Blue Cross — what’s next? Public debate about the giant insurer has intensified, but the most effective path toward reform remains unlikely BY STEVEN STYCOS

A LOT OF PEOPLE are angry with Blue Cross & Blue Shield of Rhode Island, but will anyone do anything about it?

As Rhode Island’s dominant health insurer, Blue Cross would have a significant impact under any circumstance. But employers are enraged by premiums that have roughly doubled in five years. Doctors say that low payments from Blue Cross offer inadequate income, and make it difficult to attract new physicians to the state. And consumers, who pay a growing portion of their health insurance costs, wonder why the nonprofit corporation spends millions on surveys and advertising. All three say Blue Cross’s burgeoning reserves demonstrate that the nonprofit insurer is mishandling its money.

In the past, Blue Cross has been reluctant to publicly discuss such issues. But since the Phoenix published a detailed examination (see "Blue Cross does what it wants," News, October 3) and the Providence Journal raised related questions in a lengthy November 24 editorial, Blue Cross has been fighting back, creating a major public policy debate.

With the General Assembly about to begin its 2004 session, it is unclear what — if anything — will happen with legislative efforts to take on Blue Cross. State Senator Elizabeth Roberts (D-Cranston) and other lawmakers are drafting legislation to increase regulation of the $1.5 billion corporation, but they will have to overcome Blue Cross’s extensive political connections to be successful. Other public officials, particularly Attorney General Patrick Lynch and Marilyn Shannon McConaghy, director of the state Department of Business Regulation, could also use the power of their offices to investigate and regulate the state’s largest insurer.

Meanwhile, two major lawsuits meant to alter Blue Cross’s behavior are in the works. If the legislature fails to further regulate Blue Cross’s reserves, induce higher payments to doctors, and bring more openness to the selection of board members, Providence lawyer Don Wineberg hopes to lead a group of physicians into court to achieve these goals. In addition, Delta Dental of Rhode Island is suing Blue Cross, alleging that it violated anti-trust law. AG Lynch, whose responsibilities include enforcement of anti-trust law, regulation of charitable assets, and representation of the public at insurance rate hearings, says he is monitoring the pending litigation and preparing related legislation.

Mindful of the media’s growing interest in the subject, Scott Fraser, an assistant vice president of Blue Cross, responded to the ProJo’s November editorial with a December 10 op-ed piece. Fraser cited the insurer’s controversial actions — such as accumulating hundreds of millions in reserves — as necessary to avoid repeating the kind of financial calamity that threatened it with net losses of $73.2 million from 1996 through 1998.

Just as in Rhode Island, other states are grappling with Blue Cross, as plans around the country expand their reserves while demanding double-digit premium increases. And exactly what should be done to lower health-care costs and reform Blue Cross remains disputed.

Former Attorney General Sheldon Whitehouse, who recommends making the health-care system more efficient, calls fighting with Blue Cross "a dead end." Others, though, say the insurer — which controls 65 percent of the group insurance market, according to the Robert Wood Johnson Foundation — is the key to health-care reform in Rhode Island.

SOME SEE COMPETITION as the simplest solution for concerns with Blue Cross. If other insurers come to Rhode Island, according to this theory, Blue Cross would be forced to lower prices and act less imperiously to preserve its business. As it stands, Rhode Island’s insurance market is among the nation’s least competitive. North Dakota is the only other state in which the largest three insurers control 96 percent of the group market, states a September 2003 study by the Robert Wood Johnson Foundation.

But any company seeking to become a major player in Rhode Island’s small insurance market would probably have second thoughts. "There aren’t enough covered lives to make another insurer want to come into the state," contends Dawn Touzin, director of the community health asset project at Community Catalyst, a Boston-based nonprofit research group.

Any insurer who examines the history of health insurance in Rhode Island might also balk. In the 1990s, Rhode Island had two other major health insurance companies. Together, Tufts Health Plan and Harvard Pilgrim Health Care of New England insured close to 200,000 Rhode Islanders. But in late 1999, Harvard went bankrupt, and Tufts announced that it would no longer subsidize a subsidiary encompassing Rhode Island. Many at the time, including then-Attorney General Whitehouse, saw the two companies as victims of predatory pricing — the practice of selling insurance at a loss to keep customers — in the market. Blue Cross itself lost $73 million in the late 1990s, but it outlasted Harvard and Tufts.

