Capital BlueCross Against Proposed Pa. Health Insurance Tax

January 6, 2003

Capital BlueCross President and CEO James Mead issued a statement supporting Pennsylvania Gov.-elect Ed Rendell’s proposed health insurance reserve tax to help alleviate the state’s medical malpractice liability crisis.

“The medical-malpractice crisis in Pennsylvania is real, and we applaud Gov.-elect Ed Rendell for acting decisively to resolve it,” Mead stated. “We care deeply about the health care of our patients, and we care deeply about the nearly 7,000 physicians and nearly 50 hospitals in our region of Pennsylvania who treat them. We know how ominous an issue this is for health care providers. And we stand ready to help.”

Mead continued, “But we have serious issues and concerns with this proposal to pay for it by levying a brand-new, nearly quarter-billion dollar tax on the reserves of the customers of health insurance companies, including non-profit health insurance companies such as Capital BlueCross. We and our customers and members did not cause this crisis or contribute to it. In fact, we too are already paying for it through higher utilization of services resulting from ‘defensive medicine’ and in our recently contracted physician network. Yet this proposal requires our members to pay even more and it requires our industry alone to bear the entire cost of this temporary fix. That is not fair. And it is bad public policy—for reasons I will explain.

“We are disappointed to have first learned about this proposal to tax our members after it had already been announced, and without having any opportunity to comment on how it might impact our 800,000 customers and our more than 2,000 employees,” Mead stated.

“First, it’s important to understand what we are talking about here. Our surpluses are funds set aside to protect our customers. Insurance companies are required by state law to have surpluses, and with good reason. That is how we ensure we can pay for our customers’ claims, even in the face of catastrophic events—be they events of nature, financial events, or some other calamity. The law sets very minimal surplus requirements—but stable insurance companies must set aside more than those minimum amounts. Indeed, in order for us to maintain our national network and use the Blue Cross trademark, we must exceed those amounts several times over. And it’s a good thing we do. In the past two years, at least two important Pennsylvania insurance companies—companies that once had well above the minimum surpluses—nonetheless failed, and had to be declared insolvent by the state, ultimately costing Pennsylvanians millions of dollars. Ironically, one of those companies was a large medical malpractice insurer.

“It’s also important to remember that Capital BlueCross, and all the “Blue” plans — are non-profit companies. Our reserves or surpluses are not distributed to shareholders. They are not kept as profits or paid as dividends to investors on Wall Street. Rather, they are a savings account held in reserve for our members. They serve first as a security net, to assure our members that, through good, bad or catastrophic times, their health care needs will be paid for and available.

“Second, these funds generate interest income—money that helps us to limit the growth of our premiums,” Mead continued. “Everyone knows health care premiums have been going way up; without our surpluses, they would be going up even more. That is an indisputable fact. At Capital BlueCross, we haven’t put a dime of premium revenue into reserves in more than seven years. To the contrary, we take interest income and principal out of reserves to limit premium growth.

“This proposal would significantly diminish our ability to accomplish both those important public-policy goals. Simply put, it would give our members less security, and contribute to higher premiums. And that’s not fair to them. They did nothing to create this crisis.”

Mead stated, “We also are concerned about the proposal to use this crisis to institute a graduated tax rate in Pennsylvania. Pennsylvania proudly has resisted graduated tax rates, and with good reason — and that logic applies just as pointedly here. Companies such as Capital BlueCross have sound surpluses because we have run our businesses conservatively. We are proud of that fact. Ironically, under this proposal, we would be penalized for that prudence. We would pay a higher tax rate now than if we had reduced our reserves by spending liberally. This is precisely the opposite of good public policy. Insurance companies that hold down their spending, and put that money into reserves for their members, should be supported, not punished.

“In addition, as a regional health insurer, we are concerned by the regional inequities that appear to exist in this proposal. We believe the medical malpractice crisis is a statewide problem that requires a statewide solution — and we are willing to do our fair share as Pennsylvanians. But this proposal does not appear to be fair. We have tried to run preliminary calculations as to who will pay what under this tax, from the limited information available to us in the press release. Simply put, conservative companies such as ours will pay the lion’s share of the tax burden—both in terms of actual dollars, and as a percentage of our reserves. A significantly disproportionate share of this tax would come from our members in this region, but only a relatively small share of the revenue from this tax would benefit the physicians and hospitals used by our members in this region. Capital BlueCross is one of the smaller Blue plans in Pennsylvania—but our members would be made to pay one of the largest shares of this new tax.”

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