TESTIMONY OF HORIZON BLUE CROSS BLUE SHIELD OF NEW JERSEY ON SENATE BILL NO. 4

Chairman Sarlo, Vice Chairman Stack, and Members of the Senate Budget and Appropriations Committee:

Thank you for the opportunity to address the Committee concerning S-4, which significantly alters the mission, structure, operations and financing of health service corporations in the State of New Jersey.

As you are aware, Horizon Blue Cross Blue Shield of New Jersey is the only company in the State operating as a health service corporation.  As New Jersey’s oldest and largest health insurer, Horizon has provided generations of families and businesses with access to quality, affordable health care coverage for over 85 years and, at present, is responsible for managing the health insurance needs of approximately 3.8 million New Jerseyans.  For the entirety of our 85 years of existence, our company has been headquartered in New Jersey and has been committed to serving the citizens of our State.  With nearly 5,500 employees, Horizon is one of the State’s largest employers, and is a significant tax payer despite its not-for-profit designation with over $500 million in federal and State taxes paid last year.  Of that, $212 million in taxes were collected by the State of New Jersey.  Without question, Horizon is an economic engine for the State of New Jersey and provides thousands of jobs for NJ residents, generating over $10 billion of economic activity primarily in the health care space, and paying hundreds of millions of dollars of taxes to the State.

If enacted, S-4 would impose sweeping new mandates upon Horizon alone that would fundamentally alter the way the company operates and would significantly disrupt the health insurance coverage of 3.8 million residents as well as the health care delivery systems across the State.  The disruption visited by S-4 would only serve to compound the already chaotic legislative and regulatory environment enveloping the health care industry due to “repeal and replace” activities unfolding in Washington, D.C.  We urge members of the Legislature to carefully consider the potential adverse impacts of enacting broad and far-reaching changes to New Jersey’s health care industry during this period of volatility and strongly encourage policy makers to take a deliberative and considered approach that provides for enough time to engage in a thoughtful and comprehensive analysis of the measures, and undoubtedly catastrophic impact of S-4.

As part of that analysis, we respectfully ask that you consider the following:

As presently drafted, S-4 would alter the well-established and long-standing statutory mission of health service corporations from being organized for the benefit of their members to being organized for “charitable” purposes unrelated to our members and would establish a process for the diversion of reserve funds built by our members to the State for unspecified public health programs.  The broad expansion of the mission negatively impacts the 3.8 million New Jerseyans and serves as a hidden tax to those Horizon members who will bear the financial cost of the expanded mission and any diversion of the reserves they helped build.

Specifically, Horizon’s reserves act as a safety net to protect our members from unexpected increases in health care costs due to unforeseen circumstances such as pandemics, natural disasters, the

introduction of costly new drugs such as the recent Hepatitis C drugs the company spent in excess of $100 million dollars on without any planning, and other unforeseen health care needs and crises.  The bill’s provisions that allow for the diversion of reserve funds to the State if reserve levels are deemed “inefficient” would undoubtedly jeopardize the health of the company and the security of the insurance purchased by its 3.8 million customers.  In fact, the reserve fund maintained by Horizon only amounts to 75 days in claims payment and is critically important to ensure that we are able to deliver on the promise of financing the health coverage needs of our members.  It should be further noted that our reserve funds are among the lowest of any insurer of its size, and for the complexity and breadth of risk it insures.  We reiterate that a diversion of the reserve funds for unspecified public health programs removes the security and stability expected by our members, but more importantly burdens our members alone with a hidden premium tax.

It should be also noted that the bill vests the Commissioner of Banking and Insurance with the power to make arbitrary determinations regarding the appropriate reserve levels without being bound by any independent evaluations or recommendations.  Moreover, the lack of any benchmarks or guideposts as to what would constitute an appropriate and efficient reserve level based on an unbiased, third-party industry expert exacerbates the arbitrary nature of this bill and the decisions it allows.    Most troubling, the costs of an inaccurate determination and biased decision would be borne by our members alone whose premiums will be required to be increased to replenish the reserves swept by the State.

Moreover, the specter of diminished reserves and the obligation to serve as a charity or public health oriented entity would restrict Horizon’s ability to make investments in infrastructure, technology and other measures that improve service delivery to its members.  Having fewer dollars to reinvest in the company would inhibit economic growth and innovation by the company, thereby resulting in deteriorating service conditions and poorer health outcomes for our subscribers.

