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Blue Shield's catchy cap

The insurer pledges to cap its profits and give customers one-time discounts.

June 08, 2011

Blue Shield of California announced Tuesday that it will cap its profits for the sake of making health insurance more affordable. Richer in symbolism than in economic impact, the move seems designed to deflect scrutiny and blame from insurers onto others in the industry, particularly doctors and hospitals. All the same, the steadily rising cost of medical care is where the real challenge lies for the sustainability of the healthcare system.

Blue Shield Chief Executive Bruce Bodaken said the company is limiting its annual income — the difference between its total revenue and its expenses — to 2% of its revenue. The company's income last year was a little more than 3% of its $10.1 billion in revenue, so it plans to give customers one-time discounts that will average $80 to $340. That's welcome, even if it won't be enough to offset the premium increases Blue Shield imposed on many policyholders.

The point of the cap, Bodaken said, is to assure Blue Shield's customers that its rate increases aren't intended to fatten the company's reserves. That's true in an overall sense. The cap provides no guarantee, however, that Blue Shield is spending its premium dollars wisely — witness Bodaken's $4.6 million salary, which is more than four times what the chief executive of his largest for-profit rival makes.

Nor does it give the company more incentive to hold down the rates it pays doctors and hospitals, whose cost increases can be passed on to consumers. As insurers have argued repeatedly, the main factor in rising premiums is treatment costs driven ever higher by increased demand for care and expensive new drugs and technologies.

Blue Shield can afford to cap its income in part because of the company's healthy reserves and in part because it's a not-for-profit entity with no investors to satisfy. But its voluntary action is no substitute for an Assembly-passed bill, AB 52, that would give regulators the same power over health insurers' rates that they wield over auto and home policies. Like other big insurers in California, Blue Shield is trying to kill that bill.

Nevertheless, the company's pledge sets the right example. Consumers need to lead healthier lifestyles. Doctors, hospitals and other healthcare providers need to work with insurers and policymakers to find ways to profit from wellness, not sickness. And lawmakers need to build on the foundation created by last year's healthcare reform law rather than fighting fruitless partisan battles over whether to defund or repeal it.

To its credit, Blue Shield is working to develop more efficient methods of delivering and paying for care. If it succeeds, those efforts will be more important than the nonprofit's new profit cap.

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