HCSC Members Want a Piece of $5 Billion

CHICAGO (CN) - Health Care Service Corporation, a Blue Cross Blue Shield insurer, violated its mission as a nonprofit mutual company by accumulating more than $5 billion in excess profits, and dishing it out in executive bonuses, a class action claims.

Lead plaintiff Babbitt Municipalities sued Health Care Service Corp. (HCSC) in Cook County Court.

"As a nonprofit mutual company, defendant is obligated to act for the mutual benefits of its members - the policyholders. This mandate is contained in defendant's articles of incorporation, its bylaws, and numerous public statements made by defendant," the lawsuit states.

"Over the past five years, defendant has accumulated excess profits of almost five billion dollars, funds not necessary to protect against any unforeseen financial contingency. HCSC is supposed to use these excess profits for the mutual benefit of the members of the corporation. Defendant, however, has failed to allocate its excess profits for this purpose."

HCSC is a licensee of the Blue Cross and Blue Shield Association, and provides insurance plans under the Blue Cross Blue Shield name. HCSC is the largest customer-owned health insurer in the United States, and as a nonprofit, answers to policyholders rather than investors.

But rather than spend its profits to benefit members, HCSC "has used those funds to expand its business operations and pay its corporate executives millions of dollars in 'bonus' money - the payment of which is tied to defendant's earnings growth. In other words, the more money HCSC accumulates, the more money its executives get paid. This has resulted in a perverse incentive system that favors the continued accumulation of profits and expansion of the nonprofits' business operations at the expense of its policyholder members," Babbitt claims.

The top 10 executives were paid nearly $96 million in bonuses over the past three years, according to the complaint.

It adds: "Blue Plans historically have represented that retained profits of three months of claims payments was more than sufficient to cover any unexpected financial contingency.

"HCSC, however, maintains excess profits of nearly 6 months of claims payments - nearly double of the benchmark 3-month reserve."

The insurer has increased profits by charging members higher administrative fees, even while it remains very profitable, the complaint states.

HCSC "acts in a manner contrary to its mission by branching out and conducting business activities separate and apart from its mission. For example, defendant generates enormous fees simply by administering its members' health care benefits - a task with little to no risk to the insurer. For 2013 alone, defendant generated revenue of over $229 million dollars from such administrative fees. This revenue results in an ever-increasing accumulation of excess profits. Members did not mutually benefit from this significant receipt of funds. Instead, defendant is using excess profits to expand its business operations without corresponding mutual benefit to its members," Babbitt claims.

Babbitt seeks an order finding that HCSC has breached its contracts by not using its excess profits for members' benefit, and recovery of improperly distributed excess profits.

Its lead counsel is Ari Scharg with Edelson PC.

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