BC/BS of Tennessee - a profitable nonprofit
The Best Of Times And The Worst Of Times: A Conversation With Vicky Gregg
Health Affairs
November 29, 2005
The CEO of BlueCross BlueShield of Tennessee describes what it’s like to be a profitable nonprofit in a state with a struggling Medicaid program.
Interviewed by James C. Robinson
Success Of The Blues
Robinson: 2004 was the best year you’ve ever had, according to your annual report. If I could cite some statistics from the Goldman Sachs investment bank, BCBST ranks among the top not-for-profit Blues on every dimension of performance. In particular, between 2003 and 2004 your revenue increased 42 percent, compared with 13 percent for all Blues plans. Your earnings increased 12 percent, compared with 6 percent for the other Blues plans. And your enrollment increased 12 percent, compared with 2 percent for the other Blues. How do you explain your success over these past years?
Gregg: Well, good hard work, for one thing. But I will tell you that we feel the competitiveness day in, day out. There’s no sense on our part that we walk in and it’s a slam-dunk on any employer’s health benefit account that we bid on. We have all of the big insurers here in Tennessee. We have CIGNA, we have United. We still have some strong regional players. We have John Deere; we have some hospital-based programs such as PHP in East Tennessee. There’s no market that we look at and say, “Oh, well, we just own this market.”
This year in particular-2005, year to date-our rate increases to our commercial customers are around 4 percent. We’re very successful, but we’re also today pricing below the medical cost trend. Our medical cost trend was running closer to 10 percent, maybe even ticking up a bit. So we are giving some rate relief in the market. We are trying to make sure that people are able to keep coverage, which we believe is an important part of what we contribute as a company.
Robinson: So you are consciously pricing below your medical cost trend?
Gregg: Yes.
Robinson: That’s possible, due to the fact that you’ve had very high financial reserves-a surplus built up from past years. If my numbers are correct, last year your reserves were at 540 percent of risk-based capital levels, which is way above the National Association of Insurance Commissioners [NAIC] minimum levels and the Blue Cross Blue Shield Association [BCBSA] guidelines.
Gregg: When we look at our company, we have to have capital. And as a not-for-profit, we do not have access to the capital markets in the sense that some of our competitors do. We look at what we need to drive our company and to be successful. And our sense is today, the most that we could say that we’re, quote-unquote, over-reserved, is around $250 million. Well, for a company of our size paying out more than $15 billion in claims this year, is $250 million really, quote-unquote, over-reserved? I think, again, it’s capital that allows us to fuel our business and to be competitive and to do the things that we need to do to be able to deliver affordable health care to our membership.
Consumer-Driven Health Plans?
Robinson: The buzz at the moment in health care is all about consumer-driven product designs. What is the trend in your commercial population in terms of copays, coinsurance, deductibles, and the product mix?
Gregg: We had several years, starting in early 2000s, of high double-digit inflation in medical care costs. And we saw our commercial employer customers begin to ask, “How do we engage our employees?” They did it in a number of ways.
First, we saw them begin pushing some of the premium costs over to employees. This was to wake them up, in terms of what health care really costs. The second element of employer strategies was to put deductibles and coinsurance back into place, after having taken them out during the managed care era. And now it is not unusual to see $500 and $1,000 deductibles and 20 percent coinsurance. That is the primary tool that most of our commercial customers use. It’s very prevalent in the small-group market, maybe a little less among larger groups.
We have also seen a big increase in the HSA products in our individual market. People want to have a little more flexibility there. We have seen some HSA penetration now in our group market.
Robinson: Do you see any potential in new product designs to bring some of the uninsured into insurance coverage-people who are not indigent but who are the working uninsured, who work for small firms?
Gregg: Yes. We have a number of products, and we’ve done a lot of focus groups around what products and price points are attractive to at least some of the uninsured. For the population that we’re talking about-and it tends to be low income but working-we heard a couple things. First, the price point is somewhere around $60 per month for a premium. So what can you buy for $60? The second point, which really made us sit back and say, “Wow, we need to think about this,” is that they indicated that if they’re going to pay $60, they don’t want just catastrophic protection. They’re paying $60, and they want to know what they’re going to get back for that. So in the focus groups they want dental benefits, they want vision benefits, and they want all these different things. So we have designed products. We have one called Simply Blue that’s targeted to that market and provides skinny benefits but does have some front-end first-dollar coverage [for preventive care].
The Price Of Health Care Services
Robinson: Tennessee is, like many other states, evolving toward becoming a very consolidated health care market, on both the hospital side and the insurance side. Blues plans are dominant in each region-and in each region one or a few hospital systems are dominant. So instead of a textbook economic market with lots of buyers and lots of sellers, you have a dominant buyer-that’s you-and then one seller or a few sellers on the hospital side. How does that affect the market-oriented approach to managing cost, to managing choice, and to managing performance?
Gregg: I like to use the term “shared destiny.” Our state is the poor state. We are forty-seventh in overall health status in the country. We have an uninsurance rate now that will be pushing toward 20 percent, from a low of about 6 percent. Another 20 percent are still on Medicaid, and another 15 percent are in Medicare. So you’re looking at 55 percent of the market either unfunded or underfunded, from the perspective of the actual costs of providing and financing care.
I don’t think any one entity, whether it’s Blue Cross or anybody else, can win at the expense of everyone else. Because ultimately all we’re doing is driving more people out of the market. I tell people that our biggest, toughest competitor is “nonconsumption.” It’s people who choose not to buy. And when you’re in a state where the average income is less than the U.S. average, people’s ability to buy health insurance is compromised.
http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.558v1
Comment: This interview should serve as an awakening for those who believe that nonprofit insurers provide services and coverage that is significantly superior to the for-profits. Although the for-profits may draw off a small percentage of receipts for the investors, the nonprofits are not much better in that they behave the same way as the for-profits within the private insurance marketplace.
The health insurance underwriting cycle is a phenomenon in which insurance premiums cyclically swing up and down even though health care costs maintain a relatively stable upward climb. As insurance profits increase, more players and plans enter the market. Competition drives down premiums to below the medical cost trend, and the losers leave the market. The winners then control the market and drive premiums back up well above the cost trend, with a return to significantly higher profits. Although some health care analysts have said that the underwriting cycle is no longer relevant, it is quite obvious that BC/BS of Tennessee (BCBST) is using its reserves (profits) to support its lower-than-market premiums in an attempt to drive out the competition. The underwriting cycle is alive and well and has contributed significantly to the “enviable financial success” of BCBST. The underwriting cycle would disappear if we had a universal, publicly administered insurance system.
The conversation on consumer-driven health plans provides further evidence that nonprofit insurers engage in nefarious activities in the private insurance market. BCBST determined that the insurance market wanted a premium “price point” of about $60 per month. They also determined that consumers wanted to get something back for their premium. So they gave them some front-end services to create the illusion of coverage but stripped the plans down to a package of “skinny benefits.” A publicly funded and administered program would be designed to ensure affordable access to comprehensive services and would never resort to fake plans that provided almost no protection.
When people “choose not to buy” because their “ability to buy health insurance is compromised,” then Blue Cross can’t “win at the expense of everyone else.” Nor should they! Let’s abandon these policies that are designed to make the private insurers the winners. Instead, let’s make the patients the winners by adopting policies that are designed to ensure affordable, comprehensive coverage for everyone.