December 11, 2012 -- Regence BlueShield and its parent company Cambia Health Solutions made sloppy mistakes in their reporting practices, sometimes to the tune of millions of dollars, according to a Lund Report review of the insurer’s most recent Washington state financial exam. The examination was completed earlier this year and covers the insurer’s work through the end of 2010. Regence BlueShield is the Washington subsidiary of Portland-based Cambia, which also owns Regence BlueCross BlueShield of Oregon and Blues plans in Utah and Idaho.
Among the findings by the Washington Office of the Insurance Commissioner:
Cambia reported $6 million in spending that had never taken place -- apparently because it expected to spend that money later -- a violation of common accounting practices as well as of the rules that govern its disclosures.
Regence BlueShield repeatedly made mistakes with its accounts, failing to follow its own policies or apply its own controls, at one point failing to allocate funds to a subsidiary, at another point failing to notice a vendor invoice error and allocating expenses wrong as a result, and at one point making a $15 million error thanks to a broken spreadsheet formula that nobody caught until state examiners started digging.
Regence BlueShield appears to have repeatedly made actuarial errors or miscalculated estimates – sometimes because of poor internal controls. In one case, it underestimated how much it had reserved for unpaid claims by $10.2 million, another time it underestimated its reserves for a federal employees' health plan by $1.35 million.
Officials at both Regence BlueShield and at the Washington Office of the Insurance Commissioner emphasized that the insurer remains solvent and capable of meeting its financial obligations.
“We would note that these findings did not result in a fine against Regence,” said Rich Roesler, Washington OIC spokesman. “We are primarily concerned with compliance and solvency. The issues raised did not cause us any concerns about the company’s overall solvency.”
“Regence BlueShield continues to be a stable and financially healthy company,” said Regence spokeswoman Rachelle Cunningham. “This year A.M. Best affirmed the company’s financial strength rating of A (excellent).”
Nonetheless, Regence BlueShield was told to make substantial changes. The company received an order from Washington regulators that repeatedly instructs Regence to comply with state code in how it records information in its financial statements, and that also order the company to consider ways to improve its controls over how aspects of its operation are tracked. The financial exam raises questions about Regence BlueShield’s understanding of the rules and regulations it is supposed to follow.
A market conduct exam, which Washington is currently conducting of Regence BlueShield, could provide more insight. Originally expected to come out this year, Roesler said that exam is taking longer than expected and will not likely be finished until the first or second quarter of next year. State law prevents Office of the Insurance Commissioner staff from discussing the market conduct exam until it is complete, Roesler said. Market conduct exams seek to identify practices that are potentially harmful to consumers.
Cambia, a large nonprofit corporation with multiple endeavors, often conducts business on behalf of several of its insurance companies then charges each company for a share of the total cost.
Examiners found that Health Systems International network fees were charged to Regence BlueShield instead of Asuris Northwest Health, in error. Asuris is a sister company of Regence BlueShield that also provides health insurance in Washington state.
Examiners also found that Regence BlueShield was improperly charged for some expenses at Regence Rx, a sister company that manages pharmacy benefits. In the financial exam, the examiners wrote that they “identified some Regence Rx expenses that were improperly allocated to RBS. Specifically, consulting expenses to re-brand Regence Rx were allocated to the company. These types of expenses are not related to a service performed for the company, and allocating a portion of these expenses is not in accordance with” accounting principles or state code.
Regence BlueShield said it accepted the state’s findings. In its formal response to Washington regulators, Cambia and Regence BlueShield officials said they would develop formal agreements between Regence Rx and affiliated health plans, and would fix invoice errors that led to some improper allocations.
Examiners also questioned Cambia’s allocated expenses for Kinetix Living Corp. – a fitness company it bought in March 2010, on the recommendation of Cambia CEO Mark Ganz. Regence BlueShield was charged for $21,363 in Kinetix expenses that should have been charged to subsidiary Asuris Northwest Health, examiners found. (In November 2011, Regence shut down Kinetix, which had been a $15 million investment.)
(Read more about Cambia’s investments in Kinetix and other for-profit ventures: http://www.thelundreport.org/resource/regence_bluecross_blueshield_invests_millions_in_for_profit_ventures )
Regence BlueShield responded by saying that their policies include controls to prevent this sort of misallocation from taking place, “however, in this isolated case, these controls were not properly applied. The company will continue to ensure that these controls are consistently applied.”
Spending did not happen
From April through July of 2010, Cambia – then operating under the name The Regence Group – posted $6 million of expense accruals to its books even though no transactions had actually occurred, according to the Washington Office of the Insurance Commissioner Then Cambia/The Regence Group allocated a portion of this expense to Regence BlueShield of Washington.
By November 2010 the entries had been reversed, but Washington examiners said the spending should never have been recorded in the first place. Statements of Statutory Accounting Principles, which guide insurance company accounting practices; Generally Accepted Accounting Principles, the guidelines that U.S. accountants follow when preparing financial statements; the Revised Code of Washington; and Washington Administrative Code all require financial statements to follow specific accounting practices, according to state examiners. Regence BlueShield “should only record expenses when a transaction has taken place that gives rise to the expense,” they wrote in the financial examination.
