Prior to leaving office as Maryland’s insurance commissioner, Ralph S. Tyler says his agency will provide state legislators with recommendations on how to better govern the reserve levels of non-profit health insurers.

Ralph S. Tyler

Tyler first announced the preparation of a report for the General Assembly during a recent hearing on the state’s largest such insurer, CareFirst, and two of its subsidiaries, CareFirst of Maryland and Group Hospitalization and Medical Services Inc. (GHMSI).

He told IFAwebnews.com Dec. 16, the day he announced his resignation to take a post with the U.S. Food and Drug Administration, that that pledge will be fulfilled by the Maryland Insurance Administration. Tyler’s last day in office is Jan. 8, five days before the General Assembly begins its annual 90-day session.

Tyler’s recent hearing capped a nearly yearlong review of the reserves levels for the two insurers to see if cash set aside for contingencies was excessive and how to monitor such funds in the future. A consulting firm, The Invotex Group, presented its analysis on the levels at the hearing.

“The line between too much and too little is a complicated question,” Tyler said, “as financial solvency is the bedrock of consumer protection in insurance.”

Through its own analysis, Invotex determined that neither the $394 million in reserves for CareFirst of Maryland nor GHMSI’s $687 million was “excessive,” according to its 99-page report. Findings were based in part on comparisons with nine other mid-sized, non-profit Blues affiliates in the U.S.

The District of Columbia has raised questions about the amount of money in GHMSI’s reserves. Regulators in the District could require CareFirst to create a plan to return some of the reserve funds to its customers in the District if the reserves are deemed “unreasonably large” under its laws. That determination was expected by the end of the year.

‘Unique’ company structure

While Invotex offered minor tweaks to the way Owings Mills, Md.-based CareFirst determines reserve amounts, it did have some recommendations to the insurer on its company structure.

Thomas Finnell, managing director for Invotex, noted in the report the “unique” structure of the company in that its two principal operating companies – CareFirst of Maryland and GHMSI – are non-profit, non-stock entities and that there are limitations on the ability “to move money freely at the whim of management” to mitigate risk.

Finnell pointed to an inter-company agreement at CareFirst where, in the event of a shortfall by one of its companies, another one can issue loans, capital contributions or other funds to assist. Besides suggesting that an issue threatening one company, such as a pandemic, would likely impact the others, Finell noted that the insurer is governed by three jurisdictions: Maryland, the District and Virginia.

“We have considerable doubt as to how well [the inter-company agreement] would work,” he said. “As a practical matter, the provision has really never been tested. That particular trigger has never been pulled.”

If it was pulled, Finnell added, regulatory approval from three jurisdictions “is not easily decided and would take time.

“When managing risk, if can’t get assurance when need it, that creates other problems,” he said in the report.

Non-profit pledge

Chet Burrell

Chet Burrell, CareFirst’s president and chief executive officer, said at the MIA hearing on the reserves that the hope when CareFirst’s companies were affiliates “was that they would achieve operating efficiencies and share resources,” and that today, “we operate essentially as a single company.”

Burrell acknowledged that while the companies are operationally integrated, reserve setting is not. Two separate legal entities – CareFirst of Maryland and GHMSI – are subject to the requirements of each of its regulators.

Noting the insurer was open to exploring a more efficient manner, Burrell made one point clear to all at the hearing: CareFirst intends to stay a not-for-profit company.

“The only point I want to make clear is that we wish to remain as we are, a nonprofit,” he said. “ We would not want the form change to imply that we were interested in anything else. But if we could get some capital efficiency by better pooling, freer exchange between the various entities, then we would be very interested in exploring that, and that would go hand in hand with what we think is already the operating efficiencies of the company that were gained by the company’s sharing resources.”

Reserve recommendations

The Invotex Group recently made several recommendations to the Maryland Insurance Administration regarding non-profit health plans and their reserves, including:

• Requiring plans to periodically assess reserves, report analysis to MIA
• Changing regulations to incorporate cooperation with MIA, insurer on rates to meet targeted reserve levels
• Requiring CareFirst to update its reserve range analysis every 3 to 5 years
• Modifying state insurance law regarding minimum surplus test of 8% of prior year premiums to better protect consumers
• Considering a three-tiered range approach like Pennsylvania, tying in risk and contingency factors for rate changes and reserve levels

Source: The Invotex Group