Ailing Blue Cross May Be on Road Toward Recovery

When Leonard D. Schaeffer took over as president of Blue Cross of California a year ago, complaints were so rampant his secretary wouldn’t tell callers what office they had reached for fear they would want to personally protest about the state’s largest health insurer.

“The secretary would answer the phone and just say, ‘hello’ ” Schaeffer recalled. “I said: “How are people going to know who they’ve reached?’ She said: ‘Don’t you want to avoid all those nagging calls?’ ”

Financial woes, staff turnover and management strife at Blue Cross had produced such poor service that as recently as eight months ago, the California attorney general’s office threatened to sue Blue Cross and force it to speed reimbursements and handle consumer inquiries more quickly, according to Herschel Elkins, who heads the attorney general’s consumer unit.

But today, a year after Schaeffer’s arrival and three months before Blue Cross’ 50th anniversary, the Woodland Hills-based firm appears to be making a turnaround.

Although workers say that morale remains low and the financial outlook seems uncertain, Schaeffer--a 41-year-old, one-time government administrator who’s earned a reputation as a driven and demanding boss--has already taken an important step to recovery by getting Blue Cross to improve service to its 3.5 million consumers.

“The new president has been very much involved with improving relations with consumers,” said Everett Brookhart, chief of consumer affairs for the Department of Insurance, which has been meeting quarterly with Blue Cross officials to assess its performance. “The complaint volume continues to decline. They still don’t have a completely clean bill of health. But it’s only a matter of time.”

Schaeffer, who came to Blue Cross after serving as president of the nonprofit St. Paul, Minn.-based health maintenance organization Group Health Inc. and administrator of the Health Care Financing Administration during the Carter Administration, is attempting to engineer an overhaul of Blue Cross at a time when the giant health insurer faces an uncertain future partly due to a more competitive health insurance market.

As a tax-exempt, nonprofit concern, Blue Cross helped pioneer health insurance half a century ago, when commercial insurance firms resisted insuring against health problems.

But today, it must compete against HMOs such as Maxicare Health Plans Inc. and Kaiser Permanente as well as a growing number of preferred provider organizations, or PPOs, which offer financial incentives to encourage customers to patronize health-care providers that agree to keep their costs low.

The competitive environment continues to grow tougher: On Jan. 1, the federal government ended tax-exempt status for all Blue Cross and Blue Shield organizations, arguing that they should compete equally with other commercial insurers.

Meanwhile, Blue Cross has had to appease its large customers, many of whom have found it attractive to defect to other insurance carriers or to fund their own employees health insurance plans.

Last month, for example, Pacific Bell dropped its health insurance contract with Blue Cross, canceling about $6 million in annual business. A carpenters union, which also paid Blue Cross several million dollars to administer its health insurance plan, canceled its contract, too.

All of these factors have helped plunge Blue Cross into a sea of red ink.

‘Some Days I Despair’

Although Blue Cross won’t release its 1986 figures until next month, the insurer lost $67.2 million in the third quarter ended Sept. 30, compared to a $44.5 surplus during the same period the previous year.

“Some days I think the new team we have is really a good one, and some days I despair,” said Angele Khachadour, Blue Cross general counsel. “I really don’t know whether this company is going to turn around. I think its financial condition is even worse than Mr. Schaeffer imagined.”

In his typically blunt and analytical manner, Schaeffer, who says he works 70 hours a week, blames the problems of Blue Cross on “poor Service, increased competition, poor pricing of our product and administrative costs that were too high,”

To remedy the shortcomings, Schaeffer has scrapped the old structure of sales, marketing and other business units at Blue Cross in favor of a setup in which department heads are responsible for serving consumer markets such as group health insurance accounts, administration of Medicare contracts and individual health insurance.

To accomplish his goal and reduce Blue Cross’ annual costs by $20 million, Schaeffer has laid off nearly 700 people. He has also trimmed 1,000 positions from Blue Cross’ 5,700 work force and deferred Marche raised for about 1,800 salaried employees until November. All this, he admitted, has not helped morale.

Nor has a new team of executives he has brought in to help chart a new course for Blue Cross. Many arrivals have come from financially troubled American Medical International Inc. of Beverly Hills. And that has prompted some Blue Cross employees to criticize the hiring of executives laid off by another troubled health-care concern.

Schaeffer is unfazed by such talk. He points out that he has drawn new staff members from a number of companies, not just AMI.

“The health-care marketplace is changing,” said Schaeffer. “Competition is so intense and the pace of change is so great, we can’t afford to sit around and be complacent.

“Blue Cross had gotten so large and bureaucratic it had lost sight of the reason for its existence,” he went on. “The were simply in the business of being Blue Cross. That’s not a business. That’s a state of mind. And I’ve tried like hell to change to corporate culture here.”

The sweeping changed also reflect the contrast in style between Schaeffer and his predecessor--Daniel Smith. Unlike the amiable Smith, Schaeffer can be hard to work for, employees say.

“I wouldn’t want to be his secretary,” said Khachadour. Nevertheless, she praises Schaeffer for his drive and vision, calling him very “Businesslike and entrepreneurial.”

Open Management Style

Leona M. Butler, a former Blue Cross vice president who left last month to set up her own consulting firm, also credit Schaeffer with “a more open management style. He’ll lay the problems out on the table.” But, Butler says, Schaeffer can be abrasive and intimidating. “He is a desk banger. He has yelled at me. I’ve seen him reduce people to tears.”

Says Schaeffer: “I admit I have very high standards. And when the standards of performance change, it’s sometimes hard on people. But I don’t try to belittle people, and embarrass people. I don’t ask people to do any more than I do myself.”

In part, the criticism of Schaeffer’s style stems from the disruption of the status quo, supporters say. But even Schaeffer admits that he doesn’t know whether he can infuse Blue Cross with a new entrepreneurial spirit after Blue Cross spent years not having to worry about competition.

“The corporate culture here,” he said, “is much tougher to change than I imagined.”