Is MESSA Operating Illegally as an Insurance Company?

Recently, there has been some confusion over MESSA's role as a risk taker. If MESSA paid for certain claims outside of what it owed to Blue Cross, then it would qualify as an at-risk insurer rather than an administrator. There have also been questions about the legality of MESSA because MESSA would be violating the insurance code if it accepted risk in its insurance plans. MEA Executive Director Beverly Wolkow has testified that MESSA does share risk with Blue Cross.57 But this contradicts a previous MESSA statement explaining, "These are fully insured/underwritten contracts. MESSA takes no risk."58 All things considered, MESSA technically does not appear to have accepted any explicit risk. Yet, this does not mean that MESSA is absolved of any implicit risk.

The implicit assumption of risk can be found in the formula which calculates the underwriting results that are to occur if MESSA ever terminated its contract with Blue Cross.59 The ultimate risk taker for MESSA health insurance plans is Blue Cross, but this insured risk must be put in its proper perspective. Blue Cross's ultimate risk for MESSA health insurance plans is limited to a reserve deficit in excess of 10 percent of annual premium but only at the time the MEA cancels the operating agreement. If Blue Cross suddenly stopped underwriting MESSA plans, it would still be liable for claims which have been incurred but not paid as of the termination date. The operating agreement dictates that Blue Cross will establish a Rate Stabilization Reserve (RSR) in order to cover these claims-in-process in the event that the operating agreement is ever canceled. The accumulated underwriting results of all prior ratings periods are debited or credited to the RSR. If the MEA cancels the agreement, all claims have been satisfied, and the balance in the RSR is positive, the leftover money is refunded to MESSA. If the balance is negative, Blue Cross recoups the difference from MESSA. The ultimate risk of Blue Cross to pay for claims-in-process is confined to any amount over 10 percent of the annual premium it receives from MESSA.

Suppose, for example, that MESSA paid $300 million in premiums to Blue Cross last year. Also suppose that last year, MESSA canceled its underwriting agreement with Blue Cross. Up to that point, any of MESSA's premium payments to Blue Cross that were not used to pay for' insurance benefits during the applicable plan year were added to a cash reserve. Similarly, any losses during a plan year were deducted from this reserve. At the time MESSA canceled its agreement with Blue Cross, the balance in the reserve totaled $45 million. If any claims remain unpaid at the time the agreement is canceled, MESSA has to pay for the first $30 million worth of claims, or 10 percent of annual premium. Blue Cross must come up with the difference of $15 million. In the opposite situation, if there were no unpaid claims at the time of cancellation, Blue Cross would keep $15 million and refund the $30 million to MESSA-a windfall profit.

The likelihood of a reserve deficit exceeding 10 percent of premium at the time the agreement is canceled is so remote that the operating agreement between the parties resembles more of a "minimum-premium" or "self-funded cash flow" arrangement. Under such an arrangement, MESSA would anticipate its future claims and reserve just the right amount of funds to meet the contingencies. Right now, the rate structures charged to MESSA by Blue Cross practically guarantee that enough money will be generated to cover MESSA's benefit costs for the year. If the rates generate more than enough money, the surplus is deposited in a reserve. The only time there would be any practical risk for Blue Cross is when the underwriting agreement is canceled and the cost of unpaid claims exceeds 10 percent of last year's premium, because that is the only time when the actual "insurance" will kick in. The entire risk is born by Blue Cross, but the practical risk for Blue Cross is minimal to non-existent. Realistically, Blue Cross would only be at considerable risk if MESSA somehow refused to make payment.