Profit is less than it seems


With rising medical costs canceling out increases in membership and premiums, CareFirst BlueCross BlueShield yesterday reported essentially flat earnings from insurance operations for the quarter that ended March 31.

Overall, CareFirst posted $26.2 million in earnings, up about one-third from $19.6 million in the first quarter of 2000. Nearly all of the increase, however, came in improved investment income and capital gains, the company said.

From its medical insurance business, CareFirst had earnings of $12.1 million for the quarter, up from $11.1 million in the year-earlier quarter. That improvement was achieved by exiting Medicare and Medicaid programs which, between them, accounted for $2.6 million in losses during the first quarter of 2000.

G. Mark Chaney, executive vice president and chief financial officer, said the company continues to be concerned with growing losses in commercial HMO business in Maryland - $5.8 million in the first quarter, compared with $2.3 million in the year-earlier period.

Chaney said the drop in performance reflected a change in the way CareFirst's FreeState Health Plan HMO contracts with doctors and hospitals. Previously, he said, FreeState paid physician and hospital groups a flat payment per member per month, and the providers lost money if medical costs escalated. However, those losses and changes in state regulations prompted the provider groups to cancel the contracts, pushing the losses onto FreeState's books.

In the first quarter of 2000, all of FreeState's contracts had providers bearing the risk of losses, according to CareFirst; now, only 10 percent of the contracts do.

To turn around the Maryland HMO performance, Chaney said, CareFirst continues to work on plans to combine FreeState with its profitable CapitalCare HMO, based in the District of Columbia. Chaney said CareFirst was hoping for regulatory approval of the combination in the second half of this year.

Also, he said, FreeState has received approval for raising premiums "in the low double digits" in some of its products over the rest of this year. Both the higher premiums, which will be phased in as members renew, and the HMO reconfiguration, he said, will not have a large impact on the bottom line over the next few quarters.

At the same time it is working to get its HMO costs under control, Chaney said, CareFirst also will be facing increased expenditures to subsidize a state-created prescription drug program for seniors and to upgrade computers to meet new federal regulations on electronic medical records and patient privacy.

Blue Cross plans in general have been increasing their profitability on operations, said Donna O'Rourke, an analyst for Weiss Ratings Inc., a Florida firm that monitors the performance of insurers.

Although Weiss does not yet have data for the just-ended quarter, O'Rourke said that, through last fall, Blues plans were showing "significant continued improvement in underwriting" compared with the previous year.

CareFirst's revenue in the quarter was $1.4 billion, up 13.75 percent from the year-earlier quarter.

That reflected premium increases generally in the 8 percent to 10 percent range, according to Chaney, and a 5.2 increase in membership, giving CareFirst more than 3 million members for the first time.

But medical costs rose slightly faster than revenue.

CareFirst's medical loss ratio - a closely watched figure derived from medical expenses as a percentage of revenue - crept up, to 90.1 percent in the first quarter of 2001, compared with 89.8 percent a year earlier.

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