State regulators are investigating a recent $950 million dollar payout from Blue Cross of California to its parent company WellPoint. Regulators suspect the dividend may violate a pre-merger agreement the companies signed in 2004. At the time, Blue Cross agreed to limit the amount of profits it sent out of California, to help keep a lid on health insurance premiums. KPBS Health Reporter Kenny Goldberg has the story.
With 189,000 employees and retirees, the University of California is one of the state's largest buyers of health benefits. Randy Scott is with UC's office of human resources. Every year, his department gets a bid from Blue Cross and other health insurance companies. The proposals invariably contain rate increases. Scott says he has a standard way of dealing with it.
Scott: Well, at one level I have a pillow in which I scream.
Insurers like Blue Cross raised UC's premiums an average of 11.7 percent last year. Blue Cross hit many smaller companies with 20 percent increases. And over the past few years, some individual Blue Cross members have seen premiums go up more than 50 percent.
To be sure, for-profit health insurance companies are in business to make money. But some say Blue Cross is taking things a little too far.
In 2004, Blue Cross of California merged with an out-of-state company to form WellPoint. To win state approval of the deal, Blue Cross agreed to cap the amount of profits it would take out of California for three years. The cap was around $500 million annually.
Blue Cross recently made a $950 million payout to WellPoint. State regulators aren't happy about it.
Lynne Randolph: Because it certainly if not violating this agreement legally, we think it's violating the spirit of the agreement made with California, which is that they would not excessively upstream money up to the parent company.
Lynne Randolph is with the California Department of Managed Health Care . She says there's something troubling about the situation.
Randolph: Well, we feel that a $950 million payment to the parent company, is taking that money directly from California ratepayers, where that money could maybe better be used to provide healthcare for the Blue Cross of California members.
Randolph's agency has launched an investigation into the payout. Blue Cross contends the $950 million dividend is totally above board.
Peggy Hinz is the company's head of public relations.
Hinz: It's not really unusual. I know it gets a lot of attention because it's a very large number for any of us, but it's actually the course of any large corporation. It's sort of the usual course of business that we give payments between a subsidiary company such as Blue Cross, back to its parent company, in this case WellPoint.
Hinz says Blue Cross is generating profits due to strong growth, and because the company is keeping its costs down. Hinz doesn't buy the argument that instead of sending profits to WellPoint, it could lower premiums in California.
Hinz: Well, we try to keep rates as low as possible, but one doesn't necessarily have anything to do with the other.
That's hogwash, says Jerry Flanagan, with the Foundation for Taxpayer and Consumer Rights .
Flanagan: A company like Blue Cross doesn't make money, unless it's collecting it from premiums, and the only reason that they have huge levels of profits to transfer to their parent company, is because they're keeping more money for themselves, and paying doctors and hospitals less.
Flanagan says Blue Cross has removed about half-a-billion dollars more than was allowed under the merger agreement.
Flanagan: That's a lot of money that could be used to keep rates down here in California, and those reserves are all paid for by premium increases to enrollees.
Since 2004, Blue Cross has steadily raised premiums. At the same time, it's sent more than $2 billion in profits to its parent company.
Blue Cross insists they've done nothing wrong. The Department of Managed Health Care may come to a different conclusion. Depending on the outcome of its investigation, the agency could fine Blue Cross or order the company to refund California policyholders.
Kenny Goldberg, KPBS News.
