State regulators, already probing recent rate hikes by Blue Cross of California, on Tuesday also pledged to scrutinize the health insurer's reserve fund, which is five times as big as required by law.
Blue Cross had capital reserves of $1.7 billion as of March 31, according to documents filed with the state by Blue Cross on Monday. Under state rules designed to provide a cushion against insolvency by insurers, Blue Cross was required to have about $307 million in reserve.
California doesn't impose limits on the amount of money health insurers can have in reserve, and it's not uncommon for them to have more than the state requires. But the reserves at Blue Cross, which has 7.6 million California policyholders, are drawing particular attention in light of premium increases recently imposed by the insurer.
At a hearing in Sacramento on Friday, regulators said they would step up their investigation into the rate hikes, which consumer activists allege are being used to cover an estimated $4 billion in costs related to the insurer's acquisition last year by Indianapolis-based Anthem Inc.
Cindy Ehnes, director of the state Department of Managed Health Care, said the state would now look into Blue Cross' reserves as well.
"Consumers looking at these kinds of reserves have the question -- 'Why is a rate increase needed?' " she said. "So it will certainly be part of our investigation."
Jerry Flanagan, a consumer activist with the Santa Monica-based Foundation for Taxpayer and Consumer Rights, said that "the effect of these overhead costs is that people pay more for healthcare."
A report from an actuary to be hired by the state to assist in the Blue Cross probe is expected in the next 60 days, a department spokeswoman said.
Blue Cross spokesman Michael Chee said the large capital reserves were needed to weather any spike in claims that might occur and to ensure that the company is financially sound.
"We sympathize with consumers' point of view -- it's difficult to understand the various factors of financing healthcare," he said. "But we are acting in their best interests. We want to demonstrate long-term financial stability."
Anthem completed its purchase of Thousand Oaks-based WellPoint Health Networks Inc. last year in a deal valued at $21 billion. The combined company, WellPoint Inc., is the nation's largest health insurer, with 28 million members.
According to state records, other major California health insurers also maintain reserves well in excess of state requirements, which vary for each company. Nonprofit Kaiser Permanente has the largest reserve with $10.2 billion, 13 times the required level.
"It's standard practice. You can't have too much in reserve," said David Olson, a spokesman for Woodland Hills-based insurer Health Net Inc., whose $317-million reserve is double its required amount.
"Right now, the level of reserves we have is dictated by the state and the bond rating agencies. We're getting pressured by the rating agencies to have higher levels of reserves to get better ratings on our debt and lower borrowing costs," he said.
Cypress-based PacifiCare Health Systems Inc.'s $462.8- million reserve is, like Blue Cross', five times the mandated level. "If we let that capital go, it would be a one-time Band-Aid," said PacifiCare Chief Financial Officer Greg Scott. It would not, he added, be a solution to "the problem of escalating healthcare costs."
Adam L. Miller, healthcare analyst with Williams Capital Group, said Wall Street liked insurers to maintain healthy reserves.
"It's a fine balancing act. Reserves are a big issue across the industry," said Miller. "What the appropriate level is -- there's still a lot of debate."