State pushes Blues to justify administrative costs

September 12, 1992|By Suzanne Wooton | Suzanne Wooton,Staff Writer

State regulators pushed Blue Cross and Blue Shield of Maryland to justify its administrative expenses yesterday as the insurer sought rate increases for several plans covering individuals under the age of 65.

The proposed increases -- ranging from 8.8 percent to 15 percent on four different individual plans -- would affect only 4 percent of the company's total enrollment.

But the request comes as the state's largest health insurer facesintense scrutiny of its financial operations and management. A U.S. Senate subcommittee investigating the Blues nationwide is scheduled to conduct a two-day hearing later this month on the Maryland company.

Responding to wide-ranging questions from insurance regulators, Blue Cross officials said yesterday that expenses for administering its individual policies consume 16 percent of the premiums, a considerably higher ratio than the insurer's overall administrative cost, which the company says is 10 percent.

Overall, the Maryland insurer's expenses are higher than those for Blues nationwide.

During a state legislative hearing in July, Blue Cross officials released a consultant report -- commissioned by the insurer and seen then for the first time by state regulators -- that showed the company's expenses in 1990 were 12.3 percent of premiums. That, according to the report by Booz-Allen & Hamilton Inc., was 4 percent higher than comparable Blues plans elsewhere.

At the time, Carl J. Sardegna, chairman of Blue Cross, said administrative costs have dropped to 10 percent as the company cut expenses and laid off workers. And he promised to reduce them to 9.4 percent by 1994.

"How can you justify this when Sardegna promised to reduce administrative expenses?" Insurance Commissioner John A. Donaho asked company officials yesterday.

The State Insurance Division, which has complained that it lacks access to information it needs to regulate Blue Cross, is also likely to come under scrutiny by the Senate subcommittee in Washington.

Blue Cross officials responded that individual plans are far more expensive to administer than group plans which comprise the bulk of the insurer's business. And they said expenses for their individual plans are far less than commercial carriers against whom they compete.

Regulators also questioned yesterday the proposed rate increases because the individual market business has been profitable during the past three years.

But Linda Benedict, vice president of the Individual Market Division for Blue Cross, said rate increases should reflect a six-year cycle. Typically, three good years are followed by three unprofitable ones.

The company has asked regulators for a decision on the proposed rate increases by Oct. 1. If granted, the new rates would begin Nov. 1.

But Mr. Donaho said yesterday that his division has asked the company for additional information, which could delay the decision.

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