of the Company’s entire block of small

employer experience. Prior to the effective date of Chapter 27-50, the rates for the Rhode

Island Builders Association (“the Builders Association”) were based on the claim

experience of the association members who participated in the sponsored health plan.

The Rhode Island Legislature amended Chapter 27-50 effective October 1, 2003, so that

insurance for Builders Association groups is exempt from the rating provisions of

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R.I.G.L. § 27-50-5. This provision has required Blue Cross to develop rates for the

Builders Association based on the claim experience of the Builders Association alone.

R.I.G.L. § 27-50-6, as enacted on July 13, 2000, described requirements for the small

employer carrier to renew health benefit plans. In particular, these requirements made it

difficult for a small employer carrier to eliminate or modify existing health benefit plans.

Legislation effective July 10, 2003 modified these requirements by allowing a small

employer carrier to implement, in accordance with R.I.G.L. § 27-50-6(e), minor plan

changes at renewal and to discontinue a health plan, in accordance with R.I.G.L. § 27-50-

6(a)(7), by providing notice to the affected small employers and their enrollees.

Chapter 27-50 as originally enacted contained various provisions that were intended to

modify certain requirements of Chapter 27-50 at specified future dates.

• R.I.G.L. § 27-50-5(a)(6) as originally enacted and Regulation 82 (5)(B)(3)(b) of

the then current version of Regulation 82 required that the carrier perform a

“second calculation” as part of the rating of individual small employer groups.

The purpose of the second calculation was to limit the impact of the various rating

changes required by Chapter 27-50 to 10% over those resulting from changes in

demographics, trend, and plan changes alone. This section of the law was to

expire September 30, 2002. This provision was extended by subsequent

legislation, but was removed effective July 10, 2003, and is no longer required.

This provision had been difficult for the carriers to implement in practice because

the second calculation required data that either was not maintained in company

records or was not maintained in a format that allowed its efficient use for rate

calculation.

• Until October 1, 2002, a small employer carrier who as of June 1, 2000, varied

rates by health status could continue to adjust rates for health status by plus or

minus ten percent (10%) from the adjusted community rate. This provision

allowed both of the current small employer carriers to continue to use health

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status rating. As originally enacted, a small employer carrier could not use health

status as a rating variable after October 1, 2002. The Rhode Island legislature

enacted a change effective May 30, 2002 that extended the sunset date to October

1, 2004. Legislation effective October 1, 2004 eliminated the October 1, 2004

expiration date. Health status rating is therefore still permitted.

• As originally enacted, prior to October 1, 2002, R.I.G.L. § 27-50-7(a) defines a

small employer as having “no less than two eligible employees and part-time

employees.” As originally enacted, beginning October 1, 2002, the definition of

small employer was to be expanded to include one-employee groups. Legislation

effective May 30, 2002 deferred the implementation of this aspect of the law to

October 1, 2004.While they were not required to offer insurance to groups with

only one eligible employee prior to October 1, 2004, Blue Cross has done so

during the entire time Chapter 27-50 has been effective.

• Changes were made with respect to the maximum participation requirement that

could be required by a small employer carrier for groups with 10 or fewer eligible

employees. As enacted on July 13, 2000, R.I.G.L. § 27-50-7(d)(9) allowed a small

employer carrier to have a requirement that 100% of the eligible employees

participate in the health plan. Chapter 27-50 was subsequently amended to allow a

75% minimum participation level from October 1, 2004 until October 1, 2006,

reverting back to allowing a required 100% participation level after September 30,

2006.

• As originally enacted, R.I.G.L. § 27-50-5(a)(5) required that for each health

benefit plan, the highest rate charged by a small employer carrier for each family

composition type not exceed four times the lowest premium rate for that family

composition type. This requirement is referred to as the “4-1 compression”

requirement. The “4-1 compression” requirement was scheduled to change to a

“2-1 compression” requirement effective July 13, 2002. Legislation enacted with

an effective date of May 30, 2002 maintained the “4-1” compression until

October 1, 2004 and postponed the transition to “2-1 compression” requirement to

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this date. Legislation with an effective date of July 10, 2003 eliminated the

transition to 2:1 compression and maintained the 4:1 compression requirement on

a permanent basis.

Subsequent to the period covered by the examination, Chapter 27-50 was amended by the

legislature. Among other changes, the requirement to include the Standard and Economy

plans in the product portfolio has been removed, and the provision allowing carriers to

impose a 100% participation requirement for the smallest groups effective October 1,

2006 has been removed.

7. Profile of Blue Cross Small Employer Business

Blue Cross, headquartered in Providence, Rhode Island, offers insurance to small

employers in Rhode Island. Blue Cross products are primarily Preferred Provider

Organization (“PPO”) products, although they also offer indemnity and HMO products.

An employee enrolled in a Blue Cross small employer health insurance plan is also

known as a “subscriber” or a “contract”. In this report these terms are used

interchangeably. Dependents are also covered under small employer health insurance

plans. All the people covered under a small employer health insurance plan taken

together are referred to as “members”, a term which includes both the subscribers and the

dependents.

Blue Cross’s most popular plan is HealthMate Coast-to-Coast (“HMC2C”). It is a PPO

plan that relies on copayments to help manage utilization. The benefit summary Blue

Cross provides to customers shows ten different HMC2C options, with primary care

physician (“PCP”) copayments ranging from $10 to $20, specialty care copayments

ranging from $10 to $25, emergency room copayments ranging from $25 to $100 and in-

network calendar year deductibles ranging from $0 to $1,000. HMC2C plans cover

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approximately 76% of Blue Cross small group subscribers, with the overwhelming

majority selecting the richest HMC2C option. That option is paired with a prescription

drug plan that has a $7/$25/$40 copayment structure.

Blue Cross also offers a variety of plans designated as “Blue CHiP” or “CHiP” to small

employer groups. These plans require the selection of a PCP and a PCP referral to

receive additional services. The plans have similar copayment options to the HMC2C

plans. Most of the CHiP plans do not have an in-network calendar year deductible.

Approximately 22% of small employer subscribers are enrolled in CHiP plans.

Blue Cross also offers its “Classic” indemnity program (with approximately 2% of total

small employer subscribers enrolled), and the statutorily required Essential Care 4 and 5

(described in Chapter 27-50 as “Standard” and “Economy”). According to Blue Cross

enrollment reports, fewer than 70 subscribers were enrolled in the statutory plans as of

the last full year for which enrollment was available, 2004. However, based on the

database reviewed by the examiners, as of October 2005, 114 subscribers were enrolled

in the statutory plans.

In conjunction with the sale of small employer health plans, Blue Cross sells dental

insurance products and various riders. Dental plans (with the exception of Blue Cross’s

Essential Dental plan), if available through an employer, may be selected or declined,

independent of the health plan. The Essential Dental product and various health plan

riders, such as vision, pharmacy and acupuncture are sold as part of the health plan and

are not available independently.

All plans are offered by the Blue Cross marketing organization and sold through the same

distribution channels. Although not required to do so by Chapter 27-50, Blue Cross

permits any small employer group to enroll some of its employees in one product (a

HMC2C variation, for example) and others in another product (a Blue CHiP variation, for

example). Blue Cross generally allows up to a total of one Blue CHiP, one HMC2C and

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one Classic product for a small employer group. About 11% of Blue Cross small

employer groups offer multiple options to their employees. Because these tend to be the

larger groups, they represent 25% of Blue Cross subscribers. Among groups with two

options, the average size group was approximately 8.5 subscribers, while among the

relatively few groups (about 50) with three options, the average size was slightly over 14

subscribers.

According to a database of group level information provided by Blue Cross in connection

with this examination, Blue Cross had approximately 12,300 active groups as of October

1, 2005. The groups had a total of 47,000 enrolled subscribers and 92,000 members. This

contrasts with 13,800 groups as of January 1, 2003, with 58,000 subscribers and 115,000

total members. This represents a decline in groups of 11% and of subscribers of 20%,

and a decline in the average group size from 4.2 contracts to 3.8. The average size

contract is slightly under 2 members.

Forty-two percent (42%) of Blue Cross’s groups have only one enrolled subscriber.

These are not all necessarily groups with only one eligible employee, however, since

some may have more than one eligible employee, with one or more waiving coverage

because of other insurance. Groups with one enrolled subscriber represent 11% of Blue

Cross’s small employer subscribers.

Blue Cross is one of two major small employer health insurance carriers in Rhode Island.

Blue Cross currently insures approximately 82% of the small group market by number of

groups. At the time of the prior examination, early 2002, the examiners determined that

Blue Cross covered approximately 90% of small employer groups. Blue Cross groups

include approximately 78% of all small employer subscribers because the average size of

a Blue Cross group is slightly smaller than the average group size for United.

Blue Cross reports the number of plans it insures in March of each year, in compliance

with Regulation 82-10(G)(1). In connection with this report, Blue Cross has reported

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multiple option groups with two different plans of benefits as two “plans”, which makes

comparison difficult with other sources of data which aggregate information by group.

The most recent report, containing data for the year 2004 and reported in March 2005,

shows approximately 14,800 plans issued, of which 1,700 were new issues and the

balance renewals. It also shows cancellation of 1,438 plans.

Based on information contained in the database of group level information provided to

the examiners by Blue Cross, it appears that approximately 1,300 groups have multiple

“plans” either because of multiple benefit options or multiple divisions.

Blue Cross’s small employer group revenue for 2005 was approximately $341,500,000.

The loss ratio experienced was 84%, consistent with the average loss ratio assumed in

Blue Cross’s prospective rate manual development for the fourth quarter of 2005.

Because administrative expenses and commissions are allocated on a per member per

month (“PMPM”) basis2, the loss ratio by plan of benefits varies.

Blue Cross’s small employer health insurance base rate increases in the last three years

have averaged 19% for new business and renewals in 2003, 9% in 2004 and 7% in 2005.

Rate increases experienced by individual groups vary from the increases in the base rates

because of group specific demographic changes from year to year. The trend in base rates

corresponds to the average increases groups would have seen in those years, since rates

are normalized to the base rate.

In its rate manual, Blue Cross assigns a value of 1.00 to the richest HMC2C benefit plan.

The average plan of benefits sold in the small group market during 2004 had a benefit

value of approximately .96 as compared to the richest HMC2C plan. In general, the trend

2 This reflects the methodology used for the development of the rate manual for the fourth quarter of 2005. For the third quarter 2005 rate manual, Blue Cross allocated administrative expenses in proportion to claim cost. These were the only complete rate manuals reviewed by the examiners. The examiners also reviewed the portion of the first and second quarter 2005 and first quarter 2006 rate manuals that show the formulas and factors for rates charged to customers, but not the portion that supports the development of the base rates themselves.

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in plan design seems to be toward slightly less rich plans. Only 45% of groups renewing

in the first quarter of 2005 had the richest HMC2C plan. However, the enrollment in Blue

Cross small employer coverage is weighted heavily to very rich benefit plans.

Blue Cross’s rates vary by average age/gender factor for a group, by health status

adjustment and by family composition. These factors are all permitted by Chapter 27-50.

As required by Chapter 27-50, variation in rates due to age/gender and health status is

managed within a 4:1 compression ratio.

Blue Cross utilizes multiple marketing channels to obtain its business. All brokerage

business is channeled through a general agent, which is compensated based on inforce

business. Blue Cross small employer plans are endorsed by various independent

Chambers of Commerce (“Chamber business”). Blue Cross has contracted with three

intermediaries who market its small employer plans and provide administrative services.

The intermediaries are limited by their agreements with Blue Cross to serving the one to

nine employee group market.

Brokers and intermediaries were compensated by Blue Cross on a percent of premium

basis through December 31, 2004. Effective January 1, 2005, Blue Cross changed its

compensation structure to a per contract per month (“PCPM”) basis. Brokers are paid

$18 PCPM for new and renewal business. General Agents (“GAs”) were previously paid

on a percentage basis (generally 2% of premium, but graded by size), but as of January 1,

2006, there is only one GA which is now paid $8 PCPM. Since GAs are involved in all

brokered business, the total compensation for brokered cases is now $26 PCPM.

Intermediaries are paid $21 PCPM. Compensation to all outside distribution channels,

when averaged over the entire small employer book of business, costs in excess of $10

per member per month.

Based on data from the broker commission system, about 35% of groups including about

55% of subscribers are represented by brokers. Eighteen percent (18%) of groups with

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one enrolled employee are represented by brokers, while 75% of groups with more than

ten enrolled employees are represented by brokers.

Blue Cross also has a marketing relationship with the Rhode Island Builders Association

(the “Builders Association”). The Builders Association markets Blue Cross small

employer plans to its members and provides billing and other administrative services.

Blue Cross pays compensation to the Builders Association based on enrollment.

Blue Cross also allows small employers to contact them directly to purchase small

employer health insurance, and approximately 35% of groups obtain insurance in this

way. Internal marketing representatives interact with these buyers on the telephone, and

are paid a one-time incentive payment of $20 per contract for securing a new small

employer group. Internal representatives are also compensated through salary and

benefits, so the incentive payments are not directly comparable to brokerage commissions

for business that is not sold on a direct basis. Small employers are not required by Blue

Cross to use brokers or intermediaries in order to obtain coverage.

Blue Cross also offers Direct Pay health benefit products to individuals in Rhode Island

who are not eligible for small employer health insurance. The most commonly held

benefit design is similar to the Classic group product, although the trend in Direct Pay has

been toward the HealthMate PPO product first introduced in 2003. Blue Cross has

recently revised its entire Direct Pay product portfolio. The new products and new rates

were subject to a public hearing, and were approved in February 2006.

Blue Cross has two pools of coverage for Direct Pay subscribers. Select Blue (Pool II) is

offered to individuals who provide evidence of insurability, and is age and gender rated.

Direct Blue (Pool I) is available to people who are unable to provide evidence of

insurability, either at open enrollment or at time of conversion from group coverage.

Rates for Direct Blue are community rated, and set roughly equal to the highest Select

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Blue age rates. Blue Cross is the only carrier offering an individual Direct Pay product in

Rhode Island.

When Blue Cross strengthened its eligibility verification procedures after the last small

employer insurance market conduct examination, a number of groups were found not to

be eligible for small employer coverage. Blue Cross reported over 1,100 groups that

were terminated in 2003 because they could not demonstrate that they met small

employer insurance eligibility standards. An additional 400 groups were terminated in

2004 for the same reasons. Blue Cross believes that many of these groups subsequently

enrolled in Direct Pay. Blue Cross Direct Pay benefit plans are generally less rich

(involving greater cost sharing) than the small employer plans purchased by most groups.

Approximately 57% of Blue Cross small employer subscribers purchase single coverage,

while the remaining subscribers purchase one of the family options. Blue Cross contracts

cover, on average, two members.

8. Changes in Blue Cross Operations

At the time of the prior market conduct examination, Coordinated Health Partners

(“CHiP” or “Blue CHiP”) was a wholly owned subsidiary of Blue Cross. On January 1,

2005 the assets and liabilities of CHiP were transferred into Blue Cross and CHiP ceased

to exist as a corporate entity. Blue Cross and CHiP had elected to be treated as one

company for purposes of Chapter 27-50, however, so the consolidation did not have an

important effect on Blue Cross’s small employer business.

A number of recommendations contained in the prior market conduct examination report

pertained to inadequacies in the processes Blue Cross had in place to ensure compliance

with respect to:

• The determination of “small employer” status,

• Employee eligibility,

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• Collection of waiver information, and

• Notifications required when a large employer became a small employer and when

a small employer grows into a large employer.

In response to the recommendations contained in the prior report, Blue Cross established

the Recertification Department and invested considerable resources in developing the

various educational materials, policies and procedures, form letters, and systems support

required to implement these recommendations.

One of the marketing channels utilized by Blue Cross is independent brokers. Blue Cross

requires that independent brokers use a general agent for all broker generated business.

At the time of the prior report, Blue Cross used two general agents. Blue Cross

terminated its relationship with one general agent effective September 1, 2005. Blue

Cross has maintained its relationship with the other general agent and all broker

generated business has that general agent as the designated general agent.

9. Management Structure for Small Employer Business

Blue Cross does not have a separate management structure for small employer business.

Instead, Blue Cross’s organization is functional and the small employer business is one of

the responsibilities of people who are also responsible for other lines of business. Within

certain departments there are specialists assigned to the small employer business,

including the marketing, underwriting, eligibility certification and actuarial areas.

10. Marketing to Small Employers

Blue Cross’s small employer products are marketed in Rhode Island through direct

marketing, brokers, intermediaries, the Builders Association, and the Chamber of

Commerce (“Chamber”) business. These marketing channels are not mutually exclusive.

For example, most Chamber business is administered by intermediaries and a Builders

Association group can appoint a broker of record.

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The following table provides an overview of the Blue Cross small employer business by

marketing channel:

Distribution of Business (12/31/2005 Inforce)Marketing Channel Groups Subscribers Subscribers %

Direct 4,176 14,124 30% Broker 4,305 25,568 55% Intermediary 3,820 6,904 15% Builders Association* 724 2,156 5% Chamber** 2,314 5,000 11%Total*** 12,301 46,596 100% Notes: * Builders Association business may be brokered

** All Chamber new business is administered by intermediaries, while some existing Chamber accounts are managed by Blue Cross directly *** Sum of Direct, Broker, and Intermediary

Direct Business:

Blue Cross does not actively solicit business on a direct basis. Blue Cross has a Small

Group Sales Department staffed by 11 individuals (including the manager) to respond to

inquiries by small employers. In addition, this unit provides sales support to brokers, the

general agent, and the intermediaries. In response to a request from a small employer

Blue Cross sends a package with information about plans available to small employers.

This package also specifies the information necessary for Blue Cross to provide a quote

on a direct basis. Upon receipt of the information package, the small employer may

continue the application process on a direct basis, through a broker, or through an

intermediary. For business written on a direct basis, Blue Cross pays the salaried Direct

Marketing Representatives a one time incentive fee of $20 for each new subscriber.

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Intermediaries:

Blue Cross offers insurance through the following intermediaries: Massachusetts

Business Association (MBA), the Good Neighbor Alliance (GNA), and New England

Benefits Companies (NEBCO).

Intermediaries perform certain administrative and sales functions for Blue Cross. They

function as brokers by selling and renewing small employer health plans. They also

perform administrative functions by issuing proposal and renewal packages, facilitating

subscriber enrollment, issuing monthly statements, and collecting premiums. The

intermediaries remit the premiums they collect on an aggregate basis to Blue Cross. Blue

Cross has an agreement with each intermediary that defines its functions, responsibilities,

and compensation.

The January 1, 2005 agreements between Blue Cross and the intermediaries limit the

marketing activities of intermediaries to small employer groups of one to nine eligible

employees. All new Chamber business comes in through the intermediaries, though Blue

Cross has some “older” Chamber business that was not written through intermediaries.

As of December 31, 2005, the intermediaries represented 3,820 groups or approximately

30% of Blue Cross’s small employer groups and 6,904 subscribers or approximately 15%

of Blue Cross’s small employer subscribers.

Effective January 1, 2005, Blue Cross agreed to pay intermediaries $21 per subscriber per

month for small employer health plan business. Section 4.3 of the agreements with the

intermediaries provides that the intermediary may not add any administrative fee to the

monthly premium charged by Blue Cross and the intermediary may not charge the

employer a separate administrative fee unless the intermediary receives prior approval

from Blue Cross.

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A prior agreement between Blue Cross and MBA with an effective date of May 1, 2003

provided for compensation of 5.5% of the monthly premium and also prohibited the

intermediary from adding any administrative fee to the monthly premium charged by

Blue Cross. It is our understanding that similar agreements were in effect with GNA and

NEBCO.

As part of the market conduct examination, the examiners reviewed a list of complaints

received during a three year period (See the section of this report titled “Review of

Company Process for Responding to Complaints”). The Blue Cross summary of one of

the complaints (2005-DBR-311, received by Blue Cross on July 28, 2005), indicated that

the employer had been paying a fee of $15 per subscriber per month to GNA. An

examination of the file indicated that the Employee-Only rate charged by Blue Cross was

$636.99 per month and the “Employee-Only” rate quoted in a letter from the employer

indicated a rate of $651.99 per month. Following several requests for additional

information, Blue Cross indicated that GNA may have been charging, without its

knowledge, a fee of $15 per subscriber per month. The addition of a fee to the Blue Cross

premium by GNA is prohibited by Section 4.3 of the January 1, 2005 agreement between

Blue Cross and GNA.

The addition of a fee of $15 per employee per month is also a violation of Regulation

82(5)(B)(3)(b), which provides that the maximum fee that can be charged is $5 per

employee per month, and that any fees must be applied in a uniform manner to all groups

(that is, not to just intermediary groups). The prior Market Conduct Examination report3

of Blue Cross stated that up until October 1, 2001 Blue Cross had allowed intermediaries

to include administrative fees of $15 per employee per month in the bills for small

employer groups and that, effective October 1, 2001, the intermediaries would no longer

include an administrative fee in the bills for small employers.

3 See the prior Blue Cross targeted market conduct examination report as of March 31, 2002, page 22.

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The examiners have recommended that Blue Cross commence audits of the

intermediaries and that Blue Cross identify all small employer groups that were impacted

by the collection of subscriber administrative fees and determine for each such group the

amounts collected by intermediaries in violation of Regulation 82(5)(B)(3)(b) and the

Company’s agreement with the intermediary. Blue Cross has advised the examiners that

it has hired the accounting firm Sansiveri, Kimball & McNamee, LLP to conduct audits

of MBA, GNA, and NEBCO. The audit process began on or about March 1, 2006.

Recommendation 1: It is recommended that Blue Cross investigate whether

intermediaries are adding a monthly fee to the premiums charged by Blue Cross and, if

so, require that intermediaries cease the practice.

Recommendation 2: It is recommended that Blue Cross create a listing that indicates for

each small employer the amount of fees, if any, that the small employer paid to

intermediaries since October 1, 2001

Independent Brokers and General Agents

Blue Cross has used independent brokers as a source of business for approximately 10

years. The company decided to contract with general agents to manage their broker

relationships because it did not have prior experience in dealing with brokers. Any broker

placing business with Blue Cross is required to contract with a general agent.

The general agent provides services to both the broker and Blue Cross with respect to all

proposals, renewals, and enrollment related issues. The general agent provides the broker

with access to quarterly continuing education seminars and assistance with licensing. On

an ongoing basis, the general agent facilitates the processing of enrollment forms and

waivers, provides assistance with the sale and installation of ancillary products, and

responds to questions related to enrollment guidelines, underwriting, and benefits. Blue

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Cross benefits from the presence of the general agent because it does not have to develop

the staff and support systems needed to serve the brokerage community.

As of October 31, 2005, approximately 35% of the groups and 55% of the subscribers

were represented by brokers.

Effective January 1, 2005, Blue Cross pays its independent brokers a commission for

small employer health plans of $18.00 for every in-force subscriber per month. Prior to

this date commissions for all Blue Cross business, large and small, were calculated on a

sliding scale ranging from as 4% of premium to 0.25%. This resulted in commissions for

most small employer groups equal to 4% of premiums (3% for Builders cases). Other

commission scales are applicable to small employer dental and life insurance plans. A

commission scale that is calculated as a flat percentage of premium results in commission

levels that increase with the rate of medical inflation. During the first ten months of 2005,

a total of 502 brokers were paid commissions of $4,182,000, excluding bonuses. On an

approximate annualized basis, this would equate to about $5,000,000. The top 8

brokerage companies in total received $1,637,000, or 39% of the total. Twenty-seven

brokerage companies earned commissions in excess of $25,000, representing 60.5% of

total commissions paid.

In addition to the commission of $18 per subscriber per month, the broker may be eligible

for additional payments under the Blue Cross “Broker Persistency Bonus Program.”

Payments under this program are based on the combined performance of the broker’s

block of health business (including large group). The level of payments under this

program is dependent on (i) the persistency experience of the broker’s book of business

and (ii) the volume of new production. Payments under the bonus program can be as high

as 28% of the aggregate commission payments for a twelve month base period. The most

recent completed base period was June 1, 2004 thru May 31, 2005. For this period 9

brokers earned a bonus.

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The examiners allocated the total bonus amount between large group and small employer

health business on the basis of commissions paid during the base period. The following

comments pertain to the portion allocated to the small employer business. The total

amount of persistency bonus paid in 2005 and allocated to the small employer business

was $191,000. Only four of the eight top 2005 commission earners received a Broker

Persistency bonus in 2005.

Brokers - By Amount of

Commissions

Number of

Payees

Amount of Commissions

(000) % of Total

Bonus (000)

Commission and Bonus

(000) >$100,000 8 $1,637 39% $ 145 $ 1,782 $50,000 to $100,000 10 628 15% 16 644 $25,000 to $50,000 9 266 6% 30 296 $5,000 to $25,000 105 1,139 27% 1,139 < $5,000 370 512 12% ____ 512 Total Brokers 502 $4,182 100% $ 191 $ 4,373

Prior to January 1, 2006, the general agent was paid an override on a percentage basis.

The override percentage was applied to all brokerage business, large and small group.

The percentage of premium varied according to the following scale. The percentage was

generally 2% for small employer business.

GA Commission Scale Annual Paid Premium Commission

$ 1 - $ 100,000 2.00% $ 100,001 - $ 175,000 1.75% $ 175,001 - $ 350,000 0.75% $ 350,001 - $ 875,000 0.50% $ 875,001 - $1,750,000 0.25% $1,750,001 - $3,500,000 0.13% $3,500,001+ Blue Cross Consideration

Effective January 1, 2006 the general agent receives an override of $8.00 per subscriber

per month from Blue Cross for all in-force business with a designated general agent.

During 2005, Blue Cross contracted with two general agents, but currently only has one

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general agent relationship. In 2005, Blue Cross paid commission overrides to general

agents of $1,489,000.

