Committee on Governmental Affairs United States Senate
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1 104TH CONGRESS REPORT 1st Session SENATE 104±92 "! FOURTH INTERIM REPORT ON UNITED STATES GOVERNMENT EFFORTS TO COMBAT FRAUD AND ABUSE IN THE INSURANCE INDUSTRY: PROBLEMS IN BLUE CROSS/BLUE SHIELD PLANS IN WEST VIRGINIA, MARYLAND, WASHINGTON, DC, NEW YORK, AND FEDERAL CONTRACTS PREPARED BY THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE JUNE 1995 JUNE 5, 1995.ÐOrdered to be printed U.S. GOVERNMENT PRINTING OFFICE 99±010 WASHINGTON : 1995 COMMITTEE ON GOVERNMENTAL AFFAIRSÐ104TH CONGRESS WILLIAM V. ROTH, Jr., Delaware, Chairman TED STEVENS, Alaska SAM NUNN, Georgia WILLIAM S. COHEN, Maine JOHN GLENN, Ohio FRED THOMPSON, Tennessee CARL LEVIN, Michigan THAD COCHRAN, Mississippi DAVID PRYOR, Arkansas CHARLES E. GRASSLEY, Iowa JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona DANIEL K. AKAKA, Hawaii BOB SMITH, New Hampshire BYRONL. DORGAN, North Dakota Franklin G. Polk, Staff Director and Chief Counsel Leonard Weiss, Minority Staff Director Michal Sue Prosser, Chief Clerk PERMANENT SUBCOMMITTEE ON INVESTIGATIONS WILLIAM V. ROTH, JR., DELAWARE, Chairman TED STEVENS, Alaska SAM NUNN, Georgia WILLIAM S. COHEN, Maine JOHN GLENN, Ohio FRED THOMPSON, Tennessee CARL LEVIN, Michigan THAD COCHRAN, Mississippi DAVID PRYOR, Arkansas CHARLES E. GRASSLEY, Iowa JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona DANIEL K. AKAKA, Hawaii BOB SMITH, New Hampshire BYRON L. DORGAN, North Dakota Harold Damelin, Chief Counsel/Staff Director Dan Gelber, Chief Counsel to the Minority John F. Sopko Deputy Chief Counsel to the Minority Carla Martin, Chief Clerk COMMITTEE ON GOVERNMENTAL AFFAIRSÐ103RD CONGRESS JOHN GLENN, Ohio, Chairman SAM NUNN, Georgia WILLIAM V. ROTH, Jr., Delaware CARL LEVIN, Michigan TED STEVENS, Alaska JIM SASSER, Tennessee WILLIAM S. COHEN, Maine DAVID PRYOR, Arkansas THAD COCHRAN, Mississippi JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona DANIEL K. AKAKA, Hawaii ROBERT F. BENNETT, Utah BYRON L. DORGAN, North Dakota Leonard Weiss, Staff Director Franklin G. Polk, Minority Staff Director and Chief Counsel Michal Sue Prosser, Chief Clerk PERMANENT SUBCOMMITTEE ON INVESTIGATIONS SAM NUNN, Georgia, Chairman JOHN GLENN, Ohio, Vice Chairman CARL LEVIN, Michigan WILLIAM V. ROTH, Jr., Delaware JIM SASSER, Tennessee TED STEVENS, Alaska DAVID PRYOR, Arkansas WILLIAM S. COHEN, Maine JOSEPH I. LIEBERMAN, Connecticut THAD COCHRAN, Mississippi BYRON L. DORGAN, North Dakota JOHN McCAIN, Arizona ROBERT F. BENNETT, Utah Eleanore Hill, Chief Counsel Daniel F. Rinzel, Chief Counsel to the Minority Mary D. Robertson, Chief Clerk ii C O N T E N T S Page I. INTRODUCTION ............................................................................................. 1 II. THE BLUE CROSS/BLUE SHIELD SYSTEM .............................................. 3 A. History of the Plans .................................................................................... 3 B. Unique Status of Blue Cross/Blue Shield Plans ....................................... 3 C. The Blue Cross and Blue Shield Association ............................................ 4 D. Association Structure ................................................................................. 4 E. Financial Information ................................................................................. 5 F. Oversight of Member Plans ........................................................................ 5 III. FINDINGS ........................................................................................................ 6 THE WEST VIRGINIA, MARYLAND,DISTRICT OF COLUMBIA, & EM- PIRE PLANS ................................................................................................. 6 A. Mismanagement .......................................................................................... 6 B. Inadequate Oversight by the Boards of Directors .................................... 7 C. Inadequate Regulation by State Insurance Departments ....................... 8 D. Inadequate Oversight by the Blue Cross/Blue Shield Association ......... 8 FEDERAL CONTRACTS ................................................................................. 9 A. Mismanagement .......................................................................................... 9 B. Inadequate Regulation ............................................................................... 10 C. Inadequate Oversight by the Blue Cross/Blue Shield Association ......... 10 IV. CONCLUSIONS ............................................................................................... 10 V. RECOMMENDATIONS ................................................................................... 