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TRANSCRIPT
Report on Examination
of
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Providence, Rhode Island
as of
December 31, 2009
State of Rhode Island Department of Business Regulation
Insurance Division
TABLE OF CONTENTS
Page
SALUTATION 1
SCOPE OF EXAMINATION 2
HISTORY 3
TERRITORY AND PLAN OF OPERATION 5
INSURANCE HOLDING COMPANY SYSTEM 9
Organizational Structure 9
Line of Credit Agreement 10
Intercompany Services Agreement 10
Tax Sharing Agreement 10
Health and Wellness Services Agreement 11
MANAGEMENT AND CONTROL 11
Members 11
Board of Directors 12
Committees 13
Board Compensation 16
Officers 16
Conflict of Interest 17
Corporate Records 19
EMPLOYEE BENEFITS 19
REINSURANCE 22
Self-Funded Health Plans 23
BlueCHip for RIteCare 23
Continuation of Coverage Reinsurance 24
FIDELITY BOND AND OTHER INSURANCE 26
ACCOUNTS AND RECORDS 26
Information Systems 27
Independent Audit 27
TABLE OF CONTENTS (Cont.)
Page
Internal Audit 27
FINANCIAL STATEMENTS 29
Comparative Statement of Assets 30
Comparative Statement of Liabilities and Capital and Surplus 31
Statement of Revenue and Expenses 32
Capital and Surplus Account 33
Reconciliation of Capital and Surplus 34
Analysis of Examination Adjustments 35
ASSETS 36
Bonds 36
Common Stocks 37
Real Estate 37
LIABILITIES 38
Claims Unpaid 38
Unpaid Claims Adjustment Expenses 38
CAPITAL AND SURPLUS 39
SUBSEQUENT EVENTS 40
CONCLUSION 42
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April 8, 2011
Honorable Christopher F. Koller Health Insurance Commissioner State of Rhode Island Cranston, Rhode Island Dear Commissioner Koller: In compliance with your instructions and pursuant to the provisions of R.I. Gen. Laws §27-19-9 and §27-20-9, an examination has been made as of December 31, 2009, of the financial condition and affairs of
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND 500 Exchange Street
Providence, Rhode Island a non-profit hospital service and medical service corporation chartered by the State of Rhode Island. The report of such examination is submitted herewith. Blue Cross & Blue Shield of Rhode Island, hereinafter referred to as the ”Corporation,” or as ”Blue Cross,” was last examined as of December 31, 2005 by the State of Rhode Island, Department of Business Regulation, Insurance Division.
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SCOPE OF EXAMINATION
The current examination was performed in compliance with the above mentioned sections of
the General Laws of the State of Rhode Island, as amended, and covered the intervening
four-year period ended December 31, 2009. The examination was conducted in accordance
with the National Association of Insurance Commissioners (“NAIC”) Financial Condition
Examiners Handbook (“Handbook”), 7-Phase Risk-Focused Examination Process. The
Handbook requires that we plan and perform the examination to evaluate the financial
condition and identify prospective risks of the Corporation by obtaining information about
corporate governance, identifying and assessing inherent risks, and evaluating the controls
and procedures used to mitigate those risks. The examination included assessing the
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation, and management’s compliance with Statutory
Accounting Principles and the NAIC Annual Statement Instructions. The examination
process included a business risk assessment to focus examination procedures on those areas
considered to have greater risk in order to identify significant operating issues and/or
deviations from statutory accounting practices that may affect solvency. All accounts and
activities of the Corporation were considered in accordance with the Risk-Focused
Examination Process.
Blue Cross instructed their independent accounting firm to make available for review all
work papers concerning procedures followed, tests performed, information obtained, and
conclusions reached pertinent to the firm’s audit of the Corporation’s financial statements for
the year ended December 31, 2009. The work papers of the independent accounting firm
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were reviewed in order to ascertain the extent to which procedures were employed to
determine compliance with statutory requirements and guidelines. The work papers and
analyses prepared by the independent accounting firm were utilized to the extent possible.
Where applicable, the independent accounting firm’s work papers have been incorporated
into the examination process.
HISTORY
The Corporation was organized on February 27, 1939, as the Hospital Service Corporation of
Rhode Island, under the provisions of the Enabling Act passed by the General Assembly in
that year. It commenced business the same year under non-business Articles of
Incorporation, for the purpose of conducting business as a non-profit hospital service
corporation, as defined and authorized by an Act entitled “An Act Providing for the
Incorporation of Non-Profit Hospital Service Corporations and Defining Their Powers,”
Chapter 719 of the Public Laws, 1939.
On November 20, 1973, the corporate name was changed to Blue Cross of Rhode Island
under an amendment to the Articles of Incorporation.
A separate entity, the Rhode Island Medical Society Physicians Service, was organized on
May 2, 1949, under the provisions of an Enabling Act passed in 1945 by the General
Assembly. It commenced business in 1950 under non-business Articles of Incorporation, for
the purpose of providing voluntary insurance against the cost of medical care to the people of
the State of Rhode Island. On March 25, 1974, the corporate name was changed to Blue
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Shield of Rhode Island under an amendment to the Articles of Incorporation.
Subsequently, on October 1, 1982, with the approval of the Board of Directors of both Blue
Cross of Rhode Island and Blue Shield of Rhode Island, the two corporations merged
through an “Agreement of Merger.” Blue Cross of Rhode Island remained as the continuing
corporation and the name was changed to Blue Cross & Blue Shield of Rhode Island. The
Corporation does business under the Enabling Act of Blue Cross, as it is sufficiently flexible
to allow activities of both without legislative change.
On August 8, 1985, the Board of Directors approved a resolution describing the formation,
structure, and operation of a health maintenance organization called HMO Rhode Island, Inc.
In May 1996, HMO Rhode Island, Inc. changed its name to Coordinated Health Partners
(“CHiP”). CHiP, a wholly owned subsidiary of the Corporation, received its license to
transact business from the Rhode Island Department of Business Regulation on August 12,
1986. As a for-profit federally qualified, individual practice association model health
maintenance organization, CHiP provided comprehensive medical services to its members,
generally for a fixed, prepaid fee. Effective January 1, 2005 the Corporation liquidated CHiP
and consolidated its product lines into Blue Cross.