The role of the broker is to advise the small employer with respect to the health benefit

plan that best meets the needs of the small employer, regardless of the level of

compensation that the broker may receive. The change from a percentage of premium

commission structure to a flat dollar amount per subscriber is supportive of this principle.

A bonus compensation program that is based on persistency and volume of new business

introduces an incentive for a broker to focus his or her efforts on a single one of the small

employer carriers, possibly to the detriment of the small employer. Unlike for large

groups, where brokerage commissions are reported to the employer in order for the

employer to meet ERISA reporting requirement, there is no such reporting requirement

imposed by ERISA on small employer groups. Because small employers are not required

to report brokerage commissions, Blue Cross is not required to disclose to small

employers the amount of compensation paid to brokers, and they do not. In particular,

Blue Cross has not disclosed to small employers the existence of an incentive bonus

program that rewards the broker for not moving business to a new carrier. There appears

to be no direct prohibition in either Chapter 27-50 or Regulation 82 that prohibits a bonus

program based on persistency of existing business and production of new business. There

is, in today’s business environment, a greater awareness of the possible ethical conflicts

created by such a bonus program by encouraging brokers to give advice that is contrary

to the interest of their client. Insurance Bulletin 2006-2 notifies producers that, effective

January 1, 2006, producers are required to provide a disclosure to policyholders regarding

their compensation. This requirement responds in part to the concern addressed above.

It should be noted that Blue Cross is required to obtain approval for all broker

commission rates and programs from OHIC4, including the ones cited in the report, by

R.I.G.L. § 27-19-10 and § 27-20-10, which apply only to non-profit hospital and medical

4 Prior to the creation of OHIC, DBR was the regulatory authority.

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service corporations. Blue Cross has provided the examiners copies of commission plans

and approvals verifying that it has obtained approval for all commission and bonus rates

and programs that apply to the small employer market.

It is the understanding of the examiners that the incentive compensation programs at Blue

Cross have been approved by DBR and/or OHIC. In addition, DBR conducted a formal

inquiry in 2004 on the issue of contingency payments for all Rhode Island insurers,

including Blue Cross and United, but it is our understanding that no action on this issue

has been required to date.

Rhode Island Builders Association

The Builders Association was one of a number of associations that were separately rated

by Blue Cross before Chapter 27-50 was enacted in 2000. These associations were rated

on their own experience and were generally table-rated, meaning each employee’s rate

was based on the employee’s own age and gender. Builders Association rates were

adjusted for all member groups on a single renewal date, November 1. After the

implementation of Chapter 27-50, groups that belonged to the Builders were required to

adopt the requirements of R.I.G.L. § 27-50-5, including group composite rating, four-tier

demographic rating, a four-to-one rate compression limitation on rate variability, a

limitation on the use of health status to +/-10%, and implementation of the “second

calculation” limiting the effect of changes as compared to the prior rating structure.

Effective October 1, 2003, an amendment to Chapter 27-50 exempted the Builders from

the rating requirements of R.I.G.L. § 27-50-5. As a result of this exemption, Blue Cross

agreed to limit eligibility for insurance through the Builders Association to groups with a

demonstrable connection to the building industry, in order to maintain the integrity of the

remainder of the small employer pool. The amendment allowed Blue Cross to return to

the rating practices in place prior to Chapter 27-50. However, in practice Blue Cross has

rated Builders Association groups in the exact same way as the remainder of the small

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employer pool, except that the experience base is confined to just the Builders

Association groups. All the remaining requirements of R.I.G.L. § 27-50-5 are reflected

in rates applicable to the Builders groups. Initially, this resulted in a modestly lower rate

for otherwise similar groups enrolled through the Builders as opposed to the small

employer pool in general, but the rates have migrated together, and now are virtually

indistinguishable. Blue Cross has advised the examiners that it did not return to table

rating of Builders Association cases because of concerns about issues of migration

between rating systems, particularly if a future change in law might result in a return to

the requirement for the Builders Association business to comply with R.I.G.L. § 27-50-5.

The number of Builders Association groups has decreased from 907 at the beginning of

2003 to 755 as of October 2005. The average size of a Builders Association group is

approximately 2.9 contracts, as compared to approximately 4 contracts for other small

employer groups. Builders Association groups now represent approximately 6% of

overall Blue Cross small employer groups and about 4.5% of small employer contracts.

The Builders Association endorses the Blue Cross small employer plans on its website. A

link on the website makes available a brochure describing a HealthMate Coast-to-Coast

plan, a CHiP Flex 10 Plan, and a CHiP for Medicare plan. This brochure indicates that

other plans are available. Prospects are invited to complete a form with employee census

information and mail it to the Builders Association for a quote. The statutory plans are

not referenced in the marketing material. R.I.G.L. § 27-50-7(b) requires that the small

employer carrier actively market the two statutory health plans. Regulation 82(10)(A)(2)

requires that the small employer carrier use for the statutory plans at least the same

sources and methods as it uses for its other plans. With respect to marketing of the

statutory plans through the Builders Association, Blue Cross sought and received

guidance from DBR in 2003 to the effect that the Builders Association is not required to

market the statutory plans, as long as they are available directly from Blue Cross. Blue

Cross has provided the examiners documentation of the communication with DBR on this

matter.

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Blue Cross advised the examiners that the Builders Association provides administrative

services, including enrollment processing, submission of applications, processing of

subscriber additions and deletions, COBRA administration, responding to subscriber

inquiries, mailing, and billing services. As compensation for these services, Blue Cross

provides administrative fees to the Builders Association of $3.00 per subscriber per

month for the employee-only tier, $4.00 per subscriber per month for each of the other

three tiers, and $2.00 per subscriber per month for Medicare beneficiaries. Intermediaries

are not involved in the administration of Builders business. However, a Builders group

can designate a broker of record. In that case brokerage commissions would be paid to

the broker in addition to the administrative fees that are paid to the Builders Association.

Chambers of Commerce

Certain Rhode Island Chambers of Commerce make available Blue Cross small employer

plans and refer small employer Chamber members to either NEBCO or MBA. It is our

understanding that these relationships are not exclusive, and United also offers insurance

to Chamber members.

The MBA agreements of May 1, 2003 and January 1, 2005 provide for the payment of $1

($3 in the case of employers with one or two subscribers) per subscriber per month by the

intermediary to participating Chamber employers. If payments actually are made to

employers, they may constitute rebates as defined in R.I.G.L. § 27-29-4(8).

In practice, according to Blue Cross, the payment is made to the Chamber. Blue Cross

has indicated that this compensation allows the Chambers to provide certain services that

the intermediaries could not provide, such as advertising the availability of coverage in

member publications, directing members to the intermediaries, holding informational

sessions on coverage, and assisting to some degree with enrollment, billing, and similar

questions for their members. Under the May 1, 2003 agreement these fees were paid by

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the intermediaries with reimbursement by Blue Cross. With the January 1, 2005

agreement between Blue Cross and MBA, these payments were made by MBA without

reimbursement by Blue Cross.

The NEBCO agreement effective January 1, 2005 provides for the continuation of

payment of fees to the Chambers by Blue Cross. Blue Cross advised the examiners that

Blue Cross did not provide the required ninety days notice to the intermediary of the

intended shift of responsibility for payment of these fees from Blue Cross to the

intermediary and as a result Blue Cross agreed to continue the payment of fees to the

Chambers for an additional two year period.

R.I.G.L. § 27-50-5(d) requires that rates can vary only for plan design and differences in

demographics of the group, as allowed by R.I.G.L. § 27-50-5(a). A payment by Blue

Cross to the participating Chamber employers, as described above, would appear to

constitute a difference in rates that would violate this subsection of Chapter 27-50. Such

payments also might constitute illegal rebates under R.I.G.L. § 27-29-4(8).

Recommendation 3: It is recommended that Blue Cross review its agreements with the

intermediaries and determine if the fees described are received by the Chambers or the

participating small employer. If Blue Cross determines that the payments are received by

the Chambers, Blue Cross should determine if the receipt of such payments results in any

benefit to the participating small employers. If the payments made by Blue Cross result in

a benefit that accrues to the small employer it is recommended that Blue Cross determine

the amounts paid for each such small employer since May 1, 2003.

Management of Financial Fiduciaries

As described above, the Builders Association and the intermediaries perform billing

services for small employer health plans. In this capacity these entities receive premiums

from small employers and remit the collected amounts to Blue Cross in bulk on a

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periodic basis. Blue Cross has indicated that, although it has a contractual right to audit

the services performed on behalf of Blue Cross, it has never done so. Though not

required by law, sound business practice suggests that Blue Cross should perform a

periodic audit of any entities that are a conduit of company funds. As noted previously

Blue Cross has made arrangements to audit the three intermediaries. The audits are

scheduled to start March 1, 2006.

Recommendation 4: It is recommended that Blue Cross establish a plan to periodically

audit those third party entities that collect and remit premiums on behalf of Blue Cross.

Overview of Commissions and Fees

We have noted in the paragraphs above that Blue Cross makes various payments to

entities with which it has established contractual relationships. The annualized aggregate

amount of these marketing costs is estimated in the following table:

Projected Annualized Commission & Intermediary Cost Based on 12/31/2005 In-force

12/31/2005 Subscribers Rate

Estimated Annual

Cost (000) Intermediaries 6,904 $21/sub/month $ 1,740 Brokers 25,568 $18/sub/month 5,520** General Agent 25,568 $8/sub/month 2,450 Chambers Expense Allowance 2,338 $1/$3/sub/month 60 Chambers Expense Direct Business 906 $1/$3/sub/month 20 Builders Association Expense Allowance 2,156 $3/$4/sub/month 100 Persistency Bonus * 190 Total $ 10,080 Annual Small Employer Premium $341,500 Commissions and expense allowances as % of Premium 3%

*) Based on payments made for the period July 1, 2004-June 30, 2005.

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**) In a prior table, it was noted that broker commissions of $4,182,000 were paid in the first ten months of 2005. The broker commission database from which that number was drawn was created before 2005 payments were complete. In addition, some payments are made on a manual basis outside the broker commission system.

The aggregate marketing costs from the sources identified in the prior table are reflected

in the premiums charged to all small employers and represent approximately 3% of 2005

annualized premium.

Toll Free Phone Number

There is a requirement under Regulation 82(10)(C) for a small employer carrier to

maintain a toll-free number that a small employer can call to obtain information about

health insurance products available to small employers and how to apply for coverage.

Blue Cross indicated that it implemented (800) 637-3718 as the toll-free number for

small employers to use to obtain information about health plans available to small

employers. The examiners dialed this number and a recorded message followed: “if you

know the 4-digit extension of the person you wish to reach, please dial it now” followed

by “if you are an employer and wish to obtain information about health benefit plans

available to employers in Rhode Island, including small employers, please press “1”.

When the examiners pressed “1” they were provided with various options related to

Direct Pay plans. None of the options related to small employer health plans. The

examiners next pressed “0” and an individual in the Direct Pay sales area responded.

When the examiners told her that they wanted to obtain information about small

employer health plans, she indicated that she needed to transfer the call and that the

examiners could select any individual identified on the next phone message. On listening

to the phone message in the Small Group Sales Department, the examiners randomly

selected an individual. Next, we listened to a phone message that indicated that the

individual was not in the office and that the caller could leave a message. No option to

transfer to another individual was provided.

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The “800” number provided by Blue Cross did not meet the requirements of Regulation

82-10(C). We recommended that Blue Cross change its phone system so that the number

allows direct access to the small employer direct marketing unit.

We notified Blue Cross of our findings with respect to the 800 number on December 16,

2005. We were notified on January 6, 2006 that Blue Cross had made changes to the

“message tree” at the 800 number and that, as a result of the changes, the noted

deficiencies had been corrected. On January 24, 2006 the examiners again tested the 800

number. This time the message tree provided ready access to Blue Cross’s Small Group

Sales Department.

The examiners reviewed the Verizon telephone directory for Providence and other areas

of Rhode Island and verified that (800) 637-3718 is listed in the directory. However, this

number is listed as a general number for the Blue Cross administrative offices. This

meets the requirements of Chapter 27-50.

11. Rating Methodology for Small Employer Business

The examination included a review of the rate manual and rating methodology, review of

individual rate calculations for accuracy and compliance with R.I.G.L. § 27-50-5 and

Reg. 82(5), and analysis of rating variables and rates by group to develop data to assist in

an overall understanding of the small employer market and to determine the effect of

current regulatory limitations in small employer rating, and to provide a statistical basis

to evaluate the impact of potential changes in rating.

Rating Methodology Review Process

The examination staff reviewed the following items with regard to the rate manual, rating

methodology, rating compliance and statistical analysis of rating variables:

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• Complete small employer group rating manuals for 3rd and 4th quarter 2005 and

just the rating factors for 1st and 2nd quarters 2005, and 1st quarter 2006. The

complete manuals contain both a detailed description of the development of base

rates and a separate section with the resulting rating factors used for all plans.

• Complete Builders Association rating manual for November 2005. All Builders

Association cases are renewed in November each year.

• Lotus spreadsheets capable of calculating rates for individual groups.

• Database including individual groups, the plan design, age/gender factor and

health status factor for each group, and the rates charged.

• Actuarial statements of certification of compliance prepared by Blue Cross’s

consulting actuaries (“Actuaries”) filed in March, 2003, 2004, and 2005, and by

Blue Cross’s own actuary, John Lynch, FSA, MAAA, in March 2006.

• Sample of 11 medical underwriting files to enable verification of calculation of

age/gender and health status factors on an individual case basis.

Blue Cross Rate Manual

R.I.G.L. § 27-50-5(h) requires that the small employer carrier maintain a complete and

detailed description of its rating practices and that its rating methods and practices are

based on commonly accepted actuarial assumptions and are in accordance with sound

actuarial principles. Regulation 82(5)(A)(4) requires that premium rates charged to small

employers be computed solely from a rate manual.

The examiners reviewed the rate manuals for the third quarter 2005 and the fourth quarter

2005 applicable new business and renewals with effective dates in the respective quarter.

The examiners note that Blue Cross has devoted a substantial effort to responding to

Recommendation 5 of the prior Market Conduct Examination Report.5 With minor

exceptions discussed in this section of the report and summarized below, the examiners 5 The text of Recommendation 5 from the report dated March 31, 2002 follows: It is recommended that the Company maintain a rate manual that includes the required elements to calculate a rate, and the required documentation of the development of base rates, base rate relationships, and expense allocation.

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conclude that the rate manuals prepared by the Company comply with the requirements

of R.I.G.L. § 27-50-5(h) and Regulation 82(5)(A)(4). The exceptions that were noted

follow:

• The rate manual does not adequately describe the selection of the health status

rating band for PER-2 cases, new issue or renewal (see details in the medical

underwriting section),

• The maximum 10% change in the health status rating band is not described in the

rate manual.

Except for the deficiencies noted above, the examiners were able to calculate rates for

small employer groups solely from the rate manual.

Overview of Blue Cross Rate Development Methodology

Blue Cross sets base rates quarterly, based on analysis of its overall small employer

claims experience (excluding Builders Association claim experience, which is analyzed

separately to support development of the Builders Association base rates). Base rates

within a quarter are adjusted by a monthly effective date factor using Blue Cross’s cost

and utilization trend factor, currently approximately 9% annually. For example, in first

quarter 2006, the base rates apply to January new business and renewals. February new

business and renewals incorporate an effective date adjustment factor of 1.0075.

Base rate development uses twelve months of prior experience projected forward 19

months to the period for which the rates are to apply. The projection is done on a PMPM

basis, and uses trend factors applied separately to the following categories of services:

Inpatient Hospital, Outpatient Hospital, Medical/Surgical, Major Medical and

Prescription Drug. The first four categories are combined in order to develop the medical

portion of the premium, while prescription drug is priced separately, since the different

medical plans can be combined with different prescription drug plans. As of the most

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recent quarter’s rate development manual reviewed, for 4th quarter 2005 rates, the

annualized claims trend was approximately 13% for medical claims and 14.5% for

prescription drug.

Adjustments are made for administrative expenses, investment income earned, Federal

Income Tax, and contribution to Blue Cross reserves. Administrative expenses are

determined on a PMPM basis and added to the projected medical expense to develop

premium rates for each plan of benefits. The investment income credit is based on an

expected yield rate on invested assets, including that portion of Blue Cross reserves

allocated to the small employer business. The level of contribution to Blue Cross’s

reserves is determined by senior management on a quarterly basis.

As required, Blue Cross uses a four-tier family composition rate structure, The four tiers

are single (employee only), employee and spouse, employee and child(ren), and family.

Blue Cross develops a base rate for the single employee tier for each plan of benefits, and

adjusts the base rate by family composition factors for each other tier. In order to make

sure that the aggregate rates balance back to the total required revenue, the Company

normalizes these rates to take account of any lack of balance in rating factors applied on a

case by case basis, including age and gender, health status, limitations on increase in

health status, and limitations on rates due to 4:1 rate compression.

Age and gender factors are determined based on a table of factors that vary by 5-year age

intervals, and are separate by male and female single rates, and unisex for employee plus

spouse, employee plus child(ren), and family. The factors are normalized quarterly to an

average value of 1.000.

Health status factors are determined by a process of medical underwriting that varies

depending on the size of the group. Medical condition points are converted to a health

status factor ranging from .92 to 1.10. Blue Cross limits the change in the health status

factor in any one year to no more than 10 percent.

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Rates for a given group are then determined by multiplying the group’s age and gender

factor times its health status factor and testing it against overall limits designed to meet a

4:1 ratio of the maximum rate to minimum rate for the quarter. For 4th quarter 2005, the

limits on the combined factor are set at approximately .4125 and 1.6500. The use of this

methodology insures that rates comply in all cases with the requirement of R.I.G.L. § 27-

50-5(5) that rates must be within a 4:1 compression ratio. Approximately 10% of Blue

Cross small employer groups have rates that are either increased or decreased from what

they would otherwise be because of the effects of rate compression. Because these tend

to be the smaller groups (since large groups are more likely to have employees with a

range of ages), only about 4.4% of subscribers are affected by the rate compression.

The Blue Cross rate manual provides for a rate reduction of 0.7% for small employer

groups who are also enrolled for workers’ compensation coverage with Beacon Mutual

Insurance Company. This reduction is referred to by Blue Cross as “CompAlliance

credit”. Blue Cross has an administrative arrangement with Beacon Mutual Insurance

Company to facilitate the co-ordination of claim adjudication. For the purpose of

compliance with Chapter 27-50 and with Regulation 82, Blue Cross treats the

CompAlliance arrangement as a plan of benefits variable. The effective coordination of

the workers’ compensation plan and the health plan should result in reduced claim costs

to the health plan. It is for this reason that it is reasonable to treat the health plan with the

CompAlliance arrangement as different from the health plan where such effective

coordination does not exist.

Effect of the Dissolution of Blue CHiP

On January 1, 2005 the assets and liabilities of CHiP were transferred into Blue Cross,

and Blue Cross is a single company. Therefore, Blue Cross is required by Regulation

82(5)(B)(2) to set the rate relationships between all its plans on the basis of benefit

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differences only, and not to consider the separate experience of CHiP and Blue Cross

plans.

Prior to January 1, 2005 and in accordance R.I.G.L. § 27-50-4(b) Blue Cross had elected

to treat Blue Cross and CHiP as a single carrier for the purpose of meeting the

requirements of Chapter 27-50. Therefore, the dissolution of CHiP and the transfer of

CHIP assets and liabilities into Blue Cross did not result in any changes in the rating

process.

The Company’s methodology of developing its rating factors based on the combined

experience of its business designated as Blue Cross and as CHiP complies with R.I.G.L. §

27-50-4(b) and Regulation 82(5)(B)(2).

Builders Association

In accordance with R.I.G.L. § 27-50-5(a)(6), the premium rates associated with the health

plans underwritten by the Company and offered by the Builders Association to its

members are not subject to the requirements of R.I.G.L. § 27-50-5. Builders Association

cases are subject to all other sections of Chapter 27-50.

Blue Cross maintains a separate rate manual for the Builders Association. It is similar in

format to the rate manual in effect for the balance of the small employer business.

However, the rates for the two blocks of business (small employer and Builders

Association) are based on their own separate claim experience. When the Builders

Association business was exempted from compliance with the rating provisions of

Chapter 27-50, Blue Cross could have resumed table rating of Builders Association

business, as had been their practice prior to Chapter 27-50, but did not, because of

concern about possible disruptions that would be caused if the Builders Association

exemption from R.I.G.L. § 27-50-5 were to be removed from Chapter 27-50 in the future.

Instead, Blue Cross has used the same rating structure for Builders Association business

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as for the business rated under Chapter 27-50. While Builders Association base rates

were initially modestly lower than rates for other small employers, rates in the most

recent Builders Association rating were almost identical to small employer rates

generally. Therefore, it appears that the Builders Association derives no particular

advantage from being exempt from compliance with the rating provisions of Chapter 27-

50.

Description of Rating Methodology

Unless explicitly stated, the following comments relate to Blue Cross’s small employer

business excluding the Builders Association.

Once the base rates are established for a particular quarter, the rate relationships among

the various plans offered to small employers are based on an analysis of benefit

differences modeled by the Company’s Actuarial and Statistical Analysis (“ASA”)

Department, using actuarial methods and assumptions regarding cost and utilization of

health care services. This complies with R.I.G.L. § 27-50-5(d) and Regulation

82(5)(B)(2), which require that the Company’s rating factors reflect only differences in

plan design, and not the actual claim experience of the individual plans.

Age and gender rating is done on a subscriber basis using separate factors for five

demographic groups:

• Male single employees;

• Female single employees;

• Employee plus spouse;

• Employee plus child(ren); and

• Employee plus spouse and child(ren) (family).

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The factors for each demographic group begin with a factor for those under age 30, and

vary by five year age brackets up to age 65. Separate factors are used for over age-65

employees where Medicare is primary and over age-65 employees where Medicare is

secondary. Separate family composition factors are applied as well. Single employees

have a weight of 1.00. Family composition types employee plus spouse, employee plus

child or children, and full family each have separate standard weighting factors..

The age/gender factors in the rate manual reflect an overall adjustment that normalizes

the factors for the age/gender composition during the experience period. In addition, there

is an overall normalization step that takes into account the net effect of the 4:1

compression limitations of the Company’s small employer business during the period that

the rates will be applicable. The age/gender factors for a group are weighted by the

assumed relationships of rates by family composition tier to develop an average

age/gender factor for a group. The age/gender factors were developed by the Company’s

actuarial consultants. The demographic tier factors were developed by Blue Cross

internally.

The process followed by the Company for calculating the average age/gender factor for a

small employer group is permitted by R.I.G.L. § 27-50-5(a)(3) and R.I.G.L. § 27-50-

5(a)(4).

The Company is permitted by R.I.G.L. § 27-50-5(a)(2) to adjust its small employer

community rates for health status by up to 10% above and below the adjusted community

rate. The Company employs a process, discussed in another section of this report, which

assigns a health status factor to each small employer group. The health status factor can

vary between .92 and 1.10. For renewal business, the determination of the health status

factor is based on either the individual claim records of the insured members (PER-1

groups) or the loss ratio experience of the group (PER-2 groups). The methodology used

by Blue Cross complies with the requirements of R.I.G.L. § 27-50-5(a)(2). In particular,

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the average health status rating is approximately 1.00, which results in no variation from

the average greater than 10%.

The Company calculates a combined adjustment factor for each small employer group

that is the product of (i) the age/gender factor and (ii) the health status factor. This

combined adjustment factor is applied to the base rate. R.I.G.L. § 27-50-5(a)(5) requires

that for each health benefit plan, the highest rate charged by a small employer carrier for

each family composition type not exceed four times the lowest premium rate for that

family composition type. This requirement is referred to as the “4:1 compression”

requirement. The Company meets the 4:1 compression requirement by reviewing on a

quarterly basis the product of the combined adjustment factor and the base rate for all

groups renewing that quarter. The company then selects minimum and maximum rates

such that the 4-1 compression requirement is met. Then Blue Cross offsets the net

amount of premium gained or lost by an overall adjustment to all rates. The minimums

and maximums are determined as part of the quarterly rate development process by

modeling all the groups renewing for the specified quarter. In general, the sum of the

premiums gained and lost due to compression tends to be a loss in total revenue.

Therefore Blue Cross must increase its overall normalization factor.

The methodology employed by Blue Cross complies with the requirements of R.I.G.L. §

27-50-5(a)(5).

Administrative Expenses, Contribution to Reserves and Investment Income

Regulation 82(5)(B)(4) requires that Blue Cross describe in its rate manual the method of

allocating administrative expenses to the various health plans for which the manual was

developed.

The following comments pertain to a review of the Blue Cross’s rate manual applicable

to renewal and issue dates during the fourth quarter of 2005.

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The rate manual includes worksheets that indicate budgeted total corporate operating

expenses and carve-outs that result in the amount of operating expenses allocated to the

small employer business. The rate manual does not however contain any description of

the methodology by which Blue Cross determines the amount of operating expense

allocated to any function or line of business, as required by Regulation 82(5)(B)(4).

Based on the aggregate amount of operating expense allocated to the small employer

business and the projected member months, an expense charge is calculated on a PMPM

basis. This amount is split between medical and pharmacy based on the claim cost of the

medical and pharmacy claim components of the standard plan, the HMC2C plan with a

$7/$25/$40 pharmacy plan. These amounts are added to the projected claim cost for the

medical and pharmacy components for each health plan offered.

Blue Cross personnel responsible for expense allocation gave the examiners adequate

information to enable an understanding of Blue Cross’s expense allocation procedures

and results, and were responsive to all questions asked of them.

Recommendation 5: It is recommended that Blue Cross include in its rate manual a

description of the methodology used to allocate operating expenses to the lines of

business.

