The remaking of the Blues - Blue Cross and Blue Shield Association - Company Profile

As the nation's largest health insurer, the Blues must adapt to the new world of health care. The question is, What course are they charting to become part of the solution?

Curiously absent from the health care reform debate in recent months has been any mention of the nation's Blue Cross and Blue Shield plans. While the president and first lady have lambasted the major commercial insurers, they have scarcely mentioned the Blues, despite criticism from a congressional investigations committee about a dozen major Blues plans last year. The committee cited sloppy management, fraud, shaky finances, and lavish executive perks.

The size of the Blues makes this oversight strange. The 69 plans nationwide are the country's dominant health insurer. Collectively, they cover 66 million people--about 40% of the 170 million people with employer-based coverage. In many states, they cover well over half the population. By comparison, the new combined Travelers Met Life health insurance company will cover 13 million people as the nation's largest commercial health insurer.

Both White House and Blues' officials deny that any deal was struck to spare the Blues criticism. It's more likely that, despite the Blues recent troubles, the administration and many lawmakers see them-or want to see them--as part of the solution to the health care crisis rather than part of the problem. Blues officials share that vision.

The Blues have--and deserve--an honored place in the history of health insurance. After all, they more or less originated the idea in the United States 60 years ago.

But the times are changing--and fast. The question now is, Can the Blues adapt to the new world of health care? Or are they threatened with extinction, the dinosaurs of the Jurassic era of health insurance? And what evolutionary course are they charting to become part of the solution?

By all accounts, most Blues plans are anything but lumbering, small-brained giants unprepared for the meteor of health care reform. In fact, most have been aggressively transforming themselves over the past five years into flexible if not exactly nimble managed care companies. That has meant, however, pulling back from the Blues' founding philosophy of coveting all comers in a community rated pool. Fewer than 20 Blues plans today, according to a recent General Accounting Office report, fill the role of insurer of last resort.

The changes have bolstered the bottom line. In 1993, the Blues collectively made $2.6 billion more than they paid out, and they had revenue of $71.2 billion, an 'increase of 2.2% from 1992. It was the fifth straight year of gain, a record in an industry noted for its cyclical ups and downs.

The Blues have also been playing the new game of health care monopoly every bit as vigorously as their competitors, the commercial insurers, such as Prudential, CIGNA, and Aetna; and HMO operators, such as Kaiser Permanente and United HealthCare. In the last few years, they have been busy buying and forming HMOs, merging with each other, partnering with providers and employers, creating the integrated delivery systems of the future, and generally girding themselves for the managed competition to come.

Little known fact: By virtue of their size, the Blues' plans are the largest purveyors of managed care in the country. This year, about 26 million Blues' enrollees are in managed care networks. That represents 39% of all Blues enrollees and one in 10 of all Americans. Blues plans own or operate 89 HMOs in 42 states with about 6 million members, 55 PPOs in 44 states and the District of Columbia, and 61 point-of-service plans in 41 states. The Blues' own projection for the future: 80% of its enrollees in managed care plans by the year 2000. "Most plans know where they need to go and are very well positioned in most markets to get there," says Bernard Tresnowski, president of the Blue Cross and Blue Shield Association, in Chicago, a trade group for the 69 plans.

The biggest single step the Blues have taken to prepare for the future is to allow plans to become for-profit companies, or to create or be involved in for-profit subsidiaries. The association has until now required plans to be not-for-profit, a status that limited their ability to raise money for expansion. The group's board of governors formally approved the change last month. Before the board's approval, about a dozen plans nationwide had already made the move to create for-profit subsidiaries. But the change has sparked controversy in some states.

Blue Cross of California, for example, created a for profit subsidiary, The Wellpoint Health Network, early last year. It sold a 20% stake to the public, raising almost $500 million. Now the state has demanded that the still non-profit California Blue donate at least $100 million cash this year to charity to offset its asset gains from the Wellpoint deal. California Blue officials have countered with an offer of $25 million cash plus stock.

