Re: Consumers Union s comments on California Physicians Service (dba Blue Shield of California) Rate Filing, SERFF number BCCA

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1 Via to: Elaine Paniewski Contract Manager Division of Premium Rate Review Department of Managed Health Care th Street, Suite 500 Sacramento, CA Re: s comments on California Physicians Service (dba Blue Shield of California) Rate Filing, SERFF number BCCA Dear Ms. Paniewski:, the policy and advocacy division of Consumer Reports, writes to provide you with comments on California Physicians Service (dba Blue Shield of California) Rate Filing, SERFF number BCCA In addition to the review enclosed in the attached memorandum by our consulting actuary, Allan I. Schwartz, draws DMHC s attention to the following when deciding whether this rate request is unreasonable: I. The opacity of Blue Shield s rate filing makes it hard to determine if it is living up to its obligations and pledge as a nonprofit. II. Blue Shield includes numerous factors that were not adequately supported to justify its claims that costs will increase in III. Blue Shield did not account for cost saving anticipated in I. The opacity of Blue Shield s rate filing makes it hard to determine if it is living up to its obligations and pledge as a nonprofit. As a California not-for-profit mutual benefit corporation, Blue Shield s assets must be irrevocably dedicated to charitable, religious, or public purposes. 1 Blue Shield explains that their status as a nonprofit entity means that [p]hilosophically, we re guided by our mission to ensure all Californians have access to high-quality health care at an 1 California Corporations Code Part 3, Chapter 1, Article 1, Section 7111, available at Headquarters Office 101 Truman Avenue Yonkers, New York (914) (914) (fax) Washington Office th Street, NW #500 Washington, DC (202) (202) (fax) West Coast Office 1535 Mission Street San Francisco, CA (415) (415) (fax) South West Office 506 West 14th Street, Suite A Austin, TX (512) (512) (fax)

2 affordable price. 2 The scant amount of information provided by Blue Shield s rate filing makes it difficult to decipher whether Blue Shield is fulfilling its obligation. This opacity combined with recent public activity is concerning. The planned contribution to surplus is excessive and unreasonable. Nonprofit organizations like Blue Shield amass surplus : the excess of a carrier s assets over liabilities. Because nonprofits are intended to serve a public benefit and not enrich the company or stakeholders, the purpose of the surplus is to protect the organization and its stakeholders (here, providers and policyholders) in the event of financial losses, ensuring solvency and moderating premium increases. Blue Shield has historically struggled against keeping their surplus in check. In response to mounting pressure, Blue Shield pledged to limit their annual net income to 2% of revenue, with any excess returned to customers and the community. Between 2010 and 2012, $520 million was returned. 3 Even with this pledge and the associated refunds, Blue Shield reported a ratio of tangible net equity to required tangible net equity of 1,540% as of June 30, , a ratio that can be viewed as a lens through which to estimate Blue Shield s current surplus. In other words, Blue Shield has over-15 times more equity than needed. To call their nearly $4 billion excess tangible net equity 5 (or, surplus) substantial is an understatement. Clearly, Blue Shield s surplus is significantly more than needed to protect their solvency, so why are they increasing insurance rates instead of using their surplus to moderate rates? This question why are rates going up when Blue Shield has a robust surplus is especially relevant in light of their plan to increase contribution to surplus from 1.15% to 1.95%. Characterizing this decision as better aligning with our commitment to limit annual net income to 2% of revenue across the company 6, is a weakly disguised attempt to reframe the facts. The 2% Pledge is not a target Blue Shield should strive to meet; it is a ceiling. What Blue Shield proposes tucking more money away does not help honor the commitment to a 2% maximum, it merely keeps the increase to just under their cap. We strongly urge DMHC to evaluate whether a 69% increase in contribution to surplus is justified and reasonable. 2 Blue Shield of California website, What Does Being a Non-Profit Mean to Us? Accessed August 28, 2014, available at: 3 Blue Shield Website, Our Pledge to Keep Healthcare Affordable, accessed 28 August 2014, available at 4 Blue Shield financial statement filed with DMHC, 30 June Id. 6 Blue Shield Actuarial Memorandum. 2

