The state insurance commissioner turned thumbs down yesterday on a request by FreeState HMO for a 47 percent rate increase in its "open enrollment" policies.
The open enrollment policies are designed to offer affordable insurance without a medical exam, to reduce the number of uninsured.
FreeState's parent, CareFirst BlueCross BlueShield, receives $32 million in discounts on hospital rates each year in exchange for offering the policies. About $5 million of the discount goes to FreeState, with the rest applying to other CareFirst policies.
"It is not appropriate to grant FreeState an increase in premiums for this type of policy when it does not pass on its full cost savings to policyholders," said the insurance commissioner, Steven B. Larsen.
G. Mark Chaney, CareFirst executive vice president and chief financial officer, said the hospital discounts should not be seen as a subsidy only for open enrollment policies, but as a way of keeping premiums lower for all of CareFirst's 2.7 million subscribers. "We believe that's good public policy and is supported in state law," he said.
In addition to rejecting the increase on open enrollment policies, Larsen trimmed to 25 percent FreeState's request for a 42 percent increase on its individual policies, which cover about 18,000 members.
Under Larsen's actions, FreeState will lose about $10 million in the individual market next year, "and we don't believe it's appropriate to have these policies subsidized by all our other products," Chaney said.
The CareFirst official said the company is reviewing its options now, which include dropping some or all of the policies or seeking a hearing to review Larsen's action.
The rate battle comes against a background of losses in FreeState's commercial business and continued controversy over the hospital discounts that come with participation in the open enrollment program.
For the quarter that ended June 30, CareFirst reported a loss of $7.1 million on FreeState's commercial business, which covers 256,000 members.
CareFirst has already announced that it is dropping its Medicare HMO at the end of the year, leaving about 32,000 Maryland seniors looking for other coverage. It also said it is considering whether to stay in the state's Medicaid program. Chaney said yesterday, "We're working closely with the state people, and we haven't made a decision yet."
As for the hospital discount, the state, which regulates hospital rates, has offered a 4 percent price cut for more than two decades to encourage insurers to offer open enrollment policies. The discounts are made up by higher rates to other insurers and to individuals paying hospital bills. Over the years, a number of state commissions have concluded that the discount is too big.
The most recent panel to tackle the issue, co-chaired by Larsen, recommended last year that the discount be cut in half. A bill in the legislature would have done that, but last-minute maneuvering by CareFirst led to the General Assembly freezing the discount for two years. In return, CareFirst agreed to subsidize a prescription drug insurance plan for rural seniors.
While other insurers offer open enrollment policies as well, CareFirst gets the lion's share of the discount.
According to Larsen, FreeState collected $4.1 million in premiums on 1,400 open enrollment policies, and paid out $5.5 million in claims. With administrative costs, it lost nearly $2 million on the policies - but enjoyed $5 million in hospital discounts.
Even if FreeState dropped its open enrollment policies - forgoing the $5 million - CareFirst could continue to offer an open enrollment indemnity policy. The indemnity plan, which enrolls about 800 people, has fewer benefits than FreeState's HMO plan, but has lower premiums.
FreeState's open enrollment premiums are $265 a month for individuals and $748 for families. For indemnity coverage, the premium is $131 for individuals and $323 for families.