Whether the plans are for-profit or not, benefit managers, consultants, and health policy experts largely agree that the Blues are strongly positioned to remain a powerful force in many mariners. But these experts don't minimize the competition the Blues face and some of the baggage they bring to the fight for market share.

"They will be the major player in our area for years to come," says Jim Astuto, managed care coordinator for GTE's Southeast region. "But we'll be holding their feet to the fire on price." In Alabama, for example, the Blues insure 50% of the population, including most of GTE's employees in that state. Almost 85% of enrollees are in a PPO. "Our strategy is to work closely with employers," says Jim Brown, vice president of marketing for the Alabama Blues. "What we are mostly hearing is that they want continued containment of costs but they don't want restricted networks of providers. That's a challenge for sure."

In New York, Empire Blue Cross and Blue Shield faces a different challenge. The plan last year came under the most severe attack of all the Blues plans for mismanagement and possible fraud and that probe continues. The plan also was vilified by small business groups for raising rates 15% to 22% a year from 1990 to 1993. The state clamped down and new management was brought in, but not before the Empire lost one million subscribers. The state denied a request by Blues management in April to raise rates 8.8%. "They face an increasingly competitive market," says Richard Allen, president of American Corporate Benefits, consultants in New York. "They'll have to get their act together if they don't want to go the way of Howard Johnson's."

In Cleveland, John Polk, executive director of the Council of Smaller Enterprises (COSE), an employer coalition with 12,000 members in Ohio, agrees with that assessment. While 165,000 of the 200,000 lives the coalition represents are covered by Blue Cross and Blue Shield of Ohio, Polk says, "I've been amazed at how laggard [the Blues] have been. They are too comfortable and smugly satisfied, and have not been ready to be creative in helping solve the problems in health care in our area." For example, he says, the Blues fought change when an initiative by Cleveland hospitals and employers to measure the quality of care in Cleveland's hospitals was proposed. "Their position was that they already do that, so why should we bother," says Polk.

But the Blues get a better report card in other cities and towns. Two cases illustrate their strategy and reflect some of the broader forces in health care today.

The first involves Ameritech, the Baby Bell of the Midwest serving a five-state area. The company selected Blue Cross of Illinois as its insurer in 1990. The Blues plan covers all but 100 of Ameritech's 66,000 employees. The point-of-service plan the Blues built and offered to Ameritech beat out bids from Prudential, Aetna, CIGNA, and Met Life. "They have pulled together a very powerful organization in this area," says Bob Batey, manager of benefit planning at Ameritech. What gave the Blues the advantage, besides a competitive price, Batey explains, was a well-established network of providers in the five states. "They could give us complete service in most of the major cities and they are committed to reaching the smaller cities," he adds.

What Blue Cross of Illinois offered Ameritech was a package deal of five states' Blues networks. The Illinois Blue subcontracts with its sister plans in Indiana, Michigan, Ohio, and Wisconsin to provide care for Ameritech employees. All claims are processed by the Illinois plan with standardized procedures and claims forms, something Ameritech demanded. Employees use Blues HMO or PPO providers in all the five states. They get full coverage for in-network care and 75% coverage (minus deductibles) for care provided out of network.

Explains Mike Siebold, the Illinois Blue's vice president for marketing and Ameritech account manager, "The multistate accounts are critical to us and to our future. Large employers have traditionally thought of the Blues as independent plans with no connection and very different approaches. We want to change that image and show customers that we [the plans] can and will work together to build the networks they want."

The second example illustrates a similar willingness by a Blues plan to customize coverage, but this time crafted for small employers on a local level. In Racine and Kenosha, Wis., a group of 46 small employers formed a health insurance purchasing coalition in 1991. In bidding last year, Blue Cross and Blue Shield United of Wisconsin beat out five other insurers for a contract to cover the coalition's 3,500 lives. "They offered us the best provider network, the better product, the best experience in managed care, and the best experience in the small group market," says Mike Silgen, managing director of the coalition, called the Benefit Alliance.