3 Blue Shield s recent elective expenditures put upward pressure on insurance rates without justification. Blue Shield s nonprofit status and their stated philosophy dictate that their activities should receive additional scrutiny. In addition to excessive contributions to surplus, recent expenditures by Blue Shield are questionable and out of line with their nonprofit status, not to mention likely to put upward pressure on insurance rates. In particular, urges DMHC to scrutinize Blue Shield s recent investments in a joint endeavor with for-profit Anthem Blue Cross, contributions to a political campaign, and a sizeable frivolous expense. None of these were detailed in the rate filing, but because of the clear relationship between carrier expenditures and rates charged to policyholders, expenses like these warrant further review. In August, Blue Shield and Anthem Blue Cross announced a joint initiative called Cal INDEX. The initiative is incorporated as an independent nonprofit mutual benefit corporation. According to Blue Shield s website, Cal INDEX is a: Statewide, next-generation health information exchange (HIE), which will include clinical data from healthcare providers and health insurers. Cal INDEX will allow physicians, nurses, and hospitals throughout the state to share patients health information to help them provide the safest, highest-quality care possible. 7 Without impugning the merits of the endeavor, we note that the carriers public statements indicate that it is not intended to solely benefit consumers (or, the community ). Equally featured goals are cost saving, research and business opportunity purposes. 8 Though news articles surrounding the endeavor emphasize exchange of clinical medical records, to our knowledge no physicians or hospitals have committed to participate and thus only claims data from the two carriers, not clinical medical records, will be available for an undetermined period of time. The benefit to Blue Shield policy holders in 2015 those whose rates are proposed to be increased is uncertain at best. Equally if not more disconcerting are factors that make us question the assertion that Cal INDEX is an independent organization and also whether and how Blue Shield, a nonprofit, can partner with Wellpoint, a for-profit organization. 7 Blue Shield website, Cal INDEX web page, accessed 28 August 2014, available at 8 The recent press release for that endeavor, (available at cites four other goals of the project, in addition to improving quality of care through integrated patient information: Provide patients with a seamless transition between health plans or various healthcare professionals and hospitals; Improve efficiency and reduce the cost of health care; Encourage healthcare technology innovation Improve public health by producing data for medical research. 3

4 Blue Shield and Wellpoint plan to charge health plans and medical providers for use of Cal INDEX in the future 9 ; Blue Shield along with Wellpoint have sole power to elect all board members 10 ; Blue Shield and Wellpoint essentially retain veto power over all corporate actions 11 ; Blue Shield would receive a large majority of the assets of the organization upon dissolution in certain circumstances before 2017, and a smaller but still majority of the assets of the organization if dissolution occurs after All of these factors taken together paint a picture of two corporations with divergent stakeholder and legal obligations coming together to form an ostensibly independent organization over which the two retain complete control, and from which both organizations stand to benefit greatly. For these reasons, DMHC should require Blue Shield to explain where this sizeable investment is included in the rate calculation and substantiate how their share of the $80 million contribution over three years benefits the community rather than Blue Shield as business development. If Blue Shield substantiates its claim, then it must also explain why the program does not lower the costs of health care, adjusting downward the projected costs. 13 In addition, we urge vigilance in 2016 that the extent to which Blue Shield includes Cal INDEX expenses in its MLR rebate calculation is appropriately limited. Mischaracterization of investments may result in decreased or eliminated MLR rebates for consumers. Finally, we suggest further review of Blue Shield s other large expenses. First, Blue Shield is estimated to have contributed over $9.5 million to a campaign in opposition to a rate review ballot initiative that goes to voters in November. 14 Second, Blue Shield recently paid at least $2.5 million to purchase a luxury box at Levi s Stadium. As one journalist put it, Given that Blue Shield is a not-for-profit organization, one might wonder how such high-rolling fandom fits into its mission statement. 15 Blue Shield s quoted response, that, The primary purpose (of the luxury box) is to interact socially with some of our larger membership groups 16 suggests either naivety or flippancy 9 Orange County Register, Blue Shield, Anthem Blue Cross to create medical record database, 6 August 2014, available at 10 Bylaws of California Integrated Data Exchange at Bylaws of California Integrated Data Exchange at Articles of Incorporation Article VI. 13 For more on this, please see the attached memorandum by our consulting actuary, Allan I. Schwartz. 14 Secretary of State s web page, Cal-Access Search for Campaign Finance: No on 45-Californians Against Higher Healthcare Costs, a Coalition of Doctors, Hospitals, Health Insurers, and California Employers, available at Blue Shield of California s contribution is split between monetary contributions ($4,936,600) and a loan ($4,756,600). 15 San Francisco Chronicle, Blue Shield to Fete Some Members in Style at New Stadium, 17 August 2014, available at 16 Id. 4

