Senate Health Policy Committee

Coalition for Access and Affordability Testimony

January 30, 2008

Joseph T. Aoun, Esq.Nuyen, Tomtishen and Aoun, P.C.Northville, MI

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Approaches to Address the Difficult to Insure

High Risk Pools & Insurers of Last Resort:

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CAAM is a group of private insurers who value promoting health care reform in Michigan

CAAM believes in Health Insurance Reform that: Assures Affordable Health Care Increases Access to Health Care Provides for Competition and Choice Provides for Transparency Promotes Accountability, Health and Wellness

Coalition for Access & Affordability in Michigan

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High Risk Pools and Insurer of Last Resort Two options

Each represent a different approach to addressing the problem of covering the “uninsurables”

Mutually exclusive Option One: Michigan can create a high

risk pool and eliminate the role of BCBSM as insurer of last resort.

Option Two: Michigan can continue current approach—BCBSM as insurer of last resort.

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High Risk Pools and Insurer of Last Resort

Both Option One and Option Two involve important tax policy considerations Option One/High Risk Pools need broad based financing

Assessing insurers or providers to fund the pool is essentially a tax

Option Two/Insurer of Last Resort Obligation is part of quid pro quo for state and local tax-

exemption

Option One and Option Two have significantly different public policy aims Focus of High Risk Pool is covering uninsurables Insurer of Last Resort obligations is part of a broader state

policy to improve access and quality and lower costs for “all state residents”

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High Risk Pools and Insurer of Last Resort

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

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High Risk Pools and Insurer of Last Resort Choosing Option One/High Risk Pools

entails Developing a broad based financing

mechanism Insurer assessments, provider taxes/surcharges

Determining the extent to which assessments will affect Michigan business tax liability of insurers and providers

Establishing an effective governing body Developing criteria for eligibility Changing HIPAA designations

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High Risk Pools and Insurer of Last Resort Choosing Option One/High Risk Pools

entails Determining the extent to which BCBSM should be

subject to state and local (property) taxation If subject to taxation, should it remain nonprofit or be

converted to for-profit? Would the state benefit from a for-profit conversion and sale?

BCBSM Surplus “belongs to the residents of the state of Michigan” (nearly $3.0 billion). A sale would involve a considerable multiple of that amount

The experience of other states Blue Cross plan is subject to state taxation where there is a

high risk pool Blue Cross conversions and funding of trusts to provide or

finance health care coverage

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High Risk Pools and Insurer of Last Resort Choosing Option Two/Insurer of Last

Resort entails Evaluating the benefits of the tax-exemption

in light of the burden of being insurer of last resort

Determining whether to strengthen the social mission focus of BCBSM in light of PA 350 objectives regarding cost, quality and access

The experience of other states Pennsylvania—Ensuring assets directed to health

coverage for the uninsured Community Health Reinvestment Agreement

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

Not everyone who buys individual coverage is “sick” or has above average health care costs

Not everyone who selects the Insurer of Last Resort is “uninsurable” If the Insurer of Last Resort offers an attractive

product in terms of pricing, benefits and participating providers, it will attract “good” risk

In contrast, the High Risk Pool only insures unfavorable risk

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Common Considerations under Option One and Option Two: Market Shares Approximately 388,000 people insured,

approximately 35% with BCBSM and its HMO affiliates (BCN and M-Care).

HMOs cover approximately 1.7% Commercial insurers cover

approximately 63.3% BCS Life Insurance Company, in which

BCBSM has an indirect ownership interest, insured approximately 19.5% of the market

No other commercial insurer had more than a 6% market shareSource: OFIS Form 0322 filed by all carriers (2006)

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Commercial Market Share of BCBSM and Affiliates (Individuals + Groups)12/31/06 Market Share:

Total Residents per Census Bureau 9.9 millionLess Medicare beneficiaries per CMS (1.5 million)Less Medicaid recipients under age 65 (estimated) (1.3 million)

Commercial Population 7.1 millionLess Uninsured (per Census Bureau) (1.0 million)

Insured Commercial Population 6.1 millionBlue Cross, BCN and M-Care Commercial Enrollment 4.3 million

Market share of Insured Commercial Population 70.5%

Sources: U.S. Census Bureau; Centers for Medicare and Medicaid Services; Michigan Department of Human Services; BCBSM and affiliates filings with OFIS.