The Wisconsin Blues designed for the coalition a PPO network with 85% in-network coverage and 70% out-ofnetwork coverage with no gatekeepers. But it packaged that with an alternative employers wanted, a POS plan that requires workers to go through a primary care gatekeeper and pays 100% in-network coverage. The coalition's contract with the Blues runs through 1996.

Nationwide, the Blues appear to be evolving into regional entities, which is evident in the recent flurry of mergers and new partnerships. In May 1993, Blues plans in Illinois, Iowa, and South Dakota merged to create what is essentially a single company. Plans in Kentucky and Indiana also came together to build an HMO. An attempt last year by the Colorado, Nevada, and New Mexico plans to merge was aborted, but the plans have essentially merged their managements and are presenting a unified force to employers. Tresnowski predicts that the consolidation will continue, dropping the number of Blues plans nationwide to 40 over the next decade.

Part of this consolidation approach is to create managed care networks and integrated delivery systems that will serve broad areas and go beyond containing costs by bargaining for discounts with providers, say Blues' officials. Some examples:

* In Minnesota, one of the nation's hotbeds of managed care innovation, Minnesota Blue Cross is striving to create the state's largest managed care company. It has joined with Affiliated Medical Centers, a multi-specialty clinic in the western and southern parts of the state, to form Pioneer Health Systems. PHS is conceived as an integrated service network the entities called for in a law passed by the legislature last year--that will serve rural areas and bigger cities. Minnesota Blue would centralize data collection and initiate an outcomes-based system for credentialing providers.

* Arkansas Blue Cross and Blue Shield joined forces last year with the Baptist Medical System and HMO Arkansas to form a plan that has some 47,000 enrollees, 600 physicians, and 17 participating hospitals. A wholly owned subsidiary of the Arkansas Blues, USAble Inc. owns 50% of the plan and administers it.

* Blue Cross and Blue Shield of Massachusetts, in a first for a Blues plan, will begin buying physician practices through a new subsidiary, Physician Partners of New England. "This step is part of our strategic transformation from traditional insurer to a full-service health care company," says Joseph Avellone, executive vice president of the plan.

* Blue Cross and Blue Shield of New Jersey, that state's largest insurer, announced a similar move in May. But instead of buying existing practices, it will establish its own statewide network of family and primary care clinics. The clinics, which will have staff physicians, would be allied with a network of 56 hospitals and a statewide HMO the New Jersey Blues established last year. Of the two million people the New Jersey Blues cover in the state, the HMO now enrolls about 500,000.

"This puts us on the cutting edge of health care delivery," says William J. Marino, president and CEO of the New Jersey Blues.

The New Jersey Blues has also joined forces with IBM to create and market an electronic service designed to enable insurers, providers, and employers to share claims information, patient data, and enrollment information through a standardized data base..

* The Pennsylvania Blue Shield plan began aggressively moving this spring to transform its PPO, Premier Blue, into a more rigorously selective network of providers. It had been open to all providers despite the state's lack of an any-willing-provider law. The new plan will look more carefully at physician cost effectiveness and build in utilization oversight and provider profiling. Not surprisingly, Pennsylvania doctors have chafed at the changes.

In fact, physicians nationwide are wary of many of the moves the Blues are making. Blues reimbursements make up a large share of most physicians' incomes. And much of that reimbursement has been on a relatively generous fee-for-service basis for years. No longer. The case of Blue Cross and Blue Shield of the National Capital Area, in Washington, is illustrative--again, of the Blues game plan but also of the turmoil it may stir up.

