Health Care Service Corp. tops $1 billion in net profit for second straight year

Crains reports By: Andrew Wang March 06, 2012:

“The parent of Blue Cross & Blue Shield of Illinois booked more than $1 billion in net income in 2011, the second straight year that the Chicago-based company has crossed that milestone.

Health Care Service Corp., which also operates Blue Cross plans in Oklahoma, Texas and New Mexico, saw its net income jump 10 percent, to $1.2 billion in 2011, from about $1.1 billion in 2010, according to its annual financial statement.

Illinois’ largest health insurer also set aside $88.2 million in rebates to individual and small-group members. How the rebates will be divided among the four states was not disclosed.

The insurer’s total revenue rose 2 percent, to $19.9 billion, in 2011, despite a drop in member months, a measure of the number of people insured. Company executives expect to use its strong financial position to comply with changes required by the federal health care overhaul.

The rebates, which had been expected, are required by the Affordable Care Act of 2010, which calls for insurers to spend at least 80 percent of premium revenues from individual and small-group plans on medical care or quality improvement initiatives.

Read our premium content:  Blue Cross opens door to insurance rebates in Illinois

Company officials say the rebates were the result of lower-than-expected use of medical care by customers in 2011, which created a surplus in revenue that wasn’t used to pay claims.

“We would’ve expected that utilization would have ticked up more,” said Kenneth Avner, the insurer’s chief actuary and chief financial officer. “We didn’t see that at the end of the year.”

The rebates are a sign that many insurers are still working to comply with the requirement, called the medical loss ratio, or MLR.

“It’s pretty challenging to get the MLR for individual plans down because the administrative costs are high,” said attorney Emily Wey, a partner in the Denver office of law firm Polsinelli Shughart P.C.

The bulk of the rebate reserve — about $84 million — is set aside for individual policyholders. The company is modifying its rates and doesn’t anticipate issuing rebates of similar size in the future, Mr. Avner said.

Health Care Service had 823,131 individual plan members at the end of 2011, including 305,596 in Illinois. It dominates the Illinois market, writing 48 percent of health, life, property and casualty insurance policies here.

Also as part of federal health care reform, states must have health insurance exchanges up and running by Oct. 1, 2013.

As a result, many insurers including Health Care Service expect to sell more individual policies as more employers push workers to purchase insurance on markets rather than participate in group plans, Mr. Avner said.

To cope with the rush of new membership and the increased administrative costs of writing those policies, Health Care Service needs to invest more money in its business operations.

“It’s a significant change to the business model, and we’ve got to adapt to what the future business model is going to be,” he said. “It requires a fair amount of capital to make those changes.”

Indeed, the latest balance sheet shows $14.6 billion in net assets for the insurer, including $2.3 billion in cash and equivalents. Net assets and cash were $12.7 billion and $1.5 billion, respectively, in 2010 for Health Care Service, a mutual company owned by its 13 million policyholders.

The financial reports only cover Health Care Service’s insurance operation and do not include its fee-based work administering health plans for self-insured clients.”