William L. Jews wasn't quite sure what he had stepped into when he took over embattled Blue Cross and Blue Shield of Maryland one year ago.
"I started out apprehensive," recalled Mr. Jews, chief executive of the giant insurer. "Then I went through a phase of focusing on the issues."
There was a lot to focus on.
After all, the state's largest insurer was almost insolvent. It had the worst customer service record of any Blue plan in the country. It was losing market share, angering corporate clients with its arrogant "love it or leave it" attitude, even as competitors flooded the state with cut-rate deals. It faced a public relations crisis after it was discovered that the company's previous chief executive was paid more than $900,000 and a U.S. Senate subcommittee exposed the Maryland Blues' poor financial health and mismanagement.
Underscoring the depth of its problems, two former executives of the company were indicted by a federal grand jury last week on charges of defrauding more than $1 million into businesses in which they held a secret interest.
Mr. Jews set out immediately to try to regain the credibility and integrity the Blues had lost.
Since then, the insurer has made inroads -- reorganizing its sales force, modernizing its products, shedding some assets to shore up finances, and repairing relationships with customers, lawmakers, regulators and physicians.
Mr. Jews said results in the first two months of 1994 exceeded expectations, and he insists the insurer is positioned to reverse the trends that have clobbered Blue Cross and Blue Shield.
At the same time, he acknowledges that much remains to be done.
"You don't kind of snap your fingers and say everything will change overnight. I'm afraid people have amnesia. Everybody has to realize it took three or four years for this company to end up in the position it did at the end of 1993," Mr. Jews said.
The company hasn't been able to make the kind of dent in expenses it needs to compete with the competition. And despite improvements, it remains on probation for poor service on federal contracts.
Furthermore, it still can't turn a profit in one of its most important businesses -- managing health care plans for others. And it faces daunting competition: the market is flush with national and regional companies anxious to gain market share before national health reforms kick in.
In 1993, only about half the insurer's $71 million profit came from operations. The rest resulted from selling assets, which helped boost Blue Cross' reserve to safe levels. Its reserve is now $98 million, up from an unacceptable $9 million in December 1992.
To remain profitable, the insurer must make money on its base business and lure new customers into its health maintenance organizations, neither of which did as well as expected last year.
Barring one-time accounting changes, revenues from its base business operations last year actually fell because of continued losses on its biggest chunk of business -- managing health care plans for self-insured corporations.
This business -- ironically called "non-risk" because the corporations pay their own medical bills -- lost $12 million last year, up from $10 million the previous year.
In the past those losses stemmed in part because the Blues underpriced services to win market share, but they had promised to stop under orders from state regulators. Regulators said the practice was unfair to individuals and small businesses, who were forced to pay higher prices.
Extra liabilities
John M. Friesen, acting chief financial officer, said losses grew in 1993 because Blue Cross discovered extra liabilities on several big accounts and had to put aside money in anticipation of more medical bills from them. He and Mr. Jews insisted that the practice of pricing below cost to win market share has stopped.
"We are striking a balance between gaining market share and profitability," Mr. Jews said.
He predicted that that end of the business would be profitable this year. But state insurance commissioner Dwight K. Bartlett is skeptical.
"I am not satisfied they have a plan," Mr. Bartlett said, adding he has called in Blues officials to detail what they will do to turn around the business.
Mr. Bartlett also is puzzled by the Blues' decision to stay with another money-loser -- processing Medicare claims.
The Blues lost $4 million last year in that area. Even so, they agreed to process claims this year at a lower price to keep the prestigious contract. Although plagued by overpayments to doctors and hospitals, Mr. Jews predicts the Blues will make a profit on that business this year.
In the first year under Mr. Jews, a strategy has begun to emerge for Blue Cross and Blue Shield. The company has begun aggressively pricing its products, hoping to broaden its base of customers before state and national health care reforms take effect.
In January, Blue Cross was first to introduce an affordable health plan for small businesses -- Choice Advantage -- that guarantees coverage without regard to workers' medical conditions. It has become a bestseller, said Roy Wilkinson, president of Wilkinson Benefits of Towson, which rates managed care companies for the small group and individual market.
"I have high marks for the present management and what they are doing," he said. "I think they have made a remarkable turnaround," he said.
In addition, the Blues priced insurance for individuals more competitively in the past year. A person aged 30 to 39, for instance, pays $120 a month compared with an average $145 at other companies for a policy with a $200 deductible, Mr. Wilkinson said.