5 about the organization s obligation to serve the community. We urge DMHC to require Blue Shield to justify their need to increase rates by 6.0% given their ability to finance of these combined $12 million in questionable expenses. II. Blue Shield s filing includes numerous factors that were not adequately supported to justify its claims that costs will increase in The projected medical trend is inflated by use of an artificially high prescription drug trend that is not supported by the data included in the filing nor consistent with other industry research. The Blue Shield rate filing includes medical trend projections ranging from an astronomical 9.2% 17 down to the more earthly but still high 6.0% 18. Even if the lower variable is used, it is still several times larger than the trend used by another California carrier, Kaiser, which claims only a 2.9% medical trend. 19 Notably, the actuarial firm that provided the Independent Actuarial Certification for Kaiser conducted Blue Shield s review as well, stating with regards to the 2.9% trend that I have reviewed the choice of assumptions in light of Kaiser and industry experience and found the assumptions to be reasonable. 20 It is curious, then, that the same actuarial firm supports a much higher trend in this filing. Further, according to an independent non-profit research and consulting organization, Health care prices in June 2014 were 1.7% higher than in June 2013, a tenth lower than the May year-over-year reading. The June month moving average rose to 1.3% from 1.2% in May, the highest average since December Year over year, hospital prices a key price index driver grew 1.9 in June, below the May rate of 2.1%. Physician and clinical services prices grew 0.5%, just below the May rate of 0.6%, and home health care prices continued a three-month rebound from a year-long negative growth trend, recording 0.7% rate in June. 21 In its filing, Blue Shield provides very little information to support any of its claims, including its medical trend projection. In the absence of concrete information from Blue Shield, we urge DMHC to press for substantial justification for its medical trend projection. Based on our analysis, it appears that Blue Shield s medical trend claim was inflated by an exorbitant pharmaceutical trend claim of 14.2% 22, several multiples more than the 3%-7% supported by evidence. The study National trends in prescription drug expenditures and projections for 2014 gives a range for a projected 3-5% increase in 17 In the California Rate Filing Form. 18 In the Milliman Actuarial Memorandum and the Blue Shield in-house memorandum. 19 Kaiser Foundation Health Plan, Inc. filing, SERFF Tracking #: KHPI , California Rate Filing Form sub-section 18 and Exhibit E-1, dated August 1, 2014, at page Kaiser Foundation Health Plan, Inc. filing, SERFF Tracking #: KHPI ; Exhibit E-1, Page 6 21 Altarum Institute, Policy Brief, 7 August 2014, available at 22 According to Blue Shield s in-house Actuarial Memorandum and the California Rate Filing Form, or 13.9% according to Milliman, Inc. 5

6 total drug expenditures across all settings. 23 The Altarum Institute recently found that prescription drug prices rose 4.1% between May 2014 and June 2014, up from the 3.6% May rate and the highest rate since March Finally, CMS has previously stated, Projected prescription drug spending growth for 2014 is 5.2 percent and For 2015 through percent per year. 25 More recently, analysts from their Office of the Actuary projected prescription drug spending to accelerate to 6.8 percent. 26 Blue Shield fails to provide any justification for their prescription drug trend projection, suggesting a lack of justification. If their prescription drug trend projection were replaced by a more reasonable trend, the medical trend would be adjusted downward and the rate increase moderated. We, therefore, strongly encourage DMHC to demand justification for the substantial trend projection and, unless justified by substantial evidence, replacement with a trend number in line with industry research. Lastly, Blue Shield failed to incorporate the reduction in pharmaceutical costs due to patent expiration. According to a report issued by CMS, despite the growth in health spending due to pharmaceuticals like Sovaldi, drug spending won t continue to spike because the widespread use of generic drugs will keep costs in check. 27 Blue Shield neglects to adequately justify their morbidity adjustment calculation. As Blue Shield acknowledges, the morbidity adjustment is derived from a combination of factors including the impact of guaranteed issue, premium subsidies, and the individual mandate. As with the bulk of their filing, though, Blue Shield s explanation for the weighting of these factors and how they interact is lacking and requires substantially more detail to be credible. In particular, although it is logical that guaranteed issue in the absence of other reforms would increase the average morbidity of the individual insured population 28, it does not, in fact, exist in a vacuum. The ACA provides three separate but interrelated programs to address increased risk by insurers and to assure stable prices for consumer and small employers. These programs, known as the 3Rs risk adjustment, risk corridors, and reinsurance mitigate risk borne by carriers in large part due to their 23 National Trends in Prescription Drug Expenditures and Projections for 2014, Am J Health-Syst Pharm Vol 71, 2014, available at (PubMed subscription required). 24 Altarum Institute, Policy Brief, 7 August 2014, available at 25 CMS National Health Expenditure Projections , available at Statistics-Data-and-Systems/Statistics-Trends-and- Reports/NationalHealthExpendData/downloads/proj2012.pdf. 26 Andrea M. Sisko et. al., National Health Expenditure Projections, : Faster Growth Expected with Expanded coverage and Improving Economy, Health Affairs, 33, No. 10 (2014). 27 PoliticoPro, Health Care Spending Growth Remains Modest, available here: 28 Blue Shield Actuarial Memorandum, emphasis added. 6

