Blue Shield

By Chad Terhune
March 27, 2015

With billions of dollars in reserve, nonprofit insurer Blue Shield of California is facing new pressure to offer better prices for its policies.

Despite its nonprofit status, the health insurance giant is usually on par or priced slightly above its for-profit rivals, according to a review of rates and interviews with insurance agents and industry officials.

That pricing trend can be seen at the state’s two biggest buyers of healthcare: the California Public Employees’ Retirement System and the state’s Obamacare exchange. Together, they provide health benefits to nearly 3 million people, and they’ve been putting pressure on health plans to rein in costs.

The San Francisco insurer’s premiums are drawing renewed scrutiny since the California Franchise Tax Board stripped Blue Shield of its longtime exemption for state income taxes after an audit.

Blue Shield is protesting that decision and said it plans to remain a nonprofit health plan. Meantime, the company said it has already paid $62 million in back taxes to the state for 2013 and 2014.

The tax ruling has sparked public debate about whether the nonprofit is fulfilling its stated mission of ensuring Californians “have access to high-quality healthcare at an affordable price.” There are calls for Blue Shield to draw on its $4.2 billion in financial reserves and reduce what it charges employers and consumers.

Many families and businesses say they would welcome some relief after years of big rate hikes. Since 2013, state regulators have deemed three Blue Shield rate increases unreasonable, but officials have no authority to block them.

“Blue Shield could adjust their premiums lower than for-profit companies and make that one way to fulfill their public mission,” said Glenn Melnick, a healthcare economist and professor at USC. “That could stimulate more price competition across the market.”

For its part, the state’s third-largest health insurer said its rates are appropriate and reflect the rising cost of medical care. It also rejects the notion of tapping reserves to lower premiums as unsustainable.

Blue Shield has already earmarked a big chunk of its surplus for an acquisition. It agreed in December to buy Care1st, a Medicaid managed-care plan, for $1.2 billion and expects to complete the deal this year.

“Our prices are a direct result of the cost of healthcare,” said Blue Shield spokesman Steve Shivinsky. “Hospitals and pharmaceutical companies don’t charge us differently because we are a nonprofit.”

Shivinsky said drawing on the company’s financial cushion could send the wrong signal to medical providers that they don’t need to control their spending.

“It’s unreasonable to think we would tap the company’s savings account to artificially lower our rates,” he said.

Blue Shield also notes that it already capped its profits at 2% of its annual revenue and returned $560 million to customers and community groups from 2010 to 2012. Overall, the company has 3.4 million customers and posted $13.6 billion in revenue last year.

Richard Haight, an insurance broker in Sylmar, said Blue Shield deserves credit for those rebates and he said the company is more responsive than its competitors when a problem arises.

“I think their commitment to reduce total profit to 2% of gross revenue was a step in the right direction,” he said.

Employers and consumer groups have also complained about the high cost of California’s other big nonprofit health plan, HMO giant Kaiser Permanente.

But Kaiser, which also runs its own hospitals and physician offices, dropped its rates 4% this year at CalPERS and 1.4%, on average, in the Covered California exchange. Blue Shield’s rates went up in both places.

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