Blue Cross and Blue Shield plans across the country have transformed themselves into the nation's leading managed-care player.
In June, membership in the 76 HMOs offered by the nation's 69 independent Blues plans reached 7.6 million, and that total is growing by 500,000 every 12 months. The growth allowed the Blues to overtake managed-care giant Kaiser Permanente, which reported that HMO enrollment in its 12 regions as of this June reached 6.62 million, inching up from 6.6 million in June 1993.
Currently, about 42% of the Blues plans' total enrollment-27.3 million out of 65.5 million-is in managed care, including 17.4 million in PPOs and 2.3 million in point-of-service products. That compares with 21% of enrollment in managed-care products in 1989, including 4.5 million in HMOs, 11 million in PPOs and 100,000 in point-of-service products.
Blues plans-long identified with traditional fee-for-service insurance-are continuing to devise and refine managed-care strategies tailored to their local markets. These include setting up joint ventures or other affiliations with hospitals and medical groups, acquiring providers, consolidating, forming for-profit subsidiaries and offering an array of managed-care products.
Surpassing Oakland, Calif.-based Kaiser is "certainly a significant milestone, hopefully indicative (that) we are getting our act together....I think you're going to see a lot of changes over the next few years in the Blues," said Norwood H. Davis Jr., chairman and chief executive officer of Trigon Blue Cross and Blue Shield, based in Richmond, Va. "The Blues have incredible resources, and we certainly have had our difficulties over the years. But I am optimistic there's a new era ahead for the Blues."
Among the Blues' more publicized difficulties was the collapse of Blue Cross and Blue Shield of West Virginia in 1990, which prompted a two-year Senate investigation of problems in Blues organizations. A permanent subcommittee found mismanagement and misuse of funds in the Maryland, New York and District of Columbia plans.
The General Accounting Office, Congress' investigative arm, said in a report prepared for the subcommittee that although most Blues plans are financially sound, healthcare reform will require plans to quickly adjust to competition. Adjusting has been difficult for some of the more bureaucratic plans and has contributed to their financial woes in the past, the GAO report said.
But plans across the country have a lot going for them. "I see a tremendous amount of dynamism in Blue Cross/Blue Shield right now in trying to adapt" to market forces, said Thomas Kinser, chief operating officer at the national Blue Cross and Blue Shield Association based in Chicago.
The individual Blues plans "are well positioned to win in the managed-care marketplace if we recognize them as the original managed-care organization, because they have traditionally focused on and recognized the importance of the local delivery of care," said Joseph Torella, director of marketing and sales support at Alexander and Alexander Consulting Group in Lyndhurst, N.J.
Managed care has become popular with purchasers and payers of healthcare because "at the heart of it is a cost element," Mr. Torella said. Although there is much more to managed care than controlling costs, the Blues were the first to establish relationships with enough physicians in a marketplace to negotiate a price discount, he said.
An array of strategies.Blues plans are choosing various strategies to expand their managed-care operations. "Everybody's trying to figure out how to get there," said Mr. Kinser, who will become chief executive officer of Blue Cross and Blue Shield of Tennessee effective Oct. 1.
"We don't know enough yet to see what the successful models are going to be," Mr. Kinser said. But the Blues will continue to focus on "adapting to local markets and provider conditions."
When the national association decided in June that Blues plans could go public under the Blue Cross/Blue Shield brand, predictions were that many plans would rush to convert into for-profit companies, taking advantage of their high brand recognition and strong market shares. But observers now don't think that will be the case.
Before the association's decision, three Blues plans created for-profit subsidiaries: Blue Cross and Blue Shield United of Wisconsin formed United Wisconsin Service in 1991; Associated Insurance Cos. (Blue Cross and Blue Shield of Indiana) created Accordia in 1992; and Blue Cross of California formed WellPoint Health Networks in 1993.
Blue Cross and Blue Shield of Missouri recently raised $38.5 million in an initial public offering of stock for a subsidiary called RightChoice Managed Care. It will market managed-care products under the name Alliance Blue Cross and Blue Shield-marking the first time the brand name has been used by a for-profit subsidiary. The Missouri Blues have 850,000 enrollees, and 1993 revenues totaled $760.7 million.
For some large plans in intensely competitive markets, going public will provide the capital to expand more aggressively into managed care. But "it is unlikely you will see a large number of offerings over the next few months," said Casey Safreno, a director in Merrill Lynch & Co.'s healthcare investment banking group in San Francisco.
"We believe capital market access is very important to Blues plans and that their geographic concentration makes them attractive to potential investors," Mr. Safreno said. "However, it takes some time and effort to be able to access the capital markets, given (the Blues') nonprofit structure."