7 inability to underwrite as in previous years. In its filing, Blue Shield anticipates a total of $32.41 per member per month (PMPM) combined net payment from the reinsurance program and the risk adjustment program. Because of the lack of information in its filing, it is unclear how Blue Shield is factoring the Federal risk mitigation programs against the potential of attracting policyholders with higher morbidity via guaranteed issue. Additional questions left unanswered include how Blue Shield calculated the morbidity adjustment due to guaranteed issue in the previously insured population versus the previously uninsured population and what assumptions were made to come up with the 12.4% population morbidity adjustment shown in Milliman s Client Report. Finally, it is unclear why Blue Shield overlooks the fact that the risk of guaranteed issue applies equally to the continuously insured population as to the previously-uninsured population. Given the magnitude of their 12.4% morbidity adjustment compared to comparable in-state insurers Anthem Blue Cross used a (or, 6.05%) morbidity factor Blue Shield must be required to substantiate their calculation. Finally, in anticipating the cost of previously uninsured enrollees, it is worth mentioning that the common perception that the uninsured are a homogenous block is truly a misperception. Newly covered enrollees in Blue Shield products in 2015 are not necessarily the previously long-term uninsured. The uninsured is not a static population. Rather, respected research indicates that one-half to one-third of those who are uninsured in any given year move into or out of coverage in that year. 29 New enrollees thus could well be those who recently had, but lost, prior coverage through life changes such as divorce or loss of employment. These life transitions do not coincide with increased morbidity, nor would they dictate any pent-up demand. We, therefore, urge DMHC to require Blue Shield to support its projections with externally validated information. The assumption that lower cost sharing burden will induce utilization constitutes doublecounting. Blue Shield asserts that mandated changes in benefits will decrease the the average costs sharing members will have to pay in order to receive services and will in turn result in an overall increase in services, separate from the expected morbidity increase. 30 We disagree with this premise and believe that doing so may constitute double counting. Without conceding that plans with lower deductibles lead people to use more services, the medical trend already embedded in the rate request should account 29 Center for Labor Research and Education, University of California, Berkeley, The Promise of the Affordable Care Act, the Practical Realities of Implementation: Maintaining Health Coverage During Life Transitions, October 2011, available at 30 Blue Shield of California Company Actuarial Memorandum, Section 6(f). This section of the memorandum refers to the expected morbidity increase as 8.9% despite the fact that the separate expected morbidity increase (or, population risk morbidity ) detailed in Blue Shield s filing is (or, 12.4%) according to both the Alternative Unified Rate Review Template filed by Blue Shield and the Milliman Client Report dated 28 July 2014, at page 4. There, Milliman lists 8.9% as the additional adjustment for induced utilization alone. 7

8 for projected utilization. To add another factor about utilization would compound that. Furthermore, for those who signed up in 2014, pent-up demand has already been satisfied, and rates set for 2014 already took this risk into account. The projected quality improvement expenditures leave questions about how the cost is calculated and how it will benefit policyholders. By state law, health insurance carriers must detail significant new health care cost containment and quality improvement efforts and provide an estimate of potential savings together with an estimated cost or savings for the projection period. 31 In its filing, Blue Shield projects an increase of per member per month (PMPM) expenditure for activities that improve health care quality and expenditures related to health information technology from $2.92 in 2014 to $3.42 in That is the full extent of information they provide. It neither provides details on cost containment and quality improvement efforts nor estimates of costs or savings, as required. Blue Shield also neglects to explain how the added costs translate to quality improvement for policyholders. In particular, among details missing from this filing is whether Blue Shield s new joint initiative with Anthem Blue Cross, Cal INDEX, factored into their quality improvement budget line. For more on this endeavor and our concerns, please see Section I, subsection Blue Shield s recent elective expenditures put upward pressure on insurance rates without justification, starting on page 3. III. Blue Shield did not account for cost savings Cost savings can be anticipated due to the decrease in uncompensated care in the market. As the number of insured Californians rises, the number of medical services likely to go unpaid by patients without insurance or who can t afford to pay their portion of the cost is expected to decrease. It does not appear that Blue Shield accounted for this shift in their 2015 prices. The Kaiser Family Foundation recently reported that of the Californians who were uninsured prior to open enrollment, 58 percent now report having health insurance, translating to approximately 3.4 million previously uninsured adult Californians now with coverage. 33 In fact, the rate of uninsurance was halved from 22% to 11% in the first open enrollment period. 34 It is likely that as more Californians gain insurance, fewer will 31 Health and Safety Code Section (c)(3). 32 Blue Shield Rate Filing Form Q Kaiser Family Foundation, Where are California's Uninsured Now? Wave 2 of the Kaiser Family Foundation California Longitudinal Panel Survey, available at 34 The Commonwealth Fund, Affordable Care Act Tracking Surveys, July Sept and April June 2014, available at 8

9 require charity care. In turn, the reduction in charity care obligations on the hospital should reduce the cost of insurance as the need to shift the cost of caring for the uninsured onto the insured diminishes. Concurrently, it is reasonable to predict that some health care providers will accept lower fees because of the reduction in bad debt, a position supported by Milliman, the actuarial firm used to review Blue Shield s rate filing. According to Milliman, some providers may be willing to accept lower rates than in the past, perhaps due to a reduction in uncompensated care for the uninsured. 35 Twenty-five percent of previously uninsured Californians are now covered by Medi-Cal. According to a report by Fitch ratings, Relative to the early muted influence of insurance expansion on volume growth, expansion of state Medicaid programs had an immediate and dramatic influence on payor mix. In expansion states, hospitals are experiencing strong growth in Medicaid patient volumes and a drop in uninsured patient volumes. Based on only one-quarter of experience under insurance expansion, it is difficult to determine the longer term effect of the payor mix shift, but these early results show the industry could experience a meaningful and durable reduction in the financial headwind created by uncompensated care. 36 We urge DMHC to do as Oregon s insurance regulator recently did and require Blue Shield, and other insurers, to account for the reduction of uncompensated care as a factor in their rates. 37 Insurers with large market share, such as Blue Shield, will be able to reduce costs by using their considerable bargaining power Due to the success of the Covered California marketplace as a whole and Blue Shield s increased enrollment on the marketplace, Blue Shield now shares market dominance with Anthem Blue Cross 38 Blue Shield has bargaining power that they can use to control health care costs in In the first open enrollment period of Covered California, 1,395,929 Californians enrolled in Qualified Health Plans, exceeding original projections by 815,929, and 1.9 million enrolled in Medi-Cal plans. 39 Carriers can, and should, leverage this increased customer base to reduce provider and other costs, due ground-americans-health-insurance-coverage-and-access-to-care/uninsured-rates-fell-sharply-incalifornia-and-texas Milliman Medical Index, available at 36 Fitch Ratings, For-Profit Hospitals Potentially Benefit from Early ACA, 30 June 2014, available at Potentially?pr_id= Department of Consumer and Business Services, Oregon Insurance Division, Press Release: Average Health Insurance Rates Lower in 2015, available at 38 Kaiser Family Foundation, Sizing Up Exchange Market Competition, 17 May 2014, available at 39 Covered California press release, 17 April 2014, available at 9

