Blue Cross — what’s next? (continued)

ALTHOUGH HIS GOALS are not as far reaching as Maryland’s law, Attorney General Patrick Lynch is considering legislation to regulate Blue Cross’s reserves. Currently, the Department of Business Regulation regulates reserves simply to guarantee that insurers do not go bankrupt.

In December 1999, at the end of its price war with Harvard Pilgrim, Blue Cross’s reserves were down to $101 million, according to DBR records, but they have grown quickly since then. By 2006, Battista hopes to boost them to $450 million, or about 22 percent of annual premium. Pointing to two company-financed studies, Battista says this target is a sensible level. If DBR hired a reputable accounting firm to analyze Blue Cross’s reserve levels, it would reach the same finding, insists Battista, adding, "I guarantee you."

But Lynch still wants to determine "how high is enough" when it comes to reserves. Prior to its repeal in 2000, state law barred Blue Cross from amassing more than three months of premiums as reserves. Only Minnesota, which caps reserves at four months of premiums, currently limits reserves for nonprofit insurers, according to Melissa Lopes, a Community Catalyst staff lawyer.

Even Blue Cross critics like The Hospital Association of Rhode Island’s Quinlan and Newell Warde, executive director of the Rhode Island Medical Society, hesitate to charge that Blue Cross’s reserves are too high. Instead, they say the reserves were accumulated too quickly, unfairly depriving hospitals and doctors of higher fees. Similarly, Lynch calls Blue Cross’s recent cash accumulation, "too steep." To solve the problem, he is working with the DBR on legislation to regulate the rate at which companies can accumulate reserves. Companies with low reserves should be allowed to increase them rapidly, Lynch says, but once a safe level is reached, the rate of accumulation should slow.

Although DBR director McConaghy says Lynch’s idea "makes sense conceptually," she declines to discuss any DBR legislative proposals, because they are awaiting approval by Governor Donald Carcieri.

Lynch, the first-term AG, is also considering proposals to regulate what Blue Cross can do with its reserves. Blue Cross should not be allowed, he says, to use reserves to build a new hospital in northern Rhode Island — a project, Battista says, that remains under discussion with Roger Williams and Landmark medical centers. Finally, Lynch wants to require Blue Cross to place a third of its reserves in an escrow account under state control, in case the company ever collapses financially.

State Senator Elizabeth Roberts (D-Cranston), chair of the Senate’s Health and Human Services Committee, is also drafting legislation concerning Blue Cross. "Regulation should not be solely based on solvency," she says, referring to DBR’s current watchdog role. The affordability of health insurance also needs to be considered, she states. Roberts also believes that DBR needs more money to operate. "Government does not have adequate resources to really represent the public," she says. In particular, she notes that DBR needs a full-time actuary to examine the financial condition of insurers. Currently, the agency hires consultants.

"We’ve been saying that for years," agrees McConaghy. "It’s a huge hole [in DBR’s regulatory staff]." The department currently charges banks and insurance companies when examiners look at their finances and market conduct, McConaghy observes, so the legislature could easily require industry to pay for an actuary, thereby minimizing state personnel costs.

Staffing may be inadequate in other areas, Roberts says, and McConaghy, who is in her fourth year as DBR’s director, readily agrees. In early 1990s, the agency had 135 full-time employees, she says, but with an ongoing cap on hiring, it employs only 104. To further strengthen insurance regulation, the Rhode Island Medical Society will propose, Warde says, that the state create a cabinet-level department of insurance.

As DBR director, McConaghy, a former state senator and insurance company lobbyist, already has wide powers to hold hearings on reserves, but she insists that DBR should only guarantee insurer solvency. "We’re not here to make policy about reserves," she says firmly. "That’s a legislative function."

Legislators, however, are certain to propose changes in the way that Blue Cross operates. State Senator James Sheehan (D-North Kingstown), vice chair of the Health and Human Services Committee, says he is working on a related bill, but declines to specify the details. He proposed last year that any insurance company with more than 51 percent of the market should be regulated like a public utility. Representative Brian Kennedy, chairman of the House Corporations Committee, says he is unaware of any House proposals at this point.

The Rhode Island Medical Society hopes to find legislators to resubmit its Health Care Fairness Act, which would allow doctors to join together, under the supervision of the attorney general, to bargain with Blue Cross. (State anti-trust law currently bars doctors and other providers from joint negotiations.) Large insurers’ power "to unilaterally impose provider contract terms jeopardizes the ability of physicians and other health-care providers to deliver the superior health-care service," the 2003 legislation states. Joint bargaining would also give doctors more power, Warde says, to increase Blue Cross payments for office visits and medical procedures.

Whitehouse, who helped draft the bill while he was attorney general, says much of the conflict between doctors and Blue Cross stems from a power mismatch. "It’s like the tanks against the cavalry," he says. "That is enough to be pretty annoying."

