Market, not charity, likely motivating CareFirst


CAREFIRST BlueCross BlueShield, Maryland's biggest health insurer, says its plan to shrink potential revenue by $60 million and book a smaller profit for 2005 is part of its new, enlightened mission as a nonprofit do-gooder.

I don't buy the reason. The rest of the industry is doing the same thing - restraining price and revenue increases to gain new customers. Playing copycat makes business sense for CareFirst or any insurer.

And business sense continues to be the main motivator for this organization - bigger, fuzzier "nonprofit" label or not. As it should.

CareFirst's Mother Teresa act was prompted by the General Assembly, which decided the insurer made too much money and ignored its charitable duty as a nonprofit corporation. So the company has rolled out $90 million in proposed "public benefits," including $60 million in forgone price increases for medical plans.

But is this a public benefit like Bill Gates' donation to fight malaria in Africa? Or is it more like GM's rebates on Chevy Silverados?

CareFirst Chairman Michael R. Merson disputes my depiction of 2005 rate and profit restraint as tactical marketing in philanthropic clothing.

"We didn't look at it that way," he says. "If the company had wanted to, we believe we could have continued to target to earn a bottom line of approximately 3-plus percent to 3.5 percent" instead of the 2.2 percent projected for this year.

But don't take my word for it. Maryland Insurance Commissioner Alfred W. Redmer Jr. doesn't sound like he's swallowing it, either. Redmer already disallowed a dental insurer from claiming lower-than-possible rate increases as fulfillment of its nonprofit duty.

While he considers these matters on a case-by-case basis, he says that a precedent has been set. "I don't know that increasing market share [through lower prices] is meeting the nonprofit mission," he said. In the dental insurer's case, "the public-policy position I took is 'no.' Arbitrarily keeping your rates low does not meet the nonprofit mission."

Even for-profit medical insurers are trying to keep rates low this year - potentially reducing profit - in hope of drawing new business, analysts say. And they don't have legislators yelling at them about "commitment" to nonprofit obligations.

"Pricing is much more aggressive than it was, say, several years ago," says Philadelphia insurance analyst Douglas B. Sherlock, although not as sharp-penciled as some expected, he adds.

For health insurance premiums, "this is the slowest increase since the late 1990s," says Thomas Carroll, health insurance analyst at Legg Mason Wood Walker in Baltimore. "I would suggest that CareFirst is probably seeing its cost trends come down as well and therefore is able to lower its prices as a result."

This is all relative, mind you. "Lower its prices" means lower than what they might have been, not lower absolutely. Nationally, analysts expect health costs to rise "only" 8 percent or 9 percent this year, with insurance premiums rising 9 percent or 10 percent.

Does any of this matter? Should it make a difference to policy-makers if CareFirst's philanthropic contributions, strictly characterized, are less than the advertised $90 million?

Maybe not. Certainly CareFirst should do genuine charity, such as selling below-cost policies to the indigent or subsidizing neighborhood clinics. But the amount it must give away shouldn't greatly exceed the unpaid taxes and other advantages of being nonprofit, which probably are nowhere near $90 million. Otherwise the company would be on unequal footing with its tax-paying, for-profit competitors.

The General Assembly has forgotten this, but it wasn't long ago that people worried CareFirst was making too little money, not too much. Forced philanthropy that substantially reduces CareFirst's capital cushion would risk tagging taxpayers with a bailout - or employers and workers with even bigger-than-usual rate increases.

It's a good thing the company has no bondholders. Otherwise Merson's words before the General Assembly last week - "We will not be driven by the bottom line to the extent the company was previously" - would scare them to death.

Because it can't tap the capital markets like other companies, CareFirst has a double need to stay far above required solvency levels. Its balance sheet has improved substantially in recent years, but it will need the pillow if there's a price war. Or if, as looks likely, Delaware regulators force the separation of CareFirst's Delaware subsidiary, reducing the larger company's capital heft and economies of scale.

Do you really want more charity out of CareFirst? Then blame the General Assembly for blocking its sale two years ago to WellPoint Health Networks. As payment, WellPoint would have set up a $1 billion charitable Maryland foundation devoted to health care.

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