Blue Cross Blue Shield Association and its sock puppet trade association, America's Health Insurance Plans, have finally decided to end their phony charade of "support" for health care reform, and have come out strongly against the public option in Barack Obama's plan. So who are these guys, and why do they think what they provide is so much better than a public option?
Let's take a closer look at BCBS, and the merits of its case against the public option.
In the "good ol' days," BCBS controlled everything, and if you wanted insurance you took their deal. "Blue Cross" was to health insurance as "Xerox" was to copiers. The harshness to consumers was mitigated somewhat by the fact that the Blues were organized as non-profit companies and were regulated by the states. Today, BCBS controls "only" about 44% of the total market, but considerably more than that in many key places, and it's a much larger market. Moreover, the times have changed. First, the Blues have relentlessly pushed, over the years, to convert to for-profit corporations, and have almost always been successful. Second, state regulators used to have much less on their plates to worry about; as their troubles have increased, their vigilence over health insurance has waned, and the Blues have taken full advantage. Finally, the corporate world is just a different place that it was 25 years ago. For-profits have become more and more rapacious, and the even the non-profits now emulate the ways of the for-profits.
Here's an accurate thumbnail description of the Blue Cross Blue Shield Association today:
The Blue Cross and Blue Shield Association is a federation of independent health insurance companies who license the Blue Cross and Blue Shield brand names. Member companies -- of which there are about 40 -- own the rights to sell Blue-branded health plans within defined regions. The Association coordinates some national programs such as BlueCard, which allows members of one franchisee to have coverage in other service areas, and the Federal Employee Program, which covers more than half of federal government employees, retirees, and their families.
Essentially, therefore, BCBS Association is a franchise operation. It licenses its 40 member companies to peddle insurance and other products under the Blue Cross name -- for a fee of course, which pays the salaries of the Association's 880 employees. It is headquartered in a very handsome building in Chicago, and it operates in all 50 states.
Wellpoint,Inc. is the biggest of the BCBS franchisees, and is a public company traded on the NYSE. It operates in Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (in 10 New York City metropolitan counties and selected upstate counties), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.), and Wisconsin. It is recognized as the leading "consolidator" of the BCBS entities due to its success in "rolling up," or acquiring, one state or regional Blue after another:
Over the past several years, WellPoint has grabbed headlines as it swept through the managed-care industry, converting Blue Cross and Blue Shield plans to for-profit status and rolling them up into what is arguably now the nation's most dominant publicly traded health insurer.
According to Wellpoint's latest proxy statement, it paid it Chairman, Larry Glasscock, $982,764 last year and its CEO, Angela Braley, a whopping $9,844,212. Its top 5 executives were paid a total of more than $20 million. Thanks to the company's generous stock option plans, Mr. Glasscock owns Wellpoint stock worth about $70 million at current market prices; Ms. Braley owns company stock worth about $33 million.
Carefirst, Inc. is the BCBS franchisee operating in Maryland, the District of Columbia and Northern Virginia. CareFirst a not-for-profit, non-stock company governed by a Board of Directors and special statutes regulating its business. Because it is a non-public company, transparency on its executive compensation arrangements is limited. The most informative data that has emerged concerned the company's failed attempt to convert itself to a for-profit entity and sell itself to Wellpoint in 2003, which was rejected by the Maryland Insurance Commissioner because the price for the sale of the company was too cheap. Perhaps the price was cheap because the Wellpoint execs didn't negotiate very hard; they had good reason not to, as the deal included a whopping $120 million payout to Carefirst execs, of which $40 million would have been paid out to the CDEO, William Jews:
WellPoint announced that it would buy CareFirst for $1.3 billion, with Jews and his executives to manage a WellPoint regional subsidiary based in Owings Mills after the deal closed. As the deal negotiations were winding down, the CareFirst board adopted a bonus plan for its executives under which they would have received about $120 million.
Having been rejected by state regulators, the disappointed CEO then agreed to terminate his relationship with the company, for a golden parachute worth $18 million. This also hit a snag, and in 2008, the Commissioner reduced Mr. Jews' compensation package to a paltry $9 million. In its order, the commissioner cited
the substantial compensation Mr. Jews received while CEO (more than $16.5 million in his last six years as CEO, plus another $1.6 million in deferred payments)
and noted, as an additional reason, "the former CEO’s mixed record of achievement." Pretty good job, where even a "mixed record of achievement" can net you about $3 million per year, followed by a "good-by and good riddance" payment of $9 million.
The sad Carefirst saga highlights one recurring theme of the BCBS world, the constant push of non-profit BCBS entities to escape into the for-profit world, where recent experience has shown that there are in effect, no effective limits on executive compensation. Unlike Carefirst's, most of the escapees have succeeded in making their way past more easily satisfied state commissioners. As one public interest group reported:
Nor was CareFirst the only Blue Cross Blue Shield that tried to become a for-profit company. There have been 18 such conversions .... And the only two that have encountered difficulties are CareFirst's and that of the Kansas Blue Cross Blue Shield, which also sought to convert to a for-profit company and be bought at the same time.
These are the companies that a public option would have to compete with. Is there any doubt that there is more than ample room for increased efficiency? And if there's any doubt that a public option could provide greater integrity and less hypocrisy, let's look at one more BCBS entity, Blue Cross Blue Shield of North Carolina.
