Michigan Blues sets plan to trim $300M by 2018

Blue Cross and Blue Shield of Michigan plans to cut $300 million in expenses by 2018, which could lead to an unspecified reduction in employees and contractors, according to records obtained by Crain's Detroit Business.

Layoffs of 25 employees and three contractors last month in the Detroit-based company's healthcare value division were just the first part of what it is calling a “strategic business transformation” as customers push it to lower costs.

Documents shown to employees and obtained by Crain's show that the Blue Cross plan targets rising administrative costs—costs up to 30% higher than those at national insurers and other competing plans in Michigan, according to one Blue Cross report.

Sources inside Blue Cross told Crain's that more layoffs are coming as division department heads review employee needs and potential cost cuts over the next several weeks.

Blue Cross officials confirmed that the initiative could lead to more layoffs and staff reductions from attrition.

Andy Hetzel, vice president of corporate communications with Blue Cross, said the company is conducting an ongoing business review of operations, as it has done regularly since Dan Loepp became CEO in 2006.

“We are at the starting gate of the process to become more efficient,” Hetzel said. “Dan Loepp has been very transparent about what that includes, where the best people need to be and where our strategy needs to be in three years.”

Outside experts told Crain's that it is highly unlikely Blue Cross can cut $300 million in costs, which would amount to about 10% of total administrative expenses each year, by simply improving efficiencies and claims processing. That kind of cut would almost require staffing to shrink.

Sources told Crain's that multiple factors are forcing the Blues to cut costs. They include adjusting the workforce after a huge expansion to prepare for changes and new customers from the Patient Protection and Affordable Care Act of 2010.

Most insurers have expanded workforces and operations to comply with new demands under the healthcare overhaul and to keep up with competitors, said Harry Dalsey, a consultant with Dalsey & Associates in West Bloomfield Township.

Blue Cross also has expanded its sales and marketing workforce, say sources, to capture more individual customers.

In the past two open enrollment periods since December 2013, Blue Cross has added 90,000 individual members, primarily through the federally managed health insurance exchange in Michigan. Blue Cross now has 261,000 individual members.

But the major external force demanding lower administrative costs is Blue Cross' own client base, including auto suppliers, the three Detroit automakers, and large, self-funded companies.

Sources said these companies want Blue Cross to lower its fees for managing their self-insured health benefit plans.

Sources told Crain's that Blue Cross is concerned that to save money, major employers will defect from the Blues and sign on with Aetna, Cigna, United Healthcare or competing Michigan insurers that include Priority Health and Health Alliance Plan.

Hetzel confirmed that one of the driving forces for cost-cutting is talks Blue Cross recently has had with some of its largest customers.

“When we are in the room with our customers, this is what we hear: 'Our employees prefer Blue Cross, but you need to help us offer it affordably,' ” Hetzel said, adding: “We are not going to wait and be outflanked by our competitors.”

Blue Cross also faces potentially new competition from hospital-based systems that have formed two major clinically integrated networks to contract directly with employers.

Sources said these provider networks, coupled with third-party administrators, could offer employers an option to bypass the Blues' formidable network and lower discount pricing arrangements with hospitals, doctors and other health providers.

Last year, Together Health Network was formed by Livonia-based Trinity Health Michigan and Warren-based Ascension Health Michigan. The network encompasses the 27 hospitals and more than 5,000 physicians.

This year, a network tentatively called the “Federation” was formed by Allegiance Health in Jackson, Sparrow Health System in Lansing, Covenant HealthCare in Saginaw, MidMichigan Health in Midland, Bronson Healthcare Group in Kalamazoo and Lakeland HealthCare in St. Joseph.

With Henry Ford Health System planning to acquire Allegiance and talk about an affiliation with Kaiser Permanente, the Federation could become a powerful statewide contracting force that could threaten Blue Cross' dominance, experts said.

“Successful companies initiate change before they are forced to change,” Hetzel said.

Six years ago, Blue Cross' “strategic transformation” led to a reduction of nearly 1,000 workers through attrition, layoffs and retirements. The reduction amounted to a 12% cut in the Blues' workforce to about 6,900.

Since then, however, Blue Cross and its related subsidiaries have grown to 7,921 employees.

Jerry Konal, Mercer's principal business leader in Detroit, said Mercer's surveys have found a large variance in Blue Cross administrative service costs compared with those of competitors.

Moreover, because of a variety of factors — including Blue Cross' recent legal settlement with Aetna over its arrangements with providers that guaranteed Blue Cross the lowest rate — Blue Cross' discounts from hospitals aren't as deep as they used to be.

