Behind BSCA's 2% Solution

But the remaining 15% to 20% of the premium represents the insurer's own production – its value added – for things like marketing, claims processing, managing care, negotiating prices, etc. According to Reinhardt, even with a margin of 2% Blue Shield can still get a 10% to 15% return on the value added. "That's a very handsome return."

Okay, so maybe Blue Shield isn't taking a huge gamble with this step, but I still don't understand how holding profits to a 2% margin and refunding $80 to $340 once a year to some health plan members helps hold down costs.

It doesn't, Reinhardt says . "It does virtually nothing to control costs, which are driven by what hospitals do and what they charge for it, and ditto for MDs and drug companies. It's a good PR move."

Blue Shield could use some good PR right now. There's certainly no love lost between the California Department of Insurance and Blue Shield; the two have been fighting about rate increases for years. Dave Jones, head of the DOI, even termed Blue Shield's announcements as "essentially an admission by the insurer that it is…making excessive profits."