New Report Examines adultBasic Funding Crisis

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Report Summary

For the last nine years, the Commonwealth of Pennsylvania’s adultBasic program has been providing affordable, no-frills health insurance coverage to thousands of Pennsylvanians.

Since 2005, Pennsylvania’s four Blue Cross/Blue Shield plans (the Blues) have provided most of the funding for adultBasic under the Community Health Reinvestment (CHR) Agreement, in order to satisfy the charitable obligation they have in return for their tax-exempt status. That agreement expires December 31, 2010. Without a new agreement, the primary funding source for adultBasic will be lost and more than 45,000 people will lose their low-cost health insurance coverage.

This crisis comes amid continued growth in the ranks of Pennsylvania’s uninsured and renewed scrutiny of the large and growing surpluses held by the nation’s and the Commonwealth’s non-profit Blue Cross/Blue Shield plans.
The Blues (Highmark, Independence Blue Cross, Blue Cross of Northeastern Pennsylvania, and Capital Blue Cross) could voluntarily agree to extend their funding of adultBasic through 2013, serving as a temporary bridge until federal healthcare reforms go into effect in January 2014.

If the Blues do not agree to extend funding, the Pennsylvania General Assembly should take action this fall to continue the program. Legislation sponsored by House Majority Leader Todd Eachus (HB 2455) would continue the CHR agreement until December 2013, providing continuing coverage for 45,000 enrollees.

Blues’ Surpluses Continue to Grow

While CHR funds are currently used to support adultBasic (providing $125 million in funding for the program in 2009-10), they were negotiated to resolve a different problem: public outcry over explosive growth in surpluses accumulated by the state’s four Blue Cross/Blue Shield plans.

The report found that despite making CHR contributions, the Blues’ surpluses have continued to grow:

  • From 2002 to 2009, the four companies’ cumulative surpluses went from $3.5 billion to $5.6 billion, an increase of 61.4%. These surpluses grew two-and-a-half times faster than Pennsylvania wages. 
  • Even with their combined contributions of more than $500 million to the Commonwealth to support adultBasic, the Blues have reported $821 million in profit since 2005.
  • In 2009, the Pennsylvania Insurance Department evaluated the size of the Blues’ surpluses:

o  Highmark’s surplus was found to be so large that the company is not allowed to add a percentage to its premium rates specifically to add to its surplus.
o  The other three plans all had efficient surpluses – large enough to absorb routine changes in rates of investment returns and underwriting losses.
o  All four companies were found to be substantially above minimum standards set by the Blue Cross and Blue Shield Association and state regulators.

Without action to continue the Community Health Reinvestment agreement through 2013, more than 45,000 Pennsylvanians will lose health coverage through adultBasic.

Recommendations:
• ;Pennsylvania’s Blue Cross/Blue Shield plans should agree to extend the Community Health Reinvestment (CHR) Agreement though December 2013.

• The Pennsylvania General Assembly should enact HB 2455, which would establish the CHR in statute.

• The Pennsylvania Insurance Department should revisit its standards for evaluating the Blues’ surpluses.

 

ConsumersUnion looked at Blue Cross/Blue Shield plans across the country and found that the plans had surpluses that were many times the minimum standards. Included in the study was Blue Cross of Northeastern Pennsylvania, whose surplus was more than double the required level. To prevent the Blues from building excessive surpluses and to help keep premium rates in check, the Pennsylvania Insurance Department should revisit its surplus rating system.

Who Uses AdultBasic?

AdultBasic provides Pennsylvanians who are not eligible for Medicaid or Medicare and are between the ages of 19 and 64 with health insurance for $36 per month. To qualify, a person’s income cannot exceed 200% of the Federal Poverty Level. For a single person, this works out to a maximum income of $21,660, and for an enrollee in a family of four, the limit is $44,100.

People in every county in Pennsylvania rely on adultBasic for affordable health coverage, with usage slightly higher in rural counties. The report also found that:

  • There were 45,927 Pennsylvanians enrolled in adultBasic as of June, with another 397,671 on the waiting list. The waiting list has grown by more than 300,000 people since the start of the recession in December 2007.
  • More than 85% of adultBasic enrollees have incomes below $30,000.
  • Nearly 70% of enrollees are white and 63% are women.
  • One-third of enrollees are between 46 and 55 years of age, while 27% are between age 36 and 45. On the waiting list, there is a large build-up of people between ages 19 and 45.
  • Almost 50% of adultBasic enrollees retain their coverage for more than four years. 

Conclusion

When enacted, the Community Health Reinvestment Agreement was hailed as a model for the nation, and it continues to serve as a standard to establish appropriate community benefit contributions for other non-profit Blue Cross/Blue Shield plans. Extending these agreements supports the Blues’ charitable obligations and maintains access to affordable insurance for low-income working Pennsylvanians.

Introduction

Pennsylvania’s low-cost health insurance program for adults, called adultBasic, is in jeopardy. AdultBasic was established by Governor Tom Ridge using funds from Pennsylvania’s share of the national settlement with big tobacco companies and began insuring Pennsylvanians in 2002. As pressure on the tobacco settlement increased, another source of funding was found to fund the popular program. In 2005, the Pennsylvania Blue Cross/Blue Shield plans agreed to contribute to adultBasic in order to satisfy the charitable obligation they have in return for their tax-exempt status. That agreement expires December 31, 2010. Unless renewed or unless another funding source is found by the end of the year, 45,927 Pennsylvanians will lose their health insurance.

This crisis comes amid continued growth in the ranks of Pennsylvania’s uninsured and renewed scrutiny of the large and growing surpluses held by the nation’s and the Commonwealth’s non-profit Blue Cross/Blue Shield plans. 