The remaining elements of the expense component of the rating formula are the

contribution to reserves, the credit for investment income and the charge for federal

income tax. The examiners view the investment income credit element of the small

employer rate structure as being subject to Regulation 82(5)(B)(4). For both of these

elements the rate manual includes a factor and the examiners can determine how the

factors are used in the formula that determined the base rates. The rate manual does not

however contain any description of the methodology by which Blue Cross determines the

amount of investment income allocated to the small employer business, as required by

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Regulation 82(5)(B)(4). Blue Cross varies the contribution to reserves based on

balancing its need to build and maintain adequate reserves and competitive factors. In

the fourth quarter 2005, it included a 1% of premium contribution to reserves. This is

lower than average, which has generally been about 2%. The provision for federal

income tax is set equal to 25% of the contribution to reserves. As a result of discussions

during the course of the examination, Blue Cross has added to its rate manual a

description of the methodology used to determine the amount of investment income that

is allocated to the small employer business.

Actuarial Certification

R.I.G.L. § 27-50-5(h)(2) requires that Blue Cross file on an annual basis an actuarial

certification that certifies that the company is in compliance with Chapter 27-50 and that

the rating methods of the small employer carrier are actuarially sound. Insurance Bulletin

2002-4 provides the requirements for the Actuarial Certification:

• The certification should be prepared in accordance with Actuarial Standard of

Practice 26 (“ASOP 26”),

• Certification must include the following areas of compliance:

o Restrictions related to premium rates in R.I.G.L. § 27-50-5

o Provisions related to renewability of coverage in R.I.G.L. § 27-50-6,

o Provisions related to availability of coverage in R.I.G.L. § 27-50-7,

o Provisions related to certification of creditable coverage in R.I.G.L. § 27-

50-8.

• The certification should include identification of instances of non-compliance, the

number of such instances, the nature of non-compliance, and the steps taken to

correct the non-compliance, both prospectively and retrospectively

• The certification should include a statement describing the extent to which the

actuary relied on the work of others. If the actuary relied on others, a statement

from the person(s) relied upon describing the accuracy and completeness of the

work should be attached.

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• The certification should be prepared and signed by a “qualified actuary”. In order

to meet the definition of being qualified, an actuary must be:

o A Member of the American Academy of Actuaries,

o Familiar with the requirements of Chapter 27-50,

o Qualified to sign Prescribed Statements of Actuarial Opinion regarding

compliance with small employer group health laws and regulations,

• The certification must be submitted on or before March 15 of the year following

the calendar year that is covered by the certification.

The examiners reviewed the actuarial certification for calendar year 2003, filed in March

2004 (the “2003 certification”), the actuarial certification for 2004, filed in March 2005

(the “2004 certification”), and the actuarial certification filed in March 2006 (the “2005

certification”).

The 2003 and 2004 certifications were dated March 15, 2004 and March 15, 2005

respectively. Both certifications were submitted and signed by John P. Burke, F.S.A.,

M.A.A.A. and Ronald G. Harris, F.S.A, M.A.A.A (the “Actuaries”). The certifications

include a statement that the Actuaries meet the qualifications specified in Insurance

Bulletin 2004-4.

The certifications include a reliance statement, stating that the Actuaries have relied on

data supplied by Blue Cross, have performed reasonable tests, have conducted interviews

with Blue Cross employees, and have reviewed available data as needed to confirm

information collected in these interviews.

The Actuaries state that the certifications have been prepared in accordance ASOP 26.

With respect to the certification for 2003, the Actuaries state that:

• The Blue Cross small employer rating methodology is actuarially sound and in

compliance with R.I.G.L. § 27-50-5 (except for a noted issue),

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• Blue Cross is in compliance with other sections of Chapter 27-50.

With respect to the certification for 2004, the Actuaries state that:

• The Blue Cross small employer rating methodology is actuarially sound and in

compliance with R.I.G.L. § 27-50-5 (except for a minor noted error),

• Blue Cross is in compliance with other sections of Chapter 27-50.

The certifications and actuarial memorandums for 2003 and 2004 covered both Blue

Cross and CHiP. During 2003 and 2004 CHiP was a wholly owned subsidiary of Blue

Cross. It was appropriate for a single actuarial certification for the small employer

activity of the two companies since Blue Cross and CHiP had elected to be treated as a

single carrier in accordance with R.I.G.L. § 27-50-4(b).

The following observations were made regarding the Actuarial Memorandums supporting

the 2003 and 2004 certifications.

• The Actuaries stated that they reviewed the contents of the marketing packages

related to proposals and renewals, and the re-certification package. The content of

the renewal package is listed in Chart 1 of the Actuarial Memorandum. This

listing does not include the “Disclosure of Certain Rating and Renewability

Provisions” sheet or a similar item. This information is required by § 27-50-5(g).

While it is not mentioned in the Actuarial Memorandum, it is the understanding of

the examiners that this information is included in the renewal package.

• The list of items reviewed by the Actuaries to analyze compliance with R.I.G.L. §

27-50-5 is appropriate.

• The process described for testing the rating formula and sample case rates for

compliance is appropriate for analyzing compliance with R.I.G.L. § 27-50-5.

• Case sample testing for the 2003 certification identified three groups with renewal

rates in excess of the level allowed under the second calculation. In all three

instances, the error was attributed to case specific extraordinary situations.

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• The case sample testing for the 2004 certification identified one non-systematic

error of a small magnitude, related to using an incorrect factor to rate a single

group.

• The actuaries determined that the rate manual maintained by Blue Cross satisfied

the requirements of R.I.G.L. § 27-50-5(h).

• In the section titled “Other Compliance Requirements” the Actuaries rely on Blue

Cross staff, as indicated by the phrase “Blue Cross asserted,” to conclude that

Blue Cross satisfies the requirements of Chapter 27-50 that pertain to availability,

renewability, fair marketing, disclosure, and certification of creditable coverage.

The 2003 and 2004 certifications satisfy the requirements of R.I.G.L. § 27-50-5(h)(2) and

Insurance Bulletin 2002-4 with the following exception:

• Bulletin 2002-4 requires that the certification include a statement describing the

extent to which the actuary relied on the work of others and if the actuary relied

on others, a statement from the person(s) relied upon describing the accuracy and

completeness of the work shall be attached. The 2003 and 2004 certifications state

that the Actuaries relied on others, but the required reliance statements from Blue

Cross personnel were not included as part of the certification.

The 2005 certification and associated actuarial memorandum refers only to Blue Cross.

Effective January 1, 2005, CHiP was no longer a separate entity from Blue Cross. Mr.

Lynch meets the qualification standards for preparing the certification, and the

certification is in the form required by R.I.G.L. § 27-50-5(h)(2). The following

observations were made regarding the actuarial memorandum accompanying the 2005

certification.

• The actuarial memorandum contains a list of the materials reviewed by Mr. Lynch

in the course of his review. The list contains appropriate materials that would

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enable him to reach his conclusions about compliance. These items are similar to

items reviewed by the examiners in the course of this examination.

• The discussion of actuarial soundness of rating methodology and the description

of the review and testing done to confirm the soundness of the methodology are

appropriate.

• The description of testing to insure compliance with rate limitations contained in

R.I.G.L. § 27-50-5 is adequate. The results of the testing are consistent with the

observations of the examiners in the course of their own testing. The sampling

and testing methodologies are adequate for determining compliance.

• Mr. Lynch determined that the rate manual maintained by Blue Cross satisfied the

requirements of R.I.G.L. § 27-50-5(h).

• In the section titled “Other Compliance Requirements” Mr. Lynch adequately

described the process he undertook to verify that Blue Cross satisfies the

requirements of Chapter 27-50 that pertain to availability, renewability, fair

marketing, disclosure, and certification of creditable coverage.

The 2005 certification satisfies the requirements of R.I.G.L. § 27-50-5(h)(2) and

Insurance Bulletin 2002-4 with the following exception:

• The 2005 certification actuarial memorandum contains the following statement.

“I have also been provided information and representations by staff within

BCBSRI. My certification relies upon the validity, accuracy, and completeness of

this information and could be affected by any material errors in it. Nothing has

come to my attention which would lead me to believe such information was not

valid or accurate, or was incomplete.” While this reliance is appropriate, and

nothing has come to the attention of the examiners that would indicate any

inaccuracy in data Mr. Lynch may have relied upon, Bulletin 2002-4 requires that

if the actuary who prepares the certification relied on others, a statement from the

person(s) relied upon describing the accuracy and completeness of the work shall

be attached.

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Recommendation 6: It is recommended that Blue Cross include, as part of its Actuarial

Certifications, statements from all persons on whom the actuary signing the Certification

relied. These statements should include a description of information that the signing

actuary relied upon and that further indicates the accuracy and completeness of that

information.

Testing for Compliance on New Business and Renewal Cases

The examiners selected a sample of files for the purpose of testing the calculation of

components of first year and renewal rates.

The first sample consisted of ten cases. For each of the cases in this sample the examiners

calculated the health status debit points for each enrolled member based on the debit

points noted by the medical underwriter for each condition, calculated the average health

status debit points for the group, calculated the health status band factor and compared

that to the health status band factor that was contained in an extract from Blue Cross’s

rate calculation and renewal underwriting system, which they refer to as the “PEG

system”. It was purchased by Blue Cross from an outside vendor several years ago. In all

instances the examiners were able to match the health status band factor in the PEG

system. A summary of this analysis is contained in Appendix 6.

For the same sample of groups as in the prior paragraph, the examiners determined the

age/gender factor applicable to each subscriber, based on the birthday of the subscriber

on the renewal or issue date and rate tier, calculated an age/gender factor for the group

based on the algorithm defined in the applicable Rate Manual, and compared the resulting

value to the age/gender factor for the group that was contained in an extract from the

PEG system. In all except one situation the examiners were able to match the calculated

age/gender factor with the age/gender factor contained in the PEG system extract. The

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exception case was explained by a change in enrollment that was not reflected in the data

that was the basis of the calculations by the examiners.

Additionally, for some of the cases in this sample, the examiners calculated the rates

applicable to the group and were able to match the rates contained in the paper files.

The calculations produced results consistent with the PEG system extract in all instances

that were reviewed by the examiners, except as noted and explained above. A summary

of this analysis is contained in Appendix 5.

12. Underwriting Methodology for Small Employer Business

Introduction

The underwriting of Blue Cross’s small employer business consists of the determination

of:

• Small employer status,

• Employee eligibility,

• Enrollment or waiver status,

• Group participation level, and

• Health status.

While R.I.G.L. § 27-50(7)(d)(9) also allows Blue Cross to establish a minimum employer

health plan contribution level, Blue Cross does not have such a requirement.

The underwriting process applies to both new business and renewals and to all

distribution channels. There are differences between the new business and renewal

underwriting processes. The following paragraphs discuss the underwriting process for

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new business and renewals in separate sub-sections. The highlights of the medical

underwriting process have been included in the New Business Proposals and Renewal

Underwriting sub-sections, with a more detailed description of the medical underwriting

process at the end of the Underwriting Methodology section of the report.

New Business Proposals

The underwriting process for new business takes place in three phases. In the first phase,

the prospect is provided with a package of marketing materials. For the second phase,

when the employer provides census data, a new business proposal package is prepared by

the Marketing Department and presented to the employer. The new business proposal

package is provided with estimated rates. Final rates are provided later when the actual

enrollment and health status are known, and when it is determined that the group meets

the participation requirement.

The third phase is the actual sale to the employer. It is here that the employer selects the

actual plan (or plans) to be offered to the employees, signs the Sales Agreement, and

obtains enrollment forms and/or waiver forms from the eligible employees. The

enrollment forms and waiver forms are reviewed for completeness and reconciled against

payroll (or similar) data. Evidence that the employer is a small employer is reviewed. The

participation level is determined, based on the total number of eligible employees, those

enrolling, the number of declines, and the waivers due to other coverage.

If the group has fewer than 20 enrolling employees, each employee completes a Health

Assessment Form. Otherwise, the employer completes a risk appraisal form for the entire

group.6 A review by the Medical Underwriting Department results in the calculation of

debit points for the group. The debit points are translated by a formula into a health status

6 In lieu of the employer completed risk appraisal form, the employer can elect to ask the enrolling employees to complete the individual Health Assessment Form

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adjustment factor, which ranges from 92% to 110%. The medical underwriting process is

described in more detail in a separate section of this report.

Based on this information, Blue Cross computes four-tier rates for all plans offered in the

small employer market, taking into consideration actual enrollment, health status,

age/gender, the CompAlliance discount7 (if applicable), and reflecting the 4-1

compression limitation.

The examination staff requested a copy of the small employer underwriting manual. In

response to this request Blue Cross provided the examination staff with the

Recertification Department Procedure and Policy Manual (“Recertification Manual”).

Based on a review of this manual and underwriting elements contained in the rate

manual, and on discussions with the manager of this department, the examination staff

developed an understanding of the process. In the case of medical underwriting, which is

performed by a different business unit, the examination staff depended on the manager of

the Medical Underwriting Department to develop that understanding.

Renewals

As a result of recommendations contained in the prior market conduct examination

report, the Company established a Recertification Department and developed the

documents and procedures to support the renewal eligibility recertification process. The

various processes are documented in the Recertification Manual. The focus of this

process is described in Reg. 82(6)(B) and Insurance Bulletin 2002-5, which require a

carrier to obtain appropriate supporting documentation on an annual basis, and terminate

or non-renew any group that fails or refuses to provide it. The documentation required

includes:

7 The CompAlliance discount is described in the Rating Methodology section of this report

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• Certification with respect to the group’s status as a small employer, as defined in

R.I.G.L. § 27-50-3(kk);

• Documentation as to the number of eligible employees; and

• Completed waiver forms for each eligible employee and/or dependent(s) who

declines coverage, whether because of already having other coverage (a “waiver”)

or because the individual does not want health insurance coverage at all (a

“decline”).

Based on this information the Recertification Department determines whether the group

satisfies the participation requirement.

The renewal certification process starts approximately four months prior to the renewal

date with a mailing that consists of a cover letter, a renewal certification form to be

completed by the employer, and a set of instructions. The small employer is instructed to

mark on a payroll report or Quarterly Tax and Wage Report the status of individual

employees. Owners who are not listed on payroll reports are required to submit a recent

Schedule C or Schedule K-1. The instructions indicate that waiver forms are required to

be submitted for any eligible employee or eligible dependent not currently enrolled in the

group plan. Follow up letters are sent on a monthly basis in an attempt to obtain the

necessary information prior to renewal. A group will not be renewed without completing

the renewal recertification process.

In 2005, Blue Cross cancelled 249 groups that had been inforce as “small employer”

groups for reasons related to the recertification process. The specific reasons for

cancellation were:

• Did not provide complete information – 39 groups

• Non-responsive – 167 groups

• Identified as moving out of area – 22 groups

• Not meeting participation – 10 groups

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• Misc. reasons (including insufficient payroll data) – 11 groups

If the Company learns that a group has grown to more than 50 eligible employees, then

consistent with Regulation 82(3)(E)(1), the carrier notifies the employer that the

provisions and the protections available under Chapter 27-50 will cease to apply to the

employer if the employer does not renew its current health plan. A form letter to provide

such notification is contained in the Recertification Manual. The Company has indicated

that, for any group that chooses to remain in the small employer pool, any change in the

benefit plan will result in loss of the protections available under Chapter 27-50.8 This

interpretation depends on a strict definition of health insurance plan that refers to the

actual plan of benefits, rather than to the provision of health benefits to employees of a

small employer. While this is a reasonable interpretation, Chapter 27-50 is not

completely clear on whether a minor change in the benefits offered by a small employer

results in non-renewal of a health benefit plan. It was noted in the prior examination

report that the Rhode Island Department of Business Regulation (“DBR”) had advised

Blue Cross that such a change did create a different health benefit plan and did constitute

non-renewal of the existing health benefit plan.9

Similarly, Regulation 82(3)(E)(2) requires that when a carrier providing coverage to an

employer becomes aware that the employer becomes eligible to be a small employer by

decreasing its eligible employees to fifty or fewer, the carrier must notify the employer of

the options and protections available under Chapter 27-50, and the employer’s option to

purchase a small employer health benefit plan. A form letter to provide such notification

is contained in the Recertification Manual. The Company makes a reasonable effort to

identify such cases by identifying all “large group cases” with 50 or fewer subscribers.

All such groups are included in the re-certification process. The certification specialist

8 The only exception permitted by Blue Cross occurs when Blue Cross eliminates a benefit plan from its portfolio, and groups must choose different benefits. Groups can add new plans and stay in that small employer class as long as they also keep in-force the health benefit plan that was in-force when they chose to stay in the small employer class. 9 Report on the Targeted Market Conduct Examination of Blue Cross & Blue Shield of Rhode Island and Coordinated Health Partner, Inc. as of March 31, 2002, p. 40.

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then follows the normal review process with such groups to determine if the group is

eligible for small employer status. In connection with the 2005 re-certification process,

there were 199 “large” group cases reviewed as part of the small employer re-

certification process. Of these 196 stayed in large groups and three moved to small group.

Twenty-two groups that had previously been small employer groups changed to large

group as part of the process. In addition, one group with more than 50 eligible employees

was re-certified as a small employer group.

Groups that are classified as PER-1 groups (25 or fewer enrolled contracts) are subject to

medical underwriting at each renewal. The medical underwriting process for PER-1

renewals starts approximately six months prior to the renewal effective date. The medical

underwriting process is discussed in detail in a separate section of this report. For PER-1

business a health status factor is determined for each group using average results of a

member-by-member review of medical conditions based on Blue Cross claim records.

For PER-2 business, the Actuarial Department ranks the groups based on their loss ratio

and assigns a health status factor to each group in such a manner as to produce an

approximate bell curve over the range of health status factors. The census used for

developing health status rates is known as “Census-1”.

Using census data from approximately 90 days prior to renewal (“Census-2”), Blue Cross

then develops age/gender factors. Initial renewal rates are then calculated in the manner

described in the “Rating Methodology for Small Employer Business” section of this

report, by multiplying the base rates by the product of (i) the age/gender factor from

Census-2 and (ii) the health status factor from Census-1, and subjecting the result to the

4-1 compression limitations.

Renewal rates are provided to the broker or intermediary, if applicable, approximately 40

days prior to the effective date and renewal rates are provided to the account

approximately 30 days prior to the effective date. On receipt of the renewal, the employer

or broker may request a re-calculation based on adds and/or deletes that are not reflected

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in the renewal that was delivered. This recalculation is referred to as a “Census-3” rate. If

the result of this recalculation is less than the rates that had been delivered to the small

employer, the Census-3 rates will be delivered and installed. If the Census-3 rates are

greater than the rates that had been delivered, the Census–2 rates are maintained.

Medicare Primary/Secondary and COBRA

The Employee eligibility tab of the Recertification Manual provides a description of

COBRA and the criteria that determine whether or not a group is subject to COBRA.

The Recertification Manual contains a description of the criteria that determine whether

or not Medicare is primary for Medicare eligible individuals who are actively at work and

are enrolled in the employer sponsored health plan. This is shown in tab 10 of the

Procedure section of the Recertification Manual.

Recommendation 19 of the prior report indicated that Blue Cross did not collect adequate

data to determine Medicare primary status for a small employer group.10

The criteria for COBRA and Medicare are somewhat different from each other and

different from the criteria for certification as a small employer.

Blue Cross has in place procedures documented in its procedure manuals that apply in the

event that a group has active employees who are Medicare eligible or employees who are

identified as eligible for COBRA. In the event of such plan participants, Blue Cross

collects information from the employer that will allow it to properly determine if

Medicare is primary or if the employer is subject to COBRA extension of benefits.

The procedures outlined by Blue Cross are satisfactory for the purpose of determining the

proper rating for a small employer group at renewal or initial issue.

10 See Page 49 of the prior report

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Medical Underwriting:

The Medical Underwriting Unit of the Small Group Underwriting Department consists of

7 medical underwriters and the Team Leader. The unit is responsible for medical

underwriting on all Direct Pay applications, all PER-1 and PER-2 new issues, and all

PER-1 renewals.

Production volume for 2005 consisted of:

• Direct Pay - 4,925 applications (including 379 Plan 65 Select)

• PER-1 new issues – 1,858 groups

• PER-1 renewals – 12,347 groups

• PER-2 new issues – 126 groups

The Medical Underwriting Unit determines debit points for each member based on

medical conditions that are identified from Health Risk Appraisal forms and/or the Blue

Cross claims data base. The assignment of debit points is based on a manual obtained

from Blue Cross of Connecticut in approximately 1994. This manual has been updated on

an ad-hoc basis by Blue Cross to take into account changes in procedures, treatments, and

drugs.

The Medical Underwriting Unit intends to implement a new model for renewals

beginning in the fourth quarter of 2006. The objective of this change is to improve

productivity, accuracy, and consistency.

For PER-2 new business the employer is provided the option of submitting a health

statement at the group level, based on the employer’s knowledge, or submitting

individual Health Risk Appraisal forms, as completed by each new subscriber.

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The Team Leader of the Medical Underwriting unit indicated that, on average, a medical

underwriter is able to review 150-200 members per day. Based on other information

available to the examiners, this appears to be a relatively high estimate. Something closer

to 100 members per day appears reasonable. This performance level includes

administrative duties such as workload management/planning, and data entry into the

PEG rating and renewal underwriting system.

The assignment of debit points is based on medical conditions identified from the

subscriber or employer Health Risk Appraisal Form and claims data obtained from the

Blue Cross claim system. Each individual starts with a debit of 100 points. Additional

debit points are assigned for each condition (related conditions are combined), with up to

5000 debit points per condition. Multiple unrelated conditions are each assigned debit

points. There is no maximum per individual for the total number of debit points.

The medical underwriting process is labor intensive. The annual budget for medical

underwriting of small employer groups is approximately $600,000 or approximately

$0.50 PMPM for small employer business.

For renewal PER-1 business, a claim listing for all members of the group is obtained and

points are assigned for each identified medical condition based on the medical history,

taking into account diagnostic codes, pharmacy utilization, estimated severity, and

estimated impact going forward. For PER-1 new business, the starting point is the Health

Risk Appraisal forms that are completed by each subscriber who enrolls. For each

member listed on the Health Risk Appraisal form, the Blue Cross claims database is

searched. If a pertinent claim history is found it is printed. Based on the responses

indicated on the Health Risk Appraisal form and the claim history (if any), debit points

are assigned for each unrelated condition.

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For each member of a renewal or new issue PER-1 case, the sum of the starting 100

points and the points for each condition are entered into the PEG system, which serves as

the renewal rating system for small employer business. Internal to the PEG system the

average debit points is calculated (total points for the group is divided by the number of

members). The Health Status Band (a percentage factor that is applied to the base rate) is

determined by the average debit points assigned to the group. The PEG system produces

the “Subscriber/Membership Grid” form, which is a summary of the actions taken by

Medical Underwriting in assigning debit points to each member. The following table

indicates the Health Status Band that corresponds to the average member debit points for

a PER-1 case:

PER-1 Band Assignment Average Debit Points Lower Upper Band 0 125 0.92 126 450 0.96 451 800 1.00 801 1,050 1.04 1,051 1,200 1.07 greater than 1,200 1.10

For PER-2 new business groups for which the employer submits individual Health

Appraisal forms, the process is the same as for new issue PER-1 business. There was

some confusion within Blue Cross about whether there was a different table for assigning

health status bands for PER-2 groups that provide individual Health Appraisal forms

from those in the above table due to incorrect instructions. However, Blue Cross has

researched its band assignments for PER-2 groups that provided individual Health

Appraisal forms and confirmed that the same table was in fact used. We found no

evidence of non-compliance in the way health status was assigned to PER-1 groups as

compared to PER-2 groups.

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Blue Cross has changed the health status band table, beginning with groups effective in

the first quarter of 2005. The prior table allowed more groups to qualify for 0.92, the

lowest health status band factor, and placed fewer groups in band 1.10, the highest factor.

For PER-2 new issue business where the employer submits the “group” health

assessment, Medical Underwriting determines the number of members who would be

assigned at least 4,100 debit points, based on the information provided by the employer

and any prior claims data available. Based on the total number of subscribers with 4,100

points or more, the Health Status band is assigned. This is manually calculated and

entered into the PEG system. The following table is used to assign the PER-2 health

status band:

Number of members with 4,100 or more debit points

Health Status Band

0 0.92 1 0.96 2 1.00 3 1.04 4 1.07 5 1.10

As described above, the medical underwriting process starts substantially ahead of the

actual renewal date, and runs parallel with the recertification process. At the first

iteration, the health band factor is calculated based on the debit points in the PEG system.

An age/gender factor is calculated incidentally but this is not the final age/gender factor

used in the renewal rate. The result is referred to as calculations based on Census-1.

Shortly before the actual renewal date the age/gender factor calculation is generated

based on the most recent demographic data for the group. The health band factor is not

adjusted. This becomes Census-2. Census-2 is the basis of the renewal that is delivered to

the employer. Medical underwriting is typically only done in connection with Census-1,

and the health status factor is not re-calculated in connection with Census-2 unless there

is a change in membership and the group has requested a review.

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With the delivery of the renewal the employer may note a discrepancy in the membership

listing and may request a re-rating of the case. This becomes a Census-3 based rating.

The debit points are adjusted due to new demographics. However, if the demographic

change is the result of the addition of only one new hire, a medical underwriting

assessment is not done for this one individual in order to avoid the potential of

identifying the new hire as having caused an identifiable increase due to a medical

condition. In most instances the health band factor does not change unless there is a

substantial demographic change or if the group is “on the border” of the debit point range

for a particular band. If the resultant Census-3 rate is higher, it is generally not delivered

to the account and the Census-2 rate is installed. If the Census-3 rate is lower, the

Census-3 rate is delivered to the employer and installed as the renewal rate. There may be

more than one version of Census-3 and the subsequent rate calculation. Documentation

related to changes made to Census-2 or -3 is contained in the comments section in the

PEG system.

Comments on the process:

• The process appears to be very labor intensive and costly. It demands the efforts

of a staff of seven medical underwriters, and the budget for this function is

approximately $0.50 PMPM.