10 to economies of scale and the related increase in bargaining power with health care providers. In fact, Blue Shield exercised such bargaining power in by creating EPO products in several regions and narrowing the network of providers offered in their plans. An informal review by found that in some regions, EPO networks were up-to three times smaller than off-exchange PPOs in the same region. Blue Shield plans to offer similar products in In its filing, Blue Shield anticipates 14.4% savings from current contracted rates by bargaining with providers in narrow networks. Given that consumers experienced substantial problems with Blue Shield s network in 2014 so bad in fact that your Department launched a non-routine survey of both Blue Shield and Anthem Blue Cross s networks 41 we are concerned that this 14.4% discount will be at the expense of consumers access to care. We therefore encourage DMHC to continue investigating how narrow networks impact consumers and confirm that what Blue Shields identifies as a discount will not come as a cost to consumers. Conclusion We strongly encourage DMHC to demand additional information that fully justifies Blue Shield s rate request. If Blue Shield is unable to do so given the financial burden of escalating costs on California families and in light of Blue Shield s substantial surplus and large elective expenses in 2014 urges DMHC to find the requested rates unreasonable and not justified. Sincerely, Dena B. Mendelsohn Health Policy Analyst 40 Blue Shield proposes offering EPOs with and without Health Savings Accounts in four regions in 2015: Alameda County (Region 6), Central Coast (Region 9), North Bay counties (Region 2), and Northern counties (Region 1). 41 California Healthline, DMHC Launches Probe of Anthem, Blue Shield Provider Networks, 23 June 2014, available at 10

11 AIS RISK CONSULTANTS, INC. Consulting Actuaries Insurance Advisors 4400 Route 9 South Suite 1200 Freehold, NJ (732) Fax (732) Date: September 12, 2014 To: From: Allan I. Schwartz, FCAS, ASA, MAAA Re: Review of California Physicians' Service dba Blue Shield of California DMHC Individual On and Off Exchange Rate Filing Dated July 30, 2014 HOrg02I Individual Health Organizations - Health Maintenance (HMO) HOrg02I.005A Individual - Preferred Provider (PPO) SERFF Tracking #: BCCA As you requested, we have reviewed the above captioned filing submitted by California Physicians' Service ( Blue Shield ) to the Department of Managed Health Care (DMHC). 1,2,3 Blue Shield is requesting a rate increase of 6.0% with an effective January 1, ,5 The total annual premium increase being requested is about $200.4 million. 6,7 In evaluating the rate proposal by Blue Shield, three overall characteristics of the company can be considered. 1 This analysis was provided to assist (CU) in its evaluation of the Blue Shield filing, including submitting this document to the California Department of Managed Health Care (DMHC). It should not be relied upon for any other purpose or by any other entities. If this analysis is provided to any other entity the following conditions apply: (i) it should only be done after obtaining the written consent of AIS, (ii) the entire analysis should be supplied and (iii) that entity should be informed that AIS is available under appropriate circumstances to discuss the analysis. 2 This analysis is based upon the information currently available. The analysis and conclusions may change if additional relevant information becomes available. Furthermore, my lack of comment on particular aspects of the filing should not be taken to mean that I agree with those procedures. 3 The rate filing documents from the DMHC we relied upon consisted six PDF files and eight EXCEL files. These were available at: 4 Blue Shield filing, Filing at a Glance Section and Rate Information Page 5 According to the Rate Information section of the Blue Shield filing, 6.0% is both the minimum and maximum rate change. 6 $3.541 billion X ( 1 1 / 1.06); see Blue Shield filing, Requested Rate Change Information - Requested Rate 7 It was not possible to calculate the average annual premium increase per policyholder since the number of policyholders corresponding to the annual premium was not provided.