11 VI. APPENDIX: CASE STUDIES ......................................................................... 18 THE WEST VIRGINIA PLAN ......................................................................... 18 A. Background/Organization ........................................................................... 18 B. Financial Profile .......................................................................................... 18 C. Problem Areas ............................................................................................. 18 D. Effects .......................................................................................................... 28 THE MARYLAND PLAN ................................................................................. 29 A. Background/Organization ........................................................................... 29 B. Financial Profile .......................................................................................... 29 C. Problem Areas ............................................................................................. 30 D. Effects .......................................................................................................... 43 THE NATIONAL CAPITAL AREA PLAN ..................................................... 45 A. Background/Organization ........................................................................... 45 B. Financial Profile .......................................................................................... 45 C. Problem Areas ............................................................................................. 46 THE EMPIRE PLAN ........................................................................................ 57 A. Background/Organization ........................................................................... 57 B. Financial Profile .......................................................................................... 57 C. Problem Areas ............................................................................................. 58 D. Effects .......................................................................................................... 70 FEDERAL CONTRACTS ................................................................................. 72 A. Background/Organization ........................................................................... 72 B. Financial Profile .......................................................................................... 73 C. Problem Areas ............................................................................................. 74 iii 104th CONGRESS REPORT 1st Session SENATE 104±92 "! FOURTH INTERIM REPORT ON UNITED STATES GOVERN- MENT EFFORTS TO COMBAT FRAUD AND ABUSE IN THE INSURANCE INDUSTRY: PROBLEMS IN BLUE CROSS/BLUE SHIELD PLANS IN WEST VIRGINIA, MARY- LAND, WASHINGTON, DC, NEW YORK, AND FEDERAL CONTRACTS JUNE 5, 1995.ÐOrdered to be printed Mr. ROTH, from the Committee on Governmental Affairs, submitted the following REPORT I. INTRODUCTION For the past several years, the Senate Permanent Subcommittee on Investigations has been examining fraud, abuse, and inadequate regulation in the insurance industry. During this investigation, a number of regulators described problems they had encountered in trying to regulate and oversee the operations of Blue Cross/Blue Shield Plans in their states. Many of them noted that they spent a disproportionately greater amount of time regulating their ``not- for-profit Blues'' than they did on any ``for-profit'' insurance compa- nies. Other regulators said that they knew little about their Blue Cross/Blue Shield Plans, and that when they attempted to find out more about their operations, they were either denied access or were otherwise barred by their own State law from requiring full disclo- sure. Some regulators expressed concern that the philosophy guid- ing many of these Plans had changed from that of a non-profit or- ganization primarily concerned with the subscribers' interests to that of a large corporation out to maximize short-term profits. 2 In October, 1990, for the first time in the history of the Blue Cross/Blue Shield System one of its membersÐthe West Virginia PlanÐwas declared insolvent and was seized by the West Virginia Insurance Department, leaving more than 51,000 individuals with unpaid claims and thousands more with reduced or non-existent coverage. In the aftermath of this Plan's failure, press reports raised serious questions about its management and the regulatory oversight of its operations. In 1991, the National Association of Insurance Commissioners (NAIC) formed a Special Committee on Blue Cross Plans.1 The Special Committee's charge was to ``identify solvency issues related to Blues organizations, and review current regulatory oversight of these issues.''