Insurance Giant Battling to Keep Newfound Health : Blue Cross: Leonard D. Schaeffer has moved the company back into the black, but it still has plenty of rivals in an increasingly competitive market.
Leonard D. Schaeffer tells the story about a consultant who called a telephone operator a few years ago to get Blue Cross of California’s phone number. “I wouldn’t call Blue Cross,” the operator shot back. “They’re terrible.”
Indeed it was. Saddled with a bloated bureaucracy, soaring medical costs and a well-earned reputation for lousy service, the state’s largest health insurer gushed red ink in the mid-1980s. Morale sagged at the company’s Woodland Hills headquarters.
But in 1986, Blue Cross made one right move. It hired Schaeffer as president.
What he and the rest of the insurer have accomplished since then is little short of remarkable. Despite the continued sharp rise in health-care costs, Schaeffer has put Blue Cross solidly in the black with a combination of big cuts in overhead costs, renewed attention to service, profitable contracts with doctors and hospitals, and the introduction of new products that have transformed the company’s entire focus.
“They’ve undergone a tremendous financial turnaround,” said Albert Lowey-Ball, a health-care consultant in Sacramento.
After losing $153 million in 1987, Blue Cross in the past 3 1/2 years has earned combined profits of $274 million . In the six months that ended past June 30 alone, Blue Cross--which provides benefits to more than 5 million people--had net income of $85.7 million on revenue of $1.3 billion, nearly double its year-earlier earnings.
Part of the gains came when Schaeffer decided to unload some of its assets--including its headquarters building in Warner Center, which was sold for $90 million in 1987--and from investment income. But Blue Cross’ basic business is also making money again.
Its profit from underwriting insurance last year totaled $72 million, triple its underwriting profit of $23.8 million in 1989. In 1988, Blue Cross lost $68.1 million from its basic business of providing insurance.
“There’s an awful lot of people who wrote this company off,” said Schaeffer, 46, who’s now chairman and chief executive of Blue Cross. “We’re a long way from where we were in 1987.”
But Blue Cross today still finds itself battling with other health-plan powerhouses, including Kaiser Foundation Health Plan and Health Net, the state’s two largest health maintenance organizations. And they’re not awed by Blue Cross’ rebound.
“The major challenge for Blue Cross is: How can they maintain and increase their market share in the face of ever-stiffening competition from the other big players, like Health Net and Kaiser?” Lowey-Ball said.
Even more immediate is that Blue Cross “must perform at the levels they’ve set for themselves” in order to prove to the health-care marketplace that the company’s rebound was not a fluke, said Glenn Meister, a principal of A. Foster Higgins & Co., a benefits consultant in Los Angeles.
“Now it’s really critical that they perform,” he said. “The worst thing would be for them to stumble with some major clients.”
Certainly it has performed recently. Blue Cross achieved its insurance-underwriting earnings because its claim payments plus its overhead costs amounted to 96.9 cents for $1 of premium revenue last year, a figure known in the industry as a “combined ratio” of 96.9%. The ratio fell to 94.2% in the first half of 1991. Insurers often fail to keep the ratio below 100%--meaning that they lose money on basic insurance--but report a profit anyway thanks to investment income.
Blue Cross doesn’t technically earn a profit because it’s a nonprofit organization, one of the 73 Blue Cross and Blue Shield insurance plans around the nation. But the net gains, as Blue Cross of California calls them, are crucial because they provide cash that the insurer adds to the reserve it sets aside for paying future claims. And it is that reserve that characterizes the long-term financial stability of an insurer.
Four years ago, Blue Cross’ reserve was dangerously low at less than $75 million. But with the rebound in earnings, Blue Cross has built its reserve to $425 million. Moreover, as of June 30, it had a record surplus of $326 million--that is, cash beyond that needed to pay its claims.
“You have to give an enormous amount of credit to management,” said Assemblyman Phillip Isenberg (D-Sacramento), who is active in health-care issues. “They’ve made some tough decisions.”
After Schaeffer arrived, he first cut operating costs largely by slashing Blue Cross’ employment. The company now employs 3,500 workers, one-third fewer than when Schaeffer took over. Yet he still bolstered Blue Cross’ service by upgrading the company’s computer system--thus cutting claims-processing time--and by requiring employees to more quickly answer mail and telephone calls.
Schaeffer also found that many of Blue Cross’ health plans were priced so low that it was impossible for the company to make money. So he raised the plans’ prices to stem the losses. (Many health insurers raised prices as well in the late-1980s, which raised their earnings.)
Some moves were more symbolic. Schaeffer chose a ground-floor office in Blue Cross’ 14-story headquarters building--eschewing the penthouse offices most chief executives enjoy--and began putting in 70-hour workweeks. “Let the employees have the view,” he said. “They do the work.”
But Schaeffer’s most crucial step was to transform the company’s mission. For most of its history--Blue Cross was formed in 1982 with the merger of the Northern and Southern California Blue Cross plans, which were started 45 years earlier--the company was a traditional “fee-for-service” insurer. It reimbursed customers for each visit to a doctor or hospitalwith no specified ceiling on the cost.
But like many other insurers, Blue Cross has turned into a “managed care” provider that operates health maintenance organizations (HMOs) and preferred provider organizations (PPOs). Both help limit medical costs of Blue Cross and its customers by providing coverage with selected doctors and hospitals whose reimbursement is controlled. The physicians agree to that control because, in exchange, they know that the plans will channel patients their way.
Whereas Blue Cross five years ago derived a majority of its revenue from “fee-for-service,” that traditional coverage is now a mere 5% of the company’s business and the insurer seldom sells it. PPOs, meanwhile, today account for more than 50% of the company’s revenue, with HMO revenues--mainly from its CaliforniaCare HMO--making up the balance.
“CaliforniaCare is a competitive product,” Kaiser spokesman Daniel Danzig conceded. “But TakeCare and Health Net are too,” and CaliforniaCare’s strength is limited mainly to Southern California, he said.
Schaeffer believes that success lies in having several versions of HMO and PPO plans that Blue Cross can offer. Employers, faced with the inexorable rise in medical costs, are looking for alternative plans that keep those costs from spiraling out of control, he said.
“Most employers now want a plan that meets their needs, and it’s usually a combination of minimizing cost and maximizing choice,” Schaeffer said. So Blue Cross has “dual-option plans,” “opt-out plans” and an array of other choices that give clients several degrees of medical coverage at various costs.
Under one program, for instance, a member of Blue Cross’ PPO can get services from doctors or hospitals outside the company’s PPO network without paying a penalty, but the member pays less by staying within the network, Schaeffer said.
It’s that type of marketing tactic that health insurers statewide will seek in the years to come as the industry continues to consolidate, experts say. The companies, notably HMOs, have been rapidly merging to boost their memberships and gain market share.
Indeed, Blue Cross is one of several bidders trying to acquire Woodland Hills-based Health Net, which has 840,000 members. Blue Cross wants to merge Health Net--which incidentally was started by Blue Cross in 1977--with CaliforniaCare, which has 350,000 members. Health Net has not welcomed any of the bids, however.
Blue Cross of California Comeback Blue Cross of California suffered major losses in the mid-1980s, but has since enjoyed growing earnings. The health insurer technically reports “net gains”, not profits, because it is a nonprofit company. Its revenue includes premiums plus net investment income.