AdultBasic can serve as an important bridge until federal healthcare reform goes into effect in January 2014. Without an extension, enrollees will be forced to go without insurance, or pay significantly higher premiums for three years.

The Pennsylvania General Assembly should take action this fall to continue the program. Legislation sponsored by House Majority Leader Todd Eachus would continue the Community Health Reinvestment (CHR) Agreement until December 2013, providing continuing coverage for 45,000 enrollees.

While CHR funds are currently used to support adultBasic, they were negotiated to resolve a different problem: public outcry over explosive growth in surpluses accumulated by the state’s four Blue Cross/Blue Shield plans (the Blues). The Blues’ surpluses have grown from $3.5 billion in 2002 to $5.6 billion in 2009. At the same time, the Blues have undergone a “quiet conversion,” moving much of their business from the non-profit parent company to for-profit subsidiaries. Although companies pay a 2% insurance premiums tax on for-profit business, rates of for-profit insurers are not subject to rate approval by the Pennsylvania Insurance Department, a motivating factor in the conversion activities.

When enacted, the CHR Agreement was hailed as a model for the nation, and it continues to serve as a standard to establish appropriate community benefit contributions for other non-profit Blue Cross/Blue Shield plans. Extending these agreements supports the Blues’ charitable obligations and maintains access to affordable insurance for low-income working Pennsylvanians.

Overview of adultBasic

Act 77 of 2001 outlined Pennsylvania’s distribution of receipts from the Tobacco Settlement Master Agreement and created an insurance plan for adults who could not qualify for Medicaid or Medicare. This plan, now called adultBasic, began serving low-income, uninsured Pennsylvania residents between the ages of 19 and 64 on July 1, 2002. The program is administered by the Pennsylvania Insurance Department, but insurance is provided by private insurance companies under contract with the Department.

To qualify for adultBasic, applicants must earn less than 200% of the Federal Poverty Level, based on family size.1 Enrollees may not have any other health insurance coverage, and must be without insurance coverage for 90 days prior to enrollment, unless loss of coverage was due to a job loss in the family. An applicant must be a resident of Pennsylvania for 90 days prior to enrollment and must be a U.S. citizen or have permanent legal immigrant status.2

“This program (adultBasic) saved us not once, but many times… Before applying for adultBasic, I had to look for other options.  The cheapest insurance I could find was $500/month (which is unaffordable for us) and it would not cover my pre-existing conditions.  I had even been hung up on by insurance agents after mentioning to them my pre-existing conditions.”
-Mary H.

As of June 2010, adultBasic provides basic health insurance to 45,927 Pennsylvanians. The Insurance Department maintains a waiting list for the program, which has grown to a staggering 397,6713, fully one-third of the 1.2 million uninsured Pennsylvanians.4 The Great Recession has contributed to growth in demand for the program. In December 2007, the waiting list was less than a third of its current size.

The healthcare coverage that this state-subsidized program provides is invaluable to the low-income Pennsylvanians it serves. AdultBasic has two key advantages. Premiums for the program are set at $36 per month, which is very affordable.  Secondly, the program does not refuse coverage on the basis of pre-existing conditions, which is especially beneficial to individuals who require consistent medical care, but had few affordable options prior to the program. (Federal healthcare reform has outlawed the denial of health insurance coverage based on pre-existing conditions, but this provision will not go into effect for adults until 2014.) By sustaining adultBasic, current enrollees who have pre-existing and chronic medical conditions will be able to keep their health insurance until federal reforms are in place.

As the name implies, adultBasic provides basic medical coverage for participants.  Doctor visits, specialists, maternity care, hospitalizations, diabetic supplies, and rehabilitation are covered. AdultBasic does not cover dental care, vision, hearing, mental health services, or most prescription drugs.  Though not the most complete or wide-ranging coverage, adultBasic has helped many thousands of people and their families receive the basic healthcare they need.

Individuals who are on the waiting list may purchase coverage at full cost, which was $330 per month until this year.  In March 2010, the cost to purchase unsubsidized adultBasic insurance jumped from $330 to $600 per month - nearly an 82% increase.  Effective July 2010, this unsubsidized premium cost increased to $629 per month.5 Prior to these price hikes, 3,500 people6 chose to purchase unsubsidized healthcare coverage.  In June 2010, only 1,052 people were using the full price option.

The newly enacted federal healthcare reform law defines affordable insurance as costing 8% or less of one’s income. Using this standard, the unsubsidized adultBasic premium is 35% of annual income and 17% of the annual income for a family of four.7

Four private insurers provide the insurance coverage under contract with the state: Highmark is the largest contractor with 22,015 enrollees; Independence Blue Cross provides coverage for 13,566 individuals; Blue Cross of Northeastern Pennsylvania (NE PA) covers 5,084 enrollees; and Unison Health Plan, a division of United Health, covers 5,262 enrollees.8

To qualify for adultBasic, participants must have a maximum family income of 200% or less of the Federal Poverty Level, based on family size (see table below for current income limits).

 
adultBasic Income Limits by Family Size
Family size Maximum Family Income
1 $ 21,660
2 $ 29,140
3 $ 36,620
4 $ 44,100
5 $ 51,580
6 $ 59,060
7 $ 66,540
8 $ 74,020
Source. Pennsylvania Insurance Department9
   

Who Uses adultBasic?

Data from the Insurance Department for June 2010 offers a profile of the typical adultBasic enrollee. The vast majority of enrollees, almost 70%, are white and almost two-thirds are women. The largest share - 33% - is 46 to 55 years old, and the largest group earns between $10,000-$20,000 per year, which is around the full-time minimum wage income of $15,080.

