In 18 months since William L. Jews became its president, Blue Cross and Blue Shield of Maryland has sold two businesses, scrambled its organization chart, cut staff by hundreds, repaired its profits and quadrupled its net worth.
Now comes the hard part.
Blue Cross is still under siege. Although its financial turnaround has pleased regulators, Maryland's biggest health insurer is far from posting a clean checkup. Its finances are still below grade by some measures.
Worse, rivals continue to swarm, paring prices, swiping customers and threatening Blue Cross' long-term franchise. Competition in the state has never been more intense, say people who buy or sell health policies. "It's sort of frenzied," said Elaine Johnston, benefits director for Baltimore Gas and Electric Co.
As the 10-ton whale of Maryland medical coverage, Blue Cross has the most business to lose and less room to adjust. It is trying, nevertheless. In doing so it is sending waves over patients, employers, doctors and hospitals.
Nine days ago the insurer announced it would cut 350 more jobs -- 9 percent of its work force -- as part of several sharp price reductions. It may increase pressure on physicians and hospitals to cut prices. It might buy more HMOs.
"What we're trying to do is appropriately reduce our costs and price our products right," said Mr. Jews, 42, an Eastern Shore native who ran his first hospital at age 29.
More drastic changes could follow. A Blue Cross subsidiary might soon be quoted on stockbrokers' tickers along with General Motors and IBM. The company is seriously considering trying to sell stock in its HMO division -- a sharp and possibly controversial reversal at historically not-for-profit Blue Cross, according to interviews with executives.
That might not be all. If Blue Cross of Maryland keeps losing customers, it could eventually be forced to merge with a nearby Blue Cross plan or some other insurer, analysts said. It may have to merge even if enrollment grows.
Maryland Blue Cross isn't involved in any merger discussions now, executives said. Even so, financial analyst Thomas Hodapp believes that one-state plans like Maryland Blue Cross will become increasingly scarce.
"We're in the very early stages of, basically, the restructuring of the [health insurance] market," said Mr. Hodapp, who follows the industry for investment house Robertson, Stephens & Co. in San Francisco. "I think we're going to see massive consolidation."
Upheaval at Blue Cross vividly shows that health care change hasn't been slowed by the failure of federal reform legislation this year.
To understand why many physicians' pay won't rise as fast in the future, look at Blue Cross. To see why medical costs are moderating, at least for now, check Blue Cross. To learn why you're likely to get new choices in medical insurers and less choice in doctors, examine what's going on at Blue Cross.
The Owings Mills-based insurer "is having a tough time," said Robert Davis, executive director of the Maryland Health Cost Coalition.
But, he said, "they'll land on their feet. . . . They still have formidable market share, and they're still a formidable company. We're not talking about Studebaker here. They can shape prices just because of their size."
Blue Cross was a wreck when Mr. Jews arrived in April 1993. Its computers were clunky. Its claims service record was among the worst of Blues nationally. Its net worth had plunged from $121.9 million in 1985 to $24.9 million in 1992. It had been harshly criticized by legislators in Washington and Annapolis for allegedly excessive pay and perks for executives. Most of its top managers had left.
Mr. Jews, a methodical, analytical manager partial to expensive suits and long sentences, has spent much of the time simply stabilizing the business. He unified Blue Cross' multiple sales forces, dropped a big, money-losing job of processing Medicare claims and sparked a sharp improvement in service.
"We've had a lot fewer complaints," said William F. Simmons, president of Group Benefit Services Inc. in Lutherville.
Now bigger change is coming, and the company's already-traumatized 3,700 workers are on edge again.
Layoffs by year-end are inevitable, executives said, although they're trying to eliminate some of the 350 positions through attrition. Managers are huddling behind closed doors to plan the reduction. Few of the company's workers know who'll get hit.
"The morale here is absolutely awful," one worker said.
Employee chats by Mr. Jews and other executives haven't eliminated bitterness that Blue Cross is firing people even as its profits are growing, and so close to the holidays. The company has strengthened security, making guards more visible and adding surveillance cameras in its modern office buildings and parking areas. The measures are partly the result of a routine security study, Mr. Jews said.