Up until now, the insurance industry has had a go at trying to portray itself as receptive to needed changes in the health care. If you believe that, then BCBSNC just "broke ranks" with its industry and came out against the public option. If you don't believe what the industry was saying, then BCBSNC finally let the industry's true colors show. The support offered by BCBSNCfor its position in its proposed new ad campaign? Well ....
- BCBSNC says that "We believe an unchecked government-run plan would lower payment to doctors and hospitals," but in 2007 BCBSNC and other Blues had to pay $128 million in a lawsuit alleging they had fraudulently underpaid doctors' claims. In 2003, moreover, BCBSNC was fined $1.8 million -- the largest fine ever levied against a NC insurance company -- and admitted "that over a five-year period it knowingly underpaid some 146,000 emergency room claims."
- "We can do a lot better than a government-run health care system," BCBSNC, which has a 75% share of the NC health insurance market, claims in its ads. But, if that's true, why not just show us how much better you can do? Why waste time killins such a weak competitor?
- In its ads, BSNC "paints a picture of a future system in which patients wait months for appointments and can't choose their own doctors." Of oourse, if the members of a public plan find dealing with that plan's administrators less satisfying than dealing with BCBSNC's, they will stay loyal to the private plan.
Because BCBSNC is nominally a "non-profit" corporation, information on its compensation structure is hard to come by. However, the Raleigh News and Observer reports that
Robert J. Greczyn Jr., the chief executive of Blue Cross of North Carolina, earned $3.2 million in 2007.... Other top executives also drew salaries well in excess of $1 million, a pay range that exceeds the top levels in the public sector by an order of magnitude.
Given the compensation practices that seem to prevail in the Blues, in both its for-profit and non-profit components, is it any wonder they fear competition with a new public option? Given the business and trade practices of these companies, is there any doubt a public option can do better?
UPDATE: I wanted to correct one error in this diary, the statement that two states, Kansas and Maryland, have rejected BCBS applications to convert from non-profit to for-profit status. Add Washington, which rejected the application of Premera BC in 2004, to the list.
Washington state Insurance Commissioner Mike Kreidler yesterday denied Premera Blue Cross' proposed switch to a for-profit insurer, all but dealing a terminal blow to Premera's bruising two-year battle to shed its nonprofit status.
In his 58-page ruling, Kreidler resoundingly rejected Premera's application on grounds that it could expose policyholders to excessive premium increases, particularly in Premera's stronghold in Eastern Washington.
Kreidler also concluded that Premera would transfer less than its full fair value to new charitable foundations after dissolving as a nonprofit, as required by law. And he dismissed Premera executives' assurances that they intended to remain in Mountlake Terrace, saying a for-profit Premera stood a high likelihood of becoming an acquisition target.
Generally, state insurance regulators may be starting to take a harder look at such applications. When they do, they tend to discover the obvious: that the plans usually do not provide a sufficient payout for non-profit assets, money which could potentially be used by a state to set up an alternative health care option for the departing non-profit. Clearly, no converting BCBS entity would want that. In addition, examination of the financial projections of the for-profit entity often shows that steep premium increases will be required to support the insurer in its for-profit form. These considerations were among those that influenced then-commissioner of insurance Sebelius of Kansas to reject the conversion application of Kansas BCBS in 2002, the first time ever such an application had been turned down.
Sebelius rejected the proposed conversion and sale of Blue Cross and Blue Shield of Kansas, citing concerns that the proposed for-profit conversion "would not be in the public interest" and would "be hazardous and prejudicial to the insurance buying public."
Commissioner Sebelius's final order came after a detailed review process in which four interveners, the Kansas Association for the Medically Underserved, the Kansas State Nurses Association, the Kansas Hospital Association and the Kansas Medical Society reviewed and opposed the deal. In addition, over 1,200 Kansans demonstrated their concern about the deal by attending public comment meetings that were convened as part of the review process in five locations across the state.
Additional opposition came from a panel of Insurance Department staff and outside counsel that Sebelius convened to advise her on the deal. The panel's findings, issued in late January, criticized the proposed plan of conversion, which they estimated would require additional premium increases of $248 million in the individual and small group markets over the next five years. In addition, the panel cited the inability of Blue Cross and Blue Shield or Anthem to demonstrate any quantitative benefits Kansas would receive from the conversion.
Sebelius' action had the effect of stiffening the backbone of other state commissioners, and BCBS applications were subsequently rejected in Maryland and, as noted, Washington. In addition, BCBS preparations to file such applications may have been discouraged and headed off (at least for now, but they'll surely be back!) in several other states.
The state approach to conversion applications that should NOT be emulated is the path taken by Governor Pataki in NY. As recounted in Consumers Union (publisher of Consumers Reports):
Because of gravely flawed state legislation rushed through in January 2002, New York is poised to miss a crucial onetime opportunity to improve the health of its most vulnerable citizens. The product of a surprising alliance between a conservative governor and the leader of the state's largest labor union, the new law permits nonprofit Empire Blue Cross and Blue Shield to convert to a for-profit corporation without a fair and equitable charitable asset set aside. Consumer groups are outraged at what appears to be a blatant political payoff. The legislation, which was not made available for public review or comment, was passed at 4:30 in the morning.
The "political payoff" cited by Consumers Union referred to the fact that the health care workers union, SEIU, was bought off by a deal which expropriated 95% of the value of the non-profit's assets, over $950 million, to fund pay increases for NY health care workers. Likely no one would dispute that these workers deserved more pay, but that did not justify their stealing from NY's poorest residents (those who should have benefited from the proceeds of the sale of Empire BCBS) in order to get it.