Blue Shield devoted just 72% of premiums to medical costs


Blue Shield disclosed this week to the Los Angeles Times that it would be required to pay $61.7 million in rebates to customers who had coverage in 2014. The rebates are required under Obamacare rules whenever insurers spend less than 80% of premiums on medical expenses. The Times reported “Blue Shield said it fell short of that mark, spending 76.8% of premiums collected on medical care in both its individual and small employer business last year.”

In fact, Blue Shield spent significantly less than that on medical care for its individual customers—only 72% of premiums. If Blue Shield were rebating the full difference between its actual medical expenses and the 80% threshold, the rebates would total $155 million.

The reason for the discrepancy is that a separate Obamacare provision requires insurers to pay into a fund a portion of excess profits earned, and those payments are added to medical expenses in calculating an insurer’s rebate obligation. Blue Shield recently reported to California regulators that it expected to have to make a $93.3 million excess profit, or “risk corridor,” payment on its 2014 individual market business.

That means Blue Shield’s medical spending fell short of the 80% mark by $93.3 million more than the $61.7 million rebate amount. In percentage terms, the health plan was short by 8% of premiums rather than the 3.2% it told the Times.

The Obamacare risk corridor program, which takes from insurers with excess profits and gives to those with excess losses, is intended to reduce the risks to insurers of setting prices too low and rewards of setting them too high. The program plays a critical role in stabilizing premiums across the market, so it isn’t to blame for the excess premiums paid by Blue Shield customers that won’t be rebated.

Given the protection Obamacare provided it against outsized losses, Blue Shield, especially as a nonprofit, should have erred on the side of consumers in anticipating claims costs and setting prices. Instead, it erred on the side of profits.