As one of the 11 Blues plans pegged last year by Congress and the General Accounting Office as being poorly managed and in bad economic shape, the District of Columbia Blues has this year struggled to turn itself around. It brought in a new management team and restructured its operations and products, including expanding its HMO and PPO panels. An ad campaign touted the "new" D.C. Blues in April and May. One ad ran two full pages in the Washington Post, trumpeting a 15% reduction in rates for businesses with two to 49 employees.

The D.C. Blues plan appears to be back on track. During the first quarter of 1994, the plan, which covers 485,000 people, reported a gain of $1.7 million on revenues of $61.8 million. The plan lost a whopping $47 million in 1993.

But in June, the District of Columbia chapter of the AMA filed a lawsuit against the Blues plan, alleging, in essence, that the savings the plan achieved came at the expense of local physicians and, more important, at the expense of quality care.

Specifically, the suit charges the plan has systematically cut doctors whose expenses exceeded certain limits even when those expenses were clearly attributable to treating sicker patients. The effect, the physicians' group says, is to provide a powerful incentive to about half of the doctors in the D.C. area to exclude the sickest patients from their practices. The Blues plan denies the allegation.

Meanwhile, one Midwest Blues plan is on the other side of a precedent-setting lawsuit--a case that also tests the rapid changes under way in health care. Blue Cross and Blue Shield United of Wisconsin filed a suit in February against the 400physician Marshfield Clinic and its HMO, charging them with violating federal and state antitrust laws. Specifically, the Blues plan argues, Marshfield has gained control of the vast majority of the physicians in 10 Wisconsin counties and bars those physicians from working for any other managed care plan.

The case goes to the heart of a central issue in managed care and health care reform. Should managed care plans be able to "lock up" providers? Physicians' groups staunchly oppose contracts that prevent doctors from signing with numerous plans. But insurers and managed care groups hold conflicting views on the issue. For its part, the Blue Cross and Blue Shield Association says it is not opposed to physicians being bound tightly to one group, the Wisconsin lawsuit notwithstanding.

On another issue dear to its heart, however, the Blues have taken the high road. The Blues trade association formally asked Congress in April to end the special tax status of Blues plans. Most Blues plans pay significantly lower portions of their revenues to the state and to the IRS commercial insurers pay. The tax break will be about $300 million this year. The status was granted originally because the Blues were mandated by state laws to take all comers. The group says it now wants a single uniform tax policy for all health plans. "We are prepared to accept an end to our special tax status to achieve something far more important to our subscribers: a reformed health system that relies on vigorous and fair competition among health plans to control health costs," Mary Nell Lehnhart, the Blues association's senior vice president, told a congressional committee. Despite her request, two congressional committees that have formulated health reform plans retain the Blues special tax status.

The National Association of Insurance Commissioners is also poised to recommend that the Blues be regulated by states as other insurers are. An NAIC task force formed in 1991 to look at the Blues will issue a report early next year that will advise stricter financial disclosure and consumer protection standards for the Blues and other health insurers, says Jim Long, North Carolina commissioner of insurance and chairman of the NAIC Blues task force. "It's time to truly create a level playing field in health insurance," says Long. "The Blues no longer warrant any special treatment."

Finally, the Senate Permanent Subcommittee on Investigations, the committee that initiated a probe of the Blues' finances in 1992, is scheduled to have one more round of hearings on the plans next month. The hearings will focus on the Blues contracts with the federal government. Problems appear to be mounting in the processing of Medicare claims, says a subcommittee staff member. Ten plans have been put on probation this year for not meeting government standards in processing Medicare claims; three are under investigation for filing allegedly fraudulent claims.

But staffers on the committee say that the 11 plans cited last year as being in tenuous financial shape appear to be moving quickly to cut costs, improve management, build reserves, and protect enrollees.

Health reform will take the Blues and every other health care provider into uncharted waters over the next decade. There's little doubt the Blues will stay afloat, but no question either that some stormy seas lie ahead as they struggle to remain the nation's dominant health insurer.

COPYRIGHT 1994 A Thomson Healthcare Company
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