Nonprofit Blues plans report declining earnings in 2008

Experts predict higher premiums and co-pays, and tougher contract negotiations for physicians.

By Emily Berry — Posted Oct. 5, 2009

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BlueCross BlueShield-affiliated nonprofit insurers are faced with both declining income from their health plans and a drop in the investment income that in the past had been used as a financial buffer.

Average overall profit margin for nonprofit Blues plan declined from 4.3% in 2007 to 2% in 2008, according to compiled financial results provided to state regulators and gathered by Goldman Sachs investment analyst Matthew Borsch for a recent report. Some plans reported losses for 2008, most notably Blue Cross Blue Shield of Michigan, which was $144.9 million in the red last year.

Analysts say the plans' reaction to this trend is going to be predictable, and probably not good for physicians. They expect plans to raise premiums, get tougher in negotiations with doctors and hospitals, and push policies with less coverage. With no sign that membership declines are going to reverse in the face of rising unemployment, nonprofit Blues plans also have cut thousands of jobs.

The Blues are affected by the same trends that hit shareholder-owned health insurers, said Merit Smith, vice president and director of health care practice at Simsbury, Conn.-based consulting firm Robert E. Nolan Co.

But nonprofit Blues plans typically have fewer additional lines of business from which to draw income. That's in contrast to the largest national insurers, many of which have subsidiaries in pharmacy, claims analysis or research. As higher unemployment numbers have resulted in fewer insured, nonprofit plans have fewer options for riding out the storm.

BlueCross BlueShield of South Carolina, for example, operates in a state where the unemployment rate jumped from 5.8% in December 2007 to 8.8% in December 2008. The plan saw a decline in enrollment from 660,000 in 2007 to 639,000 in 2008, according to numbers compiled by Borsch.

That's just a 3.1% drop in membership, but both underwriting and investment income dropped over the same period, leaving the plan with a drop in pre-tax income from $168 million in 2007 to $140 million in 2008 -- a 16% drop in one year. No numbers are available yet for 2009, but South Carolina's unemployment jumped to 11.8% in July.

Unemployment hurts the Blues' core business in two ways, Smith said. It means a loss of premiums. But it also means that the remaining workers tend to be older and sicker, so the plans' medical spending rises.

Often the Blues plan is a contracted Medicaid managed care organization as well as a plan that offers group insurance in a given state. So laid-off employees technically might remain enrolled with their Blues plan as a Medicaid beneficiary. This keeps numbers up but these memberships are less profitable, Smith said.

The Blues are faced with a limited number of levers to pull to boost net income, Smith said. "Rather than throw one lever really hard, what we traditionally counsel is to make moderate changes in a variety of different things. [Plans] will do things like be aggressive on [premium] increases for members and groups, toughen their stance on contract negotiations with providers, and there may be some product changes they push that may increase collection problems for providers."

Borsch said for-profit plans saw similar declines in underwriting profit, but the trend showed up earlier, and they already have raised premiums in response.

Aside from contracting negotiations and higher deductible, simply raising plan premiums has a ripple effect on physicians, said Roger Feldman, PhD, Blue Cross professor of health insurance at the University of Minnesota.

Higher premiums, Feldman said, trigger "more people dropping insurance, and therefore there will be less demand, because people who don't have insurance are going to cut back. Those who do go to the doctor may have more trouble paying out-of-pocket bills."

Although Feldman's position at the university was endowed by Blue Cross and Blue Shield of Minnesota, he does not speak on their behalf or have any connection to the company.

The Minnesota Blues reported a $15.7 million loss on $8.8 billion in revenue in 2008, a decline it attributed mostly to investment losses. In July, the company announced it would cut 100 of its 4,000 workers.

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Profits, reserves both down

BlueCross BlueShield-affiliated plans and other nonprofit insurers are required to maintain a certain level of surplus, meant to ensure solvency in case of a financial or medical crisis. After years of steady growth, those reserves dropped for Blues plans from 2007 to 2008.

Surplus (in millions)
2002 $16,011
2003 $20,731
2004 $25,010
2005 $28,748
2006 $33,333
2007 $36,536
2008 $33,191

Note: Excludes WellMark, Idaho, Mississippi, Louisiana, Hawaii, and Puerto Rico Blues plans

Source: Matthew Borsch, Goldman Sachs

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Investments less of a buffer

Just as BlueCross BlueShield-affiliated plans began to rely more heavily on investment income for profits in 2006 and 2007, the recession hit and took a bite out of the companies' bottom line. Combined with smaller profit margins from underwriting, the insurers saw lower overall profits in 2008, with an average pre-tax profit margin of 2%, down from 4.3% in 2007.

Investment income percentage of pre-tax earnings:

2002 21%
2003 27%
2004 30%
2005 35%
2006 45%
2007 71%
2008 34%

Note: Excludes WellMark, Idaho, Mississippi, Louisiana, Hawaii, and Puerto Rico Blues plans

Source: Matthew Borsch, Goldman Sachs

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Job cuts at the Blues

Because of declining earnings, nonprofit BlueCross BlueShield-affiliated plans nationwide have laid off workers to cut costs. Among the cuts in 2009, in order of announcement:

Job cuts Percentage of workforce Announced
Blue Cross Blue Shield of Michigan 1,000 10.0% January
Blue Cross of Northeastern Pennsylvania 89 7.0% February
Independence Blue Cross (Pa.) 100-125 1.1% April
Premera Blue Cross (Wash., Alaska) 95 3.0% April
BlueCross BlueShield of Florida* 300 5.0% April
Horizon Blue Cross Blue Shield of New Jersey 253 5.0% May
Blue Cross and Blue Shield of Alabama 151 4.0% June
BlueCross and BlueShield of Minnesota 100 2.5% July
Health Care Service Corp. (Ill., Okla., N.M., Texas) 650 4.0% August

*BlueCross BlueShield of Florida said it expected to cut another 200-250 employees through attrition.

Sources: Company announcements, news reports

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