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Common Considerations under Option One and Option Two: Regulation Guaranteed issue

BCBSM unique under state law (Insurer of Last Resort) and HIPAA (alternative mechanism)

HMOs have a guaranteed issue obligation subject to certain limits

Guaranteed renewal and group conversion All companies treated the same

Premium rating Community rating by BCBSM and HMOs

Age rating by BCBSM Health status by commercial carriers

Pre-existing condition limitations BCBSM must waive for HIPAA eligibles; otherwise 6

month limit HMOs 6 month limit; commercial carriers 12 month limit

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Common Considerations under Option One and Option Two: Financial Burden While having to insure “all comers” presents

a risk of adverse selection and losses, this burden is mitigated in the case of BCBSM due to Tax-exemption Lower provider rates of payment Large enrollment—nearly 5 million individuals—

thus improving ability to spread risk and initiate successful care management programs

Group profits Over the past five years, BCBSM has earned more than

$1.0 billion in commercial business underwriting profits

Source: BCBSM Annual Statements 2002--2006

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Common Considerations under Option One and Option Two: Financial Burden In 2006, BCBSM covered approximately

124,000 individuals, more than half of whom were group conversion members As noted above, group conversion obligations are

the same among all carriers; many carriers experience losses in this segment

In the nongroup or classic individual market, BCBSM projected a loss of $6.5 million for 2006. Substantially less than value of tax-exemption De minimus in relation to overall profitability of

BCBSM The loss would be even less after taking into

account investment income and subsidiary incomeSources: BCBSM Nongroup Rate Filing, dated October 24, 2006;BCBSM Medicare Supplement Rate Filing, dated February 8, 2007.

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Common Considerations under Option One and Option Two: Financial Burden From 2002 through 2006, Blue Cross has

made $1.85 billion (pre-tax), more than one million dollars a day:

Consolidated Net Income (GAAP)(before federal income taxes)

2006: $279.6 M2005: 337.32004: 497.52003: 440.0

2002: 292.9

Sources: BCBSM 2002 – 2006 Audited Financial Statements

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Capital and Surplus/Fund Balance GrowthBCBSM Consolidated Surplus (GAAP)

(Billions of Dollars)

2.84

1.30

0.00

1.00

2.00

3.00

2001 2006

Source: BCBSM 2001 and 2006 Annual Statements

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Individual Market Reform: Challenges and Considerations

Michigan statistics show that 73% of households with an uninsured member include at least one full-time working adult. An estimated 60,000 Michigan

households have a worker eligible for employer-provided insurance who fails to “take-up” coverage. Over 65% of the time, such workers fail to take-up coverage because they cannot afford their share of the cost of coverage

Source: Michigan State Planning Project for the Uninsured, Report dated August 2006.

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Individual Market Reform: Challenges and Considerations

The challenge in the individual market is to improve affordability, not to change the mechanism for covering the “uninsurables”

The financial impact associated with the uninsurables is considerably less than the financial impact associated with the uninsured

Less than 1% of the state’s population is uninsurable, yet more than 10% of the state’s population is uninsured

Families USA estimated that, in 2005, the cost of the uninsured in Michigan was $1.1 billion, and that private health insurers picked up two thirds of this cost

Source: Paying a Premium: The Added Cost of Care for the Uninsured, Families USA, June 2005.

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Individual Market Reform: Challenges and Considerations

Competition lowers costs, and the Michigan individual market is fairly competitive BCBSM’s market share (about 35%) is the

largest, but it is half of its overall commercial market share (about 70%)

The largest factor driving premiums is claims cost Risk of higher utilization can be mitigated by

lower provider rates (BCBSM) Risk of higher provider rates can be

mitigated by favorable utilization (HMOs and commercial insurers)

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Individual Market Reform: Challenges and Considerations

In assessing the position that reform is necessary to “level the playing field” Is regulatory consistency appropriate where

BCBSM, HMOs and commercial insurers all have different statutory objectives and mandates?

Even if there was regulatory consistency, will that truly level the playing field where there are important other differences, such as Provider payment rates Tax benefits/burdens

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Individual Market Reform: Challenges and Considerations

In assessing the position that the individual market losses undermine BCBSM financial strength Are the losses substantial and can they be mitigated

through proper management? How much is due to Insurer of Last Resort obligation?

Not all individuals buying coverage from BCBSM are doing so because they cannot get coverage elsewhere

Do other carriers have similar losses, e.g., conversion coverage?

How much is due to business decisions? What is BCBSM’s capital and surplus level and is it

excessive? Has BCBSM deployed its capital and surplus in a

manner to promote lower cost coverage to all residents?