Profits indeed are up. Chief financial officer David D. Wolf said Blue Cross earned $47 million through Sept. 30 this year -- far more than the $16 million it made for the same period in 1993, not counting profits from asset sales last year.
Thanks in part to profits on the sale of two businesses last year, the company's net worth rose to $129.8 million as of June 30. The figure exceeds state requirements.
All major segments of Blue Cross' business should make money this year, managers said, including its once unprofitable "nonrisk" business of processing claims for self-insured employers.
"They certainly are much stronger financially than they were a couple years ago, when they were sort of scraping along in very thin fashion," said Dwight K. Bartlett III, Maryland's insurance commissioner.
But Blue Cross isn't fat. It falls short of certain capital targets set by the Blue Cross/Blue Shield Association in Chicago.
"Their financial position still needs to be strengthened," said Susan Barrish, vice president of licensure and financial services for the national group.
And the future is uncertain.
Health maintenance organizations grew more quickly in Maryland last year than in all but three other states, according to a study by Marion Merrell Dow. HMOs promise cost savings and deliver care within a limited network of doctors for a prepaid fee.
Aggressive, for-profit HMOs such as Mid Atlantic Medical Services Inc. and U.S. Healthcare are eating into Blue Cross' stock in trade -- its traditional, often more-expensive "fee for service" plans.
Blue Cross has fought back with its own HMOs, including Freestate Health Plan and Columbia Medical Plan, but the company is still losing members overall.
It expects year-end enrollment to dip "slightly" from 1993's 1.4 million, Mr. Jews said. One big blow: the recent decision allowing more insurers to compete with Blue Cross in signing up state workers.
Blue Cross' revenue, too, is falling. Even after adjusting for the sale last year of mental health management firm Green Spring Health Services Inc. and Paradigm Pharmacy Management Inc., the company will take in less money this year than in 1993, Mr. Wolf said. He declined to furnish an estimate.
He blamed much of the drop on falling medical costs for accounts in which the company administers claims without assuming risk, but defections have played a role. Blue Cross revenue last year was $1.95 billion.
Mr. Jews' No. 1 goal now is to reverse enrollment and revenue drops -- without putting Blue Cross back in a financial pit.
The first step: cutting prices and costs. Blue Cross announced premium reductions of up to 30 percent in its small-group business last summer and up to another 15 percent overall three weeks ago.
At the same time, the company plans to reduce administrative costs by $40 million, or more than 15 percent. Current job cuts represent $20 million of that.
The markdowns have made Blue Cross prices much more competitive, brokers report. But rivals like Mid Atlantic Medical Services Inc. (MAMSI), are matching or beating them, spurring a price war that is helping to tame medical inflation but bears uncertain consequences for insurer profits.
"Whatever the Blues are doing, MAMSI seems to be sitting there saying, 'We'll match you blow for blow' ," said Kurt Funderburg, an analyst with Ferris, Baker Watts Inc. in Baltimore.
A protracted price war could hurt medical plans' financial health, a prospect that clearly concerns Mr. Bartlett, the insurance commissioner. He termed Blue Cross' rate decreases as "very substantial" and added, "We're not quite sure yet what they've done and what the rationale is for what they've done."
Laying off claims processors and secretaries isn't the only way Blue Cross can reduce costs. It can also push doctors and hospitals to work for less money, threatening to send its 1.4 million patients elsewhere if they don't.
Maryland limits discounts on inpatient hospital prices. But insurers expect Blue Cross to be much more aggressive in asking for markdowns on outpatient hospital bills and on all physician services.
"They can really put pressure on providers," said Mr. Davis of the Maryland Health Care Coalition, an employer group that tries to control costs.
"Historically, they've been real reluctant to do that. I'd be real surprised if they didn't start using that leverage very soon."
Mr. Jews, whose former job as a hospital administrator called for extracting the biggest checks possible from insurers, confirmed that Blue Cross' payment schedules are under review.
"We've got to look at our payment profiles as to how we reimburse physicians, hospitals and the like," he said. "Wherever there's an opportunity to reduce unnecessary medical costs, we want to do that."
If Blue Cross presses hard, physicians are likely to resist. Many doctors claim that insurer cost-cuts are hurting care. Already, Blue Cross "has substantially underpriced the value of physician services," said Dr. J. Leonard Lichtenfeld, former president of the Maryland Society of Internal Medicine.