• There is substantial judgment involved, and errors can readily result. In the course

of our review of several cases with the Team Leader, Small Group Underwriting,

the Team Leader identified several errors made by a medical underwriter in

assigning debit points. Blue Cross has advised that it intends to move to an

automated system to improve efficiency and accuracy of the process.

• In the PER-2 process, as a case gets larger, it becomes more likely that a case will

have individuals with 4,100 debit points or more and thus more likely to receive a

higher band factor, resulting in a higher rate. The process does not include a step

that adjusts for the number of members. Also, a PER-2 case that does not have

any individuals with 4,100 or more debit points receives the minimum health

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status factor of .92, which may be a more favorable result than that of a similarly

situated (with respect to health status) PER-1 case.

• For larger PER-2 new business cases, it becomes more likely that the employer

will not have knowledge of ongoing health issues among employees and their

dependents, thus tending to suppress the resultant band factor. Lack of employer

knowledge would be particularly prevalent with respect to dependents and

conditions that are not readily apparent.

• The process for the medical underwriting of PER-2 groups is not accurately

described in the Rate Manual. The table included above for PER-2 new issues and

the specifications for its usage are not included in the rate manual.

• The company limits the change in health status for any PER-1 group at renewal to

10 percent up or down, subject to use of the specific health band factors.11 This

process is not adequately described in the Rate Manual. Based on review of health

band factors for all cases, the examiners found only two instances out of more

than 12,000 where bands increased by more than 10%. In one case the increase

was 11% and in the other it was 13%. This appears to be a reasonable method for

assigning health status, in that it offers partial credibility to information that by its

nature is not fully credible.

For renewals, the process works on a quarterly cycle. For example, for third quarter 2006

renewals, the underwriting cycle began January 23, 2006.

Review of the Health Status Band Calculation

The examiners selected a sample of ten PER-1 cases and one PER-2 case for the purpose

of verifying the health status factor used in the rating system to that derived from the

condition-based debit points in the medical underwriting process. Copies of the medical

underwriting files were obtained for each of the selected cases.

11 For example, if based on the average debit points the band would otherwise have changed from .92 to 1.10, the company would use a factor of 1.00 at renewal

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The testing process consisted of the following steps:

• For each case, a listing was made of the individuals to be medically underwritten;

• For each individual, the assigned debit points was determined, based on the points

assigned for each event and condition;

• The total debit points for the group was determined by addition of the debit points

for each individual;

• The average debit points for the group was determined by dividing the group total

by the number of members;

• Based on the average debit points for the group and a table in the relevant Rate

Manual, described as “Table 2”, the health status band factor was selected;

• The selected health status band factor was compared to the group’s health status

factor contained in the rating system.

For each of the ten PER-1 cases in the sample the examiners were able to match the

health status factor in the rating system. All health status band factors are in the range of

.92-1.10 and thereby satisfy the requirements of Chapter 27-50 with respect to adjustment

for health status.

A summary of the analysis is included as Appendix 6 of this report.

In addition, Blue Cross reviewed health status band calculations for the 47 PER-2 new

business groups which provided individual health information in 2004 or 2005. Blue

Cross was able to confirm that 44 of those groups were given the health status band that

was consistent with the medical underwriting points assigned, while two had a health

status band consistent with the previous medical underwriting factor table. The final case

was assigned a health status band that was one step lower than the one the medical

underwriting table should have assigned. No further explanation was available for that

case.

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Review of the Age-Gender Factor Calculation

The calculation of the Age-Gender Factor is described in Table 1 of the rate manual. The

examiners tested the calculation of the age-gender factor for each of the ten cases in the

sample of PER1 cases.

The testing process consisted of the following steps:

• For each case a listing was made from the medical underwriting records of the

subscribers. Where necessary, this listing was adjusted to reflect changes in

census;

• For each subscriber listed the birth date was recorded, and the age as of the

renewal date was calculated;

• Based on the ages of the subscribers and the table and formula listed on Table 1 of

the rate manual, the age-gender factor is calculated; and

• The calculated age-gender factor is compared to the age-gender factor for the

group that is extracted from the rating system.

For all except one group the age-gender factor calculated by the examiners matched the

age-gender factor extracted from the PEG system. That group terminated coverage prior

to the renewal, and the age gender factor was not updated after that point by Blue Cross.

With that one exception, all age gender factors were capable of being reproduced.

A summary of the analysis is included Appendix 5 of this report

Review of the Eligibility Certification and Recertification Process

Eligibility certification for new business groups and recertification of renewing groups is

undertaken by the Recertification Department under the direction of Kathi Robbins,

Manager. Ms. Robbins provided the examiners with an overview of the Recertification

process, and provided sample case data and follow up information as necessary.

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Regulation 82(6)(B) and Insurance Bulletin 2002-5 place requirements on the small

employer carrier to collect certain data from each small employer as part of the

application process and as part of the renewal process. The required data includes the

following:

• A complete list of eligible employees and dependents of eligible employees

• Documentation that supports the “eligible employee” status of the individuals on

the list submitted by the employer (such as W-2 data, Wage and Tax Form,

Schedule C, K-1 Form, etc.);

• A waiver form for each eligible employee who waives coverage because of other

insurance or declines coverage entirely, for himself or herself or for any eligible

dependents. The waiver form should be signed by the employee. In the event that

the employee refuses to sign the waiver form, the small employer must certify this

refusal in writing.

The examiners reviewed the waiver form used by the Company. This waiver form, if

completed by the waiving employee or signed by the employer in accordance with

Regulation 82(6)(B)(2)(d) and Insurance Bulletin 2002-5, satisfies the requirements of

Regulation 82(6)(B)(2) and Insurance Bulletin 2002-5.

For the purpose of determining if the employer is a “small employer,” as defined in

R.I.G.L. 27-50-3(kk), the Company requests that the employer complete either the “New

Business Underwriting Checklist” (for new business) or the “Renewal Certification”

package (for renewals) and provide the required documentation. These documents

include instructions for the employer.

In order to determine the Company’s compliance with this process, the examiners

obtained certification files for a sample of ten cases.

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The review process focused on the following:

• Supporting documentation that the employer was a “small employer”

• Documentation that identifies employees who are eligible employees and

indicates their status (enrolled, part-time, temporary, waived, etc.)

• Review of completed enrollment and waiver forms

• Level of Participation in the health plan12

A summary of the results of this review is as follows:

Small Employer: In all instances, the employer was provided the definition of “small

employer” taken from R.I.G.L. § 27-50-3(kk) and the employer certified eligibility.

Eligible Employee: In all instances the employer provided a payroll report for employees

who were paid on “regular” payroll. For owners and partners the files included either a

K-1 form or Schedule C.

Employee Status: Based on the status of each employee, the employer enters a code from

a list contained in the instructions provided by the Company. The examiners noted that

each file contained such a list (generally the payroll report or the quarterly Wage and Tax

Form) with appropriate coding. The examiners noted that the employer determines the

number of hours per week that an employee needs to work, but this is not recorded

anywhere and this could be different on a yearly basis.

Enrollment and Waiver Forms: The files contain a waiver form for all eligible employees

and an enrollment form for newly enrolling eligible employees.

All enrollment forms reviewed were properly completed by the eligible employee,

including the employee signature.

12 The examiners noted in another section of this report that the method of calculating participation used by the Company is more liberal than the minimum standard specified in R.I.G.L. § 27-50-7(d)(9).

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The review of the completed waiver forms identified some potential inaccuracies,

including the following:

• Wrong employee name on a waiver.

• The employer certification section was completed unnecessarily for some

employees.

• One waiver form did not appear to have a valid employee signature.

• One waiver described waiving coverage for spouse and children only, but Blue

Cross listed the employee as waived.

• For one company with a large number of waivers, most were signed by the Office

Manager. On several of these forms additional information was added in a

different handwriting. The manager explained to the examiners that the

recertification specialist routinely contacts the employer with regard to waivers to

make sure they are categorized appropriately. In some cases, additional

information is provided with regard to other coverage, and this is recorded by the

recertification specialist on the waiver form.

• Some people submitted waivers that listed themselves as not married, and then

stated that they had other coverage through a spouse.

Review of Participation: It has been noted that the calculation used by the Company to

measure participation is more liberal than that specified in the statute. Using the Blue

Cross methodology all of the groups in this sample met the Company’s 75% participation

requirement. It is interesting to note that the Company’s methodology can produce

dramatically different results from the minimum standard specified in the statute. In one

case, use of the Blue Cross formula resulted in a participation level of 77%, while the

statutory minimum standard formula produced a participation level of 33%.

For another group, Blue Cross’s methodology results in a participation level of 69%,

while the statutory standard produces a participation level of 58 %. The examiners asked

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why this case was renewed and were told that the group should have been terminated if

the case had been handled properly.

A summary of our review of the certification/recertification process is attached to this

report as Appendix 5.

It is apparent to the examiners that Blue Cross makes a significant effort to meet the

requirements of Chapter 27-50 with respect to the certification of small employer status

and obtaining properly completed waiver forms from employees and their dependents

who choose to not participate in the health plan. The level of effort required is quite

apparent, based on the waiver forms reviewed by the examiners. The examiners question

whether the effort expended for renewals with respect to collecting and maintaining

waiver information as required by Regulation 82(6)(B)(2) and Bulletin 2002-5 creates

sufficient value.

13. Review of Direct Pay Business

Direct Pay Product Portfolio

The Company offers health plans to individuals and families on a direct pay basis

(“Direct Pay” business). The current Direct Pay product portfolio consists of three plans:

• HealthMate Coast-to-Coast Direct, a PPO plan with co-pays for in-network office

visits and urgent and emergency care. Most other services are subject to a $2000

plan deductible and 80/20% coinsurance. Out-of-network services are subject to a

separate $2000 deductible and 60/40% coinsurance;

• Direct Blue Standard, an indemnity plan with a $300 deductible for major medical

services and 80/20% coinsurance for most services once the deductible is met.

Prescription drugs are subject to 20% coinsurance at participating pharmacies;

and

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• Direct Blue Economy, an indemnity plan with a $500 per admission deductible.

Office visits and prescription drugs are not covered. Most other services are

covered with 80/20% cost sharing.

Direct Pay Underwriting

Individuals and families can apply for Direct Pay coverage under two different

underwriting scenarios, each of which has its own rate structure. The two underwriting

scenarios are referred to by the Company as “Select Blue” (or “Pool II”) and “Direct

Blue” (or “Pool I”). Pool II is offered to individuals and families who can provide

satisfactory evidence of insurability, and is age and gender rated. Pool I is available on a

guaranteed issue basis for individuals who are unable to provide satisfactory evidence of

insurability. Rates for Pool I have been set at the maximum rates for Pool II and do not

vary by age or gender. The level of benefits for a given health plan does not vary between

the two risk pools. Blue Cross is the only small employer carrier that offers individual

health plans in Rhode Island. Applications for Direct Pay coverage are accepted by Blue

Cross at any time. If the applicant completes the health questions and passes medical

underwriting, the applicant is enrolled in Pool II. If the applicant does not qualify for

Pool II, but has a HIPAA certificate that indicates eligibility under R.I.G.L. § 27-18.5-

3(a), the applicant is enrolled in Pool I. Applicants who do not either pass underwriting

or have adequate prior coverage are accepted into Pool I, but only during a specified open

enrollment period. In 2005 the open enrollment period was August 15-September 15.

Blue Cross is in the process of replacing its current Direct Pay portfolio with four entirely

new plans. These plans (and Blue Cross’s updated rates) were the subject of a recent rate

hearing process and the new plans were approved by the Health Insurance Commissioner,

to be effective starting April 1, 2006. The new plans include two HealthMate Direct

options, HM400 and HM2000, and two high deductible health plans (“HDHPs”) suitable

for use with Health Savings Accounts (“HSAs”). These plans have been identified as

HM for HSA3000 and HM for HSA5000. Blue Cross has projected that most current

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holders of Direct Blue Standard will enroll in the new HM400, and that most holders of

the current HealthMate Direct and Direct Blue Economy plans will enroll in the new HM

for HSA3000 HDHP.

Small Employer Implications

Regulation 82(10)(F) requires that a carrier must gather the following information from

applicants for individual insurance:

• Whether any portion of the premium is paid by a small employer, either directly

or through wage adjustment or other means of reimbursement.

• Whether the prospective insured treats it as non-taxable employee benefits for tax

purposes.

According to Regulation 82(10)(F), if the Company does not make a good faith effort to

collect this information, it is deemed to be on notice of such information. If the Company

allowed the usage of its Direct Pay products for small employer health plans, it would

need to offer Direct Pay plans to all small employer groups, as required by R.I.G.L. § 27-

50-12(a), and the rates for Direct Pay products would need to be developed in accordance

with R.I.G.L. § 27-50-5.

Compliance Review of Direct Pay Products

The application form for the Company’s Direct Pay products requests that the applicant

indicate eligibility status with respect to an employer sponsored health plan. The

applicant is also asked if an employer will pay or reimburse any portion of the premium.

It is our understanding that the Company will not issue a Direct Pay policy in the case of

an affirmative response to either of these questions. Based on the enrollment form and the

underwriting process, the Company satisfies the requirements of Regulation 82(10)(F).

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Review of Direct Pay Marketing Materials

While not the primary focus of this market conduct examination, the examiners reviewed

the product portfolio, rates, and marketing materials that the Company utilizes for its

Direct Pay products.

A comparison of the Direct Pay portfolio with the Small Employer product portfolio

results in the following observations:

• The Direct Pay products are generally less rich than the small employer products.

For example, the benefit value of HealthMate 2000 Direct product is about 66%

of the benefit value of the most popular HealthMate Coast-to-Coast small

employer product.

• Because the Direct Pay products are generally less rich, there is a greater amount

paid by the member. In 2004, cost sharing for Direct Pay products averaged 18%

of allowed claims as compared to 12% for small employer products. This

disparity will increase when the new Direct Pay plans are implemented.

• The rating structures of the Direct Pay Pool II and Small Employer products are

very different. The slope of the rates by age is very different and the Direct Pay

products are two-tier (individual and family) while the small employer products

are four-tier. The Direct Pay family rates are relatively lower compared to

individual rates than they are for Small Employer rates. The small employer

group rates are also affected by the health status factor and the impact of the 4:1

compression. However, Direct Pay rates are more compressed than 4:1.

• The new Direct Pay rates are, on an age, gender, health status and benefit adjusted

basis, comparable to Small Employer rates – slightly lower than Small Employer

for Pool II, slightly higher for Pool I.

• No commissions are payable on Direct Pay business, since it is only available on

a direct basis. This results in a lower expense load for Direct Pay than small

employer business. Otherwise, administrative expenses allocated to Direct Pay

are comparable to Small Employer.

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• Direct Pay subscribers are generally older than small employer subscribers. Using

the small employer age/gender factors as a base line, the average age/gender

factor for Direct Pay subscribers is 122% of that for the small employer

subscribers.

• The utilization of healthcare services is much higher for Direct Pay members,

compared to small employer members. The sum of Blue Cross paid claims and

subscriber cost sharing is 30% higher for Direct Pay subscribers over that paid for

small employers. Since the effect of age distribution accounts for approximately

22%, other differences in utilization of services, including the net effect of more

unfavorable health status offset by the deterrent effect of higher relative cost

sharing account for the remaining 8% of increased cost for Direct Pay as

compared to small employer insurance.

Due to differences in the age and gender table structure used for the small employer and

Direct Pay business, some people eligible for small employer insurance may be able to

buy Direct Pay more cheaply than comparable Small Employer health plans. This could

potentially be an issue with regard to the smallest small employer groups.

Direct Pay Pool II rates are significantly lower than the small employer rates at the higher

ages and for all female age categories, on a comparable benefit basis. If a Direct Pay

applicant does not qualify for medically underwritten Pool II rates, the applicant can

apply for the guaranteed issue product (Pool I). If the Pool I applicant has a HIPAA

certificate indicating qualifying prior coverage, the applicant is accepted into Pool I

immediately. If the applicant cannot pass medical underwriting or demonstrate adequate

prior coverage, the applicant can be admitted to Pool I during the annual open enrollment

period. Small employer rates are generally less than the Pool I rates, except for the

highest age groupings.

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14. Review of Company Process for Responding to Complaints

When a complaint from a Blue Cross member is submitted to the DBR, the DBR

forwards the complaint to the attention of Blue Cross’s General Counsel. The General

Counsel then forwards the complaint to the Regulatory Relations and Delegation

Oversight Department for review, research, and response by a compliance oversight

analyst. The company makes an effort to provide a response to the DBR within a 30 day

timeframe, unless the DBR sets a specific shorter timeframe for response. A draft

response is reviewed by an Assistant General Counsel, the manager of the Regulatory

Relations and Delegation Oversight Department, and other employees whose expertise is

required for the case. Following this review process, the response is sent to the DBR by

first class mail. All follow up questions are directed to the compliance oversight analyst.

Paper files are retained by the Regulatory Relations and Delegation Oversight

Department. The complaint is also logged in the appropriate department database for

reporting purposes.

Complaints that are submitted directly to Blue Cross are generally handled by the person

and/or department to whom they are directed. The small employer complaint log

provided by the company includes two complaints that were submitted directly to Blue

Cross. Blue Cross tracks complaints/appeals using an administrative form – “Complaint

and Administrative Appeal Case File Check List.”

The examiners requested and reviewed a log of small employer health insurance related

complaints received in the last three years from the Company. The log included the name

of the complainant, the date received, the issue raised, the name of the person who

handled the complaint, and how and when the complaint was resolved.

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The complaint log received by the examiners contained 23 complaints. Twenty-one of the

complaints were submitted through the DBR and two of the complaints were submitted

directly to the company.

Of the twenty-three complaints, 13 related to renewal rate increases. Based on the

statements of resolution contained in the log, the Company generally responded to

complaints of this nature with an explanation to the policyholder of the rating process,

and a recalculation and verification of the rates charged.

Six complaints related to eligibility, including four that specifically related to failure of a

group to meet participation requirements and issues related to the definition of small

employer. The Company responded to these complaints with an explanation of the

requirements of Chapter 27-50 and Regulation 82 regarding eligibility and review and

verification of the individual circumstances.

Two items from the complaint log were inquiries about husband and wife enrollment

options if both are employed by the business. The Company responded to such questions

by indicating that each can enroll individually as an employee or alternatively, one of the

spouses can enroll as the dependent of the other. The choice selected by the group can

affect the age-gender factor of the group and consequently the rates charged.

After reviewing the complaint log, the examiners requested five complete complaint files

for additional review. Based on our review, the complaints were handled in a reasonable

fashion, although certain issues arose that led us to further investigation or

recommendations.

1. It appeared from one of the complaints that an intermediary (GNA) had, at least in

one circumstance, charged an additional fee of $15 per contract per month, in

violation of its agreement with Blue Cross and in violation of Regulation 82.

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Blue Cross has instituted an audit of its intermediaries to investigate this situation

and to ensure proper handling of accounts by the intermediaries.

2. One of the complaints related to a small employer with an out-of-state business

address, one employee who resided and worked in Rhode Island and one

employee who resided outside Rhode Island. Blue Cross concluded correctly that

the employer was not eligible for a small employer health plan.

3. Two of the complaints related to RI extension of benefits under RI GL 27-19.1. It

appears to the examiners that there is not sufficient clarity in the existing small

employer law and regulation to determine the correct rating of these cases. A

review of the documentation provided by Blue Cross did not find adequate

internal guidelines with respect to such situations. Blue Cross did offer the

extension of coverage as required.

Recommendation 7: It is recommended that Blue Cross review its policies related to

treatment of employees of employers who go out of business.

A more complete discussion of the review of the Complaint Log and the detailed

examination of a sample of complaint files reviewed is contained in Appendix 7.

Reconciliation of DBR complaint log to Blue Cross complaint records

The examiners obtained a listing of complaints filed with the DBR and closed during

2004. The examiners provided that portion of the listing that pertained to Blue Cross

complaints to the Company and asked that it identify the complaints on the listing that

were associated with small employer business.

In response the company identified:

• 6 complaints that were related to small employer business and were in the log

provided by the Company;

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• 3 complaints of which the company had no record; according to DBR records,

these were handled directly by DBR and Blue Cross was not notified.

• 2 additional complaints that were related to COBRA coverage on small employer

cases and should have been reported by the Company as small employer

complaints in response to the data request generated by the examiners; and

• 1 complaint that the Company recognized as a small employer complaint but that

inadvertently had not been reported previously to the examiners.

No further follow up was conducted with regard to these complaints.

Other than as noted, Blue Cross’s complaint resolution process is adequate, and did not

indicate areas of non-compliance.

15. Review of Contracts and Forms

The review of contracts and forms included review of the following documents:

• Subscriber Agreements and marketing brochures for all available health plans

• Sales Agreement

• Membership Application for individual employees

• Employee Risk Appraisal

• Small Employer Waiver Form/Certification

• Group Risk Appraisal Form

• Disclosure of Certain Rating and Renewability Provisions

• Form letters and forms used in the eligibility re-certification process

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Subscriber Agreements

Benefits described in the Subscriber Agreements were compared to those described in the

marketing brochures. They are consistent with the benefits described in the Blue Cross

marketing brochures.

According to the Summary of Benefits, dependent children are covered until January

1 of the year after reaching their nineteenth birthday and full-time students are covered

until January 1 following the year that the student attains age 26. Availability of coverage

for children and full-time students exceeds the requirements of R.I.G.L. § 27-50-3(j).

The Subscriber Agreement includes a description of when an employee can enroll. An

employee can enroll when first eligible, during the annual open enrollment period, or

when eligible for a Special Enrollment. This provision meets the requirements of R.I.G.L.

§ 27-50-7(d).

Sales Agreement

R.I.G.L. § 27-50-5(g) requires a carrier to make adequate disclosure in connection with a

new business proposal or a renewal of the carrier’s right to change premiums and factors

that effect changes in premium rates, of provisions related to renewability, and of

descriptive information, including benefits and premiums for all benefit plans for which

the small employer is qualified.

Blue Cross’s right to change premiums is included in the Sales Agreement, where it is

reflected in the “Financial Terms” and the “Extension of Agreement” paragraphs.

The “Termination of Agreement” paragraph of the Sales Agreement indicates that the

agreement may be terminated by the small employer for “cause” or at “the end of any

rating period subsequent to the initial term by providing Blue Cross with no less than

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thirty (30) days’ prior written notice of its intention not to renew.” Blue Cross’s practice

differs from the requirement described in the Sales Agreement. Blue Cross will allow a

small employer to terminate the agreement on dates other than the end of the rating

period. Blue Cross’s practice is permitted by Chapter 27-50 and Regulation 82 but it is

not consistent with the description in the Sales Agreement.

Recommendation 8: It is recommended that Blue Cross amend its Sales Agreement to

reflect its actual practice with respect to the right of a small employer to terminate.

The Blue Cross Sales Agreement supports in all other respects the requirements of

Chapter 27-50.

While not contrary to Chapter 27-50, the examiners found that the size of the type made

reading the Sales Agreement difficult.

Membership Application for individual employees

The Membership Application allows an eligible employee and dependents to enroll in the

small employer health plan. The application form contains the appropriate information

and is in compliance with the requirements of Chapter 27-50.

Employee Risk Appraisal and Group Risk Appraisal Forms

Blue Cross uses different employee risk appraisal forms based on the size of the

employer group. They collect individual forms for groups of up to 19 enrolling

employees, and use an employer based form for groups of 20 or more enrolling

employees. The forms collect generally similar information and are used in generally the

same way. Blue Cross refers to these two segments of its small employer business as

“PER-1” and “PER-2”. The employee risk appraisal forms collect information about

medical conditions of employees and dependents. This information is used by the Blue

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Cross Medical Underwriting Unit to determine the debit points to be assigned to the

enrolling members. The collection of health status data is permitted by Chapter 27-50 and

supports the determination of a rate adjustment factor that is related to the overall health

status of a group applying for coverage. Blue Cross collects and uses medical condition

information in a way that is permitted by Chapter 27-50 to support determination of the

debit points assigned to each newly enrolling subscriber and dependent.

Small Employer Waiver Form/Certification

Regulation 82(6)(B)(2) requires that Blue Cross obtain from every eligible employee a

waiver form if that employee and/or dependents of the employee choose not to enroll in

the health plan. The waiver form asks the employee to indicate the eligible individuals

who do not enroll and the reason for the waiver. The employee is required to sign the

waiver form and in the case that the employee refuses to sign, the employer is required to

provide a certification. Additionally, the waiver form is required to include a statement

informing the eligible employee of their special enrollment rights provided by R.I.G.L. §

27-50-7(d). The waiver form used by Blue Cross allows the company to meet the

requirements of Regulation 82(6)(B)(2).

Disclosure of Certain Rating and Renewability Provisions

R.I.G.L. § 27-50-5(g) requires that, in connection with the offering for sale of any health

benefit plan, a small employer carrier make reasonable disclosure, as part of its

solicitation and sales material, of:

1. The provisions of the health benefit plan concerning the carrier’s right to change

premium rates and the factors that are utilized in the calculation of premium rates;

2. The provisions relating to renewability of policies and contracts;

3. The provisions relating to pre-existing conditions; and

4. A listing and descriptive information, including benefits and premiums, about all

benefit plans for which the small employer is qualified.

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R.I.G.L. § 27-50-7(b) requires that every small employer carrier shall actively offer to

small employers all health benefit plans it actively markets to small employers, including

the Standard and Economy plans.

In the course of the examination, the examiners reviewed samples of proposal and

renewal packages. Each proposal and renewal package that was reviewed included (i) a

disclosure statement that described the underwriting criteria for eligibility for a small

employer health benefit plan, (ii) a description of the rating components and the factors

that impact the rate for any particular small employer, and (iii) conditions related to

renewability, minimum participation, and a recommendation with respect to minimum

contributions by the employer to the health benefit plan. Each proposal and renewal

package also included a summary benefit description of all the available plans and rates

that reflected Blue Cross’s rating practices and the demographics of the group. Based on

this review, the examiners conclude that Blue Cross’s practices satisfy the requirements

of R.I.G.L. § 27-50-5(g) and R.I.G.L. § 27-50-7(b).

