Blue Cross and Blue Shield of Maryland included nearly $100 million worth of assets on its books last year by relying on exceptions to accounting rules that commercial insurers nationwide are required to use.
The exceptions, some of which are for 1991 only, were approved by the state insurance commissioner and played a major role in boosting the company's reserve -- the money the insurance industry keeps for emergencies and which is called net worth in other industries.
The different treatment helped paint a brighter picture of the company's financial situation. Had state regulators forced the Blues to use the stricter industry rules, the company's assets would have dropped by tens of millions of dollars. Instead of showing a mounting reserve, Blue Cross would have been portrayed as barely solvent.
Blue Cross officials acknowledge the difference but maintain that the rules that apply to insurance companies that do business across state lines generally should not apply to them. The state commissioner knows local conditions best, they say, and the bottom line is that, with or without exceptions, Blue Cross has turned a profit for 44 months, is paying its bills and is conservatively estimating its future claims.
"It's [Maryland Insurance Commissioner John A.] Donaho's reputation and neck that's on the line if he approves" something, said John A. Picciotto, vice president and chief legal officer of Blue Cross.
Maryland and all other states follow the guidelines of the National Association of Insurance Commissioners, made up of state insurance regulators, including Mr. Donaho. The accounting rules are conservative and intended to alert states to financially troubled companies and to protect the public. While widely followed by companies doing business nationwide, NAIC rules are still only advisory. The commissioner in each state has wide latitude to value a company's assets.
Blue Cross, which was set up in 1937 as a non-profit insurer of last resort, insures or administers insurance for 1.4 million Marylanders.
In an interview yesterday, Mr. Donaho and top regulators of the division described the 1991 exceptions for the Maryland Blues as an interim action intended to force the insurer to "clean up its act" with regard to how it reported the financial details of its subsidiary companies.
Mr. Donaho said he is confident that the company not only is legally solvent -- Maryland law requires it to have a minimum of $75,000 in reserves -- but also can provide continued coverage. But he acknowledged that the value of Blue Cross assets could drop sharply after an outside consultant he will hire reviews them according to the NAIC rules. If significant weaknesses are found, Mr. Donaho said, the state will devise a plan to "rehabilitate" Blue Cross in such a way that no Marylander or health provider would suffer.
In July, Mr. Donaho told a U.S. Senate subcommittee hearing that he was concerned that Blue Cross was not following NAIC rules and that his office had not received enough information from the insurer to properly assess its financial condition. Blue Cross has disagreed with Mr. Donaho's statements. The subcommittee has scheduled hearings on the Maryland Blues next week.
At one point last year, before allowing the exceptions, state officials pegged Blue Cross' worth at $3.6 million, far less than the $45 million the company claimed at the time, according to an internal Insurance Division memo. As of June 30, Blue Cross reported a $101 million reserve, just short of the $120 million considered optimum for a company its size. It includes a $42 million note that state officials said yesterday would probably not be admitted as an asset this year.
"This is a transition stage," said Charles Siegel, the associate commissioner in charge of reviewing the solvency of Maryland ++ insurance companies. In the future, he said, "We want them to follow the rules."
Last year was the third time in five years that the state's largest health insurer did not follow industry accounting norms, sometimes with the approval of the incumbent insurance commissioner. Indeed, the rules the state permitted it to follow over the years allowed the company to conceal the full extent of losses by Blue Cross and its subsidiary businesses as they occurred.
A review of company documents by The Sun shows that as of December, Blue Cross had earned $171 million in the past decade but lost $140 million on subsidiaries -- everything from health maintenance organizations to credit card, computer and furniture leasing companies.
In an interview last week, Blue Cross acknowledged its losses but said that its core business is debt-free, that it has a plan to pay its subsidiaries' debts and that it has stopped investing in losing businesses. It says it is operating at a profit and has more money than needed to pay expected claims.