My late colleague, Walt McNerney, was president of the Blue Cross and Blue Shield Association in the 1970s. I miss him, but I am sort of glad that he doesn’t have to hear all the commotion being made over the profits reaped by today’s Blue plans. I wonder if he would say it was their own damn fault.
Founded during the depression, the Blues represented a win/win for patients who could prepay for their medical care and providers who received a steady source of revenue. The Blues were owned by the providers and Blue coverage was always the most comprehensive (the better to boost demand for medical care.) State laws granted the Blues tax exempt status and in exchange the plans community rated. This allowed for-profit insurers to cherry pick healthy enrollees but the Blues always kept dominant market shares in their territories.
When Walt McNerney took over the leadership of the association, Americans were upset about rising costs. The Blues were still respected insurers and Walt used his position to education Blue plan leaders about managed care. Blue HMOs became some of the most successful in the nation, paving the way for other insurers to offer managed care plans of their own. The Blues also experimented with payment rules and utilization review.
And then the HMO backlash hit. About the only feature of managed care that survived intact is selective contracting. Hospitals and insurers understood the importance of clout and hospitals in many markets merged to suffocate competition. But the largest insurers – the Blues – did not have to merge. Most Blues had market shares in their territories of 40 percent; many had shares above 60 percent. These shares have held steady over the years. With this leverage, the Blues can pay providers among the lowest rates while offering customers the widest networks. That alone guarantees market success, and huge profits.
Blue plan executives see the dollar signs. But nonprofit executives are banned from “inurement” (essentially, compensation based on profitability.) And so Blue executives convinced their boards to convert to for-profit status. They preached the mantra of economies of scale, but the evidence for such economies is minimal. They preached the mantra of capital but they mostly used their capital to enter new markets, and acquire existing plans, and gain even more clout. There was little in it for consumers.
Gone are the days when the Blues did well by doing good. Walt McNerney would hardly recognize many of today’s Blues, with names like Wellpoint, Excellus, and the utterly unimaginative Healthcare Services Corporation. (The latter is a “mutual” –it gets to call itself a nonprofit while paying its CEO about $10 million annually.) These Blues earn returns on assets that dwarf returns in most industries. (In fairness, some Blue plans remain nonprofit, realize minimal returns on assets, and honor the ban on inurement.) And while their total profits are a drop in the ocean of overall healthcare spending, the profit-seeking Blues have settled into a comfortable status quo where market power has become the overarching business strategy. Innovation in healthcare delivery? Forget about it. Payment reform? Forget about it. Let others take the risks. The Blues rake in the profits.
If market clout is their raison d’etre, why tolerate them?