In January of 2007, Blue Cross formed a health and wellness subsidiary, organized as a
Rhode Island limited liability company, known as The Health & Wellness Institute, LLC
(“HWI”). HWI is dedicated to promoting health and wellness programs to paying customers
within and outside the State of Rhode Island, including those of Blue Cross. Blue Cross has
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sole authority to manage the Institute. (Refer to the “Insurance Holding Company System”
section in this report for further details).
TERRITORY AND PLAN OF OPERATION
Blue Cross markets, administers, services and underwrites health and dental insurance plans
for organizations (groups) and governmental agencies that provide such coverage to their
employees or members. Blue Cross also provides claims administration services for groups
that elect to assume partial or full risk of medical expenses incurred by their employees or
members. In addition, Blue Cross offers fully insured medical insurance plans to individuals
through its Direct Pay Program.
The Corporation’s health plans include contractual agreements with a network of
participating providers to file claims, obtain the necessary pre-authorizations and hold
members harmless from any balance billing beyond the normal allowances for services.
The Corporation’s medical and dental plans also provide such services as the issuance of
identification cards and plan literature, membership and claim administration, and customer
service.
In the group market, Blue Cross offers medical plans and administrative services, including
but not limited to preferred provider organizations (“PPO”), indemnity plans, a dental plan,
and administrative services only plans.
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The Corporation’s PPO plan – HealthMate Coast to Coast, provides fully covered benefits
for hospital, ancillary, and medical/surgical care through negotiated contractual arrangements
with Blue Cross network providers.
Traditional indemnity type coverage is available with the Classic Blue plan. Like
HealthMate, Classic Blue covers hospitalization, ancillary, and medical/surgical care up to
the plan allowance. Classic Blue provides 80% coverage for outpatient services. Also, as
part of Classic Blue, the Corporation makes available ”Major Medical” coverage against the
cost of serious or prolonged illness that may reach financially catastrophic proportions.
The Corporation offers an HMO product. The focal point of medical services provided to
members is the primary care physician (“PCP”) model. PCP’s are independent practitioners
acting as ”care managers.” A member selects a PCP to manage his or her care on an on-
going basis and to authorize all referrals to specialists, hospitals and other health care
providers.
Blue Cross utilizes the national Blue Cross and Blue Shield Association’s BlueCard Program
to administer services rendered to members who are outside of the local area. The medical
services are reimbursed at the prevailing rates negotiated by the local Blue Cross Blue Shield
Plans.
The Corporation administers medical benefits for the U.S. Office of Personnel Management -
Federal Employee Program. The terms of the agreement are similar to a cost plus
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arrangement where, for an agreed upon administrative fee, the Corporation will administer
the program and be reimbursed for its benefit payments and administrative costs. The
administrative costs are reimbursed up to a maximum amount, as approved by the
Washington Office of the Federal Employee Program. The Corporation shares in
underwriting this national program through a participation agreement with The Blue Cross
and Blue Shield Association.
The Corporation offers coverage in the direct pay market. There are a number of Plans
offered based on varying levels of co-insurance amounts. Also, a High Deductible Health
Plan is also offered providing the subscriber with tax benefits. Direct pay programs are fully
insured with premiums due in monthly or quarterly installments.
The Corporation offers Blue Cross Dental to group accounts and direct pay subscribers.
Dental coverage can be purchased in levels, whereby each level provides additional
coverage. Blue Cross Dental offers all of the same features and provider guarantees included
in the Corporation's medical plans, such as hold harmless protection and administration for
claims filed by participating dentists.
Blue Cross offers The Good Health Benefit to educate employees about the long-term
benefits of a healthy lifestyle. This program provides customized on-site interactive
seminars in English or foreign languages.
While most Blue Cross accounts are funded under a fully insured (Prospective Premium)
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arrangement, the Corporation offers several alternative funding arrangements each with
incrementally increasing levels of risk to the account. A self-insured account can also
purchase stop-loss insurance from Blue Cross or a third party reinsurer, to cover catastrophic
claims expense.
Effective July 1, 2006, Blue Cross commenced selling stop-loss insurance to self-funded
health plans. Blue Cross has entered into a quota share arrangement with BCS Insurance
Company (“BCS”). Under this arrangement, Blue Cross assumes a 25% risk and BCS
assumes a 75% risk. The stop-loss offered to the self-funded health plans includes specific
and aggregate coverage.
Blue Cross also maintains contractual agreements with each hospital in the State of Rhode
Island and several nearby Massachusetts hospitals to provide medically necessary health
services to its subscribers. These agreements define the various reimbursement mechanisms
negotiated with each hospital, including global per diem, diagnosis-related group, global per
case, fixed fee and discounted fee for service. Arrangements with non-hospital providers
include both fixed global provider group payments per member per month, adjusted
retroactively for actual services utilized on a shared-risk basis and discounted fee for service
arrangements. The Corporation contracts with physician corporations who enter into
participating provider agreements to provide covered services to the Corporation’s members
and who share in the premium revenues and medical expenses of these members.
Prescription drugs, durable medical equipment and medical laboratory services are provided
by third-party vendors under various payment arrangements, including capitation and fee for
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service, depending on the product line of business.
Non-participating hospitals are those which have not signed a contract with Blue Cross. All
hospitals in Rhode Island are Blue Cross participating hospitals. The Blue Cross payment
allowance for covered services provided by a non-participating hospital outside of Rhode
Island is the lower of a) the hospital's charge; b) an amount the Corporation determines to be
a reasonable payment for that service or procedure; or c) the allowance for that area of
service. Depending on the particular benefit and/or product, the subscriber may be
responsible for a co-payment.
INSURANCE HOLDING COMPANY SYSTEM
The Corporation, as required under Title 27, Chapter 35 of the Rhode Island General Laws
entitled “Insurance Holding Company Systems,” filed registration statements “Form B” and
“Form C” with the Rhode Island Insurance Division, for all years under examination. A
review of the Corporation’s records indicated that the required information had been included
in the registration statements filed with the Insurance Division for the period under
examination.
