Hearing officers say the health insurer has a mission to provide "affordable and accessible health insurance."

01:00 AM EST on Wednesday, November 24, 2004

BY EDWARD FITZPATRICK
Journal Staff Writer

PROVIDENCE -- The state Department of Business Regulation yesterday rejected the 17-percent rate increase that Blue Cross wanted to apply to 13,500 Direct Pay subscribers, who are self-employed, unemployed or who otherwise buy health insurance for themselves.

The rejection follows a series of controversies over executive perks at Blue Cross & Blue Shield of Rhode Island and reflects new laws passed in reaction to scandals at the nonprofit health insurer.

The hearing officers who recommended rejecting the rate increase noted that this year the legislature "decreed for the first time that Blue Cross' mission is to include providing . . . affordable and accessible health insurance to a comprehensive range of consumers."

The proposed 17-percent rate boost did not meet that new standard, hearing officers Elizabeth Kelleher Dwyer and G. Rollin Bartlett wrote in recommendations adopted by the Department of Business Regulation's director, Marilyn Shannon McConaghy.

"In sum, the legislature has stated without equivocation that it should not be 'business as usual' for Blue Cross," the hearing officers wrote. "Although Blue Cross perceives that it is competing with commercial carriers, under the newly enacted statute its rates must reflect a higher social mission."

Under a new law, Blue Cross had to notify subscribers of the rate hearings, and for the first time in memory subscribers showed up. "The most common complaint among the public comment related to the severance package given to Blue Cross' former CEO, Ronald Battista," the hearing officers said.

Blue Cross emphasized that none of Battista's $3.1-million severance package came from the salaries and benefits charged to Direct Pay subscribers.

But the hearing officers, who referred to it as a $2.1-million severance package, said that "does not affect the reality that the corporation has $2.1-million fewer dollars in assets. Had assets not been applied to the severance payout, those assets could have been used to offset costs. Under its mission, Blue Cross is to guard its 'charitable assets' with the utmost good faith."

Blue Cross also argued that it has a $1.7-million "reserve deficiency" in the Direct Pay program. But the hearing officers said, "Blue Cross as a whole has sufficient reserves and is not in any current danger of insolvency."

The hearing officers said Blue Cross has a competitive advantage over for-profit insurers because it doesn't have to pay stockholder dividends. And they said the insurer might "be able to develop a program that would provide for a 'social dividend' that could be applied to benefit the only class of subscribers that lacks any other entity to cushion the rapid increase in the cost of health care."

Blue Cross spokesman Scott A. Fraser said, "We are certainly disappointed with the decision and disagree with it. We feel the rate filing was justified and actuarially sound." He said Blue Cross hadn't decided whether to appeal the decision to state Superior Court.

The hearing officers spelled out the kind of information the insurer would have to provide if Blue Cross pursues an alternative rate proposal, to show that the rates are "affordable" and take into consideration the effect on the unemployed.

Attorney General Patrick C. Lynch's office had called Blue Cross' request justified, but asked for a 1-percentage-point reduction in the rate increase. But the Department of Business Regulation rejected that.

Spokesman Michael J. Healey said Lynch "applauds DBR's new interest in the administrative expense component of Blue Cross' rating practices because that is one area in which this office has expressed concern over the years."

Healey said the decision was unexpected "because when a rate filing is supported by the claims and administrative cost data, as was the case here, DBR customarily grants the increase." So, he said, "we are in a bit of uncharted territory. Rate-making based on the concept of affordability is undefined in the statute and DBR, in its filing, has provided no standards to measure affordability or to know when it's been achieved."

Governor Carcieri's spokesman, Jeff Neal, said, "The governor has made it clear DBR should err on the side of protecting health-care subscribers. . . . He hopes today's decision represents the beginning of a new era in the way Rhode Island regulates health care."

Elaine Gambardella, 59, a widow and former French teacher from Warwick who spoke at one of the rate hearings, said she was "utterly shocked" the rate increase was rejected. "Wow," she said. "My faith is restored."

But, Gambardella said, "I'm waiting for the other shoe to drop -- for Blue Cross to say, 'We'll have to go elsewhere,' or something like that, and people like me will have no other place to go for health insurance."

"It's good news inasmuch as someone seems to have the . . . fortitude to say no to Blue Cross," she said. "I think finally someone in the State of Rhode Island listened to its people."