R.I.G.L. § 27-50-3(kk) provides the definition of small employer. In particular, a business

with one employee can satisfy this definition of small employer and may therefore be

eligible to purchase a small employer health plan from Blue Cross. In several instances

Blue Cross materials improperly describe eligibility as limited to groups with 2-50

eligible employees:

• Blue Cross’s website indicates that the Essential Plans are available “for groups

with 2-50 employees”

• The Direct Pay enrollment application makes a reference to “employer sponsored

plan that employs two or more….”

The examiners are not aware of any instances in which an employer with only one

eligible employee was denied access to a small employer plan when it otherwise

qualified.

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Recommendation 9: It is recommended that Blue Cross review its documentation

(including electronic) to ensure that it includes groups of one eligible employee within

the criteria for eligible small employer in all its marketing contexts and public

communications.

We note the following discrepancies with respect to the disclosure form:

• The disclosure form states that the Company develops separate rates for coverage

for individuals age 65 and older for whom Medicare is the primary payor and

coverage for individuals age 65 and older for whom Medicare is the secondary

payor. It is our understanding that it is the Company’s practice to include over age

65 individuals in the calculation of the age/gender factor for the group and that

separate rates are not developed. While either method is acceptable, the Blue

Cross description of its methodology should reflect actual practice.

• The disclosure form indicates that the Company has a 75% participation

requirement and that a group’s participation percentage is calculated as the ratio

of eligible employees who enroll in the plan to the total number of eligible

employees who have not waived coverage due to other health coverage. The

procedure indicated on the disclosure form is consistent with that prescribed in

R.I.G.L. § 27-50-7(d)(9). The Company’s actual practice for determining the level

of participation, as described in the Eligibility Certification Manual, is different in

that it includes in both the numerator and denominator those eligible employees

who have waived due to other coverage. Blue Cross’s practice, as described in the

recertification manual, is more liberal than the minimum standard specified in

R.I.G.L. § 27-50-7(d)(9). We noted one example where Blue Cross’s

methodology produced a 77% participation rate and the more restrictive

methodology described in R.I.G.L. § 27-50-7(d)(9) and on the disclosure form

produced a 33% participation rate. Based on an analysis of Blue Cross’s database

of 2005 certification activity, it appears that approximately 300 groups met Blue

Cross’s participation definition that would not have met the more stringent

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definition allowed by the law. However, it is the examiners’ opinion that Blue

Cross is allowed to use the more inclusive definition, as long as it does so

uniformly for all groups.

Recommendation 10: It is recommended that Blue Cross modify the disclosure form to

reflect its actual practice as it relates to the development of rates for individuals over age

65.


reflect its actual practice as it relates to the calculation of the participation level.

Recertification Letter and Forms

The prior Market Conduct Examination Report included various recommendations that

required Blue Cross to collect information on a periodic basis to determine:

• If the group is still a small employer,

• If the group meets the Blue Cross participation requirements,

• If the group was formerly a small employer, but has grown into large group status,

• If the group was formerly not a small employer , but has decreased in size and is

now eligible to purchase a small employer health plan,

• If waiver forms have been submitted for all eligible employees and dependents

who have chosen not to enroll in the health plan.

In response to various prior report recommendations Blue Cross established the

Recertification Department and developed a detailed Recertification Manual. The manual

contains copies of Chapter 27-50 and the accompanying regulation. The examiners have

reviewed the contents of this manual and conclude that the explanations, instructions,

forms, and form letters allow the Blue Cross to administer those aspects of Chapter 27-50

described in this section.

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16. Medical Management

While medical management is not addressed in Chapter 27-50, the Health Insurance

Commissioner requested that the examiners gain an understanding of the medical

management programs which impact small employer members. To do this, the

examiners met with the Assistant Vice President of Medical Management Operations and

the Senior Medical Director, the individuals responsible for overseeing utilization and

care management activities. The following narrative is a summary of this discussion.

Blue Cross does not have specific programs geared to the small employer market. Small

employer members are able to participate in all relevant programs that Blue Cross offers.

Disease Management: Blue Cross has population-based disease management programs

focused on asthma, diabetes, congestive heart failure, depression, and coronary artery

disease. Potential program participants are identified from a quarterly claims extract.

These individuals are then contacted by mail. Subsequently, staff in the disease

management call center may contact an interested individual and conduct a member

assessment in order to determine the member’s knowledge of the disease and the

member’s current compliance with treatment regimens. Blue Cross has a process for

measuring results and savings.

Utilization Review: Utilization review of inpatient stays is triggered as a result of

notification by the hospital. The utilization review staff uses InterQual guidelines for

care, working on-site at the hospital and using real-time hospitalization data. In addition,

a quality assurance program with Johns Hopkins is geared to decreasing length of stay in

intensive care units.

Case Management: Candidates for case management are identified from physician

referrals, hospital discharges, and analyses of claim data. The case management staff is

particularly sensitive to members with co-morbidities who could benefit from case

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management. Blue Cross is currently piloting a physician incentive program to

encourage physicians to refer patients for both disease management and case

management programs. Blue Cross is also considering member incentives for these two

programs in order to encourage participation in the disease management and case

management programs.

Physician Focused Programs: Physician profiling involves comparing physicians to their

peers with respect to the cost per year for laboratory, office visits, hospital care,

emergency room care, radiology, and prescription drugs. Blue Cross staff reviews the

medical records of outliers and meetings with such physicians frequently follow to

discuss their cases. The aim of these meetings is to encourage change in physician

behavior, if such change is warranted following the review and a face to face meeting.

Blue Cross also has a program to provide incentive payments to primary care physicians

for improvements in HEDIS measures. (HEDIS is a program of the National Committee

for Quality Assurance (“NCQA”). It is a set of standardized performance measures

related to the provision of care, frequently used to compare the performance of health

plans.) HEDIS measures of particular interest include after-hours access, diabetic blood

tests, and utilization of mammograms.

Blue Cross is funding fifty physicians to encourage the implementation and utilization of

e-health records. Funding is for both equipment and software. The goal is to promote

improved record-keeping and to enable physicians to meet selected outcome goals, which

will be measured at the end of three years.

Prescription Drug Benefit Management: With respect to prescription drug benefit

management, Blue Cross takes advantage of the standard programs offered by its

Pharmacy Benefit Manager, WellPoint. In addition, Blue Cross has initiated a program

to provide approximately thirty to thirty-five of the larger physician practices with a

system to dispense samples of generic medications, rather than the more typical samples

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of brand name drugs, to patients. It should be noted that, while Blue Cross fully funds

this program, its competitors in the market place will reap its benefits as well.

Program Development Efforts: Blue Cross is considering the development and

implementation of programs in the following focused areas:

• Require prior approval for selected radiology procedures (this is currently in place

for PET scans only);

• Incentives to providers to promote the treatment of chronic conditions, including

payment for group patient education visits;

• Payments for pre-operative assessments, including second opinions, for knee and

hip replacements;

• Hospital certification for disease management;

• Enhanced physician and member education efforts;

• New physician profiling software to analyze episodes of care rather than overall

cost per patient; and

• Centers of Excellence for bariatric and cardiac surgery.

Blue Cross Concerns: Perceived external obstacles to more efficient and effective overall

medical management programs include legislative and regulatory obstacles to an efficient

process for implementing medical necessity denials and provider influence on legislation.

In addition, as the dominant carrier in the marketplace, Blue Cross believes that its

competition benefits from the “free-ride” effect of its programs. They believe that

changing physician practice patterns benefits all carriers in the market, not just the one

which pays for the program.

17. Carrier Concerns and Recommendations for Change

The examiners met twice with Blue Cross staff to hear their observations about Chapter

27-50 and suggestions for change. Suggestions for change fell into three main categories:

rating methodology, administrative requirements, and the inclusion of groups of one in

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the definition of small group. Additionally, Blue Cross expressed concern with carriers

that are not subject to Chapter 27-50, but which may be competing in the small employer

market.

Rating Methodology

With respect to rating methodology, Blue Cross proposed the following changes:

• Separate rating classes based on group size, including exclusion of groups of one

from the small employer market and inclusion of those groups in Direct Pay;

• Allowance of health status rate factors to vary more than the current plus or minus

10% maximum (they proposed plus or minus 25%);

• Allowance of rates that vary more widely than the current 4:1 compression; and

• The ability to list bill groups with fewer than ten employees (with list billing a

monthly premium is charged for each employee based on that employee’s age,

gender, and contract type, but not health status, which would continue to be

applied on a group basis).

Each of these suggestions leads to a system under which each group is rated more

directly on its own demographics. Such a system would thereby reduce the level of

community rating that currently exists. The suggestion to adopt list billing would, in the

opinion of Blue Cross, allow changes in the demographics of the group to be reflected in

the month that the change took place, rather than deferred to the next renewal. Blue

Cross’s suggestions for change are based in part on their perception that they are losing

the younger, healthier subscribers. To the extent that rates could be lower for these

individuals, Blue Cross believes that fewer members will leave the small group pool and,

additionally, more such individuals will enter the small group market. Blue Cross

believes that this would spread risks more broadly, thereby lowering overall community

rates.

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List billing for smaller groups is also a mechanism to better explain and manage rate

volatility in this segment of the market. With list billing, rather than each contract type

paying the same rate, each specific subscriber is assigned a rate based on his/her

demographic characteristics (with the exception of health status, which would continue to

be applied on a group basis). Providing an employer with different rates for individual

subscribers in groups under 10 helps to both explain and to manage the rate change based

on new hires. It also means that a rate adjustment upward or downward would be

reflected in the total premium for each new hire as soon as he/she becomes covered,

rather than waiting for the next annual anniversary date. Blue Cross believes this would

prevent gaming of the system whereby employers may add or remove individuals from

coverage during the rating process, then revert enrollment after the rates have been

established. The examiners did not see any evidence during the course of the

examination that documents this practice.

In addition, the Company suggested that splitting the small employer risk pool into

several segments based on employer size would enable the development of more

advantageous products and employer incentives.

Administrative Requirements

Blue Cross suggested that standardized administrative forms for tasks required by the

small group legislation would be helpful. The Company specifically mentioned tasks

related to certification of small employer status, a requirement for which each carrier has

developed its own forms and processes. Blue Cross has a perception that the process they

use for certification of small employer status is more onerous for them and more difficult

for the brokers and employers to comply with than the process used by United. The

examiners note that the same argument can be made with respect to other forms, such as

enrollment, waiver, and health status.

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R.I.G.L. § 27-50-3(c) provides a definition of “affiliate or affiliated” and R.I.G.L. § 27-

50-3(kk) provides a definition of small employer and states that “affiliated companies

will be included for the purpose of the determination of small employer status.” Blue

Cross suggested clarification of what business should and should not be considered

affiliated. Blue Cross also suggested clarification of whether Rhode Island groups that

are affiliates of non-Rhode Island entities are eligible for Rhode Island small employer

insurance. The examiners agree with Blue Cross that, as currently written, it appears that

such groups are not Rhode Island small employer groups, unless a majority of all

employees of the total affiliated entity are employed in Rhode Island.

Direct Pay and the Treatment of Groups of One

Blue Cross proposes removing small employer groups of one from the small employer

pool. This recommendation is based on internal analysis performed by Blue Cross that

groups of one are, on average, worse risks than the remaining small group membership.

Their inclusion in the small group pool, therefore, results in higher overall average rates

for all. Should this suggestion be incorporated in legislation, groups of one would have

to purchase Direct Pay coverage, currently offered only by Blue Cross.

Blue Cross also shared its suggestions for reform of the Direct Pay market with the

examiners. Blue Cross proposed for consideration a number of strategies:

• “pay or play” taxation on carriers to support the availability and affordability of

the Direct Pay market,

• a high risk pool subsidized by all insurers in the state, and

• the replacement of the direct pay rate hearing process with a minimum loss ratio

or maximum rate change requirement.

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Competition not Subject to Chapter 27-50

Concern was expressed by Blue Cross that MEGA Life and Health Insurance Company

(“MEGA”) might be insuring a number of small employers in a way that might not be in

compliance with Chapter 27-50. If this were true, it might undermine the effectiveness of

Chapter 27-50 by allowing MEGA to compete unfairly, thereby causing adverse selection

to the small employer carriers. This concern was based on MEGA reporting

approximately 24,000 insured members for health coverage in Rhode Island in its annual

statement.

To investigate this situation, the examiners reviewed Blue Cross’s MARRS IRIP

database with regard to canceled cases and new business cases. Blue Cross’s MARRS

IRIP database is not complete with regard to information about either the disposition of

canceled cases or the source of new business, in part because Blue Cross is not always

able to obtain that information. However, of all the cases canceled by Blue Cross and for

which a cancellation disposition was included in MARRS IRIP, MEGA was reported as

the succeeding carrier in only three cases, with a total of three subscribers. Similarly, of

the cases for which a source of business was included in MARRS IRIP, Blue Cross

reported three new business cases where MEGA was the prior insurer, for a total of three

subscribers. Based on this, it does not appear that MEGA has had a significant effect on

Blue Cross small employer membership.

On further analysis, the examiners determined that MEGA writes a large amount of

student health insurance in Rhode Island, including covering students at Brown

University, Johnson & Wales, Providence College, Bryant College and Roger Williams

College. This seems to be a reasonable explanation for the membership reported by

MEGA in its annual statement.

Based on other investigations done in the course of the small employer market study, it

appears that MEGA may in fact be offering coverage to small employer groups, including

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groups larger than one. While at this point it appears to the examiners that MEGA is not

at this time a significant factor in the small employer market, a preliminary determination

has been made that MEGA is subject to Chapter 27-50 and is insuring at least some

Rhode Island small employer groups. The examiners have forwarded the relevant

information to the Office of the Health Insurance Commissioner to determine the

appropriate next steps. MEGA has now filed with the DBR a statement of actuarial

certification regarding compliance with Chapter 27-50 for 2005. As of May 10, 2006, an

examination warrant has been issued for a targeted market conduct examination of

MEGA with regard to compliance with Chapter 27-50.

Examiner Comments

HAT is preparing a separate report addressing the policy issues which have arisen out of

the market conduct examinations and an analysis of the small employer marketplace in

Rhode Island. This report will include recommendations for legislative and regulatory

changes to Chapter 27-50. The Company’s suggestions and expected outcomes will be

discussed in the policy paper.

18. Achievement of the Purposes of Chapter 27-50

The purposes of Chapter 27-50 are described in R.I.G.L. § 27-50-2:

• To enhance the availability of health insurance coverage to small employers

regardless of their health status or claims experience

Blue Cross makes health insurance available to all small employers. It does not

limit the availability of health insurance based on health status or claims

experience. Blue Cross membership has declined since the last report. This

decline is due in part to an affirmative effort by Blue Cross to identify and remove

groups which do not meet the eligibility requirements of Chapter 27-50.

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• To prevent abusive rating practices

The examiners found no evidence or suggestion that Blue Cross engages in

abusive rating practices.

• To prevent segmentation of the health insurance market based upon health risk

Blue Cross is complying in this and does not use pre-existing condition

limitations or require affiliation periods to obtain coverage. There is no

“uninsurables pool,” and people with health problems are not being forced out of

the market.

• To spread health risk more broadly

The law seeks to spread health risk broadly by limiting disparities in rates by age,

gender and health status, and by prohibiting the use of other rating variables.

Blue Cross complies with the requirement to hold group-by-group rates within the

4-1 compression. Spreading risk broadly has the unavoidable impact of increasing

prices for younger and healthier groups to subsidize prices for older or less

healthy groups, which may lead to problems with affordability for those younger

groups.

• To require disclosure of rating practices to purchasers

R.I.G.L. § 27-50-5(g) requires disclosure about rating and underwriting in

connection with new business and renewal proposals, and R.I.G.L. § 27-50-5(h)

requires that companies maintain rate manuals that show how rates are developed.

Blue Cross is in compliance with disclosure requirements. The examiners

recommend that Blue Cross correct minor discrepancies in its documentation.

• To establish rules regarding renewability of coverage

Blue Cross complies with the requirements of R.I.G.L. § 27-50-6(a), by offering

renewal to all customers on the same basis.

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• To limit the use of pre-existing condition exclusions

Blue Cross does not use a pre-existing conditions limitation in its small employer

policies.

• To provide for the development of Economy, Standard and Basic health benefit

plans to be offered to all employers

The Basic plan is no longer required by Chapter 27-50. Blue Cross’s marketing of

the Economy and Standard plans has been adequate. These plans have not been

particularly popular and the examiners conclude that the statutory plans have not

promoted health insurance purchases among groups otherwise not insured. This is

not due to any non-compliance by Blue Cross.

• To improve the overall fairness and efficiency of the small group health insurance

market

Fairness in the market is somewhat in the eye of the beholder, but the attributes of

guaranteed renewability, protection from experience rating, equal underwriting

and rating by size of group and for new business and renewal are all elements that

are important. Blue Cross has been sincere in its efforts to treat its new business

prospects and its policyholders fairly, and its conduct has been consistent with the

attributes mentioned here.

The examiners note that R.I.G.L. § 27-50-2(b) states that Chapter 27-50 is not intended to

provide a comprehensive solution to the problem of affordability of healthcare or health

insurance.

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19. Conclusions

Blue Cross is committed to the state of Rhode Island, and considers the small employer

market an important part of its mission. Given that Blue Cross provides health benefit

plans to almost 80% of the people covered under Rhode Island small employer contracts,

its compliance with Chapter 27-50 is of paramount importance.

Blue Cross has made a significant effort to implement all of the recommendations from

the prior market conduct examination in 2002, and they are now in substantial

compliance with all elements of Chapter 27-50.

Blue Cross has lost market share since 2002, and the number of groups and employees

covered in the small employer market in Rhode Island has declined. Some of this is

because of more rigorous enforcement of eligibility requirements, but there may be other

contributing factors, which have not been determined within the examination process.

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20. Blue Cross's Initial Comments on the Report


Written Response to Market Conduct Examination Report

Pursuant to R.I. General Laws Section 27-13.1-5(b)

This document constitutes the written response pursuant to R.I. General Laws Section 27-

13.1-5(b) of Blue Cross & Blue Shield of Rhode Island (“Blue Cross”) to the Market

Conduct Examination Report (the “Report”) conducted on behalf of the Rhode Island

Department of Business Regulation (the “DBR”).

At the outset, Blue Cross wishes to commend the actuarial examiners, Mr. Charles

DeWeese and Mr. Anthony van Werkhooven, for their professionalism. They conducted

the examination in a meticulous manner, as demonstrated in their detailed and thorough

report and as readily acknowledged by the staff who have worked with them these past

months.

It should be emphasized, as recognized in the report that Blue Cross has made significant,

good faith efforts to comply with the provisions of the small group law. Blue Cross

devoted significant time, energy, and resources to compliance, and implemented all of the

recommendations of the prior report. As a result, the recommendations listed in the

report are minor and technical in nature. Most of the recommendations do not constitute

violations of the small group law at all, but rather ways to improve business practices.

Attached are our responses to each of the recommendations listed in the Report. We have

provided our comments, have indicated how we will comply with the recommendations,

and, where applicable, indicated the dates that we will begin and complete the

implementation of the recommendations.

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Recommendation 1: It is recommended that Blue Cross investigate whether

intermediaries are adding a monthly fee to the premiums charged by Blue Cross and, if

so, require that intermediaries cease the practice.

Blue Cross Response:

In February, Blue Cross engaged Sansiveri, Kimball & McNamee, LLP to

conduct an audit of Blue Cross’ three current intermediaries: MBA, GNA, and

NEBCO. The audit includes a review of internal controls within Blue Cross with

respect to intermediary billing. The audit commenced March 1, 2006, and is on-

going. The scope of the audit is to review the controls in place surrounding the

intermediary billing process and determine if they are working as Blue Cross

intended. The scope of the audit includes the following:

• Accuracy and timeliness of generating premium billing

• Accuracy and timeliness of recording premium payments

• Accuracy and timeliness of reconciling member data

• Calculation and reporting of fees and other charges, if any

• Reconciliation of premiums billed and collected

If the final audit result discloses that intermediaries are adding a monthly fee to

the premiums charged by Blue Cross, Blue Cross will require the intermediaries

to cease that practice.

Recommendation 2: It is recommended that Blue Cross create a listing that indicates for

each small employer the amount of fees, if any, it paid to intermediaries since October 1,

2001.


As noted in response to Recommendation #1, the scope of the audit includes the

identification of fees, if any, which are identified in the audit process. If the final

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audit discloses that intermediaries are adding a monthly fee to the premiums

charged by Blue Cross, Blue Cross will quantify the fees paid.

Recommendation 3: It is recommended that Blue Cross review its agreements with the

intermediaries and determine if the fees described are received by the Chambers or the

participating small employer. If Blue Cross determines that the payments are received by

the Chambers, Blue Cross should determine if the receipt of such payments results in any

benefit to the participating small employers. If the payments made by Blue Cross result in

a benefit that accrues to the small employer it is recommended that Blue Cross determine

the amounts paid for each such small employer since May 12, 2003.


The fees described in the intermediary agreements are received by the Chambers,

and not by the participating small employer. One agreement has a typographical

error that suggests that the employer receives the payment, but that is not the case

in intent or practice.

The receipt of the payment by the Chambers is to compensate the Chambers for

the administrative services provided by the Chambers, and is not passed through

(directly or indirectly) to small employers as a benefit in cash or in kind.

Recommendation 4: It is recommended that Blue Cross establish a plan to periodically

audit those third party entities that collect and remit premiums on behalf of Blue Cross.


As noted in response to Recommendation #1, the on-going audit includes both a

review of the intermediaries and their billing practices as well as the internal

controls utilized by Blue Cross. Upon completion of the audit, Blue Cross will

review the results with an eye toward identifying future risk and a reasonable

approach to on-going monitoring of the intermediaries as well as other

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organizations that may collect and remit premiums on behalf of Blue Cross. The

results of the audit will educate us as to areas of on-going risk, which Blue Cross

will use to develop an approach to auditing these entities.

Recommendation 5: It is recommended that Blue Cross include in its rate manual a

description of the methodology used to allocate operating expenses to the lines of

business.


Blue Cross agrees with this recommendation and will include a description of the

methodology used to allocate operating expenses to the lines of business in the

third quarter 2006 rate manual.

Recommendation 6: It is recommended that Blue Cross include, as part of its Actuarial

Certifications, statements from all persons on whom the actuary signing the Certification

relied. These statements should include a description of information that the signing

actuary relied upon and that further indicates the accuracy and completeness of that

information.


Blue Cross agrees with this recommendation and will include statements from all

persons on whom the actuary signing the Small Group Certification relied upon.

The statements will contain a description of information and will further indicate

the accuracy and completeness of that information. This change will be part of

the CY2006 Actuarial Certification due on March 15, 2007 to the Department of

Business Regulation.

Recommendation 7: It is recommended that Blue Cross review its policies related to

documentation related to out-of-state employers and to treatment of employees of

employers who go out of business.

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We believe that our policies for handling employers with out-of-state locations or

employees and employers that have gone out of business are appropriate and in

compliance with RIGL 27-50. However, we will review those policies to

determine whether they can be improved in a manner that is consistent with the

business and financial goals of Blue Cross, and make any changes deemed

appropriate and feasible after that review.

Recommendation 8: It is recommended that Blue Cross amend its Sales Agreement to

reflect actual practice with respect to termination.


Blue Cross will review its practices with respect to termination and amend the

Sales Agreement as necessary and appropriate to reflect actual and on-going

practices. This may result in either a modification to Blue Cross’ current

termination practices to be in line with the Sales Agreement, or vice versa. The

review will be completed by August 1, 2006 and necessary modifications, if any,

will be implemented in the next printing of the PER Sales Agreement following

the completion of such review.

Recommendation 9: It is recommended that Blue Cross review its documentation

(including electronic) to ensure that it includes groups of one eligible employee within

the criteria for eligible small employer in all its marketing contexts and public

communications.


Blue Cross has identified that the current Direct Pay Health and Dental

Application contains an incorrect definition of small employer. This will be

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corrected in the next printing of the application, which will occur when the

current (recently printed) supply is depleted.


reflect its actual practice as it relates to the development of rates for individuals over age

65.


Blue Cross will modify the disclosure form to reflect its actual practice, as shown

in the attached modified disclosure form. The modification will be implemented

in the next printing of the disclosure form.


reflect its actual practice as it relates to the calculation of the participation level.


Blue Cross will review its practices with respect to calculation of the participation

level and amend its disclosure form when necessary and appropriate to reflect

actual and on-going practices. This may result in either a modification to Blue

Cross’ current calculation of the participation level to be in line with the

disclosure form, or vice versa. The review will be completed by August 1, 2006

and necessary modifications, if any, will be implemented in the next printing of

the disclosure form following the completion of such review.

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Section 17 – Carrier Concerns and Recommendations for Change

In Section 17 of the Report, the Examiners provided an overview of BCBSRI’s concerns

and recommendations for change in relation to the Small Group Market. The Examiners

commented that:

“HAT is preparing a separate report addressing the policy issues which have arisen out

of this market conduct examination and an analysis of the small employer marketplace in

Rhode Island. This report will include recommendations for legislative and regulatory

changes to Chapter 27-50. The Company’s suggestions and expected outcomes will be

discussed in the policy paper.”

While BCBSRI’s recommendations and concerns are summarized in the Report at a high

level, BCBSRI would like to take this opportunity to clarify and expand on what we

believe are needed market reforms.

