CareFirst hits goal of lower earnings

Held to nonprofit mission, insurer made 1/3 less in '05

March 17, 2006|By M. WILLIAM SALGANIK | M. WILLIAM SALGANIK,SUN REPORTER

CareFirst BlueCross BlueShield shaved its profit by close to a third last year, meeting its goal of making less money to fulfill its nonprofit mission.

Under pressure from legislators and regulators, CareFirst announced a decision last year to cut earnings in order to make insurance more affordable by holding down rates and to give more money in grants. Regulatory filings released yesterday show the company did, in fact, make $54.9 million less in 2005 than the year before. Net income for the year was $123.9 million - down 30.8 percent from $178.8 million in 2004.

The decision to trim profit came after a failed attempt by CareFirst to convert to for-profit operation and sell the company in a billion-dollar-plus deal. Angry Maryland legislators passed a bill forcing the company to remain nonprofit and replacing a majority of the board members.

The reshaped board decided the company would hold down premium increases, lowering its profit target for 2005 by $60 million. Although it is a nonprofit, CareFirst still tries to have its revenue exceed its expenses. The income is kept as surplus, which can be used to develop new products, buy new equipment or pay unexpected claims.

The reduced net income "reflects the decision by the board to moderate premiums," Jeffery W. Valentine, a company spokesman, said yesterday.

That doesn't mean premiums went down, or even stayed the same.

Valentine said a few Medicare supplemental subscribers saw decreases, but that the impact was greatest on individual and small-employer subscribers, who saw smaller increases than they would have if the company had followed normal pricing.

Also reducing the company's bottom line, Valentine said, was $8.7 million in spending for programs to improve patient safety and reduce disparities in care among different ethnic groups. The program to moderate rates and offer grants is called "the CareFirst commitment."

Yesterday, Del. Shane E. Pendergrass, a Howard County Democrat who was a prime sponsor of the 2003 reform legislation that reshaped CareFirst's board, called the lower earnings "a start."

"I am heartened they are trying to do what we asked them to do, but it would make me happier to see rates go down or stay the same," Pendergrass said. As a market leader, CareFirst can influence the rates of its competitors, she said.

The filings confirm that CareFirst increased premiums more slowly than its medical costs were rising. For the subsidiaries that operate in Maryland, which constitute 93 percent of CareFirst's business, premium revenue was up 11.8 percent, while medical costs increased 13.6 percent, according to company filings with the Maryland Insurance Administration.

Critics have said that the moderation in premiums could be viewed not as a public-spirited act but as a business decision to help CareFirst sell more policies.

Valentine said the company had about $85 million less in underwriting gains - the excess of premium revenue over medical costs - on traditional insurance business than in 2004. Somewhat offsetting that, he said, were improved margins on business where CareFirst collects a fee for administration, but the employer bears the risk if claims increase.

Going forward, Valentine said, CareFirst intends to continue the grants. It doesn't plan another round of premium moderation, and plans to seek increases in line with medical costs.

However, Valentine said, subscribers will continue to benefit, because the increases will be on a lower base.

Overall, premium revenue in 2005 was $5.3 million, compared with $4.7 million in 2004. Membership was 3.4 million at the end of the year, up about 120,000, or 3.6 percent. CareFirst operates Blue Cross plans serving Maryland, the District of Columbia, Northern Virginia and Delaware.

CareFirst's net income represents 2.3 cents on each premium dollar, down from 2.6 cents in 2004. Publicly traded for-profit health insurers make about three times as much as CareFirst on each dollar of revenue, according to Pulse, an industry newsletter.

bill.salganik@baltsun.com

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