Organizational Structure
At December 31, 2009, the Corporation owns a 100% membership interest in its wholly
owned subsidiary, The Health & Wellness Institute, LLC. HWI, which was organized
effective January 1, 2007 pursuant to a Limited Liability Company Agreement, operates as a
non-insurance limited liability corporation extending beyond the State of Rhode Island. The
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purpose of HWI is to provide comprehensive healthcare wellness solutions of improving the
health of Rhode Islanders and in addition, HWI contracts with out-of-state clients to provide
health and wellness programs to their members.
Line of Credit Agreement
Effective January 1, 2007, the Corporation and HWI executed a Line of Credit Agreement,
whereby the Corporation agreed to lend HWI up to a maximum aggregate principal amount
of $500,000 on a revolving credit basis. The line of credit may only be used by HWI for
working capital and business operational purposes. During 2009 HWI did not access its line
of credit.
Intercompany Services Agreement
Effective January 1, 2007, the Corporation and HWI entered into an Intercompany Services
Agreement whereby the Corporation provides services to HWI consisting of legal and
regulatory, human resources, financial, communications, medical director, information
technology, insurance and analytical solutions. Depending on the services rendered, the
charge may be a fixed annual amount or a fixed fee per unit.
Tax Sharing Agreement
Effective January 1, 2007, the Corporation and HWI entered into a Tax Sharing Agreement
whereby the Corporation shall be responsible for preparing and filing returns and making
payment of federal taxes attributable to the Corporation and HWI. HWI has designated the
Corporation as its agent for the purpose of taking any and all actions necessary or incident to
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the filing of federal income tax returns, including the filing and remittance of any and all
estimated payments for each taxable period for which a tax return is filed.
Health and Wellness Services Agreement
Effective January 1, 2007, the Corporation and HWI entered into a Health and Wellness
Services Agreement whereby HWI provides wellness services to the Corporation consisting
of good health benefit, wellness van visits, HEDIS1 implementation, community services
consulting and support, major events support, member health support, senior management
consulting support, account reporting and consulting support, and Wellness Council of
America program support.
MANAGEMENT AND CONTROL
Members
The Corporation’s By-Laws, as amended through June 4, 2009, provide that the annual
meeting of its Members shall be held in the City of Providence, in April of each year at the
time and place designated by the Directors, for the election of Directors and Members and
the transaction of such other business that may come before the meeting. Special meetings
may be called by the Chairman, either Vice Chairman, President, a majority of the Board of
Directors, or by the written request of 25 percent of the Members.
A quorum for the transaction of business requires the presence of at least 25 Members,
present in person. Unless required otherwise by law or by the By-Laws, all questions shall
1 The Healthcare Effectiveness Data and Information Set (HEDIS) is a widely used set of performance measures in the managed care industry, developed and maintained by the National Committee for Quality Assurance (NCQA).
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be decided by a vote of a majority of the Members present in person. Each Member is
entitled to one vote in person.
Board of Directors
The Corporation’s By-Laws provide that its affairs, business, and property shall be managed
by a Board of Directors (“Board”) of not less than ten (10) or more than nineteen (19)
directors. In accordance with Rhode Island General Laws §27-19.2-5, six publicly appointed
directors shall be appointed, two each by the Governor, Speaker of the House of
Representatives, and the President of the Senate. Once the public appointments are made,
vacancies will be filled for a maximum of three, 3-year terms.
At each annual meeting, the Members of the Corporation shall fix the total number of
directors for the ensuing year. In all cases, directors shall serve until their successors are
elected and qualified.
Not more than twenty-five (25) percent of the Board of Directors shall be comprised of
physicians. No officers or employees of the Corporation or any of its subsidiaries or
affiliates shall serve as directors.
Vacancies in the Board occurring from any cause may be filled for the unexpired term by a
majority vote of the remaining directors. In the case of a publicly appointed director, the
office of the public official who appointed the director will appoint a new director.
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Regular meetings of the Board may be held from time to time at such times and places as the
Board shall determine. Special meetings shall be held whenever called by or at the direction
of the Chairman of the Board, Vice Chairman, President, or any seven (7) members of the
Board. A majority of the directors shall constitute a quorum for the transaction of business at
all meetings.
A review of the Board of Directors’ attendance was performed for the four-year period
covered by this examination. It was noted that attendance at all meetings averaged 86% of
total Board membership during this period.
Committees
The By-Laws provide that the Executive Committee shall be elected by the Board and shall
consist of the Chairman of the Board, the Vice Chairmen of the Board, the Secretary of the
Board, the Chairmen of the standing committees of the Board of Directors, and one (1)
publicly appointed director. Not more than 40% of the members of the Executive Committee
shall be physicians.
When the Board is not in session, the Executive Committee shall be vested with such powers
of the Board, except the Executive Committee shall not have authority to fill vacancies on the
board or the Executive Committee, nor to elect any of the officers, nor to amend By-laws.
Also, a majority of the members shall constitute a quorum for the transaction of business at
any meeting of the Executive Committee.
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In addition to the Executive Committee, other standing committees of the Board shall include
the Audit Committee, Compensation Committee, Finance Committee, Governance
Committee, Physician Provider and Affordability Committee, Social Mission Committee,
and Strategic Planning & Transformation Committee. Other committees may be established
as approved by the Board of Directors. Each committee shall contain at least one publicly
appointed director.
