Blue Cross Blue Shield of Vermont, the state’s largest health insurer with 66 percent market share, is on the brink of bankruptcy due to dwindling reserves, according to state regulators.
Vermont Department of Financial Regulation Commissioner Kevin Gaffney said Friday he is confident BCBSVT will remain solvent and that it is his department’s responsibility to ensure that happens.
“As a solvency regulator, our primary role is to protect the market,” Gaffney said. “People have to have a place where they can buy insurance. If we’re not doing a good job of protecting Vermont residents.”
Gaffney said Vermont’s largest health insurer is at a critical crossroads.
“Blue Cross Blue Shield of Vermont is a supertanker,” he said. “We have to start turning it around. We can do that, and we have the steps to do that.”
Gaffney said Vermont hasn’t experienced a major insurer failure, but he said the example of Florida, where losses from natural disasters caused property-casualty insurers to fail and prompted other insurers to exit the market, offers a lesson.
“Our solvency process is robust enough to prevent this from happening,” Gaffney said. “I think the DFR is taking these steps in a timely and appropriate manner.”
Gaffney has asked BCBSVT to submit a plan to the DFR by early September showing how it will “strengthen reserves and improve solvency.” A key part of that plan, articulated in a “solvency letter” Gaffney sent to Green Mountain Care Board Chairman Owen Foster on July 12, is that BCBSVT will increase its reserve contributions by 4 percent.
The Green Mountain Care Board is an independent oversight board established by the Vermont General Assembly to regulate key areas of the state’s health care system, including health insurance rates. The Care Board must approve any increases to BCBSVT’s reserve fund contributions.
‘Weak financial situation’
BCBSVT President and CEO Don George emailed an open letter titled “A Precarious Financial Situation” on Monday, July 22. In the letter, George said the insurer is in an “unprecedented situation” that has forced it to file an amendment request with the Green Mountain Care Board to request a 4% increase in contributions to a reserve fund that is funded from premiums paid by policyholders. The reserve fund is used to cover unexpected claims that insurers have experienced over the past several months.
“Since May, medical claims have skyrocketed, causing a sharp decline in our member reserve levels,” George said. “In addition to underwriting losses in five of the past six years, our existing member reserves do not provide the means to weather this downturn. The cumulative effect of underfunded premiums, despite our consistent insistence on premium rates that fully cover our members’ medical expenses, has created this fragile financial position.”
Sarah Teachout, BCBSVT’s director of government and media relations, explained that underwriting losses occur when a company can’t cover its members’ total claims and administrative fees. She said BCBSVT’s administrative fees are “fairly low” compared with national peers, but the company still cuts administrative costs by not advertising and limiting new hiring.
“The only time we didn’t have losses was in 2020, the year of COVID-19, when people didn’t go to the hospital,” Teachout said.
Blue Cross Blue Shield VT requests $20 million in additional reserve fund
The original request for contributions to the reserve fund, submitted in May, called for a 3% increase, or $15 million. Teachout said the revised 7% increase is the equivalent of $35 million, more than double the original request.
“Blue Cross VT has consistently advocated for adequate funding of our member reserves for many years, but our requests have been reduced year after year,” George said in an email to the Burlington Free Press. “Now that our member reserves are dangerously depleted, we are forced to significantly increase our rates to make up for the deficit.”
Care Committee Chairman Owen Foster declined to comment on the matter because a hearing on BCBSVT’s fee application is ongoing.
Ensure that BlueCross BlueShield VT maintains its ability to service its debt.
Gaffney said the reserves are “critical” to maintaining BCBSVT’s solvency. He said the strength of the reserves can be expressed as a percentage known as the risk-based capital ratio range, which is arrived at through a complex calculation that reflects BCBSVT’s investment risk, but essentially the percentage equates to an amount that takes into account “volatility.”
“In 2019, the (DFR) ordered Blue Cross Blue Shield of Vermont to maintain a risk-based capital ratio in the range of 590% to 745%,” Gaffney said. “If they can stay in that range, they can withstand volatility and not be at risk (of failure).”
As of the end of 2023, BCBSVT’s risk-based capital ratio range is 337%, well below the required range. Gaffney said that in six of the past 10 years, the insurer’s contributions to reserves “were negative due to other adjustments to rate filings.” Rates are regulated by the Green Mountain Care Commission.
“As devastating as it sounds, this is a disaster,” Gaffney said.
Reserves will continue to decline this year
BCBSVT’s reserve balance has declined by $47 million over the past two years, excluding this year’s results, Gaffney said. The insurer had about $88 million in reserves at the end of 2023, but that figure continues to decline through 2024. Teachout was unable to disclose the current balance of the reserves.
“We know that the 2023 figure was enough to cover just under two months of members’ billings, which is an extremely low figure,” Teachout said. “We need to nearly double what we have now. The balance at the end of 2023 should have been closer to $180 million.”
“We need a place where people can buy insurance.”
The overall context of the debate over BCBSVT’s solvency is a crisis in health care affordability for Vermonters, both in terms of hospital costs and insurance premiums. Gaffney said he is not unsympathetic to the affordability issue, but that he has a greater responsibility as DFR commissioner and as BCBSVT’s solvency regulator.
Gaffney said he understands that “there is often a perception that these price increases are just intended to increase insurance companies’ profits.”
“That’s not the case now,” he said. “It’s going to take some time to get back to the 590% to 745% range.”
Vermont’s poor health is a big, costly problem
George cited rising hospital costs, as well as Vermonters’ deteriorating health outcomes, as key factors in BCBSVT’s financial crisis. He said health care organizations across the country are facing “extraordinary cost pressures” as a result of “significant increases in demand for medical care and pharmaceuticals.”
“In Vermont, we face the same pressures that many of you have experienced in your lifetime,” George said. “Furthermore, our data shows that the ongoing impacts of the pandemic have significantly worsened the overall health of many of our members. These issues collide with the state’s decade-long policy decisions to drastically cut health insurer reserves and premiums in the name of affordability, creating the urgent situation we face today.”
Not only are the number of claims increasing, but the claims are also larger for more serious medical conditions, Gaffney said.
“The key point is that premiums reflect costs, not company choice,” he said. “Companies operate on slim margins.”
Contact Dan D’Ambrosio at 660-1841 or ddambrosio@freepressmedia.com. Follow him on Twitter: @DanDambrosioVT.
