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BCBSRI Market Conduct Examination Report

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					    Blue Cross & Blue Shield of Rhode Island

    Targeted Market Conduct Examination
        with regard to compliance with
        R. I. Gen. Laws §§ 27-50, et seq.,
Small Employer Health Insurance Availability Act


                 Final Report
              September 11, 2006



         Hinckley, Allen & Tringale LP
           DeWeese Consulting, Inc.
                  Blue Cross & Blue Shield of Rhode Island
                       Market Conduct Examination

                    TABLE OF CONTENTS

                                                                 Page Number
Salutation                                                               2
1. Introduction                                                          3
2. Executive Summary                                                     4
3. Summary of Recommendations                                           14
4. Overview of Chapter 27-50                                            16
5. Examination Methodology                                              18
6. Changes in Chapter 27-50                                             20
7. Profile of Blue Cross Small Employer Business                        23
8. Changes in Blue Cross Operations since the last Examination          29
9. Management Structure for Small Employer Business                     30
10. Marketing to Small Employers                                        30
11. Rating Methodology for Small Employer plans                         44
12. Underwriting Methodology for Small Employer plans                   60
13. Review of Direct Pay Business                                       78
14. Review of Company Process for Responding to Complaints              83
15. Review of Contract and Forms                                        86
16. Medical Management                                                  93
17. Carrier Concerns and Recommendations for change                     95
18. Achievement of the Purposes of Chapter 27-50                       100
19. Conclusions                                                        103
20. Blue Cross's Initial Comments on the Report                        104

Appendices

1.   Glossary                                                          117
2.   Review of Recommendations from 2002 Report                        121
3.   Legislative History of Chapter 27-50                              132
4.   Blue Cross Statistical Supplement                                 136
5.   Summary of Recertification Case Sample Analysis                   147
6.   Summary of Medical Underwriting case sample analysis              148
7.   Summary of Complaint Log                                          149

Exhibits                                                               152




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                      Blue Cross & Blue Shield of Rhode Island
                           Market Conduct Examination


September 11, 2006
Honorable Christopher Koller
Health Insurance Commissioner
State of Rhode Island

Dear Commissioner Koller:

In accordance with your instructions and pursuant to statutes of the State of Rhode Island,
a targeted Market Conduct Examination with regard to compliance with R. I. Gen. Laws
§§ 27-50, et seq., the Small Employer Health Insurance Availability Act (“Chapter 27-
50”) was conducted of:

              Blue Cross & Blue Shield of Rhode Island (“Blue Cross”)
                            Providence, Rhode Island

This examination was done to support the periodic market evaluation required by
R.I.G.L. § 27-50-9. The examination was conducted by Hinckley, Allen & Tringale LP
and DeWeese Consulting, Inc. (the “examiners”) of Boston, MA and Canton, CT. It was
conducted in accordance with the standards contained in the NAIC Market Conduct
Examiners Handbook. The examination involved extensive on site interviews and review
and analysis of records at the offices of Blue Cross in Providence, RI. The results of the
examination are reported here on a test basis.




Charles C. DeWeese, FSA, MAAA
DeWeese Consulting, Inc.




Anthony J. van Werkhooven, PhD, FSA, MAAA
DeWeese Consulting, Inc.




Elinor Socholitzky
Hinckley, Allen & Tringale LP




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1. Introduction


R.I.G.L. §§ 27-50, et seq., the Small Employer Health Insurance Availability Act
(“Chapter 27-50”) requires that an independent actuarial study and report be prepared to
analyze the effectiveness of Chapter 27-50 in promoting rate stability, product
availability, and coverage affordability. The report may contain recommendations for
actions to improve the overall effectiveness, efficiency, and fairness of the small group
health insurance marketplace. The report shall address whether carriers and producers are
fairly and actively marketing or issuing health benefit plans to small employers in
fulfillment of the purposes of the chapter. The report may contain recommendations for
market conduct or other regulatory standards or action (R.I.G.L. § 27-50-9). The initial
report of this type was prepared as of June 30, 2002. Subsequent reports are required on
a scheduled basis.    The Office of the Health Insurance Commissioner of Rhode Island
(“OHIC”) contracted with Hinckley, Allen & Tringale LP (“HAT”) to prepare this report.
In order to collect data in connection with the report and to determine compliance with
Chapter 27-50, OHIC directed that HAT and its actuarial subcontractor, DeWeese
Consulting, Inc. (“DCI”) perform targeted market conduct examinations of the companies
active in the small employer market. Those companies include Blue Cross & Blue Shield
of    Rhode       Island   (“Blue    Cross”)    and     UnitedHealthCare      of    New
England/UnitedHealthCare Insurance Company (collectively, “United”).


The examiners assigned to perform the targeted market conduct examination of Blue
Cross and to collect actuarial data to support the small employer market report were
Charles C. DeWeese, FSA, MAAA and Anthony J. van Werkhooven, PhD, FSA, MAAA
of DCI and Elinor Socholitzky of HAT.


The examination extended from November 1, 2005 to February 28, 2006. A substantial
portion of the examination took place on site at Blue Cross headquarters, where personnel
were interviewed and data requested, received and analyzed. This examination report


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addresses compliance with Chapter 27-50 on a test basis. It also addresses the profile of
Blue Cross’s small employer business and the effect on Blue Cross and its customers of
Chapter 27-50. During the course of the examination, a substantial amount of data was
obtained and analyzed to support the general overall report being prepared by HAT on
the small employer market in Rhode Island.


Blue Cross personnel have been given an opportunity to review this report.         Their
comments are contained in the section titled “Blue Cross's Initial Comments on the Report”.


2. Executive Summary


The targeted market conduct examination of Blue Cross Blue Shield of Rhode Island
(“Blue Cross”) with regard to the Small Employer Health Insurance Availability Act
(R.I.G.L. §§ 27-50, et seq., or “Chapter 27-50”) and Regulation 82 was conducted on site
at Blue Cross from November 17, 2005 through January 12, 2006, with follow up data
requests and interviews through February 28, 2006.


Blue Cross provided office space to examination staff during the on-site portion of the
examination, and Blue Cross personnel and representatives provided information in
connection with the examination. Blue Cross was cooperative with regard to all aspects
of the examination and responded to information requests on a timely and complete basis.


Blue Cross data was collected to enable examination of compliance with Chapter 27-50
in the following areas:


   •   Verification that policy forms contain provisions that meet the requirements of
       Chapter 27-50.
   •   Review of marketing practices and marketing materials to determine whether all
       plans are being actively marketed to all eligible small employer groups.
   •   Review of sample files to evaluate medical underwriting practices and accuracy.



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                            Market Conduct Examination

   •   Review of sample files to evaluate the completeness and accuracy of processes to
       determine eligibility of groups and to determine eligibility of individuals within a
       group, including analysis and maintenance of waivers for eligible employees and
       their dependents who choose not to enroll in the health benefit plan.
   •   Analysis of the rate manual, computer rating models, case pricing details and
       actuarial certifications of rate compliance to determine whether rating
       requirements of Chapter 27-50 are being implemented properly and accurately.
   •   Review of detailed expense allocation procedures.


The examination was undertaken in accordance with the standards contained in the NAIC
Market Examiners Handbook. This report contains results of the compliance audit on a
test basis. In addition, substantial data was collected and analyzed to enable the
development of an overview of Blue Cross’s small employer business and Blue Cross’s
rating structure. The resulting statistical data, when combined with that of the other
Rhode Island small employer carrier provides an overview of the small employer market.


Chapter 27-50 defines the small employer market and requirements of carriers in the
small employer market to promote access and availability of health care. Among the key
provisions of Chapter 27-50:


   •   The small employer market covers employer sponsored groups with at least one
       and no more than 50 eligible employees. To be eligible, an employer must be
       actively engaged in business and the majority of the employees must work in
       Rhode Island.
   •   All permanent employees who work full-time are eligible. Full-time employment
       is defined by §27-50-3(n) as working 30 or more hours per week, although the
       employer has the right to consider a lesser number of hours as full-time, as long as
       that number is at least 17.5 hours per week. Temporary employees are not
       eligible, even if they are full-time.




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   •   All small employer groups are eligible for coverage, as long as they meet a
       minimum participation requirement, which can be no higher than 75%.
   •   Insurers are required to verify the eligibility of each group on an annual basis, and
       to maintain appropriate documentation.
   •   Rates must be determined on a four-tier composite basis.
   •   The only rating variables allowed from group to group are age, gender, family
       composition and health status. Health status factors can vary by no more than +/-
       10%. The combination of all rating variables is limited so that the highest rate
       charged for a given plan of insurance and family composition type can be no
       higher than four times the lowest rate (referred to as “4:1 compression”).
   •   Insurers must offer two statutory plans of insurance, known as the Standard and
       Economy plans.


Blue Cross, headquartered in Providence, Rhode Island, offers insurance to small
employers in Rhode Island. Blue Cross products are primarily Preferred Provider
Organization (“PPO”) products, although they also offer indemnity and Point of Service
(“POS”) products. Prior to January 1, 2005, Blue Cross offered products designated as
HMO products through its wholly owned subsidiary, Coordinated Health Plans, Inc.
(“CHiP”). CHiP was dissolved as of January 1, 2005, at which time its HMO license was
surrendered and all its assets and liabilities were assumed by Blue Cross.


Blue Cross insured approximately 12,300 active groups as of October 1, 2005. The
groups had a total of 47,000 enrolled subscribers and 92,000 members. This contrasts
with 13,800 groups as of January 1, 2003, with 58,000 subscribers and 115,000 total
members.


This represents a decline in groups of 11% and of subscribers of 20%, and a decline in
the average group size from 4.2 contracts to 3.8. Blue Cross covers approximately 82%
of insured small employer groups in Rhode Island and about 78% of insured subscribers
in small employer groups. At the time of the last small employer market conduct report,


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Blue Cross had a market share of approximately 90%.UnitedHealthCare (“United”) is the
other major carrier offering small employer group insurance in Rhode Island, and they
insure the remaining market share.


Forty-two percent (42%) of Blue Cross’s groups have only one enrolled subscriber.
These are not all necessarily groups with only one eligible employee, however, since
some may have more than one eligible employee, with one or more waiving coverage
because of other insurance. Groups with one enrolled subscriber represent 11% of Blue
Cross’s small employer subscribers.


Blue Cross’s most popular plan is HealthMate Coast-to-Coast (“HMC2C”). It is a PPO
plan that relies on copayments to help manage utilization. The benefit summary Blue
Cross provides to customers shows ten different HMC2C options, with primary care
physician (“PCP”) copayments ranging from $10 to $20, specialty care copayments
ranging from $10 to $25, emergency room copayments ranging from $25 to $100 and in-
network calendar year deductibles ranging from $0 to $1,000. HMC2C plans cover
approximately 76% of Blue Cross small group subscribers, with the overwhelming
majority selecting the richest HMC2C option. That option is paired with a prescription
drug plan that has a $7/$25/$40 copayment structure.


Blue Cross also still offers a variety of plans designated as “Blue CHiP” or “CHiP” to
small employer groups. These plans require the selection of a PCP and a PCP referral to
receive additional services. As mentioned above, Blue Cross considers these to be POS
plans. The plans have similar copayment options to the HMC2C plans. Most of the CHiP
plans do not have an in-network calendar year deductible. Approximately 22% of small
employer subscribers are enrolled in CHiP plans.


Blue Cross also offers its “Classic” indemnity program (with approximately 2% of total
small employer subscribers enrolled), and the statutorily required Essential Care 4 and 5
(described in Chapter 27-50 as “Standard” and “Economy” plans). According to the Blue



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                            Market Conduct Examination

Cross 2004 quarterly enrollment reports, fewer than 70 subscribers were enrolled in the
statutory plans. However, based on the database reviewed by the examiners, as of
October 2005, 114 subscribers were enrolled in the statutory plans.


Although not required to do so by Chapter 27-50, Blue Cross permits any small employer
group to enroll some of its employees in one product (a HMC2C variation, for example)
and others in another product (a Blue CHiP variation, for example). About 11% of Blue
Cross small employer groups offer multiple options to their employees. Because these
tend to be the larger groups, they represent 25% of Blue Cross subscribers. Among
groups with two options, the average size group was approximately 8.5 subscribers, while
among the relatively few groups (about 50) with three options, the average size was
slightly over 14 subscribers.


In its rate manual, Blue Cross assigns a value of 1.00 to the richest HMC2C benefit plan.
The average plan of benefits sold in the small group market during 2004 had a benefit
value of approximately .96 as compared to the richest HMC2C plan. In general, the trend
in plan design seems to be toward slightly less rich plans, but the difference is not great.


Blue Cross’s rates vary by average age/gender factor for a group, by health status
adjustment and by family composition. These factors are all permitted by Chapter 27-50.
As required by Chapter 27-50, variation in rates due to age/gender and health status is
managed within a 4:1 compression ratio.


Blue Cross utilizes multiple marketing channels to obtain its business. Some business is
sold directly. All brokerage business is channeled through a general agent, who is
compensated based on inforce business. Various independent Chambers of Commerce
(“Chambers”) offer their members the opportunity to purchase group health insurance
coverage through Blue Cross, and provide certain administrative services to make the
enrollment, billing and related functions run smoothly. Blue Cross has contracted with
three intermediaries who market its small employer plans and provide administrative



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services. The intermediaries are limited by their agreements with Blue Cross to serving
the one to nine employee segment of the market.


Brokers and intermediaries were compensated by Blue Cross on a percent of premium
basis through December 31, 2004. Effective January 1, 2005, Blue Cross changed its
compensation structure to a per contract per month (“PCPM”) basis. Brokers are paid
$18 PCPM for new and renewal business. General Agents (“GAs”) were previously paid
on a percentage basis (generally 2% of premium, but graded by size), but as of January 1,
2006, there is only one GA, who is now paid $8 PCPM. Since GAs are involved in all
brokered business, the total compensation for brokered cases is now $26 PCPM.
Intermediaries are paid $21 PCPM. Compensation to all outside distribution channels,
when averaged over the entire book of small employer business, cost in excess of $10 per
member per month.          Blue Cross is required to obtain approval for all brokerage
commission rates and programs from OHIC1, including the ones mentioned in this report
by the provisions of R.I.G.L. §27-19-10 and §27-20-10, which statutes govern non-profit
hospital and medical service corporations, of which Blue Cross is the only one. Blue
Cross has provided the examiners copies of commission plans and approvals verifying
that it has filed and obtained approval for all brokerage commission rates and programs
used in the small employer market.


Small employers are not required to use brokers or intermediaries to obtain coverage
through Blue Cross. R.I.G.L. § 27-50-12 requires that a carrier actively market to all
eligible small employers on an equal basis. Therefore, if Blue Cross accepts brokered
business for its larger small employer customers, it must permit its smallest small
employer customers to use brokers as well. Approximately 35% of groups including
about 55% of subscribers are represented by brokers. 30% of groups and 15% of
subscribers are represented by intermediaries, while the remaining 35% of groups and
30% of subscribers contract directly with Blue Cross. Eighteen percent (18%) of groups


1
  Prior to the creation of OHIC, the Rhode Island Department of Business Regulation (“DBR”) was the
regulatory authority.


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with one enrolled employee are represented by brokers, while 75% of groups with more
than ten enrolled employees are represented by brokers.


Blue Cross also has a marketing relationship with the Rhode Island Builders Association
(the “Builders Association”). The Builders Association markets Blue Cross small
employer plans to its members and provides billing and other administrative services.
Blue Cross pays compensation to the Builders Association based on enrollment.


Blue Cross also offers Direct Pay health benefit products to individuals in Rhode Island
who are not eligible for small employer health insurance, and is the only carrier to do so.
It offers Direct Pay on a guaranteed issue basis (Pool I) and an underwritten basis (Pool
II). Direct Pay benefits available are less rich than small employer plans and require
greater cost sharing on the part of the insured. Pool II subscribers are generally younger
and healthier on average than small employer subscribers, and pay lower average rates.
Pool I subscribers are older and less healthy than small employer subscribers, and
generally pay higher rates, although Pool I rates are community rated and do not vary by
age.


When Blue Cross strengthened its eligibility verification procedures after the last small
employer insurance market conduct examination, a number of groups were found not to
be eligible for small employer coverage. Blue Cross reported over 1,100 groups that
were terminated in 2003 because they could not demonstrate that they met small
employer insurance eligibility standards. An additional 400 groups were terminated in
2004 for the same reasons. Blue Cross believes that many of these groups subsequently
enrolled in Direct Pay.


Approximately 57% of Blue Cross small employer subscribers purchase single coverage,
while the remaining subscribers purchase one of the family options.           Blue Cross
subscriber contracts cover, on average, two members.




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At the time of the prior market conduct examination, Coordinated Health Partners
(“CHiP” or “Blue CHiP”) was a wholly owned subsidiary of Blue Cross. On January 1,
2005 the assets and liabilities of CHiP were transferred into Blue Cross and CHiP ceased
to exist as a corporate entity. The consolidation did not have an important effect on Blue
Cross’s small employer business.


Blue Cross does not have a separate management structure for the small employer
business. Instead, Blue Cross’s organization is functional and the small employer
business is one of the responsibilities of people who are also responsible for other lines of
business. Within certain departments there are specialists assigned to the small employer
business, including the marketing, underwriting, eligibility certification and actuarial
areas.


Small employer health insurance rates are not required to be filed with the Department of
Business Regulation or the Office of the Health Insurance Commissioner. There are two
annual reports that are required to be filed, however. One of these is the Actuarial
Certification, which is a demonstration that Blue Cross has audited its rating and
underwriting practices and found them to be accurate and in compliance with Chapter 27-
50. The other is a report of enrollment required by Regulation 82-10-G(1). Blue Cross
has filed each of these reports on a timely basis since the implementation of Chapter 27-
50. The examiners reviewed each of these reports and noted no errors or incompleteness,
except for omission of necessary reliance statements from the Actuarial Certifications.


In response to the recommendations contained in the prior report, Blue Cross has
expended a great deal of effort to comply fully with the provisions of Chapter 27-50 and
of Regulation 82. A number of recommendations contained in the prior market conduct
examination report pertained to inadequacies in the processes Blue Cross had in place to
ensure compliance with respect to group and subscriber eligibility. Blue Cross has
established the Recertification Department and invested considerable resources in
developing the various educational materials, policies and procedures, form letters, and



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systems support required to implement these recommendations. The recertification
process they have developed is thorough, and while it has been effective in identifying
groups that are not eligible for small employer coverage, it has been perceived as onerous
by brokers and employers. Blue Cross has made multiple affirmative efforts, through
discussions with DBR and/or OHIC and the examiners and retooling of its procedures
since 2002 to develop the current procedure, which it believes to be the least onerous
fully compliant procedure.


Blue Cross maintains a rate manual, consistent with the requirements of Chapter 27-50.
It updates its rate manual quarterly. It rates all groups using an age, gender and family
composition formula that is adjusted to an average value of 1.00 across its block of
business. The formula is based on the age and gender of single employees, and the age
only of employees with the various kinds of family coverage. Blue Cross’s rate structure
rates the various tiers of family coverage at a direct multiple of the individual rate. The
multipliers used by Blue Cross are based on the expected cost of each family composition
type, and are the same for all groups. Blue Cross has not changed the factors during the
time period covered by the examination.


Blue Cross also assigns rating factors to its small employer groups on the basis of health
status. In order to determine health status, Blue Cross collects health forms from new
groups, and supplements the health forms with analysis of Blue Cross claim records for
members with prior Blue Cross coverage. At renewal, Blue Cross relies on its own claim
records to update health status factors.     The process is relatively labor intensive,
involving a staff of seven full time medical underwriters, at an allocated cost of
approximately $.50 PMPM. The factors assigned range from .92 to 1.10, consistent with
the limitations imposed by Chapter 27-50.


The examiners verified the rating factors for a sample of Blue Cross groups and found no
discrepancies.




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Blue Cross’s small employer health insurance revenue for 2005 was approximately
$341.5 million. Blue Cross’s small employer health insurance base rate increases in the
last three years have averaged 19% for new business and renewals in 2003, 9% in 2004
and 7% in 2005.       Rate increases experienced by individual groups vary from the
increases in the base rates because of group specific demographic changes from year to
year. The trend in base rates corresponds to the average increases groups would have
seen in those years, since rates are normalized to the base rate.


Blue Cross’s rates generate approximately an 84% loss ratio. Approximately 11% covers
administrative costs, 3% commissions and producer incentive payments, and 2% is built
in for contribution to reserves. The administrative expense charges are similar to those
charged to large employer groups and direct pay. Commissions are relatively higher than
for large employer groups, and are not charged to direct pay customers.


The examiners reviewed Blue Cross’s complaint log.              The process for resolving
complaints is adequate and properly documented. Only one issue found in the complaint
log has resulted in a recommendation for change. Apparently one of the intermediaries
has, at least in some instances, charged small employer groups a fee of $15 per contract
per month. As a result of investigation connected with the examination, Blue Cross has
begun an audit of its intermediaries to ensure that they are complying with their
agreements with Blue Cross and with the requirements of Chapter 27-50.


The examiners reviewed a number of the forms Blue Cross uses in connection with its
small employer health insurance business. With a relatively few minor exceptions noted
in the report, these forms provide adequate information to policyholders, allow Blue
Cross to collect necessary information from small employer groups and members, and
comply with the requirements of Chapter 27-50.


During the course of the examination, Blue Cross presented recommendations for
changes to Chapter 27-50. Included in these recommendations were the following:



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   •   Expansion of rate variable variation to include
           o Rating by size of group
           o Health status bands expanded to +/- 25%
           o Rate differences by age and health status expanded to 6:1 compression
              from the currently permitted 4:1 compression
   •   Removal of groups with one eligible employee from the requirements of Chapter
       27-50, and insuring these groups instead through the Direct Pay product.
   •   Exploration of additional funding for Direct Pay, through expanding the number
       of insurers, or a reinsurance subsidy, or some other means.
   •   Standardization of administrative forms related to eligibility recertification.
   •   Clarification of whether Rhode Island groups that are affiliates of out-of-state
       organizations can be insured under Chapter 27-50.
   •   Clarification of what business should and should not be considered affiliated in
       determining eligible employers for the purposes of R.I.G.L. 27-50-3(c).


The examination staff notes that Blue Cross’s recommendations related to rating would
all act to diminish the community rating effects of Chapter 27-50. In general, Blue Cross
believes that implementation of their recommendations would lead to increasing the total
number of enrolled members and reducing the number of the uninsured.


Generally, Blue Cross has a full understanding of Chapter 27-50, and the examiners
found no substantial areas of non-compliance. A number of relatively minor problems
were identified in the course of the examination. These problems have been identified to
Blue Cross and recommendations for resolution are contained in the report.


3. Summary of Recommendations


   1. It is recommended that Blue Cross investigate whether intermediaries are adding
       a monthly fee to the premiums charged by Blue Cross and, if so, require that
       intermediaries cease the practice.


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2. It is recommended that Blue Cross create a listing that indicates for each small
   employer the amount of fees, if any, the small employer paid to intermediaries
   since October 1, 2001.


3. It is recommended that Blue Cross review its agreements with the intermediaries
   and determine if the fees described are received by the Chambers or the
   participating small employer. If Blue Cross determines that the payments are
   received by the Chambers, Blue Cross should determine if the receipt of such
   payments results in any benefit to the participating small employers. If the
   payments made by Blue Cross result in a benefit that accrues to the small
   employer it is recommended that Blue Cross determine the amounts paid for each
   such small employer since May 1, 2003.


4. It is recommended that Blue Cross establish a plan to periodically audit those
   third party entities that collect and remit premiums on behalf of Blue Cross.


5. It is recommended that Blue Cross include in its rate manual a description of the
   methodology used to allocate operating expenses to the lines of business.


6. It is recommended that Blue Cross include, as part of its Actuarial Certifications,
   statements from all persons on whom the actuary signing the Certification relied.
   These statements should include a description of information that the signing
   actuary relied upon and that further indicates the accuracy and completeness of
   that information.


7. It is recommended that Blue Cross review its policies related to documentation of
   out-of-state employers and the treatment of employees of employers who go out
   of business.




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   8. It is recommended that Blue Cross amend its Sales Agreement to reflect actual
       practice with respect to the right of a small employer to terminate.


   9. It is recommended that Blue Cross review its documentation (including
       electronic) to ensure that it includes groups of one eligible employee within the
       criteria for eligible small employer in all its marketing contexts and public
       communications.


   10. It is recommended that Blue Cross modify the disclosure form to reflect its actual
       practice as it relates to the development of rates for individuals over age 65.


   11. It is recommended that Blue Cross modify the disclosure form to reflect its actual
       practice as it relates to the calculation of the participation level.


4. Overview of Chapter 27-50


Chapter 27-50 defines the small employer market and requirements of carriers in the
small employer market to promote access and availability of health care. Among the key
provisions of Chapter 27-50:


   •   The small employer market is defined as containing all employer sponsored
       groups with at least one and no more than 50 employees eligible for health
       insurance. To be eligible, an employer must be actively engaged in business and
       the majority of the employees must work in Rhode Island.
   •   All permanent employees who work full-time (at least 30 hours per week) are
       eligible, with the ability, at the employer’s option, to cover employees who work
       at least 17.5 hours per week. Temporary employees are not eligible, even if they
       work full-time.
   •   All small employer groups are eligible for coverage, as long as they meet a
       minimum participation requirement. The minimum participation requirement can



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    be no higher than 75%. No groups or individual employees within those groups
    can be denied coverage or terminated for reasons other than non-payment of
    premiums, failure to meet minimum participation standards, or fraud or
    intentional misrepresentation of material facts.
•   There are rules to govern the continuance of small employer eligibility for groups
    that become larger than 50 eligible employees.
•   Insurers are required to verify the eligibility of each group on an annual basis, and
    to maintain documentation of waivers of coverage for eligible employees and
    their dependents who choose not to enroll. Small employer carriers are required
    to obtain appropriate supporting documentation and terminate or non-renew any
    small employer that fails or refuses to provide it, as provided by Reg. 82(6)(B)
    and Insurance Bulletin 2002-5.
•   Rates must be determined on a four-tier composite basis. That is, there must be
    separate rates for each family composition type. The four family composition
    types are single coverage, employee plus spouse, employee plus child or children,
    and employee plus spouse and children.             Rates must be determined on a
    composite basis by group, such that each employee within a group with the same
    family status will pay the same rate.
•   The only rating variables allowed from group to group are age, gender, family
    composition and health status. Health status factors can vary by no more than +/-
    10% from the adjusted community or average rate. The combination of age,
    gender and health status is limited so that the highest rate charged for a given plan
    of insurance and family composition type can be no higher than four times the
    lowest rate.
•   In addition to any other plans of insurance they offer, insurers must offer two
    statutory plans of insurance, known as the Standard and Economy plans.
•   Small employer carriers must actively market all plans.
•   Chapter 27-50 applies to all small employer groups, except that groups that
    purchase insurance through the Rhode Island Builders Association are exempt
    from R.I.G.L. § 27-50-5 (the rating provisions of Chapter 27-50).


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Subsequent to the period covered by the examination, Chapter 27-50 was amended by the
legislature. Among other changes, the requirement to sell the Standard and Economy
plans has been removed, and the provision allowing carriers to impose a 100%
participation requirement for the smallest groups effective October 1, 2006 has been
removed.


5. Examination Methodology


A preliminary list of data requests was transmitted to Blue Cross on November 1, 2005.


The examiners were provided office space at Blue Cross headquarters, and were on site at
Blue Cross from November 17, 2005 through January 12, 2006, interviewing personnel
and requesting, receiving and analyzing data and other responses.


During the course of the examination, a number of Blue Cross personnel were
interviewed.   The primary person at Blue Cross responsible for coordinating data
responses and directing questions to the proper Blue Cross personnel was George Loens,
Senior Actuarial Analyst of the Actuarial Department.


Other Blue Cross personnel who were interviewed or provided responses to questions and
data requests were:


       Thelma Bennett, Team Leader, Small Group Underwriting
       Paul Brodeur, Manager, Operations Support and PEG Rating
       Alan Brown, Business Consultant, Small Group Underwriting
       Lauren Cherry, Team Leader, Direct Marketing
       James Daly, Cost Accounting Department
       Keith Demty, Assistant Vice President, Underwriting
       Tim Dyl, Manager, Budgets and Cost Analysis



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       Dave Fogerty, Assistant Vice President, Budget Department
       Mary Hickey, Assistant Vice President, Medical Management Operations
       Brad Johnson, Manager, Direct Marketing
       John Lynch, Chief Actuary, Actuarial Department
       Augustine Manocchia, M.D., Senior Medical Director
       Cathy Mitchell, Senior Actuarial Analyst
       Kathi Robbins, Manager, Small Group Underwriting Recertification and
       Administrative Units
       Robert Wells, Manager, Actuarial Department




In addition to the above named individuals, numerous responses to inquiries were
received from Blue Cross’s outside counsel, Kimberly McCarthy, Esq. of Partridge,
Snow & Hahn, LLP.


All Blue Cross representatives who assisted the examiners were very helpful and
accommodating to our many requests for data and further information. Mr. Loens in
particular was diligent and thorough in researching examiner requests and providing
responses to numerous questions on a variety of subjects, as well as organizing the
responses of all areas to the extensive data requests.


Blue Cross data was collected to enable examination of compliance with Chapter 27-50
in the following areas:


   •   Verification that policy forms contain provisions that meet the requirements of
       Chapter 27-50.
   •   Review of marketing practices and marketing materials to determine whether all
       plans are being actively marketed to all eligible small employer groups.
   •   Review of sample files to evaluate medical underwriting practices and accuracy.




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   •   Review of sample files to evaluate the completeness and accuracy of processes to
       determine eligibility of groups and to determine eligibility of individuals within a
       group, including analysis and maintenance of waivers for eligible employees and
       their dependents who choose not to enroll in the health benefit plan.
   •   Analysis of the rate manual, computer rating models, case pricing details and
       actuarial certifications of rate compliance to determine whether rating
       requirements of Chapter 27-50 are being implemented properly and accurately.


This report contains results of the compliance audit on a test basis.


In addition, substantial data was collected and analyzed to enable the development of an
overview of Blue Cross’s small employer business and Blue Cross’s rating structure. The
resulting statistical data, when combined with that of all Rhode Island small employer
carriers provides an overview of the small employer market.


6. Changes in Chapter 27-50


Chapter 27-50 was first effective July 13, 2000. In order to give the carriers time to
comply with the rating provisions of Chapter 27-50, R.I.G.L. § 27-50-5(i) specified that
the effective date of the rating provisions of Chapter 27-50, as described in R.I.G.L. § 27-
50-5, was October 1, 2000.


Chapter 27-50 as originally effective required that all small employers be charged
premium rates based on the claim experience of the Company’s entire block of small
employer experience. Prior to the effective date of Chapter 27-50, the rates for the Rhode
Island Builders Association (“the Builders Association”) were based on the claim
experience of the association members who participated in the sponsored health plan.
The Rhode Island Legislature amended Chapter 27-50 effective October 1, 2003, so that
insurance for Builders Association groups is exempt from the rating provisions of




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R.I.G.L. § 27-50-5. This provision has required Blue Cross to develop rates for the
Builders Association based on the claim experience of the Builders Association alone.


