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Originally published Wednesday, February 8, 2012 at 9:05 PM

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3 big health insurers stockpile $2.4 billion as rates keep rising

Noting that health-insurance companies are amassing growing surpluses while raising rates, state Insurance Commissioner Mike Kreidler says lawmakers should allow him to consider an insurer's surplus before he agrees to any rate increase.

Seattle Times health reporter

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Most publicly traded companies sitting on a pile of cash face a lot of sharp questions from shareholders, often accompanied by demands to fork it over as dividends.

Nonprofit health-insurance companies in Washington don't have shareholders. But they are facing demands for the $2.4 billion they've amassed while handing steep rate hikes to customers.

State Insurance Commissioner Mike Kreidler is again asking lawmakers to give him the power to consider a nonprofit health insurer's surplus before he agrees to any rate increase.

A bill that would give him that power is making its way through the Legislature.

Washington's three largest insurers — Premera Blue Cross, Regence BlueShield and Group Health Cooperative — are nonprofit. And, says Kreidler, they've all raised premiums steeply for individual and small-group policies while together collecting a considerable cache.

The companies say money is needed to protect their financial health in the face of unexpected costs, particularly those that result from the federal health care overhaul, and to invest in new systems.

Kreidler, who notes that the cost of individual policies more than doubled over the past six years, argues that the insurers now have at least $1 billion more than they need to pay claims and meet contingencies.

Some customers of Premera would go a step farther: In a lawsuit filed in King County Superior Court in January, they have demanded refunds.

Their attorneys, who seek class-action status for the suit, include Ray Siderius, whose 2005 class-action suit killed the state's estate tax and returned $150 million in refunds to beneficiaries.

The plaintiffs — six businesses and an individual policyholder — complained of steep rate increases. The suit says monthly premiums for Annette Steiner, of Mercer Island, went from $185 in 2003 to $765 in 2010.

Siderius says he was astounded to learn the three insurers were sitting on that much cash while raising rates.

"To me, it's ridiculous for a nonprofit corporation to have over a billion in surplus. It's insane!"

Premera spokesman Eric Earling, at this point, will say only that the factual allegations in the lawsuit are inaccurate and the legal positions are "inconsistent with Washington law and without merit."

Premera and the other insurers paint a dark picture of unknown impacts from federal health care changes, and say they're simply trying to make sure they survive any potential turmoil.

They argue that having cash on hand helps make them stronger. "Financial strength is a good thing, not a vice," insurance lobbyist Mel Sorensen told the Senate committee hearing the bill late last month.

And the insurers took vigorous exception to the notion of forcing only nonprofits to spend down their cash.

"Why at this point in the evolution of health care do we want to disadvantage nonprofits and give for-profit national insurers an advantage?" asked Joe King, a former House speaker lobbying for Group Health.

Kreidler's office says that unlike nonprofits, for-profit companies have a mechanism to return profits to shareholders.

"We are all the stockholders for not-for-profits," Kreidler told lawmakers.

The insurers also noted that in Oregon, where a similar law was passed in 2009, the size of Regence's surplus prompted the insurance commissioner in 2010 to slash the requested rate increase of 22.1 percent to 12.8 percent — below the break-even level, reasoning the company could make up the difference with the surplus.

"We think it's very disturbing that a government entity could force a private company, nonprofit or otherwise, to operate at a loss," Regence's Chris Bandoli told committee members.

What's in a name

The trouble with a pile of cash is that you can call it all sorts of things. At the Senate committee hearing, the insurance-company representatives, without fail, referred to it as "reserves."

Kreidler begged to differ, insisting that reserves represent the cash on hand earmarked to pay expected bills and claims, but "surplus" is just that — extra, spare, excess.

Kreidler says he takes insurer solvency very seriously, and wouldn't do anything to jeopardize a company's financial health — in part, because his office could end up having to run the company if it goes into receivership.

The insurers, by contrast, insist the money is a hedge against bad times. Whatever you call it, it's all about the "financial capacity of a company," Sorensen said.

Among their worries: The health law will bring lots of new people into the individual market, and they may not be as healthy as the ones now there.

The investment market, not great now, could grow even worse. Roger Stark, a health-policy analyst with the Washington Policy Center, maintains that health-insurance reserves are "extremely fragile."

In a recent brief, he wrote: "Deterioration of the stock and bond markets could quickly lower a health insurance company's reserves by 15-20 percent. A natural disaster or mass emergency could lower its reserves by 20-25 percent in one day."

At the hearing, many critics of the bill recalled the early 1990s, when the state's market for individual coverage essentially evaporated after a handful of regulations — originally part of broader insurance legislation later dismantled by lawmakers — prompted insurers to stop selling those policies.

Len Sorrin, director of congressional and legislative affairs for Premera, said his company lost about $100 million in those years — money, he said, it took a decade to recover.

No one knows what sorts of health expenses insurers will face with people newly eligible to buy insurance in 2014 because of the new federal health care regulations, Sorrin said. "We think carrier strength is essential to carry us through that period."

Some lawmakers wonder: If the insurers are saving for feared market turmoil, will they give the money back to policyholders if their fears turn out not to be true?

The answer, from Regence, seems to turn on the difference between being "arbitrarily forced to pay down" the reserves versus what insurers characterize as a more natural adjustment to rates based on costs.

Some supporters of Kreidler's effort say insurers should return excess cash to consumers.

Says Curt Fackler, an industry veteran and three-time candidate for insurance commissioner: "There is currently no mechanism to get that back to the consumers."

Brian McCullough, another former insurance-commissioner candidate, has pushed for years on the surplus issue, and said the bill doesn't go far enough.

"The people who paid into these plans should get it back," he said. "This money needs to be refunded to the policyholders."

Simpler bill

The bill — Substitute Senate Bill 5247 — is much simpler and less prescriptive than similar legislation proposed last year, although it says the insurance commissioner "must" review surplus levels as an element in determining whether a proposed rate is reasonable.

It would apply to individual and small-group rate filings by nonprofit health insurers that would be effective on or after Jan. 1, 2013.

In addition, it contained a last-minute addition — the Group Health amendment — giving Kreidler the power to "take into consideration" the capital facility needs of insurers who also operate hospital and clinical facilities.

Carol M. Ostrom: 206-464-2249 or costrom@seattletimes.com. On Twitter @costrom.

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