Blue Cross does what it wants Critics rap Rhode Island’s largest health insurer as a near-monopoly more interested in strengthening its franchise than serving the public good BY STEVEN STYCOS

SITTING IN US Representative Patrick Kennedy’s Pawtucket office on April 21, David Ettensohn, president of the Rhode Island Medical Society (RIMS), and Steven DeToy, the society’s director of government and public affairs, were eager for the meeting to start. John Gregory, president of the Northern Rhode Island Chamber of Commerce, and Edward Quinlan, president of The Hospital Association of Rhode Island, were also waiting. Only Ronald Battista, president of Blue Cross & Blue Shield of Rhode Island, and Thomas Lynch, Blue Cross’s vice president of external affairs, had yet to arrive.

Kennedy organized the meeting because of his general concerns about health-care in Rhode Island, says his press secretary, Ernesto Anguilla. In December, Kennedy met with Ettensohn, Quinlan, DeToy, and others, and he gathered with Battista and Lynch in March. Each of the individuals agreed to meet again, Anguilla says. "The point of the meeting," he explains, "was to get the parties in the room and start the discussion."

But just as the April meeting was to begin, the phone rang. Lynch wanted to know who else was there. When Kennedy staffer George Zainyeh provided the answers, Anguilla relates, Lynch objected and said that he and Battista wouldn’t be attending. Kennedy, DeToy recalls, "clearly was not happy about being stood up by Mr. Battista and Mr. Lynch."

The abrupt no-show by the Blue Cross execs, DeToy says, illustrates the arrogance of Rhode Island’s largest health insurer. Newell Warde, executive director of the Rhode Island Medical Society, describes Blue Cross as "a bully who dictates and has no real give and take." He adds, "There’s this talk about working cooperatively, but it has tragically zero credibility in the provider community."

Blue Cross increasingly controls health-care in Rhode Island, but not without controversy. The company has been sued three times over the last five years for alleged anti-trust and anti-competition violations. And a group of doctors is currently preparing another lawsuit, charging that Blue Cross engaged in illegal predatory practices to bankrupt its competitors, establish a near-monopoly, and dictate payments to medical providers.

Critics also question whether the nonprofit charitable corporation is being run for the public good, especially since 1999, when two competitors, Harvard Pilgrim Health Care of New England and Tufts Health Plan, folded in Rhode Island. As Blue Cross strengthened its market share and approximately doubled its premiums, advertising and marketing expenditures have soared, annual payments to Blue Cross’s board of directors went from nothing to more than $600,000, and executives — including Battista — have enjoyed burgeoning compensation. The largest target for critics’ ire is Blue Cross’ reserves, which have grown by $150 million since 1999. These dollars, critics say, could be used to lower premiums or increase payments to doctors and hospitals.

Battista, however, isn’t talking. Scott Fraser, Blue Cross’s assistant vice president of public affairs, declined to answer the Phoenix’s questions, and Battista, through Fraser, declined to be interviewed. Gerald Fogarty Jr., who chaired Blue Cross’s board of directors from 1992 to 2002, also declined to comment after a brief conversation.

Rhode Islanders, however, are talking about Blue Cross. Some say the health insurance market needs more competition. Others prefer more regulation, likening Blue Cross to a public utility. And just about everyone would like more information about the Blue Cross decisions that influence the direction of Rhode Island’s economy.

RISING HEALTH-CARE costs are not unique to Rhode Island. An aging population, rising drug prices, and advancing medical technology have forced these costs up across the nation.

But unlike the rest of the country, the health-care problem is a Blue Cross problem in Rhode Island. According to a September 2003 report funded by the Robert Wood Johnson Foundation, Blue Cross controls 65 percent of the group insurance market in the state. Blue Cross controls a larger market share in only four other states — North Dakota, Alabama, Hawaii, and Alaska.

In fact, because the only other major health insurer in the Rhode Island market is UnitedHealthcare of New England, Rhode Island ties with North Dakota as the least competitive health insurance market in the US, according to the foundation. In both states, the three largest insurers hold 96 percent of the market. "When you have an entity with that much market power," says Christopher Koller, CEO of Neighborhood Health Plan of Rhode Island, "they are really in a position to make or break providers."

It wasn’t this way five years ago. At the time, Harvard Pilgrim Health Care of New England and Tufts Health Plan provided health insurance to close to 200,000 Rhode Islanders. But in late 1999, Harvard went bankrupt, and Tufts announced it would no longer subsidize its subsidiary operating in Rhode Island, New Hampshire, and Maine. Blue Cross was also ailing at the time, losing $73 million cumulatively from 1996 to 1998. Even United lost $19 million in 1998. But with Harvard and Tufts out of the way, the landscape changed.

Since 1999, Blue Cross has raked in the cash. Premiums have approximately doubled in the last five years, says Joel Cooper co-owner of Benefits Unlimited, Rhode Island’s largest independent insurance agency and consulting firm. In 1998, the average HealthMate premium for an individual in a group plan was $200 a month, relates Cooper, whose firm does an annual benefit cost survey of employers. Individual coverage now costs about $380 a month, he says, while a family plan has risen to about $900 a month, from $500, during the same period.