Directors, and committee members holding office as of December 31, 2009, were as follows:
Board of Directors
Business Affiliation
Term Expires
Denise A. Barge Barge & Associates, LLC 2012 Francis X. Basile, Jr, M.D. Physician, University Medicine Foundation 2012 Fredric V. Christian, M.D. Physician, Rhode Island Cardiology Center 2012 Judge Edward C. Clifton Associate Justice, Superior Court of Rhode Island 2011 Meredith Curren Partner/Principal, Edgewood Holdings, LLC 2011 Michael V. D’Ambra President, D’Ambra Construction Company, Inc. 2010 Christine C. Ferguson Research Professor 2012 Samuel H. Havens President (Retired), Prudential Healthcare 2012 Peter C. Hayes Partner, Hayes & Sherry Real Estate Services 2012 Juana I. Horton President/CEO, Horton Interpreting Services, Inc. 2012 Deborah R. Jacobson Vice President (Retired), LIN TV Corporation 2011 Chuck LoCurto Executive V.P. and CIO, Textron Financial
Corporation 2011
John P. Maguire Educator, North Providence High School 2011 Carol A. Mumford Retired Educator and Legislator 2011 Anne E. Powers President & CEO, American Tele-Connect
Services, Inc. 2012
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Executive Committee
Finance Committee
Deborah R. Jacobson, Chairman Chuck LoCurto, Chairman Fredric V. Christian, M.D., Vice Chair Meredith Curren, Vice Chair Francis X. Basile, Jr, M.D. Michael V. D’Ambra Judge Edward C. Clifton Christine C. Ferguson Meredith Curren Samuel H. Havens Samuel H. Havens Carol A. Mumford Juana I. Horton Chuck LoCurto Carol A. Mumford Anne E. Powers
Governance Committee
Audit Committee
Judge Edward C. Clifton, Chairman Meredith Curren, Chairman Anne E. Powers, Vice Chair Michael V. D’Ambra Denise A. Barge Samuel H. Havens Fredric V. Christian, M.D. Peter C. Hayes Carol A. Mumford
Compensation Committee
Physician Provider and Affordability Committee
Samuel H. Havens, Chairman Francis X. Basile, Jr, M.D., Chairman Michael V. D’Ambra Fredric V. Christian, M.D., Vice Chair Denise A. Barge Michael V. D’Ambra Chuck LoCurto Peter C. Hayes John P. Maguire Juana I. Horton Deborah R. Jacobson
Social Mission Committee
Ad Hoc Building Committee
Juana I. Horton, Chairman Deborah R. Jacobson, Chairman Judge Edward C. Clifton, Vice Chair Judge Edward C. Clifton John P. Maguire Peter C. Hayes Juana I. Horton Anne E. Powers
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Strategic Planning & Transformation Committee
Anne E. Powers, Chairman Francis X. Basile, Jr, M.D. Christine C. Ferguson Samuel H. Havens Deborah R. Jacobson Chuck LoCurto
Board Compensation
In accordance with Rhode Island General Laws §27-19.2-7, no compensation shall be paid to
the Board members by a nonprofit hospital or medical services corporation, excluding
reimbursement for ordinary and necessary expenses, without the approval of the State of
Rhode Island Health Insurance Commissioner. As of the date of this report, no approval has
been granted for Board compensation. As such, the Board of Directors have not received
compensation since May 3, 2004.
Officers
The By-Laws provide that the officers of the Corporation shall be elected annually by the
Board of Directors. The officers of the Corporation shall consist of the following Board
Officers: a Chairman of the Board; a Vice Chairman; and a Secretary. Other officers of the
Corporation not members of the Board of Directors include: a President; one or more Vice
Presidents; a Treasurer; a Secretary in the event that the Board decides not to elect a Board
member to serve in such position; and such other officers as the Board in its discretion may
from time to time determine.
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The officers of the Corporation, and their respective titles at December 31, 2009, are as
follows:
Deborah R. Jacobson Chairman of the Board Fredric V. Christian, M.D. Vice Chairman of the Board James E. Purcell President and Chief Executive Officer Dorothy A. Coleman Corporate Treasurer and Chief Financial Officer Richard P. Farias Chief Operating Officer Michele B. Lederberg, Esquire Secretary
Executive Vice Presidents
Dorothy A. Coleman Richard P. Farias Michele B. Lederberg, Esquire William K. Wray
Senior Vice President
Michael H. Samuelson
Vice Presidents
Thomas A. Boyd Linda H. Newton Thomas D. Cauthorn Brian M. O’Malley Eric E. Gasbarro Harold A. Picken, M.D. Augustine A. Manocchia, M.D. Mark D. Waggoner Shanna C. Marzilli
Conflict of Interest
The Corporation maintains a Corporate Compliance & Ethics Program to ensure that
business is conducted properly and to ensure conformance to applicable federal, state and
local statutory and regulatory obligations, as well as to all internal policies and procedures.
The overall responsibility for the oversight of the compliance and ethics plan belongs to the
Board of Directors. The Assistant Vice President of Corporate Compliance & Ethics is
responsible for the implementation of the conflict of interest polices and procedures and for
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ensuring that all appropriate individuals, committees, programs, and/or services are involved
in the review and updating of the policies and procedures. The Corporation has also
established committees to oversee compliance and ethics activities. These committees are:
the Compliance Representative Committee, that is comprised of individuals chosen by vice
presidents to implement divisional compliance and ethics initiatives, and the Compliance &
Ethics Committee, that is comprised of members from the Executive Leadership Team who
oversee and promote compliance and ethics throughout the organization.
On an annual basis, each employee is required to complete a Conflict of Interest
Questionnaire (“questionnaire”). Employees must also keep their information updated by
submitting a revised questionnaire any time a change in their personal situation warrants. The
Compliance & Ethics Department reviews all completed questionnaires, and together with
the Legal Department, provides guidance for resolving any existing conflicts. New
employees are required to complete the questionnaire during the employment application
process.
Each member of the Board of Directors is also required to complete a Conflict of Interest
Questionnaire at the following times: annually; when a change in his or her situation
requires an update; and when joining the Board as a new member. Potential conflicts of
interest are to be reported to the Board of Directors Audit Committee by the Corporate
Compliance Officer, and the potential issue is addressed with the submitting Board member.
Completed questionnaires are retained by the Corporate Compliance & Ethics Department.
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The examiners reviewed the Conflict of Interest Questionnaires completed by the members
of the Board of Directors and Executive Leadership Team for 2009. Communications from
the Corporate Compliance & Ethics Department to the Audit Committee of the Board of
Directors during 2008, 2009 and 2010 were also obtained and reviewed. Although potential
conflicts of interest do exist, there is no indication in the documentation examined of a
situation involving an actual conflict of interest that has not been adequately disclosed and
addressed by the Corporation.