R.I.G.L. § 27-50-6, as enacted on July 13, 2000, described requirements for the small
employer carrier to renew health benefit plans. In particular, these requirements made it
difficult for a small employer carrier to eliminate or modify existing health benefit plans.
Legislation effective July 10, 2003 modified these requirements by allowing a small
employer carrier to implement, in accordance with R.I.G.L. § 27-50-6(e), minor plan
changes at renewal and to discontinue a health plan, in accordance with R.I.G.L. § 27-50-
6(a)(7), by providing notice to the affected small employers and their enrollees.


Chapter 27-50 as originally enacted contained various provisions that were intended to
modify certain requirements of Chapter 27-50 at specified future dates.


   •   R.I.G.L. § 27-50-5(a)(6) as originally enacted and Regulation 82 (5)(B)(3)(b) of
       the then current version of Regulation 82 required that the carrier perform a
       “second calculation” as part of the rating of individual small employer groups.
       The purpose of the second calculation was to limit the impact of the various rating
       changes required by Chapter 27-50 to 10% over those resulting from changes in
       demographics, trend, and plan changes alone. This section of the law was to
       expire September 30, 2002. This provision was extended by subsequent
       legislation, but was removed effective July 10, 2003, and is no longer required.
       This provision had been difficult for the carriers to implement in practice because
       the second calculation required data that either was not maintained in company
       records or was not maintained in a format that allowed its efficient use for rate
       calculation.

   •   Until October 1, 2002, a small employer carrier who as of June 1, 2000, varied
       rates by health status could continue to adjust rates for health status by plus or
       minus ten percent (10%) from the adjusted community rate. This provision
       allowed both of the current small employer carriers to continue to use health


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    status rating. As originally enacted, a small employer carrier could not use health
    status as a rating variable after October 1, 2002. The Rhode Island legislature
    enacted a change effective May 30, 2002 that extended the sunset date to October
    1, 2004. Legislation effective October 1, 2004 eliminated the October 1, 2004
    expiration date. Health status rating is therefore still permitted.

•   As originally enacted, prior to October 1, 2002, R.I.G.L. § 27-50-7(a) defines a
    small employer as having “no less than two eligible employees and part-time
    employees.” As originally enacted, beginning October 1, 2002, the definition of
    small employer was to be expanded to include one-employee groups. Legislation
    effective May 30, 2002 deferred the implementation of this aspect of the law to
    October 1, 2004.While they were not required to offer insurance to groups with
    only one eligible employee prior to October 1, 2004, Blue Cross has done so
    during the entire time Chapter 27-50 has been effective.

•   Changes were made with respect to the maximum participation requirement that
    could be required by a small employer carrier for groups with 10 or fewer eligible
    employees. As enacted on July 13, 2000, R.I.G.L. § 27-50-7(d)(9) allowed a small
    employer carrier to have a requirement that 100% of the eligible employees
    participate in the health plan. Chapter 27-50 was subsequently amended to allow a
    75% minimum participation level from October 1, 2004 until October 1, 2006,
    reverting back to allowing a required 100% participation level after September 30,
    2006.

•   As originally enacted, R.I.G.L. § 27-50-5(a)(5) required that for each health
    benefit plan, the highest rate charged by a small employer carrier for each family
    composition type not exceed four times the lowest premium rate for that family
    composition type. This requirement is referred to as the “4-1 compression”
    requirement. The “4-1 compression” requirement was scheduled to change to a
    “2-1 compression” requirement effective July 13, 2002. Legislation enacted with
    an effective date of May 30, 2002 maintained the “4-1” compression until
    October 1, 2004 and postponed the transition to “2-1 compression” requirement to



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       this date. Legislation with an effective date of July 10, 2003 eliminated the
       transition to 2:1 compression and maintained the 4:1 compression requirement on
       a permanent basis.


Subsequent to the period covered by the examination, Chapter 27-50 was amended by the
legislature. Among other changes, the requirement to include the Standard and Economy
plans in the product portfolio has been removed, and the provision allowing carriers to
impose a 100% participation requirement for the smallest groups effective October 1,
2006 has been removed.




7. Profile of Blue Cross Small Employer Business


Blue Cross, headquartered in Providence, Rhode Island, offers insurance to small
employers in Rhode Island. Blue Cross products are primarily Preferred Provider
Organization (“PPO”) products, although they also offer indemnity and HMO products.


An employee enrolled in a Blue Cross small employer health insurance plan is also
known as a “subscriber” or a “contract”.         In this report these terms are used
interchangeably. Dependents are also covered under small employer health insurance
plans. All the people covered under a small employer health insurance plan taken
together are referred to as “members”, a term which includes both the subscribers and the
dependents.


Blue Cross’s most popular plan is HealthMate Coast-to-Coast (“HMC2C”). It is a PPO
plan that relies on copayments to help manage utilization. The benefit summary Blue
Cross provides to customers shows ten different HMC2C options, with primary care
physician (“PCP”) copayments ranging from $10 to $20, specialty care copayments
ranging from $10 to $25, emergency room copayments ranging from $25 to $100 and in-
network calendar year deductibles ranging from $0 to $1,000. HMC2C plans cover


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approximately 76% of Blue Cross small group subscribers, with the overwhelming
majority selecting the richest HMC2C option. That option is paired with a prescription
drug plan that has a $7/$25/$40 copayment structure.


Blue Cross also offers a variety of plans designated as “Blue CHiP” or “CHiP” to small
employer groups. These plans require the selection of a PCP and a PCP referral to
receive additional services. The plans have similar copayment options to the HMC2C
plans. Most of the CHiP plans do not have an in-network calendar year deductible.
Approximately 22% of small employer subscribers are enrolled in CHiP plans.


Blue Cross also offers its “Classic” indemnity program (with approximately 2% of total
small employer subscribers enrolled), and the statutorily required Essential Care 4 and 5
(described in Chapter 27-50 as “Standard” and “Economy”). According to Blue Cross
enrollment reports, fewer than 70 subscribers were enrolled in the statutory plans as of
the last full year for which enrollment was available, 2004. However, based on the
database reviewed by the examiners, as of October 2005, 114 subscribers were enrolled
in the statutory plans.


In conjunction with the sale of small employer health plans, Blue Cross sells dental
insurance products and various riders. Dental plans (with the exception of Blue Cross’s
Essential Dental plan), if available through an employer, may be selected or declined,
independent of the health plan. The Essential Dental product and various health plan
riders, such as vision, pharmacy and acupuncture are sold as part of the health plan and
are not available independently.


All plans are offered by the Blue Cross marketing organization and sold through the same
distribution channels. Although not required to do so by Chapter 27-50, Blue Cross
permits any small employer group to enroll some of its employees in one product (a
HMC2C variation, for example) and others in another product (a Blue CHiP variation, for
example). Blue Cross generally allows up to a total of one Blue CHiP, one HMC2C and



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one Classic product for a small employer group. About 11% of Blue Cross small
employer groups offer multiple options to their employees. Because these tend to be the
larger groups, they represent 25% of Blue Cross subscribers. Among groups with two
options, the average size group was approximately 8.5 subscribers, while among the
relatively few groups (about 50) with three options, the average size was slightly over 14
subscribers.


According to a database of group level information provided by Blue Cross in connection
with this examination, Blue Cross had approximately 12,300 active groups as of October
1, 2005. The groups had a total of 47,000 enrolled subscribers and 92,000 members. This
contrasts with 13,800 groups as of January 1, 2003, with 58,000 subscribers and 115,000
total members. This represents a decline in groups of 11% and of subscribers of 20%,
and a decline in the average group size from 4.2 contracts to 3.8. The average size
contract is slightly under 2 members.


Forty-two percent (42%) of Blue Cross’s groups have only one enrolled subscriber.
These are not all necessarily groups with only one eligible employee, however, since
some may have more than one eligible employee, with one or more waiving coverage
because of other insurance. Groups with one enrolled subscriber represent 11% of Blue
Cross’s small employer subscribers.


Blue Cross is one of two major small employer health insurance carriers in Rhode Island.
Blue Cross currently insures approximately 82% of the small group market by number of
groups. At the time of the prior examination, early 2002, the examiners determined that
Blue Cross covered approximately 90% of small employer groups. Blue Cross groups
include approximately 78% of all small employer subscribers because the average size of
a Blue Cross group is slightly smaller than the average group size for United.


Blue Cross reports the number of plans it insures in March of each year, in compliance
with Regulation 82-10(G)(1).     In connection with this report, Blue Cross has reported



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multiple option groups with two different plans of benefits as two “plans”, which makes
comparison difficult with other sources of data which aggregate information by group.
The most recent report, containing data for the year 2004 and reported in March 2005,
shows approximately 14,800 plans issued, of which 1,700 were new issues and the
balance renewals. It also shows cancellation of 1,438 plans.


Based on information contained in the database of group level information provided to
the examiners by Blue Cross, it appears that approximately 1,300 groups have multiple
“plans” either because of multiple benefit options or multiple divisions.


Blue Cross’s small employer group revenue for 2005 was approximately $341,500,000.
The loss ratio experienced was 84%, consistent with the average loss ratio assumed in
Blue Cross’s prospective rate manual development for the fourth quarter of 2005.
Because administrative expenses and commissions are allocated on a per member per
month (“PMPM”) basis2, the loss ratio by plan of benefits varies.


Blue Cross’s small employer health insurance base rate increases in the last three years
have averaged 19% for new business and renewals in 2003, 9% in 2004 and 7% in 2005.
Rate increases experienced by individual groups vary from the increases in the base rates
because of group specific demographic changes from year to year. The trend in base rates
corresponds to the average increases groups would have seen in those years, since rates
are normalized to the base rate.


In its rate manual, Blue Cross assigns a value of 1.00 to the richest HMC2C benefit plan.
The average plan of benefits sold in the small group market during 2004 had a benefit
value of approximately .96 as compared to the richest HMC2C plan. In general, the trend

2
  This reflects the methodology used for the development of the rate manual for the fourth quarter of 2005.
For the third quarter 2005 rate manual, Blue Cross allocated administrative expenses in proportion to claim
cost. These were the only complete rate manuals reviewed by the examiners. The examiners also reviewed
the portion of the first and second quarter 2005 and first quarter 2006 rate manuals that show the formulas
and factors for rates charged to customers, but not the portion that supports the development of the base
rates themselves.


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in plan design seems to be toward slightly less rich plans. Only 45% of groups renewing
in the first quarter of 2005 had the richest HMC2C plan. However, the enrollment in Blue
Cross small employer coverage is weighted heavily to very rich benefit plans.


Blue Cross’s rates vary by average age/gender factor for a group, by health status
adjustment and by family composition. These factors are all permitted by Chapter 27-50.
As required by Chapter 27-50, variation in rates due to age/gender and health status is
managed within a 4:1 compression ratio.


Blue Cross utilizes multiple marketing channels to obtain its business. All brokerage
business is channeled through a general agent, which is compensated based on inforce
business. Blue Cross small employer plans are endorsed by various independent
Chambers of Commerce (“Chamber business”). Blue Cross has contracted with three
intermediaries who market its small employer plans and provide administrative services.
The intermediaries are limited by their agreements with Blue Cross to serving the one to
nine employee group market.


Brokers and intermediaries were compensated by Blue Cross on a percent of premium
basis through December 31, 2004. Effective January 1, 2005, Blue Cross changed its
compensation structure to a per contract per month (“PCPM”) basis. Brokers are paid
$18 PCPM for new and renewal business. General Agents (“GAs”) were previously paid
on a percentage basis (generally 2% of premium, but graded by size), but as of January 1,
2006, there is only one GA which is now paid $8 PCPM. Since GAs are involved in all
brokered business, the total compensation for brokered cases is now $26 PCPM.
Intermediaries are paid $21 PCPM. Compensation to all outside distribution channels,
when averaged over the entire small employer book of business, costs in excess of $10
per member per month.


Based on data from the broker commission system, about 35% of groups including about
55% of subscribers are represented by brokers. Eighteen percent (18%) of groups with



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one enrolled employee are represented by brokers, while 75% of groups with more than
ten enrolled employees are represented by brokers.


Blue Cross also has a marketing relationship with the Rhode Island Builders Association
(the “Builders Association”). The Builders Association markets Blue Cross small
employer plans to its members and provides billing and other administrative services.
Blue Cross pays compensation to the Builders Association based on enrollment.


Blue Cross also allows small employers to contact them directly to purchase small
employer health insurance, and approximately 35% of groups obtain insurance in this
way. Internal marketing representatives interact with these buyers on the telephone, and
are paid a one-time incentive payment of $20 per contract for securing a new small
employer group.     Internal representatives are also compensated through salary and
benefits, so the incentive payments are not directly comparable to brokerage commissions
for business that is not sold on a direct basis. Small employers are not required by Blue
Cross to use brokers or intermediaries in order to obtain coverage.


Blue Cross also offers Direct Pay health benefit products to individuals in Rhode Island
who are not eligible for small employer health insurance. The most commonly held
benefit design is similar to the Classic group product, although the trend in Direct Pay has
been toward the HealthMate PPO product first introduced in 2003. Blue Cross has
recently revised its entire Direct Pay product portfolio. The new products and new rates
were subject to a public hearing, and were approved in February 2006.


Blue Cross has two pools of coverage for Direct Pay subscribers. Select Blue (Pool II) is
offered to individuals who provide evidence of insurability, and is age and gender rated.
Direct Blue (Pool I) is available to people who are unable to provide evidence of
insurability, either at open enrollment or at time of conversion from group coverage.
Rates for Direct Blue are community rated, and set roughly equal to the highest Select




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Blue age rates. Blue Cross is the only carrier offering an individual Direct Pay product in
Rhode Island.


When Blue Cross strengthened its eligibility verification procedures after the last small
employer insurance market conduct examination, a number of groups were found not to
be eligible for small employer coverage. Blue Cross reported over 1,100 groups that
were terminated in 2003 because they could not demonstrate that they met small
employer insurance eligibility standards. An additional 400 groups were terminated in
2004 for the same reasons. Blue Cross believes that many of these groups subsequently
enrolled in Direct Pay. Blue Cross Direct Pay benefit plans are generally less rich
(involving greater cost sharing) than the small employer plans purchased by most groups.


Approximately 57% of Blue Cross small employer subscribers purchase single coverage,
while the remaining subscribers purchase one of the family options. Blue Cross contracts
cover, on average, two members.


8. Changes in Blue Cross Operations


At the time of the prior market conduct examination, Coordinated Health Partners
(“CHiP” or “Blue CHiP”) was a wholly owned subsidiary of Blue Cross. On January 1,
2005 the assets and liabilities of CHiP were transferred into Blue Cross and CHiP ceased
to exist as a corporate entity. Blue Cross and CHiP had elected to be treated as one
company for purposes of Chapter 27-50, however, so the consolidation did not have an
important effect on Blue Cross’s small employer business.


A number of recommendations contained in the prior market conduct examination report
pertained to inadequacies in the processes Blue Cross had in place to ensure compliance
with respect to:
   •   The determination of “small employer” status,
   •   Employee eligibility,



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   •   Collection of waiver information, and
   •   Notifications required when a large employer became a small employer and when
       a small employer grows into a large employer.
In response to the recommendations contained in the prior report, Blue Cross established
the Recertification Department and invested considerable resources in developing the
various educational materials, policies and procedures, form letters, and systems support
required to implement these recommendations.


One of the marketing channels utilized by Blue Cross is independent brokers. Blue Cross
requires that independent brokers use a general agent for all broker generated business.
At the time of the prior report, Blue Cross used two general agents. Blue Cross
terminated its relationship with one general agent effective September 1, 2005. Blue
Cross has maintained its relationship with the other general agent and all broker
generated business has that general agent as the designated general agent.


9. Management Structure for Small Employer Business


Blue Cross does not have a separate management structure for small employer business.
Instead, Blue Cross’s organization is functional and the small employer business is one of
the responsibilities of people who are also responsible for other lines of business. Within
certain departments there are specialists assigned to the small employer business,
including the marketing, underwriting, eligibility certification and actuarial areas.


10. Marketing to Small Employers


Blue Cross’s small employer products are marketed in Rhode Island through direct
marketing, brokers, intermediaries, the Builders Association, and the Chamber of
Commerce (“Chamber”) business. These marketing channels are not mutually exclusive.
For example, most Chamber business is administered by intermediaries and a Builders
Association group can appoint a broker of record.



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The following table provides an overview of the Blue Cross small employer business by
marketing channel:


                       Distribution of Business (12/31/2005 Inforce)
             Marketing Channel           Groups      Subscribers     Subscribers %
        Direct                            4,176          14,124          30%
        Broker                            4,305          25,568          55%
        Intermediary                      3,820           6,904          15%
        Builders Association*               724           2,156           5%
        Chamber**                         2,314           5,000          11%
        Total***                         12,301          46,596         100%

        Notes:
        * Builders Association business may be brokered
        ** All Chamber new business is administered by intermediaries, while some
        existing Chamber accounts are managed by Blue Cross directly
        *** Sum of Direct, Broker, and Intermediary


Direct Business:


Blue Cross does not actively solicit business on a direct basis. Blue Cross has a Small
Group Sales Department staffed by 11 individuals (including the manager) to respond to
inquiries by small employers. In addition, this unit provides sales support to brokers, the
general agent, and the intermediaries. In response to a request from a small employer
Blue Cross sends a package with information about plans available to small employers.
This package also specifies the information necessary for Blue Cross to provide a quote
on a direct basis. Upon receipt of the information package, the small employer may
continue the application process on a direct basis, through a broker, or through an
intermediary. For business written on a direct basis, Blue Cross pays the salaried Direct
Marketing Representatives a one time incentive fee of $20 for each new subscriber.




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Intermediaries:


Blue Cross offers insurance through the following intermediaries: Massachusetts
Business Association (MBA), the Good Neighbor Alliance (GNA), and New England
Benefits Companies (NEBCO).


Intermediaries perform certain administrative and sales functions for Blue Cross. They
function as brokers by selling and renewing small employer health plans. They also
perform administrative functions by issuing proposal and renewal packages, facilitating
subscriber enrollment, issuing monthly statements, and collecting premiums. The
intermediaries remit the premiums they collect on an aggregate basis to Blue Cross. Blue
Cross has an agreement with each intermediary that defines its functions, responsibilities,
and compensation.


The January 1, 2005 agreements between Blue Cross and the intermediaries limit the
marketing activities of intermediaries to small employer groups of one to nine eligible
employees. All new Chamber business comes in through the intermediaries, though Blue
Cross has some “older” Chamber business that was not written through intermediaries.
As of December 31, 2005, the intermediaries represented 3,820 groups or approximately
30% of Blue Cross’s small employer groups and 6,904 subscribers or approximately 15%
of Blue Cross’s small employer subscribers.


Effective January 1, 2005, Blue Cross agreed to pay intermediaries $21 per subscriber per
month for small employer health plan business. Section 4.3 of the agreements with the
intermediaries provides that the intermediary may not add any administrative fee to the
monthly premium charged by Blue Cross and the intermediary may not charge the
employer a separate administrative fee unless the intermediary receives prior approval
from Blue Cross.




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A prior agreement between Blue Cross and MBA with an effective date of May 1, 2003
provided for compensation of 5.5% of the monthly premium and also prohibited the
intermediary from adding any administrative fee to the monthly premium charged by
Blue Cross. It is our understanding that similar agreements were in effect with GNA and
NEBCO.


As part of the market conduct examination, the examiners reviewed a list of complaints
received during a three year period (See the section of this report titled “Review of
Company Process for Responding to Complaints”). The Blue Cross summary of one of
the complaints (2005-DBR-311, received by Blue Cross on July 28, 2005), indicated that
the employer had been paying a fee of $15 per subscriber per month to GNA. An
examination of the file indicated that the Employee-Only rate charged by Blue Cross was
$636.99 per month and the “Employee-Only” rate quoted in a letter from the employer
indicated a rate of $651.99 per month. Following several requests for additional
information, Blue Cross indicated that GNA may have been charging, without its
knowledge, a fee of $15 per subscriber per month. The addition of a fee to the Blue Cross
premium by GNA is prohibited by Section 4.3 of the January 1, 2005 agreement between
Blue Cross and GNA.


The addition of a fee of $15 per employee per month is also a violation of Regulation
82(5)(B)(3)(b), which provides that the maximum fee that can be charged is $5 per
employee per month, and that any fees must be applied in a uniform manner to all groups
(that is, not to just intermediary groups). The prior Market Conduct Examination report3
of Blue Cross stated that up until October 1, 2001 Blue Cross had allowed intermediaries
to include administrative fees of $15 per employee per month in the bills for small
employer groups and that, effective October 1, 2001, the intermediaries would no longer
include an administrative fee in the bills for small employers.




3
    See the prior Blue Cross targeted market conduct examination report as of March 31, 2002, page 22.


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The examiners have recommended that Blue Cross commence audits of the
intermediaries and that Blue Cross identify all small employer groups that were impacted
by the collection of subscriber administrative fees and determine for each such group the
amounts collected by intermediaries in violation of Regulation 82(5)(B)(3)(b) and the
Company’s agreement with the intermediary. Blue Cross has advised the examiners that
it has hired the accounting firm Sansiveri, Kimball & McNamee, LLP to conduct audits
of MBA, GNA, and NEBCO. The audit process began on or about March 1, 2006.


Recommendation 1: It is recommended that Blue Cross investigate whether
intermediaries are adding a monthly fee to the premiums charged by Blue Cross and, if
so, require that intermediaries cease the practice.


Recommendation 2: It is recommended that Blue Cross create a listing that indicates for
each small employer the amount of fees, if any, that the small employer paid to
intermediaries since October 1, 2001


Independent Brokers and General Agents


Blue Cross has used independent brokers as a source of business for approximately 10
years. The company decided to contract with general agents to manage their broker
relationships because it did not have prior experience in dealing with brokers. Any broker
placing business with Blue Cross is required to contract with a general agent.


The general agent provides services to both the broker and Blue Cross with respect to all
proposals, renewals, and enrollment related issues. The general agent provides the broker
with access to quarterly continuing education seminars and assistance with licensing. On
an ongoing basis, the general agent facilitates the processing of enrollment forms and
waivers, provides assistance with the sale and installation of ancillary products, and
responds to questions related to enrollment guidelines, underwriting, and benefits. Blue




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Cross benefits from the presence of the general agent because it does not have to develop
the staff and support systems needed to serve the brokerage community.


As of October 31, 2005, approximately 35% of the groups and 55% of the subscribers
were represented by brokers.


Effective January 1, 2005, Blue Cross pays its independent brokers a commission for
small employer health plans of $18.00 for every in-force subscriber per month. Prior to
this date commissions for all Blue Cross business, large and small, were calculated on a
sliding scale ranging from as 4% of premium to 0.25%. This resulted in commissions for
most small employer groups equal to 4% of premiums (3% for Builders cases). Other
commission scales are applicable to small employer dental and life insurance plans. A
commission scale that is calculated as a flat percentage of premium results in commission
levels that increase with the rate of medical inflation. During the first ten months of 2005,
a total of 502 brokers were paid commissions of $4,182,000, excluding bonuses. On an
approximate annualized basis, this would equate to about $5,000,000.             The top 8
brokerage companies in total received $1,637,000, or 39% of the total. Twenty-seven
brokerage companies earned commissions in excess of $25,000, representing 60.5% of
total commissions paid.


In addition to the commission of $18 per subscriber per month, the broker may be eligible
for additional payments under the Blue Cross “Broker Persistency Bonus Program.”
Payments under this program are based on the combined performance of the broker’s
block of health business (including large group). The level of payments under this
program is dependent on (i) the persistency experience of the broker’s book of business
and (ii) the volume of new production. Payments under the bonus program can be as high
as 28% of the aggregate commission payments for a twelve month base period. The most
recent completed base period was June 1, 2004 thru May 31, 2005. For this period 9
brokers earned a bonus.




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The examiners allocated the total bonus amount between large group and small employer
health business on the basis of commissions paid during the base period. The following
comments pertain to the portion allocated to the small employer business. The total
amount of persistency bonus paid in 2005 and allocated to the small employer business
was $191,000. Only four of the eight top 2005 commission earners received a Broker
Persistency bonus in 2005.


    Brokers - By        Number       Amount of                            Commission
     Amount of            of        Commissions      % of      Bonus       and Bonus
    Commissions         Payees         (000)         Total     (000)         (000)

>$100,000                      8       $1,637         39%      $ 145        $ 1,782
$50,000 to $100,000           10          628         15%         16            644
$25,000 to $50,000             9          266          6%         30            296
$5,000 to $25,000            105        1,139         27%                     1,139
< $5,000                     370          512         12%       ____            512
Total Brokers                502       $4,182        100%      $ 191        $ 4,373

Prior to January 1, 2006, the general agent was paid an override on a percentage basis.
The override percentage was applied to all brokerage business, large and small group.
The percentage of premium varied according to the following scale. The percentage was
generally 2% for small employer business.


                         GA Commission Scale
        Annual Paid Premium                    Commission
$       1 - $ 100,000                             2.00%
$ 100,001 - $ 175,000                             1.75%
$ 175,001 - $ 350,000                             0.75%
$ 350,001 - $ 875,000                             0.50%
$ 875,001 - $1,750,000                            0.25%
$1,750,001 - $3,500,000                           0.13%
$3,500,001+                              Blue Cross Consideration

Effective January 1, 2006 the general agent receives an override of $8.00 per subscriber
per month from Blue Cross for all in-force business with a designated general agent.
During 2005, Blue Cross contracted with two general agents, but currently only has one


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general agent relationship. In 2005, Blue Cross paid commission overrides to general
agents of $1,489,000.


The role of the broker is to advise the small employer with respect to the health benefit
plan that best meets the needs of the small employer, regardless of the level of
compensation that the broker may receive. The change from a percentage of premium
commission structure to a flat dollar amount per subscriber is supportive of this principle.


A bonus compensation program that is based on persistency and volume of new business
introduces an incentive for a broker to focus his or her efforts on a single one of the small
employer carriers, possibly to the detriment of the small employer. Unlike for large
groups, where brokerage commissions are reported to the employer in order for the
employer to meet ERISA reporting requirement, there is no such reporting requirement
imposed by ERISA on small employer groups. Because small employers are not required
to report brokerage commissions, Blue Cross is not required to disclose to small
employers the amount of compensation paid to brokers, and they do not. In particular,
Blue Cross has not disclosed to small employers the existence of an incentive bonus
program that rewards the broker for not moving business to a new carrier. There appears
to be no direct prohibition in either Chapter 27-50 or Regulation 82 that prohibits a bonus
program based on persistency of existing business and production of new business. There
is, in today’s business environment, a greater awareness of the possible ethical conflicts
created by such a bonus program by encouraging brokers to give advice that is contrary
to the interest of their client. Insurance Bulletin 2006-2 notifies producers that, effective
January 1, 2006, producers are required to provide a disclosure to policyholders regarding
their compensation. This requirement responds in part to the concern addressed above.


It should be noted that Blue Cross is required to obtain approval for all broker
commission rates and programs from OHIC4, including the ones cited in the report, by
R.I.G.L. § 27-19-10 and § 27-20-10, which apply only to non-profit hospital and medical

4
    Prior to the creation of OHIC, DBR was the regulatory authority.


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service corporations. Blue Cross has provided the examiners copies of commission plans
and approvals verifying that it has obtained approval for all commission and bonus rates
and programs that apply to the small employer market.


It is the understanding of the examiners that the incentive compensation programs at Blue
Cross have been approved by DBR and/or OHIC. In addition, DBR conducted a formal
inquiry in 2004 on the issue of contingency payments for all Rhode Island insurers,
including Blue Cross and United, but it is our understanding that no action on this issue
has been required to date.


Rhode Island Builders Association


The Builders Association was one of a number of associations that were separately rated
by Blue Cross before Chapter 27-50 was enacted in 2000. These associations were rated
on their own experience and were generally table-rated, meaning each employee’s rate
was based on the employee’s own age and gender. Builders Association rates were
adjusted for all member groups on a single renewal date, November 1.              After the
implementation of Chapter 27-50, groups that belonged to the Builders were required to
adopt the requirements of R.I.G.L. § 27-50-5, including group composite rating, four-tier
demographic rating, a four-to-one rate compression limitation on rate variability, a
limitation on the use of health status to +/-10%, and implementation of the “second
calculation” limiting the effect of changes as compared to the prior rating structure.


Effective October 1, 2003, an amendment to Chapter 27-50 exempted the Builders from
the rating requirements of R.I.G.L. § 27-50-5. As a result of this exemption, Blue Cross
agreed to limit eligibility for insurance through the Builders Association to groups with a
demonstrable connection to the building industry, in order to maintain the integrity of the
remainder of the small employer pool. The amendment allowed Blue Cross to return to
the rating practices in place prior to Chapter 27-50. However, in practice Blue Cross has
rated Builders Association groups in the exact same way as the remainder of the small



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employer pool, except that the experience base is confined to just the Builders
Association groups. All the remaining requirements of R.I.G.L. § 27-50-5 are reflected
in rates applicable to the Builders groups. Initially, this resulted in a modestly lower rate
for otherwise similar groups enrolled through the Builders as opposed to the small
employer pool in general, but the rates have migrated together, and now are virtually
indistinguishable. Blue Cross has advised the examiners that it did not return to table
rating of Builders Association cases because of concerns about issues of migration
between rating systems, particularly if a future change in law might result in a return to
the requirement for the Builders Association business to comply with R.I.G.L. § 27-50-5.


The number of Builders Association groups has decreased from 907 at the beginning of
2003 to 755 as of October 2005. The average size of a Builders Association group is
approximately 2.9 contracts, as compared to approximately 4 contracts for other small
employer groups. Builders Association groups now represent approximately 6% of
overall Blue Cross small employer groups and about 4.5% of small employer contracts.


The Builders Association endorses the Blue Cross small employer plans on its website. A
link on the website makes available a brochure describing a HealthMate Coast-to-Coast
plan, a CHiP Flex 10 Plan, and a CHiP for Medicare plan. This brochure indicates that
other plans are available. Prospects are invited to complete a form with employee census
information and mail it to the Builders Association for a quote. The statutory plans are
not referenced in the marketing material. R.I.G.L. § 27-50-7(b) requires that the small
employer carrier actively market the two statutory health plans. Regulation 82(10)(A)(2)
requires that the small employer carrier use for the statutory plans at least the same
sources and methods as it uses for its other plans. With respect to marketing of the
statutory plans through the Builders Association, Blue Cross sought and received
guidance from DBR in 2003 to the effect that the Builders Association is not required to
market the statutory plans, as long as they are available directly from Blue Cross. Blue
Cross has provided the examiners documentation of the communication with DBR on this
matter.



