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PA Bulletin, Doc. No. 04-122


Reserve and Surplus Levels of Hospital Plan and Professional Health Services Plan Corporations; Application; Notice 2004-01

[34 Pa.B. 458]

   The Insurance Department (Department) has directed Capital Blue Cross, Highmark, Inc. d/b/a Highmark Blue Cross Blue Shield and d/b/a Pennsylvania Blue Shield, Hospital Service Association of Northeastern Pennsylvania d/b/a Blue Cross of Northeastern Pennsylvania and Independence Blue Cross (collectively, Blues Plans) to make applications for approval of the reserves and surpluses they maintain under, inter alia, 40 Pa.C.S. Chapter 61 (relating to hospital plan corporations). The applications, in a form further described herein, are due on April 15, 2004. The completed applications will be made available on the Department's website ( and in its public room and regional offices for inspection and copying as soon as possible thereafter. Interested parties are invited to submit written comments regarding the completed applications on or before May 15, 2004, to Blues Reserve/Surplus Application, Insurance Department, Office of Insurance Product Regulation and Market Enforcement, 1311 Strawberry Square, Harrisburg, PA 17120, (717) 787-4192,

   The Blues Plans face a large variety of financial, economic and operating risks, all of which require the maintenance of surplus to assure continued viability of these plans. Because experts, such as accountants, actuaries and economists, often disagree how to best measure the risks facing enterprises such as the Blues Plans, it is necessary for the Department to determine and monitor what level of surplus are adequate to efficiently protect the continued viability of the Blues Plans. The National Association of Insurance Commissioners (NAIC) has developed a tool, known as Risk Based Capital (RBC), as a formulaic approach to establishing capital requirements for insurers, while accounting for the risks associated with the business operations of each insurer. The NAIC RBC formula ratios an insurer's total adjusted surplus to its measured authorized control level surplus. Calculating RBC ratios necessarily requires accurate statement of proper reserves. Utilizing the RBC scoring methodology, the national Blue Cross Blue Shield Association has identified an RBC ratio of 375% of Authorized Control Level to constitute an ''Early Warning Level,'' at which point monitoring may be considered by that organization. On a countrywide basis, the Blues were operating at a system-wide average RBC of 628% as of June 30, 2002, and approximately 60% of premiums were written by Blues plans operating at an RBC ratio of 600% or less.

   The Department held a public informational hearing on September 4, 2002, to gather information about the reserve and surplus levels of the Blues Plans. As a result of analyzing information received at and after that hearing, the Department determined that the Blues Plans collectively held in excess of $2.4 billion in reserves for unpaid liabilities and approximately $3.5 billion in surplus as of December 31, 2002. The Department also believes that an appropriate RBC ratio range for the Blues Plans is most likely between 350% and 650%. Surplus maintained at levels resulting in RBC ratios in excess of a respective maximum ratio within that range, and in any event in excess of 650%, are likely excessive.

   Whether current surplus levels of the Blues Plans are excessive cannot adequately be determined from the information provided to date, and at what level within the identified efficient RBC range each Blues Plan should be operating also requires additional analysis. Moreover, since the September 2002 informational hearing, the Blues Plans have each sought rate increases on various insurance products, while at the same time certain Blues Plans have also sought advice, permission or other input concerning expenditure of surplus. Therefore, to assure that the Blues Plans are maintaining properly stated reserve levels and appropriate but not excessive surplus to properly fulfill corporate obligations and social missions, the Department has determined that each Blues Plan must submit an application for approval of its reserve and surplus.

   In the application, each Blues Plan must, in a manner the Department deems necessary and proper: (a) state what reserve levels it and all of its insurance subsidiaries are holding and what surplus levels it and all of its insurance subsidiaries are currently maintaining; (b) state the maximum RBC ratio within the 350% to 650% range that is appropriate, and explain the rationale for that maximum ratio; (c) identify the Plan's funds dedicated, allocated or expended for charitable purposes in 2002 and 2003, and those planned for 2004 through 2006; and (d) provide a proposed business plan explaining how any maintained surplus that results in an RBC ratio that is in excess of the maximum RBC ratio will be fairly and equitably distributed to benefit Plan participants and the Commonwealth's underinsured and uninsured citizens in a manner befitting charitable and benevolent institutions such as the Blues Plans. Prior to the due date for the applications, the Department may make inquiries, audits and investigations, and may require the submission of supplemental studies and information, as it may deem necessary or proper, to enable it to reach a determination.

Deputy Insurance Commissioners

[Pa.B. Doc. No. 04-122. Filed for public inspection January 16, 2004, 9:00 a.m.]

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