Small Group and Individual market reform legislation should focus on improved

affordability and a reduction in the uninsured rolls. Reducing the number of uninsured

allows risks to be spread across a broader base and should lower overall average rate

levels. In the voluntary health insurance market system that we operate under, consumers

weigh the price they must pay against the value they expect to receive. Most healthy

individuals are willing to pay a premium somewhat higher than the benefits they expect

to receive in order to be protected against unanticipated injury or illness. However there

is a limit to the additional premium any given consumer is willing to pay in order to

obtain this peace of mind. If premiums rise above this threshold then healthy individuals

elect not to purchase coverage. As health insurance becomes more expensive consumers

can be expected to evaluate the costs and benefits of participation ever more carefully. In

light of this we believe it is appropriate to interject a little more financial equity into the

allowed rating structures. That is, if lower cost risks are leaving the market because they

perceive it offers them an increasingly poor value proposition (and we believe this to be

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the case), then it follows that we should be able to slow and hopefully even reverse their

withdrawal by improving their value proposition.

BCBSRI LEGISLATIVE PROPOSAL FOR SMALL GROUP REFORM

To improve the value proposition for lower cost risks, some relaxation of the current

limitations on rating is necessary. Restrictions on carriers’ rating and underwriting

flexibility improve affordability for the highest cost risks but increasingly are pricing

lower cost risks out of the market. BCBSRI offers several strategies aimed at improving

the value proposition for lower cost risks and thereby growing total enrollment. These

include: rating factors (expanded health status rate adjustments and max/min rate

compression ranges); moving groups of size one over to the individual market; and list

billing.

Increase flexibility in rating factors

The system needs to entice the uninsured, healthier population back into the market.

These individuals left the pool based on their perspective that the value of the coverage

was no longer worth the cost, and relaxing the current rating and underwriting restrictions

on carriers would allow them to offer attractive prices to lower costs risks who are

increasingly being priced out of the market. Increasing the health adjustment range to +/-

25% from the current 10% while also increasing the range of rates from a 4:1 to a 6:1

max/min ratio may attract those individuals back by offering them better value. In turn,

bringing this good risk back into the small group market will help reduce the rates for the

entire population of small employers as the risk is able to be spread over more

individuals.

Permit list billing

The demographics of a group have the biggest influence on what healthcare cost will be.

For the smallest employers – those with ten (10) or fewer employees, one or two changes

in subscriber composition can have a major impact on rates when renewing accounts. At

their annual renewal, these small accounts see the most volatile rate changes. These are

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also the employers that have the most difficulty in being able to absorb these abrupt

changes. List billing these accounts will allow rate levels to change both up or down

during the course of the year to reflect the changing risk (as measured by the changing

demographics) that the groups experience. By using a list billing approach, the rate

changes are spread more evenly throughout the year as enrollment changes. As a result,

the group’s renewal will result in most stable rate changes at renewal time. This type of

approach also eliminates the opportunity for abuses of the system by groups that

misrepresent their enrollment at critical times during the year in order to artificially

improve their rates. For example, if an account is rated with very young employees, their

rate is much lower than one rated with only older employees. Accounts may withhold

identification of the older eligible employees until after they receive a low rate for the

younger population and then add the older population after the rates are already delivered

and billed at the significantly lower level. Ultimately, this type of gaming hurts the entire

pool.

Address treatment of groups of one

Lastly, it is BCBSRI’s opinion that “groups” of size one should not be eligible for group

coverage and rates. To date, the inclusion of these individuals in the group market has

adversely affected rates for the entire small group pool by approximately 2.5%. Further,

we estimate that moving these individuals to the Direct Pay market will lower rates in

that market as well, by as much as 5%, as this subset of the group market actually

improves the existing Direct Pay pool. While some group size one members, a

constituency totaling approximately twelve thousand members, may be adversely

affected by this move, many of these individuals may benefit by qualifying for Direct Pay

preferred rates. Alternatively, if a blanket exclusion of groups of size 1 from the Small

Group market is viewed as too disruptive of existing member carrier relationships, we

suggest that it would be appropriate to allow a carrier to restrict the eligibility for its

Small Group line to groups of 2 or greater when such carrier also makes available a

guaranteed issue Direct Pay product line.

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GENERAL COMMENTS ON OTHER SIGNIFICANT LEGISLATION

The Governor and Lieutenant Governor have each introduced legislation which would

significantly impact the health insurance market by introducing a subsidy in the form of

reinsurance, funded in either part of whole by an assessment on insurers. We have the

following general comments on those proposals.

Subsidies based on the following guiding principles would have the most positive

systemic impact: injects new money; assists the uninsured; and minimizes administrative

expenses. Given the enormity of the small group and individual markets, we believe that

limited subsidy funding should be targeted on specific subsets of the market and not

spread so broadly as to lose its ability to have an impact on a consumer’s enrollment

decision. We believe the subsets that should be targeted are the currently uninsured and

low income individuals. Targeting uninsured and low income will help reduce the

instances of uncompensated care, which burdens the entire system, and will also help

bring new members into the insurance market, thereby achieving the goal of insurance –

spreading risk, and ultimately help to reduce overall rate levels for the entire market. For

example, $10 million dollars would reduce overall small group rates by less than 3%.

These same dollars targeted toward 15% of the enrollment would result in a savings of

nearly 20% for those individuals.

Monies might also be targeted toward a high risk pool for individuals, potentially

qualifying the state for federal funding, and on the smallest employer groups (ten or

fewer employees), one of the fastest growing segments of uninsured. Subsidies should

bring new money into the healthcare system. An assessment funded by a tax on insurers

is essentially “circular” money, resulting in premium increases for those already in the

system. Since enrollment for those already in the system is voluntary, some of these

members for whom the prices are increasing will stop purchasing insurance, continuing

the downward enrollment cycle. Sources of new monies might include sin (alcohol and

cigarette) taxes, tobacco payments, taxes on over the counter medicines, and general state

revenues. If monies from within the system are necessary, legislators might consider

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“play or pay” taxation on carriers who do not participate in the high risk individual

insurance market.

Reinsurance has been mentioned as a “subsidy” vehicle, and it does help redistribute

dollars between carriers, such that carriers underwriting the bigger risks may be

supported by carriers who don’t. However, reinsurance in and of itself does not address

affordability, as there are no new monies being funneled into the system, and the

administrative costs for both the carriers and the state would be excessive. If however,

reinsurance is the most acceptable method, then we suggest that the actuarial value of a

reinsurance attachment point (or rating corridor) could be given to the insurance

companies in proportion to the risk they undertake, and directly deducted from the

targeting population’s rates. This would eliminate the burdensome bookkeeping, large

overhead costs, and the underwriting risk associated with reinsurance. Reduced claims

costs may also be realized as carriers retain a vested interest in medical management of

the population.

CONCLUSION

As the examiners indicate in Section 18, “Achievement of the Purposes of Chapter 27-

50,” one of the many goals of the existing law was: “To spread health risk more broadly”.

The examiners further state that doing so “…has the unavoidable impact of increasing

prices for younger and healthier groups to subsidize prices for the older or less healthy

groups, which may lead to problems with affordability for those younger groups.”

(Report at Page 100.) Therefore, spreading the risk more broadly requires a delicate

balance of strategies that allow increased coverage while maintaining affordability for

these people who may perceive the value of coverage as marginal. Steps to expand that

range of compression will allow insurers to offset some of the community rating

downfalls and expand enrollment by improving the value for this critical subset of small

group employees.

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The question for our legislative leaders is what the ultimate goal is: "affordability" for

the older, less healthy population, or relative affordability and increased number of

insured? The bottom line is that the closer you move to community rating, the more

uninsured we create (with healthier folks dropping out of the pool, leaving less subsidies

for the sicker population), and the only way to re-attract the uninsured is moving further

away from community rating, as BCBSRI proposes. If one of the objectives is to ensure

affordability for the select few who can't afford to pay rates commensurate with their

risks, then some of the subsidies being discussed should be directed at this group. In the

meantime, the more people an insurer is able to attract onto the books because of

appropriate rating flexibility, the more risks are spread, and the more overall rate levels

are subdued.

BCBSRI appreciates the opportunity to offer these observations and suggestions.

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Disclosure of Certain Rating and Renewability Provisions Required by the Small Employer Health Insurance Availability Act

The Small Employer Health Insurance Availability Act (the “Act”) requires that Blue Cross & Blue Shield of Rhode Island (“Blue Cross”) conform to certain rating, renewability, enrollment, and marketing practices with respect to “small employers.” If your business is a “small employer”, this disclosure contains important information for you that you should read carefully. If your business is not a “small employer”, this disclosure does not apply to you. Please notify your Marketing Representative. A “small employer” is any person, firm, corporation, partnership, association, or political subdivision that (a) is actively engaged in business, (b) on at least 50% of its working days during the preceding calendar quarter; employed no more than 50 “eligible employees” with a normal work week of 30 or more hours, the majority of whom were employed within this state, (c) is not formed primarily for purposes of buying health insurance, and (d) in which a bona fide employer-employee relationship exists. An “eligible employee” is a full-time employee who works on a permanent (i.e. not temporary or substitute) basis. Rating Blue Cross develops an adjusted community rate (“ACR”) based on the pooled claims experience of all enrolled small employers. ACR has two components:

• An amount that expresses projected claims experience for all small group employers; and • An amount that expresses the expense of administering Blue Cross coverage for all small

group employers. This amount is adjusted by subtracting an amount for expected earnings on investments and adding an amount that has been reserved for future use.

The ACR is then adjusted for certain factors prescribed by the Act. Those factors are the age, gender, and contract type (e.g. enrollee, enrollee/spouse, enrollee/child(ren), enrollee/spouse/child(ren)) of all the subscribers enrolled through your small employer plan. The ACR adjustment includes an adjustment based on employee age, with rates for employees between age 30 and 65 varying in five-year age brackets.. A lower factor is used for those subscribers age 65 and older for whom Medicare is the primary payer. The ACR is adjusted for health status by no more than 10% based on medical underwriting techniques. Finally, Blue Cross compares the rate quoted for each contract type for your health benefit plan to the rates quoted for each contract type for all health benefit plans issued or renewed in the same period, and makes any adjustments required to ensure that the relationship between the highest and lowest rates quoted falls within the limits prescribed by the Act. These adjustments determine your final rate. Blue Cross may not adjust your rate more frequently than annually, except to reflect: (1) changes to your enrollment; (2) changes to contract type (e.g. if an employee marries or has a child); or (3) changes to your health benefit plan that you request. Enrollment and Renewability Our small group health benefit plans are offered annually for renewal to all groups that are “small employers” except in limited circumstances prescribed by the Act, including the following:

• Non-payment of the required premiums; or • Fraud or misrepresentation by the employer; or • Non-compliance with minimum participation requirements; or • Non-compliance with minimum employer contribution requirements. Minimum Participation Requirements:

Groups must enroll 75% of employees that a) are eligible for health coverage and b) have not waived enrollment due to other health coverage.

If any eligible employee wishes to waive coverage for him- or herself or any dependents, the waiver must be documented with a “Waiver/Certification Form” and returned to your Marketing Representative.

Minimum Contribution Requirements: Employer is requested to contribute a minimum of 75% of the individual premium rate

for all eligible employees. Marketing Please see the attached list for a description of benefits and premiums for health benefit plans that Blue Cross currently offers to small employers. If you have any questions, please contact your broker, agent, or account executive for clarification of available plan types and benefit variations or for help in calculating rates/premiums.

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Appendices

APPENDIX 1

Glossary

Adjusted Community Rate – The Community Rate with demographic adjustments

allowed by Chapter 27-50 (age, gender, and health status)

Base Rate – the rate needed from the average contract to generate sufficient revenue to

cover all expected claims, administrative expenses, and reserve requirements for

contracts renewed in a given calendar quarter. The base rate has an age/gender factor of

1.00 and a health status adjustment of 1.00

Broker – A person licensed as an insurance producer by the State of Rhode Island who

assists individuals and employers with the purchase of health insurance. A broker

represents the small employer, providing information and answering the employer’s

questions about products offered by all carriers in the market. Typically, a broker

receives a commission, paid by the insurance carrier. Blue Cross builds this expense into

the rates charged to all small groups.

Community Rate – The rate required from each contract type to generate sufficient

revenue to cover expected claims, administrative expense, and reserve requirements

Contract – An enrolled employee or “subscriber” is sometimes referred to as a

“contract” encompassing the employee and any enrolled dependents of that employee.

Debit Points – The scoring system used by Blue Cross to score an individual’s health

status

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Decline – A waiver form which indicates that the employee and/or the employee’s

dependents are not interested in health insurance coverage even though they do not have

other coverage.

Dependent –Family members of the employee (e.g., spouse, children)

Direct Business – Employer groups who are not represented by either a broker or

intermediary. For Direct Business, Blue Cross marketing representatives work directly

with the employer.

Direct Pay – The group of products sold by Blue Cross to individuals and/or families

who do not have access to health insurance through an employer. These products are

sold without the involvement of a broker or an intermediary.

Distribution Channel – the means by which information about health insurance products

is provided to potential customers and/or policies are marketed and sold. Examples of

distribution channels are brokers, intermediaries, Chambers of Commerce, R.I. Builders

Association, and Blue Cross salaried staff (Direct Sales).

4:1 Compression - R.I.G.L. § 27-50-5(a)(5) requires that the most expensive rate for a

specific contract type in a given calendar quarter be limited to 4 times the least expensive.

General Agent – An independent entity which serves as the interface between an

insurance carrier and a broker. The general agent collects and transmits information

between the broker and the insurer.

Intermediary – An independent organization under contract to an insurance carrier to

sell, enroll, bill, and collect premium for small group insurance coverage. The

intermediary transmits premium to the carrier on an agreed upon schedule. An

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intermediary receives a commission (or fee) from the insurance carrier for services

rendered. Blue Cross builds this expense into the rates charged to all small groups.

Medical Underwriting – A process used to analyze an individual’s health status. The

basis for this process is information provided by the individual, the employer, or from an

analysis of historical claims experience.

Member - Each person covered under an insurance contract. The subscriber (the

employee who is enrolled in the health plan) is a member, as are each of a subscriber’s

dependents.

PEG System – The Blue Cross designation for its small group rating and renewal

underwriting system.

PER-1 – The Blue Cross acronym for small groups with 25 or fewer enrolled

subscribers. PER stands for Pooled Experience Rated.

PER-2 – The Blue Cross acronym for small groups with more than 25 enrolled

subscribers

PCPM – per contract per month.

PMPM – per member per month.

Rate Manual – A compilation of all the data, processes, policies, and procedures used to

develop health insurance rates for a given calendar quarter, including the formulas and

factors used to rate individual groups to assure actuarially based and consistent rating of

all small employer groups.

Renewal business – A group which has already had coverage for at least one year.

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Subscriber – The subscriber is the term given to the employee who enrolls in coverage.

The number of subscribers is thus the same as the number of total contracts.

Tier - The demographic family composition and rate basis for each subscriber. Chapter

27-50 requires four different family composition tiers – employee; employee and

child(ren); employee and spouse; employee, spouse, and child(ren).

Underwriting – The processes used to determine whether or not an employer group is

eligible for a small employer health plan determine eligibility of each individual within

that group, and determine health status of either the members or the overall group

Medical underwriting is a component of the overall underwriting process.

Waiver – A completed waiver form which indicates that the employee and/or the

employees’ dependents have other health insurance coverage.

Waiver Form – The statement by an employee indicating that the employee and/or the

employees’ dependents decline health insurance coverage offered though the small group

employer because of either (i) other health insurance coverage or (ii) they choose not to

have health insurance. As permitted by Chapter 27-50, the waiver form can be

completed by the employer in the event that an employee fails or refuses to complete one.

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Appendix 2

Review of Recommendations from 2002 Report

The following paragraphs contain the recommendation from the 2002 report and our

current assessment (in bold type) of Blue Cross’s response.

1. It is recommended that Blue Cross amend its Direct Pay applications forms by

requesting information from the individual applicant as to whether any portion of

the premium is paid by a small employer, either directly or through wage

adjustment or other means of reimbursement, and whether the prospective insured

will treat it as a non-taxable employee benefit for income tax purposes, and that

Blue Cross use that information in determining eligibility for Direct Pay

insurance.

A review of the Direct Pay application form currently in use by Blue Cross

indicates that it collects the information suggested in the recommendation.

2. It is recommended that Blue Cross provide information about small employer

plans and how to apply for them over a toll-free line, as required by Regulation

82(10)(C).

Blue Cross provided the examiners with (800) 637-3718 as its toll free

number to obtain information about small employer plans. When the

examiners initially dialed this number, it connected to the Individual Sales

Department. Blue Cross was informed that the toll free number provided did

not meet the requirements of RI Regulation 82-10(C).

Blue Cross has corrected the problem and currently the number does

connect to the small employer group sales department.

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3. It is recommended that Blue Cross review and revise their plan rate relationship

factors to ensure that their rates for CHiP and Blue Cross products differ only by

amounts attributable to plan design.

A review of Blue Cross’s rate manual indicates that the rates for all Blue

Cross plans (including CHiP plans) are developed as a multiple of the rate

for a standard plan (benefit factors). The benefit factors are based on an

analysis of their overall book of business. Blue Cross therefore is in

compliance with this recommendation.

4. It is recommended that Blue Cross not include their CompAlliance factor as part

of their calculation to determine the application of the 4-1 compression to the

group.

Blue Cross has implemented changes in the calculation process consistent

with the recommendation. A review of Blue Cross’s rate manual indicates

that the rate ceilings are adjusted for the CompAlliance credit, if applicable

for a specific case. The rate calculation process used by Blue Cross is

consistent with this description.

5. It is recommended that Blue Cross maintain a rate manual that includes the

required elements to calculate a rate, and the required documentation of the

development of base rates, base rate relationships, and expense allocation.

The examiners reviewed Blue Cross’s rate manuals applicable for business

issued or renewed in the third quarter and fourth quarter of 2005. The rate

manuals respond appropriately to the changes recommended, with minor

exceptions noted in the report.

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6. It is recommended that Blue Cross improve their disclosure information for new

business proposals and renewals regarding the factors that influence rates,

provisions related to renewability, and the availability of statutory plans.

Sample proposal packages reviewed by the examiners include a sheet titled

“Disclosure of Certain Rating and Renewability Provisions.” The

information provided on this sheet provides the required information related

to rates, renewability, and availability. However, the examiners have noted in

the report certain inconsistencies between the description of practices on this

form and Blue Cross’s actual practices, including the description of

participation requirements and the rating of groups that include members

who are eligible for Medicare. These inconsistencies are addressed in

recommendations made in the current report.

7. It is recommended that Blue Cross correct their underwriting manual to reflect

actual underwriting practice and the requirements of Chapter 27-50.

Blue Cross provided the examiners with a “Recertification Policies and

Procedures Manual.” This manual is more focused on the process related to

renewing business, but it does contain all the elements that should be

included in an Underwriting Manual. BCBSRI has a manual similar to the

recertification manual that is applicable to new business. A review of new

business cases indicates that Blue Cross attempts to obtain the required

information.

8. It is recommended that Blue Cross collect adequate information as part of their

annual renewal process to determine if active employees over age 65 are

Medicare primary or Medicare secondary, and apply rating factors accordingly.

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Medicare is secondary for Medicare eligible active employees of employers

with 20 or more employees.

The “Overview Small Group Class PER Rating Procedures” section of the

rate manual describes the rating process and indicates that there are distinct

age-sex factors, depending on whether Medicare is primary or secondary.

BCBSRI has in place a process to obtain supplemental information to make a

determination as to the group’s Medicare primary/secondary status for every

group that has a subscriber who is age 65 or older.

9. It is recommended that Blue Cross enforce their minimum participation

requirements in an equitable and uniform manner.

Company marketing material indicates that Blue Cross has a 75%

participation requirement. The Renewal Certification manual also indicates

the 75% participation requirement and indicates the methodology for

calculating the participation level:

“To determine the group’s participation level, subtract the number of

declined waivers from the number of total eligible employees, and

then divide that number by the total number of eligible employees.”

This methodology is more liberal than the standard contained in Chapter 27-

50 and responds to the recommendation.

Blue Cross has implemented the recommendation.

10. It is recommended that Blue Cross ensure that they apply their underwriting

requirements with respect to employer contributions in a consistent and

documented manner.

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Blue Cross does not have requirements with respect to employer

contributions. The “Disclosure of Certain Rating and Renewability

Provisions” sheet indicates that Blue Cross recommends that employers

contribute a minimum of 75% of the individual rate. Blue Cross is not

required to establish a minimum contribution level.

11. It is recommended that Blue Cross collect data adequate to identify groups that

are small employer groups, but that subsequently employ more than 50 eligible

employees.

12. It is recommended that Blue Cross institute procedures to provide timely

notification to groups that are small employer groups, but that subsequently

employ more than 50 eligible employees, that the provisions and protections

provided under Chapter 27-50 shall cease to apply if the employer fails to renew

its current health benefit plan.

13. It is recommended that Blue Cross collect data adequate to identify groups that

are not small employer groups, but that subsequently become small employer

groups.

14. It is recommended that Blue Cross institute procedures to provide timely

notification to groups that are not small employer groups, but that subsequently

become small employer groups, of the options and protections available to the

employer under Chapter 27-50, including the option to purchase a health benefit

plan from any small employer carrier.

15. It is recommended that Blue Cross review forms currently used for their pre-

renewal audit process, and expand the employer population that is subject to this

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process to include all groups with fewer than 50 subscribers and all groups rated

as small employers that have more than 50 subscribers.

11, 12, 13, 14, and 15: Blue Cross has developed various forms and policies

and procedures related to the process of eligibility recertification. Blue Cross

has devoted considerable resources in an effort to meet the requirements of

Chapter 27-50 and of Regulation 82 in this area, including the development

of the Recertification Manual. The forms, processes and procedures that

Blue Cross has implemented allow the company to meet the requirements of

Chapter 27-50.

16. It is recommended that Blue Cross document its practices for re-rating small

employer groups whose census has changed between the rating date and the actual

renewal in the rate manual.

Blue Cross includes the following paragraph in the Overview section of the

Rating Manual:

“All groups requesting rate re-quotations will be considered. Updated

demographics are used to effect changes to the age/gender and health status

factors for the group. Where the changes in enrollment are based on only

one employee, the health status factor is not adjusted so as not to

highlight an individual's health assessment. If the resulting re-quotation

produces a higher rate, the revised rates may not be implemented unless

there is a significant enrollment change. If we are made aware of a

significant change in population, a change of at least 50 percent for

groups with up to 25 employees and 25 percent for group with more than 25

employees, this could result in the group being recertified with all

appropriate documentation and a reassessment of their rates.”

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Blue Cross’s response meets the requirements of the recommendation.

17. It is recommended that Blue Cross implement a second calculation that allows the

premium rate for a group to increase over the prior premium rate by no more than

the following factors: a) cost and utilization trends, b) premium changes due to

changes in the demographic case characteristics of the small employer, as

measured using the rate manual in effect during the prior rating period, c) the

change in the actuarial value of benefits, and d) 10%.

Effective July 10, 2003 the second calculation was eliminated as a component

of the renewal rate calculation.

18. It is recommended that Blue Cross review and update their small employer group

underwriting manual to include documentation relating to renewal underwriting

practices.

Blue Cross has developed its Recertification Manual. The manual provides

samples of numerous forms with instructions. This manual by itself does not

completely document the renewal underwriting/rating process. However,

when used in conjunction with the rating manual, Blue Cross’s

documentation satisfies the changes recommended. BCBSRI has developed a

similar manual that is applicable to new business.

19. It is recommended that Blue Cross collect and analyze adequate data to determine

small employer status, health plan eligibility, Medicare primary status, and

participation percentage.

We reviewed a package of material that was labeled “New Business Packet-

Direct.” The cover letter indicates that a quote will be provided based on the

information provided by the employer on the “General Account

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Information” form and the “Employee Census” form. Based on the

information provided by the employer, Blue Cross could not determine with

accuracy whether Medicare was primary or secondary. In the event there is

an employee age 65 or older, Blue Cross requests additional information that

allows it to determine if the small employer’s health plan is primary or

secondary to the Medicare program.

20. It is recommended that Blue Cross modify their marketing and proposal packages

to include information about the statutory plans on the same basis as other health

plans.

The examiners reviewed samples of proposal and renewal packages. The

proposal and renewal packages include information and rates for the

statutory plans on the same basis as other health plans.

21. It is recommended that Blue Cross ensure that their general agents and

intermediaries make the statutory plans available to small employers on an equal

basis to other health benefit plans.

The general agent’s website now lists the statutory plans on a basis that is

similar to other plans offered by Blue Cross. Intermediaries provide

prospects the standard Blue Cross proposal package. The standard Blue

Cross proposal package presents the statutory plans on the same basis as all

other Blue Cross plans.

22. It is recommended that Blue Cross allow small employers to include the statutory

plans as part of a multiple option package.

Since our last Market Conduct Study, the requirement that Blue Cross offer

the Basic plan to small employers was eliminated.

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Based on a review of proposal and renewal packages provided to us, we

conclude that Blue Cross offers the statutory plans on the same basis as its

other plans.

23. It is recommended that Blue Cross modify their Sales Agreement by removing the

provision that allows Blue Cross to terminate the agreement on 30 days notice.

The provision that allows Blue Cross to terminate the agreement on 30 days

notice has been removed from the Sales Agreement. The current version of

the Sales Agreement indicates that “Blue Cross may terminate or refuse to

renew the medical care benefits offered hereunder as permitted by R.I.G.L. §

27-50-6(a).” It would be preferable for the Sales Agreement to list the

primary reasons why Blue Cross would not renew rather than just to

reference Chapter 27-50, and leave the policyholder to interpret how

Chapter 27-50 may allow termination or refusal of renewal.

We note that the Sales Agreement has unusual language with respect to

termination that is initiated by the small employer. According to the Sales

Agreement, the small employer can only terminate for cause (i.e. Blue Cross

failed to comply with a material provision of the Agreement) or on a policy

anniversary. Blue Cross indicates that its practice differs from that stated in

the Sales Agreement.