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Blue Cross advised the examiners that the Builders Association provides administrative
services, including enrollment processing, submission of applications, processing of
subscriber additions and deletions, COBRA administration, responding to subscriber
inquiries, mailing, and billing services. As compensation for these services, Blue Cross
provides administrative fees to the Builders Association of $3.00 per subscriber per
month for the employee-only tier, $4.00 per subscriber per month for each of the other
three tiers, and $2.00 per subscriber per month for Medicare beneficiaries. Intermediaries
are not involved in the administration of Builders business. However, a Builders group
can designate a broker of record. In that case brokerage commissions would be paid to
the broker in addition to the administrative fees that are paid to the Builders Association.


Chambers of Commerce


Certain Rhode Island Chambers of Commerce make available Blue Cross small employer
plans and refer small employer Chamber members to either NEBCO or MBA. It is our
understanding that these relationships are not exclusive, and United also offers insurance
to Chamber members.


The MBA agreements of May 1, 2003 and January 1, 2005 provide for the payment of $1
($3 in the case of employers with one or two subscribers) per subscriber per month by the
intermediary to participating Chamber employers. If payments actually are made to
employers, they may constitute rebates as defined in R.I.G.L. § 27-29-4(8).


In practice, according to Blue Cross, the payment is made to the Chamber. Blue Cross
has indicated that this compensation allows the Chambers to provide certain services that
the intermediaries could not provide, such as advertising the availability of coverage in
member publications, directing members to the intermediaries, holding informational
sessions on coverage, and assisting to some degree with enrollment, billing, and similar
questions for their members. Under the May 1, 2003 agreement these fees were paid by



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the intermediaries with reimbursement by Blue Cross. With the January 1, 2005
agreement between Blue Cross and MBA, these payments were made by MBA without
reimbursement by Blue Cross.


The NEBCO agreement effective January 1, 2005 provides for the continuation of
payment of fees to the Chambers by Blue Cross. Blue Cross advised the examiners that
Blue Cross did not provide the required ninety days notice to the intermediary of the
intended shift of responsibility for payment of these fees from Blue Cross to the
intermediary and as a result Blue Cross agreed to continue the payment of fees to the
Chambers for an additional two year period.


R.I.G.L. § 27-50-5(d) requires that rates can vary only for plan design and differences in
demographics of the group, as allowed by R.I.G.L. § 27-50-5(a). A payment by Blue
Cross to the participating Chamber employers, as described above, would appear to
constitute a difference in rates that would violate this subsection of Chapter 27-50. Such
payments also might constitute illegal rebates under R.I.G.L. § 27-29-4(8).


Recommendation 3: It is recommended that Blue Cross review its agreements with the
intermediaries and determine if the fees described are received by the Chambers or the
participating small employer. If Blue Cross determines that the payments are received by
the Chambers, Blue Cross should determine if the receipt of such payments results in any
benefit to the participating small employers. If the payments made by Blue Cross result in
a benefit that accrues to the small employer it is recommended that Blue Cross determine
the amounts paid for each such small employer since May 1, 2003.


Management of Financial Fiduciaries


As described above, the Builders Association and the intermediaries perform billing
services for small employer health plans. In this capacity these entities receive premiums
from small employers and remit the collected amounts to Blue Cross in bulk on a



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periodic basis. Blue Cross has indicated that, although it has a contractual right to audit
the services performed on behalf of Blue Cross, it has never done so. Though not
required by law, sound business practice suggests that Blue Cross should perform a
periodic audit of any entities that are a conduit of company funds. As noted previously
Blue Cross has made arrangements to audit the three intermediaries. The audits are
scheduled to start March 1, 2006.


Recommendation 4: It is recommended that Blue Cross establish a plan to periodically
audit those third party entities that collect and remit premiums on behalf of Blue Cross.




Overview of Commissions and Fees


We have noted in the paragraphs above that Blue Cross makes various payments to
entities with which it has established contractual relationships. The annualized aggregate
amount of these marketing costs is estimated in the following table:


                   Projected Annualized Commission & Intermediary Cost
                               Based on 12/31/2005 In-force
                                                                                      Estimated
                                                12/31/2005                             Annual
                                                Subscribers           Rate            Cost (000)
Intermediaries                                     6,904        $21/sub/month        $ 1,740
Brokers                                           25,568        $18/sub/month           5,520**
General Agent                                     25,568        $8/sub/month            2,450
Chambers Expense Allowance                         2,338        $1/$3/sub/month             60
Chambers Expense Direct Business                     906        $1/$3/sub/month             20
Builders Association Expense Allowance             2,156        $3/$4/sub/month           100
Persistency Bonus *                                                                       190
                                                                Total                $ 10,080

Annual Small Employer Premium                                                        $341,500
Commissions and expense allowances as % of Premium                                        3%

*) Based on payments made for the period July 1, 2004-June 30, 2005.



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**) In a prior table, it was noted that broker commissions of $4,182,000 were paid in the
     first ten months of 2005. The broker commission database from which that number
     was drawn was created before 2005 payments were complete. In addition, some
     payments are made on a manual basis outside the broker commission system.

The aggregate marketing costs from the sources identified in the prior table are reflected
in the premiums charged to all small employers and represent approximately 3% of 2005
annualized premium.


Toll Free Phone Number


There is a requirement under Regulation 82(10)(C) for a small employer carrier to
maintain a toll-free number that a small employer can call to obtain information about
health insurance products available to small employers and how to apply for coverage.
Blue Cross indicated that it implemented (800) 637-3718 as the toll-free number for
small employers to use to obtain information about health plans available to small
employers. The examiners dialed this number and a recorded message followed: “if you
know the 4-digit extension of the person you wish to reach, please dial it now” followed
by “if you are an employer and wish to obtain information about health benefit plans
available to employers in Rhode Island, including small employers, please press “1”.
When the examiners pressed “1” they were provided with various options related to
Direct Pay plans. None of the options related to small employer health plans. The
examiners next pressed “0” and an individual in the Direct Pay sales area responded.
When the examiners told her that they wanted to obtain information about small
employer health plans, she indicated that she needed to transfer the call and that the
examiners could select any individual identified on the next phone message. On listening
to the phone message in the Small Group Sales Department, the examiners randomly
selected an individual. Next, we listened to a phone message that indicated that the
individual was not in the office and that the caller could leave a message. No option to
transfer to another individual was provided.




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The “800” number provided by Blue Cross did not meet the requirements of Regulation
82-10(C). We recommended that Blue Cross change its phone system so that the number
allows direct access to the small employer direct marketing unit.


We notified Blue Cross of our findings with respect to the 800 number on December 16,
2005. We were notified on January 6, 2006 that Blue Cross had made changes to the
“message tree” at the 800 number and that, as a result of the changes, the noted
deficiencies had been corrected. On January 24, 2006 the examiners again tested the 800
number. This time the message tree provided ready access to Blue Cross’s Small Group
Sales Department.


The examiners reviewed the Verizon telephone directory for Providence and other areas
of Rhode Island and verified that (800) 637-3718 is listed in the directory. However, this
number is listed as a general number for the Blue Cross administrative offices. This
meets the requirements of Chapter 27-50.


11. Rating Methodology for Small Employer Business


The examination included a review of the rate manual and rating methodology, review of
individual rate calculations for accuracy and compliance with R.I.G.L. § 27-50-5 and
Reg. 82(5), and analysis of rating variables and rates by group to develop data to assist in
an overall understanding of the small employer market and to determine the effect of
current regulatory limitations in small employer rating, and to provide a statistical basis
to evaluate the impact of potential changes in rating.


Rating Methodology Review Process


The examination staff reviewed the following items with regard to the rate manual, rating
methodology, rating compliance and statistical analysis of rating variables:




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    •   Complete small employer group rating manuals for 3rd and 4th quarter 2005 and
        just the rating factors for 1st and 2nd quarters 2005, and 1st quarter 2006. The
        complete manuals contain both a detailed description of the development of base
        rates and a separate section with the resulting rating factors used for all plans.
    •   Complete Builders Association rating manual for November 2005. All Builders
        Association cases are renewed in November each year.
    •   Lotus spreadsheets capable of calculating rates for individual groups.
    •   Database including individual groups, the plan design, age/gender factor and
        health status factor for each group, and the rates charged.
    •   Actuarial statements of certification of compliance prepared by Blue Cross’s
        consulting actuaries (“Actuaries”) filed in March, 2003, 2004, and 2005, and by
        Blue Cross’s own actuary, John Lynch, FSA, MAAA, in March 2006.
    •   Sample of 11 medical underwriting files to enable verification of calculation of
        age/gender and health status factors on an individual case basis.


Blue Cross Rate Manual


R.I.G.L. § 27-50-5(h) requires that the small employer carrier maintain a complete and
detailed description of its rating practices and that its rating methods and practices are
based on commonly accepted actuarial assumptions and are in accordance with sound
actuarial principles. Regulation 82(5)(A)(4) requires that premium rates charged to small
employers be computed solely from a rate manual.


The examiners reviewed the rate manuals for the third quarter 2005 and the fourth quarter
2005 applicable new business and renewals with effective dates in the respective quarter.
The examiners note that Blue Cross has devoted a substantial effort to responding to
Recommendation 5 of the prior Market Conduct Examination Report.5 With minor
exceptions discussed in this section of the report and summarized below, the examiners
5
 The text of Recommendation 5 from the report dated March 31, 2002 follows: It is recommended that the
Company maintain a rate manual that includes the required elements to calculate a rate, and the required
documentation of the development of base rates, base rate relationships, and expense allocation.


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conclude that the rate manuals prepared by the Company comply with the requirements
of R.I.G.L. § 27-50-5(h) and Regulation 82(5)(A)(4). The exceptions that were noted
follow:


    •     The rate manual does not adequately describe the selection of the health status
          rating band for PER-2 cases, new issue or renewal (see details in the medical
          underwriting section),
    •     The maximum 10% change in the health status rating band is not described in the
          rate manual.


Except for the deficiencies noted above, the examiners were able to calculate rates for
small employer groups solely from the rate manual.


Overview of Blue Cross Rate Development Methodology


Blue Cross sets base rates quarterly, based on analysis of its overall small employer
claims experience (excluding Builders Association claim experience, which is analyzed
separately to support development of the Builders Association base rates). Base rates
within a quarter are adjusted by a monthly effective date factor using Blue Cross’s cost
and utilization trend factor, currently approximately 9% annually. For example, in first
quarter 2006, the base rates apply to January new business and renewals. February new
business and renewals incorporate an effective date adjustment factor of 1.0075.


Base rate development uses twelve months of prior experience projected forward 19
months to the period for which the rates are to apply. The projection is done on a PMPM
basis, and uses trend factors applied separately to the following categories of services:
Inpatient Hospital, Outpatient Hospital, Medical/Surgical, Major Medical and
Prescription Drug. The first four categories are combined in order to develop the medical
portion of the premium, while prescription drug is priced separately, since the different
medical plans can be combined with different prescription drug plans. As of the most



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recent quarter’s rate development manual reviewed, for 4th quarter 2005 rates, the
annualized claims trend was approximately 13% for medical claims and 14.5% for
prescription drug.


Adjustments are made for administrative expenses, investment income earned, Federal
Income Tax, and contribution to Blue Cross reserves. Administrative expenses are
determined on a PMPM basis and added to the projected medical expense to develop
premium rates for each plan of benefits. The investment income credit is based on an
expected yield rate on invested assets, including that portion of Blue Cross reserves
allocated to the small employer business. The level of contribution to Blue Cross’s
reserves is determined by senior management on a quarterly basis.


As required, Blue Cross uses a four-tier family composition rate structure, The four tiers
are single (employee only), employee and spouse, employee and child(ren), and family.
Blue Cross develops a base rate for the single employee tier for each plan of benefits, and
adjusts the base rate by family composition factors for each other tier. In order to make
sure that the aggregate rates balance back to the total required revenue, the Company
normalizes these rates to take account of any lack of balance in rating factors applied on a
case by case basis, including age and gender, health status, limitations on increase in
health status, and limitations on rates due to 4:1 rate compression.


Age and gender factors are determined based on a table of factors that vary by 5-year age
intervals, and are separate by male and female single rates, and unisex for employee plus
spouse, employee plus child(ren), and family. The factors are normalized quarterly to an
average value of 1.000.


Health status factors are determined by a process of medical underwriting that varies
depending on the size of the group. Medical condition points are converted to a health
status factor ranging from .92 to 1.10. Blue Cross limits the change in the health status
factor in any one year to no more than 10 percent.



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Rates for a given group are then determined by multiplying the group’s age and gender
factor times its health status factor and testing it against overall limits designed to meet a
4:1 ratio of the maximum rate to minimum rate for the quarter. For 4th quarter 2005, the
limits on the combined factor are set at approximately .4125 and 1.6500. The use of this
methodology insures that rates comply in all cases with the requirement of R.I.G.L. § 27-
50-5(5) that rates must be within a 4:1 compression ratio. Approximately 10% of Blue
Cross small employer groups have rates that are either increased or decreased from what
they would otherwise be because of the effects of rate compression. Because these tend
to be the smaller groups (since large groups are more likely to have employees with a
range of ages), only about 4.4% of subscribers are affected by the rate compression.


The Blue Cross rate manual provides for a rate reduction of 0.7% for small employer
groups who are also enrolled for workers’ compensation coverage with Beacon Mutual
Insurance Company. This reduction is referred to by Blue Cross as “CompAlliance
credit”. Blue Cross has an administrative arrangement with Beacon Mutual Insurance
Company to facilitate the co-ordination of claim adjudication. For the purpose of
compliance with Chapter 27-50 and with Regulation 82, Blue Cross treats the
CompAlliance arrangement as a plan of benefits variable. The effective coordination of
the workers’ compensation plan and the health plan should result in reduced claim costs
to the health plan. It is for this reason that it is reasonable to treat the health plan with the
CompAlliance arrangement as different from the health plan where such effective
coordination does not exist.


Effect of the Dissolution of Blue CHiP


On January 1, 2005 the assets and liabilities of CHiP were transferred into Blue Cross,
and Blue Cross is a single company. Therefore, Blue Cross is required by Regulation
82(5)(B)(2) to set the rate relationships between all its plans on the basis of benefit




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differences only, and not to consider the separate experience of CHiP and Blue Cross
plans.


Prior to January 1, 2005 and in accordance R.I.G.L. § 27-50-4(b) Blue Cross had elected
to treat Blue Cross and CHiP as a single carrier for the purpose of meeting the
requirements of Chapter 27-50. Therefore, the dissolution of CHiP and the transfer of
CHIP assets and liabilities into Blue Cross did not result in any changes in the rating
process.


The Company’s methodology of developing its rating factors based on the combined
experience of its business designated as Blue Cross and as CHiP complies with R.I.G.L. §
27-50-4(b) and Regulation 82(5)(B)(2).


Builders Association


In accordance with R.I.G.L. § 27-50-5(a)(6), the premium rates associated with the health
plans underwritten by the Company and offered by the Builders Association to its
members are not subject to the requirements of R.I.G.L. § 27-50-5. Builders Association
cases are subject to all other sections of Chapter 27-50.


Blue Cross maintains a separate rate manual for the Builders Association. It is similar in
format to the rate manual in effect for the balance of the small employer business.
However, the rates for the two blocks of business (small employer and Builders
Association) are based on their own separate claim experience. When the Builders
Association business was exempted from compliance with the rating provisions of
Chapter 27-50, Blue Cross could have resumed table rating of Builders Association
business, as had been their practice prior to Chapter 27-50, but did not, because of
concern about possible disruptions that would be caused if the Builders Association
exemption from R.I.G.L. § 27-50-5 were to be removed from Chapter 27-50 in the future.
Instead, Blue Cross has used the same rating structure for Builders Association business



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as for the business rated under Chapter 27-50. While Builders Association base rates
were initially modestly lower than rates for other small employers, rates in the most
recent Builders Association rating were almost identical to small employer rates
generally.    Therefore, it appears that the Builders Association derives no particular
advantage from being exempt from compliance with the rating provisions of Chapter 27-
50.




Description of Rating Methodology


Unless explicitly stated, the following comments relate to Blue Cross’s small employer
business excluding the Builders Association.


Once the base rates are established for a particular quarter, the rate relationships among
the various plans offered to small employers are based on an analysis of benefit
differences modeled by the Company’s Actuarial and Statistical Analysis (“ASA”)
Department, using actuarial methods and assumptions regarding cost and utilization of
health care services. This complies with R.I.G.L. § 27-50-5(d) and Regulation
82(5)(B)(2), which require that the Company’s rating factors reflect only differences in
plan design, and not the actual claim experience of the individual plans.


Age and gender rating is done on a subscriber basis using separate factors for five
demographic groups:
      •   Male single employees;
      •   Female single employees;
      •   Employee plus spouse;
      •   Employee plus child(ren); and
      •   Employee plus spouse and child(ren) (family).




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The factors for each demographic group begin with a factor for those under age 30, and
vary by five year age brackets up to age 65. Separate factors are used for over age-65
employees where Medicare is primary and over age-65 employees where Medicare is
secondary. Separate family composition factors are applied as well. Single employees
have a weight of 1.00. Family composition types employee plus spouse, employee plus
child or children, and full family each have separate standard weighting factors..


The age/gender factors in the rate manual reflect an overall adjustment that normalizes
the factors for the age/gender composition during the experience period. In addition, there
is an overall normalization step that takes into account the net effect of the 4:1
compression limitations of the Company’s small employer business during the period that
the rates will be applicable. The age/gender factors for a group are weighted by the
assumed relationships of rates by family composition tier to develop an average
age/gender factor for a group. The age/gender factors were developed by the Company’s
actuarial consultants.    The demographic tier factors were developed by Blue Cross
internally.


The process followed by the Company for calculating the average age/gender factor for a
small employer group is permitted by R.I.G.L. § 27-50-5(a)(3) and R.I.G.L. § 27-50-
5(a)(4).


The Company is permitted by R.I.G.L. § 27-50-5(a)(2) to adjust its small employer
community rates for health status by up to 10% above and below the adjusted community
rate. The Company employs a process, discussed in another section of this report, which
assigns a health status factor to each small employer group. The health status factor can
vary between .92 and 1.10. For renewal business, the determination of the health status
factor is based on either the individual claim records of the insured members (PER-1
groups) or the loss ratio experience of the group (PER-2 groups). The methodology used
by Blue Cross complies with the requirements of R.I.G.L. § 27-50-5(a)(2). In particular,




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the average health status rating is approximately 1.00, which results in no variation from
the average greater than 10%.


The Company calculates a combined adjustment factor for each small employer group
that is the product of (i) the age/gender factor and (ii) the health status factor. This
combined adjustment factor is applied to the base rate. R.I.G.L. § 27-50-5(a)(5) requires
that for each health benefit plan, the highest rate charged by a small employer carrier for
each family composition type not exceed four times the lowest premium rate for that
family composition type. This requirement is referred to as the “4:1 compression”
requirement. The Company meets the 4:1 compression requirement by reviewing on a
quarterly basis the product of the combined adjustment factor and the base rate for all
groups renewing that quarter. The company then selects minimum and maximum rates
such that the 4-1 compression requirement is met. Then Blue Cross offsets the net
amount of premium gained or lost by an overall adjustment to all rates. The minimums
and maximums are determined as part of the quarterly rate development process by
modeling all the groups renewing for the specified quarter. In general, the sum of the
premiums gained and lost due to compression tends to be a loss in total revenue.
Therefore Blue Cross must increase its overall normalization factor.


The methodology employed by Blue Cross complies with the requirements of R.I.G.L. §
27-50-5(a)(5).


Administrative Expenses, Contribution to Reserves and Investment Income


Regulation 82(5)(B)(4) requires that Blue Cross describe in its rate manual the method of
allocating administrative expenses to the various health plans for which the manual was
developed.


The following comments pertain to a review of the Blue Cross’s rate manual applicable
to renewal and issue dates during the fourth quarter of 2005.



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The rate manual includes worksheets that indicate budgeted total corporate operating
expenses and carve-outs that result in the amount of operating expenses allocated to the
small employer business. The rate manual does not however contain any description of
the methodology by which Blue Cross determines the amount of operating expense
allocated to any function or line of business, as required by Regulation 82(5)(B)(4).


Based on the aggregate amount of operating expense allocated to the small employer
business and the projected member months, an expense charge is calculated on a PMPM
basis. This amount is split between medical and pharmacy based on the claim cost of the
medical and pharmacy claim components of the standard plan, the HMC2C plan with a
$7/$25/$40 pharmacy plan. These amounts are added to the projected claim cost for the
medical and pharmacy components for each health plan offered.


Blue Cross personnel responsible for expense allocation gave the examiners adequate
information to enable an understanding of Blue Cross’s expense allocation procedures
and results, and were responsive to all questions asked of them.


Recommendation 5: It is recommended that Blue Cross include in its rate manual a
description of the methodology used to allocate operating expenses to the lines of
business.


The remaining elements of the expense component of the rating formula are the
contribution to reserves, the credit for investment income and the charge for federal
income tax. The examiners view the investment income credit element of the small
employer rate structure as being subject to Regulation 82(5)(B)(4). For both of these
elements the rate manual includes a factor and the examiners can determine how the
factors are used in the formula that determined the base rates. The rate manual does not
however contain any description of the methodology by which Blue Cross determines the
amount of investment income allocated to the small employer business, as required by



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Regulation 82(5)(B)(4).       Blue Cross varies the contribution to reserves based on
balancing its need to build and maintain adequate reserves and competitive factors. In
the fourth quarter 2005, it included a 1% of premium contribution to reserves. This is
lower than average, which has generally been about 2%. The provision for federal
income tax is set equal to 25% of the contribution to reserves. As a result of discussions
during the course of the examination, Blue Cross has added to its rate manual a
description of the methodology used to determine the amount of investment income that
is allocated to the small employer business.


Actuarial Certification


R.I.G.L. § 27-50-5(h)(2) requires that Blue Cross file on an annual basis an actuarial
certification that certifies that the company is in compliance with Chapter 27-50 and that
the rating methods of the small employer carrier are actuarially sound. Insurance Bulletin
2002-4 provides the requirements for the Actuarial Certification:
   •   The certification should be prepared in accordance with Actuarial Standard of
       Practice 26 (“ASOP 26”),
   •   Certification must include the following areas of compliance:
           o Restrictions related to premium rates in R.I.G.L. § 27-50-5
           o Provisions related to renewability of coverage in R.I.G.L. § 27-50-6,
           o Provisions related to availability of coverage in R.I.G.L. § 27-50-7,
           o Provisions related to certification of creditable coverage in R.I.G.L. § 27-
               50-8.
   •   The certification should include identification of instances of non-compliance, the
       number of such instances, the nature of non-compliance, and the steps taken to
       correct the non-compliance, both prospectively and retrospectively
   •   The certification should include a statement describing the extent to which the
       actuary relied on the work of others. If the actuary relied on others, a statement
       from the person(s) relied upon describing the accuracy and completeness of the
       work should be attached.


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    •   The certification should be prepared and signed by a “qualified actuary”. In order
        to meet the definition of being qualified, an actuary must be:
            o A Member of the American Academy of Actuaries,
            o Familiar with the requirements of Chapter 27-50,
            o Qualified to sign Prescribed Statements of Actuarial Opinion regarding
                   compliance with small employer group health laws and regulations,
    •   The certification must be submitted on or before March 15 of the year following
        the calendar year that is covered by the certification.


The examiners reviewed the actuarial certification for calendar year 2003, filed in March
2004 (the “2003 certification”), the actuarial certification for 2004, filed in March 2005
(the “2004 certification”), and the actuarial certification filed in March 2006 (the “2005
certification”).


The 2003 and 2004 certifications were dated March 15, 2004 and March 15, 2005
respectively. Both certifications were submitted and signed by John P. Burke, F.S.A.,
M.A.A.A. and Ronald G. Harris, F.S.A, M.A.A.A (the “Actuaries”). The certifications
include a statement that the Actuaries meet the qualifications specified in Insurance
Bulletin 2004-4.


The certifications include a reliance statement, stating that the Actuaries have relied on
data supplied by Blue Cross, have performed reasonable tests, have conducted interviews
with Blue Cross employees, and have reviewed available data as needed to confirm
information collected in these interviews.


The Actuaries state that the certifications have been prepared in accordance ASOP 26.


With respect to the certification for 2003, the Actuaries state that:
    •   The Blue Cross small employer rating methodology is actuarially sound and in
        compliance with R.I.G.L. § 27-50-5 (except for a noted issue),



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   •   Blue Cross is in compliance with other sections of Chapter 27-50.


With respect to the certification for 2004, the Actuaries state that:
   •   The Blue Cross small employer rating methodology is actuarially sound and in
       compliance with R.I.G.L. § 27-50-5 (except for a minor noted error),
   •   Blue Cross is in compliance with other sections of Chapter 27-50.


The certifications and actuarial memorandums for 2003 and 2004 covered both Blue
Cross and CHiP. During 2003 and 2004 CHiP was a wholly owned subsidiary of Blue
Cross. It was appropriate for a single actuarial certification for the small employer
activity of the two companies since Blue Cross and CHiP had elected to be treated as a
single carrier in accordance with R.I.G.L. § 27-50-4(b).


The following observations were made regarding the Actuarial Memorandums supporting
the 2003 and 2004 certifications.


   •   The Actuaries stated that they reviewed the contents of the marketing packages
       related to proposals and renewals, and the re-certification package. The content of
       the renewal package is listed in Chart 1 of the Actuarial Memorandum. This
       listing does not include the “Disclosure of Certain Rating and Renewability
       Provisions” sheet or a similar item. This information is required by § 27-50-5(g).
       While it is not mentioned in the Actuarial Memorandum, it is the understanding of
       the examiners that this information is included in the renewal package.
   •   The list of items reviewed by the Actuaries to analyze compliance with R.I.G.L. §
       27-50-5 is appropriate.
   •   The process described for testing the rating formula and sample case rates for
       compliance is appropriate for analyzing compliance with R.I.G.L. § 27-50-5.
   •   Case sample testing for the 2003 certification identified three groups with renewal
       rates in excess of the level allowed under the second calculation. In all three
       instances, the error was attributed to case specific extraordinary situations.


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    •   The case sample testing for the 2004 certification identified one non-systematic
        error of a small magnitude, related to using an incorrect factor to rate a single
        group.
    •   The actuaries determined that the rate manual maintained by Blue Cross satisfied
        the requirements of R.I.G.L. § 27-50-5(h).
    •   In the section titled “Other Compliance Requirements” the Actuaries rely on Blue
        Cross staff, as indicated by the phrase “Blue Cross asserted,” to conclude that
        Blue Cross satisfies the requirements of Chapter 27-50 that pertain to availability,
        renewability, fair marketing, disclosure, and certification of creditable coverage.


The 2003 and 2004 certifications satisfy the requirements of R.I.G.L. § 27-50-5(h)(2) and
Insurance Bulletin 2002-4 with the following exception:


    •   Bulletin 2002-4 requires that the certification include a statement describing the
        extent to which the actuary relied on the work of others and if the actuary relied
        on others, a statement from the person(s) relied upon describing the accuracy and
        completeness of the work shall be attached. The 2003 and 2004 certifications state
        that the Actuaries relied on others, but the required reliance statements from Blue
        Cross personnel were not included as part of the certification.


The 2005 certification and associated actuarial memorandum refers only to Blue Cross.
Effective January 1, 2005, CHiP was no longer a separate entity from Blue Cross. Mr.
Lynch meets the qualification standards for preparing the certification, and the
certification is in the form required by R.I.G.L. § 27-50-5(h)(2). The following
observations were made regarding the actuarial memorandum accompanying the 2005
certification.


    •   The actuarial memorandum contains a list of the materials reviewed by Mr. Lynch
        in the course of his review. The list contains appropriate materials that would




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       enable him to reach his conclusions about compliance. These items are similar to
       items reviewed by the examiners in the course of this examination.
   •   The discussion of actuarial soundness of rating methodology and the description
       of the review and testing done to confirm the soundness of the methodology are
       appropriate.
   •   The description of testing to insure compliance with rate limitations contained in
       R.I.G.L. § 27-50-5 is adequate. The results of the testing are consistent with the
       observations of the examiners in the course of their own testing. The sampling
       and testing methodologies are adequate for determining compliance.
   •   Mr. Lynch determined that the rate manual maintained by Blue Cross satisfied the
       requirements of R.I.G.L. § 27-50-5(h).
   •   In the section titled “Other Compliance Requirements” Mr. Lynch adequately
       described the process he undertook to verify that Blue Cross satisfies the
       requirements of Chapter 27-50 that pertain to availability, renewability, fair
       marketing, disclosure, and certification of creditable coverage.


The 2005 certification satisfies the requirements of R.I.G.L. § 27-50-5(h)(2) and
Insurance Bulletin 2002-4 with the following exception:


   •   The 2005 certification actuarial memorandum contains the following statement.
       “I have also been provided information and representations by staff within
       BCBSRI. My certification relies upon the validity, accuracy, and completeness of
       this information and could be affected by any material errors in it. Nothing has
       come to my attention which would lead me to believe such information was not
       valid or accurate, or was incomplete.” While this reliance is appropriate, and
       nothing has come to the attention of the examiners that would indicate any
       inaccuracy in data Mr. Lynch may have relied upon, Bulletin 2002-4 requires that
       if the actuary who prepares the certification relied on others, a statement from the
       person(s) relied upon describing the accuracy and completeness of the work shall
       be attached.


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Recommendation 6: It is recommended that Blue Cross include, as part of its Actuarial
Certifications, statements from all persons on whom the actuary signing the Certification
relied. These statements should include a description of information that the signing
actuary relied upon and that further indicates the accuracy and completeness of that
information.


Testing for Compliance on New Business and Renewal Cases


The examiners selected a sample of files for the purpose of testing the calculation of
components of first year and renewal rates.


The first sample consisted of ten cases. For each of the cases in this sample the examiners
calculated the health status debit points for each enrolled member based on the debit
points noted by the medical underwriter for each condition, calculated the average health
status debit points for the group, calculated the health status band factor and compared
that to the health status band factor that was contained in an extract from Blue Cross’s
rate calculation and renewal underwriting system, which they refer to as the “PEG
system”. It was purchased by Blue Cross from an outside vendor several years ago. In all
instances the examiners were able to match the health status band factor in the PEG
system. A summary of this analysis is contained in Appendix 6.


For the same sample of groups as in the prior paragraph, the examiners determined the
age/gender factor applicable to each subscriber, based on the birthday of the subscriber
on the renewal or issue date and rate tier, calculated an age/gender factor for the group
based on the algorithm defined in the applicable Rate Manual, and compared the resulting
value to the age/gender factor for the group that was contained in an extract from the
PEG system. In all except one situation the examiners were able to match the calculated
age/gender factor with the age/gender factor contained in the PEG system extract. The




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exception case was explained by a change in enrollment that was not reflected in the data
that was the basis of the calculations by the examiners.


Additionally, for some of the cases in this sample, the examiners calculated the rates
applicable to the group and were able to match the rates contained in the paper files.


