Michigan Blue Cross Blue ShieldBlue Cross Blue Shield of Michigan will be increasing rates 22% on individual policies. The good news is that these staggering increases are less than half of the rate hikes Michigan Blue proposed. The Michigan Attorney General, Mike Cox, tried to force the non-profit to reach into its $2.4bn reserve fund to pay for $133mn of losses it incurred last year, but wasn’t able to get his courts to help the beleaguered citizens he represents.

Unlike some of the Blues (I’m looking at you, Arkansas), Michigan Blue puts its financial statements on the internet. Let’s see what happened in 2008. On the surface, the company reported an operating loss of $118.3mn, but that includes an increase in premium reserves of $187.3. Michigan Blue explains that it records an increase when it becomes

… probable [that] expected claim losses and allocable administrative expenses will exceed future premiums on existing health and other contracts without consideration of investment income.

In other words, Michigan Blue records its guess about future costs, and doesn’t consider investment income. Management says the major factor causing this projected loss is that it is the only health insurer which accepts everyone, without regard to health status. Other private insurance companies are cherry-picking applicants. As people lose their jobs and their health insurance, other companies can refuse to insure, leaving Michigan Blue as the only insurer for those with pre-existing conditions. This is one thing that everyone, except a group of Neanderthal congressionals, agrees must be changed.

The other big problem was losses on the investment portfolio. Michigan Blue has total investments of $5.6bn, down from $5.95bn at the end of 2007. Michigan Blue recognized a loss of $284.2mn on its trading portfolio, leaving a balance of $857.2mn at the end of 2008. Absent these losses, Michigan Blue was profitable, even with the increase in premium reserves. The trading portfolio is managed by third parties. I wonder who was doing the trading, and how much they were paid.

Michigan Blue projects losses over the next four years of $544mn, before investment income. Even assuming this materializes, the losses are reserved. Subscriber balances at 12/31/08 were $2.33bn. so, it wouldn’t be that big a deal if the losses occurred. Why then does Michigan Blue insist on a huge increase in premiums? One plausible reason is that it is looking at serious losses in its portfolio, which for whatever reason it hasn’t publicly disclosed. The Portfolio includes asset-backed securities and collateralized mortgage obligations of $1.17bn, with a net unrealized loss of only $25mn. I’m thinking maybe that’s light, and it may be one reason for the concerns.

The second possibility is that like a lot of people, Michigan Blue is afraid to dip into savings to cover losses. The Attorney General correctly tried to force that outcome, but the Courts refused to make management do the right thing. A third possibility is that Michigan Blue thinks it won’t make as much in the future from self-funded plans, like those of the automobile companies, for which Michigan Blue receives an administrative fee.

Its cost structure is comparable to for-profit health insurance companies. Operating expenses are about 18.4% of gross revenues, which for Michigan Blue is premiums plus net revenues from operating self-funded health plans. That is about the same as Aetna, at 18.5% (total revenue/operating expenses, p. 5). Given its market dominance, Michigan Blue should be able to handle a lower cost structure. Again that is an argument for forcing Michigan Blue to reach into its reserves to accommodate potential losses.

Another reason is that projected premium deficits are calculated without accounting for investment income, which in 2008, a bad year, was over $300mn. There are also policy considerations. What is the purpose of allowing the accumulation of reserves far beyond foreseeable needs?

There are two problems with the regulatory structure in Michigan. First, it allows private companies to cherry-pick the people it will insure, at the expense of Michigan Blue. The second is that it doesn’t control the accumulation of cash by the non-profit Michigan Blue.

There’s a lesson for national health care reform in both of these problems.



I read a lot of books.