But Whitehouse’s vision of joint negotiating is different from Warde’s. Although the former prosecutor envisions improving health-care delivery, like encouraging emergency rooms to quickly provide antibiotics, by banding doctors together, he believes the joint efforts should not negotiate higher fees for office visits. AG Lynch supports the bill, but worries about its cost to the attorney general’s office. "It needs a lot more work," he concludes.

Battista is less enthusiastic. He would support reimbursement hikes, he says, for doctors whose patients consistently recover more quickly from certain illnesses. He notes, too, that while Blue Cross suffers the brunt of doctors’ criticism, it pays them eight percent to 13 percent more than United.

WINNING BATTLES with Blue Cross at the State House will be difficult since the corporation is a major player on Smith Hill. In 2003, it had five paid lobbyists and contributed thousands of dollars to political campaigns through its political action committee, CAREPAC of Rhode Island. The PAC averaged $4485 a year in such contributions over the last three years, according to campaign finance reports, but even more money — an average of $8318 a year — comes from Blue Cross’s executives. Battista leads by example, having contributed $2914 to candidates and CAREPAC since January 2001.

Most of the money goes to legislators. Over the last three years, the largest recipients of contributions from CAREPAC and Blue Cross employees was the trio of men who will play key roles in the upcoming health-care debate. Carcieri received $5400, Senate President William Irons collected $4100, and Senate Majority Leader Joseph Montalbano received $3950. Embattled Senator John Celona (D-North Providence), who was on drug store giant CVS’s payroll while his committee considered pharmacy choice bills opposed by Blue Cross and CVS — and who has temporarily resigned as chairman of the Senate Commerce, Housing and Municipal Government Committee — received $2325.

Not all the action with Blue Cross will be at the State House. In early December, the Rhode Island Medical Society endorsed a lawsuit, being prepared by Providence lawyer Don Wineberg, against Blue Cross. In January, the physician advisory committee working with Wineberg will ask Rhode Island’s some 2000 physicians to join the case. The class-action suit will allege that Blue Cross illegally used its near-monopoly power to raise premiums and freeze payments to doctors.

The suit seeks three remedies, Wineberg says. First, the group wants to average Blue Cross payments in Massachusetts and Connecticut to set a floor for reimbursement rates. A recent study by the Massachusetts Medical Society indicated that payments to Providence doctors for 32 selected services in 2002 were about half those received by doctors in Hartford, Boston, Manchester, New Hampshire, and Portland, Maine.

Second, Wineberg says, the group wants to be paid damages, "On the theory that Blue Cross reserves were illegally expanded by abuse of its monopoly power." Lastly, he says, the suit wants to change the selection and payment of Blue Cross board members. Currently, Frank Montanaro, board chairman and president of the Rhode Island AFL-CIO, receives $15,000 a year, while board members get $12,500 a year, according to Scott Fraser, a Blue Cross assistant vice president. They also receive $750 for each board and committee meeting that they attend, Fraser adds. The lawsuit, Wineberg says, seeks a more public selection process — like one recently adopted in Maryland — for board members. (In his ProJo op-ed, Fraser wrote that 98 percent of Blue Cross Blue Shield plans pay outsider directors, and that making these payments as a substitute — instead of offering lifetime health insurance for board members — represents a savings.)

A second lawsuit, already underway, may also affect Blue Cross’s behavior. In June 2002, Blue Cross negotiated a contract to provide health insurance to members of the Rhode Island Interlocal Intergovernmental Trust, a risk-sharing pool of more than 30 cities and towns. Under the deal, according to legal documents, any municipality purchasing health insurance through the trust is penalized if it buys dental insurance from anyone other than Blue Cross. In the agreement’s first year, the penalty is $2.31 per member, per month. The fee then rises annually, according to a portion of the contract cited in legal documents, reaching $7.56 per member, per month, in July 2006.

Rhode Island’s leading dental insurer, Delta Dental of Rhode Island, sued in Superior Court to declare the contract illegal under anti-trust law. Delta argues that Blue Cross was illegally using its power in the health insurance market to force customers to buy its dental insurance. Disputing Delta Dental’s view, the intergovernmental trust has cited the dental plan as a voluntary option. The lawsuit has yet to go to trial, but Lynch says he will use the outcome to guide future anti-trust regulation of Blue Cross.

Ultimately, both Lynch and Whitehouse, his predecessor, say that the problems of Rhode Island’s health-care system could best be handled not in court or at the State House, but in a meeting with all the parties to hammer out solutions. That was how the workers’ compensation crisis was solved in the early 1990s, Whitehouse notes. So far, though, Blue Cross has resisted such an approach. Laments Lynch, "Only real dire situations seem to drive things like that."

Steven Stycos can be reached at stycos1@ yahoo.com