The calculations produced results consistent with the PEG system extract in all instances
that were reviewed by the examiners, except as noted and explained above. A summary
of this analysis is contained in Appendix 5.




12. Underwriting Methodology for Small Employer Business


Introduction


The underwriting of Blue Cross’s small employer business consists of the determination
of:


      •   Small employer status,
      •   Employee eligibility,
      •   Enrollment or waiver status,
      •   Group participation level, and
      •   Health status.


While R.I.G.L. § 27-50(7)(d)(9) also allows Blue Cross to establish a minimum employer
health plan contribution level, Blue Cross does not have such a requirement.


The underwriting process applies to both new business and renewals and to all
distribution channels. There are differences between the new business and renewal
underwriting processes. The following paragraphs discuss the underwriting process for


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new business and renewals in separate sub-sections. The highlights of the medical
underwriting process have been included in the New Business Proposals and Renewal
Underwriting sub-sections, with a more detailed description of the medical underwriting
process at the end of the Underwriting Methodology section of the report.


New Business Proposals


The underwriting process for new business takes place in three phases. In the first phase,
the prospect is provided with a package of marketing materials. For the second phase,
when the employer provides census data, a new business proposal package is prepared by
the Marketing Department and presented to the employer. The new business proposal
package is provided with estimated rates. Final rates are provided later when the actual
enrollment and health status are known, and when it is determined that the group meets
the participation requirement.


The third phase is the actual sale to the employer. It is here that the employer selects the
actual plan (or plans) to be offered to the employees, signs the Sales Agreement, and
obtains enrollment forms and/or waiver forms from the eligible employees. The
enrollment forms and waiver forms are reviewed for completeness and reconciled against
payroll (or similar) data. Evidence that the employer is a small employer is reviewed. The
participation level is determined, based on the total number of eligible employees, those
enrolling, the number of declines, and the waivers due to other coverage.


If the group has fewer than 20 enrolling employees, each employee completes a Health
Assessment Form. Otherwise, the employer completes a risk appraisal form for the entire
group.6 A review by the Medical Underwriting Department results in the calculation of
debit points for the group. The debit points are translated by a formula into a health status




6
 In lieu of the employer completed risk appraisal form, the employer can elect to ask the enrolling
employees to complete the individual Health Assessment Form


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adjustment factor, which ranges from 92% to 110%. The medical underwriting process is
described in more detail in a separate section of this report.


Based on this information, Blue Cross computes four-tier rates for all plans offered in the
small employer market, taking into consideration actual enrollment, health status,
age/gender, the CompAlliance discount7 (if applicable), and reflecting the 4-1
compression limitation.


The examination staff requested a copy of the small employer underwriting manual. In
response to this request Blue Cross provided the examination staff with the
Recertification Department Procedure and Policy Manual (“Recertification Manual”).
Based on a review of this manual and underwriting elements contained in the rate
manual, and on discussions with the manager of this department, the examination staff
developed an understanding of the process. In the case of medical underwriting, which is
performed by a different business unit, the examination staff depended on the manager of
the Medical Underwriting Department to develop that understanding.


Renewals


As a result of recommendations contained in the prior market conduct examination
report, the Company established a Recertification Department and developed the
documents and procedures to support the renewal eligibility recertification process. The
various processes are documented in the Recertification Manual. The focus of this
process is described in Reg. 82(6)(B) and Insurance Bulletin 2002-5, which require a
carrier to obtain appropriate supporting documentation on an annual basis, and terminate
or non-renew any group that fails or refuses to provide it. The documentation required
includes:




7
    The CompAlliance discount is described in the Rating Methodology section of this report


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   •   Certification with respect to the group’s status as a small employer, as defined in
       R.I.G.L. § 27-50-3(kk);
   •   Documentation as to the number of eligible employees; and
   •   Completed waiver forms for each eligible employee and/or dependent(s) who
       declines coverage, whether because of already having other coverage (a “waiver”)
       or because the individual does not want health insurance coverage at all (a
       “decline”).


Based on this information the Recertification Department determines whether the group
satisfies the participation requirement.


The renewal certification process starts approximately four months prior to the renewal
date with a mailing that consists of a cover letter, a renewal certification form to be
completed by the employer, and a set of instructions. The small employer is instructed to
mark on a payroll report or Quarterly Tax and Wage Report the status of individual
employees. Owners who are not listed on payroll reports are required to submit a recent
Schedule C or Schedule K-1. The instructions indicate that waiver forms are required to
be submitted for any eligible employee or eligible dependent not currently enrolled in the
group plan. Follow up letters are sent on a monthly basis in an attempt to obtain the
necessary information prior to renewal. A group will not be renewed without completing
the renewal recertification process.


In 2005, Blue Cross cancelled 249 groups that had been inforce as “small employer”
groups for reasons related to the recertification process. The specific reasons for
cancellation were:


   •   Did not provide complete information – 39 groups
   •   Non-responsive – 167 groups
   •   Identified as moving out of area – 22 groups
   •   Not meeting participation – 10 groups


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    •    Misc. reasons (including insufficient payroll data) – 11 groups


If the Company learns that a group has grown to more than 50 eligible employees, then
consistent with Regulation 82(3)(E)(1), the carrier notifies the employer that the
provisions and the protections available under Chapter 27-50 will cease to apply to the
employer if the employer does not renew its current health plan. A form letter to provide
such notification is contained in the Recertification Manual. The Company has indicated
that, for any group that chooses to remain in the small employer pool, any change in the
benefit plan will result in loss of the protections available under Chapter 27-50.8 This
interpretation depends on a strict definition of health insurance plan that refers to the
actual plan of benefits, rather than to the provision of health benefits to employees of a
small employer.         While this is a reasonable interpretation, Chapter 27-50 is not
completely clear on whether a minor change in the benefits offered by a small employer
results in non-renewal of a health benefit plan. It was noted in the prior examination
report that the Rhode Island Department of Business Regulation (“DBR”) had advised
Blue Cross that such a change did create a different health benefit plan and did constitute
non-renewal of the existing health benefit plan.9


Similarly, Regulation 82(3)(E)(2) requires that when a carrier providing coverage to an
employer becomes aware that the employer becomes eligible to be a small employer by
decreasing its eligible employees to fifty or fewer, the carrier must notify the employer of
the options and protections available under Chapter 27-50, and the employer’s option to
purchase a small employer health benefit plan. A form letter to provide such notification
is contained in the Recertification Manual. The Company makes a reasonable effort to
identify such cases by identifying all “large group cases” with 50 or fewer subscribers.
All such groups are included in the re-certification process. The certification specialist

8
  The only exception permitted by Blue Cross occurs when Blue Cross eliminates a benefit plan from its
portfolio, and groups must choose different benefits. Groups can add new plans and stay in that small
employer class as long as they also keep in-force the health benefit plan that was in-force when they chose
to stay in the small employer class.
9
  Report on the Targeted Market Conduct Examination of Blue Cross & Blue Shield of Rhode Island and
Coordinated Health Partner, Inc. as of March 31, 2002, p. 40.


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then follows the normal review process with such groups to determine if the group is
eligible for small employer status. In connection with the 2005 re-certification process,
there were 199 “large” group cases reviewed as part of the small employer re-
certification process. Of these 196 stayed in large groups and three moved to small group.
Twenty-two groups that had previously been small employer groups changed to large
group as part of the process. In addition, one group with more than 50 eligible employees
was re-certified as a small employer group.


Groups that are classified as PER-1 groups (25 or fewer enrolled contracts) are subject to
medical underwriting at each renewal. The medical underwriting process for PER-1
renewals starts approximately six months prior to the renewal effective date. The medical
underwriting process is discussed in detail in a separate section of this report. For PER-1
business a health status factor is determined for each group using average results of a
member-by-member review of medical conditions based on Blue Cross claim records.
For PER-2 business, the Actuarial Department ranks the groups based on their loss ratio
and assigns a health status factor to each group in such a manner as to produce an
approximate bell curve over the range of health status factors.      The census used for
developing health status rates is known as “Census-1”.


Using census data from approximately 90 days prior to renewal (“Census-2”), Blue Cross
then develops age/gender factors. Initial renewal rates are then calculated in the manner
described in the “Rating Methodology for Small Employer Business” section of this
report, by multiplying the base rates by the product of (i) the age/gender factor from
Census-2 and (ii) the health status factor from Census-1, and subjecting the result to the
4-1 compression limitations.


Renewal rates are provided to the broker or intermediary, if applicable, approximately 40
days prior to the effective date and renewal rates are provided to the account
approximately 30 days prior to the effective date. On receipt of the renewal, the employer
or broker may request a re-calculation based on adds and/or deletes that are not reflected



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in the renewal that was delivered. This recalculation is referred to as a “Census-3” rate. If
the result of this recalculation is less than the rates that had been delivered to the small
employer, the Census-3 rates will be delivered and installed. If the Census-3 rates are
greater than the rates that had been delivered, the Census–2 rates are maintained.


Medicare Primary/Secondary and COBRA


The Employee eligibility tab of the Recertification Manual provides a description of
COBRA and the criteria that determine whether or not a group is subject to COBRA.


The Recertification Manual contains a description of the criteria that determine whether
or not Medicare is primary for Medicare eligible individuals who are actively at work and
are enrolled in the employer sponsored health plan. This is shown in tab 10 of the
Procedure section of the Recertification Manual.


Recommendation 19 of the prior report indicated that Blue Cross did not collect adequate
data to determine Medicare primary status for a small employer group.10


The criteria for COBRA and Medicare are somewhat different from each other and
different from the criteria for certification as a small employer.


Blue Cross has in place procedures documented in its procedure manuals that apply in the
event that a group has active employees who are Medicare eligible or employees who are
identified as eligible for COBRA. In the event of such plan participants, Blue Cross
collects information from the employer that will allow it to properly determine if
Medicare is primary or if the employer is subject to COBRA extension of benefits.


The procedures outlined by Blue Cross are satisfactory for the purpose of determining the
proper rating for a small employer group at renewal or initial issue.

10
     See Page 49 of the prior report


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Medical Underwriting:


The Medical Underwriting Unit of the Small Group Underwriting Department consists of
7 medical underwriters and the Team Leader. The unit is responsible for medical
underwriting on all Direct Pay applications, all PER-1 and PER-2 new issues, and all
PER-1 renewals.


Production volume for 2005 consisted of:


   •     Direct Pay - 4,925 applications (including 379 Plan 65 Select)
   •     PER-1 new issues – 1,858 groups
   •     PER-1 renewals – 12,347 groups
   •     PER-2 new issues – 126 groups


The Medical Underwriting Unit determines debit points for each member based on
medical conditions that are identified from Health Risk Appraisal forms and/or the Blue
Cross claims data base. The assignment of debit points is based on a manual obtained
from Blue Cross of Connecticut in approximately 1994. This manual has been updated on
an ad-hoc basis by Blue Cross to take into account changes in procedures, treatments, and
drugs.


The Medical Underwriting Unit intends to implement a new model for renewals
beginning in the fourth quarter of 2006. The objective of this change is to improve
productivity, accuracy, and consistency.


For PER-2 new business the employer is provided the option of submitting a health
statement at the group level, based on the employer’s knowledge, or submitting
individual Health Risk Appraisal forms, as completed by each new subscriber.


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The Team Leader of the Medical Underwriting unit indicated that, on average, a medical
underwriter is able to review 150-200 members per day. Based on other information
available to the examiners, this appears to be a relatively high estimate. Something closer
to 100 members per day appears reasonable.             This performance level includes
administrative duties such as workload management/planning, and data entry into the
PEG rating and renewal underwriting system.


The assignment of debit points is based on medical conditions identified from the
subscriber or employer Health Risk Appraisal Form and claims data obtained from the
Blue Cross claim system. Each individual starts with a debit of 100 points. Additional
debit points are assigned for each condition (related conditions are combined), with up to
5000 debit points per condition. Multiple unrelated conditions are each assigned debit
points. There is no maximum per individual for the total number of debit points.


The medical underwriting process is labor intensive. The annual budget for medical
underwriting of small employer groups is approximately $600,000 or approximately
$0.50 PMPM for small employer business.


For renewal PER-1 business, a claim listing for all members of the group is obtained and
points are assigned for each identified medical condition based on the medical history,
taking into account diagnostic codes, pharmacy utilization, estimated severity, and
estimated impact going forward. For PER-1 new business, the starting point is the Health
Risk Appraisal forms that are completed by each subscriber who enrolls. For each
member listed on the Health Risk Appraisal form, the Blue Cross claims database is
searched. If a pertinent claim history is found it is printed. Based on the responses
indicated on the Health Risk Appraisal form and the claim history (if any), debit points
are assigned for each unrelated condition.




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For each member of a renewal or new issue PER-1 case, the sum of the starting 100
points and the points for each condition are entered into the PEG system, which serves as
the renewal rating system for small employer business. Internal to the PEG system the
average debit points is calculated (total points for the group is divided by the number of
members). The Health Status Band (a percentage factor that is applied to the base rate) is
determined by the average debit points assigned to the group. The PEG system produces
the “Subscriber/Membership Grid” form, which is a summary of the actions taken by
Medical Underwriting in assigning debit points to each member. The following table
indicates the Health Status Band that corresponds to the average member debit points for
a PER-1 case:


                              PER-1 Band Assignment
                          Average Debit Points
                          Lower         Upper     Band
                               0           125    0.92
                             126           450    0.96
                             451           800    1.00
                             801         1,050    1.04
                           1,051         1,200    1.07
                            greater than 1,200    1.10

For PER-2 new business groups for which the employer submits individual Health
Appraisal forms, the process is the same as for new issue PER-1 business. There was
some confusion within Blue Cross about whether there was a different table for assigning
health status bands for PER-2 groups that provide individual Health Appraisal forms
from those in the above table due to incorrect instructions. However, Blue Cross has
researched its band assignments for PER-2 groups that provided individual Health
Appraisal forms and confirmed that the same table was in fact used. We found no
evidence of non-compliance in the way health status was assigned to PER-1 groups as
compared to PER-2 groups.




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Blue Cross has changed the health status band table, beginning with groups effective in
the first quarter of 2005. The prior table allowed more groups to qualify for 0.92, the
lowest health status band factor, and placed fewer groups in band 1.10, the highest factor.


For PER-2 new issue business where the employer submits the “group” health
assessment, Medical Underwriting determines the number of members who would be
assigned at least 4,100 debit points, based on the information provided by the employer
and any prior claims data available. Based on the total number of subscribers with 4,100
points or more, the Health Status band is assigned. This is manually calculated and
entered into the PEG system. The following table is used to assign the PER-2 health
status band:


                                                           Health
               Number of members with 4,100 or             Status
                     more debit points                     Band
                            0                               0.92
                            1                               0.96
                            2                               1.00
                            3                               1.04
                            4                               1.07
                            5                               1.10

As described above, the medical underwriting process starts substantially ahead of the
actual renewal date, and runs parallel with the recertification process. At the first
iteration, the health band factor is calculated based on the debit points in the PEG system.
An age/gender factor is calculated incidentally but this is not the final age/gender factor
used in the renewal rate. The result is referred to as calculations based on Census-1.
Shortly before the actual renewal date the age/gender factor calculation is generated
based on the most recent demographic data for the group. The health band factor is not
adjusted. This becomes Census-2. Census-2 is the basis of the renewal that is delivered to
the employer. Medical underwriting is typically only done in connection with Census-1,
and the health status factor is not re-calculated in connection with Census-2 unless there
is a change in membership and the group has requested a review.


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With the delivery of the renewal the employer may note a discrepancy in the membership
listing and may request a re-rating of the case. This becomes a Census-3 based rating.
The debit points are adjusted due to new demographics. However, if the demographic
change is the result of the addition of only one new hire, a medical underwriting
assessment is not done for this one individual in order to avoid the potential of
identifying the new hire as having caused an identifiable increase due to a medical
condition. In most instances the health band factor does not change unless there is a
substantial demographic change or if the group is “on the border” of the debit point range
for a particular band. If the resultant Census-3 rate is higher, it is generally not delivered
to the account and the Census-2 rate is installed. If the Census-3 rate is lower, the
Census-3 rate is delivered to the employer and installed as the renewal rate. There may be
more than one version of Census-3 and the subsequent rate calculation. Documentation
related to changes made to Census-2 or -3 is contained in the comments section in the
PEG system.


Comments on the process:
   •   The process appears to be very labor intensive and costly. It demands the efforts
       of a staff of seven medical underwriters, and the budget for this function is
       approximately $0.50 PMPM.
   •   There is substantial judgment involved, and errors can readily result. In the course
       of our review of several cases with the Team Leader, Small Group Underwriting,
       the Team Leader identified several errors made by a medical underwriter in
       assigning debit points. Blue Cross has advised that it intends to move to an
       automated system to improve efficiency and accuracy of the process.
   •   In the PER-2 process, as a case gets larger, it becomes more likely that a case will
       have individuals with 4,100 debit points or more and thus more likely to receive a
       higher band factor, resulting in a higher rate. The process does not include a step
       that adjusts for the number of members. Also, a PER-2 case that does not have
       any individuals with 4,100 or more debit points receives the minimum health



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         status factor of .92, which may be a more favorable result than that of a similarly
         situated (with respect to health status) PER-1 case.
     •   For larger PER-2 new business cases, it becomes more likely that the employer
         will not have knowledge of ongoing health issues among employees and their
         dependents, thus tending to suppress the resultant band factor. Lack of employer
         knowledge would be particularly prevalent with respect to dependents and
         conditions that are not readily apparent.
     •   The process for the medical underwriting of PER-2 groups is not accurately
         described in the Rate Manual. The table included above for PER-2 new issues and
         the specifications for its usage are not included in the rate manual.
     •   The company limits the change in health status for any PER-1 group at renewal to
         10 percent up or down, subject to use of the specific health band factors.11 This
         process is not adequately described in the Rate Manual. Based on review of health
         band factors for all cases, the examiners found only two instances out of more
         than 12,000 where bands increased by more than 10%. In one case the increase
         was 11% and in the other it was 13%. This appears to be a reasonable method for
         assigning health status, in that it offers partial credibility to information that by its
         nature is not fully credible.


For renewals, the process works on a quarterly cycle. For example, for third quarter 2006
renewals, the underwriting cycle began January 23, 2006.


Review of the Health Status Band Calculation


The examiners selected a sample of ten PER-1 cases and one PER-2 case for the purpose
of verifying the health status factor used in the rating system to that derived from the
condition-based debit points in the medical underwriting process. Copies of the medical
underwriting files were obtained for each of the selected cases.


11
  For example, if based on the average debit points the band would otherwise have changed from .92 to
1.10, the company would use a factor of 1.00 at renewal


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The testing process consisted of the following steps:
    •   For each case, a listing was made of the individuals to be medically underwritten;
    •   For each individual, the assigned debit points was determined, based on the points
        assigned for each event and condition;
    •   The total debit points for the group was determined by addition of the debit points
        for each individual;
    •   The average debit points for the group was determined by dividing the group total
        by the number of members;
    •   Based on the average debit points for the group and a table in the relevant Rate
        Manual, described as “Table 2”, the health status band factor was selected;
    •   The selected health status band factor was compared to the group’s health status
        factor contained in the rating system.


For each of the ten PER-1 cases in the sample the examiners were able to match the
health status factor in the rating system. All health status band factors are in the range of
.92-1.10 and thereby satisfy the requirements of Chapter 27-50 with respect to adjustment
for health status.


A summary of the analysis is included as Appendix 6 of this report.


In addition, Blue Cross reviewed health status band calculations for the 47 PER-2 new
business groups which provided individual health information in 2004 or 2005. Blue
Cross was able to confirm that 44 of those groups were given the health status band that
was consistent with the medical underwriting points assigned, while two had a health
status band consistent with the previous medical underwriting factor table. The final case
was assigned a health status band that was one step lower than the one the medical
underwriting table should have assigned. No further explanation was available for that
case.




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Review of the Age-Gender Factor Calculation


The calculation of the Age-Gender Factor is described in Table 1 of the rate manual. The
examiners tested the calculation of the age-gender factor for each of the ten cases in the
sample of PER1 cases.


The testing process consisted of the following steps:
   •   For each case a listing was made from the medical underwriting records of the
       subscribers. Where necessary, this listing was adjusted to reflect changes in
       census;
   •   For each subscriber listed the birth date was recorded, and the age as of the
       renewal date was calculated;
   •   Based on the ages of the subscribers and the table and formula listed on Table 1 of
       the rate manual, the age-gender factor is calculated; and
   •   The calculated age-gender factor is compared to the age-gender factor for the
       group that is extracted from the rating system.
For all except one group the age-gender factor calculated by the examiners matched the
age-gender factor extracted from the PEG system. That group terminated coverage prior
to the renewal, and the age gender factor was not updated after that point by Blue Cross.


With that one exception, all age gender factors were capable of being reproduced.


A summary of the analysis is included Appendix 5 of this report


Review of the Eligibility Certification and Recertification Process


Eligibility certification for new business groups and recertification of renewing groups is
undertaken by the Recertification Department under the direction of Kathi Robbins,
Manager. Ms. Robbins provided the examiners with an overview of the Recertification
process, and provided sample case data and follow up information as necessary.


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Regulation 82(6)(B) and Insurance Bulletin 2002-5 place requirements on the small
employer carrier to collect certain data from each small employer as part of the
application process and as part of the renewal process. The required data includes the
following:


   •   A complete list of eligible employees and dependents of eligible employees
   •   Documentation that supports the “eligible employee” status of the individuals on
       the list submitted by the employer (such as W-2 data, Wage and Tax Form,
       Schedule C, K-1 Form, etc.);
   •   A waiver form for each eligible employee who waives coverage because of other
       insurance or declines coverage entirely, for himself or herself or for any eligible
       dependents. The waiver form should be signed by the employee. In the event that
       the employee refuses to sign the waiver form, the small employer must certify this
       refusal in writing.


The examiners reviewed the waiver form used by the Company. This waiver form, if
completed by the waiving employee or signed by the employer in accordance with
Regulation 82(6)(B)(2)(d) and Insurance Bulletin 2002-5, satisfies the requirements of
Regulation 82(6)(B)(2) and Insurance Bulletin 2002-5.


For the purpose of determining if the employer is a “small employer,” as defined in
R.I.G.L. 27-50-3(kk), the Company requests that the employer complete either the “New
Business Underwriting Checklist” (for new business) or the “Renewal Certification”
package (for renewals) and provide the required documentation. These documents
include instructions for the employer.


In order to determine the Company’s compliance with this process, the examiners
obtained certification files for a sample of ten cases.




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The review process focused on the following:
     •   Supporting documentation that the employer was a “small employer”
     •   Documentation that identifies employees who are eligible employees and
         indicates their status (enrolled, part-time, temporary, waived, etc.)
     •   Review of completed enrollment and waiver forms
     •   Level of Participation in the health plan12


A summary of the results of this review is as follows:


Small Employer: In all instances, the employer was provided the definition of “small
employer” taken from R.I.G.L. § 27-50-3(kk) and the employer certified eligibility.


Eligible Employee: In all instances the employer provided a payroll report for employees
who were paid on “regular” payroll. For owners and partners the files included either a
K-1 form or Schedule C.


Employee Status: Based on the status of each employee, the employer enters a code from
a list contained in the instructions provided by the Company. The examiners noted that
each file contained such a list (generally the payroll report or the quarterly Wage and Tax
Form) with appropriate coding. The examiners noted that the employer determines the
number of hours per week that an employee needs to work, but this is not recorded
anywhere and this could be different on a yearly basis.


Enrollment and Waiver Forms: The files contain a waiver form for all eligible employees
and an enrollment form for newly enrolling eligible employees.


All enrollment forms reviewed were properly completed by the eligible employee,
including the employee signature.


12
  The examiners noted in another section of this report that the method of calculating participation used by
the Company is more liberal than the minimum standard specified in R.I.G.L. § 27-50-7(d)(9).


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The review of the completed waiver forms identified some potential inaccuracies,
including the following:
   •   Wrong employee name on a waiver.
   •   The employer certification section was completed unnecessarily for some
       employees.
   •   One waiver form did not appear to have a valid employee signature.
   •   One waiver described waiving coverage for spouse and children only, but Blue
       Cross listed the employee as waived.
   •   For one company with a large number of waivers, most were signed by the Office
       Manager. On several of these forms additional information was added in a
       different handwriting. The manager explained to the examiners that the
       recertification specialist routinely contacts the employer with regard to waivers to
       make sure they are categorized appropriately.           In some cases, additional
       information is provided with regard to other coverage, and this is recorded by the
       recertification specialist on the waiver form.
   •   Some people submitted waivers that listed themselves as not married, and then
       stated that they had other coverage through a spouse.


Review of Participation: It has been noted that the calculation used by the Company to
measure participation is more liberal than that specified in the statute. Using the Blue
Cross methodology all of the groups in this sample met the Company’s 75% participation
requirement. It is interesting to note that the Company’s methodology can produce
dramatically different results from the minimum standard specified in the statute. In one
case, use of the Blue Cross formula resulted in a participation level of 77%, while the
statutory minimum standard formula produced a participation level of 33%.


For another group, Blue Cross’s methodology results in a participation level of 69%,
while the statutory standard produces a participation level of 58 %. The examiners asked




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why this case was renewed and were told that the group should have been terminated if
the case had been handled properly.


A summary of our review of the certification/recertification process is attached to this
report as Appendix 5.


It is apparent to the examiners that Blue Cross makes a significant effort to meet the
requirements of Chapter 27-50 with respect to the certification of small employer status
and obtaining properly completed waiver forms from employees and their dependents
who choose to not participate in the health plan. The level of effort required is quite
apparent, based on the waiver forms reviewed by the examiners. The examiners question
whether the effort expended for renewals with respect to collecting and maintaining
waiver information as required by Regulation 82(6)(B)(2) and Bulletin 2002-5 creates
sufficient value.




13. Review of Direct Pay Business


Direct Pay Product Portfolio


The Company offers health plans to individuals and families on a direct pay basis
(“Direct Pay” business). The current Direct Pay product portfolio consists of three plans:
   •   HealthMate Coast-to-Coast Direct, a PPO plan with co-pays for in-network office
       visits and urgent and emergency care. Most other services are subject to a $2000
       plan deductible and 80/20% coinsurance. Out-of-network services are subject to a
       separate $2000 deductible and 60/40% coinsurance;
   •   Direct Blue Standard, an indemnity plan with a $300 deductible for major medical
       services and 80/20% coinsurance for most services once the deductible is met.
       Prescription drugs are subject to 20% coinsurance at participating pharmacies;
       and



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   •   Direct Blue Economy, an indemnity plan with a $500 per admission deductible.
       Office visits and prescription drugs are not covered. Most other services are
       covered with 80/20% cost sharing.


Direct Pay Underwriting


Individuals and families can apply for Direct Pay coverage under two different
underwriting scenarios, each of which has its own rate structure. The two underwriting
scenarios are referred to by the Company as “Select Blue” (or “Pool II”) and “Direct
Blue” (or “Pool I”). Pool II is offered to individuals and families who can provide
satisfactory evidence of insurability, and is age and gender rated. Pool I is available on a
guaranteed issue basis for individuals who are unable to provide satisfactory evidence of
insurability. Rates for Pool I have been set at the maximum rates for Pool II and do not
vary by age or gender. The level of benefits for a given health plan does not vary between
the two risk pools. Blue Cross is the only small employer carrier that offers individual
health plans in Rhode Island. Applications for Direct Pay coverage are accepted by Blue
Cross at any time. If the applicant completes the health questions and passes medical
underwriting, the applicant is enrolled in Pool II. If the applicant does not qualify for
Pool II, but has a HIPAA certificate that indicates eligibility under R.I.G.L. § 27-18.5-
3(a), the applicant is enrolled in Pool I. Applicants who do not either pass underwriting
or have adequate prior coverage are accepted into Pool I, but only during a specified open
enrollment period. In 2005 the open enrollment period was August 15-September 15.


Blue Cross is in the process of replacing its current Direct Pay portfolio with four entirely
new plans. These plans (and Blue Cross’s updated rates) were the subject of a recent rate
hearing process and the new plans were approved by the Health Insurance Commissioner,
to be effective starting April 1, 2006. The new plans include two HealthMate Direct
options, HM400 and HM2000, and two high deductible health plans (“HDHPs”) suitable
for use with Health Savings Accounts (“HSAs”). These plans have been identified as
HM for HSA3000 and HM for HSA5000. Blue Cross has projected that most current



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holders of Direct Blue Standard will enroll in the new HM400, and that most holders of
the current HealthMate Direct and Direct Blue Economy plans will enroll in the new HM
for HSA3000 HDHP.


Small Employer Implications


Regulation 82(10)(F) requires that a carrier must gather the following information from
applicants for individual insurance:
   •   Whether any portion of the premium is paid by a small employer, either directly
       or through wage adjustment or other means of reimbursement.
   •   Whether the prospective insured treats it as non-taxable employee benefits for tax
       purposes.


According to Regulation 82(10)(F), if the Company does not make a good faith effort to
collect this information, it is deemed to be on notice of such information. If the Company
allowed the usage of its Direct Pay products for small employer health plans, it would
need to offer Direct Pay plans to all small employer groups, as required by R.I.G.L. § 27-
50-12(a), and the rates for Direct Pay products would need to be developed in accordance
with R.I.G.L. § 27-50-5.


Compliance Review of Direct Pay Products


The application form for the Company’s Direct Pay products requests that the applicant
indicate eligibility status with respect to an employer sponsored health plan. The
applicant is also asked if an employer will pay or reimburse any portion of the premium.
It is our understanding that the Company will not issue a Direct Pay policy in the case of
an affirmative response to either of these questions. Based on the enrollment form and the
underwriting process, the Company satisfies the requirements of Regulation 82(10)(F).




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Review of Direct Pay Marketing Materials


While not the primary focus of this market conduct examination, the examiners reviewed
the product portfolio, rates, and marketing materials that the Company utilizes for its
Direct Pay products.


A comparison of the Direct Pay portfolio with the Small Employer product portfolio
results in the following observations:
   •   The Direct Pay products are generally less rich than the small employer products.
       For example, the benefit value of HealthMate 2000 Direct product is about 66%
       of the benefit value of the most popular HealthMate Coast-to-Coast small
       employer product.
   •   Because the Direct Pay products are generally less rich, there is a greater amount
       paid by the member. In 2004, cost sharing for Direct Pay products averaged 18%
       of allowed claims as compared to 12% for small employer products.             This
       disparity will increase when the new Direct Pay plans are implemented.
   •   The rating structures of the Direct Pay Pool II and Small Employer products are
       very different. The slope of the rates by age is very different and the Direct Pay
       products are two-tier (individual and family) while the small employer products
       are four-tier.   The Direct Pay family rates are relatively lower compared to
       individual rates than they are for Small Employer rates. The small employer
       group rates are also affected by the health status factor and the impact of the 4:1
       compression. However, Direct Pay rates are more compressed than 4:1.
   •   The new Direct Pay rates are, on an age, gender, health status and benefit adjusted
       basis, comparable to Small Employer rates – slightly lower than Small Employer
       for Pool II, slightly higher for Pool I.
   •   No commissions are payable on Direct Pay business, since it is only available on
       a direct basis. This results in a lower expense load for Direct Pay than small
       employer business. Otherwise, administrative expenses allocated to Direct Pay
       are comparable to Small Employer.


