Focus, Government, and Health Care

New Blue Cross likely to have higher premiums

Upcoming insurance exchange could put policy providers under a white light.

March 29, 2013
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After 75 years of operating as a tax-exempt nonprofit organization, Michigan’s largest health insurer, with 4.4 million members, will become what state lawmakers have called a “customer-owned nonprofit.”

But what exactly does that mean and how will the changes the Legislature made to Blue Cross Blue Shield of Michigan impact premium costs?

In addition, how will the state’s new health insurance exchange, required by the Patient Protection and Affordable Care Act, affect insurance prices for businesses and consumers across Michigan?

Both the new BCBSM and the PPACA exchange are expected to go into effect next year.

As for the legislators’ novel structural designation for BCBSM, it’s sort of a gimmicky new way to identify a longstanding existing operational status.

“They are going to be a mutual insurance company, a company that is owned by its customers. There are also companies that are owned by its stockholders and these are called a stock company. So BCBSM is going to be treated just like any other company,” said Mike La Penna, principal of the La Penna Group Inc., a health care business development firm in Grand Rapids.

“It may be a nonprofit, but by nonprofit, they’re just saying there is no stockholder dividend. So when they’re using the term ‘nonprofit,’ they’re really meaning ‘non-stock.’ They are paying taxes at the local and state levels, just like anybody else does,” he added.

“It’s going to change from the Blue Cross Blue Shield charter-type company that was enabled by the state to have special status to a company that is going to be just like a regular normal insurance company.”

The structural change will require BCBSM to pay an estimated $1.8 billion in state and local taxes over 18 years. The new entity will also contribute $1.6 billion over the same timeframe to an endowment fund. Legislators reportedly have defined the fund as a way to improve the access to care.

La Penna said the endowment requirement was abnormal for a nonprofit entity and is more associated with a nonprofit that changes to a for-profit format. When that happens, the funding requirement is seen as somewhat of a “make good” for all the years a nonprofit hasn’t paid taxes and hasn’t funded such things as public infrastructure improvements.

“So somebody in their wisdom said we’ll recognize this benefit that we gave Blue Cross Blue Shield in building up this huge base of business here in Michigan. But in order to do that, we’ve got to put them back on firm footing and we’ve got to really show people that we’ve recovered some value for all the time and all the years they didn’t have to pay taxes,” said La Penna of the lawmakers’ action. “An endowment is a way to do that.”

The newly designated “customer-owned nonprofit” is looking at about $190 million in new annual tax and endowment expenses, if those projections are correct, because of the legislative change. It’s all but certain BCBSM will try to recoup those expenditures through higher coverage charges.

“Yes, it’s going to be picked up, just like UnitedHealth insurance pays taxes and Cigna pays taxes. So if I go to Blue Cross Blue Shield, part of my premium is going to go to that,” said La Penna, who added that it’s too early to know what the premium increase will be.

Consumers Union and Michigan Attorney General Bill Schuette have already gone on record saying the change will raise rates, especially for seniors who get Medigap coverage from BCSBM. Schuette tagged that hike as a 66 percent increase and said the legislation lets the insurer stop offering Medigap policies in 2016.

“There is a limitation on what they can pass through because the people to whom they’re passing it will elect to choose another insurance company. They’re already a pretty high-priced option,” said La Penna.

“You and I are trapped with a utility increase, but Blue Cross Blue Shield is not a utility. I can go out and buy insurance from any number of different places. Plus the health care act (President Barack) Obama put in place is going to require lots of the insurance companies to participate in these exchanges and be more open in accepting me as a client. So the playing field will be more level.”

La Penna said because there isn’t any real transparency in premium pricing and an open marketplace doesn’t really exist, he believes the exchange is going to have a dampening effect on rates. He took that position because the exchanges are being offered on a state-by-state basis and that should treat the insurance product as more of a commodity rather than a brand-type product.

“We are going to have much more information available to consumers and businesses about how much insurance costs and what the medical-loss ratios are,” said La Penna. “So more information always gives the consumer — whether that is a business or a private individual — more power, more control and more of a fluid marketplace, which we have never had with insurance before. We’ve certainly never had it in Michigan.”

La Penna also sees the exchange as helping human resource directors optimize spending on insurance. He felt they will be able to give company CEOs and municipal boards more than the latest percentage increase. They will be able to compare and rank where a company or government stands with others in the amount each pays for coverage.

“The question being asked now is, with this new exchange does that give us the opportunity and time to change? Is this the time to consider who our carrier is? That discussion is going on in every venue. That’s the thing that’s going to make some change because Blue Cross Blue Shield and UnitedHealth and Cigna and Priority are now really under a white light,” he said.

One feature of the exchange that some might feel is missing is the public insurance option that would have been based on the Medicare model. It would have offered lower premiums because its overhead is a fraction of the private firms. But La Penna felt that a different version of a public option will emerge from the exchange.

“The public option that was anxiety producing in 2010 would have been a national thing and could have had a Medicare-like impact. I think what we’re defaulting to now, if you said if I’m in Michigan, is there going to be a public option,” he said.

“Almost certainly there is going to be something that is like an expansion of Medicaid or an expansion of some sort of state-sponsored type of option because the insurance companies, I don’t think, are going to be able to absorb the additional people.”

Had the public option gone forward, La Penna said it would have given CMS, the centers for Medicare and Medicaid payments, a lot more power. He said that option would have also centralized the system around the single-payer concept that other nations have adopted but the U.S. has avoided to the point of having the world’s most expensive medical system.

“It would have put another 40 or 50 million Americans in some sort of public option that was workable and like Medicare. I think many employers would have looked at it and said, ‘All I need to do is allow that public option to be somewhat paid for by my support for employees and let them go out and choose that.’ And that would have been the standard-setter for rates and the standard-setter for provider payments and stuff like that,” he said.

“So I think it was an unfortunate political battle lost. We don’t have a common standard. The public option would have given us a universal benchmark.”

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