“Annual net income for the parent company of Blue Cross & Blue Shield of Illinois fell well below the $1 billion mark for the first time since 2009, in part because the insurance giant is setting aside money to offset expected losses from the troubled rollout of Obamacare.
Chicago-based Health Care Service Corp. booked $684.3 million in net profit in 2013, down about a third from the $1.01 billion it posted a year before. The bottom line tumbled despite its increasing revenue, which hit $22.69 billion for the year, compared with $20.65 billion in 2012.
Expenses rose in part because in the fourth quarter the company had to pour $260 million into its reserves to shield against expected losses in 2014. As of Dec. 31, its “premium deficiency reserve” stood at $283.2 million, up from $34.4 million a year before and just $4.2 million at the end of 2010.
The company, which operates Blues plans in Illinois, Texas, Oklahoma, New Mexico and Montana, attributes the losses to some policyholders continuing health plans that don’t comply with the requirements of the Affordable Care Act. President Barack Obama, reacting to reports of people receiving cancellation notices for coverage they wanted to keep, said in November that the federal government would allow insurers to continue offering the noncompliant plans. Illinois regulators followed suit a week later.
Company officials had anticipated the change, but not before they had already set prices for the new plans to be sold on the public insurance exchange, HealthCare.gov.
“We priced them to have reasonable margins,” said Health Care Service Senior Vice President and CFO Kenneth Avner. When it became clear that noncompliant plans would be continued, “we had to make the choices available even if they went against us.”
The upshot, he said, was that many policyholders chose to continue cheaper, non-ACA-compliant plans, and fewer customers than anticipated selected plans on the exchange.
“We were out of sync there,” Mr. Avner said.
Federal authorities say about 3.3 million people signed up by the end of January for plans via state-based or federal exchanges, including 88,000 in Illinois. Enrollments for insurance have ramped up in recent months after a troubled fall, in which technical problems prevented customers from accessing plans.
It remains unclear how many people have actually paid for insurance, though insurers are estimating the rate of payment of first-month premiums at about 80 percent, according to the New York Times.
Mr. Avner declined to state Health Care Service’s enrollment numbers or the count of policyholders who chose to stay with noncompliant plans.
He did add that another reason for the anticipated losses was the slow enrollment on HealthCare.gov. The technical glitches mean Health Care Service won’t be able to collect as much premium revenue early in the year as anticipated to offset the higher expenses incurred selling on the public exchanges.
One expert said the company’s explanations for the expected loss seemed reasonable, but the accuracy of its estimates is unclear.
“I think there are questions around those two assumptions, but overall it’s valid that they would have some negative impact,” said Nancy Scola Lombaer, a partner at Chicago-based Laurus Strategies, a benefits consulting firm.
Until 2013, Health Care Service has posted billion-dollar-plus net incomes since 2010, when it netted $1.09 billion on $19.53 billion in total revenue. It followed up that result in 2011 with $1.20 billion in net profit on $19.91 billion in revenue.
Mr. Avner said other expense increases in 2013 related to health and drug claims were in line or lower than industry trends.
As of Dec. 31, the company has about 8.5 million members in its fully insured business. The financial results do not include the contribution of its low-margin business processing claims for self-insured groups.