Opinion ID: 2598249
Heading Depth: 1
Heading Rank: 4

Heading: The Commissioner's Findings and Order

Text: Among other things, the Commissioner found that the proposal for consideration and allocation was fair to Eligible Policyholders. She also found that the sponsored demutualization would not result in any compensation, stock, or other benefit to any person associated with BCBSKS, and that BCBSKS executive officer compensation would not change as a result of the sponsored demutualization. She further found that BCBSKS has been able to recruit and retain sufficient competent staff and management. She also found that Anthem intends to offer employment to all persons employed by BCBSKS upon its acquisition of BCBSKS, but the employment will not necessarily be in Kansas. According to the Commissioner, however, the sponsored demutualization would not produce significant economies of scale. Nor would it lessen BCBSKS's exposure to local events. The combined Anthem companies would be subject to local events in nine states rather than only in Kansas. The Commissioner further found that BCBSKS had accumulated a considerable surplus, which had allowed it to operate without maximizing its underwriting margins and thereby to hold down premium rates. She also found that BCBSKS intended to reduce the $286 million surplus to $155 million. She additionally found that not only would Anthem fail to restore the $131 million reduction, but it would also further reduce the surplus dedicated to Kansas policyholders to approximately $90 to $112.5 million because it capitalizes its subsidiaries at substantially lower levels than those maintained by BCBSKS. From this, the Commissioner found that after the sponsored demutualization, BCBSKS policyholders would be protected by a surplus less than half the current amount, so that BCBSKS would be considerably financially weakened by the sponsored demutalization. The Commissioner also reviewed a report from PricewaterhouseCoopers LLP (PwC), which had been retained by the KID testimonial team to conduct a market impact analysis of the sponsored demutualization to determine likely changes that would occur in the health insurance market in Kansas if the transaction were approved. Toward that end, PwC specifically analyzed choices, availability and cost of insurance coverage, provider contracting arrangements, administrative processes, employment levels in Kansas, and factors likely affecting Anthem's general performance. For its study, PwC requested information from Anthem and BCBSKS, obtained information from the Departments of Insurance in other states in which Anthem operates, interviewed individuals who represent medical associations and hospital associations in states in which Anthem operates, and reviewed public documents. PwC concluded that with relation to choice, availability and cost of insurance, the levels of insurance that are available today would likely continue, but that there would be premium rate increases significantly higher with the sponsored demutualization than without it. The Commissioner found that PwC performed the only systematic, analytic review of the Kansas health insurance market and therefore gave its report substantial weight. Primarily based upon the PwC report, the Commissioner also found the following, which are primarily compiled from her findings of fact: 54. Due to rising medical costs, health insurance rates will increase whether or not the sponsored demutualization is approved. This increase is referred to as trend in the market. 56-59. Over the last 6 years, while operating as a mutual company, BCBSKS had negative underwriting margins of 2 to 3%. While it had projected it would achieve positive underwriting margins of 0.4% by 2005, its best projection nowdue to a worse than expected underwriting performance during 2001is that it will achieve 0% underwriting margin by 2005. 60-61. As a mutual insurance company, before converting to a stock company in 2001, Anthem achieved positive underwriting margins of 2 to 3%. However, Anthem's primary corporate objective is to match or exceed its top competitor across several criteria, including underwriting margins, and its investor-owned competitors have underwriting margins of 4.5 to 5%. 63-65. As a result of the sponsored demutualization, premium rates will not only increase above trend, but also will be greater than those increases that would occur under BCBSKS's current management. Premium rate increases would not be uniform across categories of insureds. The premium rates will not increase above trend for large group businesses because it is experience-rated and more competitive than small group and individual markets. Similarly, rates are unlikely to increase, above trend, in the Medicare block of business, because it is already profitable and more competitive than the small group and individual markets. 66. As a result, the premium rate increases will be concentrated in the small group and individual markets, on which BCBSKS is currently losing money. These rates will occur as follows:  To achieve an increase in underwriting margins from BCBSKS's past 6-year negative 2% to a positive 2.5% (a conservative estimate of Anthem corporate performance) by 2005, Anthem would increase premium rates by 14% above trend.  And to achieve those underwriting margins of 2.5% by 2005, Anthem's premium rates would be 7% higher than those required to achieve BCBSKS's 0% underwriting projection by 2005.  Accordingly, BCBSKS premium rates will increase by at least 6% to 7% above the levels that would be expected without the sponsored demutualization. Although PwC did not analyze the scenario where Anthem would achieve its purported goal of greater underwriting margins (4.5 to 5%) by 2005, the Commissioner found that under those circumstances the premium increases would be significantly higher than the 14% above trend increases which were based upon a 2.5% underwriting goal by 2005. Although the commissioner found that premiums were only one of five factors which affect, e.g., increase, underwriting margins, she further found that there was insufficient/unpersuasive evidence presented to her to demonstrate strategies that would utilize these other factors to achieve such an increase in the future. Accordingly, she found that this lack of evidence necessarily pointed the analysis toward premium rate increases. These other four factors, and her discussion, follow: (a) Medical expenses. Reducing medical expenses requires more aggressive contracting with providers than has been BCBSKS's practice. The sponsored demutualization will not reduce BCBSKS's medical costs. (b) Administrative expenses or overhead. BCBSKS has lower administrative costs than Anthem. BCBSKS's current administrative-expense ratio is approximately 9%. When calculated in a way similar to BCBSKS's calculation, Anthem's current administrative-expense ratio is approximately 11.5%. The administrative-expense ratio of the Anthem West Region is 13.7%, down from 26.8% in 1999. Anthem presented no substantial evidence on how material reductions in BCBSKS's administrative expenses could be achieved. (c) Membership enrollment. Anthem presented no evidence on how it would materially increase membership in Kansas. (d) Benefit design. BCBSKS's benefit design will not change as a result of the sponsored demutualization. From the information presented, the Commissioner concluded that Anthem would severely deplete BCBSKS's surplus to benefit the Anthem holding company and would raise premium rates significantly more than BCBSKS would without the acquisition. This would weaken the financial standing of the state's dominant health insurer and place a substantial/significant financial burden on the BCBSKS's policyholders, the public, and the insurance-buying public. Citing K.S.A. 40-3304(d)(1)(C), she concluded as a matter of law that the proposed sponsored demutualization would cause a material change in management that would be unfair and unreasonable to policyholders and not in the public interest. For these same reasons, the Commissioner also concluded as a matter of law, citing K.S.A. 40-3304(d)(1)(E), that the proposed sponsored demutualization would likely be hazardous or prejudicial to the insurance-buying public. Based on the 66 findings of fact and 8 conclusions of law of the final order, the Commissioner disapproved the proposed sponsored demutualization.