12 Page 2 of 15 First, the Tangible Net Equity for Blue Shield as of June 30, 2014 of $4.250 billion exceeds the Required Net Equity of $276 million by $3.974 billion. 8 Put another way, the actual Tangible Net Equity for Blue Shield is equal to 1,540% of the Required Net Equity. 9 According to the financial reports filed by Blue Shield, it has a Tangible Net Equity Excess of $3.974 billion. Blue Shield could use some of the excess Tangible Net Equity to offset in part or in whole its requested rate increase. As previously discussed, the rate proposal by Blue Shield is for an increase of around $200 million. This is only about 5% of the Tangible Net Equity Excess reported by Blue Shield. Second, Blue Shield s profitability since the beginning of 2014 has been significant. For the period January 1, 2014 to June 30, 2014 Blue Shield had income (before taxes) of $496 million on total revenue of $5.750 billion, for a profit ratio of 8.6%. In comparison, during the first six months of 2013 Blue Shield had income (before taxes) of $267 million on total revenue of $4.326 billion, for a profit ratio of 6.2%. Blue Shield s income in the first six months of 2014 exceeded that for the first six months of 2013 by 86%. This was composed of a revenue increase of 33% and a profit ratio increase of 39%. 10 Hence, during 2014 Blue Shield benefited from both a significant increase in the volume of business as well as a significant increase in the amount of profit per unit of business. These increased profits could be used to mitigate the proposed rate increase. Third, Blue Shield appears to be spending policyholder funds on items that are not appropriately charged to policyholders. One such item is the purchase of a luxury box at the San Francisco 49ers new facility, Levi s Stadium, which is estimated to cost from $2.5 million to $8.0 million. 11,12 Another questionable item is the funds being spent in opposition to Proposition 45. Blue Shield has contributed about $10 million to the organization Californians Against Higher Health Care Costs. 13,14 8 Blue Shield June 30, 2014 financial statement filed with DMHC = $4.250 billion / $276 million = 1.33 X 1.39 (within rounding) This is based upon an annual price of between $250,000 and $400,000 and a 10 or 20 year commitment ive_(2014)

13 Page 3 of 15 Our analysis shows that the proposed rate increase is likely inflated and unreasonable for various reasons including Blue Shield s use of an excessive Annual Medical Trend Rate of +6.0% a year. 15,16 Other concerns with the Blue Shield filing include: Cost Containment Issues Lack of Documentation of Ratemaking Factors Failure to Account for Reduction in Uncompensated / Charity Care A more detailed discussion of issues with the Blue Shield filing follows. 1. Excessive Annual Medical Trend Rate The Blue Shield filing is based upon an Annual Medical Trend Rate of +6.0% a year, which includes a prescription drug trend of 13.9% a year. 17 The filing was essentially devoid of any basis for that value. The filing contained two general vague descriptions related to the trend. The Milliman report stated A summary of anticipated claim cost trends by service category is shown as Appendix C-3. I have reviewed the methodology and assumptions used in developing the proposed premium rates and found the methodology and assumptions to follow generally accepted actuarial practice. 18 The Actuarial Memoradum stated Trend factors are 14 Other major contributors have been Kaiser Foundation Health Plan, Inc. / KP Financial Services at about $15 million and Wellpoint, Inc. and Affiliated Entities at about $13 million. Of the total amount of contributions to Californians Against Higher Health Care Costs of about $37.3 million, about 99% has come from these three insurance companies Blue Shield, Kaiser and Wellpoint. Ibid. 15 Blue Shield Filing, Milliman Report : Appendix C-3 - Development of Claim Cost Trends 16 There is some uncertainty regarding the actual trend used by Blue Shield, since various places in the Blue Shield filing show varying trend values. The Milliman report shows an annual trend value of 6.0%. The California Rate Filing Form, Item Overall Medical Trend Factor gives an annual value of 9.2%. The Blue Shield Actuarial Memorandum shows trends for 2014 and 2015 of 6.9% and 5.7%, which averages to 6.3%. 17 Blue Shield Filing, Milliman Report : Appendix C-3 - Development of Claim Cost Trends 18 Page 4

14 Page 4 of 15 derived from historical Blue Shield experience, extending back over the past seven years. 19 However, in neither place were any data, analyses or calculations provided. Given this lack of information in the Blue Shield filing, we reviewed other sources of information regarding an appropriate trend factor. These sources are consistent with a medical loss trend lower than 6%. Altarum Institute has reported Health care prices in June 2014 were 1.7% higher than in June 2013, a tenth lower than the May year-over-year reading. The June month moving average rose to 1.3% from 1.2% in May, the highest average since December Year over year, hospital prices a key price index driver grew 1.9% in June, below the May rate of 2.1%. Physician and clinical services prices grew 0.5%, just below the May rate of 0.6%, and home health care prices continued a three-month rebound from a year-long negative growth trend, recording a 0.7% rate in June. Prescription drug prices rose 4.1%, up from the May 3.6% rate, and the highest rate since March Milliman stated the following regarding the 2014 Milliman Medical Index (MMI) the 5.4% growth rate from 2013 to 2014 is the lowest annual change since the MMI was first calculated in The medical trend used by Blue Shield is more than twice as much as the 2.9% annual trend used by Kaiser. The Kaiser filing for rates effective January 1, 2015 states The Plan has projected an overall Medical Trend of 2.9%. 22 Milliman, the actuarial firm that provided the Independent Actuarial Certification for both the Blue Shield and Kaiser filings, stated in relation to the 2.9% trend used in Kaiser filing that I have reviewed the choice of assumptions in light of Kaiser and industry experience and found the assumptions to be reasonable. 23,24 Milliman, in relation to the Kaiser filing, discusses a comparison between the proposed rate change and the medical cost inflation index stating The Company is proposing a rate 19 Section 6i 20 Price Brief, August 7, 2014; Milliman Medical Index report, mmi.pdf; Milliman is an actuarial firm often relied upon by health insurance companies 22 Kaiser Foundation Health Plan, Inc. filing, SERFF Tracking #: KHPI ; Exhibit E-1, Page 6 23 Ibid., Milliman Report Page 4 24 The same actuary from Milliman, Ms. Susan E. Pantely, provided the independent actuarial certification for both the Blue Shield and Kaiser filings.