Regence BlueShield’s responded by saying: “The company agrees with this finding and discontinued the practice effective with the 2011 interim financial statements prior to identification of this finding by examiners.”
Estimates in error
Insurers must estimate how much they have to pay out for healthcare that their members have received but not yet submitted the paperwork on, called incurred but not reported claims. Insurers are required to set aside financial reserves to eventually pay these claims. But examiners found that Regence BlueShield actually under estimated its unpaid claims by $13.4 million in 2010. Regence BlueShield’s estimates were also off in other categories – too high in some, too low in others. The net effect: Regence reported a surplus that was $10.2 million higher than it should have been.
“At the time this estimate was made, it was a reasonable estimate based on the information known and application of actuarial standards in practice,” according to Regence BlueShield’s official response to state examiners. The company accepted the state’s findings.
On another estimate of unpaid claims, Regence BlueShield used an estimate that was not based on its historical experience to calculate likely expenses. As a result, examiners had the insurer increase its unpaid claims adjustment expense by $4.9 million.
Starting with its 2011 annual statement, the insurer has addressed this point by changing how it estimates these claims to include past experience along with “current trends and other factors,” it said.
In addition, “The company did not correctly calculate the rate stabilization reserve (RSR) and the corresponding uncollected premium asset for the Federal Employees Health Benefit Plan,” state examiners found. As a result, it understated its reserves by $1.35 million – an “immaterial” amount in the grand scheme of things, according to the Office of the Insurance Commissioner, but still an error that resulted from failing to comply with state requirements and industry standards.
Regence BlueShield accepted the state’s finding and adjusted its financial statements in the first quarter of 2011.
“Regence applies actuarial standards of practice in estimating its claim reserves, as does every insurance company,” said Regence BlueShield spokeswoman Rachelle Cunningham, when asked if multiple errors in estimates were a sign of actuarial shortcomings at the company. “The estimates the company makes are based on known information, and although we always strive to be as accurate as possible, actual circumstances may not bear out these estimates.”
Cunningham also noted that actual claims incurred and paid were quite close to Regence BlueShield’s estimates.
$15 million typo?
Then there’s what appears to have been a $15 million typo, part of a pattern of weak internal controls identified by the state of Washington.
“The company had material weakness in its internal controls relating to the recording of its net deferred tax assets and associated surplus/unassigned funds,” examiners wrote. “A formula error existed in spreadsheets used to calculate DTAs (deferred tax assets). The lack of controls in the review of the deferred tax calculation resulted in the DTA being understated by $15.2 million.”
Regence BlueShield accepted responsibility for the error. “The company has developed a remediation plan and is currently in the process of implementing this plan,” it told the state.
Examiners also said they “found instances where the person approving a vendor invoice or manual journal entry also provided the initial general ledger coding. No independent review and approval of this coding was evident.”
“The company’s accounting policies include controls to ensure the proper coding of manual journal entries; however the controls were not consistently applied,” Regence BlueShield officials said. They promised to make changes to strengthen their controls.
The big picture
Regence BlueShield is one of 19 companies to receive Washington Office of the Insurance Commissioner orders this year, though only two others were healthcare service corporations. The OIC also examines life insurers, property insurers and corporate gift annuity businesses. A review of the other two health insurers shows that they also were reportedly ordered to make changes in compliance with state law and industry standards.
Vision Service Plan did not adequately make records accessible to examiners, did not include adequate information about its agreements with related companies, and used incorrect methods for estimating the value of foreign investments, among other findings by examiners. It received a seven-point order from the state.
Asuris Northwest Health received a 10-point order from the state in an exam that raised some of the same concerns as were raised in the Regence BlueShield review. Both insurers are owned by Cambia Health Systems. Asuris was dinged for its Regence Rx allocations, for recording expenses before they occurred, and for not maintaining adequate internal controls, much like Regence BlueShield.
“Due to the substantial differences between companies, it’s difficult to compare the scope of these violations to other exams,” said Roesler, the Office of the Insurance Commissioner spokesman, when he was asked to put the Regence BlueShield financial examination into context. “Accounting errors of this type are not atypical for corporations the size of Regence, although we would, of course, like to see full compliance.”
Regence BlueShield “has taken corrective action where necessary” in response to the financial exam, said spokeswoman Cunningham. “We take seriously our promise to be able to pay our members’ claims, and we are well prepared to do so.”
Current and former employees who are critical of Regence BlueShield agree that the company is financially sound. But its multi-million-dollar typos, failure to comply with state and industry accounting norms and other findings brought forth by the Washington Office of the Insurance Commissioner raise questions about how organized and well run Regence BlueShield and Cambia ultimately are.
Courtney Sherwood covers the business of healthcare, and welcomes tips and insight into how Regence BlueShield and its related companies operate. Contact her at 503-208-4173 or [email protected].