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   •   Direct Pay subscribers are generally older than small employer subscribers. Using
       the small employer age/gender factors as a base line, the average age/gender
       factor for Direct Pay subscribers is 122% of that for the small employer
       subscribers.
   •   The utilization of healthcare services is much higher for Direct Pay members,
       compared to small employer members. The sum of Blue Cross paid claims and
       subscriber cost sharing is 30% higher for Direct Pay subscribers over that paid for
       small employers. Since the effect of age distribution accounts for approximately
       22%, other differences in utilization of services, including the net effect of more
       unfavorable health status offset by the deterrent effect of higher relative cost
       sharing account for the remaining 8% of increased cost for Direct Pay as
       compared to small employer insurance.


Due to differences in the age and gender table structure used for the small employer and
Direct Pay business, some people eligible for small employer insurance may be able to
buy Direct Pay more cheaply than comparable Small Employer health plans. This could
potentially be an issue with regard to the smallest small employer groups.


Direct Pay Pool II rates are significantly lower than the small employer rates at the higher
ages and for all female age categories, on a comparable benefit basis. If a Direct Pay
applicant does not qualify for medically underwritten Pool II rates, the applicant can
apply for the guaranteed issue product (Pool I). If the Pool I applicant has a HIPAA
certificate indicating qualifying prior coverage, the applicant is accepted into Pool I
immediately. If the applicant cannot pass medical underwriting or demonstrate adequate
prior coverage, the applicant can be admitted to Pool I during the annual open enrollment
period. Small employer rates are generally less than the Pool I rates, except for the
highest age groupings.




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14. Review of Company Process for Responding to Complaints


When a complaint from a Blue Cross member is submitted to the DBR, the DBR
forwards the complaint to the attention of Blue Cross’s General Counsel. The General
Counsel then forwards the complaint to the Regulatory Relations and Delegation
Oversight Department for review, research, and response by a compliance oversight
analyst. The company makes an effort to provide a response to the DBR within a 30 day
timeframe, unless the DBR sets a specific shorter timeframe for response. A draft
response is reviewed by an Assistant General Counsel, the manager of the Regulatory
Relations and Delegation Oversight Department, and other employees whose expertise is
required for the case. Following this review process, the response is sent to the DBR by
first class mail. All follow up questions are directed to the compliance oversight analyst.


Paper files are retained by the Regulatory Relations and Delegation Oversight
Department. The complaint is also logged in the appropriate department database for
reporting purposes.


Complaints that are submitted directly to Blue Cross are generally handled by the person
and/or department to whom they are directed. The small employer complaint log
provided by the company includes two complaints that were submitted directly to Blue
Cross. Blue Cross tracks complaints/appeals using an administrative form – “Complaint
and Administrative Appeal Case File Check List.”


The examiners requested and reviewed a log of small employer health insurance related
complaints received in the last three years from the Company. The log included the name
of the complainant, the date received, the issue raised, the name of the person who
handled the complaint, and how and when the complaint was resolved.




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The complaint log received by the examiners contained 23 complaints. Twenty-one of the
complaints were submitted through the DBR and two of the complaints were submitted
directly to the company.


Of the twenty-three complaints, 13 related to renewal rate increases. Based on the
statements of resolution contained in the log, the Company generally responded to
complaints of this nature with an explanation to the policyholder of the rating process,
and a recalculation and verification of the rates charged.


Six complaints related to eligibility, including four that specifically related to failure of a
group to meet participation requirements and issues related to the definition of small
employer. The Company responded to these complaints with an explanation of the
requirements of Chapter 27-50 and Regulation 82 regarding eligibility and review and
verification of the individual circumstances.


Two items from the complaint log were inquiries about husband and wife enrollment
options if both are employed by the business. The Company responded to such questions
by indicating that each can enroll individually as an employee or alternatively, one of the
spouses can enroll as the dependent of the other. The choice selected by the group can
affect the age-gender factor of the group and consequently the rates charged.


After reviewing the complaint log, the examiners requested five complete complaint files
for additional review. Based on our review, the complaints were handled in a reasonable
fashion, although certain issues arose that led us to further investigation or
recommendations.


   1. It appeared from one of the complaints that an intermediary (GNA) had, at least in
       one circumstance, charged an additional fee of $15 per contract per month, in
       violation of its agreement with Blue Cross and in violation of Regulation 82.




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       Blue Cross has instituted an audit of its intermediaries to investigate this situation
       and to ensure proper handling of accounts by the intermediaries.
   2. One of the complaints related to a small employer with an out-of-state business
       address, one employee who resided and worked in Rhode Island and one
       employee who resided outside Rhode Island. Blue Cross concluded correctly that
       the employer was not eligible for a small employer health plan.
   3. Two of the complaints related to RI extension of benefits under RI GL 27-19.1. It
       appears to the examiners that there is not sufficient clarity in the existing small
       employer law and regulation to determine the correct rating of these cases. A
       review of the documentation provided by Blue Cross did not find adequate
       internal guidelines with respect to such situations. Blue Cross did offer the
       extension of coverage as required.


Recommendation 7: It is recommended that Blue Cross review its policies related to
treatment of employees of employers who go out of business.


A more complete discussion of the review of the Complaint Log and the detailed
examination of a sample of complaint files reviewed is contained in Appendix 7.


Reconciliation of DBR complaint log to Blue Cross complaint records


The examiners obtained a listing of complaints filed with the DBR and closed during
2004. The examiners provided that portion of the listing that pertained to Blue Cross
complaints to the Company and asked that it identify the complaints on the listing that
were associated with small employer business.


In response the company identified:
   •   6 complaints that were related to small employer business and were in the log
       provided by the Company;




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   •   3 complaints of which the company had no record; according to DBR records,
       these were handled directly by DBR and Blue Cross was not notified.
   •   2 additional complaints that were related to COBRA coverage on small employer
       cases and should have been reported by the Company as small employer
       complaints in response to the data request generated by the examiners; and
   •   1 complaint that the Company recognized as a small employer complaint but that
       inadvertently had not been reported previously to the examiners.


No further follow up was conducted with regard to these complaints.


Other than as noted, Blue Cross’s complaint resolution process is adequate, and did not
indicate areas of non-compliance.


15. Review of Contracts and Forms


The review of contracts and forms included review of the following documents:


   •   Subscriber Agreements and marketing brochures for all available health plans
   •   Sales Agreement
   •   Membership Application for individual employees
   •   Employee Risk Appraisal
   •   Small Employer Waiver Form/Certification
   •   Group Risk Appraisal Form
   •   Disclosure of Certain Rating and Renewability Provisions
   •   Form letters and forms used in the eligibility re-certification process




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Subscriber Agreements


Benefits described in the Subscriber Agreements were compared to those described in the
marketing brochures. They are consistent with the benefits described in the Blue Cross
marketing brochures.


According to the Summary of Benefits, dependent children are covered until January
1 of the year after reaching their nineteenth birthday and full-time students are covered
until January 1 following the year that the student attains age 26. Availability of coverage
for children and full-time students exceeds the requirements of R.I.G.L. § 27-50-3(j).


The Subscriber Agreement includes a description of when an employee can enroll. An
employee can enroll when first eligible, during the annual open enrollment period, or
when eligible for a Special Enrollment. This provision meets the requirements of R.I.G.L.
§ 27-50-7(d).


Sales Agreement


R.I.G.L. § 27-50-5(g) requires a carrier to make adequate disclosure in connection with a
new business proposal or a renewal of the carrier’s right to change premiums and factors
that effect changes in premium rates, of provisions related to renewability, and of
descriptive information, including benefits and premiums for all benefit plans for which
the small employer is qualified.


Blue Cross’s right to change premiums is included in the Sales Agreement, where it is
reflected in the “Financial Terms” and the “Extension of Agreement” paragraphs.


The “Termination of Agreement” paragraph of the Sales Agreement indicates that the
agreement may be terminated by the small employer for “cause” or at “the end of any
rating period subsequent to the initial term by providing Blue Cross with no less than



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thirty (30) days’ prior written notice of its intention not to renew.” Blue Cross’s practice
differs from the requirement described in the Sales Agreement. Blue Cross will allow a
small employer to terminate the agreement on dates other than the end of the rating
period. Blue Cross’s practice is permitted by Chapter 27-50 and Regulation 82 but it is
not consistent with the description in the Sales Agreement.


Recommendation 8: It is recommended that Blue Cross amend its Sales Agreement to
reflect its actual practice with respect to the right of a small employer to terminate.


The Blue Cross Sales Agreement supports in all other respects the requirements of
Chapter 27-50.


While not contrary to Chapter 27-50, the examiners found that the size of the type made
reading the Sales Agreement difficult.


Membership Application for individual employees


The Membership Application allows an eligible employee and dependents to enroll in the
small employer health plan. The application form contains the appropriate information
and is in compliance with the requirements of Chapter 27-50.


Employee Risk Appraisal and Group Risk Appraisal Forms


Blue Cross uses different employee risk appraisal forms based on the size of the
employer group.      They collect individual forms for groups of up to 19 enrolling
employees, and use an employer based form for groups of 20 or more enrolling
employees. The forms collect generally similar information and are used in generally the
same way. Blue Cross refers to these two segments of its small employer business as
“PER-1” and “PER-2”. The employee risk appraisal forms collect information about
medical conditions of employees and dependents. This information is used by the Blue



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Cross Medical Underwriting Unit to determine the debit points to be assigned to the
enrolling members. The collection of health status data is permitted by Chapter 27-50 and
supports the determination of a rate adjustment factor that is related to the overall health
status of a group applying for coverage. Blue Cross collects and uses medical condition
information in a way that is permitted by Chapter 27-50 to support determination of the
debit points assigned to each newly enrolling subscriber and dependent.


Small Employer Waiver Form/Certification


Regulation 82(6)(B)(2) requires that Blue Cross obtain from every eligible employee a
waiver form if that employee and/or dependents of the employee choose not to enroll in
the health plan. The waiver form asks the employee to indicate the eligible individuals
who do not enroll and the reason for the waiver. The employee is required to sign the
waiver form and in the case that the employee refuses to sign, the employer is required to
provide a certification. Additionally, the waiver form is required to include a statement
informing the eligible employee of their special enrollment rights provided by R.I.G.L. §
27-50-7(d). The waiver form used by Blue Cross allows the company to meet the
requirements of Regulation 82(6)(B)(2).


Disclosure of Certain Rating and Renewability Provisions


R.I.G.L. § 27-50-5(g) requires that, in connection with the offering for sale of any health
benefit plan, a small employer carrier make reasonable disclosure, as part of its
solicitation and sales material, of:
    1. The provisions of the health benefit plan concerning the carrier’s right to change
        premium rates and the factors that are utilized in the calculation of premium rates;
    2. The provisions relating to renewability of policies and contracts;
    3. The provisions relating to pre-existing conditions; and
    4. A listing and descriptive information, including benefits and premiums, about all
        benefit plans for which the small employer is qualified.



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R.I.G.L. § 27-50-7(b) requires that every small employer carrier shall actively offer to
small employers all health benefit plans it actively markets to small employers, including
the Standard and Economy plans.


In the course of the examination, the examiners reviewed samples of proposal and
renewal packages. Each proposal and renewal package that was reviewed included (i) a
disclosure statement that described the underwriting criteria for eligibility for a small
employer health benefit plan, (ii) a description of the rating components and the factors
that impact the rate for any particular small employer, and (iii) conditions related to
renewability, minimum participation, and a recommendation with respect to minimum
contributions by the employer to the health benefit plan. Each proposal and renewal
package also included a summary benefit description of all the available plans and rates
that reflected Blue Cross’s rating practices and the demographics of the group. Based on
this review, the examiners conclude that Blue Cross’s practices satisfy the requirements
of R.I.G.L. § 27-50-5(g) and R.I.G.L. § 27-50-7(b).


R.I.G.L. § 27-50-3(kk) provides the definition of small employer. In particular, a business
with one employee can satisfy this definition of small employer and may therefore be
eligible to purchase a small employer health plan from Blue Cross. In several instances
Blue Cross materials improperly describe eligibility as limited to groups with 2-50
eligible employees:
    •   Blue Cross’s website indicates that the Essential Plans are available “for groups
        with 2-50 employees”
    •   The Direct Pay enrollment application makes a reference to “employer sponsored
        plan that employs two or more….”


The examiners are not aware of any instances in which an employer with only one
eligible employee was denied access to a small employer plan when it otherwise
qualified.




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Recommendation 9: It is recommended that Blue Cross review its documentation
(including electronic) to ensure that it includes groups of one eligible employee within
the criteria for eligible small employer in all its marketing contexts and public
communications.


We note the following discrepancies with respect to the disclosure form:


   •   The disclosure form states that the Company develops separate rates for coverage
       for individuals age 65 and older for whom Medicare is the primary payor and
       coverage for individuals age 65 and older for whom Medicare is the secondary
       payor. It is our understanding that it is the Company’s practice to include over age
       65 individuals in the calculation of the age/gender factor for the group and that
       separate rates are not developed. While either method is acceptable, the Blue
       Cross description of its methodology should reflect actual practice.
   •   The disclosure form indicates that the Company has a 75% participation
       requirement and that a group’s participation percentage is calculated as the ratio
       of eligible employees who enroll in the plan to the total number of eligible
       employees who have not waived coverage due to other health coverage. The
       procedure indicated on the disclosure form is consistent with that prescribed in
       R.I.G.L. § 27-50-7(d)(9). The Company’s actual practice for determining the level
       of participation, as described in the Eligibility Certification Manual, is different in
       that it includes in both the numerator and denominator those eligible employees
       who have waived due to other coverage. Blue Cross’s practice, as described in the
       recertification manual, is more liberal than the minimum standard specified in
       R.I.G.L. § 27-50-7(d)(9). We noted one example where Blue Cross’s
       methodology produced a 77% participation rate and the more restrictive
       methodology described in R.I.G.L. § 27-50-7(d)(9) and on the disclosure form
       produced a 33% participation rate. Based on an analysis of Blue Cross’s database
       of 2005 certification activity, it appears that approximately 300 groups met Blue
       Cross’s participation definition that would not have met the more stringent



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          definition allowed by the law. However, it is the examiners’ opinion that Blue
          Cross is allowed to use the more inclusive definition, as long as it does so
          uniformly for all groups.


Recommendation 10: It is recommended that Blue Cross modify the disclosure form to
reflect its actual practice as it relates to the development of rates for individuals over age
65.


Recommendation 11: It is recommended that Blue Cross modify the disclosure form to
reflect its actual practice as it relates to the calculation of the participation level.


Recertification Letter and Forms


The prior Market Conduct Examination Report included various recommendations that
required Blue Cross to collect information on a periodic basis to determine:
      •   If the group is still a small employer,
      •   If the group meets the Blue Cross participation requirements,
      •   If the group was formerly a small employer, but has grown into large group status,
      •   If the group was formerly not a small employer , but has decreased in size and is
          now eligible to purchase a small employer health plan,
      •   If waiver forms have been submitted for all eligible employees and dependents
          who have chosen not to enroll in the health plan.


In response to various prior report recommendations Blue Cross established the
Recertification Department and developed a detailed Recertification Manual. The manual
contains copies of Chapter 27-50 and the accompanying regulation. The examiners have
reviewed the contents of this manual and conclude that the explanations, instructions,
forms, and form letters allow the Blue Cross to administer those aspects of Chapter 27-50
described in this section.




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16. Medical Management


While medical management is not addressed in Chapter 27-50, the Health Insurance
Commissioner requested that the examiners gain an understanding of the medical
management programs which impact small employer members.                  To do this, the
examiners met with the Assistant Vice President of Medical Management Operations and
the Senior Medical Director, the individuals     responsible for overseeing utilization and
care management activities. The following narrative is a summary of this discussion.


Blue Cross does not have specific programs geared to the small employer market. Small
employer members are able to participate in all relevant programs that Blue Cross offers.


Disease Management: Blue Cross has population-based disease management programs
focused on asthma, diabetes, congestive heart failure, depression, and coronary artery
disease. Potential program participants are identified from a quarterly claims extract.
These individuals are then contacted by mail.          Subsequently, staff in the disease
management call center may contact an interested individual and conduct a member
assessment in order to determine the member’s knowledge of the disease and the
member’s current compliance with treatment regimens. Blue Cross has a process for
measuring results and savings.


Utilization Review: Utilization review of inpatient stays is triggered as a result of
notification by the hospital.    The utilization review staff uses InterQual guidelines for
care, working on-site at the hospital and using real-time hospitalization data. In addition,
a quality assurance program with Johns Hopkins is geared to decreasing length of stay in
intensive care units.


Case Management: Candidates for case management are identified from physician
referrals, hospital discharges, and analyses of claim data. The case management staff is
particularly sensitive to members with co-morbidities who could benefit from case



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management.     Blue Cross is currently piloting a physician incentive program to
encourage physicians to refer patients for both disease management and case
management programs. Blue Cross is also considering member incentives for these two
programs in order to encourage participation in the disease management and case
management programs.


Physician Focused Programs: Physician profiling involves comparing physicians to their
peers with respect to the cost per year for laboratory, office visits, hospital care,
emergency room care, radiology, and prescription drugs. Blue Cross staff reviews the
medical records of outliers and meetings with such physicians frequently follow to
discuss their cases. The aim of these meetings is to encourage change in physician
behavior, if such change is warranted following the review and a face to face meeting.


Blue Cross also has a program to provide incentive payments to primary care physicians
for improvements in HEDIS measures. (HEDIS is a program of the National Committee
for Quality Assurance (“NCQA”). It is a set of standardized performance measures
related to the provision of care, frequently used to compare the performance of health
plans.) HEDIS measures of particular interest include after-hours access, diabetic blood
tests, and utilization of mammograms.


Blue Cross is funding fifty physicians to encourage the implementation and utilization of
e-health records. Funding is for both equipment and software. The goal is to promote
improved record-keeping and to enable physicians to meet selected outcome goals, which
will be measured at the end of three years.


Prescription Drug Benefit Management: With respect to prescription drug benefit
management, Blue Cross takes advantage of the standard programs offered by its
Pharmacy Benefit Manager, WellPoint. In addition, Blue Cross has initiated a program
to provide approximately thirty to thirty-five of the larger physician practices with a
system to dispense samples of generic medications, rather than the more typical samples



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of brand name drugs, to patients. It should be noted that, while Blue Cross fully funds
this program, its competitors in the market place will reap its benefits as well.


Program Development Efforts:          Blue Cross is considering the development and
implementation of programs in the following focused areas:
   •   Require prior approval for selected radiology procedures (this is currently in place
       for PET scans only);
   •   Incentives to providers to promote the treatment of chronic conditions, including
       payment for group patient education visits;
   •   Payments for pre-operative assessments, including second opinions, for knee and
       hip replacements;
   •   Hospital certification for disease management;
   •   Enhanced physician and member education efforts;
   •   New physician profiling software to analyze episodes of care rather than overall
       cost per patient; and
   •   Centers of Excellence for bariatric and cardiac surgery.


Blue Cross Concerns: Perceived external obstacles to more efficient and effective overall
medical management programs include legislative and regulatory obstacles to an efficient
process for implementing medical necessity denials and provider influence on legislation.
In addition, as the dominant carrier in the marketplace, Blue Cross believes that its
competition benefits from the “free-ride” effect of its programs.         They believe that
changing physician practice patterns benefits all carriers in the market, not just the one
which pays for the program.


17. Carrier Concerns and Recommendations for Change


The examiners met twice with Blue Cross staff to hear their observations about Chapter
27-50 and suggestions for change. Suggestions for change fell into three main categories:
rating methodology, administrative requirements, and the inclusion of groups of one in


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the definition of small group. Additionally, Blue Cross expressed concern with carriers
that are not subject to Chapter 27-50, but which may be competing in the small employer
market.


Rating Methodology


With respect to rating methodology, Blue Cross proposed the following changes:
    •    Separate rating classes based on group size, including exclusion of groups of one
         from the small employer market and inclusion of those groups in Direct Pay;
    •    Allowance of health status rate factors to vary more than the current plus or minus
         10% maximum (they proposed plus or minus 25%);
    •    Allowance of rates that vary more widely than the current 4:1 compression; and
    •    The ability to list bill groups with fewer than ten employees (with list billing a
         monthly premium is charged for each employee based on that employee’s age,
         gender, and contract type, but not health status, which would continue to be
         applied on a group basis).


Each of these suggestions leads to a system under which each group is rated more
directly on its own demographics. Such a system would thereby reduce the level of
community rating that currently exists. The suggestion to adopt list billing would, in the
opinion of Blue Cross, allow changes in the demographics of the group to be reflected in
the month that the change took place, rather than deferred to the next renewal. Blue
Cross’s suggestions for change are based in part on their perception that they are losing
the younger, healthier subscribers. To the extent that rates could be lower for these
individuals, Blue Cross believes that fewer members will leave the small group pool and,
additionally, more such individuals will enter the small group market.          Blue Cross
believes that this would spread risks more broadly, thereby lowering overall community
rates.




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List billing for smaller groups is also a mechanism to better explain and manage rate
volatility in this segment of the market. With list billing, rather than each contract type
paying the same rate, each specific subscriber is assigned a rate based on his/her
demographic characteristics (with the exception of health status, which would continue to
be applied on a group basis). Providing an employer with different rates for individual
subscribers in groups under 10 helps to both explain and to manage the rate change based
on new hires. It also means that a rate adjustment upward or downward would be
reflected in the total premium for each new hire as soon as he/she becomes covered,
rather than waiting for the next annual anniversary date. Blue Cross believes this would
prevent gaming of the system whereby employers may add or remove individuals from
coverage during the rating process, then revert enrollment after the rates have been
established.   The examiners did not see any evidence during the course of the
examination that documents this practice.


In addition, the Company suggested that splitting the small employer risk pool into
several segments based on employer size would enable the development of more
advantageous products and employer incentives.


Administrative Requirements


Blue Cross suggested that standardized administrative forms for tasks required by the
small group legislation would be helpful. The Company specifically mentioned tasks
related to certification of small employer status, a requirement for which each carrier has
developed its own forms and processes. Blue Cross has a perception that the process they
use for certification of small employer status is more onerous for them and more difficult
for the brokers and employers to comply with than the process used by United. The
examiners note that the same argument can be made with respect to other forms, such as
enrollment, waiver, and health status.




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R.I.G.L. § 27-50-3(c) provides a definition of “affiliate or affiliated” and R.I.G.L. § 27-
50-3(kk) provides a definition of small employer and states that “affiliated companies
will be included for the purpose of the determination of small employer status.” Blue
Cross suggested clarification of what business should and should not be considered
affiliated. Blue Cross also suggested clarification of whether Rhode Island groups that
are affiliates of non-Rhode Island entities are eligible for Rhode Island small employer
insurance. The examiners agree with Blue Cross that, as currently written, it appears that
such groups are not Rhode Island small employer groups, unless a majority of all
employees of the total affiliated entity are employed in Rhode Island.


Direct Pay and the Treatment of Groups of One


Blue Cross proposes removing small employer groups of one from the small employer
pool. This recommendation is based on internal analysis performed by Blue Cross that
groups of one are, on average, worse risks than the remaining small group membership.
Their inclusion in the small group pool, therefore, results in higher overall average rates
for all. Should this suggestion be incorporated in legislation, groups of one would have
to purchase Direct Pay coverage, currently offered only by Blue Cross.


Blue Cross also shared its suggestions for reform of the Direct Pay market with the
examiners. Blue Cross proposed for consideration a number of strategies:
   •   “pay or play” taxation on carriers to support the availability and affordability of
       the Direct Pay market,
   •   a high risk pool subsidized by all insurers in the state, and
   •   the replacement of the direct pay rate hearing process with a minimum loss ratio
       or maximum rate change requirement.




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Competition not Subject to Chapter 27-50


Concern was expressed by Blue Cross that MEGA Life and Health Insurance Company
(“MEGA”) might be insuring a number of small employers in a way that might not be in
compliance with Chapter 27-50. If this were true, it might undermine the effectiveness of
Chapter 27-50 by allowing MEGA to compete unfairly, thereby causing adverse selection
to the small employer carriers.        This concern was based on MEGA reporting
approximately 24,000 insured members for health coverage in Rhode Island in its annual
statement.


To investigate this situation, the examiners reviewed Blue Cross’s MARRS IRIP
database with regard to canceled cases and new business cases. Blue Cross’s MARRS
IRIP database is not complete with regard to information about either the disposition of
canceled cases or the source of new business, in part because Blue Cross is not always
able to obtain that information. However, of all the cases canceled by Blue Cross and for
which a cancellation disposition was included in MARRS IRIP, MEGA was reported as
the succeeding carrier in only three cases, with a total of three subscribers. Similarly, of
the cases for which a source of business was included in MARRS IRIP, Blue Cross
reported three new business cases where MEGA was the prior insurer, for a total of three
subscribers. Based on this, it does not appear that MEGA has had a significant effect on
Blue Cross small employer membership.


On further analysis, the examiners determined that MEGA writes a large amount of
student health insurance in Rhode Island, including covering students at Brown
University, Johnson & Wales, Providence College, Bryant College and Roger Williams
College.     This seems to be a reasonable explanation for the membership reported by
MEGA in its annual statement.


Based on other investigations done in the course of the small employer market study, it
appears that MEGA may in fact be offering coverage to small employer groups, including



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groups larger than one. While at this point it appears to the examiners that MEGA is not
at this time a significant factor in the small employer market, a preliminary determination
has been made that MEGA is subject to Chapter 27-50 and is insuring at least some
Rhode Island small employer groups.        The examiners have forwarded the relevant
information to the Office of the Health Insurance Commissioner to determine the
appropriate next steps. MEGA has now filed with the DBR a statement of actuarial
certification regarding compliance with Chapter 27-50 for 2005. As of May 10, 2006, an
examination warrant has been issued for a targeted market conduct examination of
MEGA with regard to compliance with Chapter 27-50.


Examiner Comments


HAT is preparing a separate report addressing the policy issues which have arisen out of
the market conduct examinations and an analysis of the small employer marketplace in
Rhode Island. This report will include recommendations for legislative and regulatory
changes to Chapter 27-50. The Company’s suggestions and expected outcomes will be
discussed in the policy paper.




18. Achievement of the Purposes of Chapter 27-50

The purposes of Chapter 27-50 are described in R.I.G.L. § 27-50-2:

   •   To enhance the availability of health insurance coverage to small employers
       regardless of their health status or claims experience

       Blue Cross makes health insurance available to all small employers. It does not
       limit the availability of health insurance based on health status or claims
       experience.   Blue Cross membership has declined since the last report. This
       decline is due in part to an affirmative effort by Blue Cross to identify and remove
       groups which do not meet the eligibility requirements of Chapter 27-50.



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•   To prevent abusive rating practices

    The examiners found no evidence or suggestion that Blue Cross engages in
    abusive rating practices.

•   To prevent segmentation of the health insurance market based upon health risk

    Blue Cross is complying in this and does not use pre-existing condition
    limitations or require affiliation periods to obtain coverage.        There is no
    “uninsurables pool,” and people with health problems are not being forced out of
    the market.

•   To spread health risk more broadly

    The law seeks to spread health risk broadly by limiting disparities in rates by age,
    gender and health status, and by prohibiting the use of other rating variables.
    Blue Cross complies with the requirement to hold group-by-group rates within the
    4-1 compression. Spreading risk broadly has the unavoidable impact of increasing
    prices for younger and healthier groups to subsidize prices for older or less
    healthy groups, which may lead to problems with affordability for those younger
    groups.

•   To require disclosure of rating practices to purchasers

    R.I.G.L. § 27-50-5(g) requires disclosure about rating and underwriting in
    connection with new business and renewal proposals, and R.I.G.L. § 27-50-5(h)
    requires that companies maintain rate manuals that show how rates are developed.
    Blue Cross is in compliance with disclosure requirements. The examiners
    recommend that Blue Cross correct minor discrepancies in its documentation.

•   To establish rules regarding renewability of coverage

    Blue Cross complies with the requirements of R.I.G.L. § 27-50-6(a), by offering
    renewal to all customers on the same basis.


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   •   To limit the use of pre-existing condition exclusions

       Blue Cross does not use a pre-existing conditions limitation in its small employer
       policies.

   •   To provide for the development of Economy, Standard and Basic health benefit
       plans to be offered to all employers

       The Basic plan is no longer required by Chapter 27-50. Blue Cross’s marketing of
       the Economy and Standard plans has been adequate. These plans have not been
       particularly popular and the examiners conclude that the statutory plans have not
       promoted health insurance purchases among groups otherwise not insured. This is
       not due to any non-compliance by Blue Cross.

   •   To improve the overall fairness and efficiency of the small group health insurance
       market

       Fairness in the market is somewhat in the eye of the beholder, but the attributes of
       guaranteed renewability, protection from experience rating, equal underwriting
       and rating by size of group and for new business and renewal are all elements that
       are important. Blue Cross has been sincere in its efforts to treat its new business
       prospects and its policyholders fairly, and its conduct has been consistent with the
       attributes mentioned here.


The examiners note that R.I.G.L. § 27-50-2(b) states that Chapter 27-50 is not intended to
provide a comprehensive solution to the problem of affordability of healthcare or health
insurance.




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19. Conclusions


Blue Cross is committed to the state of Rhode Island, and considers the small employer
market an important part of its mission. Given that Blue Cross provides health benefit
plans to almost 80% of the people covered under Rhode Island small employer contracts,
its compliance with Chapter 27-50 is of paramount importance.


Blue Cross has made a significant effort to implement all of the recommendations from
the prior market conduct examination in 2002, and they are now in substantial
compliance with all elements of Chapter 27-50.


Blue Cross has lost market share since 2002, and the number of groups and employees
covered in the small employer market in Rhode Island has declined. Some of this is
because of more rigorous enforcement of eligibility requirements, but there may be other
contributing factors, which have not been determined within the examination process.




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20. Blue Cross's Initial Comments on the Report


                     Blue Cross & Blue Shield of Rhode Island

                              Written Response to
                     Market Conduct Examination Report
               Pursuant to R.I. General Laws Section 27-13.1-5(b)


This document constitutes the written response pursuant to R.I. General Laws Section 27-
13.1-5(b) of Blue Cross & Blue Shield of Rhode Island (“Blue Cross”) to the Market
Conduct Examination Report (the “Report”) conducted on behalf of the Rhode Island
Department of Business Regulation (the “DBR”).


At the outset, Blue Cross wishes to commend the actuarial examiners, Mr. Charles
DeWeese and Mr. Anthony van Werkhooven, for their professionalism. They conducted
the examination in a meticulous manner, as demonstrated in their detailed and thorough
report and as readily acknowledged by the staff who have worked with them these past
months.