Significantly, individuals tend to remain with the program. Almost 32% have been enrolled for five years or more and fully 76% have been on the program for two years or more.
Every county in Pennsylvania has adultBasic participants, ranging from 31 in Montour County to 6,897 in Philadelphia (see Appendix 1 for enrollment by county).

The demographics of the 397,671 people on the waiting list tend to mirror the enrolled population. Most are white females with similar incomes. The waiting list is significantly younger, with the highest percentage in the 26-35 age range. This may be related to the national recession, as younger people who have lost jobs find themselves without insurance coverage. There are people on the adultBasic waiting list from every county, a fact indicative of the need for low-cost health insurance across the state.

Source. Pennsylvania Insurance Department tabulation of adultBasic demographic data.

While adultBasic users are not evenly distributed geographically, neither is Pennsylvania’s general population. Over 50% of adultBasic enrollees come from the two more populated areas of Pennsylvania, the South East and South West regions.10 According to 2009 Census statistics, 31.8% of the Pennsylvania population lives in the South East region, while its share of the state’s adultBasic enrollment is approximately that percentage, at 29.5%. The South West region’s population is only 18.5% of Pennsylvania, while its adultBasic enrollment percentage surpasses that figure at 22.8%. The Harrisburg and Eastern regions have relatively low enrollment percentages despite being the third and fourth most populous Pennsylvania regions. All other regions have enrollment in proportion to population.

Source. Pennsylvania Insurance Department tabulation of adultBasic demographic data.

The vast majority (70%) of adultBasic enrollees are white. An unexpected 9% of enrollees are Asian, while 6.5% are African Americans.11 Almost two-thirds (62.8%) of people enrolled in adultBasic are women.

Source. Pennsylvania Insurance Department tabulation of adultBasic demographic data.

Almost 85% of adultBasic users earn $30,000 or less per year. As the program is limited to 200% of poverty, it is not surprising that most people enrolled in adultBasic have modest incomes. 

Source. Pennsylvania Insurance Department tabulation of adultBasic demographic data.

Source. Pennsylvania Insurance Department tabulation of adultBasic demographic data.

Claims that people go onto adultBasic, use medical services (operations and other procedures), and then exit the program are not supported by the data. More than 75% of enrollees have been on adultBasic for more than two years.  In fact, almost 50% of adultBasic enrollees have retained their coverage for more than four years, leaving little room for people on the waiting list to be offered subsidized coverage.  Ending the program will push these Pennsylvanians closer to financial ruin.

For demographic information on individuals on the adultBasic waiting list, please see Appendix 2.

Karen F. had paid for her own health insurance for many years and then found she could no longer afford it.  She signed up for adultBasic and was on the waiting list for 18 months before getting coverage.  Luckily she did, as she was then diagnosed with a brain tumor and thyroid cancer. While it provided only basic coverage, it did allow her to have the major surgeries she needed to live.

History of adultBasic Enrollment and Waiting Lists

Available funding has allowed between 37,000 and 57,500 Pennsylvanians to be enrolled in adultBasic at any one time.  While funding for the program has increased over time, so have healthcare costs.

Too many Pennsylvanians are without health insurance and that number has only grown during the Great Recession. According to the U.S. Census Bureau, 8.3% of Pennsylvanians (1.0 million) lacked health insurance in 2000-2001. By 2007-2008, that percentage rose to 9.7%, or 1.2 million Pennsylvanians.12

Many of the newly uninsured had lost coverage through an employer. From 2000-01 to 2007-08, Pennsylvania ranked second in the nation in the number of individuals (694,000) who had lost employment-based coverage.13

According to the 2008 Pennsylvania Health Insurance Survey, men were more likely to be uninsured than women. Typical working age Pennsylvanians (19-64) made up more than 85% of the state’s uninsured population. Almost two-thirds (63%) of unemployed Pennsylvanians between 19-64 years of age currently work (a majority work full-time). The survey also found that the rate of uninsured varied from 7% in the Pittsburgh region to 9.6% in Northeastern Pennsylvania.14

Total demand for adultBasic, which can be seen in the size of the waiting list, has varied somewhat, due to economic conditions and available funding. Applicants began being placed on the adultBasic waiting list in March 2003. By December 2003, the waiting list numbered more than 63,000. The list grew to 127,430 by October 2005.

New funding in 2005-06 from the Community Health Reinvestment (CHR) Agreement increased enrollment to 50,000 people and helped reduce the waiting list until it briefly fell below the number of enrollees in June 2006.

The global recession, related job and income losses, and administrative program changes15 have significantly increased demand for adultBasic. In December 2007 (the official beginning of the recession in the United States), the adultBasic waiting list totaled 95,649. Two years later, as of December 2009, the size of the waiting list had exploded to 353,301 (see chart below). As of June 2010, the waiting list stands at 397,671.


Source. Pennsylvania Insurance Department, Annual Report to Legislature on adultBasic.16

One thing is clear; Pennsylvanians are increasingly turning to adultBasic, although few are able to be covered.

History of the Community Health Reinvestment Agreement

Pennsylvania’s Blue Cross/Blue Shield plans (the Blues) were established under a 1938 statute as non-profit hospital and professional health services plans. They were deemed as “charitable and benevolent institutions” exempt from taxation by the state and its political subdivisions, and according to the Pennsylvania Insurance Commissioner, commonly recognized as insurers of last resort.17

Pennsylvania’s first Community Benefit Agreement came in 1996, when two Pennsylvania Blues plans merged to become Highmark. As part of the approval process, the Insurance Commissioner required the combined company to annually contribute 1.25% of direct written premiums for charitable purposes.18 In 2003, Highmark reported $93 million in community benefits pursuant to this requirement.

