Calif. Blue Cross Spent 78.9 Percent of Premium on Patients In 2004-05

August 15, 2006

For the fifth year running, Blue Cross of California has spent less than 80 percent of premium dollars on patient care, according to a report released by the California Medical Association.

Blue Cross, the state’s largest for-profit health insurer, spent 78.9 percent of its premium dollars on patient care in fiscal year 2004-2005, with 21 percent to profits and administration, according to CMA’s 13th annual report examining annual health plan expenditures.

“Vital patient care is being short-changed by for-profit HMOs that send ever increasing portions of premium to Wall Street instead of spending it on patients,” said Michael Sexton, M.D., CMA president. “If a substantial part of these profits were kept in the health care system, it would help make Californians healthier, stabilize the endangered emergency care system and ensure that all patients get access to the care they expect and deserve.”

State law requires, under the Knox-Keene act, that no more than 15 percent of revenues go to administrative costs including marketing. When the Knox-Keene Act became law in 1975, the intent was to require insurers to spend 85 percent of premium directly on medical care. The vast majority of health plans at the time were nonprofit and it was accepted that the nonprofit model would prevail. As a result, language regarding profits was not included. For-profit health plans have interpreted this to mean that profits are an expense that can come from the 85 percent intended for patient care.

Under Senate Bill 1591, which was sponsored this year by CMA, that erroneous interpretation would have been corrected by barring health plans from spending more than 15% of premium dollars combined for profit and administration. The bill was introduced by Sen. Sheila Kuehl, D-Santa Monica. CMA will continue to pursue this policy in a new measure, said CMA officials.

In addition to Blue Cross, several other plans do not meet the 85 percent threshold. Aetna Health Care, for instance, spent 78.7 percent of its premium dollars on patient care with more than 21 percent going to profits and administration. Blue Cross insures more than 4.5 million Californians; Aetna fewer than 300,000.

A change in the law would provide an enormous benefit to patients and the health care system. Blue Cross and Aetna alone collected $12 billion in premiums from patients. If just these two immensely profitable insurance companies were required to spend another 6 percent on health care, an additional $720 million would be available for patient care in California.

CMA officials noted that many health plans do spend at least 85 percent of premium on patient care. Kaiser Foundation Health Plan scored the highest of the major plans, spending 93 percent of its funds on patients. Molina Medical Center/American Family Care, also noteworthy, spent 88.4 percent of its funds on patient care, a five percent increase from the previous year.

The largest ratio of money going to patient care was exhibited by nonprofits CalOptima (99.7 percent), Central Coast Alliance for Health (98.6 percent) and Partnership Health Plan (95.4 percent).

In total, five of 10 companies that spend the least on patient care are for-profit companies, while all 10 of the companies that spend the most on treating their patients are nonprofit. In an irony that reflects the industry view of health care, insurance companies universally refer to what they spend on patient care as “medical loss” and they call the percentage “the medical loss ratio.”

The report also compiles data on executive compensation for publicly traded health plans. Wellpoint Health Networks, the parent company of Blue Cross of California, paid CEO Larry Glasscock more than $5.4 million in salary and other compensation. Thomas Snead Jr., another Wellpoint executive, received more than $5 million in compensation. Neither figure includes stock option amounts or values. These compensation amounts were several million dollars more than the average compensations earned by other health plan executives.

Last year, WellPoint reported that CEO Leonard Schaeffer received more than $11 million in total stock, salary and other compensation.

The Knox-Keene Health Plan Expenditures Summary is a compilation of expenditure data reported from managed care plans to the Department of Managed Health Care and other public resources. The report breaks down information by number of patients, tax status and geographic communities served. Plans are listed as to whether they are public, private, for-profit or nonprofit.

The Knox-Keene Health Care Service Plan Act of 1975 refers to a collection of laws regulating and governing health plans. While the Department of Managed Health Care regulates health plans and their reporting of expenditures, it does not publish this data, as CMA believes it should. CMA continues to compile this data in an annual public report.

Next year, UnitedHealthcare, which recently returned to the California market, will be included in the report. On a national basis, UnitedHealthcare does not meet the 85 percent threshold.

To view the report, visit

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