Prognosis Improves as Ailing Blue Cross Shapes Up

If Blue Cross of California was a patient in the hospital, one would say it has recently been taken off the critical list and upgraded to stable condition. Financially, Blue Cross’ prognosis is good, but the company is still ailing.

The giant Woodland Hills-based health insurer last week reported a $15.9-million profit for the fourth quarter but posted a net loss of $9.1 million for all of 1988. On its basic business alone, underwriting health insurance, Blue Cross lost $68.1 million last year. Thanks to money earned on outside investments, the final net loss for 1988 was narrowed to the $9.1-million figure.

Still, the results were a marked improvement from 1987, when the company had a whopping insurance underwriting loss of $152.8 million and posted an overall loss for 1987 of $56 million.

Back in those days, Blue Cross was really sick. Skyrocketing medical costs, together with increased competition and Blue Cross’ own poor service, computer problems, bloated work force and inattention to a changing market for health insurance left the company mired in red ink.

Underwriting Profit

But in last year’s fourth quarter, the company showed a slender $7.4-million underwriting profit--Blue Cross’ first insurance profit after 13 consecutive quarters of underwriting losses.

The $7.4 million “doesn’t sound like a lot, but I’ll tell you, it’s an awful lot given some of the quarters we had one or two years ago,” said Blue Cross President Leonard D. Schaeffer.

Schaeffer has engineered Blue Cross’ rebound since he was hired three years ago. Not only has he bolstered Blue Cross’ balance sheet by cutting expenses, he has also improved Blue Cross’ service, overhauled the company’s marketing strategy and changed its prices to better match its revenue with the rising medical costs.

The changes are being noticed. “They’re doing much better,” said Tom Moore, a health industry consultant in San Francisco. Before, Blue Cross “didn’t have a coherent marketing or business plan” but now the company “is a much more disciplined organization than it was a few years ago,” he said.

Nonprofit Entity

Blue Cross is not in business solely to make big profits, since it is a nonprofit entity that tries to return most of its $2 billion a year in premiums to its nearly 3 million customers in the form of benefits. Yet Blue Cross must be financially strong to pay claims, and Schaeffer said the company’s $409 million in reserves are adequate to pay future claims.

“We’ve got to improve our financial strength; that’s number one,” Schaeffer said. “Number two, we want to distinguish ourselves in the marketplace as having the best service you can get.”

Schaeffer has taken out his hatchet and is chopping fat wherever he can find it. Last year, Blue Cross cut its operating costs 8% from the previous year, to $294.3 million, in part by using attrition and layoffs to cut its total work force by 1,300 people, to about 3,800, he said.

Even with fewer people, Schaeffer said Blue Cross is processing claims more quickly. “Telephone answering time is reduced, correspondence answering time is reduced,” he said. Blue Cross also improved its computer system and has moved some offices “so we got economies of scale, we got closer to the customer,” he said.

Blue Cross also is repricing its insurance to more closely match the medical expenses it must reimburse. Before, some customers were undercharged and some were overcharged, Schaeffer said. “We’re doing it right now,” he said of the repricing.

Finally, Blue Cross continues to focus less on being a traditional “fee-for-service” insurer, which reimburses customers for each visit to a doctor or hospital no matter the cost, and more on being a “managed care” insurer that operates health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

Both HMOs and PPOs help limit medical costs by providing coverage for their members with selected doctors and hospitals. HMOs typically charge patients a flat fee regardless of what medical service they need or how often, and the HMOs’ doctors and hospitals have caps on their reimbursement. Blue Cross’ HMO is called CaliforniaCare.

Business Referrals

PPOs refer their members to certain doctors and hospitals that, in turn, give the plans a discount for being referred their business. Blue Cross’ PPO, the Prudent Buyer Plan, was started in 1982 and now has 575,000 members.

Schaeffer estimated that 75% of Blue Cross’ business involves managed-care plans, compared to less than 50% three years ago. Blue Cross likes managed-care plans not only because they limit its costs, but also because they give it the marketing tool of providing more choices to employers and individuals.

To further control costs, Blue Cross is increasingly trying to sign multi-year contracts with the doctors and hospitals that belong to its HMOs and PPOs. Currently, most of the contracts are renewed and revised every year.

“The managed-care products are growing, and that’s where we see our future,” Schaeffer said.

In the meantime, Blue Cross is looking at other ways to bolster its cash reserves. Two years ago, Blue Cross sold its headquarters building in Warner Center for $90 million but the company still owns 24 acres there that analysts have said is worth tens of millions of dollars. Schaeffer is putting the land out to bid. Since August, he said, Blue Cross has received several offers, although he added that no proposals have been accepted.

Will all these moves be enough to get Blue Cross out of its sickbed? Schaeffer is a cautious sort and dodges making specific predictions. Nevertheless, he said he sees “several good years coming up.”

And he said that Blue Cross must “do more than break even” because “we never want a repeat of what happened the last couple of years.”