"Converting to for-profit may facilitate a wide variety of strategic transactions, including mergers over the next few years, in addition to IPOs," Mr. Safreno added.
Mr. Kinser agreed: "There's only a handful of plans that have real muscle in terms of a drive to managed care, as well as the financing, and are of sufficient size to be attractive to Wall Street."
Mission and tradition.For some plans, "the not-for-profit tradition is very deep and abiding," Mr. Kinser said. For example, the Pennsylvania and Rochester, N.Y., Blues plans enjoy a large market share and have a strong sense of social mission. "For those plans to change roles would just be enormous," he said.
Douglas Sherlock, an HMO analyst at Sherlock Co. in Gwynedd, Pa., points out that the half-dozen large plans that are likely to go public in the next year and a half "represent most of the equity of the association."
As an illustration, the entire Blues system had a net worth of about $6.8 billion in 1991, and WellPoint alone-the Blue Cross of California subsidiary that went public in 1993-is worth about $2.7 billion, he said.
The plans that have gone public clearly are in a position to use the generated capital to pursue their managed-care objectives, said Merrill Lynch's Mr. Safreno. For example, the Wisconsin plan has pursued "a continuous program of joint ventures," he said.
WellPoint is eager to use some of its $1.5 billion in cash reserves-$516 million of which was raised from the sale of shares-to expand outside of California, said John Cygul, WellPoint's vice president of investor relations.
Going public also has helped the plan invest in stronger relationships with our providers, Mr. Cygul said. For example, in California's push to expand managed-care services for patients in Medi-Cal-the state's Medicaid program-WellPoint has picked up 21,000 enrollees in Sacramento. The HMO is investing in on-line systems for its 200 providers in the program to automatically check for eligibility and facilitate referrals. The HMO declined to reveal how much the company has invested in the information systems.
WellPoint also acquired a workers' compensation insurance company, UniCARE, based in Irvine, Calif., for about $160 million in cash. The company is licensed to do business in 32 other states.
"Going public gave us more resources to consider a purchase of that sort," Mr. Cygul said.
WellPoint has begun offering a 24-hour insurance product jointly with UniCARE, which combines standard medical care and workers' compensation benefits in a managed-care setting, Mr. Cygul said.
Getting integrated.Not surprisingly, the Blues plans mentioned as likely to go public or those that say they are considering that route are busy setting up integrated delivery systems, which are fast becoming synonymous with managed care. Those transactions generally require abundant capital.
"We're absolutely looking at integrated systems," said Steve Brueckner, president of Community Mutual Insurance Co., a Blues plan based in Cincinnati. "We think it is the model that will prevail in many markets in the next several years." The plan has annual revenues of $2.5 billion and enrollment of about 2.5 million.
The plan currently has no equity arrangement with physicians, "but we're close," he said. Community Mutual also is close to agreement on joint ventures with hospitals, he said.
For example, Community Mutual would consider a deal similar to one in which Blue Cross and Blue Shield of Ohio formed a for-profit venture with Meridia Health System, a hospital group, Mr. Brueckner said (July 25, p. 36).
Going public is "an option we have to consider," Mr. Brueckner said. "We're seriously assessing whether that's the right vehicle to raise the capital required (for) investments both in provider relationships and technology."
Trigon, with 1993 revenues of $2.2 billion and enrollment of 1.8 million, also is among the plans mentioned as likely to go public. It has been steadily forming integrated systems. The Virginia plan set up an alliance with four Newport News hospitals in 1992 and is finalizing another with 14 hospitals in the Roanoke area. The alliances' managed-care organizations are 49% co-owned by the hospitals.
"Our strategy is negotiating arrangements that fit the circumstances and the parties, and not to use one model that will serve as a cookie-cutter," Mr. Davis said.
Asked if the plan would ever employ physicians, he said, "We do not have any staff-model HMOs now, but clearly that is one alternative we could use, and we will certainly be looking at that."
Going public may be the way Trigon will get the cash it needs to forge these new provider relationships. Mr. Davis would say only that the Securities and Exchange Commission has some "pretty strict regulations (that) govern what you can say about your intentions about going public. We have had these things under study and under consideration, and it would be inappropriate to say more."
Other Blues executives agree that capital is necessary to build integrated systems, and going public may be the best way to get it. Although the minimum amount of capital needed to own components of an integrated delivery system is "a hard number to peg" and could be as high as $50 million, Community Mutual is currently eyeing a couple of physician group acquisitions, one in the $7 million range and another in the $3 million to $4 million range, Mr. Brueckner said.
The cost of building an information technology infrastructure must be added to the cost of the actual acquisition, Mr. Brueckner said. "That cost can really be all over the place, but it's almost the glue that makes (an integrated system) work better."
