In the news: editorial in support of AB 52
July 1st, 2011
Nonprofit Insurers: Reaping Profits at the Expense of the Consumer
by Wendell Potter, from the Huffington Post
Nowhere are health insurers working harder to thwart reforms that could save consumers billions of dollars than in California. One measure they are especially determined to kill is a bill that would give state regulators the authority to reject rate increases that were excessive or discriminatory.
The California Assembly passed a bill to do just that earlier this month over the intense opposition of insurers, including the state’s biggest supposedly nonprofit health plans: Blue Shield of California and Kaiser Permanente.
Kaiser alone has spent $700,000 so far this year lobbying lawmakers in Sacramento. It undoubtedly will be spending quite a bit more this summer to persuade state senators to vote against the rate control bill. And if any health plan can pull it off, it’s Kaiser, which has the biggest market share in the state and is also one of the country’s most profitable insurance companies.
According to public filings, Kaiser has made a whopping $5 billion in profits since 2009. That’s more than all but a small handful of the country’s for-profit insurance corporations have made. During the first three months of this year, Kaiser made more than $920 million in profits. Yet because it has been able to maintain its legal structure as a nonprofit, it doesn’t pay taxes on that money like the for-profits do.
One of the ways the company has been able to keep profitability strong is by demanding double-digit rate increases from its customers. Earlier this year, Kaiser announced it would raise rates on many of its policyholders in California by as much as 23 percent. No wonder it doesn’t want the state’s insurance commissioner to have the power to say “no” to such increases.
So just how did it happen that Kaiser and many of the country’s other nonprofit health plans, especially the Blue Cross and Blue Shield plans, get to be so profitable?
According to Andy Kurz, former chief financial officer of Blue Cross of Wisconsin who, like me, has become a vocal critic of insurance companies, you can blame it on Wall Street, even though the nonprofits are not publicly traded companies.
Several years ago, Kurz told me, Wall Street financial wizards figured out a new way to make money by getting a lot of the Blues plans to convert to for-profit status.
“They scared the bejesus out of many of the nonprofit health insurers, several of which had slim reserves at the time,” Kurz said. “They explained that by changing to for-profit, they could raise equity, add that to their reserves and go out and get more business. It would be a win-win. Except that now for-profits also had to raise premium rates more to pay off public shareholders and provide higher compensation for their executives.
“What happened over the decades is that a rising tide lifts all boats,” said Kurz. “Nonprofits found they could raise their rates and still be competitive by riding the coattails of for-profits. Nonprofits can’t pay dividends or buy back stock, so they simply add the surplus to their reserves.” State regulators require insurers to keep a percentage of revenues in reserve for solvency purposes.
“Of course with fat reserves, you can afford more generous compensation and perks and still have money to spare,” Kurz added. “Net-net: far too much fat and waste in the whole system.”
Kaiser’s CEO’s $8 million in compensation puts him in the same league as the CEOs of the biggest for-profits. Blue Shield of California and many of the other nonprofit Blues around the country are also doing quite well, thank you.
As a Consumers Union analysis found last year, seven out of 10 nonprofit Blues plans had at least three times more in reserves than regulators required. To be able to maintain that level of profitability, nonprofit health plans have to hike rates just as high and just as often as their for-profit competitors.
That’s why they don’t want state insurance commissioners having any more regulatory authority than they currently do, which is really precious little.
And that’s also why they’re spending millions of their policyholders’ premiums lobbying lawmakers to keep things just as they are.