Corporate Records
The recorded minutes of the Corporation, its Board of Directors, and various committees
were reviewed for the period under examination. The recorded minutes adequately
documented the meetings and the approval of transactions and events in accordance with the
Corporation’s charter and By-Laws.
EMPLOYEE BENEFITS
The Corporation has three Supplemental Executive Retirement Plans (“SERPs”) for certain
executives as designated by the Board of Directors. The SERPs are non-qualified defined
benefit plans that are designed to add up to 15% to the retirement benefits available from the
Blue Cross & Blue Shield Retirement Plan. Two plans extend benefits to Senior
Management (they participate in one as determined by their eligibility date). The third plan
covers the President. The entire cost of the plans is borne by the Corporation.
In addition to the pension benefits discussed above, the Corporation has a tax qualified
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defined benefit pension plan covering substantially all of its employees. Pension plan
benefits are based on years of service and the employee’s compensation during the highest
three years of service. The plan is funded through a deposit administration group annuity
contract and is administered by the Compensation Committee appointed by the Blue Cross
Board of Directors. The entire cost of the plan is borne by the Corporation.
The Corporation provides an employee voluntary savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. Under this Money Match Program, employees may
contribute up to the maximum amount allowed by the IRS. Highly compensated employees
may only contribute up to 15% of their base pay before income taxes and up to the IRS
maximum allowed after income taxes. The Corporation contributes $0.50 for every dollar
that each employee contributes to the Money Match Program up to 6%, which is a maximum
employer contribution of 3% of an employee’s gross pay.
A Group Term Life Insurance and Accidental Death and Dismemberment Life Insurance
Program are also provided to employees. The coverage is equal to the employee’s salary
after three months of service, and two (2) times their salary after one year of service. For
part-time employees, enrollment occurs following five years of service and coverage is equal
to two (2) times their salary. The entire cost of the program is borne by the Corporation. In
addition to the basic Group Term Life Insurance, employees are eligible to purchase
supplemental Life Insurance up to twice their annual salary. The Corporation also provides
Group Term Life Insurance coverage for dependents of employees after one year of service
in the amount of $15,000 for spouses and $5,000 for dependent children. Regardless of
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health, all full-time employees are eligible for insurance coverage upon meeting eligibility
requirements.
The Corporation provides Short Term Disability benefits that represent a partial salary in the
event of disability as defined by the provisions of the program. Full time employees are
eligible for this benefit after 90 days of service. The entire cost of the coverage is paid by the
Corporation.
The Corporation provides Long Term Disability benefits that represent a partial monthly
salary in the event of disability as defined by the provisions of the program. Full time
employees are eligible for this benefit after one year of service. The entire cost of the
coverage is paid by the Corporation.
On the first day of the month following hire, employees are provided with individual, 2-party
or family membership in HealthMate Coast to Coast health insurance coverage and Blue
Cross Dental insurance coverage. The health coverage includes a preferred prescription drug
program. Most exempt employees pay a percentage of the cost depending on pay grade.
Non-Exempt employees do not contribute towards the cost of the health insurance plan.
To cover unreimbursed medical expenses, dependant day-care expenses and
parking/transportation expenses, employees are eligible on the first day of hire to participate
in a Flexible Spending Account program.
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The Corporation has an incentive plan in place for employees up to the level of Assistant
Vice President for the purpose of recognizing and rewarding contributions made at various
levels of the organization. Corporate goals are recommended by the senior staff and
approved by the Board of Directors by March 31st of the plan year. The incentive is a
percentage of salary established by the Board on the last day of the plan year, with funding
approved based on the achievement of the corporate goals.
The Corporation also has an incentive plan in place for executives at the level of Vice
President or above. The purpose of this plan is to attract, retain and motivate qualified
executives and management, and to align compensation with performance to ensure the
organization maintains financial stability and growth. Incentives are paid based on the
Corporation achieving the same predetermined corporate goals approved by the Board of
Directors for all other employees.
The Corporation also has an Incentive Program in effect for certain marketing management
and sales representatives. Incentive is based on the addition of new accounts, and the
expansion of benefits and retention for existing accounts.
REINSURANCE
At December 31, 2009, the Corporation had three reinsurance agreements in effect. Two of
these agreements were entered into with BCS Insurance Company (“BCS”) an affiliate of
The Blue Cross and Blue Shield Association. The first agreement was primarily a result of
contractual requirements associated with the State of Rhode Island’s RIteCare program. The
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second agreement with BCS relates to providing reinsurance to self-funded health plans. The
third agreement entered into with an unaffiliated reinsurer, provides continuation of benefits
coverage in the event of the Company’s insolvency.
The following is a summary of the primary provisions of each reinsurance agreement in
effect at December 31, 2009:
Self-Funded Health Plans
Effective July 1, 2006 the Corporation entered into a reinsurance agreement with BCS to
provide stop-loss insurance to self-funded health plans in the State of Rhode Island on a
quota share arrangement. BCS and the Corporation share in the risk as follows: BCS 75%
and the Corporation 25%, for specific and aggregate coverage.
The reinsurance agreement provides for specific and aggregate coverage based on the terms
of the contract negotiated with the self-funded group. The contract is between the self-
funded group and the Corporation. The contract terms negotiated include an attachment
point, benefit accumulation period, benefit exclusions and a maximum retained liability.
The contract with the self-funded group is negotiated on an annual basis that coincides with
the group’s renewal period.
BlueCHip for RIteCare
Effective October 1, 2009, the Corporation entered into an Excess Reinsurance Agreement
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with BCS whereby BCS will assume a 90% share of eligible hospital and medical expenses
incurred per member, per contract year, in excess of a $500,000 attachment point. This
agreement was subsequently terminated due to the Corporation exiting from the RIteCare
program effective December 31, 2010.
The following is a summary of the limitations that apply to all covered expenses under the
RIteCare reinsurance agreement:
• Acute Care - $7,500 per day.
• Sub-Acute Care - $750 per day subject to a contract year maximum of 120 days combined for all sub-acute care and home health care.