We also ask this Legislature to recognize that Horizon is made up of its members – the 3.8 million people of New Jersey who rely on us, in often their most trying times.  At its core, this bill strains the pocketbooks of our members and suppresses the ability of Horizon to deliver affordable quality health insurance.  This bill seeks to take Horizon’s reserves, the very money paid by our members, to be used in an unspecified manner.  The ripple effect of this “taking” is wide ranging.  By weakening our members’ reserves and expanding Horizon’s scope of obligations to the State as a whole this bill will put Horizon at a steep economic disadvantage and saddle our members with higher premiums.   Additionally, with the threat of having its members’ reserves diverted for unspecified public health needs, Horizon will be unable to drive innovation and invest in its core business.  Placed at a competitive disadvantage due to an unfair financial burden and premium pressures not felt by our competitors, Horizon will struggle to deliver on its ability to carry-out its charted purpose, which is to deliver low cost insurance to the people of New Jersey.  This bill simply saddles Horizon with more responsibility, less flexibility, and threatens the continued availability of an affordable quality health insurance option that 1 in 2 New Jerseyans chose for their health care needs.

Next, it should be noted that the bill’s requirement that Horizon serve as the insurer of last resort would conflict directly with the landmark reforms this very Legislature adopted over 25 years ago.  It also directly conflicts with the Affordable Care Act.  In fact, the notion of an “insurer of last resort” has been obsolete since 1992 in New Jersey and was addressed on a federal level by the 2014 Affordable Care Act market reform rules.  Now, every insurer in the individual and group markets offers coverage on a guaranteed availability basis.  We are puzzled as to why this bill seeks to reintroduce a concept that is legally obsolete and previously proven to be disastrous.

I respectfully remind this Legislature that it introduced sweeping reforms in this State’s health care system in 1992 including the elimination of “an insurer of last resort” in an effort to stabilize a volatile and failing marketplace.  In 1988, the Department of Insurance, as it was then known, hired Ernst & Whinney [predecessor to Ernst & Young] to conduct a management audit of the Company and concluded that the state needed to redefine and reduce the public policy role of the company as the “insurer of last resort “ in order for it to survive.   In fact, Horizon was essentially bankrupt in the late 1980’s and early 1990’s, as a result of its status as the insurer of last resort and because it was used as a health care policy arm of the State to singly absorb the financial losses of the individual market while allowing others to turn away members for their health status.  The Legislature in 1992 chose to end the Company’s public policy role in this regard and now requires every insurer to cover an individual regardless of his or her health status.

A retreat back to the “insurer of last resort” model would return New Jersey to the past where the marketplace was unstable and the insurer of last resort was nearly insolvent.  This bill ignores decades of history and experience with that failed model and puts us on a track to jeopardize the security of the health insurance of millions of New Jerseyans.  Unequivocally, saddling Horizon with the insurer of last resort obligation in direct contradiction of the previous studies, this very Legislature’s own actions, and without further consideration on the merits of that concept puts our 3.8 million members at risk.

In addition, S-4 substantially expands Horizon’s statutory mission by requiring it to “assist and support public and private health care initiatives for individuals without health insurance,” “promote the integration of the health care system that meets the health care needs of the residents of the State of New Jersey,” and “recognize an ongoing responsibility to contribute to fundamental improvements in the overall health status of all New Jersey residents.”  While these are all laudable goals, it is unclear why Horizon’s 3.8 million members alone must shoulder the burden of paying for these traditionally government sector obligations.  Without clarification, this nebulous language could potentially be interpreted to transform Horizon into an instrumentality of the State and may result in the taking of the Company’s private assets and funds into State assets and funds to be used for public purposes.  While it is the expectation of our members that their premium dollars are used to serve their health insurance needs as having directly contributed to the reserves, this bill takes those funds into subsidies for the public at large.  Furthermore, if the company is to be considered a charitable entity, it should be imbued with the benefits traditionally conferred upon charities.  Instead, this bill saddles Horizon with all of the obligations of a charitable institution but does not convey any of the benefits typically afforded them.  The bill also places Horizon at a significant competitive disadvantage and diminishes its ability to serve the healthcare needs of its members because it will drive up the cost of doing business and impose new hidden taxes that no other insurers or their members will have to pay.

Like all insurance companies operating in this State, Horizon exists in a very competitive marketplace.  When faced with cost increases visited by ill-advised public policies, the company must decide whether to increase costs to its members, cut expenditures through layoffs, outsourcing, or other labor related maneuvers, or adopt some combination of both.  Given that S-4 singles out Horizon for disfavored treatment, for-profit out-of-state insurance companies will now have a significant competitive advantage over Horizon, the only health insurance company established in New Jersey and operating solely within the State’s borders.  The only possible outcome of this transformation of the marketplace will be increased costs for health insurance statewide and increased instability in the health care economy.

Accordingly, we urge you to vote no on this bill.  Thank you for your time and consideration.