Mass. Blues get healthy


BOSTON - As Blue Cross plans across the country are merging, acquiring or being acquired, and converting to for-profit status, Blue Cross Blue Shield of Massachusetts remains comfortably local and resolutely nonprofit.

It's not alone. A dozen other Blues plans, large and small, are members of a coalition called Advancing Non-Profit Health Care. But the Massachusetts Blues are among the most outspoken - and the most successful.

The nonprofit Blues seem to be swimming against the tide. Blues plans in about a dozen states have switched to for-profit operation in the past decade.

Maryland's largest health insurer, CareFirst BlueCross Blue- Shield wants to join them. It is seeking permission from regulators to convert from a nonprofit and sell itself to giant WellPoint Health Networks Inc. for $1.3 billion.

A conversion bill just passed New York's legislature, and one has been introduced in Pennsylvania's General Assembly. The North Carolina Blues also are seeking permission to convert.

WellPoint just closed a deal for the Missouri Blues, less than a year after it bought the Georgia plan. The Kansas Blues tried to sell themselves, but the state's insurance commissioner vetoed the sale last week.

In those deals, the same rationale is given again and again: The Blues plans need more size and more capital to thrive.

William L. Jews, CareFirst's president and chief executive officer, told Maryland legislators this month that if CareFirst can't move ahead with the WellPoint deal, "in three years, I'll be sitting in front of you saying our company is impaired."

William C. Van Faasen begs to differ.

Van Faasen, president and CEO of Blue Cross Blue Shield of Massachusetts, thinks that large or small, local or national, for-profit or nonprofit, well-run health plans can thrive.

He prefers nonprofit, saying, "I believe we've got a commitment to the community, and the community should realize some dividends." He doesn't think for-profit Blues plans are evil - "This isn't religion to me," he commented. But he certainly doesn't believe conversion is a necessity.

"I find it fascinating," he noted, "that the people who want to convert, and the investment bankers who benefit from conversion, have generated momentum for the intellectual idea that this is an imperative."

The Massachusetts Blues performance appears to back up his argument. Over the past few years, the insurer has posted big gains in membership, operating margin and reserves.

Of 15 Blues plans, both nonprofit and for-profit, tracked in a study in the current issue of the journal Health Affairs, the Massachusetts plan had the largest increase in revenue over the past three years (39.7 percent) and the second-largest increase in membership (23.1 percent, just behind WellPoint's 26.3 percent).

After overcoming financial troubles, the Massachusetts Blues have become so prosperous that the insurer set up a foundation a year ago to help the state cope with unmet health needs, pledging $55 million over four years.

"They've got so much dough they want to do something good with it," said John McDonough, a health policy professor at Brandeis University and a former Massachusetts legislator. "After years of focusing on profitability, they now have the luxury of doing this."

That luxury comes after the plan made some tough business decisions. Van Faasen doesn't agree with a contention of some of CareFirst's critics - that a nonprofit Blues plan should swallow operating losses in some lines of business in order to provide coverage to more people.

In the current market, he said, it is the Blue Cross Blue Shield of Massachusetts Foundation - but not the company directly - that will have to take on the task of expanding coverage.

"It's a contemporary expression of our historic mission," Van Faasen says

With competitors willing to insure the young and healthy, Van Faasen said, Blues plans can't afford losses on the poor, the elderly or the chronically ill, because that would drive up premiums for others.

"If it becomes a transfer tax onto your commercial base," he said, "you're setting up an invitation for your customers to leave."

When Blues plans were created in the Depression, the idea was that they would cover everyone at the same reasonable premium rate. That worked for decades, but changed quickly as rivals launched managed care plans that offered good rates to healthier patient groups, leaving the Blues with less healthy members.

Like other Blues insurers, the Massachusetts Blues suffered hard times as HMOs began aggressively winning business with lower premiums than Blues charged for traditional insurance. Two nonprofit HMOs, Harvard Pilgrim Health Care and Tufts Health Plan, grew quickly in the Bay State.

"The Blues of Massachusetts had a fair amount of financial trouble in the early '90s," said Joy Grossman, associate director of the Center for Studying Health System Change and author of a report on the changing role of Blues plans. "As the HMOs took off, they ... lost market share."

Rated E-minus

In 1996, the Massachusetts Blues posted a $97 million operating loss. Weiss Ratings Inc., which rates the financial stability of insurers, graded the Massachusetts Blues at E-minus.

