Boston Capital

Fallon Health in a bind

By Steven Syre
Globe Columnist / June 25, 2010

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Fallon Community Health Plan was between a rock and a very hard place.

The Worcester health insurer was in Boston on Monday appealing a decision by state insurance regulators to reject many of the rate increases it had proposed for small business clients. Every big health insurer in Massachusetts has been turned down in similar fashion, and all are appealing. Harvard Pilgrim Health Care won its case yesterday, and Neighborhood Health Plan settled with regulators earlier this month.

Governor Deval Patrick is a big believer in exercising the state’s limited power to regulate rates as a way to address escalating health insurance costs. He’s made it a centerpiece of his reelection campaign against a field that includes Republican Charlie Baker, the former chief executive of Harvard Pilgrim.

But insurers recently posted their first-quarter financial reports, and all the big players showed significant operating losses. They complained the state’s rate rejections were trapping them in a cycle of financial losses, and most recognized special accounting charges to capture the effect of more anticipated red ink.

Fallon reported an operating loss for the quarter but did not claim any special charges. It is in the weakest financial condition among the state’s big health insurers and, presumably, not in a position to artificially boost losses with special charges known as premium deficiency reserves.

Fallon is not in dire shape, but it isn’t rock-solid either. The insurer’s risk-based capital, a key measure of financial security, stood at 271 percent at the end of last year. The ratio was 600 percent at Tufts Health Plan and 724 percent at Blue Cross Blue Shield of Massachusetts. Fallon’s own ratio two years earlier was 566 percent.

More to the point, insurers cross a line with regulators when the ratio dips below 200 percent. At that point, companies attract more scrutiny and are required to come up with a plan to improve their finances.

So Fallon has more on the line than most other insurers as it appeals the state’s rate rejections. Here’s how serious it is: Fallon subpoenaed Deputy Insurance Commissioner Robert Dynan to testify at its hearing Monday.

Dynan wrote a now-famous e-mail dumping on Patrick’s plan to limit rate hikes, warning it could lead to a “train wreck’’ in the industry. The memo recently came up in the first gubernatorial debate on WRKO, and Patrick responded like he was breathing fire.

Dynan could help Fallon’s case, but he might also end up talking very specifically about the company’s finances. What to do?

Fallon wanted to question him behind closed doors. Regulators pushed back and won that argument. So there Dynan sat on Monday, but I’d bet no one was anxious to actually hear from him. The hearing dragged on, no one called Dynan, and the case was continued to next Tuesday.

Fallon took a pass when I asked executives to talk about the case yesterday. State regulators didn’t want to talk about Fallon specifically, but Barbara Anthony, the governor’s undersecretary for consumer affairs and business regulation, was clear about how she saw the big picture. Insurers should negotiate harder with health care providers to drive their own costs down and stop asking consumers for so much more, she said.

That’s a good way to look at the health care and insurance system over time, but it won’t do much for Fallon in the short run. Perhaps Robert Dynan will be asked to talk about it Tuesday, but I wouldn’t bet on that.

Steven Syre is a Globe columnist. He can be reached at