It should be emphasized, as recognized in the report that Blue Cross has made significant,
good faith efforts to comply with the provisions of the small group law. Blue Cross
devoted significant time, energy, and resources to compliance, and implemented all of the
recommendations of the prior report. As a result, the recommendations listed in the
report are minor and technical in nature. Most of the recommendations do not constitute
violations of the small group law at all, but rather ways to improve business practices.


Attached are our responses to each of the recommendations listed in the Report. We have
provided our comments, have indicated how we will comply with the recommendations,
and, where applicable, indicated the dates that we will begin and complete the
implementation of the recommendations.




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Recommendation 1: It is recommended that Blue Cross investigate whether
intermediaries are adding a monthly fee to the premiums charged by Blue Cross and, if
so, require that intermediaries cease the practice.


        Blue Cross Response:
        In February, Blue Cross engaged Sansiveri, Kimball & McNamee, LLP to
        conduct an audit of Blue Cross’ three current intermediaries: MBA, GNA, and
        NEBCO. The audit includes a review of internal controls within Blue Cross with
        respect to intermediary billing. The audit commenced March 1, 2006, and is on-
        going. The scope of the audit is to review the controls in place surrounding the
        intermediary billing process and determine if they are working as Blue Cross
        intended. The scope of the audit includes the following:

            •   Accuracy and timeliness of generating premium billing
            •   Accuracy and timeliness of recording premium payments
            •   Accuracy and timeliness of reconciling member data
            •   Calculation and reporting of fees and other charges, if any
            •   Reconciliation of premiums billed and collected

        If the final audit result discloses that intermediaries are adding a monthly fee to
        the premiums charged by Blue Cross, Blue Cross will require the intermediaries
        to cease that practice.


Recommendation 2: It is recommended that Blue Cross create a listing that indicates for
each small employer the amount of fees, if any, it paid to intermediaries since October 1,
2001.


        Blue Cross Response:
        As noted in response to Recommendation #1, the scope of the audit includes the
        identification of fees, if any, which are identified in the audit process. If the final




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       audit discloses that intermediaries are adding a monthly fee to the premiums
       charged by Blue Cross, Blue Cross will quantify the fees paid.


Recommendation 3: It is recommended that Blue Cross review its agreements with the
intermediaries and determine if the fees described are received by the Chambers or the
participating small employer. If Blue Cross determines that the payments are received by
the Chambers, Blue Cross should determine if the receipt of such payments results in any
benefit to the participating small employers. If the payments made by Blue Cross result in
a benefit that accrues to the small employer it is recommended that Blue Cross determine
the amounts paid for each such small employer since May 12, 2003.


       Blue Cross Response:
       The fees described in the intermediary agreements are received by the Chambers,
       and not by the participating small employer. One agreement has a typographical
       error that suggests that the employer receives the payment, but that is not the case
       in intent or practice.


       The receipt of the payment by the Chambers is to compensate the Chambers for
       the administrative services provided by the Chambers, and is not passed through
       (directly or indirectly) to small employers as a benefit in cash or in kind.


Recommendation 4: It is recommended that Blue Cross establish a plan to periodically
audit those third party entities that collect and remit premiums on behalf of Blue Cross.


       Blue Cross Response:
       As noted in response to Recommendation #1, the on-going audit includes both a
       review of the intermediaries and their billing practices as well as the internal
       controls utilized by Blue Cross. Upon completion of the audit, Blue Cross will
       review the results with an eye toward identifying future risk and a reasonable
       approach to on-going monitoring of the intermediaries as well as other



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       organizations that may collect and remit premiums on behalf of Blue Cross. The
       results of the audit will educate us as to areas of on-going risk, which Blue Cross
       will use to develop an approach to auditing these entities.


Recommendation 5: It is recommended that Blue Cross include in its rate manual a
description of the methodology used to allocate operating expenses to the lines of
business.


       Blue Cross Response:
       Blue Cross agrees with this recommendation and will include a description of the
       methodology used to allocate operating expenses to the lines of business in the
       third quarter 2006 rate manual.


Recommendation 6: It is recommended that Blue Cross include, as part of its Actuarial
Certifications, statements from all persons on whom the actuary signing the Certification
relied. These statements should include a description of information that the signing
actuary relied upon and that further indicates the accuracy and completeness of that
information.


       Blue Cross Response:
       Blue Cross agrees with this recommendation and will include statements from all
       persons on whom the actuary signing the Small Group Certification relied upon.
       The statements will contain a description of information and will further indicate
       the accuracy and completeness of that information. This change will be part of
       the CY2006 Actuarial Certification due on March 15, 2007 to the Department of
       Business Regulation.


Recommendation 7: It is recommended that Blue Cross review its policies related to
documentation related to out-of-state employers and to treatment of employees of
employers who go out of business.



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       Blue Cross Response:
       We believe that our policies for handling employers with out-of-state locations or
       employees and employers that have gone out of business are appropriate and in
       compliance with RIGL 27-50.          However, we will review those policies to
       determine whether they can be improved in a manner that is consistent with the
       business and financial goals of Blue Cross, and make any changes deemed
       appropriate and feasible after that review.


Recommendation 8: It is recommended that Blue Cross amend its Sales Agreement to
reflect actual practice with respect to termination.


       Blue Cross Response:
       Blue Cross will review its practices with respect to termination and amend the
       Sales Agreement as necessary and appropriate to reflect actual and on-going
       practices.   This may result in either a modification to Blue Cross’ current
       termination practices to be in line with the Sales Agreement, or vice versa. The
       review will be completed by August 1, 2006 and necessary modifications, if any,
       will be implemented in the next printing of the PER Sales Agreement following
       the completion of such review.


Recommendation 9: It is recommended that Blue Cross review its documentation
(including electronic) to ensure that it includes groups of one eligible employee within
the criteria for eligible small employer in all its marketing contexts and public
communications.


       Blue Cross Response:
       Blue Cross has identified that the current Direct Pay Health and Dental
       Application contains an incorrect definition of small employer. This will be




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        corrected in the next printing of the application, which will occur when the
        current (recently printed) supply is depleted.


Recommendation 10: It is recommended that Blue Cross modify the disclosure form to
reflect its actual practice as it relates to the development of rates for individuals over age
65.


        Blue Cross Response:
        Blue Cross will modify the disclosure form to reflect its actual practice, as shown
        in the attached modified disclosure form. The modification will be implemented
        in the next printing of the disclosure form.


Recommendation 11: It is recommended that Blue Cross modify the disclosure form to
reflect its actual practice as it relates to the calculation of the participation level.


        Blue Cross Response:
        Blue Cross will review its practices with respect to calculation of the participation
        level and amend its disclosure form when necessary and appropriate to reflect
        actual and on-going practices. This may result in either a modification to Blue
        Cross’ current calculation of the participation level to be in line with the
        disclosure form, or vice versa. The review will be completed by August 1, 2006
        and necessary modifications, if any, will be implemented in the next printing of
        the disclosure form following the completion of such review.




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Section 17 – Carrier Concerns and Recommendations for Change


In Section 17 of the Report, the Examiners provided an overview of BCBSRI’s concerns
and recommendations for change in relation to the Small Group Market. The Examiners
commented that:


“HAT is preparing a separate report addressing the policy issues which have arisen out
of this market conduct examination and an analysis of the small employer marketplace in
Rhode Island. This report will include recommendations for legislative and regulatory
changes to Chapter 27-50. The Company’s suggestions and expected outcomes will be
discussed in the policy paper.”


While BCBSRI’s recommendations and concerns are summarized in the Report at a high
level, BCBSRI would like to take this opportunity to clarify and expand on what we
believe are needed market reforms.


Small Group and Individual market reform legislation should focus on improved
affordability and a reduction in the uninsured rolls. Reducing the number of uninsured
allows risks to be spread across a broader base and should lower overall average rate
levels. In the voluntary health insurance market system that we operate under, consumers
weigh the price they must pay against the value they expect to receive. Most healthy
individuals are willing to pay a premium somewhat higher than the benefits they expect
to receive in order to be protected against unanticipated injury or illness. However there
is a limit to the additional premium any given consumer is willing to pay in order to
obtain this peace of mind. If premiums rise above this threshold then healthy individuals
elect not to purchase coverage. As health insurance becomes more expensive consumers
can be expected to evaluate the costs and benefits of participation ever more carefully. In
light of this we believe it is appropriate to interject a little more financial equity into the
allowed rating structures. That is, if lower cost risks are leaving the market because they
perceive it offers them an increasingly poor value proposition (and we believe this to be



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the case), then it follows that we should be able to slow and hopefully even reverse their
withdrawal by improving their value proposition.


BCBSRI LEGISLATIVE PROPOSAL FOR SMALL GROUP REFORM
To improve the value proposition for lower cost risks, some relaxation of the current
limitations on rating is necessary.      Restrictions on carriers’ rating and underwriting
flexibility improve affordability for the highest cost risks but increasingly are pricing
lower cost risks out of the market. BCBSRI offers several strategies aimed at improving
the value proposition for lower cost risks and thereby growing total enrollment. These
include: rating factors (expanded health status rate adjustments and max/min rate
compression ranges); moving groups of size one over to the individual market; and list
billing.


Increase flexibility in rating factors
The system needs to entice the uninsured, healthier population back into the market.
These individuals left the pool based on their perspective that the value of the coverage
was no longer worth the cost, and relaxing the current rating and underwriting restrictions
on carriers would allow them to offer attractive prices to lower costs risks who are
increasingly being priced out of the market. Increasing the health adjustment range to +/-
25% from the current 10% while also increasing the range of rates from a 4:1 to a 6:1
max/min ratio may attract those individuals back by offering them better value. In turn,
bringing this good risk back into the small group market will help reduce the rates for the
entire population of small employers as the risk is able to be spread over more
individuals.


Permit list billing
The demographics of a group have the biggest influence on what healthcare cost will be.
For the smallest employers – those with ten (10) or fewer employees, one or two changes
in subscriber composition can have a major impact on rates when renewing accounts. At
their annual renewal, these small accounts see the most volatile rate changes. These are



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also the employers that have the most difficulty in being able to absorb these abrupt
changes. List billing these accounts will allow rate levels to change both up or down
during the course of the year to reflect the changing risk (as measured by the changing
demographics) that the groups experience. By using a list billing approach, the rate
changes are spread more evenly throughout the year as enrollment changes. As a result,
the group’s renewal will result in most stable rate changes at renewal time. This type of
approach also eliminates the opportunity for abuses of the system by groups that
misrepresent their enrollment at critical times during the year in order to artificially
improve their rates. For example, if an account is rated with very young employees, their
rate is much lower than one rated with only older employees. Accounts may withhold
identification of the older eligible employees until after they receive a low rate for the
younger population and then add the older population after the rates are already delivered
and billed at the significantly lower level. Ultimately, this type of gaming hurts the entire
pool.


Address treatment of groups of one
Lastly, it is BCBSRI’s opinion that “groups” of size one should not be eligible for group
coverage and rates. To date, the inclusion of these individuals in the group market has
adversely affected rates for the entire small group pool by approximately 2.5%. Further,
we estimate that moving these individuals to the Direct Pay market will lower rates in
that market as well, by as much as 5%, as this subset of the group market actually
improves the existing Direct Pay pool.         While some group size one members, a
constituency totaling approximately twelve thousand members, may be adversely
affected by this move, many of these individuals may benefit by qualifying for Direct Pay
preferred rates. Alternatively, if a blanket exclusion of groups of size 1 from the Small
Group market is viewed as too disruptive of existing member carrier relationships, we
suggest that it would be appropriate to allow a carrier to restrict the eligibility for its
Small Group line to groups of 2 or greater when such carrier also makes available a
guaranteed issue Direct Pay product line.




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GENERAL COMMENTS ON OTHER SIGNIFICANT LEGISLATION
The Governor and Lieutenant Governor have each introduced legislation which would
significantly impact the health insurance market by introducing a subsidy in the form of
reinsurance, funded in either part of whole by an assessment on insurers. We have the
following general comments on those proposals.


Subsidies based on the following guiding principles would have the most positive
systemic impact: injects new money; assists the uninsured; and minimizes administrative
expenses. Given the enormity of the small group and individual markets, we believe that
limited subsidy funding should be targeted on specific subsets of the market and not
spread so broadly as to lose its ability to have an impact on a consumer’s enrollment
decision. We believe the subsets that should be targeted are the currently uninsured and
low income individuals.      Targeting uninsured and low income will help reduce the
instances of uncompensated care, which burdens the entire system, and will also help
bring new members into the insurance market, thereby achieving the goal of insurance –
spreading risk, and ultimately help to reduce overall rate levels for the entire market. For
example, $10 million dollars would reduce overall small group rates by less than 3%.
These same dollars targeted toward 15% of the enrollment would result in a savings of
nearly 20% for those individuals.


Monies might also be targeted toward a high risk pool for individuals, potentially
qualifying the state for federal funding, and on the smallest employer groups (ten or
fewer employees), one of the fastest growing segments of uninsured. Subsidies should
bring new money into the healthcare system. An assessment funded by a tax on insurers
is essentially “circular” money, resulting in premium increases for those already in the
system. Since enrollment for those already in the system is voluntary, some of these
members for whom the prices are increasing will stop purchasing insurance, continuing
the downward enrollment cycle. Sources of new monies might include sin (alcohol and
cigarette) taxes, tobacco payments, taxes on over the counter medicines, and general state
revenues. If monies from within the system are necessary, legislators might consider



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“play or pay” taxation on carriers who do not participate in the high risk individual
insurance market.


Reinsurance has been mentioned as a “subsidy” vehicle, and it does help redistribute
dollars between carriers, such that carriers underwriting the bigger risks may be
supported by carriers who don’t. However, reinsurance in and of itself does not address
affordability, as there are no new monies being funneled into the system, and the
administrative costs for both the carriers and the state would be excessive. If however,
reinsurance is the most acceptable method, then we suggest that the actuarial value of a
reinsurance attachment point (or rating corridor) could be given to the insurance
companies in proportion to the risk they undertake, and directly deducted from the
targeting population’s rates. This would eliminate the burdensome bookkeeping, large
overhead costs, and the underwriting risk associated with reinsurance. Reduced claims
costs may also be realized as carriers retain a vested interest in medical management of
the population.


CONCLUSION
As the examiners indicate in Section 18, “Achievement of the Purposes of Chapter 27-
50,” one of the many goals of the existing law was: “To spread health risk more broadly”.
The examiners further state that doing so “…has the unavoidable impact of increasing
prices for younger and healthier groups to subsidize prices for the older or less healthy
groups, which may lead to problems with affordability for those younger groups.”
(Report at Page 100.) Therefore, spreading the risk more broadly requires a delicate
balance of strategies that allow increased coverage while maintaining affordability for
these people who may perceive the value of coverage as marginal. Steps to expand that
range of compression will allow insurers to offset some of the community rating
downfalls and expand enrollment by improving the value for this critical subset of small
group employees.




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The question for our legislative leaders is what the ultimate goal is: "affordability" for
the older, less healthy population, or relative affordability and increased number of
insured? The bottom line is that the closer you move to community rating, the more
uninsured we create (with healthier folks dropping out of the pool, leaving less subsidies
for the sicker population), and the only way to re-attract the uninsured is moving further
away from community rating, as BCBSRI proposes. If one of the objectives is to ensure
affordability for the select few who can't afford to pay rates commensurate with their
risks, then some of the subsidies being discussed should be directed at this group. In the
meantime, the more people an insurer is able to attract onto the books because of
appropriate rating flexibility, the more risks are spread, and the more overall rate levels
are subdued.


BCBSRI appreciates the opportunity to offer these observations and suggestions.




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                      Disclosure of Certain Rating and Renewability Provisions
                   Required by the Small Employer Health Insurance Availability Act
The Small Employer Health Insurance Availability Act (the “Act”) requires that Blue Cross & Blue Shield of
Rhode Island (“Blue Cross”) conform to certain rating, renewability, enrollment, and marketing practices with
respect to “small employers.”
If your business is a “small employer”, this disclosure contains important information for you that you should
read carefully.
If your business is not a “small employer”, this disclosure does not apply to you. Please notify your
Marketing Representative.
A “small employer” is any person, firm, corporation, partnership, association, or political subdivision that (a)
is actively engaged in business, (b) on at least 50% of its working days during the preceding calendar
quarter; employed no more than 50 “eligible employees” with a normal work week of 30 or more hours, the
majority of whom were employed within this state, (c) is not formed primarily for purposes of buying health
insurance, and (d) in which a bona fide employer-employee relationship exists. An “eligible employee” is a
full-time employee who works on a permanent (i.e. not temporary or substitute) basis.
Rating
Blue Cross develops an adjusted community rate (“ACR”) based on the pooled claims experience of all
enrolled small employers. ACR has two components:
          •    An amount that expresses projected claims experience for all small group employers; and
          •    An amount that expresses the expense of administering Blue Cross coverage for all small
               group employers. This amount is adjusted by subtracting an amount for expected earnings on
               investments and adding an amount that has been reserved for future use.
The ACR is then adjusted for certain factors prescribed by the Act. Those factors are the age, gender, and
contract type (e.g. enrollee, enrollee/spouse, enrollee/child(ren), enrollee/spouse/child(ren)) of all the
subscribers enrolled through your small employer plan. The ACR adjustment includes an adjustment based
on employee age, with rates for employees between age 30 and 65 varying in five-year age brackets.. A
lower factor is used for those subscribers age 65 and older for whom Medicare is the primary payer. The
ACR is adjusted for health status by no more than 10% based on medical underwriting techniques. Finally,
Blue Cross compares the rate quoted for each contract type for your health benefit plan to the rates quoted
for each contract type for all health benefit plans issued or renewed in the same period, and makes any
adjustments required to ensure that the relationship between the highest and lowest rates quoted falls within
the limits prescribed by the Act. These adjustments determine your final rate.
Blue Cross may not adjust your rate more frequently than annually, except to reflect: (1) changes to your
enrollment; (2) changes to contract type (e.g. if an employee marries or has a child); or (3) changes to your
health benefit plan that you request.
Enrollment and Renewability
Our small group health benefit plans are offered annually for renewal to all groups that are “small employers”
except in limited circumstances prescribed by the Act, including the following:
          •    Non-payment of the required premiums; or
          •    Fraud or misrepresentation by the employer; or
          •    Non-compliance with minimum participation requirements; or
          •    Non-compliance with minimum employer contribution requirements.
         Minimum Participation Requirements:
                   Groups must enroll 75% of employees that a) are eligible for health coverage and b)
                   have not waived enrollment due to other health coverage.
                   If any eligible employee wishes to waive coverage for him- or herself or any
                   dependents, the waiver must be documented with a “Waiver/Certification Form”
                   and returned to your Marketing Representative.
         Minimum Contribution Requirements:
                   Employer is requested to contribute a minimum of 75% of the individual premium rate
                   for all eligible employees.


Marketing
Please see the attached list for a description of benefits and premiums for health benefit plans that Blue
Cross currently offers to small employers. If you have any questions, please contact your broker, agent, or
account executive for clarification of available plan types and benefit variations or for help in calculating
rates/premiums.



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                                         Appendices


                                         APPENDIX 1


                                          Glossary


Adjusted Community Rate – The Community Rate with demographic adjustments
allowed by Chapter 27-50 (age, gender, and health status)


Base Rate – the rate needed from the average contract to generate sufficient revenue to
cover all expected claims, administrative expenses, and reserve requirements for
contracts renewed in a given calendar quarter. The base rate has an age/gender factor of
1.00 and a health status adjustment of 1.00


Broker – A person licensed as an insurance producer by the State of Rhode Island who
assists individuals and employers with the purchase of health insurance.       A broker
represents the small employer, providing information and answering the employer’s
questions about products offered by all carriers in the market.      Typically, a broker
receives a commission, paid by the insurance carrier. Blue Cross builds this expense into
the rates charged to all small groups.


Community Rate – The rate required from each contract type to generate sufficient
revenue to cover expected claims, administrative expense, and reserve requirements


Contract – An enrolled employee or “subscriber” is sometimes referred to as a
“contract” encompassing the employee and any enrolled dependents of that employee.


Debit Points – The scoring system used by Blue Cross to score an individual’s health
status



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Decline – A waiver form which indicates that the employee and/or the employee’s
dependents are not interested in health insurance coverage even though they do not have
other coverage.


Dependent –Family members of the employee (e.g., spouse, children)


Direct Business – Employer groups who are not represented by either a broker or
intermediary. For Direct Business, Blue Cross marketing representatives work directly
with the employer.


Direct Pay – The group of products sold by Blue Cross to individuals and/or families
who do not have access to health insurance through an employer. These products are
sold without the involvement of a broker or an intermediary.


Distribution Channel – the means by which information about health insurance products
is provided to potential customers and/or policies are marketed and sold. Examples of
distribution channels are brokers, intermediaries, Chambers of Commerce, R.I. Builders
Association, and Blue Cross salaried staff (Direct Sales).


4:1 Compression - R.I.G.L. § 27-50-5(a)(5) requires that the most expensive rate for a
specific contract type in a given calendar quarter be limited to 4 times the least expensive.


General Agent – An independent entity which serves as the interface between an
insurance carrier and a broker. The general agent collects and transmits information
between the broker and the insurer.


Intermediary – An independent organization under contract to an insurance carrier to
sell, enroll, bill, and collect premium for small group insurance coverage.             The
intermediary transmits premium to the carrier on an agreed upon schedule.                An



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intermediary receives a commission (or fee) from the insurance carrier for services
rendered. Blue Cross builds this expense into the rates charged to all small groups.


Medical Underwriting – A process used to analyze an individual’s health status. The
basis for this process is information provided by the individual, the employer, or from an
analysis of historical claims experience.


Member - Each person covered under an insurance contract.             The subscriber (the
employee who is enrolled in the health plan) is a member, as are each of a subscriber’s
dependents.


PEG System – The Blue Cross designation for its small group rating and renewal
underwriting system.


PER-1 – The Blue Cross acronym for small groups with 25 or fewer enrolled
subscribers. PER stands for Pooled Experience Rated.


PER-2 – The Blue Cross acronym for small groups with more than 25 enrolled
subscribers


PCPM – per contract per month.


PMPM – per member per month.


Rate Manual – A compilation of all the data, processes, policies, and procedures used to
develop health insurance rates for a given calendar quarter, including the formulas and
factors used to rate individual groups to assure actuarially based and consistent rating of
all small employer groups.


Renewal business – A group which has already had coverage for at least one year.



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Subscriber – The subscriber is the term given to the employee who enrolls in coverage.
The number of subscribers is thus the same as the number of total contracts.


Tier - The demographic family composition and rate basis for each subscriber. Chapter
27-50 requires four different family composition tiers – employee; employee and
child(ren); employee and spouse; employee, spouse, and child(ren).


Underwriting – The processes used to determine whether or not an employer group is
eligible for a small employer health plan determine eligibility of each individual within
that group, and determine health status of either the members or the overall group
Medical underwriting is a component of the overall underwriting process.


Waiver – A completed waiver form which indicates that the employee and/or the
employees’ dependents have other health insurance coverage.


Waiver Form – The statement by an employee indicating that the employee and/or the
employees’ dependents decline health insurance coverage offered though the small group
employer because of either (i) other health insurance coverage or (ii) they choose not to
have health insurance.     As permitted by Chapter 27-50, the waiver form can be
completed by the employer in the event that an employee fails or refuses to complete one.




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                                     Appendix 2


               Review of Recommendations from 2002 Report


The following paragraphs contain the recommendation from the 2002 report and our
current assessment (in bold type) of Blue Cross’s response.


   1. It is recommended that Blue Cross amend its Direct Pay applications forms by
       requesting information from the individual applicant as to whether any portion of
       the premium is paid by a small employer, either directly or through wage
       adjustment or other means of reimbursement, and whether the prospective insured
       will treat it as a non-taxable employee benefit for income tax purposes, and that
       Blue Cross use that information in determining eligibility for Direct Pay
       insurance.


       A review of the Direct Pay application form currently in use by Blue Cross
       indicates that it collects the information suggested in the recommendation.


   2. It is recommended that Blue Cross provide information about small employer
       plans and how to apply for them over a toll-free line, as required by Regulation
       82(10)(C).


       Blue Cross provided the examiners with (800) 637-3718 as its toll free
       number to obtain information about small employer plans. When the
       examiners initially dialed this number, it connected to the Individual Sales
       Department. Blue Cross was informed that the toll free number provided did
       not meet the requirements of RI Regulation 82-10(C).


       Blue Cross has corrected the problem and currently the number does
       connect to the small employer group sales department.


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3. It is recommended that Blue Cross review and revise their plan rate relationship
   factors to ensure that their rates for CHiP and Blue Cross products differ only by
   amounts attributable to plan design.


   A review of Blue Cross’s rate manual indicates that the rates for all Blue
   Cross plans (including CHiP plans) are developed as a multiple of the rate
   for a standard plan (benefit factors). The benefit factors are based on an
   analysis of their overall book of business.          Blue Cross therefore is in
   compliance with this recommendation.


4. It is recommended that Blue Cross not include their CompAlliance factor as part
   of their calculation to determine the application of the 4-1 compression to the
   group.


   Blue Cross has implemented changes in the calculation process consistent
   with the recommendation. A review of Blue Cross’s rate manual indicates
   that the rate ceilings are adjusted for the CompAlliance credit, if applicable
   for a specific case. The rate calculation process used by Blue Cross is
   consistent with this description.


5. It is recommended that Blue Cross maintain a rate manual that includes the
   required elements to calculate a rate, and the required documentation of the
   development of base rates, base rate relationships, and expense allocation.


   The examiners reviewed Blue Cross’s rate manuals applicable for business
   issued or renewed in the third quarter and fourth quarter of 2005. The rate
   manuals respond appropriately to the changes recommended, with minor
   exceptions noted in the report.




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6. It is recommended that Blue Cross improve their disclosure information for new
   business proposals and renewals regarding the factors that influence rates,
   provisions related to renewability, and the availability of statutory plans.


   Sample proposal packages reviewed by the examiners include a sheet titled
   “Disclosure of Certain Rating and Renewability Provisions.” The
   information provided on this sheet provides the required information related
   to rates, renewability, and availability. However, the examiners have noted in
   the report certain inconsistencies between the description of practices on this
   form and Blue Cross’s actual practices, including the description of
   participation requirements and the rating of groups that include members
   who are eligible for Medicare.          These inconsistencies are addressed in
   recommendations made in the current report.


7. It is recommended that Blue Cross correct their underwriting manual to reflect
   actual underwriting practice and the requirements of Chapter 27-50.


   Blue Cross provided the examiners with a “Recertification Policies and
   Procedures Manual.” This manual is more focused on the process related to
   renewing business, but it does contain all the elements that should be
   included in an Underwriting Manual. BCBSRI has a manual similar to the
   recertification manual that is applicable to new business. A review of new
   business cases indicates that Blue Cross attempts to obtain the required
   information.


8. It is recommended that Blue Cross collect adequate information as part of their
   annual renewal process to determine if active employees over age 65 are
   Medicare primary or Medicare secondary, and apply rating factors accordingly.




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   Medicare is secondary for Medicare eligible active employees of employers
   with 20 or more employees.


   The “Overview Small Group Class PER Rating Procedures” section of the
   rate manual describes the rating process and indicates that there are distinct
   age-sex factors, depending on whether Medicare is primary or secondary.
   BCBSRI has in place a process to obtain supplemental information to make a
   determination as to the group’s Medicare primary/secondary status for every
   group that has a subscriber who is age 65 or older.


9. It is recommended that Blue Cross enforce their minimum participation
   requirements in an equitable and uniform manner.


   Company marketing material indicates that Blue Cross has a 75%
   participation requirement. The Renewal Certification manual also indicates
   the 75% participation requirement and indicates the methodology for
   calculating the participation level:


          “To determine the group’s participation level, subtract the number of
          declined waivers from the number of total eligible employees, and
          then divide that number by the total number of eligible employees.”


   This methodology is more liberal than the standard contained in Chapter 27-
   50 and responds to the recommendation.


   Blue Cross has implemented the recommendation.


10. It is recommended that Blue Cross ensure that they apply their underwriting
   requirements with respect to employer contributions in a consistent and
   documented manner.



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   Blue Cross does not have requirements with respect to employer
   contributions. The “Disclosure of Certain Rating and Renewability
   Provisions” sheet indicates that Blue Cross recommends that employers
   contribute a minimum of 75% of the individual rate. Blue Cross is not
   required to establish a minimum contribution level.


11. It is recommended that Blue Cross collect data adequate to identify groups that
   are small employer groups, but that subsequently employ more than 50 eligible
   employees.


12. It is recommended that Blue Cross institute procedures to provide timely
   notification to groups that are small employer groups, but that subsequently
   employ more than 50 eligible employees, that the provisions and protections
   provided under Chapter 27-50 shall cease to apply if the employer fails to renew
   its current health benefit plan.


13. It is recommended that Blue Cross collect data adequate to identify groups that
   are not small employer groups, but that subsequently become small employer
   groups.


14. It is recommended that Blue Cross institute procedures to provide timely
   notification to groups that are not small employer groups, but that subsequently
   become small employer groups, of the options and protections available to the
   employer under Chapter 27-50, including the option to purchase a health benefit
   plan from any small employer carrier.


15. It is recommended that Blue Cross review forms currently used for their pre-
   renewal audit process, and expand the employer population that is subject to this




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   process to include all groups with fewer than 50 subscribers and all groups rated
   as small employers that have more than 50 subscribers.


   11, 12, 13, 14, and 15: Blue Cross has developed various forms and policies
   and procedures related to the process of eligibility recertification. Blue Cross
   has devoted considerable resources in an effort to meet the requirements of
   Chapter 27-50 and of Regulation 82 in this area, including the development
   of the Recertification Manual. The forms, processes and procedures that
   Blue Cross has implemented allow the company to meet the requirements of
   Chapter 27-50.


16. It is recommended that Blue Cross document its practices for re-rating small
   employer groups whose census has changed between the rating date and the actual
   renewal in the rate manual.


   Blue Cross includes the following paragraph in the Overview section of the
   Rating Manual:


   “All groups requesting rate re-quotations will be considered. Updated
   demographics are used to effect changes to the age/gender and health status
   factors for the group. Where the changes in enrollment are based on only
   one employee, the health status factor is not adjusted so as not to
   highlight an individual's health assessment. If the resulting re-quotation
   produces a higher rate, the revised rates may not be implemented unless
   there is a significant enrollment change. If we are made aware of a
   significant change in population, a change of at least 50 percent for
   groups with up to 25 employees and 25 percent for group with more than 25
   employees, this could result in the group being recertified with all
   appropriate documentation and a reassessment of their rates.”




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   Blue Cross’s response meets the requirements of the recommendation.


17. It is recommended that Blue Cross implement a second calculation that allows the
   premium rate for a group to increase over the prior premium rate by no more than
   the following factors: a) cost and utilization trends, b) premium changes due to
   changes in the demographic case characteristics of the small employer, as
   measured using the rate manual in effect during the prior rating period, c) the
   change in the actuarial value of benefits, and d) 10%.


