pretty hefty level of capital on day 1. Even if you don’t addmembership and your premiums are go<strong>in</strong>g up 10% to 14%a year, you have to add capital just to keep pace with theprice <strong>in</strong>crease. So our organization—and it’s someth<strong>in</strong>g wehave had to work with our public media on—<strong>is</strong> required toadd about $300 million a year to surplus just to ma<strong>in</strong>ta<strong>in</strong> ourcurrent capital strength.McPherson: Where do these r<strong>is</strong>k-based capital formulascome from, Mark?Bartlett: The formula itself was developed by the NationalAssociation of Insurance Comm<strong>is</strong>sioners <strong>in</strong> conjunction withactuaries. The Blue Cross and Blue Shield Association (BCBSA)uses it as part of its plan-licens<strong>in</strong>g process, and states use itas part of their regulatory oversight process. In Michigan, wehave leg<strong>is</strong>lated m<strong>in</strong>imum and maximum r<strong>is</strong>k-based capitalratios. The m<strong>in</strong>imum <strong>is</strong> 200% and the maximum <strong>is</strong> 1,000%.Under BCBSA’s licens<strong>in</strong>g process, your f<strong>in</strong>ancial status <strong>is</strong>considered to be <strong>in</strong> jeopardy if you drop to 375%, at whichpo<strong>in</strong>t you enter a monitor<strong>in</strong>g program. <strong>If</strong> it appears that youare go<strong>in</strong>g to be reach<strong>in</strong>g 200%, BCBSA has the authority tode-license you, withdraw<strong>in</strong>g the Blue Cross and Blue Shieldname and mark.McPherson: Are there capital differences between nonprofitsand for-profits?Bartlett: The difference <strong>is</strong> the for-profit’s ability to accessadditional capital when necessary through the equity markets,whereas nonprofits need to accumulate or borrow it. And asothers here have d<strong>is</strong>cussed, even the borrow<strong>in</strong>g can beconstra<strong>in</strong>ed. So the ease, cost, and timel<strong>in</strong>ess with which youare able to get capital <strong>is</strong> the <strong>is</strong>sue.Wedig: That’s a good po<strong>in</strong>t that could be made more or lessacross the board about for-profit and nonprofit organizations<strong>in</strong> all sectors. Sometimes I like to use the analogy that thenonprofit has to be its own bank, which <strong>is</strong> why you’ll see allthe cash on the assets side to address th<strong>is</strong> capital constra<strong>in</strong>t.O’Brien: Along those l<strong>in</strong>es, if your bond rat<strong>in</strong>g <strong>is</strong> not all thatstrong, you may want to go <strong>in</strong> for limited borrow<strong>in</strong>gs,essentially pay<strong>in</strong>g as you go. Otherw<strong>is</strong>e, you may get bondcovenants that basically are like putt<strong>in</strong>g manacles on yourwr<strong>is</strong>ts as far as runn<strong>in</strong>g the place, <strong>in</strong> return for simply gett<strong>in</strong>gthe bonds <strong>in</strong>sured, or gett<strong>in</strong>g a half-decent <strong>in</strong>terest rate.You’re right, Gerry, sometimes on some medium-sizedprojects we’ll bank it ourselves, for which we must havesome cash.McPherson: Given all the capital needs that you have beendescrib<strong>in</strong>g, how do your organizations go about decid<strong>in</strong>gwhether, and how much, earn<strong>in</strong>gs and reserves can bedevoted to community benefits?Bartlett: With<strong>in</strong> our organization that d<strong>is</strong>cussion generallyrevolves around a tax equivalent. In other words, if we weresubject to state tax, how much would that be? That <strong>is</strong> alsothe k<strong>in</strong>d of guidel<strong>in</strong>e that most people on the outside woulduse to gauge our social obligations and commitment.O’Brien: We don’t really focus on the dollar amount of<strong>in</strong>vestment <strong>in</strong> community benefits. We look more at thevalue. I’m on the American Hospital Association’s FosterMcGraw Prize Committee for Hospital Excellence <strong>in</strong>Community Service, and each year we evaluate a couple ofhundred health systems that apply for th<strong>is</strong> prize. What wetypically look at <strong>is</strong> the value of what they’re add<strong>in</strong>g to thecommunity—the output and not necessarily the total dollar<strong>in</strong>put. It happens that <strong>in</strong> our local market we are actually<strong>in</strong>vest<strong>in</strong>g significant dollars these days because ofunderfund<strong>in</strong>g of public health and other public programs.We’re stepp<strong>in</strong>g <strong>in</strong> to fill the void. It’s really all about engag<strong>in</strong>gthe community and <strong>in</strong>vest<strong>in</strong>g what you can <strong>in</strong> the quality oflife around you. For <strong>in</strong>stance, of the 66 health care providers<strong>in</strong> Massachusetts we have the most patient-friendly free careand d<strong>is</strong>count pric<strong>in</strong>g policies. We just announced that we areprovid<strong>in</strong>g 50% d<strong>is</strong>counts to all patients hav<strong>in</strong>g a family<strong>in</strong>come of up to $94,000. In addition, if a patient <strong>is</strong> approvedfor free hospital care, all of our physicians also will write offthe patient’s entire bill. Th<strong>is</strong> change <strong>in</strong> policy may or may notend up be<strong>in</strong>g very costly to the hospital, but what <strong>is</strong> mostimportant <strong>is</strong> the quality of the <strong>in</strong>vestment—the result itachieves.Goheen: Our m<strong>is</strong>sion <strong>is</strong> to make our communities healthy,and everybody who works for th<strong>is</strong> organization <strong>is</strong> educatedon that m<strong>is</strong>sion from the beg<strong>in</strong>n<strong>in</strong>g. It <strong>is</strong> really part of theDNA of th<strong>is</strong> place, so it’s not just the money that we donate.All employees are expected to participate <strong>in</strong> the community—volunteer time, participate on local boards, and dowhatever they can. As part of our overall budget process,the board looks at how much we are giv<strong>in</strong>g back to thecommunity <strong>in</strong> hard dollars as well as <strong>in</strong> <strong>in</strong>-k<strong>in</strong>d support. As5
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