• Outpatient Care – Loss is limited to $7,500 per day, except the limitation shall not apply to fixed procedural fees for bone marrow or peripheral blood stem cell transplants.
• Prescription Drugs – Loss is limited to $250,000 per agreement period.
• Professional Care – Loss is limited to 100% of the Medicare allowable amount.
• All Other – Loss is limited to $50,000 per agreement period for durable medical equipment and supplies, including orthotics and external prosthetics.
The reinsurance agreements noted above were reviewed and evaluated for compliance with
SSAP No. 61 of the NAIC Accounting Practices and Procedures Manual. None of the
agreements appear to contain any provisions which limit transfer of risk or would otherwise
prohibit transactions under the agreement from being accounted for as reinsurance.
Continuation of Coverage Reinsurance
Since May 1, 2003, the Corporation has had a “Continuation of Coverage Reinsurance
Contract” (“contract”) in effect. As of December 31, 2009, the contract was with an
unaffiliated reinsurer. The contract provides coverage in the event of the Corporation’s
insolvency. In the event of the Corporation’s insolvency (either declared insolvent or placed
25
under an order of rehabilitation or conservation by a court of competent jurisdiction) the
reinsurer shall, upon receipt of notice of the Corporation’s insolvency:
• Assume and accept all of the Corporation’s obligations and liabilities under, and be
afforded all of the Corporation’s rights and interest in, all individual and group health
insurance policies and certificates in force in the State of Rhode Island as of the date of
the insolvency.
• Pay or allow benefits (except for conversion and renewability benefits) identical to the
benefits that would have been payable by the Corporation under its policies and
certificates were it not for the Corporation’s insolvency, but only for claims incurred
from the date of insolvency through the earlier of the next renewal date or the 365th day
after the date of the insolvency, whichever occurs first.
In no event will the liability of the reinsurer exceed the benefit amounts for which the
Corporation would have been liable, nor shall the liability of the reinsurer exceed $100,000
per person.
In the event there are no claims during a contract year and the contract either continues in
force with the same reinsurer or is terminated by the reinsurer, the reinsurer agrees to refund
the Corporation, within 30 days after the end of the contract year, 50% of the reinsurance
premium paid by the Corporation for that contract year.
26
Each of the above agreements contained effective and execution dates, payment terms, a
Termination Clause, an Insolvency Clause, policies and/or lines of business reinsured, and
the Corporation’s Retention.
FIDELITY BOND AND OTHER INSURANCE
As of December 31, 2009, Blue Cross is named as the insured in an insurance company’s
fidelity bond with a principal amount of $5,000,000 and a $200,000 deductible. The
indemnity under this bond exceeds the minimum amount of fidelity insurance suggested by
the National Association of Insurance Commissioners for the corresponding level of
exposure.
Additional insurance policies include coverage for workers’ compensation, general liability,
accident, property, business automobile, directors and officers’ liability, errors and
omissions, and employee benefit plan fiduciary responsibility. Management has determined
the adequacy of coverages for all insurable assets and risks of the Corporation.
ACCOUNTS AND RECORDS
The accounts and records of the Company are maintained at its home office in Providence,
Rhode Island. The initial data entry for policies and claims also occurs at the Company’s
home office. In June 2003, the Corporation entered into a long-term agreement with Perot
Systems Healthcare Services (“PSHS”) whereby, PSHS agreed to provide claims processing,
information technology, membership administration and cash disbursement services at the
Corporation’s facilities, under the direction of PSHS staff.
27
Information Systems
In 2007 the Corporation began a program to replace its legacy core claims processing system
with a more modern industry-standard application. The first phase of this application went
into production in September 2009. Additional components are scheduled to be released in
2011, with completion of the project estimated by the end of 2012.
We performed a general overview of the Corporation’s information technology policies and
procedures to identify inherent risks within this area and to determine how the Corporation
mitigates these risks. Based upon the review performed, the examiners did not note any
significant weaknesses with regard to the Corporation’s information technology control
environment.
Independent Audit
The Corporation is audited annually by an independent accounting firm and audited financial
reports were filed with the Insurance Division for all years under examination as required.
The accounting firm’s work papers from its 2009 audit were reviewed, and utilized to
supplement the examination process and to avoid duplication of work where deemed
appropriate. There were no material internal control weaknesses noted or financial statement
adjustments made as a result of the independent audits conducted during the period under
review.
Internal Audit
The Corporation has an Internal Audit Department in place that is managed by an Assistant
28
Vice President and General Auditor to evaluate the effectiveness of risk management,
control, and governance processes. The General Auditor reports functionally to the President
and Chief Executive Officer and the Audit Committee, with administrative reporting to the
Executive Vice President and General Counsel. The General Auditor is expected to meet
with the President and Chief Executive Officer at least quarterly, and semi-annually with the
Audit Committee in Executive Session, to discuss the department’s activities and findings.
During this examination we requested copies of certain reports prepared by the Internal Audit
Department, and we inquired about the status of various findings and related follow-up
procedures. This approach was taken for the purpose of utilizing the resources of the Internal
Audit Department and the work already performed, and to avoid duplication.