Another source told Crain's that Blue Cross' settlement with Aetna, which asked for nearly $2 billion in damages, added “a couple hundred million dollars” in administrative costs this year to the Blues.

Hetzel confirmed that discounts have narrowed compared with those of competitors but said the Aetna settlement was “not a significant driver of that narrowing.”

Since 2010, Blue Cross has “experienced faster admin cost growth and lower membership gains than national, for-profit plans,” according to a confidential Blue Cross document.

For example, United Healthcare cut administrative costs by 0.5% while increasing membership 11.3%, the Blue Cross report said.

From 2013 to 2014, Blue Cross' general administrative expenses increased 25%, from $863.4 million to $1.077 billion, a Blue Cross financial document said.

The Blue Cross report stated its overall administrative costs are “20 percent to 30 percent higher than local competitors in the commercial business.”

For example, Blue Cross monthly administrative costs per member increased 27% from 2010 to 2013, or from $27.63 to $35.04. Its membership increased only 0.4% during that period, to 4.4 million members.

Other plans increased costs, but at a lower rate. They include Aetna, with 4.6% administrative cost growth to $31.19 a month per member, and Cigna, by 5.8% to $32.22. But those plans increased membership by 6.3% and 4.5%, respectively.

But more striking are comparisons with local Michigan health plans. For example, Blue Cross administrative and commission expenses on the federal health insurance exchange in Michigan are $64 per member per month, compared with $49 for Humana HMO, $41 for McLaren Health Plan, $37 for Priority Health HMO and $25 for Molina Healthcare of Michigan.

Hetzel confirmed that Blue Cross' administrative expenses have been increasing. He cited higher medical costs, coverage mandates because of the Affordable Care Act, the costs of litigation and increased investment in technology.

“Large national payers are consolidating rapidly to reduce costs and maximize efficiencies,” he said. “We are taking that very seriously and addressing our own cost structure. Large national insurers have significantly more capital to invest in new capabilities, new technologies and have the scale to aggressively spread costs over their enterprises.”

Fran Parker, CEO of the UAW Retiree Medical Benefits Trust in Detroit, said Blue Cross is reviewing its employee needs and administrative expenses in ways similar to what other health insurers are doing.

“Blue Cross is being prudent to react and be proactive to changes in market dynamics” in Michigan and nationally, said Parker, who formerly headed Health Alliance Plan.

Parker said market changes in Michigan include an increasing number of people with Medicare and Medicaid coverage and a shift to the individual market and away from fully insured plans.

“The business climate has changed dramatically,” she said. “The market is very dynamic and is demanding greater transparency around cost and value.”

Blue Cross also competes with national plans such as Aetna and United Healthcare that have developed scale and presence principally because of Medicaid and Medicare to compete more effectively with the Blues in Michigan.

“The need to invest heavily in technology has created greater pressure on traditional administrative costs,” Parker said. “The market is far past doing business as usual, and (Blue Cross) obviously knows this.”

Despite posting earnings of more than $1.1 billion the past five years, Blue Cross wants to expand to generate more revenue.

“We recognized the market is rapidly changing,” Hetzel said. “We need to identify how to streamline our cost base, grow revenue through new types of business ventures and involve all employees in what we are doing.”

On the revenue side, Blue Cross plans a multipronged effort that includes adding Medicare Advantage and Medicaid business in Michigan and nationally, partnering with other Blues state-based plans and acquiring or investing in independent companies.

“We are in a growth mode in Medicare Advantage,” said Hetzel, noting that since 2006, the Blues' Medicare managed-care plan has grown to cover 440,000 members in 1,900 counties in all 50 states.

Sources told Crain's that Blue Cross is in talks with the nonprofit Arkansas Blue Cross Blue Shield about a partnership plan for Medicare Advantage and is expecting to develop other similar partnerships with Blues plans nationally.

Last month, Blue Cross acquired ikaSystems Corp., a Southborough, Mass.-based information technology vendor, to primarily help it manage its Medicare plans and as a revenue-generating source.

Blue Cross also expects to increase revenue through its minority interest with AmeriHealth Caritas, a national Medicaid management company. In June, Blue Cross also spun off its Medicaid health plan, Blue Cross Complete, into a 50-50 AmeriHealth joint venture.

Hetzel said Blue Cross expects revenue growth on the commercial insurance and administrative services organization side of its business.

“If we get our costs more streamlined,” Hetzel said, “we see tremendous potential with continuing relationships with existing companies.”

"Blue Cross sets plan to trim $300M by 2018" originally appeared on the website of Crain's Detroit Business.