Perot .. . from page 3 is more generous in paying out AFDC health insurance premiums channeled through Perot’s NHIC. Last year, those premiums cost the state $37.87 per person per month more than the cash grant. For the state fiscal year 1981, which began September 1, 1980, the monthly AFDC premium is about $46.87 per person per month nearly $14 more than the cash grant. Not only are the Medicaid premiums soaking up a lion’s share of the TDHR budget, they’re doing so at an increasing rate. In 1976, Medicaid insurance premiums took only 17.6 percent of the TDHR budget. In the last four years, the cost of operating the Medicaid insurance program has increased by a whopping 96 percent. Nor is that all of the bad news. In the four-year contract now in contention, TDHR has budgeted $441 million for Medicaid insurance premiums for fiscal 1981, and has requested $458 million and $554.8 million for fiscal years 1982 and 1983, respectively. The $554.8 million request for fiscal 1983 represents a 61 percent increase over the 1980 actual expenditures. A Contract Worth Keeping Texas is the only state in the union that buys insurance for welfare recipients under the Medicaid program. All of the other states either pay the physician and hospital bills incurred directly, or they hire a data processing firm to make the payments for a negotiated price per claim processed. It is not surprising that Texas is alone if you consider the cost disadvantages of operating an insured program. Disadvantages to the state, that is. To companies fortunate enough to get the Texas business, the program is profitable indeed. As of June 30, 1980, NHIC had collected over $1 billion worth of Medicaid premiums, but had paid out only about $850 million worth of claims. What happened to the rest of the money? Only Perot may truly know, but there are some financial footprints. For example, from 1977 through June 1980, the state paid NHIC over $30 million for administration. The best evidence that NHIC has profited on these administrative charges is in the results of the current round of competitive bidding. Bradford National underbid NHIC on administrative charges by about $10 million per year. Another $14 million of state payments to NHIC has ,gone for “risk charge retention.” The complicated computation of risk charge retention will be explained more fully below, but for introductory purposes it is enough to say that unless NHIC loses money on the contract in the future, that $14 million is pure profit for the corporation. Premium dollars paid by the state in excess of administrative charges, risk charge retention, and claims paid by NHIC are credited to insurance reserves held in trust by NHIC for TDHR. For accounting purposes, the reserves are divided into two categories: an incurred claims liability reserve and a risk stabilization reserve. The incurred claims liability reserve reflects NHIC’s estimate of the dollar value of all claims outstanding but not yet paid. As of June 30, 1980, NHIC held $48.6 million in the incurred claims reserve. Premium funds in excess of the amounts needed to keep the incurred claims reserve at the proper estimated level are credited to the risk stabilization reserve. According to the terms of the contract between TDHR and NHIC, the risk stabilization reserve is designed to provide an emergency surplus for unforeseen contingencies, such as epidemics. As of June 30, 1980, that reserve contained $52.6 million. Hence, the combined value of both reserves on June 30th exceeded $101 million. Premium funds are not the only source of income to the risk stabilization reserve. Under the terms of the TDHRNHIC contract, the state is credited with part a critical distinction of the interest earned from NHIC’s investment of the reserves. Specifically, interest on both reserves is credited to the risk stabilization reserve. The rate of interest paid by NHIC to the state is equal to 97.5 percent of the average daily interest rate on 90-day U.S. TreasuryBills sold during the month for which interest is being credited. The difference between that rate and the much higher market interest rate becomes profit for NHIC. Over the operating history of the contract, interest rates on 90-day Treasury Bills have lagged substantially behind the rate of return on other investments. In 1977, for example, the average rate on T-Bills was 5.2 percent; in 1978, 7.19 percent; in 1979, 10.07 percent; for the first quarter of 1980, 15.2 percent. The easiest way to compute Perot’s interest profits on welfare investments is to compare the net interest on the investments reported to the State Board of Insurance in NHIC’s Annual Statements with the actual interest credited to the risk stabilization reserves for given calendar years. In calendar year 1978, NHIC reported net investment income of $6.8 million to the Insurance Board, but only $5.6 million in interest was credited to the risk stabilization reserve. Hence, Perot’s interest profit on the Medicaid investment for 1978 was about $1.2 million. Perot’s 1979 interest profits were even higher: NHIC reported net investment income of $14.1 million to the Insurance Board in that year, but only $12 million was credited to the Medicaid reserve, leaving NHIC a $2.1 million interest profit. Correspondence and memoranda in the files of the Texas State Board of Insurance indicate that Perot’s corporation managed to extract its high-level profits on welfare investments through arrangements which violated the Texas Insurance Code. In a letter dated July 21, 1980, Insurance Commissioner Jay Voorhis noted that National Heritage Insurance, Inc. was using its assets to finance “repurchase agreements” which are not “legal, admissible assets for a life insurance company.” A repurchase agreement is an arrangement with a bank or a brokerage firm to invest and reinvest some given amount of money. The purpose is to allow continuous trading. While a continuous roll-over of assets may serve to enhance interest profits, the arrangement creates problems for insurance board examiners, whose task is to identify assets. The only records tracking the course of the money involved are broker’s slips and/or lists of what was bought and sold. Under the Insurance Code, a record of what is being bought and sold is not good enough; to be legal, insurance company assets must be in their possession and convertible into cash at some specified date. Insurance Board records indicate that NHIC investments in repurchase agreements totaled $41.4 million at the end of 1978, and $44.7 million at the end of 1979. Those illegal investments represented about 38.5 percent of NHIC’s total invested assets at the end of 1978, and about 32 percent of NHIC’s total invested assets at the end of 1979. At the end of 1978, over 81 percent of all NHIC’s invested assets belonged to the state’s reserves; at the end of 1979, 79 percent of all NHIC’s investments belonged to the Medicaid reserves. The cumulative dollar value of the illegal transactions involved in NHIC’s repurchase agreements is a little staggering if you are not used to thinking about what the continuous trading of $41 to 44 million worth of assets can do in a year. NHIC reported over $9.6 billion worth of repurchase agreement transactions to the Insurance Board in 1979. THE TEXAS OBSERVER 17
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