Taxing Excess Health Plan Reserves…
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As part of the FY 2009 state budget, the Commonwealth of Massachusetts made a decision to tax what was referred to at the time as the “excess reserves” of the state’s health insurance plans. This was part of a larger effort to raise about $800 MM in new taxes - $200 MM from cigarette tax increases, $500 MM in corporate tax increases, and $100 MM in health care industry tax increases - $33 MM of which was attached to this health plan assessment. The other day, the state issued draft regulations outlining how it would plan to assess excess reserves. The comment period is now open, there’s a public hearing in mid-February, and is it assumed that the final regulations will be effective by the 1st of March.
Those of us who work for the health insurance plans in Massachusetts - almost all of which are non-profit - have wondered how the state would choose to define “excess” reserves. After all, health plans carry reserves for one purpose - to make sure they can pay for the future health care costs of their beneficiaries. What’s an excess reserve? $100 per member? $200? $500? $1,000?
Not surprisingly, there are some benchmarks around this, and most of them relate to a complex mathematical formula that’s used to calculate what insurance commissioners and industry professionals call, “Risk-Based Capital.” Risk-Based Capital was developed by regulators and actuaries (folks who measure financial risk in insurance) to figure out what a reasonable level of reserves should be. In other words, how much money is the right amount to have on hand to meet future obligations?
Using this model, state insurance commissioners have established standards around what’s considered an adequate level of reserves. For example, a health plan with enough reserves to cover only 100% of its risk-based capital requirements will end up under state supervision. Too risky - if anything bad happens at all (a bad flu season, for example), that health plan could have trouble meeting its obligations and paying its members’ bills.
A health plan with 200% of risk-based capital is automatically put onto a “watch list” - not in trouble yet, but needs to produce a plan that shows how it can improve its financial position quickly. 300% starts to get into what I might call a regulatory comfort zone - but it’s not comfortable enough to be part of the Blue Cross Blue Shield Association. To meet that standard, a Blues plan has to be at at least 375% of risk-based capital. And when the state of Pennsylvania looked at this issue a few years ago, it set the bar for a having sufficient surplus at 550% of risk-based capital.
Massachusetts is basically setting the “excess reserves” bar at the 200% mark. In other words, if paying this new assessment on excess reserves would push a health insurance plan’s risk-based capital position below 200%, then it is only required to pay until it hits the 200% mark. The rest of its obligation would be picked up by other health plans. This seems pretty aggressive. In effect, the state is saying that any reserves over the amount that would dictate “watch list” status for any health plan anywhere in the United States are “excess reserves.” Put another way, the Commonwealth seems to be saying that one dollar above “Holy Moly - Do Something!” qualifies as excess reserves. I hope that notion gets reconsidered before the final regulations are approved. Health plans don’t need to be over-reserved, but it’s pretty hard to argue 200% of RBC, so-called, is an adequately reserved health insurance plan.
Don’t know too much about what the “right” level of reserves is, but it almost seems as if you portray reserves as “insurance on insurance”, an interesting concept…
I’m interested in the larger political point that this again seems illustrative of and that is the Makers of society, the people and companies that go out and actually create economic value and earn money being forced at the point of the IRS’ and DOR’s guns to support the Takers of society.
What incentive will Harvard Pilgrim (or any other insurance company in Massachusetts) have to earn money to make investments in the healthcare system if the state and federal government are just going to come in and snatch because they are “smarter” about what to pay for with it?
Charlie - Let’s face it, when the state or local governments need money they come up with an amount that they need and then they back into the formula which will generate that amount. Same as property taxes where if the value of your house goes down they raise the property tax rate so they can still capture the money they need to fund their generous salaries, benefits and pensions. The thing that they don’t understand is that as they raise taxes to such a prohibitive level, individuals and companies will find ways to avoid these taxes altogether. For instance, as the state increases the cigarette tax, more smokers will find it worthwhile to make trips out of state or to find deals on the internet which will end up with the state actually receiving LESS overall taxes at the end of the day. Similarly, health plans will spend down any “excess” reserves to avoid paying taxes on these funds. Do you really think anyone at the state level understands the industry well enough to appreciate the impact a flu outbreak would have on plans’ financial stability? Further, this is really in bad tatse as many plans and providers took pretty big hits for the state in order for them to offer health insurance for the statewide initiative and for them to now come back and take even more money from plans and providers…. well, let’s just say it seems to be contrary to what all the parties had agreed to. Personally, I am still waiting for my property tax relief that Governor Patrick promised during the campaign.
You’ve both done a nice job of illustrating some of the downside risk of a very low threshold for applying this assessment. Let’s hope it really is a one-time thing - and doesn’t become a permanent piece of the regulatory environment here. And Tim - reserves aren’t “insurance on insurance.” They’re the funds health plans have on hand that are available to pay for all the medical expenses that have been incurred by our members, but not yet billed to us, if - for some reason, we were no longer able to operate on a go forward basis. And now that I write this, I guess you could say reserves are insurance on insurance. Sort of.
I’m confused. The DOI regulation makes it clear that a risk-based capital level of 200% is the minimum satisfactory level - they require a company at 199% to file all kinds of plans to get above 200%. Furthermore, the DOI regulations on risk-based capital states: (4) An excess of capital over the amount produced by the risk-based capital requirements contained in 211 CMR 20.00 and the formulas, schedules and instructions referenced in 211 CMR 20.00 is desirable in the business of insurance. Accordingly, insurers should seek to maintain capital above the RBC levels required by 211 CMR 20.00.
And isn’t this RBC regulation based on the guidelines developed by the National Association of Insurance Commissioners, whose mission is “to assist state insurance regulators, individually and collectively, in serving the public interest…”?
So, the state wants an insurance company to be above 200%. But now if you are above 200%, the state will define it as “excess” and tax it. Also seems turns out to be an interesting way to tax a not-for-profit - by redefining profit.
I understand that fiscal pressure generates tremendous creativity, but this is a criteria that was developed to and in fact has protected the public and insurance consumers, well for many years. Leave it alone.
KK - Your question is the same as mine - how can $1 on the upside of 200% of RBC be taxable as excess reserves, while $1 below 200% is cause for regulatory concern? The answer is, I don’t know. And by the way, you are correct. That is a national standard.