Market Uncertainty Drives Higher Than Expected Financial Results for Blue Cross NC in 2017

• Blue Cross NC posts higher than expected net income for 2017.
• Steep losses and gains over five-year period show volatility of health insurance market.
• Company will pass new tax law savings on to its insured customers by offsetting premium increases beginning in the fall of 2018.

DURHAM, N.C. – Blue Cross and Blue Shield of North Carolina (Blue Cross NC) is on stronger financial footing after years of losses since implementing the Affordable Care Act (ACA). The company has reported a higher than anticipated net income margin in 2017 at 7.8 cents for every dollar of revenue.

The company’s average net income margin over a five-year period (2013 to 2017) is still lower than targeted, at 2.2 percent. Steep losses in previous years and gains in 2017 are evidence of volatility in the market, a trend that will likely continue as a result of actions taken in Washington in 2017 and 2018.

“We manage the company on a long term basis, which has allowed us to remain in the ACA market and in all 100 North Carolina counties through years of volatility,” said Mitch Perry, chief financial officer for Blue Cross NC.

“Last year we saw changes to two key provisions of the ACA, eliminating Cost Sharing Reduction payments and dropping enforcement of the individual mandate. The longer term effects of these decisions and ongoing uncertainty in Washington will likely lead to continued volatility,” Perry said.

*Financial results, excluding months in reserve are GAAP results.

The vast majority of customers’ premium dollars in 2017 went directly to their health care. Blue Cross NC expects to again meet Medical Loss Ratio requirements to spend a majority of premiums collected on medical claims and improving quality.

Financial gains for the year were largely a result of lower medical claims than the company projected when its 2017 rates were finalized in August 2016. Blue Cross NC gained roughly 200,000 new customers from UnitedHealthcare and Aetna in 2017 after these companies left the Marketplace. These customers were healthier than anticipated. Overall, the company experienced a high turnover of its customer base from 2016 to 2017, and lower claims for these new customers contributed to the company’s financial performance.

In mid-2017, Blue Cross NC saw claims levels stabilizing in the ACA market and took steps to lower its initial average rate increase request for 2018 ACA plans from 22.9 percent to 14.1 percent. If Cost Sharing Reduction payments had been maintained at the federal level, the company’s requested rate increase would have been near zero.

In light of the 2017 Tax Cuts and Jobs Act, the company will pass on tax savings to its insured customers by offsetting premium increases for policies renewing in the fall of 2018 and moving forward in future years. As other companies have reported, Blue Cross NC’s deferred income taxes, an estimate of the company’s future tax liabilities, changed due to the law.

This was a one-time, non-cash adjustment in accounting, not a change in revenue or expenses. This resulted in a lower tax expense of $102 million for the year. Even with this reduction, Blue Cross NC’s local, state and federal fees and taxes were $511.5 million in 2017.

Total medical claims and expenses were $6.6 billion in 2017, which is up from $5.8 billion in the previous year. Despite the better health of new customers, average annual claims per person still grew to an average of $1,722 per member. Some of the key drivers of higher medical expenses were injectable drugs and infusions (both chemotherapy and non-chemotherapy drugs) administered in a facility setting, specialty drugs, inpatient cardiology costs from heart transplants and coronary bypass surgeries, and high rates of out-of-state lab testing.

ACA customers continued to be the highest users of medical care compared to other customers. This population’s use of the emergency room and inpatient care was significantly higher, more than double other non-ACA individual customers under the age of 65.

The company’s 2017 membership rose to 3.8 million from 3.7 million in 2016. This includes members served on behalf of other Blue plans. Most of the membership gains occurred in individual ACA business as competitors exited the North Carolina market.

ACA customers make up less than 15 percent of Blue Cross NC total membership. The company enrolled 538,000 ACA customers for 2018, down slightly from the previous year. Despite a shorter enrollment period, the company saw higher than expected new sales and enrollments.

Blue Cross NC hopes to continue to serve all 100 counties for 2019. Rates for 2019 individual plans will be submitted and reviewed in the spring.

State law requires the company to maintain reserves equal to a minimum of three months of claims and administrative expenses in order to ensure financial stability for its customers. Blue Cross NC finished the year maintaining reserves at a responsible level of 4.4 months. The total amount of statutory reserves equals to about $2,000 per insured health member. For comparison, the average cost of a three-day hospital stay is $16,232 (non-maternity).

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About Blue Cross NC:

Blue Cross and Blue Shield of North Carolina improves the health and well-being of our customers and communities through innovative health care products, insurance, services and information to more than 3.8 million members, including approximately 1 million served on behalf of other Blue Cross and/or Blue Shield plans. Since 1933, we have worked to make North Carolina a better place to live through our support of community organizations, programs and events that promote good health. Blue Cross NC is an independent licensee of the Blue Cross and Blue Shield Association. Visit Blue Cross NC online at bcbsnc.com. All other marks are the property of their respective owners