Spending by HMOs Is Ranked

Blue Cross of California spent less on medical care last year, as a percentage of its patient revenue, than any other large health plan in California, a physician group said Monday.

By contrast, Kaiser Foundation Health Plan finished first among the state’s five biggest health plan operators, according to the California Medical Assn., the state’s largest physician group.

The report represents the association’s latest salvo in a campaign to get a greater share of insurance premiums going to medical care and, of course, to doctors -- and less to profits and overhead.

Blue Cross, a unit of publicly traded WellPoint Inc., disputes the association’s methodology and points out that the ratings have not scared away patients.

“We provide policies and plans that are efficient, customer focused, meet public demand and are reflected in our membership numbers,” spokesman Robert Alaniz said.

Blue Cross spent 78.9% of revenue on healthcare for more than 4.6 million members in 2005, according to the physician group’s annual analysis of health plan finances reported to the Department of Managed Health Care, which regulates health maintenance organizations.

Of the balance, Blue Cross spent 11% of revenue on overhead and put 10% of it toward profit.

The association’s leaders criticized Blue Cross’ relatively low level of healthcare spending -- known among insurers as their “medical loss ratio” -- saying patients would be better served if profit was capped, as overhead expenses are now.

Including Kaiser, the 10 health plans with the highest medical loss ratios last year were all nonprofits, the group said.

Five of the 10 operators with the lowest levels of medical spending were for-profits, it said.

“From the perspective of Wall Street, a lower medical loss ratio is great,” association Chief Executive Jack Lewin said. “But, from the vantage point of a patient or a doctor or hospital, we look at it as a travesty. We believe more money should be spent on healthcare.”

State law caps administrative spending by HMOs at 15% of revenue but says nothing about profit levels.

The doctor group sponsored a state Senate bill this year that would have lumped profit in the 15% cap as well, forcing insurers to spend no less than 85% of revenue on healthcare. The bill failed to get out of committee, but the group said it would pursue it in the next legislative session.

Alaniz, WellPoint’s spokesman, said the group’s analysis was misleading because it counted as overhead many expenses -- such as disease management programs and agent commissions -- that benefit members.

WellPoint is the largest U.S. health benefit company, with 34 million members. It posted an increase in net income of $751.2 million, or 34%, in the second quarter. It also reported that its medical loss ratio companywide was 81%, 10 percentage points lower than a year earlier.

The company was formed in late 2004 when Indianapolis-based Anthem Inc. purchased Thousand Oaks-based WellPoint and adopted its name. At the time, physicians and patient advocates raised concerns that WellPoint might increase premiums to boost profit and cover the cost of the merger, which was valued at $21 billion.

As a condition of its approval of the deal, the Department of Managed Health Care, which regulates HMOs, required the company to limit administrative spending to 13.3% -- less than the legal cap -- for three years.

The agency also required Minneapolis-based UnitedHealth Group Inc., which subsequently bought Cypress-based PacifiCare Health Systems, to limit administrative spending in its California HMOs to 10%.

By law, the agency could not limit profit, agency spokeswoman Lynne Randolph said.

“Within the scope of our authority, we wanted to keep administrative costs as low as possible in order to allow as much money as possible to go toward medical costs,” she said.

State Insurance Commissioner John Garamendi is developing a regulation that would require a premium rate review if an operator’s medical loss ratio fell below a certain level. That level has not been announced.

Chris Ohman, CEO of the California Assn. of Health Plans, defended administrative spending levels of both for-profit and nonprofit operators, saying that even though it is not counted as medical care, it often improves efficiency and patient care.

As an example, he said, disease management programs operated by many health plans help patients control chronic conditions, such as asthma and diabetes, at home and avoid costly trips to the hospital.

“That’s an administrative expenditure to leverage lower costs and improve medical care,” Ohman said.

Hospitals also are concerned that some insurers don’t spend enough of their patients’ premiums on healthcare, said Jan Emerson, a spokeswoman for the California Hospital Assn. “When you have Wall Street-driven health plans, there’s some push and pull there.”

Nonprofit Kaiser Foundation Health Plan, the state’s biggest HMO with 6.6 million members, spent 93% of revenue on healthcare last year.

Blue Cross has fewer HMO members than Kaiser but is the largest health plan operator in California overall, including members in plans regulated by the Department of Insurance.

Blue Shield, the state’s third-largest HMO provider, spent 83.4% on healthcare for 2.7 million HMO members. Spokesman David Seldin noted that the nonprofit company had reduced overhead to 11.3% of revenue last year from almost 17% of revenue in 2000.

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Where the money goes

Here are the five largest medical insurance programs in California ranked by the percentage of revenue spent on medical care.

Percentage of revenue spent on medical care and membership totals

(Membership in millions)

Kaiser (6.6): 93.0%

PacifiCare: (1.6): 86.1%

Health Net (2.0): 85.7%

Blue Shield (2.7): 83.4%

Blue Cross (4.5): 78.9%

Source: California Medical Assn.