When is a Nonprofit Not a Nonprofit? Health Insurer is Sued by Members

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May 21, 2014; Courthouse News Service

In Illinois, rage against the reserves held by “nonprofit” health insurers has bubbled back up in the form of a class action suit filed against a Blue Cross Blue Shield insurer. The suit charges that HCSC’s actions are not consistent with its designation as a nonprofit mutual company, in that it continues to raise administrative fees for customers while accumulating more than $5 billion—or an estimated 6 months of claim payments in reserves, where the standard is three months—and paying out millions in executive bonuses.

“As a nonprofit mutual company, defendant is obligated to act for the mutual benefits of its members—the policyholders,” states the lawsuit. “This mandate is contained in defendant’s articles of incorporation, its bylaws, and numerous public statements made by defendant…[But] over the past five years, defendant has accumulated excess profits of almost five billion dollars, funds not necessary to protect against any unforeseen financial contingency. HCSC is supposed to use these excess profits for the mutual benefit of the members of the corporation. Defendant, however, has failed to allocate its excess profits for this purpose.”

HCSC is the largest customer-owned health insurer in the United States. It is supposed to be accountable to policyholders, but the company “has used those funds to expand its business operations and pay its corporate executives millions of dollars in ‘bonus’ money—the payment of which is tied to defendant’s earnings growth. In other words, the more money HCSC accumulates, the more money its executives get paid. This has resulted in a perverse incentive system that favors the continued accumulation of profits and expansion of the nonprofits’ business operations at the expense of its policyholder members.”

Apparently, over the past three years ten executives were paid nearly $96 million in bonuses. The suit claims that HCSC “acts in a manner contrary to its mission by branching out and conducting business activities separate and apart from its mission. For example, defendant generates enormous fees simply by administering its members’ healthcare benefits—a task with little to no risk to the insurer. For 2013 alone, defendant generated revenue of over $229 million dollars from such administrative fees. This revenue results in an ever-increasing accumulation of excess profits. Members did not mutually benefit from this significant receipt of funds. Instead, defendant is using excess profits to expand its business operations without corresponding mutual benefit to its members.”—Ruth McCambridge