"Once you have a monopoly, whether its railroads or insurance companies," observes former House Finance Committee chairman Antonio Pires of Pawtucket, "you set the price and you increase your bottom line significantly." Pires, a partner in the independent insurance agency of Troy, Pires & Allen, continues, "That’s the free enterprise system and that’s why you have anti-trust laws."

Much of Blue Cross’s profits went to increasing the company’s cash reserves, which more than doubled, from $101 million in 1999, according to its annual financial statements, to $251 million in 2002. In addition to providing a buffer for when claims exceed premiums, these reserves serve another purpose, says Pires: They discourage other companies from coming to Rhode Island and competing with Blue Cross. Companies facing a $251 million war chest, Pires says, will think twice before challenging the dominant health insurer. The hospital association’s Quinlan agrees: "For a new insurer to come into this marketplace would be a very, very daunting task, given the strength of [Blue Cross]."

In the mid-1990s, Blue Cross used its reserves to subsidize premiums so it could maintain its market share, Pires says. Harvard and Tufts left the state, he adds, because they could not compete with the superior reserves and lower costs of Blue Cross.

This is also the theory behind a lawsuit that a group of doctors is preparing to file against Blue Cross. Their lawyer, who requested anonymity, says the suit will allege that Blue Cross illegally under-priced its insurance and forced Harvard and Tufts out of the state. Then, the nonprofit insurer used its dominant market position to force low reimbursements upon doctors. The results were two-fold, the suit will charge. First, Rhode Island doctors have had difficulty attracting new physicians to join their practices because reimbursement rates are much lower than in nearby states. And second, patient care has suffered because doctors rush through appointments, not listening to patients or adequately explaining treatment, as they hustle to see enough patients to make a decent income.

The suit will ask the court to order Blue Cross give some of its reserves to doctors and to set a new reimbursement schedule equal to the Medicare fee schedule plus a set percentage. The lawyer is currently working to verify that Rhode Island premiums are equal to those in nearby states and that reimbursements are "substantially lower." Doctors will then be sought to join the suit, says the Rhode Island Medical Society’s Warde, who is helping prepare the case. "We’ll know by the end of the year whether this thing has legs," he adds.

Hospitals, whose executives also complain that Blue Cross payments do not adequately cover their costs, could also stand to benefit from the suit, but Quinlan says, "I have no knowledge that any hospital has agreed to participate."

The charge concerning predatory pricing in the local market isn’t entirely new. In a December 1998 interview with the Providence Journal, Battista, who was then Blue Cross’s newly appointed president, said that Blue Cross and other insurers’ financial losses were caused by "predatory pricing tactics [in the industry]." In the same interview, Battista modestly predicted, "I think we are on the verge of a slightly higher rate increase than we have seen in the last few years."

As premiums have risen, so have Blue Cross’s reserves. The insurance industry debates just how much of a reserve is enough, but the typical concern is whether insurers have enough to avoid bankruptcy, not whether they have too much. Even Warde and Quinlan balk at rapping Blue Cross’s reserves as too high. Rather, they say, the reserves have been accumulated too quickly, depriving hospitals and doctors of their fair share of premium dollars.

Blue Cross plans to push reserves even higher — to 22 percent of premium, or $318 million at current premium levels, according to a March 2002 letter written by James Purcell, Blue Cross’s chief operating officer. To support the company’s position, Purcell cited two consultants’ reports. One called for boosting reserves to 22 percent of premium, and the other recommended 27 to 30 percent.

Measured by other standards, Blue Cross’s reserves are more than ample. Under a state law repealed in 2000, Blue Cross’s current reserves might even be illegally high. Prior to 2000, Blue Cross had to maintain reserves equal to one month’s claims and expenses, but not greater than three months. According to its most recent financial statement, the company’s $251 million in reserves represents 3.25 months of premium under one accounting method.

Reacting to the closing of Harvard Pilgrim Health Care of New England, however, the 2000 legislature, with the backing of the state Department of Business Regulation (DBR), set a new standard for reserves, called "risk-based capital" (RBC). The RBC law more accurately reflects an insurer’s financial health, says Joseph Torti, state superintendent of insurance Joseph Torti, is used by many states, and has the recommendation of the National Association of Insurance Commissioners.

RBC is measured by a percentage. If it drops under 200 percent, DBR starts to regulate a company’s finances more closely. If reserves drop below 70 percent, the state takes over. In 2002, Blue Cross’s reserves were 460 percent of RBC, according to Torti — up from 347 percent in 1999, just after Harvard and Tufts left Rhode Island. During the same period United’s reserves also rose, Torti says, from 79 percent to 604 percent.

In addition to scaring away potential competitors and protecting against financial insolvency, large reserves make Blue Cross an attractive takeover target, says Marti Rosenberg, executive director of Ocean State Action, a union-backed organization that fought for-profit hospital takeovers in the 1990s. Although merger talk subsided after Blue Cross bottomed out in the late 1990s, a takeover by a for-profit company, like Anthem Insurance Companies of Indianapolis, remains a possibility. One attractive element of takeover is that executives often receive the lucrative severance packages known as "golden parachutes."