15 Page 5 of 15 decrease which is lower than the rate of medical cost inflation index. 25 For the Blue Shield filing, the proposed rate change of 6% is 3 times the increase in the rate of the medical cost inflation Index, with Milliman stating The proposed 6.0% quarterly premium rate increase is greater than the medical care component of the CPI for 2013 of 2.0%. 26 The 13.9% prescription drug trend used by Blue Shield is also unrealistic and contrary to overall market indications, as the following shows. The study National trends in prescription drug expenditures and projections for 2014 gives a range for a projected 3 5% increase in total drug expenditures across all settings. 27 Express Scripts (a pharmacy benefit manager) publishes a drug trend report 28 which shows annual trends for 2014 and 2015 for traditional drugs of about 2% a year and for specialty drugs of about 17-18% a year. This gives an overall drug trend of about 7% a year. 29 Another issue to consider is the California Integrated Data Exchange (Cal INDEX) jointly founded through $80 million in seed funding from Blue Shield of California and Blue Shield Blue Cross. 30 The stated goals of Cal INDEX include: 31 Improve the quality of care by providing clinicians with a unified statewide source of integrated patient information Provide patients with a seamless transition between health plans or across various healthcare professionals and hospitals 25 Ibid., Milliman Report Page 5, This was discussed in relation to Milliman s review of factors set forth in Section A of the SB 1163:2 and SB 1163:6 Guidance, titled Unreasonable Rate Increases. 26 Ibid., Milliman also includes a discussion of why for the Blue Shield filing such a comparison is, in its opinion, not appropriate The 2013 Drug Trend Report, April 2014; 29 It should be noted that PBMs could have incentives to publish inflated drug trend projections. This could be used up-front as a marketing device to sell services to control drug costs, as well as afterwards to show that the actual costs using the PBM services was less than the projected value Ibid.

16 Page 6 of 15 Improve efficiency and reduce the cost of healthcare Encourage healthcare technology innovation Improve public health by providing de-identified data for medical research These items should lower the cost of providing healthcare both medical costs and administrative expenses. The filing has not shown how this has been taken into account, either by lowering trend factors or otherwise adjusting downward the projected costs. All of this information documents that the overall annual cost trend of +6.0% a year, as well as the prescription drug trend of 13.9% a year, used by Blue Shield are both excessive and unsupported. 2. Cost Containment Issues Given the inflated cost trend proposed by Blue Shield, a possible issue is whether Blue Shield is taking reasonable steps to control health care costs. The applicable statute requires Blue Shield to include specific information on cost containment issues: 32 (c) A health care service plan subject to subdivision (a) shall also disclose the following aggregate data for all rate filings submitted under this section in the individual and small group health plan markets: (3) Any cost containment and quality improvement efforts since the plan's last rate filing for the same category of health benefit plan. To the extent possible, the plan shall describe any significant new health care cost containment and quality improvement efforts and provide an estimate of potential savings together with an estimated cost or savings for the projection period. Despite this requirement, the Blue Shield filing did not contain relevant useful information on the issue of cost containment California Health and Safety Code Section (c)(3)

17 Page 7 of 15 This is a critical issue for not just Blue Shield, but also other insurance companies, as well as health care providers. It has been estimated that about 30% of health care expenditures are wasted. 34 With rising costs making health care a significant financial burden for many people, DMHC can encourage all insurance companies to strengthen efforts to contain costs by cutting waste and focusing on prevention and other proven strategies that keep patients healthier. Various programs can be expected to control, and have reduced, health care costs. Subjects such as the manner in which health care providers are compensated, along with the use of electronic health records / big data in improving outcomes and lowering costs are reasonable issues to consider. The beneficial outcomes that can result from improvements in how health care is provided are documented by the experience of the Oregon Health Plan in 2013, as seen from the following 35 : Overall, the coordinated care model showed large improvements in the following areas for the state's Oregon Health Plan members: Decreased emergency department visits. Emergency department visits by people served by CCOs have decreased 17% since 2011 baseline data. The corresponding cost of providing services in emergency departments decreased by 19% over the same time period. Decreased hospitalization for chronic conditions. Hospital admissions for congestive heart failure have been reduced by 27%, chronic obstructive pulmonary disease by 32%, and adult asthma by 18%. 33 The filing includes a value for Quality Improvement Expense of $3.42 PMPM. (Milliman Report, Appendix C-1 - Projected Medical Loss Ratio) The derivation of this value was not provided. This is an increase of 17.1% from the value of $2.92 included in the prior Blue Shield rate filing. (SERFF Tracking #: BCCA ) No discussion or explanation was provided as to how this stated increase in Quality Improvement Expense would impact the level or trend in costs, or the quality of care provided to policyholders. 34 Institute of Medicine, Best Care at Lower Cost: The Path to Continuously Learning Health Care in America (2012), available at Health-Care-in-America.aspx -- Current waste diverts resources; the committee estimates $750 billion in unnecessary health spending in 2009 alone. Compared to the 2009 Health Care Expenditures of $2.5 trillion, this is 30%. 35 Oregon Health Authority, Office of Health Analytics, 2013 Performance Report, June 24, 2014

