"What Are 'Excess' Reserves?" by Bruce Bullen

On February 19, the Division of Health Care Finance and Policy (DHCFP) will hold a public hearing on proposed regulations implementing an assessment on insurers to raise $33 million for the state’s general fund. The proposed regulations set a very low bar for determining how much insurers should keep in reserve in order to offer coverage safely to subscribers. This low bar should be concerning to everyone with a stake in maintaining the stability of our health care system.

All health insurers need reserves in order to pay claims in the event of an unexpected surge in health services, for example, a particularly bad flu outbreak. Some policymakers have appropriately asked whether reserves not needed for this purpose might be redirected for other public purposes.

The proposed regulations, however, would set the bar for defining an insurer’s “excess” reserves at the minimum level needed to avoid direct oversight by the state’s Division of Insurance. It seems imprudent for the state to be defining all reserves above the minimum needed to avoid government action as excess. In fact, the National Association of Insurance Commissioners, the Blue Cross Blue Shield Association, and the State of Pennsylvania have all determined that a substantially higher level of reserves is essential.

One might argue that the proposed regulation simply implements a modest, one-time assessment, but the reality is that the standard set by the Division will serve as a precedent for future action. If the state continues each year to assess insurer reserves until the minimum needed to avoid DOI oversight is reached, the stability of every insurer in the state will be at risk. Given the turmoil in the financial markets (where reserves are typically invested) and the potential for unexpected increases in medical claims, it is not difficult to envision a scenario in which an insurer with minimal reserves could find that it is no longer able to pay claims. Ironically, a primary goal of insurance regulation is to avoid this situation.

In adopting its final regulations, DHCFP should act to protect the health care system by setting the standard for excess reserves at a level far greater than is being proposed.

Bruce Bullen
Chief Operating Officer
Harvard Pilgrim Health Care