24. It is recommended that Blue Cross file all required contract forms with the DBR.

Blue Cross should only enter into contracts on forms previously approved by the

DBR.

The examiners are not aware of any deficiencies in this area.

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25. It is recommended that Blue Cross review marketing materials and Subscriber

Agreements to ensure that they contain the correct definition of dependents as

including dependent students to at least age 25.

We reviewed subscriber agreements for Blue Cross products. The Summary

of Benefits provides that “Dependent children are covered until January 1st

following their 26th birthday when enrolled as a full-time student. If full-time

student status ends, coverage will end the first day of the month following the

end of student status.” Eligibility provided by Blue Cross is more generous

than required.

R.I.G.L. § 27-50-3(j) includes as a dependent “… an unmarried child of any

age who is medically certified as disabled and dependent upon the parent.”

The subscriber agreements contain language that meets this requirement.

26. It is recommended that Blue Cross institute quality controls to ensure production

of accurate subscriber agreements.

Our review of subscriber agreements did not disclose any quality control

problems with the subscriber agreements.

27. It is recommended that Blue Cross include a definition of late enrollee in their

policy forms and provide information regarding their policies with regard to late

enrollees.

R.I.G.L. § 27-50-7(d)(4) provides that “A health benefit plan shall accept late

enrollees, but may exclude coverage for late enrollees for preexisting

conditions for a period not to exceed twelve (12) months.” The term “Late

Enrollee” is not a defined term in the subscriber agreement.

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The subscriber agreement states: “You and/or your eligible dependents may

enroll following the initial enrollment period, and outside of the open

enrollment or special enrollment periods. Coverage is effective the first day

of the of the calendar year month following approval of your application.”

It is our understanding that all applicants for late enrollment are accepted

without any reduction in benefits

Blue Cross’s response satisfies the requirements of the recommendations.

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Appendix 3, p. 1.

Legislative History of RI Small Employer Law Since Replacement of the 1992 Act by the 2000 Act SECTION PUBLIC LAW CHANGE EFFECTIVE27-50-3 PL 2002 Ch. 292 §90 The only changes are editorial, as to form of citations and cross-references 6/28/2002 PL 2003 Ch. 119 Adds subsection (oo) (redesignated (nn) by the complier), defining

“affordable health plan”. 7/10/2003

PL 2003 Ch. 120 Deletes definition (c) “basic health benefit plan” and re-letters all subsequent definitions.

7/10/2003

PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 PL 2003 Ch. 375 [Identical to PL 2003, Ch. 119] 7/19/2003 PL 2003 Ch. 269 Amends subsection (m) to include retirees of certain fire districts as

“employees” 7/2/2004

27-50-5 PL 2002, Ch. 41 Extends sunset of health status adjustment from October 1, 2002 to October 1, 2004. [subsection (a)(2)] Extends sunset of “second calculation” from October 1, 2002 to October 1, 2004. [subsection (a)(2)] Postpones change from 4-1 to 2-1 compression from 10/1/2002 to 10/1/2004.

5/30/2002

PL 2002, Ch. 124 Adds RI Builders’ Association exemption to subsection (a)(7). 10/1/2003 PL 2002, Ch. 292

§90 Deletes subsection (a)(6) [“second calculation”] and re-numbers the following subsections. Other editorial changes with no change in substance. Note: The compiler rejected this change and implemented, instead, the above change by Ch. 41.

6/28/2002

PL 2002, Ch. 306 [Identical to 2002 Ch. 124] 10/1/2003 PL 2002, Ch. 366 [Identical to 2002 Ch. 41] 6/28/2002 PL 2003 Ch. 119 Adds “including those included in an affordable health plan” to last ¶ of

subsection (d). Adds new last ¶ to subsection (d) re: “calculation of premium discounts…for affordable health plans”

7/10/2003

Legislative History of RI Small Employer Law -132-

Appendix 3, p. 2.

SECTION PUBLIC LAW CHANGE EFFECTIVE27-50-5 PL 2003 Ch. 120 Amends subsection (a)(5) to delete the requirement for 2-1 compression

beginning October 1, 2004, leaving compression permanently at 4-1. Deletes subsection (a)(6), “second calculation”.

7/10/2003

PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 PL 2003 Ch. 375 [Identical to PL 2003, Ch. 119] 7/19/2003 PL 2004 Ch. 406 Amends subsection (a)(2) to remove the sunset of “health status”, which

would have taken place on October 1, 2004 10/1/2004

PL 2004 Ch. 502 [Identical to PL 2004, Ch. 406] 10/1/2004 27-50-6 PL 2003 Ch. 119 [In substance, the same as PL 2003 Ch. 120, but the compiler used the text of

PL 2003, Ch. 120] 7/10/2003

PL 2003 Ch. 120 Amends subsection (a)(7) to eliminate the requirement that the director must find that a product form is obsolete and being replaced with comparable coverage before it can be discontinued, also removes the requirement to notify all affected state insurance commissioners of the discontinuance. Shortens the notice period for beneficiaries from 180 days to 90 days. Adds subsection (e), providing for uniform modification at renewal.

7/10/2003

PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 PL 2003 Ch. 375 [Identical to PL 2003, Ch. 119] 7/19/2003 27-50-7 PL 2002, Ch. 41 Extends sunset of the “2 to 50” definition of “small employer” for purposes

of “availability of coverage” from October 1, 2002 to October 1, 2004. [subsection (a)]

5/30/2002

PL 2002, Ch. 292 §90

Deletes all of subsection (a), except the last sentence, “For the purposes…” Note: The compiler rejected the above change and implemented Ch. 41. Deletes subsection (a)(3), which said “Notwithstanding any other provision of this section, between October 1, 2000 and September 30, 2000, a carrier may choose to limit the time during which it will accept new groups for coverage to a period of not less than ninety consecutive days during each twelve month period.” Other editorial changes with no change in substance.

6/28/2002


Appendix 3, p. 3.

SECTION PUBLIC LAW CHANGE EFFECTIVE PL 2002, Ch. 366 [Identical to PL 2002 Ch. 41] 6/28/2002 PL 2003 Ch. 120 In subsection (b), changes 3 plans to 2 7/10/2003 27-50-7 PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 PL 2004 Ch. 406 Amends subsection (d)(9)(ii) and adds (d)(9)(iii) to provide that the minimum

participation level for employers of 10 and fewer will be 75%, effective from October 1, 2004 until October 1, 2006.

10/1/2004

PL 2004 Ch. 502 [Identical to PL 2004, Ch. 406] 10/1/2004 27-50-9 PL 2003 Ch. 120 Deletes requirement for an actuarial study and report due September 30, 2003 7/10/2003 PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 27-50-10 PL 2003 Ch. 120 Deletes “basic” from subsection (a)

Deletes subsection (d), which provided for development of the basic plan 7/10/2003

PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 27-50-13 PL 2003 Ch. 120 Deletes reference to “basic” 7/10/2003 PL 2003 Ch. 286 [Identical to PL 2003, Ch. 120] 7/17/2003 PL 2005 Ch. 171 Makes mastectomy mandates applicable to standard and economy (to achieve

HIPAA compliance). Applies to plans issued, delivered or renewed on and after 1/1/2006

1/1/2006

List of Public Laws Amending the Small Employer Law

PUBLIC LAW BILL EFFECTIVE DATE PL 2002, Ch. 41 2002-H 8001 5/30/2002 PL 2002, Ch. 124 2002-S 2896, Substitute A 10/1/2003 (enacted 6/14/2002) PL 2002 Ch. 292 §90 2002-H 7725, Substitute A 6/28/2002 PL 2002, Ch. 306 2002-H 7912, Substitute A as Amended 10/1/2003 (enacted 6/28/2002) PL 2002, Ch. 366 2002-S 2903 6/28/2002 PL 2003 Ch. 119 2003-H 5905, Substitute B 7/10/2003 PL 2003 Ch. 120 2003-H 6181, Substitute B 7/10/2003


Appendix 3, p. 4.

PUBLIC LAW BILL EFFECTIVE DATE PL 2003 Ch. 286 2003-S 834, Substitute A as Amended 7/17/2003 PL 2003 Ch. 375 2003-S 536, Substitute A 7/19/2003 PL 2004 Ch. 269 2004-H 7590, Substitute A 7/2/2004 PL 2004 Ch. 406 2004-S 3103, Substitute A as Amended 10/1/2004 (enacted 7/5/2004) PL 2004 Ch. 502 2004-H 8516, Substitute A as Amended 10/1/2004 (enacted 7/7/2004) PL 2005 Ch. 171 2005-S 311 Applies 1/1/2006 (enacted 7/6/05) The above includes all amendments since the 2000 enactment through the 2005 Session. Only the above sections have been amended. The laws are amended by action of the General Assembly, as edited by the Complier of the General Laws. At the end of the 2002 Session, the General Assembly reenacted the General Laws; so all changes through the end of the 2002 Session (plus other editorial changes made by the complier) have been ratified as of the end of the 2002 Session. The effective date is the date, if any, stated in the Public Law, otherwise it is the date that the bill is signed by the governor or the date that it takes effect without his signature. (Unlike the United States, where bills are subject to a “pocket veto” if the President fails to sign; in RI, bills take effect if the Governor fails to veto.)




Appendix 4

Statistical supplement

This Statistical Supplement provides a descriptive and analytic overview of Blue Cross’s

small employer business. Membership is analyzed by group size, distribution channel,

and product. An analysis of the rating factors by group size and over time provides a

look at variations in key rating variables -- age, gender, and health status – over time.

The impact of 4:1 compression is also assessed, and the impact on rates of a change in

band width is provided. Claims by size have also been analyzed.

In addition to providing a thorough overview of Blue Cross’s small employer business,

this data will also assist with the analysis of the impact of policy recommendations for

change to the small employer Act. While HAT and the examiners will use this data in

developing policy recommendations, it is important to make this data available to all with

an interest in analyzing the impact of recommended changes to Chapter 27-50.

1. Profile of the business

a. Groups, subscribers and members by size

As of October 2005, Blue Cross insured approximately 12,300 small employer groups,

including approximately 46,600 subscribers and 92,000 members. This represents a

significant decrease in both groups and members since January 2003, when Blue Cross

insured approximately 13,800 groups, including 58,000 subscribers and approximately

115,000 members. The overall decrease in number of groups covered as compared to

January 2003 is 11%, while the decrease in subscribers and members is approximately

20%. As of January 2004, the enrollment was approximately 101,000 members, and by

January 2005 it was approximately 96,000 members. Some of the decrease is likely to

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have been related to failure of groups to meet the more stringent eligibility re-

certification requirements instituted beginning in 2003. The average size group has

declined by about 10%, from 4.2 to 3.8 contracts. 57% of small employer contracts have

individual coverage only. 12% have individual and spouse coverage, 6% individual and

child coverage, and 25% have full family coverage. Exhibit 1 contains a summary of this

information.

Exhibit 2 contains information about Blue Cross’s groups by size, as well as the

distribution of groups by broker and intermediary. Approximately 42% of Blue Cross

small employer groups have only one enrolled employee. This represents approximately

11% of subscribers. Groups with only one enrolled employee have an average contract

size of approximately 2.3 members, while the balance of small employer groups average

slightly less than 2 members. One employee groups are therefore more likely to cover

family members.

b. Broker groups

Exhibit 2 summarizes enrollment through brokers. Approximately 35% of Blue Cross

small employer groups are represented by a broker. As these are generally the larger

small employer groups, they include about 55% of subscribers. The average size group

for those represented by a broker is approximately 6 employees, or over 50% larger than

the average for all groups. Only about 18% of one-employee groups are represented by

brokers, while 75% of groups of more than10 employees are represented by brokers.

Exhibit 3 summarizes broker commission activity by broker. Blue Cross made broker

commission payments in 2005 to over 500 different payees. The top eight brokerage

companies earned at least $100,000 each and in total earned approximately 40% of all

broker commission payments. Another 19 brokerage companies earned at least $25,000,

and all those with payments of $25,000 or more represented over 60% of all broker

Page 137 of 166



commission payments. Overrides paid to general agents totaled an additional 1/3 of the

commission payments.

c. Intermediary groups

Exhibit 2 summarizes enrollment through intermediaries. Approximately 31% of Blue

Cross small employer groups are represented by intermediaries. Intermediaries are

limited to marketing to groups in the one to nine eligible employee size range. As a

result, the groups represented by intermediaries are generally the smallest groups and

they include only about 15% of small employer subscribers. Blue Cross contracts with

three intermediaries. GNA and NEBCO each serve approximately 12% of Blue Cross

small employer groups, while MBA serves approximately 7%. The average size

intermediary group is approximately 1.8 contracts.

2. Distribution by plan of benefits

A summary of enrollment by plan is in Exhibit 4. Exhibit 4 also shows the plan values

assigned by Blue Cross to its top five most popular plans, to the statutory plans, and to

the average of all plans combined.

Blue Cross has 25 different plans of benefits that have enrolled groups. The five most

common plans, however, cover 75% of small employer subscribers. The most popular

plan, HMC2C $25 ER, is also the richest. Blue Cross sets the benefit value for this plan

at 1.000, and prices all its other plans relative to this one. It covers 46% of groups and

44% of subscribers. The average size group on this plan is 3.2 contracts. The second and

third most popular plans, HMC2C 100/80 and HMC2C Plan 500 each cover 7% of the

groups and 10% of the subscribers. They both cover slightly larger size groups,

averaging 4.8 and 4.3 contracts, respectively. Blue Cross assigns relative values of .890

and .917 respectively to these two plans.

Page 138 of 166



The average benefit value for all Blue Cross plans in October 2005, weighted by number

of contracts, was .942.

The two new High Deductible Health Plans (“HDHPs”) were first offered in October

2005, so very few subscribers had chosen them (only about 60 in the October cycle).

They are significantly lower cost than other plans, with the benefit value for the lowest

cost HDHP plan at slightly under .500.

The statutory Essential Care 4 and 5 plans (Standard and Economy, as described in

Regulation 82) are not very popular. According to the data, 114 subscribers are enrolled

in these plans. They were the lowest cost plans available prior to the introduction of the

HM HSA plans, but the benefit designs have not proven attractive to small employers.

However, enrollment is up slightly, as compared to about 70 subscribers in 2004.

Blue Cross allows enrollment in multiple options for all groups. Exhibit 5 provides an

overview of the distribution of multiple option plans. As of October 2005, approximately

11% of groups offered at least two benefit options. Since these are relatively larger

groups, they include about 25% of subscribers. Only 49 groups, representing less than

½% of the total, offer three or more options. The average size group with one option

only is 3.1 contracts. The average size groups with two and three options are 8.5 and

14.2 respectively.

3. Claim analysis

The examiners requested and analyzed a database that included all claims incurred in

calendar year 2004, sorted and accumulated by member. 2004 data was used in order to

insure that the claims data would be relatively complete. The analysis was done to

understand the distribution of claims by size of claim, particularly the effect of large

claims on the experience, and to understand the average member cost sharing for

Page 139 of 166



different size claims. Data was sorted by size of claim for analysis. The results of this

analysis are summarized in Exhibit 6.

The average amount of claims paid per member during 2004 was approximately $2,520.

89% of members have claims of under $5,000, while only 2% have claims greater than

$20,000. Those 2% represent 30% of the total claim dollars, and an average claim of

$45,000.

Member cost sharing, on average, was 12% of allowed charges.

Pharmacy claims averaged about $500 per member per year, while medical claims

average about $2,000. Average cost sharing on pharmacy claims was 27%, while

average cost sharing on medical claims was 7%. The larger the claim, the lower the

percentage of cost sharing and the more paid by Blue Cross, because most medical claims

are covered in full after a deductible and/or out-of-pocket limit.

Large claims were analyzed to determine the effect of any potential reinsurance

arrangement. The aggregate amount of claims in excess of $50,000 per member

amounted to 7.3% of total small employer claims. The excess over $100,000 was 3.5%

of small employer claims, while the excess of $150,000 per claims was 2.4% of all

claims.

Similar data was compiled for the Direct Pay population. The comparison of the small

employer and Direct Pay claims analysis statistics is contained in Exhibit 7. In Direct

Pay, the average paid claim per member was slightly over $3,000, or 20% higher than for

the small employer population. Direct Pay benefit plans are less rich, on average, and the

average cost sharing was 18% of total allowed charges, as compared to 12% for small

employer.

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There are relatively more large claims in the Direct Pay population. At every attachment

point, the percentage of claims in excess of that level was about 50% higher for Direct

Pay than for small employer. For example, about 10.6% of Direct Pay claims are

represented by the excess over $50,000, compared to 7.3% for small employer claims.

Presumably, this is accounted for by the demographics of the Direct Pay population,

which tends to be relatively older, and of relatively worse average health status. Adverse

selection may also be an issue, in that people with health problems may be relatively

more likely to purchase Direct Pay, whereas some of those people may not be eligible for

small employer insurance.

4. Rating variable distributions

a. Average age/gender over time

Blue Cross provided a history of the average small employer age/gender factors by

quarter back to the beginning of Chapter 27-50. This history has been analyzed, but does

not itself appear in this report. There has been a small but steady increase in the average

calculated factor, from an average of approximately 1.020 in 2001 to an average of

approximately 1.047 in 2005. Blue Cross has expressed some concern over this

phenomenon and over other analyses they have performed that seem to indicate an aging

of the block. However, the total amount of this aging is relatively minor, and may be

related to overall changes in RI small employer demographics.

b. Comparison to other business segments

The age/gender and family composition factors used by Blue Cross for small employer

business are different from those used for large employer business and both are different

from those used for Direct Pay. Nevertheless, Blue Cross was able to provide

information to enable comparison of the average age distribution of each group. Exhibit 8

provides a comparison of the age/gender composition of various segments of Blue

Page 141 of 166



Cross’s business. Using the large group member-based factors, and applying them to the

small employer population, it appears that the demographics of the small and large

employer commercial blocks are similar on a weighted basis.

A comparison was also possible to the Direct Pay population, using demographic

information provided by Blue Cross, and using the small employer demographic rating

factors on both populations. The Direct Pay population is segmented into two rating

pools, based on medical underwriting considerations. Pool I, the portion of Direct Pay

that has not passed medical underwriting, has an average demographic profile

approximately 43% higher than the small employer business segment. Pool II, the

portion of Direct Pay that has passed medical underwriting, and therefore has select rates,

has an average demographic profile approximately 9% lower (or younger) than that of the

small employer business. In total, taking both Pools together, the average Direct Pay

factor is approximately 22% higher than for small employer.

c. Distribution by health status

The analysis of the distribution of health status factors over time is contained in Exhibit

9. Blue Cross’s average health status factor has increased gradually over time, from .988

in 2001 to 1.01 in 2005 and 1.013 for groups that have been evaluated for their 2006

rates.

During this time, there has been a gradual movement from groups evaluated as having

low health status factors to groups with high factors. For example, in 2001, 55% of

groups had health status factors of .92 or .96, while that proportion has declined to 35%

for 2006. Conversely, 30% of groups in 2001 had health status factors greater than 1.00,

as compared to 40% in 2006. The overall effect of health status factors assigned to

individual groups is normalized out over the small employer book of business. A

contributing factor to the increase is a change in Blue Cross’s assignment of health status

factors to reduce the number of groups receiving the lowest factor and increase the

Page 142 of 166



number of groups receiving the highest factor. That change took place effective with

groups in the first quarter of 2005.

d. Percent with increase/decrease Health Status – 10% limitation

At renewal Blue Cross assigns a health status factor to each group, reflecting its renewal

underwriting processes. Blue Cross limits the change in the health status factor to a 10

percentage point maximum. Exhibit 10 provides a matrix summary of the analysis of the

change in health status factor from 2004 to 2005 for all groups. Exhibit 11 summarizes

changes in health status factor from 2004 to 2005 by group size. A comparison of health

status factor was made for groups that had a health status factor assigned in both 2004

and 2005. The analysis was also done by size of group as measured by enrolled 2005

subscribers. The average 2005 health status factor was approximately 1.00 for groups of

1, increasing with increasing group size to 1.02 for groups of 11-25. The largest groups,

however, had a lower average health status at .987.

In comparing 2004 and 2005 health status, 36% of groups saw their health status factors

increase from one year to the next, while 19% decreased and 45% stayed the same. 49%

of one-employee groups stayed the same, while larger groups showed more variation.

The 26-50 size segment was the only one that had more decreases than increases. The

statistical correlation of health status from one year to the next was 76%.

Blue Cross has a policy of limiting the change in health status (up or down) to 10%.

There were only two instances where a health status factor increased or decreased by

more than 10% among over 12,000 groups. The largest increase noted was 13%.

e. Correlation of Health Status and Age/Gender

Health status factors and age/gender factors are positively correlated by approximately

25%. The nature of the medical underwriting process is that it applies an adjustment for

Page 143 of 166



various medical conditions, without any adjustment for age. This means that older

people, whose rates already reflect increased risk, are more likely to have higher than

average health status adjustments.

f. Distribution of combined age/gender and health status band factors

Exhibit 12 provides the results of the analysis of the combined effect of the age/gender

factor and the health status factor and the interaction with the 4:1 compression

requirement on small employer rates. Blue Cross complies with the rating requirement to

limit variation in rates based on age gender and health status to a 4:1 range by using a

minimum and a maximum combined factor (expressed in the rate manual as minimum

and maximum rates for each tier of each plan offered). If a group’s age/gender factor

multiplied by its health band factor is less than the minimum, it is raised to the minimum.

If larger than the maximum, it is reduced to the maximum. The minimum and maximum

values are adjusted each quarter in conjunction with the quarterly rate development

process. Currently, the minimum combined factor is about .4125 and the maximum is

about 1.6500.

A model was constructed to show the effect of 4:1 compression, as well as other options,

including 1:1 (full community rating), 2:1, 3:1 and 6:1 compression. A summary of the

results can be seen at Exhibit 13. Based on a January 2005 snapshot of all groups and the

current 4:1 compression requirement, approximately 390 or 3.1% of groups had rates

increased because of the minimum factor, while approximately 900 groups or 7.2% had

rates reduced to the maximum. These are generally the smaller groups. The average size

group that was affected by 4:1 compression was approximately 1.6 subscribers. While

over 10% of groups are affected by 4:1 compression, they only cover 4.4% of

subscribers. Larger groups are likely to have more of a spread of ages enrolled, and so

are less likely to fall outside the average range.

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The average group affected by the 4:1 minimum has its rates increased by 15% as

compared to what they would be with no rate compression, while the average group

affected by the maximum experiences a 16% decrease in rates compared to a no-

compression rate. The maximum rate increase effect as compared to no compression

(occurring in the case of the youngest and healthiest male single employee) would be

approximately a 30% increase, while the largest decrease compared to no compression

would be approximately 34% (in the case of a male employee age 60-64 with adverse

health status).

At the time of the last small employer market conduct examination Chapter 27-50

included a scheduled change to a requirement of 2:1 compression. Chapter 27-50 has

since been amended to keep compression at 4:1. If, however, 2:1 compression were

instituted by Blue Cross, approximately 26% of groups and 15% of subscribers would be

affected in total. Under 2:1 compression, the average increase for groups raised to the

minimum would be 31% compared to no compression, and the maximum such increase

would be over 100%. The average decrease for groups reduced to the maximum factor

would be 22%, with the largest possible decrease equal to about 46%.

If full community rating were instituted, virtually all groups would be affected. The

average effect on groups being increased to the community rate would be an increase of

26%, while groups being decreased from a higher rate to the community rate would be

decreased 24%. These are both expressed as compared to no compression at all.

5. Canceled cases – where they went

Blue Cross tracks its canceled cases through a marketing database. The information is

incomplete because Blue Cross is not able to capture information for each case. Because

it is not complete, an exhibit summarizing the data is not contained in this report.

However, the examiners did review the database and reach certain general conclusions:

• The reason for cancellation for the largest number of cases was because there

were no members left in the group.

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• A significant number left because of non-compliance with eligibility

requirements, including failure to meet minimum participation.

• Other reason codes that affected significant numbers of groups included non-

payment of premiums and transfer to another carrier.

• Groups that transferred to another carrier were relatively larger than Blue Cross’s

average size case for the block, implying that the larger small employer groups

may be more likely to shop for the best deal, more likely to use the services of a

broker, and quicker to move from one carrier to another.

• On average, groups that changed carriers were given a lower health status band by

the new carrier.

6. New cases – where they came from

Blue Cross also tracks the cases it writes as new business, including the source of these

cases. Again, this database is incomplete, because the information to populate it is not

always available. The largest category of new business reported, by number of groups, is

groups that were previously uninsured. Groups that moved from a prior carrier were also

an important source of new business, and these groups were larger than average,

representing the greatest number of new subscribers in total.

7. Loss Ratio Analysis by Size of Group

Blue Cross provided an analysis of the loss ratio of its groups by size during 2004-2005.

This was a part of its quarterly enrollment analysis, and a summary of their analysis is

shown in Exhibit 14. While the overall loss ratio was approximately 84%, as discussed

elsewhere, the average for groups with only one enrolled employee was almost 98%, and

the average loss ratio for groups with two enrolled employees was approximately 91%.

For other size groups, the range was from 78 to 82%. The loss ratios for PER-2 groups,

those with over 25 enrolled employees, were relatively higher than for groups of three to

25 employees.

