BlueCross BlueShield of Vermont − the largest health insurer in Vermont with a 66% market share − is threatened with insolvency because of its declining reserves, according to a state regulator.

Kevin Gaffney, commissioner of the Vermont Department of Financial Regulation, said Friday he’s confident BCBSVT will remain solvent, which is his department’s responsibility to ensure.

“As solvency regulator, our primary role is protecting the market,” Gaffney said. “We have to have a place for people to purchase insurance or we haven’t done a good job of protecting Vermont residents.”

Gaffney said Vermont’s largest health insurer is at a critical juncture.

“BlueCross BlueShield of Vermont is a big tanker,” he said. “We have to start to turn it. We can do that and there are steps to do it.”

While Vermont has not had a major insurance company fail, according to Gaffney, he said the example of Florida offers a cautionary tale where losses from natural disasters have caused insolvencies in property insurance companies and have triggered other insurance companies to exit the market.

“We have sufficient rigor in our solvency process to avoid these things,” Gaffney said. “DFR is taking those actions in a timely and I think in an appropriate manner.”

Gaffney is requiring BCBSVT to file a plan with DFR by early September, showing how they’re going to “bolster their reserves and improve their solvency.” The key element of that plan, articulated in a “solvency letter” Gaffney sent to Owen Foster, chair of the Green Mountain Care Board, on July 12, is an additional 4% increase by BCBSVT in contributions to its reserve fund.

The Green Mountain Care Board is an independent oversight board created by the Vermont Legislature to regulate major areas of the health care system in the state, including health insurance premiums. The Care Board would have to approve the increased contributions to BCBSVT’s reserve fund.

‘A Fragile Financial Situation’

Don George, president and chief executive officer of BCBSVT, sent an open letter via email on Monday, July 22, titled, “A Fragile Financial Situation.” In the letter, George said the insurer is in the “unprecedented position” of being forced to file an amended request to the Green Mountain Care Board for an additional 4% increase to contributions to its reserve fund, which comes from premiums paid by policy holders. The reserve fund is used to cover unexpected levels of claims, which the insurer has experienced in the past few months.

“Since May, health care claims have increased dramatically, and our member reserve levels have declined precipitously,” George said. “This is in addition to underwriting losses in five of the last six years, leaving us without the means to weather this downturn with existing member reserves. The cumulative impact of underfunded premiums − despite our consistent advocacy for rates that fully fund the cost of our members’ health care − has created this fragile financial situation.”

Sara Teachout, director of government and media relations for BCBSVT, explained that underwriting losses occur when the company is unable to cover the total amount of member claims plus administrative costs. She said administrative costs for BCBSVT are “quite low,” when compared to its peers nationally, but the insurer is still making administrative cuts by not advertising and by restricting new hiring.

“The only year we did not have a loss was 2020, the year of COVID, when people were not going to the hospital,” Teachout said.

BlueCross BlueShield VT asks for an additional $20 million for its reserve fund

The original request for contributions to the reserve fund, filed in May, asked for a 3% increase, which equates to $15 million. The amended request for a 7% increase equates to $35 million, or more than double the original request, according to Teachout.

“Blue Cross VT has advocated for adequate funding of member reserves consistently over time, while our requests were cut year over year,” George said in an email to the Burlington Free Press. “Now with member reserves dangerously depleted, we are forced to increase the rates substantially to cover the deficit.”

Owen Foster, chair of the Care Board, declined to comment for this story because the hearings for BCBSVT’s rate filings are ongoing.

Making sure BlueCross BlueShield VT remains solvent

Gaffney said the reserve fund is “critical” to maintaining BCBSVT’s solvency. He said the health of the reserve fund can be expressed as a percentage − called a risk-based capital ratio range − reached through complex calculations that reflect BCBSVT’s investment risk, but basically the percentage equates to an amount of money that accounts for “volatility.”

“The (DFR) did an order back in 2019 for Blue Cross Blue Shield of Vermont to maintain a risk-based capital ratio range between 590% and 745%,” Gaffney said. “If you can stay in that range you can withstand volatility and not be at risk (of insolvency).”

At the end of 2023, BCBSVT’s risk-based capital ratio range was 337%, far below the required range. Gaffney said in six of the last 10 years, the insurer’s contribution to its reserve “was a negative because of other adjustments to rate filings.” Rates are regulated by the Green Mountain Care Board.

“It is as dire as it sounds,” Gaffney said.

Reserve fund continues to drop this year

BCBSVT’s reserve fund balance has declined by $47 million over the past two years, not including this year’s results, according to Gaffney. The insurer had about $88 million in reserves at the end of 2023, and that number has continued to decline through 2024. Teachout was unable to provide the current balance of the reserve fund.

“We do know the 2023 number was only adequate to cover just under two months of our members’ claims, which is extremely low,” Teachout said. “We should roughly double where we are. Our balance should have been close to $180 million at the end of 2023.”

‘We have to have a place for people to purchase insurance’

The overall context for the discussion of BCBSVT’s solvency is a crisis of health care affordability for Vermonters, both in terms of hospital costs and premiums. Gaffney said he’s not unsympathetic to the affordability issue, but that he has a larger responsibility as commissioner of DFR, and BCBSVT’s solvency regulator.

Gaffney said he also understands that “often it’s felt that these increases are to just bolster profits for insurance companies.”

“That’s not the case now,” he said. “It’s going to take some time to get back into the range of 590% to 745%.”

Vermonters’ declining health is a big, and expensive, problem

George points to the declining health of Vermonters as a key factor in BCBSVT’s financial crisis, in addition to rising hospital costs. He said health care organizations nationwide are experiencing “extraordinary cost pressures,” as a result of “massive increases in the need for medical and pharmaceutical care.”

“As many of you may have experienced in your own lives, we are faced with these same pressures here in Vermont,” George said. “Furthermore, our data shows the continuing impact of the pandemic and an alarming decline in the overall health status for many of our members. These issues are colliding with a decade of state policy decisions to cut deeply into health insurer reserves and premiums in the name of affordability, creating the urgent situation that we are faced with today.”

Not only are there more claims, but there are bigger claims from more acute medical conditions, Gaffney said.

“The takeaway is the price of insurance is a reflection of costs, not a choice the company makes,” he said. “The company runs on narrow margins.”

Contact Dan D’Ambrosio at 660-1841 or ddambrosio@freepressmedia.com. Follow him on Twitter @DanDambrosioVT.