CareFirst declines to pass on tax to customers

THE BALTIMORE SUN

Health insurer CareFirst BlueCross BlueShield said yesterday that it will absorb a 2 percent premium tax on HMOs - imposed to help solve a medical malpractice insurance crisis - rather than pass it on to 330,000 Maryland members.

CareFirst, the state's largest health insurer, said it had decided to absorb the roughly $13.7 million, after-tax cost this year in an effort to help keep health insurance affordable. A rate increase would have cost a typical family of four about $200 annually, CareFirst estimated.

"Our directors determined that our overall financial status, market conditions, trends and forecasts allow CareFirst to make this commitment to keep HMO premiums more affordable for our members in 2005," William L. Jews, CareFirst president and chief executive, said in a statement.

The insurer, which has been trying to improve its image with Annapolis lawmakers, had previously indicated that policyholders would likely have to bear the cost of the tax.

The HMO tax became a political hot potato last month when Mid Atlantic Medical Services Inc. (MAMSI) and Aetna Inc. moved to raise rates days after the General Assembly overrode Gov. Robert L. Ehrlich Jr.'s veto of the malpractice legislation.

Kaiser Permanente and Coventry Health Care Inc. also are boosting premiums to cover the tax.

Republicans, including the governor, accused Democrats of having ignored insurers' blunt warnings that the tax would mean higher costs for consumers. Democrats charged that Insurance Commissioner Alfred W. Redmer had done little to protect Maryland residents from rising costs and called for his resignation.

Bickering goes on

The political bickering continued yesterday even as both sides applauded CareFirst's move. Democratic lawmakers who favored extending the tax to HMO premiums as a way to subsidize malpractice insurance premiums seized on the announcement to bolster their argument that insurers could and should absorb the cost of the tax.

But Ehrlich spokesman Henry Falwell said that while good for CareFirst customers, it "means nothing for the hundreds of thousands of Marylanders who will be paying more for health care as a result of the legislature's tax hike."

Leading Democrats said they hoped CareFirst's decision would put pressure on other insurance companies to reconsider passing on the tax increase.

"CareFirst went through the appropriate action of determining what was going to be in the best interest of their subscribers and assessed what effect the tax would have before making a knee-jerk reaction," said House Speaker Michael E. Busch.

"It's unfortunate the insurance administrator did not review other companies that many believe are grabbing at a golden opportunity to increase their profits," Busch said.

Senate President Thomas V. Mike Miller said he wanted "to congratulate the board of directors and chairman of CareFirst for putting their customers ahead of their corporate bottom line. Governor Ehrlich called it Economics 101 when the other HMOs passed this loophole closing on to the consumer. I classify this as Leadership 101 or Good Customer Relations 101."

Miller said he hoped other HMOs would emulate CareFirst. "The stocks of all these HMOs are doing very well," he said. "Each of these companies can absorb this without doing undue damage."

'Unconscionable'

Del. John Adams Hurson, chairman of the House Health and Government Operations Committee and a Montgomery County Democrat, said of CareFirst: "They have reserves that are far in excess of what is the norm in the industry. If they passed it on, it would have been unconscionable."

Other companies will have to lower their rates as a result, he predicted. "Given their size, they [CareFirst] set the market," he said.

Fawell, the Ehrlich spokesman, said legislators are mistaken in blaming Redmer for other HMOs' decisions to pass the tax on. "That is a decision that every organization has to make for itself," Fawell said. "Commissioner Redmer implements the policies. He does not make them. In this instance, the legislature chose to raise taxes, even over the governor's objection."

Redmer said yesterday that in making decisions regarding rates, insurers look at expenses, market share and the business climate.

"That's a business decision for them to make, and I'm pleased they made it," he said of the CareFirst announcement.

But whether other insurers will follow will depend, he said, on "how competitive their products will be in light of the CareFirst decision and in light of other competitors' decisions. That's why the free market and competition is a good thing."

The Maryland Health Care Commission estimates that 1.2 million Marylanders are covered by HMOs, out of a total of 3.6 million with private health insurance.

Change of course

CareFirst's decision, announced yesterday when the company was closed for the Presidents Day holiday, marked a change in direction for the Owings Mills-based insurer, which had signaled last month that it was likely to increase rates. The extension of the tax to HMOs "will ultimately and inevitably cost our policyholders," spokesman Jeffery W. Valentine had said at the time.

But since then, "the board has looked at the company, at its total financial condition, at the marketplace, at where care cost trends are and have been and decided this is something we can and should do to ensure affordability of care for the members with HMO coverage," Valentine said yesterday.

CareFirst itself has been the target of legislative ire for its 2001 plan to convert to for-profit operation and sell the company for $1.3 billion to a California insurer. That deal was tainted by lavish executive bonuses, the state insurance commissioner ruled in blocking the sale in 2003.

Reforms imposed

The legislature subsequently moved to reform CareFirst, passing a law that required replacing Maryland members of CareFirst's board and obligated the insurer to remain nonprofit. The board turnover was completed in July, and the new board, chosen by a state-selected nominating committee, has been working to meet its nonprofit obligation.

In January the company unveiled CareFirst Commitment, a $92 million-plus initiative to improve health care access and affordability. To carry out that initiative, which includes contributions to prescription drug programs for low-income seniors, CareFirst had said it will lower its operating earnings target by at least $60 million in 2005 in order to moderate rate increases.

But the plan has been criticized by some for not doing enough and for helping to boost the insurer's competitive position. Hurson labeled the plan "pathetic" after being briefed by company officials last month.

Yesterday, CareFirst said the decision not to pass on the HMO tax was in line with that program and represented an amount beyond the $60 million.

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