Premera case highlights lack of competition in region. Options limited for health care

Our View by Spokesman-Review

July 16, 2004

Eastern Washington's health care vulnerability was in the spotlight Thursday when state Insurance Commissioner Mike Kreidler announced his denial of Premera Blue Cross's application for conversion to a for-profit company.

The fact that Premera controls 90 percent of the health insurance market in some segments of Eastern Washington wasn't the only factor in Kreidler's decision, but it figured conspicuously in his ruling. And if the insurance commissioner is correct in implying he spared this region the prospect of reduced care for higher rates under a for-profit Premera, it only underscores the lack of a competitive market here.

It's been more than two years since Premera, a non-profit health insurance company for all of its 58 years, first let the state know of its desire to convert. Going private would permit Premera to sell stock and raise the capital necessary to expand, operate more efficiently and modernize its technological infrastructure. Among other objectives, the company felt the need to raise its level of risk-based capital, an index that generally measures its financial capability to cover the potential claims against it.

Reaching those goals, Premera contended, would make it a more stable, more reliable institution. The public interest would be served.

Critics, including the professional associations representing state hospitals and doctors, had a different interpretation. Going public would divert Premera executives' paramount loyalty from their customers to profit-hungry shareholders. It would also make the new for-profit concern a target for takeover by one of the two giant multi-state health-insurance concerns Anthem and WellPoint which have bought up almost all of the converted Blue Cross and Blue Shield companies in the country.

Conversion, according to critics, would drive premiums up for consumers, reimbursement levels down for doctors and hospitals and corporate decision-making geographically farther away from the Washingtonians being affected.

After more than two years, two rounds of statewide hearings, more than 5,800 written and phoned communications and an 11-day adjudicative hearing, Kreidler concluded that the critics made a more compelling case. Allowing conversion would be unfair to the public, he held.

He noted, for instance, that Premera's risk-based capital calculation had increased in the past year, rather than declined, and would have gone up more if the company hadn't been spending more than $30 million pursuing the conversion case. He also pointed out that unlike what normally happens in conversion cases of this sort, Premera didn't have a clear explanation of how it planned to spend the $100 million to $150 million that an initial public stock offering would have raised.

But of most interest to Eastern Washington, he stressed that the lack of competition here left consumers at the company's mercy. Not just policy holders either, but also the providers who depend on fair and adequate levels of reimbursement for their services.

At a hearing in Spokane, local pediatrician Deborah Harper described Premera as a health-care "gorilla," big and powerful enough to have its way, even under current conditions.

"Yet as a for-profit entity," she testified, "Premera will need to impose even more difficult terms on the contracts with their physician network to squeeze out profits for their investors for whom they have fiduciary responsibility."

In his ruling, Kreidler predicted that the financial markets to which Premera would turn for investment would demand higher operating margins than the company can achieve without raising premiums and/or lowering reimbursements, and it could get away with it because no competitor is there to give consumers and providers an adequate alternative.

But Kreidler, conversion critics such as Harper and, for that matter, Premera officials themselves are arguing from a future they can only speculate about. Anyone who does that will probably conclude that health-care costs are going to keep rising, whether Premera is for-profit or non-profit.

Another Spokane witness to testify before the Insurance Commissioner's Spokane hearing in December was now-Mayor and then-state-Senator Jim West. While refraining from advocating one way or the other on conversion, West encouraged Kreidler to keep in mind a business's need for enough flexibility to operate efficiently. He also put his finger on the issue that most impacts Eastern Washington competition, or the lack thereof.

Premera has a decision to make about whether the company will appeal Kreidler's ruling. Given the overwhelming opposition to conversion among not only regulators but also individual citizens who commented from all over the state, it's a decision Premera should take only if it can explain explicitly how benefits of conversion to the state would exceed the costs to physicians, hospitals and customers.

In the meantime, Eastern Washington deserves a close look from its local representatives and from state officials to find out what it takes to provide a more competitive health insurance market in this region. If that could be achieved, it would address some of Kreidler's most significant worries. And it certainly would afford Eastern Washingtonians a measure of relief.



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