Class Action Lawsuit: Nonprofit Health Insurer Misused Excess Profits

A class action lawsuit has been filed against Health Care Service Corp., alleging that the Chicago-based health insurance company has accumulated excess profits of nearly $5 million even though it is a nonprofit company.

The class action lawsuit alleges that HCSC’s status as a nonprofit mutual insurer required the company to use any generated profits for the mutual benefit of its members, rather than for expansion purposes or increasing its market share. Further, HCSC allegedly failed to honor the terms of its Articles of Incorporation and Bylaws by operating as a for-profit company despite its nonprofit status.

“To make matters worse, Defendant has used those funds to expand its business operations and pay its corporate executives millions of dollars in ‘bonus’ money—the payment of which is tied to Defendant’s earnings growth,” the HCSC class action lawsuit alleges. “In other words, the more money HCSC accumulates, the more money its executives get paid. This has resulted in a perverse incentive system that favors the continued accumulation of profits and expansion of the nonprofit’s business operations at the expense of its policyholder Members.”

HCSC is the largest customer-owned health insurance company in the United States. According to the class action lawsuit, the insurance company has approximately 14 million members and operates Blue Cross Blue Shield plans in Illinois, Montana, New Mexico, Oklahoma and Texas. HCSC has reportedly accumulated more than $5 billion in profits in the last five years. The class action lawsuit alleges that these profits are not necessary to protect the company against an “unforeseen financial contingency” and should have therefore been used to benefit HCSC policyholders.

According to the class action lawsuit, the top 10 HCSC executives have earned nearly 96 million dollars in bonus money in the last three years. The class action lawsuit alleges that HCSC has a duty as a nonprofit mutual company to use any extra profits to benefit its members, but has instead used its billions of dollars of excess profits to reward executives with multi-million dollar bonuses and to aggressively expand its operations. Therefore, HCSC has violated both its Articles of Incorporation and its Bylaws, breaching its contract to its policyholders. Millions of HCSC members have been harmed by this alleged misconduct, according to the class action lawsuit.

Babbitt Municipalities Inc., an HCSC policyholder, filed the class action lawsuit against the insurer, seeking to represent all HCSC members as of Dec. 31, 2013. It seeks an injunction to stop the company from reaping excess profits and an order requiring HCSC to recover improperly distributed excess profits.

The plaintiff is represented by Jay Edelson, Rafey S. Balbanian and Ari J. Scharg of Edelson PC; William R. Caroselli, David S. Senoff and Lauren C. Fantini of Caroselli Beachler McTiernan & Conboy; and Brian W. Coffman of Coffman Law Offices.

The HCSC Excess Profit Class Action Lawsuit is Babbitt Municipalities Inc. v. Health Care Service Corp., Case No. 14CH08460, in the Circuit Court of Cook County, Ill.