Starting in the late 1990s, Pennsylvania’s media outlets and citizens alike noted the tremendous growth in the surpluses retained by the state’s four Blue Cross/Blue Shield plans. This came in the context of rapidly increasing premiums, a swelling in the number of the uninsured, reduced federal support for public coverage programs and a weakened economy. Lawmakers and advocates charged that these four non-profit insurance companies were retaining excessive surpluses that could be better used to lower healthcare premiums or contributed to charitable endeavors. 

The Pennsylvania Insurance Department was given the task of officially determining whether these surpluses were excessive. The Department requested that the Blues submit applications justifying their surpluses and the Blues agreed. However, they claimed that the state lacked the authority to set surplus limits and could instead only set minimums to help prevent financial failure.

On February 2, 2005, the Commonwealth and each of the Blues signed the six-year “Agreement on Community Health Reinvestment,” or CHR, under which the Blues agreed to contribute a fixed amount toward programs that benefit local communities and improved healthcare. Beginning March 1, 2005, the Blues were required to make “Annual Community Health Reinvestment” expenditures. These payments would be equal to 1.6% of health premiums and 1.0% of Medicare/Medicaid premiums sold by the Blues, less any insurance premiums taxes paid by their for-profit subsidiaries.

Shortly following this signing, the Pennsylvania Insurance Commissioner officially deemed the Plans’ surpluses not excessive (although three of the four companies had surpluses so large that they were prohibited from including a risk and contingency factor in their filed rates).

Later, the General Assembly agreed to direct a portion of the Plans’ payments to fund the adultBasic program. This funding allowed adultBasic to increase the number of their enrollees and provide basic healthcare to tens of thousands of Pennsylvania residents. Their contributions to other healthcare-related community programs also provide invaluable services to many needy residents.

Meet the Blues

The four Pennsylvania Blues are individually operated licensees of the Blue Cross and Blue Shield Association. Incorporated as “non-profit hospital plans,” under Pennsylvania law, these companies are not subject to the state’s insurance premiums tax.19

The four Blue Cross/Blue Shield plans are “institutions of purely public charity” that qualify for tax exemption under the Pennsylvania Constitution, Article VIII, Sections 2(a)(i) and (a)(vi).  To qualify as institutions of purely public charity, they must serve a charitable purpose and render substantial portions of their services for free or at greatly reduced subsidized prices, relieving the government of some of its burden.20

Highmark and Independence Blue Cross are the largest of the Pennsylvania Blues, in terms of members, market share, and premiums. In total, the four companies collected $22.3 billion in premiums in 2008, which account for 60% of the Pennsylvania health insurance market. (For a complete list of health insurers comprising 90% of the Pennsylvania health insurance market, see Appendix 3).

Company Headquarters Members Premiums21 Market Share
Blue Cross of Northeastern PA (NE PA) Scranton 600,000 $874 million 2.4%
Capital Blue Cross Harrisburg 1.3 million $2.0 billion 5.3%
Highmark, Inc. Pittsburgh 4.7 million $10.1 billion 27.3%
Independence Blue Cross Philadelphia 3.3 million22 $9.4 billion 25.3%
PENNSYLVANIA TOTAL     $22.3 billion 60.3%
Source. Company annual reports and the Pennsylvania Insurance Department.

Each of the Blues operates several subsidiary companies.  Even though the parent is a non-profit, these subsidiaries may be non-profit or for-profit in nature and may be located in states other than Pennsylvania. Capital Blue Cross and Blue Cross of NE PA operate under less complicated corporate structures (nine and eleven subsidiaries, respectively), while Highmark (41) and Independence Blue Cross (45) have a much more complex web of subsidiaries.

Blues’ Surpluses and Profits Continue

Despite the annual Community Health Reinvestment payments, the accumulated surpluses for Highmark and Independence Blue Cross, the larger Blues in Pennsylvania, continue to grow. From 2002 to 2009, the cumulative surpluses of the four Blues insurers have increased from $3.5 billion to $5.6 billion.23

Mary H., a single mother with two young children, went on adultBasic when she and her son came down with Lyme Disease. Having adultBasic not only allowed her to receive needed treatment for the chronic disease, it gave her access to care so that a pre-cancerous condition of her cervix could be treated before it threatened her life. AdultBasic provided not only care, but peace of mind.

As part of the Community Health Reinvestment agreement, the Pennsylvania Insurance Department monitors each Blue’s surplus and determines if it is adequate, too large or too small. To measure the size of each company’s surplus, the Department computes the surplus as a percentage of either the National Association of Insurance Commissioners (NAIC) Health Risk Based Capital (RBC) ratio or the consolidated risk factor ratio, whichever is the smaller percentage.24

The Insurance Department found that Highmark had a healthy or “sufficient” surplus in 2009, meaning it cannot include contingency factors or potential risks in its premium rate changes (it cannot add a percentage to its rates specifically to add to its surplus).25 The other Blues (Independence Blue Cross, Blue Cross of NE PA, and Capital Blue Cross) all had “efficient” surpluses – meaning their surpluses are large enough to absorb routine changes in rates of investment returns and underwriting losses.