Richard P. Krecker, president and CEO of Blue Cross and Blue Shield of Kansas City, the first plan to employ physicians in a mixed-model HMO, says he is considering taking the plan public.
The Missouri-based Blues plan, which also does business in Kansas, had total revenues of $472 million in 1993. The plan, which has an enrollment of 784,000, has had managed-care options since 1981. But in 1992 it made its first foray into the actual delivery of care by forming HealthSource, a holding company for Blue-Advantage, a mixed-model HMO that is jointly owned by the plan, a hospital chain and four other hospitals. About 39 physicians work for HealthSource, which also contracts with other physicians.
When the Kansas City Blues first contemplated employing physicians, the plan found "real interest...among physicians who felt they could enjoy and thrive" working for a health plan, Mr. Krecker said. That, plus the need to be the low-cost producer in a competitive marketplace with 26 health plans, "told us it would be timely for us to employ physicians," he said.
Integrating the financing and delivery of healthcare helps get all the major players on the same team and results in greater control of quality and cost, he said.
Alternative ventures.Because integrated systems come in
myriad forms, some Blues plans don't feel the urgency to raise capital in order to establish them. For example, rather than acquiring medical groups or employing doctors, Blue Cross and Blue Shield of Minnesota has formed three joint-venture partnerships that include more than 1,350 physicians and 28 hospitals.
"We don't feel a need to raise capital right now because we aren't acquiring groups or hospitals," said Mark Banks, M.D., president and CEO of Blue Plus, the Minnesota plan's HMO.
These joint ventures "may evolve into other relationships in the future," such as acquisitions, but at the moment they provide a high degree of flexibility to adapt to the changing healthcare environment, Dr. Banks said. Owning medical groups and hospitals now would mean "if you have a downturn in your business, you're stuck with a high degree of fixed costs," he said.
Besides, the clinics and medical groups "out there with their hands in the air saying they want to be purchased may be behind the curve in managed care," Dr. Banks said.
The Minnesota plan has been steadily investing in sophisticated data analysis-especially applied to cardiac and Caesarean-section outcomes. The plan estimates it has spent about $20 million over the past 10 years on computer systems and software for data collection and analysis. It views that resource as part of its contribution to partnerships with those who actually deliver the care, Dr. Banks said.
Blue Shield of California, based in San Francisco, with 1.6 million in enrollment, also is exploring various kinds of relationships with physicians, a spokesman said. "We're studying our options right now," he said. "Our intent is to still remain nonprofit. We feel we can remain nonprofit and accomplish the goals we're exploring right now."
A proposed merger with Burbank, Calif.-based UniHealth America fell through last November because the deal was not the best combination for both companies, executives said. (Nov. 15, 1993, p. 14).
As Blue Shield of California streamlines, it is focusing on "managed care and movement toward the HMO model." For example, it is steering its small groups of 50 and under into managed care by offering them only an HMO and a point-of-service product that is "very much a transition into an HMO," the spokesman said.
With Blue Shield of California's focus on managed-care plans, enrollment in its HMO has risen to the current 272,000 from 22,000 just five years ago.
Bigger is better.One reason individual Blues plans' HMOs have grown is the demand by multistate employers such as United Airlines for nationwide networks.
No other insurer can boast about offering an HMO in every single state, said Judith Wilson, executive director of Chicago-based HMO-USA, which coordinates 72 Blues HMO networks. Although other insurers offer networks in many states, "our size really comes in as a powerful attribute," she said.
Blues plans also can provide care for members of other Blues plans who are temporarily away from home. The process is facilitated by "an away-from-home coordinator who takes over, makes an appointment for them, and really steps in and becomes a kind of a personal advocate," Ms. Wilson said.
There is no cost to the member, since plans bill one another behind the scenes, she said.
In 1996, "guest memberships," available now only to large employers, will be available to all Blues members who are away from home for extended periods. A college student, a person spending a few months in another state or a child living apart from a divorced parent who is responsible for dependent healthcare can become a guest member of a Blues HMO. It's managed care, but it arguably has the feel of that old-fashioned blanket coverage associated with fee-for-service medicine.
Products and resources like these, and the brand recognition of the Blues, will become increasingly important as groups of consumers are given more choices among managed-care plans, analysts say.
Once a Blues plan is selected as an offering in a group program, "then you've got to be able to sell the individual, which we frankly haven't had to do in the past," said Trigon's Mr. Davis.
But research conducted for the national association last fall should encourage Blues plans' executives. According to Susan Jeffers, the association's practice director of brand enhancement and extension, consumers see the Blues as "comfortable, enduring, safe, American, big, like mother and apple pie."