18 Page 8 of 15 Developmental screening during the first 36 months of life. The percentage of children who were screened for the risk of developmental, behavioral, and social delays increased from a 2011 baseline of 21% to 33% in 2013, an increase of 58%. Increased primary care. Outpatient primary care visits for CCO members' increased by 11% and spending for primary care and preventive services are up over 20%. Enrollment in patient-centered primary care homes has also increased by 52% since 2012, the baseline year for that program. We believe it is reasonable and appropriate for DMHC to encourage insurance companies to contain healthcare costs, and to take into account the changing environment in which insurance companies and health care providers are operating in evaluating reasonable loss projection values to use for 2015 rates. DMHC may want to consider requiring insurance companies to submit additional information in its rate filing regarding cost containment and control. The Oregon Department of Insurance requires certain information of this type to be included in health insurance rate filings. A description of what ORDOI requires follows: A document labeled COST CONTAINMENT AND QUALITY IMPROVEMENT EFFORTS that: Identifies new health care cost containment efforts and quality improvement efforts since the last rate filing for the same category of health benefit plan, with estimated savings for the projection period Describes significant changes to existing health care cost containment initiatives and quality improvement efforts, with estimated savings for the projection period, savings realized over the prior experience period, and a description of how the company is measuring the impact of its initiatives Includes information about whether the cost containment initiatives reduce costs by eliminating waste, improving efficiency, by improving health outcomes through incentives, or by elimination or reduction of covered services or reduction in the fees paid to providers for services Provide, for public review, the following metrics, as recommended by the Oregon Health Policy Board: Utilization per 1,000 members and per member per month costs for o Inpatient Admissions/Days o Outpatient Visits o Emergency Department Visits o Primary Care Visits

19 Page 9 of 15 o Specialty Care Visits o Rx Scripts o Other Claims Quality metrics for CY2013, as reported to the following entities o NCQA: Breast Cancer Screening Comprehensive Diabetes Care: Hemoglobin A1c (HbA1c) Testing o CCO Metrics: Follow-Up After Hospitalization for Mental Illness Developmental Screening in the First Three Years of Life CAHPS: Access to Care 3. Blue Shield Filing Included Numerous Factors That Were Not Adequately Supported The derivation of the January 1, 2015 Rates by Blue Shield was based upon numerous assumptions for which adequate support was not provided. We previously discussed the medical trend factor and showed that the annual value of 6.0% included in the Blue Shield filing was excessive. Other assumptions used by Blue Shield for which the underlying support and detailed calculation of the numerical value used were not provided include: 36 Population morbidity adjustment Induced utilization Pediatric dental and vision Narrow network adjustment Favorable restatement of experience period Region mix shift Risk Adjustment and Reinsurance Non Benefit Expense and Profit & Risk 36 Milliman Report, page 4 and Actuarial Certification Sections 8 and 9

20 Page 10 of 15 The numerical values used by Blue Shield for the population morbidity adjustment and induced utilization are +12.4% and +8.9%, respectively. 37 The combined impact of these factors is +22.4%. 38 An important consideration in projecting morbidity and induced utilization for 2015 is that it is likely that the mix of customers enrolling for health coverage in 2015 will be younger and healthier than those who signed up for This expected difference in the health status between the early enrollees in 2014 compared to later enrollees is a generally recognized actuarial concept, as expressed by the American Academy of Actuaries: In general, higher-cost individuals are more likely to enroll early during the open enrollment period and in the first year of the program. Lower-cost individuals are more likely to enroll later during the open enrollment period and perhaps in later years as the individual mandate penalty increases. 39 Furthermore, it is probable that the people with underlying health concerns that could drive pent-up demand likely obtained coverage in 2014 and had those problems addressed. Therefore, pent-up demand should be less of an issue in 2015 than Milliman has stated the following with respect to morbidity in 2015 compared to 2014: 40 Many actuaries believe that the total morbidity of the 2015 individual market will improve relative to 2014 due to increasing participation in the market. As these factors drive increased participation in the market in 2015, overall morbidity is generally expected to improve, which will help to mitigate rate increases. Milliman has stated the following with respect to pent-up demand in 2015 compared to 2014: Ibid = X Drivers of 2015 Health Insurance Premium Changes, health-insurance-premium-changes Ibid.