Pennsylvania Insurance Department Rating System for Assessing Blues’ Surpluses

 
Rating Ratios for Highmark and Independence Blue Cross Ratios for Capital Blue Cross and Blue Cross of NE PA
Inefficient Greater than 750% Greater than 950%
Sufficient 550% to 750% 750% to 950%
Efficient Lower than 550% Lower than 750%
Source. Pennsylvania Insurance Department
   

These levels allow for surpluses that are much higher than minimum industry standards.  The Blue Cross and Blue Shield Association, which licenses individual Blues across the U.S., recommends that members of the association maintain surpluses equal to at least 375% of RBC. If a company’s surplus falls below 200% of RBC, it would lose its Blues’ affiliation and would trigger state regulators to require increased reporting. Once the surplus falls below 100% of RBC, state regulators may take over the insurer.26

Source. Company Annual Filings with the National Association of Insurance Commissioners (NAIC)

The Blues’ surpluses have been growing because the health insurers, in general, have continued to be profitable. However, investment losses due to the recession and rising healthcare costs triggered net losses in three of the four Blues in 2009. Despite the losses, all three of the insurers were able to maintain adequate surpluses.

Pennsylvania Blues’ Net Income (Loss)
  2005 2006 2007 2008 2009
Independence Blue Cross $23,355,070 $29,015,495 $16,055,722 $34,116,787 ($43,065,125)
Highmark 157,092,451 132,369,822 260,446,933 51,752,324 74,205,595
Blue Cross of NE PA (12,060,465) 24,752,339 44,043,261 (4,427,080) (59,535,036)
Capital Blue Cross 48,197,723 21,487,667 61,783,456 5,419,983 (44,168,578)
Source. Company 2009 Filings with the National Association of Insurance Commissioners (NAIC).

A recent report by ConsumersUnion (the organization that also publishes Consumer Reports) looked at ten Blue Cross/Blue Shield plans from across the nation, including Blue Cross of Northeastern Pennsylvania (NE PA). They found that from 2001 to 2009, these ten insurers saw their surpluses increase from 732% of RBC to 850%, despite falling investment income in recent years. Of these ten plans, Blue Cross of NE PA’s surplus decreased the most going from 1,051% of Risk Based Capital in 2001 to 557% in 2009. Even with a reduction of almost half its percentage value, Blue Cross of NE PA’s surplus was still far in excess of the 200% industry standard.27

Sources. Annual company filings with the NAIC and U.S. Bureau of Labor Statistics.

The Blues’ surpluses have been growing more than two-and-a-half times faster than wages in Pennsylvania in recent years. From 2002 to 2009, the four Blues saw their surpluses grow from $3.5 billion to $5.6 billion, an increase of 61.4%. Over the same period, Pennsylvanians saw their wages grow by 24.4%.28

Funding adultBasic

State funding of the adultBasic program began on July 1, 2002, using dollars from the state’s Tobacco Settlement Fund. Tobacco settlement dollars were the sole source of funding for the program until 2005-06. During this period, annual funding ranged from $98 million to $112 million, and the program had between 34,000 and 43,000 enrollees. By 2004-05, more than one-quarter of Tobacco Settlement Fund dollars went to the adultBasic program.

AdultBasic Funding by Source, 2002-03 to present (in millions)

  2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-1129
Tobacco Settlement Fund $97.5 $112.1 $103.1 $74.3 $61.6 $49.9 $38.8 $37.9 $15.6
Community Health Reinvestment
(Payments from the Blues)
$0 $0 $0 $59.2 $95.0 $109.0 $126.3 $125.2 $183.6
Total adultBasic Funding $97.5 $112.1 $103.1 $133.5 $156.6 $158.9 $165.1 $163.1 $199.2
Source. Governor’s Executive Budgets, 2004-05 to 2010-11.

Beginning in 2005-06, the financial responsibility for funding adultBasic began to shift away from the Tobacco Settlement Fund. Community Health Reinvestment payments from the Blues allowed the Commonwealth to increase total funding and enrollment in adultBasic. In 2005-06, a larger share of Tobacco Settlement Funds were redirected from adultBasic to the Medical Assistance for Workers with Disabilities program (MAWD), which helps subsidize health insurance for working people with disabilities who have incomes up to 250% of poverty.30The MAWD program is matched with federal Medicaid dollars, which allows for additional enrollment with non-state dollars.  In 2008-09, MAWD covered 13,500 individuals and drew down $56 million in federal Medicaid funds.31

As the amount of funding for adultBasic increased, so did the number of enrollees.  From 2004-05 to 2007-08, the number of participants in adultBasic increased from 40,800 to 54,100.

Summary of Blues Community Health Reinvestment Expenditures

The Community Health Reinvestment (CHR) Agreement between the Blues and the Commonwealth requires each plan to calculuate a minimum CHR contribution each year, based on their previous business.

“I had adultBasic for about six years after being on the waiting list. I was very fortunate. If it wasn’t for adultBasic, I wouldn’t have had insurance as a divorced woman struggling financially... As a resident of our Commonwealth, I’d like to see people have adultBasic and be covered. It is a wonderful, life-saving program. DO NOT DROP IT!” –Freddi C.

Total CHR payments are calculated by taking 1.6% of regular health premiums and 1% of Medicare and Medicaid premiums, less premiums taxes, credits, and other adjustments. However, the yearly CHR payment is capped at 107.5% of the previous year’s contribution, limiting the funding change from year-to-year. Companies pay the lesser of the yearly calculated amount based on a percentage of premiums and the capped amount based on the prior year payment. The 107.5% cap can have a significant effect on the amount of required CHR expenditures a company must make. From 2007 to 2009, both Highmark and Capital Blue Cross paid only the capped amounts, which reduced the companies required contributions by a total of $30.5 million.

Generally, 60% of the yearly CHR contribution is directed to the Commonwealth to be used to finance adultBasic, while the company invests the remaining 40% in grants, rate subsidies, and other uses approved each year by the Pennsylvania Insurance Department.

