It's Official, Hell Has Frozen Over

Are you feeling a little chilly right now? Look around–do you see icebergs?  Are baby harp seals collecting around your feet?  If not, they should be, because Hell has clearly frozen over:  a major U.S. health insurer has decided to give a bunch of money back to its beneficiaries as a result of “excess profits.”

No seriously, I swear it’s true.  Blue Shield of California, one of my State’s largest health insurers covering over 3 million people, has just announced that it will return $295 million in “excess profits” to its policy holders, resulting in a more than 50% credit on the December 2011 health premium bill for all insured policy holders and about 18% for others.  This is, by the way, in addition to a $180 million dollar rebate Blue Shield of CA gave to their policyholders last month to make up for “excess profits” in 2010.  See an article about this HERE.

This is a pretty stunning development, as people generally think that health insurance companies would refund profits only immediately after the Simpson’s Montgomery Burns gives Homer a juicy raise.  In other words, not gonna happen.  Health insurance companies are generally perceived as more likely to provide their beneficiaries with free nuclear contamination a la the Springfield Nuclear Power Plant than a break on their annual premium.

Blue Shield CA made a public pledge earlier this year to limit its profits to 2% (they are technically a not-for-profit entity).  Many viewed it as a gimmick assuming the way this would get done is by jacking up rates so high that giving something back would not be meaningful, kind of like when retailers double prices and declare a half-off sale.  In fact, this was a definite possibility, as the carrier tried to get a hefty premium increase approved for its 340,000 individual and family plan members earlier this year.  Blue Shield CA states that it loses money in its individual product line and that the premium increase was needed to keep that portion of the plan solvent.  There was such a hew and cry in the marketplace (the picketers at Blue Shield CA headquarters made it look like Mario Savio Day at Berkeley’s Sproul Plaza circa 1964) that they withdrew the rate increase request and promised to keep rates flat for the rest of the year.   It’s worth noting that even the individual plan members are getting an average of $135-$420 back in their pockets from the rebate plan despite the lack of profitability reported for this product line.  Some might call that a really bad business decision.  Others might call that a great PR move.  It will certainly raise eyebrows if and when Blue Shield CA seeks future rate increases for this product line.

Clearly the commitment to return “excess profits” suggests that Blue Shield CA does just fine with respect to overall cash flow (I put that term in quotation marks, by the way, because it is a phrase that would not be recognized by any typical American business…I’m sure it would fail the spell-check test on the computer at any public company, coming back as “does not compute;” “excess profits” are generally viewed as an oxymoron akin to “jumbo shrimp”).  However, the fact that Blue Shield CA’s individual insurance product area may not be profitable is pretty important as they head into a world where there are likely to be a lot more individual insurance policies sold by Blue Shield CA and every other insurance carrier after the implementation of Health Insurance Exchanges as a result of the Patient Protection and Affordable Care Act (PPACA).  Blue Shield CA has been an avid proponent of ensuring that all Americans have health insurance and thus a big advocate of the overall health reform initiative.  Yes, it is self-serving, as this change dramatically increases Blue Shield’s own potential market share; but on the other hand it is also the right thing to do.  Interesting when good and good for you collide, but in healthcare that is possible to achieve.

Some believe that when the implementation of the PPACA happens and the option exists for employers to dump their employees into government-sponsored plans administered through the exchanges, they will do so in droves.  McKinsey has estimated that as many as 30% of employers will drop health insurance coverage faster than that you can say, “See ya, hate to be ya!”  If that’s the case, the mix of policies sold by Blue Shield CA and every other insurer will change dramatically as people cycle out of employer-purchased group plans into individually purchased policies.  It will be interesting to see how this impacts the financial dynamics of Blue Shield CA and its competitors, many of which have not proven particularly proficient at the effective management of these products.

But for now, Blue Shield CA looks like a hero. Except to their competitors, of course, which must be gnashing their teeth that one of their own has gone to the dark side by willfully disclosing that “excess profits” is not an imaginary concept—next up:  full disclosure that there is no Santa Claus.