29
FINANCIAL STATEMENTS
The financial condition of the Corporation and the results of its operations are presented in
the following financial statements and exhibits:
Comparative Statements of Assets
December 31, 2009 and December 31, 2005
Comparative Statements of Liabilities and Capital and Surplus December 31, 2009 and December 31, 2005
Statement of Revenue and Expenses
Year ended December 31, 2009
Capital and Surplus Account December 31, 2008 to December 31, 2009
Reconciliation of Capital and Surplus
December 31, 2005 to December 31, 2009
Analysis of Examination Adjustments December 31, 2009
30
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Comparative Statement of Assets
December 31, 2009 and 2005
December 31,
2009 December 31,
2005 Increase
(Decrease)
Bonds $410,013,638
$468,594,860
$(58,581,222)
Preferred stocks 205,941 241,000 (35,059
Common stocks 76,758,167 22,868,404 53,889,763 Real estate: Properties occupied by
the company 30,820,444
19,005,641
11,814,803 Cash, cash equivalents and short term
investments 14,388,872
1,170,369
13,218,503
Other invested assets 5,169,448 0 5,169,448
Investment income due and accrued 3,825,923 4,511,722 (685,799) Uncollected premiums and agents’
balances in the course of collection 48,784,004
24,107,631
24,676,373
Accrued retrospective premiums 953,948 747,674 206,274
Amounts recoverable from reinsures 227,948 298,989 (71,041) Receivables from parent, subsidiaries,
and affiliates 302,775
0
302,775 Amounts receivable relating to
uninsured plans 17,790,157
18,247,447
(457,290) Current federal and foreign income
taxes recoverable 6,869,569
3,296
6,866,273
Net deferred tax asset 19,604,715 5,428,549 14,176,166 Electronic data processing equipment
and software 5,356,492
821,994
4,534,498 Health care and other amounts
receivable 16,080,658
10,584,231
5,496,427 Aggregate write-ins for other than
invested assets 21,659,090
17,804,978
3,854,112
Total Assets $678,811,789
$594,436,785
$84,375,004
31
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Comparative Statement of Liabilities and Capital and Surplus
December 31, 2009 and 2005
December 31,
2009 December 31,
2005 Increase
(Decrease)
Claims unpaid $122,846,590
$137,053,161
$14,206,571 Accrued medical incentive pool and
bonus amounts 661,542
75,076
586,466
Unpaid claims adjustment expenses 26,682,473 24,332,567 2,349,906
Aggregate health policy reserves 101,600,000 0 101,600,000
Aggregate health claim reserves 1,188,000 0 1,188,000
Premiums received in advance 25,347,647 24,641,059 706,588
General expenses due or accrued 37,435,188 30,008,495 7,426,693 Current federal and foreign income tax
payable 0
4,813,821
(4,813,821) Amounts withheld or retained for the
account of others 1,890,112
1,155,015
735,097
Remittance and items not allocated 917,565 285,340 632,225 Amounts due to parent, subsidiaries,
and affiliates 1,713,672
0
1,713,672 Liability for amounts held under
uninsured plans 21,967,813
27,237,203
(5,269,390) Aggregate write-ins for other
liabilities 37,839,826
28,932,751
8,907,075
Total Liabilities 380,090,428
278,534,488
101,555,940
Total Capital and Surplus 298,721,361
315,902,297
(17,180,936)
Total Liabilities, Capital and Surplus $678,811,789
$594,436,785
$84,375,004
32
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Statement of Revenue and Expenses
Year ending December 31, 2009
Net premium income $1,703,431,639
Hospital and Medical:
Hospital/medical benefits 1,052,434,475
Professional services 26,880,014
Emergency room and out-of-area 141,880,039
Prescription drugs 196,644,185 Aggregate write-ins for other non-health
revenues 50,634,829
Net reinsurance recoveries (354,396)
Total hospital and medical 1,468,119,146
Claims adjustment expenses 89,814,615
General administrative expenses 170,246,019 Increase in reserves for life and accident and health
contracts 101,414,000
Total underwriting deductions 1,829,593,780
Net underwriting gain or (loss) (126,162,141)
Net investment income earned 20,582,194
Net realized capital gains (losses) (3,893,802)
Net investment gains (losses) 16,688,392
Aggregate write-ins for other income or expenses 4,417,521
Net income or (loss) before federal income taxes (105,056,228)
Federal and foreign income taxes incurred (5,111,809)
Net Income (Loss) $(99,944,419)
33
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Capital and Surplus Account
December 31, 2008 To December 31, 2009
Capital and Surplus, December 31, 2008 $412,317,769
Net income or (loss) (99,944,419)
Change in net unrealized capital gains (losses) less capital gains tax 21,634,554
Change in net deferred income tax 5,473,615
Change in nonadmitted assets (34,208,578) Change in unrecognized prior service cost (6,551,580)
Net change in capital and surplus (113,596,408)
Capital and Surplus, December 31, 2009 $298,721,361
34
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Reconciliation of Capital and Surplus
December 31, 2005 To December 31, 2009
Capital and Surplus, December 31, 2005 $315,902,297
Increase
(Decrease)
Net income 54,888,350
Change in net unrealized capital gains or (losses) 10,892,135
Change in net deferred income tax 4,837,055
Change in non-admitted assets (98,889,379)
Other comprehensive income 18,635,942
Change in unrecognized prior service cost (6,392,956)
Change in pension plan intangible asset (1,152,083)
Net decrease in capital and surplus for the period (17,180,936)
Capital and Surplus, December 31, 2009 $298,721,361
35
BLUE CROSS & BLUE SHIELD OF RHODE ISLAND Analysis of Examination Adjustments
December 31, 2009
The examination of the Corporation, performed as of December 31, 2009, did not disclose
any material misstatements to the financial statements contained in its 2009 Annual
Statement filing. Accordingly, the amounts reported by the Corporation have been accepted
for purposes of this report.
36
ASSETS
Bonds $410,013,638
The above amount is the net admitted value of bonds held by the Corporation and is the same
as that reported in its 2009 Annual Statement. All of the bonds owned at year-end 2009 are
held in accordance with custodial agreements with third parties.
The above amount includes several U.S. Treasury Notes with a total par value of
$22,407,000 that have been pledged as collateral. Securities with a total par value of
$21,325,000 are pledged to satisfy The Blue Cross and Blue Shield Association’s
membership standards for out-of-area provider claim settlements. A U.S. Treasury Note with
a $500,000 par value is on deposit with the Department of Labor - Self Insurance Unit, as
collateral for the Corporation’s run-out of the self-insured workers’ compensation program.
Further, a U.S. Treasury Note with a $582,000 par value is on deposit with the State of
Rhode Island Department of Human Services Office of Managed Care relating to the
Corporation’s administration of the State of Rhode Island managed Medicaid program,
RiteCare.