The Community Health Reinvestment Agreement also includes a provision to ensure that the contribution to the Commonwealth does not decrease significantly from one year to the next. If a company’s premiums used to calculate the CHR decrease from the previous year to the point that the total calculated CHR (100%) in the current year is less than the dollar value of the 60% share that was paid to the Commonwealth in the prior year, then the entire calculated amount of CHR investment would be paid to the Commonwealth to support adultBasic, rather than being split 60/40 with required company-directed community spending. This occurred with Blue Cross of NE PA in 2008 and 2009, where its entire CHR was paid to the Commonwealth. Even though the company was not required to contribute any funds to the community under the CHR, it did so anyway, contributing more than $10 million in both years.

Source. Annual company proposals for CHR expenditures, 2005 to 2009.

The chart above shows the 60% share of the CHR payment that has been sent to the Commonwealth to fund adultBasic since 2005.32 Of the Blues, Highmark makes the largest yearly contribution. In 2009, their planned expenditure accounted for 66% of the total. Capital Blue Cross has not been required to make an annual payment to the Commonwealth since 2006, due to an overpayment made that year and state income taxes paid on their Keystone HeathPlan Central subsidiary.33

  Payments to Commonwealth to Fund adultBasic
(60% of CHR)
Proposed Company Directed Expenditures (meets or exceeds 40% of CHR) Total 2009
CHR Expenditures
Highmark $69,214,067 $90,800,000 $160,014,067
Independence Blue Cross $ 32,151,200 $ 47,300,000 $ 79,451,200
Capital Blue Cross $ - $ 633,360 $ 633,360
Blue Cross of Northeastern PA $ 2,964,320 $ 10,200,000 $ 13,164,320
Source. Annual company proposals for CHR expenditures, 2009.

The Blues are allowed to direct, with Insurance Department approval, how the remaining required 40% of the CHR payment is spent. These dollars go toward “other community health related endeavors” and are left to each company’s discretion. According to CHR plans filed with the Insurance Department, these expenditures include:

Rate subsidies for non-group health insurance products for low-income individuals, children, and seniors;

  • Offsetting underwriting losses from these products;
  • Funding for flu shots, health screenings, and other community outreach programs;
  • Scholarships for training nurses;
  • Medical school improvements;
  • Donations to health-related non-profits in the area.

For a more detailed list of other CHR community health related expenditures by year and by insurer, please see Appendix 4.

The required accounting for company-directed CHR expenditures became more stringent with the passage of Act 62 of 2008. The Act requires the Blues to submit annual documentation of proposed charitable contributions in accordance with the Community Health Reinvestment Agreement. Proposals must include anticipated expenditures, and amounts expended for each of the allowable purposes during the next fiscal year (the CHR agreement requires contributions calculated by calendar year). Proposals from each plan are due to the Pennsylvania Insurance Department by March 30 of every year for the duration of the agreement (currently 2010). These plans are then approved or sent back to the companies for revision.

A large factor in the creation of Act 62 was ongoing speculation that the Blues engaged in creative bookkeeping – disguising typical company expenses as “charitable contributions” in their obligations to the CHR agreement. Section 2501 of the Act describes valid and invalid community health reinvestment activities. Acceptable activities include funding, subsidization or provision of healthcare coverage for people unable to pay for coverage, healthcare services for those who are uninsured or unable to pay, and programs for the prevention and treatment of disease and injury.  Unacceptable activities include expenditures for advertising or public relations, sponsorships, bad debt, programs provided as an employee benefit, and many others.34

The initial reports required under Act 62 (for fiscal year 2009-10) have provided more detail on how CHR expenditures are being directed.

In 2009-10, the four Blues planned to spend more than $136 million, or 74% of the total amount designated for programs aimed at improving community health, on write-offs of rate subsidies or underwriting losses incurred on individual policies, CHIP, Special Care, and other products the plans offered.  Individually, Independence Blue Cross spent 76%, Highmark 90%, Capital Blue Cross 75%, and Blue Cross of NE PA 26% of their company-directed donations on such write-offs, in essence, reimbursing themselves, rather than putting dollars into the community.

The total amount the four Plans spent on charitable organizations was just under $49 million, or 26% of the total stipulated by the CHR agreement, in the 2009-10 fiscal year. Independence Blue Cross’s charitable expenditures totaled $11.3 million for the Charitable Medical Grant Program, the Pennsylvania Chronic Care Commission and Health eTools for Schools. Highmark donated a total of $8.4 million to organizations that address health disparities and chronic diseases, as well as programs that provide health screenings and influenza shots for seniors. Capital Blue Cross donated $4.6 million to programs that provide health services such as community health clinics, health fairs, and non-profit community organizations such as the Pennsylvania Breast Cancer Coalition. 

Blue Cross of NE PA had the largest share of community donations.  This is because of a pledge of $23 million (the vast majority of its total $24.6 million community health contributions) to the newly created Commonwealth Medical College in Scranton, Pennsylvania. 

Conclusions and Recommendations

Maintaining Health Insurance for adultBasic enrollees is good for Pennsylvania.

Lack of health insurance is both an individual problem and a source of concern for all Pennsylvanians. Individuals who lack insurance do not have access to preventive care and are forced to delay treatment for illnesses and disease.  When they do seek treatment, they are sicker and their healthcare costs are higher. They pay for treatment out of their own pockets, which creates a tremendous financial burden for themselves and their families. It is no wonder that most individual bankruptcies in the U.S. prior to the recession were healthcare related. And each day, two working-age Pennsylvanians die due to lack of health insurance.35

The insured pay the cost of medical care for the uninsured through our premiums. According to Families USA, Pennsylvanians pay a “hidden healthcare tax” of $1,017 annually for the medical costs of the uninsured.36 Pennsylvania s hospitals provide charity care to make up for the amount that uninsured patients are unable to pay, and every Pennsylvanian contributes to hospital treatment for the uninsured through our tax dollars.