   Effective July 10, 2003 the second calculation was eliminated as a component
   of the renewal rate calculation.


18. It is recommended that Blue Cross review and update their small employer group
   underwriting manual to include documentation relating to renewal underwriting
   practices.


   Blue Cross has developed its Recertification Manual. The manual provides
   samples of numerous forms with instructions. This manual by itself does not
   completely document the renewal underwriting/rating process. However,
   when used in conjunction with the rating manual, Blue Cross’s
   documentation satisfies the changes recommended. BCBSRI has developed a
   similar manual that is applicable to new business.


19. It is recommended that Blue Cross collect and analyze adequate data to determine
   small employer status, health plan eligibility, Medicare primary status, and
   participation percentage.


   We reviewed a package of material that was labeled “New Business Packet-
   Direct.” The cover letter indicates that a quote will be provided based on the
   information provided by the employer on the “General Account



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   Information” form and the “Employee Census” form. Based on the
   information provided by the employer, Blue Cross could not determine with
   accuracy whether Medicare was primary or secondary. In the event there is
   an employee age 65 or older, Blue Cross requests additional information that
   allows it to determine if the small employer’s health plan is primary or
   secondary to the Medicare program.


20. It is recommended that Blue Cross modify their marketing and proposal packages
   to include information about the statutory plans on the same basis as other health
   plans.


   The examiners reviewed samples of proposal and renewal packages. The
   proposal and renewal packages include information and rates for the
   statutory plans on the same basis as other health plans.


21. It is recommended that Blue Cross ensure that their general agents and
   intermediaries make the statutory plans available to small employers on an equal
   basis to other health benefit plans.


   The general agent’s website now lists the statutory plans on a basis that is
   similar to other plans offered by Blue Cross. Intermediaries provide
   prospects the standard Blue Cross proposal package. The standard Blue
   Cross proposal package presents the statutory plans on the same basis as all
   other Blue Cross plans.


22. It is recommended that Blue Cross allow small employers to include the statutory
   plans as part of a multiple option package.


   Since our last Market Conduct Study, the requirement that Blue Cross offer
   the Basic plan to small employers was eliminated.



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   Based on a review of proposal and renewal packages provided to us, we
   conclude that Blue Cross offers the statutory plans on the same basis as its
   other plans.


23. It is recommended that Blue Cross modify their Sales Agreement by removing the
   provision that allows Blue Cross to terminate the agreement on 30 days notice.


   The provision that allows Blue Cross to terminate the agreement on 30 days
   notice has been removed from the Sales Agreement. The current version of
   the Sales Agreement indicates that “Blue Cross may terminate or refuse to
   renew the medical care benefits offered hereunder as permitted by R.I.G.L. §
   27-50-6(a).” It would be preferable for the Sales Agreement to list the
   primary reasons why Blue Cross would not renew rather than just to
   reference Chapter 27-50, and leave the policyholder to interpret how
   Chapter 27-50 may allow termination or refusal of renewal.


   We note that the Sales Agreement has unusual language with respect to
   termination that is initiated by the small employer. According to the Sales
   Agreement, the small employer can only terminate for cause (i.e. Blue Cross
   failed to comply with a material provision of the Agreement) or on a policy
   anniversary. Blue Cross indicates that its practice differs from that stated in
   the Sales Agreement.


24. It is recommended that Blue Cross file all required contract forms with the DBR.
   Blue Cross should only enter into contracts on forms previously approved by the
   DBR.


   The examiners are not aware of any deficiencies in this area.




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25. It is recommended that Blue Cross review marketing materials and Subscriber
   Agreements to ensure that they contain the correct definition of dependents as
   including dependent students to at least age 25.


   We reviewed subscriber agreements for Blue Cross products. The Summary
   of Benefits provides that “Dependent children are covered until January 1st
   following their 26th birthday when enrolled as a full-time student. If full-time
   student status ends, coverage will end the first day of the month following the
   end of student status.” Eligibility provided by Blue Cross is more generous
   than required.


   R.I.G.L. § 27-50-3(j) includes as a dependent “… an unmarried child of any
   age who is medically certified as disabled and dependent upon the parent.”
   The subscriber agreements contain language that meets this requirement.


26. It is recommended that Blue Cross institute quality controls to ensure production
   of accurate subscriber agreements.


   Our review of subscriber agreements did not disclose any quality control
   problems with the subscriber agreements.


27. It is recommended that Blue Cross include a definition of late enrollee in their
   policy forms and provide information regarding their policies with regard to late
   enrollees.


   R.I.G.L. § 27-50-7(d)(4) provides that “A health benefit plan shall accept late
   enrollees, but may exclude coverage for late enrollees for preexisting
   conditions for a period not to exceed twelve (12) months.” The term “Late
   Enrollee” is not a defined term in the subscriber agreement.




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The subscriber agreement states: “You and/or your eligible dependents may
enroll following the initial enrollment period, and outside of the open
enrollment or special enrollment periods. Coverage is effective the first day
of the of the calendar year month following approval of your application.”


It is our understanding that all applicants for late enrollment are accepted
without any reduction in benefits


Blue Cross’s response satisfies the requirements of the recommendations.




                                                             Page 131 of 166
                                                       Appendix 3, p. 1.



     Legislative History of RI Small Employer Law Since Replacement of the 1992 Act by the 2000 Act

SECTION        PUBLIC LAW             CHANGE                                                                             EFFECTIVE
27-50-3        PL 2002 Ch. 292 §90    The only changes are editorial, as to form of citations and cross-references       6/28/2002
               PL 2003 Ch. 119        Adds subsection (oo) (redesignated (nn) by the complier), defining                 7/10/2003
                                      “affordable health plan”.
               PL 2003 Ch. 120        Deletes definition (c) “basic health benefit plan” and re-letters all subsequent   7/10/2003
                                      definitions.
               PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                    7/17/2003
               PL 2003 Ch. 375        [Identical to PL 2003, Ch. 119]                                                    7/19/2003
               PL 2003 Ch. 269        Amends subsection (m) to include retirees of certain fire districts as             7/2/2004
                                      “employees”
27-50-5        PL 2002, Ch. 41        Extends sunset of health status adjustment from October 1, 2002 to October         5/30/2002
                                      1, 2004. [subsection (a)(2)]
                                      Extends sunset of “second calculation” from October 1, 2002 to October 1,
                                      2004. [subsection (a)(2)]
                                      Postpones change from 4-1 to 2-1 compression from 10/1/2002 to 10/1/2004.
               PL 2002, Ch. 124       Adds RI Builders’ Association exemption to subsection (a)(7).                      10/1/2003
               PL 2002, Ch. 292       Deletes subsection (a)(6) [“second calculation”] and re-numbers the                6/28/2002
               §90                    following subsections. Other editorial changes with no change in substance.
                                      Note: The compiler rejected this change and implemented, instead, the
                                      above change by Ch. 41.
               PL 2002, Ch. 306       [Identical to 2002 Ch. 124]                                                        10/1/2003
               PL 2002, Ch. 366       [Identical to 2002 Ch. 41]                                                         6/28/2002
               PL 2003 Ch. 119        Adds “including those included in an affordable health plan” to last ¶ of          7/10/2003
                                      subsection (d).
                                      Adds new last ¶ to subsection (d) re: “calculation of premium discounts…for
                                      affordable health plans”



Legislative History of RI Small Employer Law                                       -132-
                                                      Appendix 3, p. 2.



SECTION        PUBLIC LAW             CHANGE                                                                          EFFECTIVE
27-50-5        PL 2003 Ch. 120        Amends subsection (a)(5) to delete the requirement for 2-1 compression          7/10/2003
                                      beginning October 1, 2004, leaving compression permanently at 4-1.
                                      Deletes subsection (a)(6), “second calculation”.
               PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                 7/17/2003
               PL 2003 Ch. 375        [Identical to PL 2003, Ch. 119]                                                 7/19/2003
               PL 2004 Ch. 406        Amends subsection (a)(2) to remove the sunset of “health status”, which         10/1/2004
                                      would have taken place on October 1, 2004
               PL 2004 Ch. 502        [Identical to PL 2004, Ch. 406]                                                 10/1/2004
27-50-6        PL 2003 Ch. 119        [In substance, the same as PL 2003 Ch. 120, but the compiler used the text of   7/10/2003
                                      PL 2003, Ch. 120]
               PL 2003 Ch. 120        Amends subsection (a)(7) to eliminate the requirement that the director must    7/10/2003
                                      find that a product form is obsolete and being replaced with comparable
                                      coverage before it can be discontinued, also removes the requirement to
                                      notify all affected state insurance commissioners of the discontinuance.
                                      Shortens the notice period for beneficiaries from 180 days to 90 days.
                                      Adds subsection (e), providing for uniform modification at renewal.
               PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                 7/17/2003
               PL 2003 Ch. 375        [Identical to PL 2003, Ch. 119]                                                 7/19/2003
27-50-7        PL 2002, Ch. 41        Extends sunset of the “2 to 50” definition of “small employer” for purposes     5/30/2002
                                      of “availability of coverage” from October 1, 2002 to October 1, 2004.
                                      [subsection (a)]
               PL 2002, Ch. 292       Deletes all of subsection (a), except the last sentence, “For the purposes…”    6/28/2002
               §90                    Note: The compiler rejected the above change and implemented Ch. 41.
                                      Deletes subsection (a)(3), which said “Notwithstanding any other provision
                                      of this section, between October 1, 2000 and September 30, 2000, a carrier
                                      may choose to limit the time during which it will accept new groups for
                                      coverage to a period of not less than ninety consecutive days during each
                                      twelve month period.” Other editorial changes with no change in substance.


Legislative History of RI Small Employer Law                                     -133-
                                                      Appendix 3, p. 3.


SECTION        PUBLIC LAW             CHANGE                                                                          EFFECTIVE
               PL 2002, Ch. 366       [Identical to PL 2002 Ch. 41]                                                   6/28/2002
               PL 2003 Ch. 120        In subsection (b), changes 3 plans to 2                                         7/10/2003
27-50-7        PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                 7/17/2003
               PL 2004 Ch. 406        Amends subsection (d)(9)(ii) and adds (d)(9)(iii) to provide that the minimum   10/1/2004
                                      participation level for employers of 10 and fewer will be 75%, effective from
                                      October 1, 2004 until October 1, 2006.
               PL 2004 Ch. 502        [Identical to PL 2004, Ch. 406]                                                 10/1/2004
27-50-9        PL 2003 Ch. 120        Deletes requirement for an actuarial study and report due September 30, 2003    7/10/2003
               PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                 7/17/2003
27-50-10       PL 2003 Ch. 120        Deletes “basic” from subsection (a)                                             7/10/2003
                                      Deletes subsection (d), which provided for development of the basic plan
               PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                 7/17/2003
27-50-13       PL 2003 Ch. 120        Deletes reference to “basic”                                                    7/10/2003
               PL 2003 Ch. 286        [Identical to PL 2003, Ch. 120]                                                 7/17/2003
               PL 2005 Ch. 171        Makes mastectomy mandates applicable to standard and economy (to achieve        1/1/2006
                                      HIPAA compliance). Applies to plans issued, delivered or renewed on and
                                      after 1/1/2006

                                   List of Public Laws Amending the Small Employer Law

PUBLIC LAW                                 BILL                                          EFFECTIVE DATE
PL 2002, Ch. 41                            2002-H 8001                                   5/30/2002
PL 2002, Ch. 124                           2002-S 2896, Substitute A                     10/1/2003 (enacted 6/14/2002)
PL 2002 Ch. 292 §90                        2002-H 7725, Substitute A                     6/28/2002
PL 2002, Ch. 306                           2002-H 7912, Substitute A as Amended          10/1/2003 (enacted 6/28/2002)
PL 2002, Ch. 366                           2002-S 2903                                   6/28/2002
PL 2003 Ch. 119                            2003-H 5905, Substitute B                     7/10/2003
PL 2003 Ch. 120                            2003-H 6181, Substitute B                     7/10/2003



Legislative History of RI Small Employer Law                                     -134-
                                                            Appendix 3, p. 4.


PUBLIC LAW                                      BILL                                              EFFECTIVE DATE
PL 2003 Ch. 286                                 2003-S 834, Substitute A as Amended               7/17/2003
PL 2003 Ch. 375                                 2003-S 536, Substitute A                          7/19/2003
PL 2004 Ch. 269                                 2004-H 7590, Substitute A                         7/2/2004
PL 2004 Ch. 406                                 2004-S 3103, Substitute A as Amended              10/1/2004 (enacted 7/5/2004)
PL 2004 Ch. 502                                 2004-H 8516, Substitute A as Amended              10/1/2004 (enacted 7/7/2004)
PL 2005 Ch. 171                                 2005-S 311                                        Applies 1/1/2006 (enacted 7/6/05)

The above includes all amendments since the 2000 enactment through the 2005 Session. Only the above sections have been amended.
The laws are amended by action of the General Assembly, as edited by the Complier of the General Laws. At the end of the 2002
Session, the General Assembly reenacted the General Laws; so all changes through the end of the 2002 Session (plus other editorial
changes made by the complier) have been ratified as of the end of the 2002 Session. The effective date is the date, if any, stated in the
Public Law, otherwise it is the date that the bill is signed by the governor or the date that it takes effect without his signature. (Unlike
the United States, where bills are subject to a “pocket veto” if the President fails to sign; in RI, bills take effect if the Governor fails to
veto.)




Legislative History of RI Small Employer Law                                              -135-
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                           Market Conduct Examination

                                     Appendix 4


                               Statistical supplement


This Statistical Supplement provides a descriptive and analytic overview of Blue Cross’s
small employer business. Membership is analyzed by group size, distribution channel,
and product. An analysis of the rating factors by group size and over time provides a
look at variations in key rating variables -- age, gender, and health status – over time.
The impact of 4:1 compression is also assessed, and the impact on rates of a change in
band width is provided. Claims by size have also been analyzed.


In addition to providing a thorough overview of Blue Cross’s small employer business,
this data will also assist with the analysis of the impact of policy recommendations for
change to the small employer Act. While HAT and the examiners will use this data in
developing policy recommendations, it is important to make this data available to all with
an interest in analyzing the impact of recommended changes to Chapter 27-50.


1. Profile of the business


a. Groups, subscribers and members by size


As of October 2005, Blue Cross insured approximately 12,300 small employer groups,
including approximately 46,600 subscribers and 92,000 members. This represents a
significant decrease in both groups and members since January 2003, when Blue Cross
insured approximately 13,800 groups, including 58,000 subscribers and approximately
115,000 members. The overall decrease in number of groups covered as compared to
January 2003 is 11%, while the decrease in subscribers and members is approximately
20%. As of January 2004, the enrollment was approximately 101,000 members, and by
January 2005 it was approximately 96,000 members. Some of the decrease is likely to



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have been related to failure of groups to meet the more stringent eligibility re-
certification requirements instituted beginning in 2003. The average size group has
declined by about 10%, from 4.2 to 3.8 contracts. 57% of small employer contracts have
individual coverage only. 12% have individual and spouse coverage, 6% individual and
child coverage, and 25% have full family coverage. Exhibit 1 contains a summary of this
information.


Exhibit 2 contains information about Blue Cross’s groups by size, as well as the
distribution of groups by broker and intermediary. Approximately 42% of Blue Cross
small employer groups have only one enrolled employee. This represents approximately
11% of subscribers. Groups with only one enrolled employee have an average contract
size of approximately 2.3 members, while the balance of small employer groups average
slightly less than 2 members. One employee groups are therefore more likely to cover
family members.


b. Broker groups


Exhibit 2 summarizes enrollment through brokers. Approximately 35% of Blue Cross
small employer groups are represented by a broker. As these are generally the larger
small employer groups, they include about 55% of subscribers. The average size group
for those represented by a broker is approximately 6 employees, or over 50% larger than
the average for all groups. Only about 18% of one-employee groups are represented by
brokers, while 75% of groups of more than10 employees are represented by brokers.


Exhibit 3 summarizes broker commission activity by broker. Blue Cross made broker
commission payments in 2005 to over 500 different payees. The top eight brokerage
companies earned at least $100,000 each and in total earned approximately 40% of all
broker commission payments. Another 19 brokerage companies earned at least $25,000,
and all those with payments of $25,000 or more represented over 60% of all broker




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commission payments. Overrides paid to general agents totaled an additional 1/3 of the
commission payments.


c. Intermediary groups


Exhibit 2 summarizes enrollment through intermediaries. Approximately 31% of Blue
Cross small employer groups are represented by intermediaries.         Intermediaries are
limited to marketing to groups in the one to nine eligible employee size range. As a
result, the groups represented by intermediaries are generally the smallest groups and
they include only about 15% of small employer subscribers. Blue Cross contracts with
three intermediaries. GNA and NEBCO each serve approximately 12% of Blue Cross
small employer groups, while MBA serves approximately 7%.              The average size
intermediary group is approximately 1.8 contracts.


2. Distribution by plan of benefits


A summary of enrollment by plan is in Exhibit 4. Exhibit 4 also shows the plan values
assigned by Blue Cross to its top five most popular plans, to the statutory plans, and to
the average of all plans combined.


Blue Cross has 25 different plans of benefits that have enrolled groups. The five most
common plans, however, cover 75% of small employer subscribers. The most popular
plan, HMC2C $25 ER, is also the richest. Blue Cross sets the benefit value for this plan
at 1.000, and prices all its other plans relative to this one. It covers 46% of groups and
44% of subscribers. The average size group on this plan is 3.2 contracts. The second and
third most popular plans, HMC2C 100/80 and HMC2C Plan 500 each cover 7% of the
groups and 10% of the subscribers.          They both cover slightly larger size groups,
averaging 4.8 and 4.3 contracts, respectively. Blue Cross assigns relative values of .890
and .917 respectively to these two plans.




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The average benefit value for all Blue Cross plans in October 2005, weighted by number
of contracts, was .942.


The two new High Deductible Health Plans (“HDHPs”) were first offered in October
2005, so very few subscribers had chosen them (only about 60 in the October cycle).
They are significantly lower cost than other plans, with the benefit value for the lowest
cost HDHP plan at slightly under .500.


The statutory Essential Care 4 and 5 plans (Standard and Economy, as described in
Regulation 82) are not very popular. According to the data, 114 subscribers are enrolled
in these plans. They were the lowest cost plans available prior to the introduction of the
HM HSA plans, but the benefit designs have not proven attractive to small employers.
However, enrollment is up slightly, as compared to about 70 subscribers in 2004.


Blue Cross allows enrollment in multiple options for all groups. Exhibit 5 provides an
overview of the distribution of multiple option plans. As of October 2005, approximately
11% of groups offered at least two benefit options. Since these are relatively larger
groups, they include about 25% of subscribers. Only 49 groups, representing less than
½% of the total, offer three or more options.    The average size group with one option
only is 3.1 contracts. The average size groups with two and three options are 8.5 and
14.2 respectively.


3. Claim analysis


The examiners requested and analyzed a database that included all claims incurred in
calendar year 2004, sorted and accumulated by member. 2004 data was used in order to
insure that the claims data would be relatively complete. The analysis was done to
understand the distribution of claims by size of claim, particularly the effect of large
claims on the experience, and to understand the average member cost sharing for




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different size claims. Data was sorted by size of claim for analysis. The results of this
analysis are summarized in Exhibit 6.


The average amount of claims paid per member during 2004 was approximately $2,520.
89% of members have claims of under $5,000, while only 2% have claims greater than
$20,000. Those 2% represent 30% of the total claim dollars, and an average claim of
$45,000.


Member cost sharing, on average, was 12% of allowed charges.


Pharmacy claims averaged about $500 per member per year, while medical claims
average about $2,000.      Average cost sharing on pharmacy claims was 27%, while
average cost sharing on medical claims was 7%. The larger the claim, the lower the
percentage of cost sharing and the more paid by Blue Cross, because most medical claims
are covered in full after a deductible and/or out-of-pocket limit.


Large claims were analyzed to determine the effect of any potential reinsurance
arrangement.    The aggregate amount of claims in excess of $50,000 per member
amounted to 7.3% of total small employer claims. The excess over $100,000 was 3.5%
of small employer claims, while the excess of $150,000 per claims was 2.4% of all
claims.


Similar data was compiled for the Direct Pay population. The comparison of the small
employer and Direct Pay claims analysis statistics is contained in Exhibit 7. In Direct
Pay, the average paid claim per member was slightly over $3,000, or 20% higher than for
the small employer population. Direct Pay benefit plans are less rich, on average, and the
average cost sharing was 18% of total allowed charges, as compared to 12% for small
employer.




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There are relatively more large claims in the Direct Pay population. At every attachment
point, the percentage of claims in excess of that level was about 50% higher for Direct
Pay than for small employer. For example, about 10.6% of Direct Pay claims are
represented by the excess over $50,000, compared to 7.3% for small employer claims.
Presumably, this is accounted for by the demographics of the Direct Pay population,
which tends to be relatively older, and of relatively worse average health status. Adverse
selection may also be an issue, in that people with health problems may be relatively
more likely to purchase Direct Pay, whereas some of those people may not be eligible for
small employer insurance.


4. Rating variable distributions


a. Average age/gender over time


Blue Cross provided a history of the average small employer age/gender factors by
quarter back to the beginning of Chapter 27-50. This history has been analyzed, but does
not itself appear in this report. There has been a small but steady increase in the average
calculated factor, from an average of approximately 1.020 in 2001 to an average of
approximately 1.047 in 2005.       Blue Cross has expressed some concern over this
phenomenon and over other analyses they have performed that seem to indicate an aging
of the block. However, the total amount of this aging is relatively minor, and may be
related to overall changes in RI small employer demographics.


b. Comparison to other business segments


The age/gender and family composition factors used by Blue Cross for small employer
business are different from those used for large employer business and both are different
from those used for Direct Pay.        Nevertheless, Blue Cross was able to provide
information to enable comparison of the average age distribution of each group. Exhibit 8
provides a comparison of the age/gender composition of various segments of Blue



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Cross’s business. Using the large group member-based factors, and applying them to the
small employer population, it appears that the demographics of the small and large
employer commercial blocks are similar on a weighted basis.


A comparison was also possible to the Direct Pay population, using demographic
information provided by Blue Cross, and using the small employer demographic rating
factors on both populations. The Direct Pay population is segmented into two rating
pools, based on medical underwriting considerations. Pool I, the portion of Direct Pay
that has not passed medical underwriting, has an average demographic profile
approximately 43% higher than the small employer business segment.            Pool II, the
portion of Direct Pay that has passed medical underwriting, and therefore has select rates,
has an average demographic profile approximately 9% lower (or younger) than that of the
small employer business. In total, taking both Pools together, the average Direct Pay
factor is approximately 22% higher than for small employer.


c. Distribution by health status


The analysis of the distribution of health status factors over time is contained in Exhibit
9. Blue Cross’s average health status factor has increased gradually over time, from .988
in 2001 to 1.01 in 2005 and 1.013 for groups that have been evaluated for their 2006
rates.


During this time, there has been a gradual movement from groups evaluated as having
low health status factors to groups with high factors. For example, in 2001, 55% of
groups had health status factors of .92 or .96, while that proportion has declined to 35%
for 2006. Conversely, 30% of groups in 2001 had health status factors greater than 1.00,
as compared to 40% in 2006. The overall effect of health status factors assigned to
individual groups is normalized out over the small employer book of business. A
contributing factor to the increase is a change in Blue Cross’s assignment of health status
factors to reduce the number of groups receiving the lowest factor and increase the



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number of groups receiving the highest factor. That change took place effective with
groups in the first quarter of 2005.


d. Percent with increase/decrease Health Status – 10% limitation


At renewal Blue Cross assigns a health status factor to each group, reflecting its renewal
underwriting processes. Blue Cross limits the change in the health status factor to a 10
percentage point maximum. Exhibit 10 provides a matrix summary of the analysis of the
change in health status factor from 2004 to 2005 for all groups. Exhibit 11 summarizes
changes in health status factor from 2004 to 2005 by group size. A comparison of health
status factor was made for groups that had a health status factor assigned in both 2004
and 2005. The analysis was also done by size of group as measured by enrolled 2005
subscribers. The average 2005 health status factor was approximately 1.00 for groups of
1, increasing with increasing group size to 1.02 for groups of 11-25. The largest groups,
however, had a lower average health status at .987.


In comparing 2004 and 2005 health status, 36% of groups saw their health status factors
increase from one year to the next, while 19% decreased and 45% stayed the same. 49%
of one-employee groups stayed the same, while larger groups showed more variation.
The 26-50 size segment was the only one that had more decreases than increases. The
statistical correlation of health status from one year to the next was 76%.


Blue Cross has a policy of limiting the change in health status (up or down) to 10%.
There were only two instances where a health status factor increased or decreased by
more than 10% among over 12,000 groups. The largest increase noted was 13%.


e. Correlation of Health Status and Age/Gender


Health status factors and age/gender factors are positively correlated by approximately
25%. The nature of the medical underwriting process is that it applies an adjustment for



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various medical conditions, without any adjustment for age. This means that older
people, whose rates already reflect increased risk, are more likely to have higher than
average health status adjustments.


f. Distribution of combined age/gender and health status band factors


Exhibit 12 provides the results of the analysis of the combined effect of the age/gender
factor and the health status factor and the interaction with the 4:1 compression
requirement on small employer rates. Blue Cross complies with the rating requirement to
limit variation in rates based on age gender and health status to a 4:1 range by using a
minimum and a maximum combined factor (expressed in the rate manual as minimum
and maximum rates for each tier of each plan offered). If a group’s age/gender factor
multiplied by its health band factor is less than the minimum, it is raised to the minimum.
If larger than the maximum, it is reduced to the maximum. The minimum and maximum
values are adjusted each quarter in conjunction with the quarterly rate development
process. Currently, the minimum combined factor is about .4125 and the maximum is
about 1.6500.


A model was constructed to show the effect of 4:1 compression, as well as other options,
including 1:1 (full community rating), 2:1, 3:1 and 6:1 compression. A summary of the
results can be seen at Exhibit 13. Based on a January 2005 snapshot of all groups and the
current 4:1 compression requirement, approximately 390 or 3.1% of groups had rates
increased because of the minimum factor, while approximately 900 groups or 7.2% had
rates reduced to the maximum. These are generally the smaller groups. The average size
group that was affected by 4:1 compression was approximately 1.6 subscribers. While
over 10% of groups are affected by 4:1 compression, they only cover 4.4% of
subscribers. Larger groups are likely to have more of a spread of ages enrolled, and so
are less likely to fall outside the average range.




                                                                          Page 144 of 166
                      Blue Cross & Blue Shield of Rhode Island
                           Market Conduct Examination

The average group affected by the 4:1 minimum has its rates increased by 15% as
compared to what they would be with no rate compression, while the average group
affected by the maximum experiences a 16% decrease in rates compared to a no-
compression rate. The maximum rate increase effect as compared to no compression
(occurring in the case of the youngest and healthiest male single employee) would be
approximately a 30% increase, while the largest decrease compared to no compression
would be approximately 34% (in the case of a male employee age 60-64 with adverse
health status).
At the time of the last small employer market conduct examination Chapter 27-50
included a scheduled change to a requirement of 2:1 compression. Chapter 27-50 has
since been amended to keep compression at 4:1. If, however, 2:1 compression were
instituted by Blue Cross, approximately 26% of groups and 15% of subscribers would be
affected in total. Under 2:1 compression, the average increase for groups raised to the
minimum would be 31% compared to no compression, and the maximum such increase
would be over 100%. The average decrease for groups reduced to the maximum factor
would be 22%, with the largest possible decrease equal to about 46%.


If full community rating were instituted, virtually all groups would be affected. The
average effect on groups being increased to the community rate would be an increase of
26%, while groups being decreased from a higher rate to the community rate would be
decreased 24%. These are both expressed as compared to no compression at all.


5. Canceled cases – where they went


Blue Cross tracks its canceled cases through a marketing database. The information is
incomplete because Blue Cross is not able to capture information for each case. Because
it is not complete, an exhibit summarizing the data is not contained in this report.
However, the examiners did review the database and reach certain general conclusions:
    •   The reason for cancellation for the largest number of cases was because there
        were no members left in the group.



                                                                       Page 145 of 166
                      Blue Cross & Blue Shield of Rhode Island
                           Market Conduct Examination

   •   A significant number left because of non-compliance with eligibility
       requirements, including failure to meet minimum participation.
   •   Other reason codes that affected significant numbers of groups included non-
       payment of premiums and transfer to another carrier.
   •   Groups that transferred to another carrier were relatively larger than Blue Cross’s
       average size case for the block, implying that the larger small employer groups
       may be more likely to shop for the best deal, more likely to use the services of a
       broker, and quicker to move from one carrier to another.
   •   On average, groups that changed carriers were given a lower health status band by
       the new carrier.


6. New cases – where they came from


Blue Cross also tracks the cases it writes as new business, including the source of these
cases. Again, this database is incomplete, because the information to populate it is not
always available. The largest category of new business reported, by number of groups, is
groups that were previously uninsured. Groups that moved from a prior carrier were also
an important source of new business, and these groups were larger than average,
representing the greatest number of new subscribers in total.


7. Loss Ratio Analysis by Size of Group


Blue Cross provided an analysis of the loss ratio of its groups by size during 2004-2005.
This was a part of its quarterly enrollment analysis, and a summary of their analysis is
shown in Exhibit 14. While the overall loss ratio was approximately 84%, as discussed
elsewhere, the average for groups with only one enrolled employee was almost 98%, and
the average loss ratio for groups with two enrolled employees was approximately 91%.
For other size groups, the range was from 78 to 82%. The loss ratios for PER-2 groups,
those with over 25 enrolled employees, were relatively higher than for groups of three to
25 employees.