Ninety-eight percent (98%) of all bonds in the Corporation’s portfolio at December 31, 2009,
were rated either “1” or “1FE by the National Association of Insurance Commissioners
Securities Valuation Office (“SVO”). All other bonds, with the exception of one bond rated
“3FE” with an admitted value of $1,999,832, were rated either “2” or “2FE.” A rating of “1”
is assigned to those bonds exhibiting the “highest” quality, and bonds rated “2” are
designated as “high” quality. The “FE” indicator signifies that the security is exempt from
37
filing with the SVO in accordance with Part Four, Section 2 of the Purposes and Procedures
Manual of the NAIC SVO (“Manual”), and the NAIC designation was arrived at by
converting the NAIC Acceptable Rating Organization (“ARO”) rating(s) into a
corresponding NAIC designation in accordance with Section 4 of the Appendix to the
Manual, or by the NAIC comparing the security with the ARO rating feeds.
The amortized book value of bonds owned at December 31, 2009, represents 60.4% of the
Corporation’s total admitted assets. The book value, fair value, actual cost and par value of
the bond portfolio at December 31, 2009, are as follows:
Book Value Fair Value Actual Cost Par Value
$410,013,639 $425,924,793 $412,046,644 $405,843,212
Common Stocks $76,758,167
The above amount is the same amount as reported by the Corporation in its 2009 Annual
Statement.
The asset reported at December 31, 2009 consists of the Corporation’s investment in various
publicly traded common stocks totaling $74,516,548, in addition to the following three
privately held common stocks; BCS Financial Corporation, Plans’ Holding Corporation, and
Plans’ Liability Insurance Company. The total carrying value of the privately held common
stocks is $2,241,619 which is 2.9% of the total common stock portfolio.
Real Estate $30,820,444
The above amount, which is comprised of property occupied by the Corporation is the same
38
amount reported in its 2009 Annual Statement. Blue Cross completed construction of its new
corporate office building and a certificate of occupancy was granted on August 17, 2009. As
of December 31, 2009 total construction costs have amounted to $121,098,752,
encumbrances are $89,490,495 with depreciation of $787,813.
LIABILITIES
Claims Unpaid $122,846,590 Unpaid Claims Adjustment Expenses $26,682,473 The above amounts are the same as those reported in the Corporation’s 2009 Annual
Statement. The reserve calculation prepared by the Corporation was reviewed by Lewis &
Ellis, Inc. (“L&E”), consulting actuaries for the State of Rhode Island Insurance Division.
L&E relied upon the underlying data reported by the Corporation and their analyses included
a review of the actuarial assumptions and methods used by the Corporation in determining
the reserves, and such tests of actuarial calculations as deemed necessary. The in-force and
claims data provided by the Corporation was relied upon by L&E.
In assisting L&E with their analysis, the examiners either independently performed or relied
upon the procedures performed by the Company’s independent accounting firm to verify the
integrity of the Company’s claims data, including completeness testing. A combination of
subjective and statistical sampling techniques was utilized in testing the claims data, as
deemed appropriate.
39
CAPITAL AND SURPLUS
Capital and Surplus $298,721,361
The above amount is the same as that reported by the Corporation in its 2009 Annual
Statement, and consists of the following:
Unassigned Funds $298,721,361
40
SUBSEQUENT EVENTS
A review of the minutes of the Board of Directors’ meetings for the period subsequent to the
examination period was performed to ascertain whether any subsequent events have occurred
which would have a material impact on the Company’s operations or financial statements. In
addition, an inquiry was made of the Company’s management regarding subsequent events.
Based upon our review, the following significant events occurred subsequent to the period
covered by this examination:
Changes in Management
• At the March 11, 2010 meeting of the Board of Directors, Shanna Marzilli, Vice
President of Operations and Strategic Planning, was promoted to Senior Vice
President.
• At the April 24, 2010 meeting of the Board of Directors, Robert G. Norton and Randy
Wyrofsky were elected to the Board of Directors.
• At the July 15, 2010 meeting of the Board of Directors, Kevin Reddy was elected to
the Board of Directors.
• At the September 2, 2010 meeting of the Board of Directors, Christopher Bush was
appointed Vice President of Underwriting, replacing Thomas Boyd.
• At the December 9, 2010 meeting of the Board of Directors, Monica Neronha was
appointed Vice President of Legal Services and Paul Hanlon was appointed Vice
President of Information Technology.
41
RIteCare Program
On August 17, 2010 Blue Cross announced that it was withdrawing from RIteCare, Rhode
Island’s state-run Medicaid program. The decision to withdraw from RIteCare was due to
resource concerns and the impact that new RIteCare obligations would have on the Blue
Cross’ ability to sustain its focus on other key initiatives.
Market Conduct Examination - Small Employer Group Rating Practices
In 2008, the Office of the Health Insurance Commissioner (“OHIC”) initiated a market
conduct examination to assess Blue Cross’ compliance with R.I. General Laws §27-50, the
Small Employer Health Insurer Availability Act, with regard to rating factors used by the
Blue Cross, including health status used as a rating factor. The market conduct examination,
which was completed in 2010, concluded that Blue Cross’ rating formulas set the health
status too low for most groups and too high for others. This resulted in many groups being
undercharged and some groups being overcharged. In March 2010, a settlement was reached
with OHIC whereby Blue Cross was required to make restitution of nearly $1,800,000 to
groups which were overcharged, and pay an administrative penalty of $325,000.
42
CONCLUSION
We have applied verification procedures to the data contained in this report using both
subjective and statistical sampling techniques as deemed appropriate. While sampling
techniques do not give complete assurance that all errors and irregularities will be detected,
those that were detected during the course of this examination have been disclosed in this
report. We were not informed of, and did not become aware of any other error or irregularity
that could have a material effect on the financial condition of the Corporation as presented in
this report.
Acknowledgment is made of the assistance rendered by Lewis & Ellis, Inc., the Insurance
Division’s consulting actuaries.
Assisting in the examination with the undersigned were John Tudino, Jr., CFE, CIE, CFSA,
Insurance Examiner-In-Charge; and Emilia Giorno, Insurance Examiner, representatives of
the Rhode Island Insurance Division.
Respectfully submitted,
___________________________
David A. Paolantonio, CFE, CFSA, CISA, AES Insurance Examiner-In-Charge Rhode Island Insurance Division