Blue Cross At A Crossroads

Can the plans be made relevant to the next century?

It is one of the most powerful brands around: More than 99% of Americans recognize the Blue Cross and Blue Shield names. There is a very good chance that you, your neighbor, or mother-in-law are covered by a Blues plan. Some 65 million people subscribe to Blues products, a combined enrollment that dwarfs that of any other health insurer.

Yet this is an organization on the verge of tremendous upheaval. As the 63 plan executives headed to Washington for a board meeting of the national BlueCross BlueShield Assn. on June 13, many wondered how relevant the Blues will remain in the next century. Enrollment edged up in 1995 for the first time in 15 years, but rules dating from the 1930s still restrict where and how plans can do business. Division within the balkanized confederation prevents consensus on how best to take on managed care and the advent of big national rivals.

There is much at stake as the nation's $1 trillion health-care industry transforms itself. With operations in every state and unmatched market penetration, the Blues "have an awesome franchise," says Dr. David Friend, director of Watson Wyatt Worldwide's health-care consulting practice. Imagine the power of a single U.S. Blues entity, selling nationally branded managed-care products and linking all its doctors and patients in one massive information system.

Few expect that to happen. Many state plans insist on retaining their autonomy, and the national body has limited control over how individual Blues operate. Even so, the Blues are hurtling into consolidation that many plan executives believe will thin today's 63 affiliates to as few as 15 in five years. On May 29, Anthem Inc., owner of Blues plans in Indiana and Kentucky, announced a deal to acquire Blue Cross & Blue Shield of New Jersey, which itself has agreed to buy the Delaware Blues. Plans in Texas and Illinois are skipping over the Bread Basket to merge, as are four plans in Pennsylvania. WellPoint Health Networks Inc., the new, publicly traded version of California's Blue Cross, has purchased the group health business of Massachusetts Mutual Life Insurance Co. and says it is eyeing other acquisitions.

The Blues are wrestling awkwardly with such tumult. The June 13 summit was expected to confront the most controversial move yet by a Blues plan--an agreement by Blue Cross & Blue Shield of Ohio to sell most of its assets to Columbia/HCA Healthcare Corp., the giant hospital operator. Many executives oppose the deal, which for the first time would put a Blues operation in the hands of a public, noninsurance company. "When it comes to any deal that has a dilutive effect on the brand, chances are it's a nonstarter," says association President Patrick G. Hays. The board ultimately could strip the Ohio combination of its right to use the Blues trademark.

The Columbia acquisition likely will be blocked or substantially revised. Beyond the Blues' resistance, opponents in Ohio say the $299.5 million price is far too low and that Blues executives are being rewarded too richly. But Hays and others know that other deals will follow that similarly challenge the Blues' old dominance. Plans will seek mergers with commercial insurers and HMOs, and increasingly will pursue business outside state boundaries. In fact, a group of Blues led by the Texas affiliate are rumored to be mounting a rival bid for Ohio. The question: How to allow plans the flexibility to compete while retaining control over the organization?

HEADLONG. Even the most tradition-bound Blues execs concede that the old rules have to change. Established mostly in the 1930s as not-for-profit organizations, they remain rooted in the standard insurance business that made them giants, with more than half their members still in indemnity products. For a decade, though, Americans have been shifting into managed-care insurance, largely at the behest of employers seeking a rein on health-care costs. "Most Blues, like all entrenched businesses, reacted sluggishly to managed care," says Michael A. Stocker, CEO of New York's Empire Blue Cross & Blue Shield. That's why overall membership has stayed flat for much of the past decade (chart).

Many Blues by now have launched themselves headlong into managed-care strategies. Empire this year will pay all its employees bonuses based largely on the number of new managed-care members it signs. The Blues association's $120 million national ad campaign, just its second in 15 years, pays clipped, MTV-style homage to the virtues of HMOs. (The appeal is to the Generation X crowd, who demonstrate surprising affinity for the old Blue Cross name. "We could be the next colored Hush Puppy," says an association executive.)

Blues plans are well-suited for managed care, which requires density of patients for an insurer's networks of doctors and hospitals to pay off. But the business depends as well on reach: Most markets extend beyond the state lines by which Blues are bound, as much by association rules as by state regulation. Commercial insurers Cigna, Aetna, and Prudential, moreover, have HMOs across the nation. None achieves the Blues' local concentration, but when it comes to contracts serving national employers, a small but growing market segment, "the Blues are not a player," says Dr. W. Allen Schaffer, head of Cigna's managed-care operations.

Managed care also requires capital. The information systems alone needed to coordinate HMO programs for patients and providers can cost from $30 million to $50 million. For Blue Cross & Blue Shield of Georgia, whose earnings dropped to $17.4 million last year from $23.7 million in 1993, keeping up with competitors required converting to for-profit status. It did so in February, changing its name to Cerulean Cos. and raising $49.9 million.

NEW RULES. Even today, two years after the Blues association voted to allow such conversions, many executives resist the notion of for-profit operation, which "could unravel the system by creating competition between plans," says Andy Czajkowski, CEO of the Blues in Minnesota. The fact that opposition persists underscores the difficulty in setting an overarching strategy. The association "is not a monolith," says Tennessee Blues CEO Thomas L. Kinser.

While many plans want flexibility to pursue expansion, what emerges from the Washington meeting likely will be new rules that actually limit their options. One proposal would require that plans seeking to diversify sell no more than 20% of their products under a non-Blues name. Will such strictures protect the brand, or just stifle competitiveness? With the Blues, it's a delicate balance. By sheer inertia, they will remain a force in managed care--but they may never live up to their promise.

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