                                                                         Page 146 of 166
                                                        Blue Cross Blue Shield of Rhode Island
                                                             Market Conduct Examination

                                                                Appendix 5
                                               Summary of Recertification Case Sample Analysis
                                Employees
Group   Total    Part-time   Eligible Waived Other   Enrolled   Decline    Participation    Participation                            Payroll data
                Temporary               Coverage                            Calculation    Calculation (RI
                Employees                                                  (Blue Cross)        27-50)
 11      18         1          17         4            13         0               100%         100%          Payroll sheet without pay amounts
 12      5          0          5          0            4          1                80%         80%           Payroll report
 13      3          0          3          1            2          0               100%         100%          Quarterly Wage and Tax Report
 14      23        13          10         3            7          0               100%         100%          Payroll register
 15      6          0          6          4            2          0               100%         100%          Advantage Payroll Services - Payroll report
 16      13         5          8          3            5          0               100%         100%          K-1 s owners, Quarterly Tax and Wage Report
 17      8          5          3          0            3          0               100%         100%          QuartelyWage and Tax Report
 18      1          0          1          0            1          0               100%         100%          Schdule C for both husband and wife
 19      8          2          6          2            4          0               100%         100%          Advantage Payroll sheet for September, 2005
 20      70        44          26         17           3          6                77%         33%           K1 for owners, Quarterly wage report - all other employees




                                                                          -147-
                     Blue Cross & Blue Shield of Rhode Island
                          Market Conduct Examination



                                      Appendix 6


              Summary of Medical Underwriting Case Sample Analysis


                                Review of Health Band Calculation
                                               Enrolled                        Health Status
Group    New/      Renewal    PER     Subscribers     Members   Total        Average     Band         In PEG
        Renewal     Date      Class                             Points                   Factor       System
  1     New        1/1/2005     1          1              5       4,650          930           1.04     1.04
  2     renewal    2/1/2005     1          1              3         300          100           0.92     0.92
  3     renewal    3/1/2005     1          2              2       4,568         2,284          1.10     1.10
  4     renewal    5/1/2005     1          2              3       5,468         1,823          1.10     1.10
  5     New       12/1/2005     1         21              54      34,598         641           1.00     1.00
  6     Renewal    8/1/2005     1         11              20      24,658        1,233          1.10     1.10
  7     Renewal    9/1/2005     1         19              22      25,358        1,208          1.10     1.10
  8     Renewal    4/1/2005     1         10              26      17,340         667           1.00     1.00
  9     Renewal    7/1/2005     1          1              2         608          304           0.96     0.96
 10     Renewal    2/1/2005     1          3              6       11,715        1,953          1.10     1.10


                       Review of Age-Gender Factor Calculation
                                               Enrolled                    Age Factor
Group    New/     Renewal     PER     Subscribers     Members   Before        After     In PEG
        Renewal     Date      Class                             CAG           CAG       System
  1     New        1/1/2005    1          1               5      1.0840       1.0362     1.0362
  2     renewal    2/1/2005    1          1               3      1.0900       1.0420     1.0420
  3     renewal    3/1/2005    1          2               2      1.4215       1.3589     1.3590
  4     renewal    5/1/2005    1          2               3      1.1312       1.0822     1.0822
  5     New       12/1/2005    1          21              54     0.8703       0.8297      0.8297
  6     Renewal    8/1/2005    1          11              20     0.7984       0.7628     0.7736
  7     Renewal    9/1/2005    1          19              22     1.2690       1.2124     1.2124
  8     Renewal    4/1/2005    1          10              26     1.0217       0.9774     0.9774
  9     Renewal    7/1/2005    1          1               2      1.0900       1.0414     1.0414
 10     Renewal    2/1/2005    1          3               6      0.9626       0.9202     0.9202




                                                                           Page 148 of 166
                        Blue Cross & Blue Shield of Rhode Island
                             Market Conduct Examination



                                       Appendix 7 – p. 1
                              Summary of Complaint Log


Complaint    Date     Date
 Number     Received Resolved              Complaint                                Resolution

   N/A      11/15/2002    11/20/2002    Requirement that coverage be     Blue Cross explained that the law
                                        offered to all eligible          requires carriers to offer coverage to all
                                        employees and dependents.        eligible employees and dependents.
   N/A      11/18/2002    12/11/2002    Size of rate increase.           Group members were notified prior to
                                                                         effective date of increase and increase
                                                                         was delayed for 1 month before renewal
                                                                         rates went into effect.
2003-DBR-   11/4/2003     1/20/2004     Request for clarification of     Blue Cross identified the couple's
92                                      coverage options available to    coverage and premium options and
                                        a husband and wife who both      explained rate calculation process.
                                        own separate small
                                        businesses.
2003-DBR-    6/3/2003     6/26/2003     Confusion about multiple         Blue Cross explained impact of age,
122                                     CHiP rates quoted for 1-         gender, and health history on group rates
                                        person group.                    plus difference between guaranteed and
                                                                         estimated rates. Offered complainant
                                                                         opportunity to meet with Direct
                                                                         Marketing to discuss further questions.
2003-DBR-   7/21/2003      8/6/2003     Size of rate increase (58.3%).   Blue Cross verified rate calculation
123                                                                      accuracy and explained rate calculation
                                                                         process and the effect of demographic
                                                                         changes on the increase.
2003-DBR-   10/16/2003    11/3/2003     Denial of RI extended benefits   Enrolled complainant in RI Extended
135                                     for worker terminated from       Benefits through August, 2004.
                                        small group. Group offered
                                        him COBRA by mistake
                                        (COBRA did not apply) and
                                        later cancelled this coverage.
2003-DBR-   3/25/2003     3/31/2003     Requested 2 individual           Blue Cross reviewed eligibility
138                                     accounts rather than coverage    documentation and complied with
                                        as an enrollee and a spouse      request.
                                        under a small group policy.
2003-DBR-   10/3/2003     10/31/2003    Terminated small group           Blue Cross explained that termination
143                                     coverage because employer        was unrelated to members' medical
                                        was not a "small employer"       history and that documentation submitted
                                        due to location of business      with recertification application showed
                                        and employees in MA.             the company did not qualify for small
                                                                         group coverage under the Act.




                                                                                   Page 149 of 166
                        Blue Cross & Blue Shield of Rhode Island
                             Market Conduct Examination

                                       Appendix 7 – p. 2
                              Summary of Complaint Log


Complaint    Date     Date
 Number     Received Resolved              Complaint                                Resolution
2003-DBR-   7/10/2003      8/7/2003     Terminated small group            Blue Cross researched and upheld
149                                     coverage because employer         termination since business is based in
                                        was not a "small employer"        Swansea, MA and majority of employees
                                        due to location of business       work from that office. Provided phone
                                        and employees in MA.              numbers for complainant to seek
                                                                          insurance from MA plan.
2003-DBR-   11/12/2003    11/26/2003    Size of rate increase (43.7%).    Blue Cross verified accuracy of rate
169                                     Copies of complaint went to       calculation and explained the effect of
                                        ProJo, Channel 10, GNA, and       change in the group's demographics.
                                        politicians from George Bush
                                        on down.
2004-DBR-   5/24/2004      6/9/2004     Size of rate increase (61%).      Blue Cross verified the rate calculation
164                                                                       and submitted a response to DBR
                                                                          explaining rate increase.
2004-DBR-   6/21/2004     8/17/2004     Size of rate increase (28.5%),    Blue Cross verified the accuracy of the
179                                     particularly increase of 8.3%     rate calculation and explained the
                                        for Change in Health Status       medical rate calculation process.
                                        on top of a 7.6% Community
                                        Base Rate increase. Group
                                        questioning if they are being
                                        assessed twice for claims
                                        experience. Group submitted
                                        a second complaint letter to
                                        DBR dated July 9, 2004
2004-DBR-   10/26/2004    11/24/2004    Inability to include same         Response sent to DBR by Blue Cross.
215                                     gender partners as                Blue Cross was unable to process
                                        "dependent".                      partner's application for coverage based
                                                                          on clarification from the DBR re:
                                                                          "dependents" under RI Small Group law.
2004-DBR-   11/15/2004    12/15/2004    Size of rate increases over 3-    Blue Cross verified the accuracy of the
222                                     year period.                      rate calculation and explained how
                                                                          medical rates for small employers are
                                                                          calculated.
2004-DBR-   11/19/2004    12/15/2004    Size of rate increase.            Blue Cross verified the accuracy of the
224                                                                       rate calculation and explained how
                                                                          medical rates for small employers are
                                                                          calculated.
2005-DBR-   1/17/2005     2/15/2005     Coverage cancelled for failure    Blue Cross explained its recertification
239                                     to meet minimum                   process, and that failure to meet
                                        participation because some        minimum participation requirements was
                                        employees declined coverage;      the reason that the small group renewal
                                        complained about application      was denied.
                                        of the rule after 20 years with
                                        Blue Cross.




                                                                                    Page 150 of 166
                        Blue Cross & Blue Shield of Rhode Island
                             Market Conduct Examination



                                       Appendix 7 –p. 3
                              Summary of Complaint Log
Complaint    Date     Date
 Number     Received Resolved              Complaint                                 Resolution
2005-DBR-   1/21/2005     2/15/2005     Size of rate increase,             Blue Cross verified the accuracy of the
241                                     particularly age adjustment        rate calculation and explained how
                                        from 45 to 46.                     medical rates for small employers are
                                                                           calculated, including the impact of
                                                                           demographic changes.
2005-DBR-   2/3/2005       3/2/2005     Size of rate increase.             Blue Cross verified the accuracy of the
243                                                                        rate calculation and explained how
                                                                           medical rates for small employers are
                                                                           calculated.
2005-DBR-   4/11/2005      5/6/2005     Size of consistent rate            Blue Cross verified the accuracy of the
263                                     increases since 2000.              rate calculation and explained how
                                                                           medical rates for small employers are
                                                                           calculated.
2005-DBR-   4/11/2005     5/24/2005     Size of rate increase and          Blue Cross verified the accuracy of the
266                                     refusal to provide employer        rate calculation and explained how
                                        with the medical information       medical rates for small employers are
                                        that caused the increase.          calculated. Blue Cross explained that it
                                                                           cannot provide member claim
                                                                           information to the group due to privacy
                                                                           concerns.
2005-DBR-   7/28/2005     8/26/2005     Size of rate increase (52%),       Blue Cross verified the accuracy of the
311                                     and particularly that birth date   rate calculation and explained how
                                        was miscalculated in age           medical rates for small employers are
                                        adjustment.                        calculated. Blue Cross explained that her
                                                                           age was calculated correctly, however she
                                                                           had dropped her husband from coverage
                                                                           mid-term which had a large effect on the
                                                                           rate. Blue Cross also identified that the
                                                                           employer was charged a $15 per month
                                                                           fee by the intermediary.
2005-DBR-   8/9/2005       9/7/2005     Size of rate increase (43.7%).     Blue Cross verified the accuracy of the
289                                                                        rate calculation and explained how
                                                                           medical rates for small employers are
                                                                           calculated.
2005-DBR-   9/26/2005     10/11/2005    Termination of coverage due        Blue Cross responded with a letter
299                                     to failure to provide              explaining why it is unable to recertify
                                        documents that BCBSRI              this individual as an eligible employee
                                        deemed valid proof of              without adequate supporting
                                        employment.                        documentation.




                                                                                    Page 151 of 166
Blue Cross & Blue Shield of Rhode Island
     Market Conduct Examination




              Exhibits




                                           Page 152 of 166
                                                                  Exhibit 1
                                             Blue Cross Summary Data from Group by Group database

                                                                      Contracts by Type
                                                                                                       Avg             Avg        Avg
                                         Total                                                        PMPM   Revenue Contract    Group
    Data Snapshot      Groups Contracts Members         Individual    Ind & Sp   Ind & Ch   Family   Revenue  Trend    Size       Size

        1/1/2003        13,777     58,419     115,380        33,496      6,674     2,831    15,418   $   196.57           1.98       4.2
        1/1/2004        12,855     51,059     101,492        28,927      6,078     2,697    13,357   $   226.32   15.1%   1.99       4.0
        1/1/2005        12,538     48,534      95,736        27,769      5,770     2,647    12,348   $   237.33    4.9%   1.97       3.9
       10/1/2005        12,301     46,622      92,383        26,660      5,528     2,676    11,758   $   248.25    4.6%   1.98       3.8
   10/1/05 Contract Distribution by Type                        57%        12%        6%       25%

   Change 1/1/03 to
       10/1/05             -11%       -20%




Blue Cross Market Conduct Examination Statistical Exhibits              -153-                                                Enrollment Data - 1
                                                                     Exhibit 2

                                                        Blue Cross 2005 Enrollment Snapshot
                    All Groups

                       Enrolled                                             Avg       % of    % of
                      Employees       Groups     Contracts    Members     Contract   groups contracts
                           1            5,222        5,222      11,910       2.28        42%     11%
                           2            2,295        4,590       8,726       1.90        19%     10%
                          3-5           2,604        9,686      18,298       1.89        21%     21%
                         6-10           1,211        9,015      17,274       1.92        10%     19%
                        11-25             798       12,438      24,539       1.97         6%     27%
                         26+              171        5,645      11,560       2.05         1%     12%
                        Total          12,301       46,596      92,307       1.98       100%    100%
                     Average Size                       3.8


                    Brokered Groups Only
                                                                                                          % Brokered
                       Enrolled                                             Avg       % of    % of
                      Employees       Groups     Contracts    Members     Contract   groups contracts   groups   contracts
                           1              938          938       2,257       2.41        22%      4%         18%      18%
                           2              836        1,672       3,134       1.87        19%      7%         36%      36%
                          3-5           1,140        4,278       8,095       1.89        26%     17%         44%      44%
                         6-10             677        5,117       9,795       1.91        16%     20%         56%      57%
                        11-25             581        9,134      17,881       1.96        13%     36%         73%      73%
                         26+              134        4,429       9,057       2.04         3%     17%         78%      78%
                        Total           4,306       25,568      50,219       1.96       100%    100%         35%      55%
                     Average Size                       5.9

                    Intermediary Groups
                                                                                                         % intermediary
                                      Groups     Contracts    Members                                   groups   contracts
                    GNA                 1,506        2,810       5,499                                       12%        6%
                    MBA/IBS               842        1,456       2,972                                        7%        3%
                    NEBCO               1,472        2,638       5,326                                       12%        6%
                    Total               3,820        6,904      13,797                                       31%       15%
                    Average Size                        1.8



Blue Cross Market Conduct Examination Statistical Exhibits               -154-                                           Dist by Size & Source - 2
                                                                   Exhibit 3
                                           Commissions Paid in 2005 from Broker Commission system
                                                       Does not include Intermediaries

                                                     Number of          Amount of                                      Commission
                         Size Category                Payees           Commissions         % of Total       Bonus       and Bonus

               >$100,000                                       8   $           1,636,909        39%     $    144,732   $   1,781,642
               $50,000 to $100,000                            10   $             628,211        15%     $     15,826   $     644,037
               $25,000 to $50,000                              9   $             266,260         6%     $     30,137   $     296,397
               $5,000 to $25,000                             105   $           1,139,325        27%                    $   1,139,325
               < $5,000                                      370   $             511,816        12%                    $     511,816
               Total Brokers                                 502   $           4,182,522       100%     $    190,696   $   4,373,217

               General Agents                                      $           1,489,086                               $   1,489,086

               Total to Brokers and GAs                            $           5,671,607                               $   5,862,303




Blue Cross Market Conduct Examination Statistical Exhibits             -155-                                                           Brokers -3
                                                                       Exhibit 4
                                                      Distribution By Plan, October 2005 Groups

                                                                                                                    Plan Pricing
                                Plan                      Contracts         Grps         % Contracts    % Groups       Factor
              Healthmate C2C 25ER                             20,438           6,407             44%          46%          1.000
              Healthmate C2C 100/80                            4,522             945             10%           7%          0.890
              Healthmate C2C Plan 500                          4,449           1,030             10%           7%          0.917
              Blue CHiP $10/$20 100ER                          2,912             963              6%           7%          0.945
              Healthmate C2C Plan 200                          2,656             669              6%           5%          0.949
              Blue CHiP 500 100ER                              1,852             498              4%           4%
              Blue CHiP Flex                                   1,635             643              4%           5%
              Healthmate C2C 50ER                              1,034             248              2%           2%
              Blue CHiP 500 50ER                                 994             246              2%           2%
              Healthmate C2C 80/60                               980             351              2%           3%
              Healthmate C2C 90/70                               913             241              2%           2%
              Healthmate C2C 80/60 2K                            788             308              2%           2%
              Managed Classic                                    737             445              2%           3%
              Blue CHiP $10/$20 50ER                             460             145              1%           1%
              Blue CHiP Plan 750                                 440             159              1%           1%
              Blue CHiP $15/$25 100ER                            404             110              1%           1%
              Healthmate C2C Plan 500V                           319              93              1%           1%
              Healthmate C2C $15/$25                             224              74              0%           1%
              Blue CHiP $15/$25 50ER                             217              62              0%           0%
              Healthmate C2C 100/80 $500 D                       187              48              0%           0%
              CHiP HMO                                            98              33              0%           0%
              Essential Care 5 (Statutory Economy)                85              58              0%           0%         0.568
              Healthmate HSA $3,000/$6,000                        44              32              0%           0%
              Essential Care 4 (Statutory Standard)               29              24              0%           0%         0.721
              Healthmate HSA $1,500/$3,000                        17              12              0%           0%
              Total / Average                                 46,434          13,844            100%         100%         0.942

              5 Most Popular Plans Only                        34,977           10,014            75%        72%          0.967




Blue Cross Market Conduct Examination Statistical Exhibits              -156-                                                      By Plan - 4
                                                                      Exhibit 5
                                                             Blue Cross Plan Distribution
                                                                Multiple Option Plans

                                          Number
                                             of                              % of       % of   Avg Size
                                          Options     Groups       Subs     Groups      Subs    Group
                                              1        11,155      34,971       89%        75%      3.1
                                              2         1,269      10,750       10%        23%      8.5
                                              3            49         698        0%         2%     14.2
                                              4             1          15        0%         0%     15.0
                                         Total         12,474      46,434      100%       100%      3.7




Blue Cross Market Conduct Examination Statistical Exhibits              -157-                             Multiple Options - 5
                                                                    Exhibit 6
                                            Analysis of 2004 calendar year incurred claims by member

                            a. Distribution of claims by size
                                                                              Combined      Cost
                             Paid Claims Per        % of                       Average     Sharing
                                   Member         Members    % of Claims        Claim      Percent Cost Sharing $
                            <500                         40%          3%             212        27%           78
                            500-5000                     49%         34%           1,727        19%          410
                            5000-20000                    9%         33%           9,096        11%        1,085
                            20000+                        2%         30%          44,613         2%          842
                            All claims                 100%         100%           2,520        12%          347


                            b. Distribution of claims by attachment point - analysis of effect of large claims
                                                   Claims in
                                                 Excess of Att Percent of     Members       % of Total Average Per
                            Attachment Point         Point     Total Claims   affected      Members          Member
                             All Claims           257,333,726        100.0%      102,000                        2,520
                                         50,000    18,690,808          7.3%          365          0.36%
                                         75,000    12,362,947          4.8%          173          0.17%
                                        100,000     9,129,130          3.5%           95          0.09%
                                        125,000     7,340,217          2.9%           53          0.05%
                                        150,000     6,190,829          2.4%           39          0.04%

                            c. Distribution of claims and cost sharing separately by Medical and Pharmacy
                                                                                             Cost
                            Total Paid Claims Pharmacy           Medical      Percent      Sharing    Cost Sharing
                                Per Member          Claims       Claims      Pharmacy     Pharmacy      Medical
                            <500                           44          168          21%          44%           21%
                            500-5000                      477        1,250          28%          32%           13%
                            5000-20000                  1,841        7,255          20%          22%            7%
                            20000+                      4,581       40,032          10%          15%            0%
                            All claims                    498        2,022          20%          27%            7%




Blue Cross Market Conduct Examination Statistical Exhibits            -158-                                             Small Employer Claims - 6
                                                                          Exhibit 7
                                                Comparison of Small Employer and Direct Pay Claim Experience
                                                  Analysis of 2004 calendar year incurred claims by member

                                          Small Employer                                                            Direct Pay

a. Distribution of claims by size
                                                                Cost                                                               Cost
 Paid Claims                                       Average     Sharing   Cost                                         Average     Sharing Cost Sharing
 Per Member      % of Members       % of Claims     Claim      Percent Sharing $      % of Members % of Claims         Claim      Percent      $
<500                      40%                 3%        212         27%      78                54%          3%              191        44%        150
500-5000                  49%                34%      1,727         19%     410                36%         26%            1,999        29%        813
5000-20000                 9%                33%      9,096         11%   1,085                 8%         30%          10,088         18%      2,285
20000+                   1.7%                30%     44,613          2%     842               2.0%         40%          54,852          5%      2,814
All claims               100%              100%       2,520         12%     347               100%       100%             3,074        18%        677


b. Distribution of claims by attachment point - analysis of effect of large claims
                   Claims in                                                            Claims in
 Attachment      Excess of Att    Percent of                                           Excess of Att Percent of
      Point          Point       Total Claims                                             Point      Total Claims
 All Claims        257,333,726         100.0%                                            43,607,851       100.0%
        50,000      18,690,808            7.3%                                            4,635,508         10.6%
        75,000      12,362,947            4.8%                                            3,068,565          7.0%
       100,000        9,129,130           3.5%                                            2,298,644          5.3%
       125,000        7,340,217           2.9%                                            1,801,039          4.1%
       150,000        6,190,829           2.4%                                            1,464,854          3.4%

c. Distribution of claims and cost sharing separately by Medical and Pharmacy
  Total Paid                                                  Cost       Cost                                                   Cost
  Claims Per       Pharmacy        Medical       Percent     Sharing    Sharing         Pharmacy       Medical        Percent  Sharing Cost Sharing
    Member          Claims          Claims     Pharmacy Pharmacy Medical                 Claims        Claims        Pharmacy Pharmacy   Medical
<500                        44            168          21%        44%       21%                  65          126           34%      27%        50%
500-5000                   477          1,250          28%        32%       13%                 771        1,228           39%      26%        31%
5000-20000               1,841          7,255          20%        22%        7%               2,298        7,790           23%      25%        16%
20000+                   4,581         40,032          10%        15%        0%               3,256      51,596             6%      25%         3%
All claims                 498          2,022          20%        27%        7%                 630        2,444           20%      26%        16%




Blue Cross Market Conduct Examination Statistical Exhibits                   -159-                                                      Direct Pay Claims - 7
                                                                Exhibit 8
                            Comparison of Large and Small Employer Demographics Using Large Group Age Factors
                                     Factors are Member-Based and Separate for Medical and Pharmacy
                                                   Assumed 78% Medical, 22% Pharmacy


                                                                                                           Ratio to Small Employer
                                 Business Segment                          Average Age/Gender Factor         Age/Gender Factor
             Large Employer (IER)                                                              1.01                            1.05
             Small Employer (PER)                                                              0.96                            1.00




             The average age gender factor shown here is based on Blue Cross's large group member-based system. Older members
             get relatively higher factors and younger members relatively lower factors. The averages shown here are weighted averages
             for all members.


                     Comparison of Small Employer and Direct Pay Demographics Using Modified Small Employer Factors
                                      Factors are Subscriber Based, and Vary by Family Composition
                                                                                                   Ratio to Small Employer
                                Business Segment                      Average Age/Gender Factor      Age/Gender Factor
             Direct Pay Pool I                                                             1.50                        1.43
             Direct Pay Pool II                                                            0.96                        0.91
             Total Direct Pay                                                              1.28                        1.22

             Small Employer                                                                        1.05                          1.00




Blue Cross Market Conduct Examination Statistical Exhibits             -160-                                               Age Factors by Segment - 8
                                                                    Exhibit 9
                                                       Small Employer Health Status Factors


                                                                          Calendar Year
                                 Factor             2001      2002       2003      2004       2005     2006
                                           0.92        35%       30%        31%       24%        14%      12%
                                           0.96        20%       12%        10%       16%        23%      23%
                                           1.00        15%       25%        23%       25%        25%      24%
                                           1.04         6%       10%         9%         9%       11%      13%
                                           1.07        10%       10%        12%         9%        5%       5%
                                           1.10        15%       13%        16%       18%        23%      24%
                                 Total                100%      100%       100%      100%       100%     100%

                                 Avg Factor          0.988     0.995      0.999     1.002      1.010    1.013




Blue Cross Market Conduct Examination Statistical Exhibits             -161-                                    HS by Year - 9
                                                                       Exhibit 10
                                                Analysis of change in Health status factor 2004 vs 2005
                                                     Distribution of Factors by Number of Groups

                                                             Current Band Factor (2005)
                       Previous
                        Band                                                                              Grand
                        Factor           0.92        0.96       1.00      1.04       1.07      1.10       Total    % of Total
                            0.92        1,265      1,057        638         1        -         -           2,961        24%
                            0.96          217        967        543       280          1       -           2,008        16%
                            1.00          177        688      1,135       450        199       413         3,062        25%
                            1.04          -          115        273       282        119       276         1,065         9%
                            1.07          -            1        253       182        178       478         1,092         9%
                            1.10          -          -          229       140        124     1,657         2,150        17%
                       Total            1,659      2,828      3,071     1,335        621     2,824        12,338
                       % of Total         13%        23%        25%       11%         5%       23%
                                                                                                                      1.011
                       Average Factor




Blue Cross Market Conduct Examination Statistical Exhibits               -162-                                                  HS Change - 10
                                                                    Exhibit 11
                                              Analysis of change in Health status factor 2004 vs 2005
                                                            Variation by size of Group



                       Number of                     Average 2004 Average 2005
                        Enrolled       Number of     Health Status Health Status     % with   % Stayed the    % with
                       Employees        Groups          Factor        Factor        Decrease     Same        Increase
                             1              4,948            0.998        1.006           19%        49%            32%
                             2              2,274            1.001        1.013           18%        44%            38%
                          3 to 5            2,540            1.003        1.014           20%        41%            40%
                         6 to 10            1,292            1.009        1.019           22%        37%            41%
                        11 to 25              852            1.011        1.021           20%        41%            39%
                        26 to 50              196            0.995        0.987           34%        45%            21%
                       All Groups          12,102            1.001        1.011           19%        44%            36%




Blue Cross Market Conduct Examination Statistical Exhibits            -163-                                               HS by size - 11
                                                                               Exhibit 12
                                                                  Distribution of Age/Gender Factors
                                                       Raw Factors without Health Band and without compression

                                                                                     Percent of
                                       Age Gender Factor               Groups         Groups      Average Factor
                                Less than .50                                 414              3%          0.390
                                Between .50 and .75                         1,359            11%           0.640
                                Between .75 and .90                         2,428            19%           0.840
                                Between .90 and 1.00                        2,154            17%           0.952
                                Between 1.00 and 1.10                       1,908            15%           1.043
                                Between 1.10 and 1.25                       1,880            15%           1.164
                                Between 1.25 and 1.50                       1,197              9%          1.351
                                Between 1.50 and 2.00                         923              7%          1.676
                                Greater than 2.00                             450              4%          2.126
                                                                           12,713           100%           1.056


                                                     Distribution of Combined Age/Gender and Health Band Factors
                                                                         Groups with 2005 Factors
                                                                        Combined
                                                                      Age/Gender &                     Average       Average Raw    Difference
                                                                       Health Band      Percent of    Combined       Factor Before   (Effect of
                                         Combined Factor                  Factor         groups         Factor     4:1 Compression Compression)
                                 Less than .50                                   536              4%         0.435            0.401          8.4%
                                 Between .50 and .60                             367              3%         0.564            0.564          0.0%
                                 Between .60 and .70                             524              4%         0.653            0.653          0.0%
                                 Between .70 and .80                           1,044              8%         0.756            0.756          0.0%
                                 Between .80 and .90                           1,662            13%          0.853            0.853          0.0%
                                 Between .90 and 1.00                          2,246            18%          0.950            0.950          0.0%
                                 Between 1.00 and 1.25                         3,418            27%          1.110            1.110          0.0%
                                 Between 1.25 and 1.50                         1,333            10%          1.350            1.350          0.0%
                                 More than 1.50                                1,582            12%          1.625            1.853        -12.3%
                                 Total                                        12,712           100%          1.045            1.072         -2.5%

                                                    Distribution of Change in Combined Factor
                                                     Groups with Both 2004 and 2005 Factors
                                                 Combined A/G and Health Band, 4:1 Compression
                                         Change Percent               Groups       Avg Change       % of Groups
                                -20% or less                                  288           -32%              2%
                                Between -10% and -20%                         505           -14%              4%
                                Between 0% and -10%                         3,964             -3%            32%
                                Between 0% and +10%                         4,983              4%            40%
                                Between + 10% and +20%                      1,422            14%             12%
                                Between + 20% and + 30%                       577            24%              5%
                                +30% or more                                  612            49%              5%
                                Total                                     12,351               5%           100%



Blue Cross Market Conduct Examination Statistical Exhibits                             -164-                                                        Age Gender Distribution - 12
                                                                     Exhibit 13
                                                      Analysis of Effect of Rate Compression

                                                                       Community
                                                        Current Law      Rating
              Compression                                  4 to 1        1 to 1         2 to 1          3 to 1       6 to 1
              Total Groups                                    12,445        12,445         12,445          12,445       12,445
              Total Subscribers                               48,346        48,346         48,346          48,346       48,346
              Minimum Combined Factor                          0.412           1.00           0.67            0.50         0.35
              Maximum Combined Factor                          1.649           1.00           1.34            1.50         2.10

              Affected by Minimum
                    Number of Groups                             388            6,710          1,437          626          181
                    Number of Subscribers                        689           25,740          3,158        1,105          306
                    Percent of Groups                           3.1%              54%          11.5%         5.0%         1.5%
                    Percent of Subscribers                      1.4%              53%            6.5%        2.3%         0.6%
                    Average Factor before Min                  0.358            0.791          0.510        0.400        0.324
                    Average Rate Increase Effect                 15%              26%            31%          25%           8%
                    Min Factor before Compression              0.317            0.317          0.317        0.317        0.317
                    Greatest Rate Increase Effect                30%             215%           111%          57%          10%

              Affected by Maximum
                    Number of Groups                             901            5,735          1,828        1,333          266
                    Number of Subscribers                      1,432           22,606          4,013        2,294          365
                    Percent of Groups                           7.2%              46%          14.7%        10.7%         2.1%
                    Percent of Subscribers                      3.0%              47%           8.3%         4.7%         0.8%
                    Average Factor before Max                  1.969            1.324          1.722        1.838        2.297
                    Average Rate Decrease Effect                -16%             -24%           -22%         -18%          -9%
                    Max Factor before Compression              2.482            2.482          2.482        2.482        2.482
                    Greatest Rate Decrease Effect               -34%             -60%           -46%         -40%         -15%

              Total Groups Affected by Compression             1,289           12,445          3,265        1,959         447
                    % of Total                                 10.4%             100%          26.2%        15.7%         3.6%
              Total Affected Subscribers                       2,121           48,346          7,171        3,399         671
                    % of Total                                  4.4%             100%          14.8%         7.0%         1.4%




Blue Cross Market Conduct Examination Statistical Exhibits             -165-                                              Rate Compression - 13
                                                              Exhibit 14
                                           Small Employer (PER) Loss Ratio by Group Size
                                  July 2004 to June 2005 Incurred Claims Paid Through August 2005
                                           Group Size Determined as of December 31, 2004

                      Enrolled Contracts on
                      12/31/2004                         Premium (000)         Claims (000)        Loss Ratio

                      1                                           $38,909             $38,025        97.7%
                      2                                           $30,995             $28,250        91.1%
                      3 to 5                                      $63,676             $49,568        77.8%
                      6 to 10                                     $61,557             $49,805        80.9%
                      11 to 25                                    $87,789             $70,035        79.8%
                      26 +                                        $38,263             $31,415        82.1%
                      Other*                                      $12,935             $12,414        96.0%
                      Total                                      $334,124            $279,513        83.7%
                      Total excluding Groups of 1                $295,215            $241,488        81.8%

                      * Groups with premium and claims during the experience period, but not active on December 31, 2004




Blue Cross Market Conduct Examination Statistical Exhibits             -166-                                               LR by Size - 14

				
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