The Patient Protection and Affordable Care Act will significantly reduce the ranks of the uninsured, beginning in three years. Many of the uninsured, particularly childless adults, will be eligible for Medicaid, while those with incomes up to 400% of the federal poverty level, about $80,000 for a family of four, will be able to find private insurance on a newly created healthcare exchange and will be eligible for tax credits to make premiums more affordable. Meanwhile, we need an effective bridge to get people to these new programs.

The Economic Climate for Pennsylvania’s Blue Cross/Blue Shield Plans Will Continue to be Favorable

Federal healthcare reform will provide an estimated 32 million people with access to private health insurance offered by insurance companies like the non-profit Blue Cross/Blue Shield plans, and commercial insurers like Aetna and UnitedHealth. All of these companies will have access to a gigantic new market of customers, and are likely to profit significantly from this expansion. With 60% of the market, Pennsylvania’s Blues are well positioned to capture much of this growth.

With the exception of 2009, all of the Blue Cross/Blue Shield plans have had increased revenue, despite the national recession. Highmark had an operating profit in 2009. All of the companies, with the exception of Capital Blue Cross, have added to their reserves since 2005.

The conditions today are much like those that existed in 2005. Premiums for small businesses and individuals have continued to increase, as have overall surpluses and executive salaries. Consumers and lawmakers have a right to question the decision to build surpluses and increase executive compensation while thousands have been losing insurance coverage.

Unlike many states, Pennsylvania’s Blues were created by statute, which specifically establishes the parent companies’ charitable mission.  The public and policymakers have a right to question whether the companies have strayed from this mission, and have used their non-profit status to build surpluses that have been used for mergers and acquisitions, rather than for policyholders and the public.

Recommendations:

  • Pennsylvania’s Blue Cross/Blue Shield plans should agree to extend the CHR agreement through December 2013 at a contribution level that, at the very least, continues enrollment at the current 46,000 person level. The Pennsylvania Insurance Department and other parties are currently in negotiation with the four Blues plans to determine the fate of the program. The Blues should agree soon to continue the program, in order to relieve the fear and uncertainty of enrollees over potential loss of coverage.
  • The Pennsylvania General Assembly should enact HB 2455, which will establish the CHR agreement in statute. Pennsylvania lawmakers should make clear to the public that they stand with the individuals who rely upon adultBasic.
  • The Pennsylvania Insurance Department should revisit its standards for evaluating and approving surpluses. As the recent report by ConsumersUnion notes, both the standards established by the Blue Cross/Blue Shield Association and the National Association of Insurance Commissioners (NAIC) may be too high and may overstate the amount that is required to protect the insurers from unexpected costs or down markets.

Appendix 1: AdultBasic Enrollment by County

Appendix 2: Waiting List Demographics (June 2010)

Appendix 3: 2008 Pennsylvania Health Insurance Market Share by Company Group

Appendix 4: Planned Community Health Reinvestment by Company

Appendix 5: Major Newspapers Join the Call for Funding adultBasic Through 2014

Endnotes

[1] Family income for most applicants is calculated using Gross Income less an Earned Income deduction (as is used for Medicaid) and certain childcare expenses.

[2] Pennsylvania Insurance Department, adultBasic Eligibility (accessed July 19, 2010) http://www.portal.state.pa.us/portal/server.pt/community/health_insuranc....

[3] Monthly adultBasic enrollment and waiting list figures are compiled by the Pennsylvania Insurance Department. Enrollment totals by county can be located here: http://www.portal.state.pa.us/portal/server.pt/document/744325/ab_enroll.... Tabulation of adultBasic waiting list by county found here: http://www.portal.state.pa.us/portal/server.pt/document/744326/wait_list....

[4] U.S. Census Bureau, Current Population Survey, 2009 Annual Social and Economic Supplement, http://www.census.gov/hhes/www/cpstables/032009/health/h06_000.htm.

[5] Pennsylvania Insurance Department, “adultBasic Frequently Asked Questions,” (accessed July 19, 2010) http://www.portal.state.pa.us/portal/server.pt/community/health_insuranc....

[6] Pennsylvania Health Access Network, “adultBasic Premium Increases Will Make Insurance Unaffordable,” January 14, 2010, http://www.pahealthaccess.org/blog/adultbasic-premium-increases-will-mak....

[7] Percentages based on the 2009 Federal Poverty Guidelines, which can be found here: http://aspe.hhs.gov/poverty/09poverty.shtml.

[8] Pennsylvania Insurance Department, “adultBasic Enrollment by Contractor by County, June 2010.” http://www.portal.state.pa.us/portal/server.pt/document/744324/ab_contra....

[9] Pennsylvania Insurance Department, “adultBasic Eligibility,” (accessed July 16, 2010) http://www.portal.state.pa.us/portal/server.pt/community/health_insuranc....