There are faster ways for Blue Cross to grow than by lowering rates and signing subscribers one by one. It could buy business. Last year the company acquired Delmarva Health Plan, a 26,000-member HMO on the Eastern Shore. The company is looking at opportunities to acquire others, Mr. Jews said.
It lacks just one thing: enough money. With its net worth close to zero as recently as two years ago, Blue Cross is unlikely to gain regulators' good wishes by spending big pieces of present reserves on HMOs or other acquisitions. Instead, it is considering raising new money by selling stock in its HMOs, which now operate as for-profit, tax-paying divisions that are wholly owned by a not-for-profit parent.
"We're probably spending considerable time right now looking at whether or not it is feasible for us to do that," said Mr. Jews. "We're a not-for-profit company in a marketplace where for-profit companies are coming in, leveraging their stock portfolios, and, to a large degree, they're positioned to undercut us in the market."
Selling a portion of its HMO division could generate substantial cash. Two years ago, an analysis by investment bank Salomon Bros. showed the operation was worth more than $120 million -- far more than the $43 million allowed by state regulators in Blue Cross' books, said Frank A. Gunther Jr., chairman of Blue Cross of Maryland.
"What this says is, the only way they will allow us to get true valuation for our HMOs is if we take part of it public," Mr. Gunther said. "It's one way of building up your surplus and your balance sheet to make you more interesting and viable as far as acquisitions and growth is concerned."
The Blue Cross and Blue Shield Association gave permission this year for members to go totally for-profit, a switch that association President Bernard Tresnowski termed a "religious" conversion. A few plans have already issued public stock. Citizen groups have protested in some cases, saying profit-seeking shareholders shouldn't benefit from not-for-profit capital raised for subscribers' benefit.
In California, the insurance commissioner made a Blue plan put $2 billion in reserves in a sheltered foundation before converting fully to for-profit status.
If the Maryland plan sells shares in an affiliate, "I think we can accomplish that without compromising the intent and purpose of Blue Cross," Mr. Jews said.
The question for some analysts is whether an independent Blue Cross of Maryland will even exist in 10 years. No matter how much it cuts costs, no matter how many Maryland members it gains, the plan may not be able to compete with a growing number of regional and national insurance giants, they said.
Blue Cross has already lost enrollees because of its one-state status. When NationsBank Corp. bought Maryland National Bank last year, it fired Blue Cross and assigned the bank's workers to its national carrier, CIGNA.
Last year, spice giant McCormick & Co. Inc. took bids on its 5,000-worker health insurance account. "One of our concerns was network coverage across all 50 states," said Cecile Perich, director of compensation and benefits. "And Blue Cross and Blue Shield of Maryland was not one that was considered."
Mr. Jews says his company does offer national coverage -- through joint plans administered by the Blue Cross Association. But experts said that, in practice, it's very difficult for the more than 60 Blue plans to compete with unified insurers.
"It has been stymied by the very real differences among the plans and the institutional inertia that the plans have," said Jim Braun, a consultant with the Wyatt Co. in Washington.
Marriages, not loose partnerships, are what the Blues ultimately may need, analysts believe. For Maryland Blue Cross, the strategy of merging with neighboring Blues has been discussed for years.
Blue plans in Maryland, Delaware, Virginia and Washington came so close to uniting under one holding company in the 1980s that they issued a prospectus for the deal, said Norwood Davis, chairman and chief executive of Trigon Blue Cross and Blue Shield, based in Richmond.
The move would have produced "substantial" cost savings and still might make sense, he said.
"We have for some time felt that there would be significant consolidation of the Blues, and I still feel like that's going to happen," Mr. Davis said.
Mr. Jews and Mr. Gunther don't rule out such a development eventually. But other issues confront them now.
The company is thinking about scrapping its long-troubled computer system and hiring a "technology partner" to help set up and run a replacement. Job cuts will be completed by the end of the year. Medical costs show signs of popping up again. Financial managers want to gauge Wall Street's response to a potential stock sale.
"Managing the dynamics of change," Mr. Jews calls it.
"The whole health care industry is under turmoil right now," he
said. "We've got to expand our opportunities."