Shares savings
And for the first time, Blue Cross last month began offering corporate clients a bigger share of savings it gets from negotiated discounts with physicians. For years, it refused to even discuss the matter, said Bruce Mardsen, health care expert and principal with William M. Mercer Inc., a benefits consulting firm.
For many big corporate customers, however, Blue Cross still lags behind its competition in philosophy, pricing and support systems, Mr. Mardsen said.
"The Blues have always been in left field," he said. Despite some changes in computer support systems, "overhead is killing them," he said.
Mr. Mardsen added that the Blues still have fences to mend. "The Blues are nice to customers and providers, but they are rarely nice to the employer who is paying the bill," he said.
The competition has U.S. Sen. Sam Nunn, D-Ga., as worried today about the Maryland Blues as he was 18 months ago when hearings exposed mismanagement and excessive spending at the nonprofit Blues.
Mr. Nunn declined to specifically discuss the Maryland Blue plan's finances. But he said last week his reports indicate that a number of plans still "are financially weak or very weak. The worse case is, things have not gotten much better."
Many Maryland companies are sitting tight just now, watching for hints about the direction of national health reforms before changing health insurance plans. When they do, they will weigh Blue Cross managed care plans against everybody else's.
The Blues also face the challenge of halting defections to other managed care companies. Managed care is the insurer's most important new line of business and the one with the most growth potential. It now accounts for one-third of the company's profits.
Market share drops
But in the past three years, the Blues' share of the market has dropped as newer, more sophisticated companies enter the state. Without the acquisition of Delmarva Health Plan in Easton last year, enrollment actually would have dropped for the third successive year, a period when the number of Maryland residents in managed care programs grew to 30 percent from 20 percent.
In those years, Blue Cross lost more than 22,000 members, with the result that enrollment has stayed flat at about 250,000. At the same time, competitors whose stock is traded publicly reported record gains in the fourth quarter of 1993 and the first quarter of this year -- the biggest months of the year in the managed care business.
Despite these trends, Mr. Jews says the insurer hopes to move 75 percent of its existing corporate customers into Blues managed care within three years. Today, only 25 percent of its corporate clients are in managed care plans.
In its first big opportunity to convert subscribers to HMOs, the Blues did not fare so well. In December, they lost more than 15,000 people in one of their biggest accounts, state workers, after prices on traditional insurance products increased 97 percent due to a state decision to reduce its share of the premium. In the end, more than half the workers and their families opted for a non-Blues managed care replacement.
Michael J. Felber, vice president for sales and marketing, said the insurer actually exceeded its goals for capturing state workers, given the short time it had to sell the HMOs. The losses occurred mostly in suburban Washington, D.C., where the insurer's network of doctors is weakest, he said. The Blues this year expect to build up doctors in those counties he said. They are home to the state's biggest managed care company -- Mid Atlantic Medical Services Inc.
Single HMO sales team
The insurer is better prepared now to capture customers switching to managed care, Mr. Felber said, because it created a single sales team Jan. 1 to sell all five HMOs and other managed care products. "That is the strongest thing we have done in this organization," Mr. Felber said.
In the past, sales people in each Blues HMO and from its traditional insurance department would compete with each other for a corporation's business, a situation that led to price wars and losses.
Mr. Felber said the Blues will introduced a series of products this spring to appeal to corporations and unions who have been reluctant to move into managed care because of concerns over quality, he said.
Cutting expenses continues to be an area requiring attention, or the Blues' efforts to match competitors' prices will fall flat.
Expenses remain higher than average for a Blue plan, at 10.4 percent of revenues, and the insurer couldn't lower them as much as it hoped last year. One reason is consultant fees, which have averaged $5 million for more than five years now, and legal bills, which ran to $1.8 million. These could grow as Blue Cross defends itself from charges of mismanagement by subscribers and other lawsuits.
Overall, Blue Cross has whittled its 4,200-member work force by 400 as it centralized sales, claims and other operations to improve service and cut costs. The company says the changes will reduce administrative costs significantly this year.
The insurer's relationship with lawmakers in Annapolis is on the mend, largely because of frequent briefings by Mr. Jews, and by the insurance commissioner and his staff, who are "much more professional" than their predecessors, said Del. Gary Alexander, D-Prince George's.
"It's one more problem we don't have to worry about," he said.
Because of improvements in the past year, Chicago-based Blue Cross and Blue Shield Association removed Maryland from its "watch-list" of plans in poor financial condition.
"They are not one of the plans we are very worried about right now," said Tom Kinser, executive vice president of the national licensing association.
But Mr. Jews knows there is a long way to go. "We're a new Blue company, making the transition. We need to earn our laurels."