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  • October 17, 2008

Blue Cross Blue Shield of North Dakota explains ramifications of rate increase denial

Standard & Poor downgrades the company's financial rating, citing inability to increase premiums at the same pace that medical costs are rising

While Blue Cross Blue Shield of North Dakota (BCBSND) prepares for an administrative hearing regarding its bank depositor line of business and continues communications with the North Dakota Insurance Department about BCBSND's denied employer group rate increase, Standard & Poor's (S&P) this week announced BCBSND's financial rating has been downgraded.

The rating downgrade from S&P, an international company that studies insurance companies' claims-paying ability and rates them on their creditworthiness and financial strength, is the first of many possible ramifications resulting from a series of rate denials by the insurance department. The national Blue Cross and Blue Shield Association requires each BCBS company to receive this annual rating by S&P.

"Contrary to what many people believe, the reason we ask for any rate increase is to ensure we can pay the claims submitted by our members, reimbursing health care providers for health services," said BCBSND President and CEO Mike Unhjem. "Essentially, these rate denials mean we will experience underwriting losses that, if continued, could ultimately threaten our members and our providers," Unhjem said.

According to the S&P report released October 15, BCBSND's rating dropped from "A, stable" to "A-, outlook negative." "This rating action follows the North Dakota insurance commissioner's denial of any rate increase for Noridian for 2009," the S&P report reads. Noridian Mutual Insurance Co. does business as BCBSND in North Dakota. "Noridian's inability to increase premiums at the same pace that medical costs are rising will diminish its competitive position, operating performance and capital adequacy," states the report.

The S&P report continues, "Without the needed rate increase for these segments, the plan could suffer as much as a $35 million underwriting loss in 2009. Operating performance for 2008 is worse than expected and will likely further diminish in 2009."

BCBSND is required to submit premium rate increases several months prior to the rate going into effect, so the increases are based on projected claims and expenses. Premium increase requests of 14.8 percent for 2009 for the bank depositor line of business and 14.9 percent for the employer group line of business have been denied, even though the company experienced a $3 million underwriting loss in 2007, and expects the underwriting loss to approach $20 million in 2008.

The projected underwriting losses for 2008 are due to rate increases requested but significantly reduced by the insurance department in 2007. With BCBSND's bank depositor individual line of business rates frozen at the 2007 level, the company is losing an additional $950,000 in needed bank depositor premium income each month. If group rates also remain frozen, the company could see an additional loss of $3 million in needed premiums each month.

Unhjem said that if the company's underwriting losses continue to increase as a  result of nearly $4 million in lost monthly premium revenue, there will be no way the company can achieve a positive bottom line in 2009, and company reserves will have to be used to pay for member' health care claims in 2009.

"Ultimately, reserves provide financial security to our 425,000 members, including the 350,000 that reside in North Dakota, and our 2,000 employees working throughout North Dakota," Unhjem said.

The company plans to hold an open media forum on October 23 to further discuss the financial issues and status of the company.

BCBSND is an independent licensee of the Blue Cross and Blue Shield Association.

Additional Information

Standard and Poor's Release

On Oct. 15, 2008, Standard & Poor's Ratings Services lowered its counterparty credit and financial strength ratings on Noridian Mutual Insurance Co., which does business as Blue Cross Blue Shield of North Dakota, to 'A-' from 'A'. The outlook is negative.