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Blue Shield Faces New Criticism of Shortchanging Doctors & Consumers in California

Blue Shield of California, already under scrutiny by state officials, is facing new criticism that it didn’t adequately pay back doctors and policy holders for excessively spending on administrative costs in 2014. The allegations were made by a former company executive in a complaint to state regulators.

But if substantiated by investigators, the accusation could force the insurer to pay additional rebates to customers. The complaint also risks becoming another black mark on Blue Shield, California’s third-largest health plan, which already has lost its tax-exempt status for failing to deliver sufficient public benefits, such as affordable health coverage.

Overall, Blue Shield has about 3.3 million customers in California, though the complaint relates to only the nearly 500,000 Californians who bought Blue Shield plans on their own, rather than through an employer. The latest charge stems from a series of administrative errors that Blue Shield made in 2014 as it was extending coverage through the new insurance marketplace created by the Affordable Care Act, also known as Obamacare. At issue is a complex bit of accounting required by the law to ensure consumers’ insurance premiums go mostly toward care, not executive compensation or other administrative costs.

An insurer selling health plans that customers buy on their own — as opposed to getting through an employer — must spend at least 80% of its customers’ premiums on their medical care or issue rebates to those customers including doctors.

Amid the difficult transition to the new marketplace, Blue Shield paid millions of dollars in medical claims that it subsequently concluded were erroneous because members had dropped their coverage or received care out of their network that shouldn’t have been fully covered. The insurer, which told state regulators that 2.6% of its claims were paid in error, did not seek to recoup the excess payments from customers or medical providers, according to company officials.

But the over-payments were included when Blue Shield reported to the federal government how much it paid in medical claims and how much it spent on administrative costs. That, in turn, inflated Blue Shield’s ratio of medical spending to administrative spending, a critical calculation known as the medical loss ratio, or MLR, that is used to determine potential penalties on insurance companies.

Blue Shield did not meet the standard of spending 80% of customer’s premiums on healthcare in 2014 and was forced to refund more than $64 million. If Blue Shield had not included the over-payments in the calculation it reported to the government, it would have fallen even further under the 80% threshold and had to pay even more rebates, said former Blue Shield public policy director Michael Johnson, who filed the complaint this week with the California Department of Managed Health Care. Johnson left the company last year and has become an outspoken critic. He is now in a legal fight with the insurer.

How much more Blue Shield might owe is not clear. But Johnson said the insurer should be held accountable. “The purpose of the MLR reform is to make transparent and limit the portion of premiums that insurers devote to profits and administration,” Johnson wrote in his complaint. “By counting the costs of administrative mistakes as medical spending, Blue Shield is making a mockery of the law.

“If Blue Shield is allowed to get away with that, not only will its customers be cheated ... the door will be left open for other insurers to adopt Blue Shield’s dishonest accounting approach, and a key consumer protection of the Affordable Care Act will be undermined.”

Blue Shield spokesman Steve Shivinsky dismissed Johnson’s allegations, saying that Blue Shield was not required to deduct the excess medical payments.

“Mr. Johnson’s latest assertions are misinformed and incorrect. He is a disgruntled former employee and frequent critic,” Shivinsky said. “Blue Shield has followed all the rules regarding medical loss ratios and, in fact, went the extra mile to protect our members and medical providers when there was widespread confusion about payment rates and eligibility during the tumultuous first year of the Affordable Care Act.” State regulators do not comment on complaints and ongoing investigations. If they determine that a health plan has violated the law, they can impose penalties and require plans to take corrective actions.

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