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Here's the bright side of those skyrocketing health insurance premiums: At least the local health insurance companies are improving their books.

Double-digit premium hikes in the last two years have helped the region's health insurers build profits and cash reserves.

The parent companies of Univera Healthcare, Blue Cross and Blue Shield of Western New York and Independent Health reported combined net income totaling $159 million in 2002.

Independent Health made $39.5 million, up from $28.6 million in 2001. Reserves for the Amherst-based health maintenance organization covering 356,000 Western New Yorkers jumped from $60 million at the start of 2002 to $100 million at year end.

HealthNow New York, the Buffalo-based Blue Cross licensee, reported net income of $34 million -- up from $15.3 million the previous year -- and the company now has $128 million in reserves.

The health insurers have strengthened their books after raising premiums 10 percent to 15 percent for many products in the last two years. The rising insurance cost has hit customers of all shapes and sizes.

Governments have blamed insurance costs as part of the reason for property tax increases. The City of Buffalo is budgeting an extra $6.6 million for health benefits this year.

HSBC, the region's biggest corporate employer, cited rising benefit costs when it laid off 80 people in December. A year of family coverage now costs some companies in the range of $7,000 per employee.

"What's happening is the businesses are shifting more and more of the cost of health insurance to their employees," said Kurt Alverson, president of the Chamber of Commerce of the Tonawandas.

But don't count on health insurers to back off the rate-hike pedal, because they still have some financial issues.

Although HealthNow has reserves of $128 million, state regulations require the company to have reserves of $190 million. The state insurance department considers the company's finances "impaired."

HealthNow had to file a report with the state on how it will cure the shortfall and the insurance department keeps a closer eye on them.

HealthNow's reserve imbalance has worsened in recent years. The company is supposed to set aside 12.5 percent of its total premiums as reserves to make sure they can pay claims in some unforeseen event.

HealthNow's reserves had reached 9.6 percent of premiums after 1998, but deteriorated over the last four years to 8.5 percent. The company's board ousted former President Thomas Hartnett in February citing differences in "management style," but did not specify if the finances were partly to blame.

"In order to keep up with the reserve requirement, you basically have to have a profit margin of 12.5 percent. We'd have a hard time getting those kind of rate increases approved and we'd also have a hard time selling those kind of rate increases," said James A. Cardone, executive vice president and chief financial officer of HealthNow.

HealthNow covers 780,000 lives across Upstate New York and it collected total premiums of more than $1.5 billion last year. This means the $33 million net income for the non-profit health insurer represents what might be considered a "profit margin" of about 2 percent.

The insurance companies are caught in the middle, between hospitals and doctors lobbying for higher reimbursements for each bed and procedure and businesses screaming for premium relief.

"There is some concern in the business community about the cry of low reimbursement rates from the physicians and the hospitals," said Andrew Rudnick, president of the Buffalo Niagara Partnership.

Rudnick said it is hard to determine how much of the financial struggles of the hospital networks is related to reimbursement rates and how much is related to excess beds in a region losing population.

Independent Health's reserves plunged after 2000, when it lost $33 million. Company officials said the situation had to be rectified.

"Independent Health's $39 million surplus for 2002 was essential in order for the company to restore its reserves to the level recommended by the New York State Department of Insurance," said Frank Sava, director of corporate communications for Independent Health. "The health care industry tends to be cyclical . . . all health plans must be prepared to withstand a year of unexpected losses."

Since Independent Health is licensed as an HMO, and not a health insurance company selling indemnity plans, it is only required to set aside 5 percent of premiums as reserves. Independent Health is required to have $37 million in reserves and it now has more than $100 million.

A.M. Best, an independent rating agency, gives Independent Health a "B" rating, which it considers a "vulnerable" rating. The rating means the company has a "fair ability to meet obligations to policy holders but is vulnerable to adverse changes in underwriting and economic conditions."

HealthNow is not rated by A.M. Best, meaning the company has not requested a rating.

Univera is part of Excellus Health Plans, a much larger company in Rochester. Excellus, which covers 2 million people, had net income of $85.7 million last year. The company's reserves of $473 million exceed the state requirement of $405 million and Excellus has an A- rating from A.M. Best.

Separate finances for Univera are not reported. Univera has 162,000 members in Western New York, down from 185,000 last year. The company chose not to rebid the contract to cover hourly workers at the General Motors and Delphi plants. Those UAW workers are now covered by a Blue Cross and Blue Shield plan from Michigan.

HealthNow is in transition. After a heated board fight to oust Hartnett, the company has launched a national search for a new president. HealthNow's board also wants to investigate converting to a for-profit company and selling stock to the public, a move recently completed by the Blue Cross licensee in New York.

Cardone said the company is considering setting up a subsidiary for its Community Blue division to address the state reserve requirements. About 60 percent of its revenue if from HMO's, which would only be subject to the 5 percent reserve requirement if it were licensed as a subsidiary.

"That's one of the options on the table," he said.


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