[10] Erie Region: Crawford, Erie, Lawrence, Mercer, Venango, Warren.
South West Region: Allegheny, Beaver, Butler, Fayette, Greene, Washington, Westmoreland.
North Central Region: Armstrong, Cameron, Clarion, Clearfield, Clinton, Elk, Forest, Indiana, Jefferson, McKean.
South Central Region: Bedford, Blair, Cambria, Centre, Fulton, Huntingdon, Mifflin, Somerset.
North East Region: Bradford, Lycoming, Potter, Sullivan, Tioga.
Harrisburg Region: Adams, Cumberland, Dauphin, Franklin, Juniata, Lancaster, Lebanon, Perry, York.
Wilkes-Barre Region: Carbon, Columbia, Lackawanna, Luzerne, Monroe, Pike, Susquehanna, Wayne, Wyoming.
Eastern Region: Berks, Lehigh, Montour, Northampton, Northumberland, Schuylkill, Snyder, Union.
South East Region: Bucks, Chester, Delaware, Montgomery, Philadelphia.

[11] People of Hispanic ethnicity were not designated as a separate category under race. As of June 2010, 1.4% of enrollees identified themselves as being of Hispanic origin.

[12] U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement, various years. Latest edition found here: http://www.census.gov/hhes/www/cpstables/032009/health/h05_000.htm.

[13] Elise Gould, Employer-Sponsored Health Insurance Erosion Continues, The Economic Policy Institute, Briefing Paper #247, October 27, 2009, http://epi.3cdn.net/6356d48ae59f625af6_xxm6bnyn2.pdf.

[14] Pennsylvania Insurance Department, 2008 Pennsylvania Health Insurance Survey, http://www.portal.state.pa.us/portal/server.pt/community/health_insuranc....

[15] The Department of Public Welfare began automatically adding persons who were found to be ineligible for Medicaid but could qualify for adultBasic to the adultBasic waiting list. Prior to this, people would have to apply separately for the two health insurance programs.

[16] Waiting list data not available on a monthly basis until the 2004 Annual Report. Total waiting list figures for January to May 2010 not currently available on the Pennsylvania Insurance Department’s website.

[17] Kaiser Family Foundation.

[18] The Lewin Group: Considerations for Regulating Surplus Accumulation and Community Benefit Activities of Pennsylvania’s Blue Cross and Blue Shield Plans. Legislative Budget and Finance Committee, June 13, 2005 p.ii.

[19] The Blues also operate for-profit subsidiaries and HMOs which are subject to tax in Pennsylvania.

[20] This standard was set forth by the Pennsylvania Supreme Court in Hospital Utilization Project v. Commonwealth of Pennsylvania, 487 A.2d 1315 (Pa. 1987).

[21] Premiums and market share are as reported by group in the 2009 Pennsylvania Insurance Department Commissioner’s Annual Statistical Report, 2008 Accident and Health Market Share, All Companies – by Group Code table found on pages 254-262. These include premiums from all subsidiaries (for-profit and non-profit) of the four companies.

[22] 2.4 million are in local areas, according to Independence Blue Cross’ website.

[23] Figures taken from parent company filings with the National Association of Insurance Commissioners (NAIC) for 2003 to 2009. While these are not the consolidated, company-wide surpluses, the parent company does tend to hold most of the group’s surplus. Consolidated financial data were not available for each company or year, so NAIC data were used instead.

[24] Pennsylvania Insurance Department, “Statement of Surplus Levels for Blue Cross and Blue Shield Plans - 2009,” http://www.portal.state.pa.us/portal/server.pt/document/856769/surplus_s....

[25] According to a 2010 report from ConsumersUnion, health insurers often add an extra 1% to 6% to the cost of premiums to build surplus and weather financial uncertainly.

[26] ConsumersUnion, How Much Is Too Much: Have Nonprofit Blue Cross Blue Shield Plans Amassed Excessive Amounts of Surplus? July 2010, http://www.prescriptionforchange.org/pdf/prescriptionforchange.org-surpl....

[27] ConsumersUnion, How Much Is Too Much: Have Nonprofit Blue Cross Blue Shield Plans Amassed Excessive Amounts of Surplus? July 2010, http://www.prescriptionforchange.org/pdf/prescriptionforchange.org-surpl....

[28] U.S. Bureau of Labor Statistics, Quarterly Census of Employment and Wages, Pennsylvania wages (all industries, total wages, all establishment sizes) (accessed July 27, 2010), http://data.bls.gov/cgi-bin/dsrv?en.

[29] Governor’s Budget projections for 2010-11 assume Community Health Reinvestment payments from the Blues will continue after 2010. If the Community Health Reinvestment payments are permitted to expire, 92% of the funding for adultBasic will be eliminated beginning in January 2011.

[30] Pennsylvania Department of Public Welfare, “Medical Assistance for Workers with Disabilities,” (accessed July 27, 2010) http://www.dpw.state.pa.us/servicesprograms/medicalassistance/003670301.htm.

[31] Commonwealth of Pennsylvania, 2010-11 Governor’s Executive Budget, February 2010.

[32] Community Health Reinvestment payments to the Commonwealth are estimates based on company CHR plans filed at the end of the previous calendar year. The plans are archived on the Pennsylvania Insurance Department’s website: http://www.portal.state.pa.us/portal/server.pt/community/industry_activi....

[33] Capital Blue Cross, “2010 CHR Application,” http://www.portal.state.pa.us/portal/server.pt/document/856762/cbc_chr_a....

[34] Pennsylvania Insurance Department, “Act 62: Community Health Reinvestment Activities,” http://www.portal.state.pa.us/portal/server.pt/community/industry_activi....

[35] Families USA, Dying for Coverage in Pennsylvania, March 2008, http://www.familiesusa.org/assets/pdfs/dying-for-coverage/pennsylvania.pdf.

[36] Families USA, Hidden Health Tax: Americans Pay a Premium, May 2009, http://www.familiesusa.org/assets/pdfs/hidden-health-tax.pdf.