Washington state lawmakers and regulators should think about what they are doing before acting to reduce surpluses at the state’s health insurers.

Consultants at the Lewin Group, Falls Church, Va., have issued that warning in a report on Washington state health insurance surplus accumulation.

The consultants prepared the report for Washington insurance regulators.

Washington state already has addressed surplus accumulation concerns by adopting a law that increases health carrier financial reporting requirements, and regulators have proposed a bill that would permit regulators to consider carriers’ surplus levels when regulating health coverage rates, according to officials in the Washington insurance commissioner’s office.

Washington also could cap health carriers’ surplus levels, and it could include a “community benefit” requirement in the charters of non-profit health carriers.

But Lewin Group consultants advise officials to beware of unintended consequences when dealing with what appear to be unreasonably high levels of surplus capital.

“Surplus levels which are too high may affect product affordability,” the consultants write in their report. But “surplus levels which are held too low expose the organization to risk of failure during predictable periods of downturns in the underwriting cycle.”

The risk is particularly grave for nonprofit and privately held insurers, which cannot turn to Wall Street for capital, the consultants write.

Requiring nonprofit health carriers to serve the community could help, but community service provisions could backfire, by creating an indirect tax on the nonprofit carriers’ customers and increasing the total cost of those customers’ coverage, the consultants write.

A copy of the report is on the Web at Document Link