Page 146 of 166

Blue Cross Blue Shield of Rhode Island Market Conduct Examination

Appendix 5Summary of Recertification Case Sample Analysis

EmployeesGroup Total Part-time

Temporary Employees

Eligible Waived Other Coverage

Enrolled Decline Participation Calculation

(Blue Cross)

Participation Calculation (RI

27-50)

Payroll data

11 18 1 17 4 13 0 100% 100% Payroll sheet without pay amounts12 5 0 5 0 4 1 80% 80% Payroll report13 3 0 3 1 2 0 100% 100% Quarterly Wage and Tax Report14 23 13 10 3 7 0 100% 100% Payroll register15 6 0 6 4 2 0 100% 100% Advantage Payroll Services - Payroll report16 13 5 8 3 5 0 100% 100% K-1 s owners, Quarterly Tax and Wage Report17 8 5 3 0 3 0 100% 100% QuartelyWage and Tax Report18 1 0 1 0 1 0 100% 100% Schdule C for both husband and wife19 8 2 6 2 4 0 100% 100% Advantage Payroll sheet for September, 200520 70 44 26 17 3 6 77% 33% K1 for owners, Quarterly wage report - all other employees

-147-



Appendix 6

Summary of Medical Underwriting Case Sample Analysis

Review of Health Band Calculation Enrolled Health Status

Group New/

Renewal

Renewal

Date

PER

Class

Subscribers Members Total

Points

Average Band

Factor

In PEG

System

1 New 1/1/2005 1 1 5 4,650 930 1.04 1.04

2 renewal 2/1/2005 1 1 3 300 100 0.92 0.92

3 renewal 3/1/2005 1 2 2 4,568 2,284 1.10 1.10

4 renewal 5/1/2005 1 2 3 5,468 1,823 1.10 1.10

5 New 12/1/2005 1 21 54 34,598 641 1.00 1.00

6 Renewal 8/1/2005 1 11 20 24,658 1,233 1.10 1.10

7 Renewal 9/1/2005 1 19 22 25,358 1,208 1.10 1.10

8 Renewal 4/1/2005 1 10 26 17,340 667 1.00 1.00

9 Renewal 7/1/2005 1 1 2 608 304 0.96 0.96

10 Renewal 2/1/2005 1 3 6 11,715 1,953 1.10 1.10

Review of Age-Gender Factor Calculation Enrolled Age Factor

Group New/

Renewal

Renewal

Date

PER

Class

Subscribers Members Before

CAG

After

CAG

In PEG

System

1 New 1/1/2005 1 1 5 1.0840 1.0362 1.0362

2 renewal 2/1/2005 1 1 3 1.0900 1.0420 1.0420

3 renewal 3/1/2005 1 2 2 1.4215 1.3589 1.3590

4 renewal 5/1/2005 1 2 3 1.1312 1.0822 1.0822

5 New 12/1/2005 1 21 54 0.8703 0.8297 0.8297

6 Renewal 8/1/2005 1 11 20 0.7984 0.7628 0.7736

7 Renewal 9/1/2005 1 19 22 1.2690 1.2124 1.2124

8 Renewal 4/1/2005 1 10 26 1.0217 0.9774 0.9774

9 Renewal 7/1/2005 1 1 2 1.0900 1.0414 1.0414

10 Renewal 2/1/2005 1 3 6 0.9626 0.9202 0.9202

Page 148 of 166



Appendix 7 – p. 1

Summary of Complaint Log

Complaint Date Date Number Received Resolved Complaint Resolution

N/A 11/15/2002 11/20/2002 Requirement that coverage be offered to all eligible employees and dependents.

Blue Cross explained that the law requires carriers to offer coverage to all eligible employees and dependents.

N/A 11/18/2002 12/11/2002 Size of rate increase. Group members were notified prior to effective date of increase and increase was delayed for 1 month before renewal rates went into effect.

2003-DBR-92

11/4/2003 1/20/2004 Request for clarification of coverage options available to a husband and wife who both own separate small businesses.

Blue Cross identified the couple's coverage and premium options and explained rate calculation process.

2003-DBR-122

6/3/2003 6/26/2003 Confusion about multiple CHiP rates quoted for 1-person group.

Blue Cross explained impact of age, gender, and health history on group rates plus difference between guaranteed and estimated rates. Offered complainant opportunity to meet with Direct Marketing to discuss further questions.

2003-DBR-123

7/21/2003 8/6/2003 Size of rate increase (58.3%). Blue Cross verified rate calculation accuracy and explained rate calculation process and the effect of demographic changes on the increase.

2003-DBR-135

10/16/2003 11/3/2003 Denial of RI extended benefits for worker terminated from small group. Group offered him COBRA by mistake (COBRA did not apply) and later cancelled this coverage.

Enrolled complainant in RI Extended Benefits through August, 2004.

2003-DBR-138

3/25/2003 3/31/2003 Requested 2 individual accounts rather than coverage as an enrollee and a spouse under a small group policy.

Blue Cross reviewed eligibility documentation and complied with request.

2003-DBR-143

10/3/2003 10/31/2003 Terminated small group coverage because employer was not a "small employer" due to location of business and employees in MA.

Blue Cross explained that termination was unrelated to members' medical history and that documentation submitted with recertification application showed the company did not qualify for small group coverage under the Act.

Page 149 of 166



Appendix 7 – p. 2


Complaint Date Date Number Received Resolved Complaint Resolution 2003-DBR-149

7/10/2003 8/7/2003 Terminated small group coverage because employer was not a "small employer" due to location of business and employees in MA.

Blue Cross researched and upheld termination since business is based in Swansea, MA and majority of employees work from that office. Provided phone numbers for complainant to seek insurance from MA plan.

2003-DBR-169

11/12/2003 11/26/2003 Size of rate increase (43.7%). Copies of complaint went to ProJo, Channel 10, GNA, and politicians from George Bush on down.

Blue Cross verified accuracy of rate calculation and explained the effect of change in the group's demographics.

2004-DBR-164

5/24/2004 6/9/2004 Size of rate increase (61%). Blue Cross verified the rate calculation and submitted a response to DBR explaining rate increase.

2004-DBR-179

6/21/2004 8/17/2004 Size of rate increase (28.5%), particularly increase of 8.3% for Change in Health Status on top of a 7.6% Community Base Rate increase. Group questioning if they are being assessed twice for claims experience. Group submitted a second complaint letter to DBR dated July 9, 2004

Blue Cross verified the accuracy of the rate calculation and explained the medical rate calculation process.

2004-DBR-215

10/26/2004 11/24/2004 Inability to include same gender partners as "dependent".

Response sent to DBR by Blue Cross. Blue Cross was unable to process partner's application for coverage based on clarification from the DBR re: "dependents" under RI Small Group law.

2004-DBR-222

11/15/2004 12/15/2004 Size of rate increases over 3-year period.

Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated.

2004-DBR-224

11/19/2004 12/15/2004 Size of rate increase. Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated.

2005-DBR-239

1/17/2005 2/15/2005 Coverage cancelled for failure to meet minimum participation because some employees declined coverage; complained about application of the rule after 20 years with Blue Cross.

Blue Cross explained its recertification process, and that failure to meet minimum participation requirements was the reason that the small group renewal was denied.

Page 150 of 166



Appendix 7 –p. 3


Complaint Date Date Number Received Resolved Complaint Resolution 2005-DBR-241

1/21/2005 2/15/2005 Size of rate increase, particularly age adjustment from 45 to 46.

Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated, including the impact of demographic changes.

2005-DBR-243

2/3/2005 3/2/2005 Size of rate increase. Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated.

2005-DBR-263

4/11/2005 5/6/2005 Size of consistent rate increases since 2000.

Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated.

2005-DBR-266

4/11/2005 5/24/2005 Size of rate increase and refusal to provide employer with the medical information that caused the increase.

Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated. Blue Cross explained that it cannot provide member claim information to the group due to privacy concerns.

2005-DBR-311

7/28/2005 8/26/2005 Size of rate increase (52%), and particularly that birth date was miscalculated in age adjustment.

Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated. Blue Cross explained that her age was calculated correctly, however she had dropped her husband from coverage mid-term which had a large effect on the rate. Blue Cross also identified that the employer was charged a $15 per month fee by the intermediary.

2005-DBR-289

8/9/2005 9/7/2005 Size of rate increase (43.7%). Blue Cross verified the accuracy of the rate calculation and explained how medical rates for small employers are calculated.

2005-DBR-299

9/26/2005 10/11/2005 Termination of coverage due to failure to provide documents that BCBSRI deemed valid proof of employment.

Blue Cross responded with a letter explaining why it is unable to recertify this individual as an eligible employee without adequate supporting documentation.

Page 151 of 166



Exhibits

Page 152 of 166

Data Snapshot Groups ContractsTotal

Members Individual Ind & Sp Ind & Ch Family

Avg PMPM

RevenueRevenue

Trend

Avg Contract

Size

Avg Group Size

1/1/2003 13,777 58,419 115,380 33,496 6,674 2,831 15,418 196.57$ 1.98 4.2 1/1/2004 12,855 51,059 101,492 28,927 6,078 2,697 13,357 226.32$ 15.1% 1.99 4.0 1/1/2005 12,538 48,534 95,736 27,769 5,770 2,647 12,348 237.33$ 4.9% 1.97 3.9

10/1/2005 12,301 46,622 92,383 26,660 5,528 2,676 11,758 248.25$ 4.6% 1.98 3.8 10/1/05 Contract Distribution by Type 57% 12% 6% 25%

Change 1/1/03 to 10/1/05 -11% -20%

Exhibit 1Blue Cross Summary Data from Group by Group database

Contracts by Type

Blue Cross Market Conduct Examination Statistical Exhibits -153- Enrollment Data - 1

All Groups

Enrolled Employees Groups Contracts Members

Avg Contract

% of groups

% of contracts

1 5,222 5,222 11,910 2.28 42% 11%2 2,295 4,590 8,726 1.90 19% 10%

3-5 2,604 9,686 18,298 1.89 21% 21%6-10 1,211 9,015 17,274 1.92 10% 19%11-25 798 12,438 24,539 1.97 6% 27%26+ 171 5,645 11,560 2.05 1% 12%Total 12,301 46,596 92,307 1.98 100% 100%

Average Size 3.8

Brokered Groups Only

Enrolled Employees Groups Contracts Members

Avg Contract

% of groups

% of contracts groups contracts

1 938 938 2,257 2.41 22% 4% 18% 18%2 836 1,672 3,134 1.87 19% 7% 36% 36%

3-5 1,140 4,278 8,095 1.89 26% 17% 44% 44%6-10 677 5,117 9,795 1.91 16% 20% 56% 57%11-25 581 9,134 17,881 1.96 13% 36% 73% 73%26+ 134 4,429 9,057 2.04 3% 17% 78% 78%Total 4,306 25,568 50,219 1.96 100% 100% 35% 55%

Average Size 5.9

Intermediary Groups

Groups Contracts Members groups contractsGNA 1,506 2,810 5,499 12% 6%MBA/IBS 842 1,456 2,972 7% 3%NEBCO 1,472 2,638 5,326 12% 6%Total 3,820 6,904 13,797 31% 15%Average Size 1.8

Exhibit 2

% Brokered

% intermediary

Blue Cross 2005 Enrollment Snapshot

Blue Cross Market Conduct Examination Statistical Exhibits -154- Dist by Size & Source - 2

Size CategoryNumber of

PayeesAmount of

Commissions % of Total BonusCommission and Bonus

>$100,000 8 1,636,909$ 39% 144,732$ 1,781,642$ $50,000 to $100,000 10 628,211$ 15% 15,826$ 644,037$ $25,000 to $50,000 9 266,260$ 6% 30,137$ 296,397$ $5,000 to $25,000 105 1,139,325$ 27% 1,139,325$ < $5,000 370 511,816$ 12% 511,816$ Total Brokers 502 4,182,522$ 100% 190,696$ 4,373,217$

General Agents 1,489,086$ 1,489,086$

Total to Brokers and GAs 5,671,607$ 5,862,303$

Exhibit 3Commissions Paid in 2005 from Broker Commission system

Does not include Intermediaries

Blue Cross Market Conduct Examination Statistical Exhibits -155- Brokers -3

Plan Contracts Grps % Contracts % GroupsPlan Pricing

FactorHealthmate C2C 25ER 20,438 6,407 44% 46% 1.000 Healthmate C2C 100/80 4,522 945 10% 7% 0.890 Healthmate C2C Plan 500 4,449 1,030 10% 7% 0.917 Blue CHiP $10/$20 100ER 2,912 963 6% 7% 0.945 Healthmate C2C Plan 200 2,656 669 6% 5% 0.949 Blue CHiP 500 100ER 1,852 498 4% 4%Blue CHiP Flex 1,635 643 4% 5%Healthmate C2C 50ER 1,034 248 2% 2%Blue CHiP 500 50ER 994 246 2% 2%Healthmate C2C 80/60 980 351 2% 3%Healthmate C2C 90/70 913 241 2% 2%Healthmate C2C 80/60 2K 788 308 2% 2%Managed Classic 737 445 2% 3%Blue CHiP $10/$20 50ER 460 145 1% 1%Blue CHiP Plan 750 440 159 1% 1%Blue CHiP $15/$25 100ER 404 110 1% 1%Healthmate C2C Plan 500V 319 93 1% 1%Healthmate C2C $15/$25 224 74 0% 1%Blue CHiP $15/$25 50ER 217 62 0% 0%Healthmate C2C 100/80 $500 D 187 48 0% 0%CHiP HMO 98 33 0% 0%Essential Care 5 (Statutory Economy) 85 58 0% 0% 0.568 Healthmate HSA $3,000/$6,000 44 32 0% 0%Essential Care 4 (Statutory Standard) 29 24 0% 0% 0.721 Healthmate HSA $1,500/$3,000 17 12 0% 0%Total / Average 46,434 13,844 100% 100% 0.942

5 Most Popular Plans Only 34,977 10,014 75% 72% 0.967

Exhibit 4Distribution By Plan, October 2005 Groups

Blue Cross Market Conduct Examination Statistical Exhibits -156- By Plan - 4

Number of

Options Groups Subs% of

Groups% of Subs

Avg Size Group

1 11,155 34,971 89% 75% 3.1 2 1,269 10,750 10% 23% 8.5 3 49 698 0% 2% 14.2 4 1 15 0% 0% 15.0

Total 12,474 46,434 100% 100% 3.7

Exhibit 5

Multiple Option PlansBlue Cross Plan Distribution

Blue Cross Market Conduct Examination Statistical Exhibits -157- Multiple Options - 5

a. Distribution of claims by size

Paid Claims Per Member

% of Members % of Claims

Combined Average

Claim

Cost Sharing Percent Cost Sharing $

<500 40% 3% 212 27% 78 500-5000 49% 34% 1,727 19% 410 5000-20000 9% 33% 9,096 11% 1,085 20000+ 2% 30% 44,613 2% 842 All claims 100% 100% 2,520 12% 347

b. Distribution of claims by attachment point - analysis of effect of large claims

Attachment Point

Claims in Excess of Att

PointPercent of

Total ClaimsMembers affected

% of Total Members

Average Per Member

All Claims 257,333,726 100.0% 102,000 2,520 50,000 18,690,808 7.3% 365 0.36%75,000 12,362,947 4.8% 173 0.17%

100,000 9,129,130 3.5% 95 0.09%125,000 7,340,217 2.9% 53 0.05%150,000 6,190,829 2.4% 39 0.04%

c. Distribution of claims and cost sharing separately by Medical and Pharmacy

Total Paid Claims Per Member

Pharmacy Claims

Medical Claims

Percent Pharmacy

Cost Sharing

PharmacyCost Sharing

Medical<500 44 168 21% 44% 21%500-5000 477 1,250 28% 32% 13%5000-20000 1,841 7,255 20% 22% 7%20000+ 4,581 40,032 10% 15% 0%All claims 498 2,022 20% 27% 7%

Exhibit 6Analysis of 2004 calendar year incurred claims by member

Blue Cross Market Conduct Examination Statistical Exhibits -158- Small Employer Claims - 6

a. Distribution of claims by size

Paid Claims Per Member % of Members % of Claims

Average Claim

Cost Sharing Percent

Cost Sharing $ % of Members % of Claims

Average Claim

Cost Sharing Percent

Cost Sharing $

<500 40% 3% 212 27% 78 54% 3% 191 44% 150 500-5000 49% 34% 1,727 19% 410 36% 26% 1,999 29% 813 5000-20000 9% 33% 9,096 11% 1,085 8% 30% 10,088 18% 2,285 20000+ 1.7% 30% 44,613 2% 842 2.0% 40% 54,852 5% 2,814 All claims 100% 100% 2,520 12% 347 100% 100% 3,074 18% 677

b. Distribution of claims by attachment point - analysis of effect of large claims

Attachment Point


PointPercent of

Total Claims


PointPercent of

Total ClaimsAll Claims 257,333,726 100.0% 43,607,851 100.0%

50,000 18,690,808 7.3% 4,635,508 10.6%75,000 12,362,947 4.8% 3,068,565 7.0%

100,000 9,129,130 3.5% 2,298,644 5.3%125,000 7,340,217 2.9% 1,801,039 4.1%150,000 6,190,829 2.4% 1,464,854 3.4%

c. Distribution of claims and cost sharing separately by Medical and PharmacyTotal Paid Claims Per

MemberPharmacy

ClaimsMedical Claims

Percent Pharmacy

Cost Sharing

Pharmacy

Cost Sharing Medical

Pharmacy Claims

Medical Claims

Percent Pharmacy

Cost Sharing

PharmacyCost Sharing

Medical<500 44 168 21% 44% 21% 65 126 34% 27% 50%500-5000 477 1,250 28% 32% 13% 771 1,228 39% 26% 31%5000-20000 1,841 7,255 20% 22% 7% 2,298 7,790 23% 25% 16%20000+ 4,581 40,032 10% 15% 0% 3,256 51,596 6% 25% 3%All claims 498 2,022 20% 27% 7% 630 2,444 20% 26% 16%

Exhibit 7

Analysis of 2004 calendar year incurred claims by member

Small Employer Direct Pay

Comparison of Small Employer and Direct Pay Claim Experience

Blue Cross Market Conduct Examination Statistical Exhibits -159- Direct Pay Claims - 7

Business Segment Average Age/Gender FactorRatio to Small Employer

Age/Gender FactorLarge Employer (IER) 1.01 1.05 Small Employer (PER) 0.96 1.00

Business Segment Average Age/Gender FactorRatio to Small Employer

Age/Gender FactorDirect Pay Pool I 1.50 1.43 Direct Pay Pool II 0.96 0.91 Total Direct Pay 1.28 1.22

Small Employer 1.05 1.00

Comparison of Small Employer and Direct Pay Demographics Using Modified Small Employer FactorsFactors are Subscriber Based, and Vary by Family Composition

Exhibit 8Comparison of Large and Small Employer Demographics Using Large Group Age Factors

Factors are Member-Based and Separate for Medical and PharmacyAssumed 78% Medical, 22% Pharmacy

The average age gender factor shown here is based on Blue Cross's large group member-based system. Older members get relatively higher factors and younger members relatively lower factors. The averages shown here are weighted averages for all members.

Blue Cross Market Conduct Examination Statistical Exhibits -160- Age Factors by Segment - 8

Factor 2001 2002 2003 2004 2005 20060.92 35% 30% 31% 24% 14% 12%0.96 20% 12% 10% 16% 23% 23%1.00 15% 25% 23% 25% 25% 24%1.04 6% 10% 9% 9% 11% 13%1.07 10% 10% 12% 9% 5% 5%1.10 15% 13% 16% 18% 23% 24%

Total 100% 100% 100% 100% 100% 100%

Avg Factor 0.988 0.995 0.999 1.002 1.010 1.013

Calendar Year

Exhibit 9Small Employer Health Status Factors

Blue Cross Market Conduct Examination Statistical Exhibits -161- HS by Year - 9

Previous Band

Factor 0.92 0.96 1.00 1.04 1.07 1.10 Grand Total % of Total

0.92 1,265 1,057 638 1 - - 2,961 24%0.96 217 967 543 280 1 - 2,008 16%1.00 177 688 1,135 450 199 413 3,062 25%1.04 - 115 273 282 119 276 1,065 9%1.07 - 1 253 182 178 478 1,092 9%1.10 - - 229 140 124 1,657 2,150 17%

Total 1,659 2,828 3,071 1,335 621 2,824 12,338 % of Total 13% 23% 25% 11% 5% 23%

1.011 Average Factor

Exhibit 10Analysis of change in Health status factor 2004 vs 2005

Current Band Factor (2005)

Distribution of Factors by Number of Groups

Blue Cross Market Conduct Examination Statistical Exhibits -162- HS Change - 10

Number of Enrolled

EmployeesNumber of

Groups

Average 2004 Health Status

Factor

Average 2005 Health Status

Factor% with

Decrease% Stayed the

Same% with

Increase1 4,948 0.998 1.006 19% 49% 32%2 2,274 1.001 1.013 18% 44% 38%

3 to 5 2,540 1.003 1.014 20% 41% 40%6 to 10 1,292 1.009 1.019 22% 37% 41%11 to 25 852 1.011 1.021 20% 41% 39%26 to 50 196 0.995 0.987 34% 45% 21%

All Groups 12,102 1.001 1.011 19% 44% 36%

Exhibit 11Analysis of change in Health status factor 2004 vs 2005

Variation by size of Group

Blue Cross Market Conduct Examination Statistical Exhibits -163- HS by size - 11

Exhibit 12Distribution of Age/Gender Factors

Raw Factors without Health Band and without compression

Age Gender Factor GroupsPercent of

Groups Average FactorLess than .50 414 3% 0.390 Between .50 and .75 1,359 11% 0.640 Between .75 and .90 2,428 19% 0.840 Between .90 and 1.00 2,154 17% 0.952 Between 1.00 and 1.10 1,908 15% 1.043 Between 1.10 and 1.25 1,880 15% 1.164 Between 1.25 and 1.50 1,197 9% 1.351 Between 1.50 and 2.00 923 7% 1.676 Greater than 2.00 450 4% 2.126

12,713 100% 1.056

Distribution of Combined Age/Gender and Health Band FactorsGroups with 2005 Factors

Combined Factor

Combined Age/Gender & Health Band

FactorPercent of

groups

Average Combined

Factor

Average Raw Factor Before

4:1 Compression

Difference (Effect of

Compression)Less than .50 536 4% 0.435 0.401 8.4%Between .50 and .60 367 3% 0.564 0.564 0.0%Between .60 and .70 524 4% 0.653 0.653 0.0%Between .70 and .80 1,044 8% 0.756 0.756 0.0%Between .80 and .90 1,662 13% 0.853 0.853 0.0%Between .90 and 1.00 2,246 18% 0.950 0.950 0.0%Between 1.00 and 1.25 3,418 27% 1.110 1.110 0.0%Between 1.25 and 1.50 1,333 10% 1.350 1.350 0.0%More than 1.50 1,582 12% 1.625 1.853 -12.3%Total 12,712 100% 1.045 1.072 -2.5%

Distribution of Change in Combined FactorGroups with Both 2004 and 2005 Factors

Combined A/G and Health Band, 4:1 CompressionChange Percent Groups Avg Change % of Groups

-20% or less 288 -32% 2%Between -10% and -20% 505 -14% 4%Between 0% and -10% 3,964 -3% 32%Between 0% and +10% 4,983 4% 40%Between + 10% and +20% 1,422 14% 12%Between + 20% and + 30% 577 24% 5%+30% or more 612 49% 5%Total 12,351 5% 100%

Blue Cross Market Conduct Examination Statistical Exhibits -164- Age Gender Distribution - 12

Current LawCommunity

RatingCompression 4 to 1 1 to 1 2 to 1 3 to 1 6 to 1Total Groups 12,445 12,445 12,445 12,445 12,445 Total Subscribers 48,346 48,346 48,346 48,346 48,346 Minimum Combined Factor 0.412 1.00 0.67 0.50 0.35 Maximum Combined Factor 1.649 1.00 1.34 1.50 2.10

Affected by MinimumNumber of Groups 388 6,710 1,437 626 181 Number of Subscribers 689 25,740 3,158 1,105 306 Percent of Groups 3.1% 54% 11.5% 5.0% 1.5%Percent of Subscribers 1.4% 53% 6.5% 2.3% 0.6%Average Factor before Min 0.358 0.791 0.510 0.400 0.324 Average Rate Increase Effect 15% 26% 31% 25% 8%Min Factor before Compression 0.317 0.317 0.317 0.317 0.317 Greatest Rate Increase Effect 30% 215% 111% 57% 10%

Affected by MaximumNumber of Groups 901 5,735 1,828 1,333 266 Number of Subscribers 1,432 22,606 4,013 2,294 365 Percent of Groups 7.2% 46% 14.7% 10.7% 2.1%Percent of Subscribers 3.0% 47% 8.3% 4.7% 0.8%Average Factor before Max 1.969 1.324 1.722 1.838 2.297 Average Rate Decrease Effect -16% -24% -22% -18% -9%Max Factor before Compression 2.482 2.482 2.482 2.482 2.482 Greatest Rate Decrease Effect -34% -60% -46% -40% -15%

Total Groups Affected by Compression 1,289 12,445 3,265 1,959 447 % of Total 10.4% 100% 26.2% 15.7% 3.6%

Total Affected Subscribers 2,121 48,346 7,171 3,399 671 % of Total 4.4% 100% 14.8% 7.0% 1.4%

Exhibit 13Analysis of Effect of Rate Compression

Blue Cross Market Conduct Examination Statistical Exhibits -165- Rate Compression - 13

Small Employer (PER) Loss Ratio by Group SizeJuly 2004 to June 2005 Incurred Claims Paid Through August 2005

Group Size Determined as of December 31, 2004

Enrolled Contracts on 12/31/2004 Premium (000) Claims (000) Loss Ratio

1 $38,909 $38,025 97.7%2 $30,995 $28,250 91.1%3 to 5 $63,676 $49,568 77.8%6 to 10 $61,557 $49,805 80.9%11 to 25 $87,789 $70,035 79.8%26 + $38,263 $31,415 82.1%Other* $12,935 $12,414 96.0%Total $334,124 $279,513 83.7%Total excluding Groups of 1 $295,215 $241,488 81.8%

* Groups with premium and claims during the experience period, but not active on December 31, 2004

Exhibit 14

Blue Cross Market Conduct Examination Statistical Exhibits -166- LR by Size - 14

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