Much like Goldilocks, when it comes to assessing its hundreds of millions of dollars in reserve funds, regional insurer CareFirst feels it is not too big, nor too small, but just right.

That opinion was made clear at a Maryland Insurance Administration hearing Nov. 19, serving as a follow-up to an analysis of the surplus cash on hand for CareFirst of Maryland and Group Hospitalization and Medical Services Inc., both non-profit health plans under CareFirst Inc. The analysis was performed for the MIA by consulting firm The Invotex Group.

Invotex cited the “unique” nature of GHMSI, which covers about 150,000 policyholders in the District, 700,000 in Maryland and 300,000 in Northern Virginia and is thereby governed by three regulators. GHMSI has a current reserve of $687 million and CareFirst of Maryland a surplus of $394 million.

Neither of those levels were considered “excessive” by Invotex and in comparison with nine other mid-sized, non-profit national Blue Cross or Blue Shield affiliates, GHMSI’s reserve levels were at the higher end of the range and CareFirst’s were at the lower end.

A similar question of whether GHMSI reserves are “unreasonably large,” as defined by law is under analysis in Washington, D.C., where insurance regulators there held a similar hearing in September. The District postponed its opinion on the matter until the end of the year to review Maryland’s opinion on the matter, since the surplus came from those two jurisdictions as well as Virginia.

Chet Burrell

Chet Burrell, president and chief executive officer for Owings Mills, Md.-based CareFirst, said the insurer “agreed” with the consultant’s findings and found “nothing we significantly disagree on.

“We are very appreciative of the work done by Invotex and the manner in which it was done,” he said. “We find the report accurate, clear and understandable.”

Burrell noted that he was “struck” with the fact that three different firms, two hired by the insurer and one by Maryland regulators, all reached the same conclusion that GHMSI’s reserves were in well within target ranges for risk-based capital (RBC), the amount of money needed to absorb losses.

For CareFirst, its RBC levels are monitored by both state regulators, as well as the national Blue Cross and Blue Shield Association, which grants them the trademark, to ensure that a company remain solvent and meets its promises to policyholders.

How much is too much?

While the current reserve dollar amount avoided scrutiny by Invotex, the way setting that money aside did not. Actuaries for CareFirst recommend a range to the company and Invotex felt that range could be “lower and tighter” than the one they are using now.

Maryland Insurance Commissioner Ralph S. Tyler said determining the line between too much reserve funds and too little is “a complicated question” as “financial solvency is the bedrock of consumer protection in insurance.”

Tyler pressed Burrell on CareFirst’s stance on their reserve levels, asking if the goal should be “to have as little as it safely can” to operate.

Burrell said that if reserve levels are too low, the company “is less able to sustain the shocks we are going through,” and a company becomes too “hesitant” and “unwilling” to explore avenues like new products and programs due to too much concern over reserve levels.

“To be healthy,” he said, “is to be within a range.”

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Cash contributions

In addition to recommending new ways to assess reserves, Invotex advised against any kind of plan to “attribute” parts of GHMSI’s surplus cash to Maryland, Virginia and Washington, D.C.

Under D.C. law passed last year, if regulators there find GHMSI’s reserves as “unreasonably large,” CareFirst must submit a plan to give back what is attributable to District policyholders, who were in essence overcharged.

“This is a question without a possible answer,” Thomas Finnell, a managing partner with Invotex said. “It is like having a swimming pool and trying to have three different water heights …each one affects the other.”

Instead, Finnell promoted the idea that if both Maryland and the District concur that reserve level is too high, CareFirst submit a plan that benefits affected subscribers over time, presumably through temporary deferrals of rate increases. The benefits are then allocated back by jurisdiction, he said, and by group or subscriber in close proportion to the sources of recent contributions to the reserve level.

One group advocating for a refund for customers in the District is public policy group DC Appleseed Center, which told District regulators in September it would like to see GHMSI reduce its surplus from $687 million to $325 million. Rather than go to current policyholders, the group feels that it could benefit “future policyholders,” those who are in need of health insurance.

“We are talking about the largest health insurance company in the region sitting on hundreds of millions in surplus,” the center’s executive director, Walter Smith, said at the Maryland hearing. “…If there is excess surplus, that could start to make a difference in a lot of people’s lives.”

For more on this story, see the January 2010 edition of Insurance & Financial Advisor.