"Six years ago, lots of people wondered whether Blue Cross would survive. They were the financial basket case," McDonough said,

The next year, the Massachusetts plan posted a slim profit margin, followed by increasing profitability. The most recent Weiss rating is now B-minus. In the third quarter of 2001, the most recent reported, the insurer posted an operating profit of $49.5 million, up 44 percent over the third quarter of 2000. Membership was up 11 percent.

Public backlash against the tight controls of HMOs, in Massachusetts and nationally, has brought business back to the Blues over the past few years. National membership - down to 65 million in 1994 - was up to 82 million last year, according to the report in Health Affairs.

Massachusetts Blue Cross also made some tough business choices to restore itself to financial health. It pulled out of the state's Medicaid program for the poor, and went to court to win a ruling allowing higher premium charges on its Medicare supplemental policies.

It also left other unprofitable businesses, such as a Medicare claims processing contract and a series of health clinics. The insurer's work force, which had been as high as 6,000, dipped below 2,600 in 1998, according to spokeswoman Susan Leahy. However, she said, the 1,200 health center workers and the 530 who did the Medicare claims went to work for the firms that took over those businesses.

"In these health care markets today, there's no mercy for failure," McDonough said. "Blue Cross of Massachusetts, like Blue Cross of Maryland, shed their unprofitable lines of business."

During the turnaround, Van Faasen believes the Massachusetts Blues have been able to accomplish some of the things for which other Blues plans say they need mergers and stock offerings. Computer systems are among the major capital expenditures of health plans - and the Massachusetts Blues outsourced theirs.

"The opportunities in this business to become a broker of best practices, to use somebody else's investment to achieve economies of scale, are endless," he said.

Consortiums, he added, provide another way of getting the advantages of size without mergers and acquisitions.

The bulging surplus of the Massachusetts Blues - which grew from $159 million in 1990 to $461 million a decade later - helped launch the foundation last year.

The foundation gives grants to community groups and health centers throughout the state.

Examples include a $25,000 grant to a neighborhood group in Fall River to expand access for uninsured Brazilians and other Latinos to free specialty care physician services. Another grant was $15,000 to Boston Health Care for the Homeless to create a motel outreach team to provide clinical care for homeless families in Peabody, Revere and Malden.

Beyond the foundation, it's difficult to measure what Blue Cross' determination to stay nonprofit contributes to Massachusetts.

David Blumenthal, a physician and director of the Institute for Health Policy at Massachusetts General Hospital, said: "I personally think Massachusetts has benefited from its nonprofit ethos" - including the other large health plans and the hospitals.

Massachusetts HMOs, he said, are near the top in national measures of care, such as immunization rate.

A Consumer Reports article in October, based on a survey of readers, rated the Massachusetts Blues' HMO second among 44 HMOs in the country in consumer satisfaction. Tufts rated fourth. (In a separate ranking of preferred-provider plans based on the same survey, CareFirst's Maryland plan ranked first.)

Based on the reforms of the individual and small-group health insurance markets, Massachusetts has been "making good progress on the uninsured," McDonough said. Recent Census Bureau data indicate that 9.2 percent of the Massachusetts population is uninsured - compared with 11.8 percent in Maryland and 14.4 percent nationally.

Costs are high

While access and quality are high, so is cost. Blumenthal said Massachusetts is consistently among the top five states in medical costs, although he said he believes that is largely explained by the state's high incomes.

Blumenthal believes, however, that the Massachusetts Blues are contributing less policy leadership. "It used to be a leader," he said. "I don't think it's a leader any more. It's been more business-like than other nonprofits."

Robert Restuccia, executive director of Health Care for All, a Boston advocacy group, disagrees with Blumenthal. And he's not hesitant to clash with Blue Cross when he thinks it's warranted - his group sued the insurer for failing to apply its discounts in calculating patient co-payments, and won a $10 million settlement.

"Historically, they've been much more out front on progressive issues," such as insurance reform and attempts to extend coverage, Restuccia said. He was named to the Blue Cross foundation's board of directors, and he praises the Blues foundation for being willing to include critics and finance advocacy efforts.

Van Faasen thinks the trend to Blue Cross conversions will slow. "Communities, and consequently [Blue Cross] boards, are becoming more impressed with how valuable having a locally operated health plan is," he said.

"There are different models for running your business, and different judgments," Van Faasen concluded. "There is no one model that guarantees success and no one model that guarantees failure."

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