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.”