Since then, the health insurance business in Rhode Island has become profitable and both surviving companies have amassed reserves. Blue Cross’s reserves have more than doubled, from $100.8 million in 1999, to $250.6 million in 2002, while rival United Healthcare of New England’s reserves exponentially rose, from $4.9 million to $78.4 million, according to records filed with the state Department of Business Regulation (DBR). Blue Cross’s reserves continue to grow. In an interview in November, CEO Ronald Battista pegged the company’s current reserves at $299 million.

As it did in the late 1990s, the insurer could again use its reserves to outlast competitors. Blue Cross could sell insurance below cost, tapping the reserves to make up the difference, to keep customers from switching to a new insurer. Any newcomer to the Rhode Island insurance market might have to absorb considerable losses to win a piece of the relatively small Rhode Island market. "For a new insurer to come into "this marketplace would be a very, very daunting task given the strength of [Blue Cross]," summarizes Edward Quinlan, president of The Hospital Association of Rhode Island.

Others say that competition is not the route to lower costs, regardless of whether it is practical. "The competitive model is not going to work," observes Ted Almon, CEO of the Claflin Company, a Warwick-based medical supplier. "In fact, competition is part of the problem." More insurance companies mean more paperwork, Almon says, and higher administrative costs.

Another proposal to use competition to improve the health insurance market would allow Rhode Island’s RIte Care program to sell health insurance at cost to small businesses. While the idea has some supporters, including former House Finance Committee chairman Antonio Pires and Christopher Koller, CEO of the Neighborhood Health Plan, it also has detractors. "Government as a competitor is a disaster," Battista told a conference of the United Nurses and Allied Professionals at the Providence Biltmore in November. Private insurers would skim off small businesses with healthy workers, he noted, leaving RIte Care to provide insurance to companies with sick and elderly workforces. That would force up RIte Care’s prices and nullify the program’s benefits.

Almon sees a small business buy-in program as a step toward his ultimate goal, a single-payer system. But to work, he says, a uniform price should be established for all groups — a concept known as community rating. "You’d have to get to community rating and you’d have to get there pretty quickly," Almon says, "or the insurers would could pick this thing apart.

Nicholas Tsiongas, a physician and former state representative who also supports a single-payer system, agrees. If all purchasers of health insurance are not lumped together, says Tsiongas, "You’re being jerked around."

Rhode Island is not the only state struggling with Blue Cross’s health-care role, and reserves are usually at the center of the controversies. From 1966 to the mid-’90s, Blue Cross plans around the country consistently held reserves ranging from 10 to 20 percent of their annual premiums, according to a January 2002 article in Health Affairs. Since, then, however, average reserves have risen to between 20 and 30 percent of annual premium, the magazine reports.

BlueCross BlueShield of Tennessee amassed reserves so large that it paid back $67 million to policyholders earlier this month, according to its Web site. Policyholders in Pennsylvania have not been so fortunate, though. An appliance storeowner, backed by a coalition of unions and community groups, is currently suing Independence Blue Cross over its reserves. In an amicus brief, the groups charge, "The Blues are maintaining excessive surpluses in the furtherance of for-profit aims and to the detriment of healthcare policyholders."

Blue Cross critics have made the greatest gains in Maryland. The fight began in November 2001, when Maryland’s nonprofit Blue Cross plan, CareFirst Inc., announced its acquisition by for-profit WellPoint Health Networks Inc. The proposed $1.37 billion purchase price undervalued the nonprofit by about $400 million, according to an analysis by state Insurance Commissioner Steven Larsen, and included bonuses for the nonprofit’s executives and board members. In March 2003, Larsen blocked the sale, declaring that it was not in the public interest.

But this was not enough for the Maryland General Assembly. Wanting to bar future attempts to use charitable assets for private gain, the legislature enacted a law that blocked any sale of the nonprofit for five years and fired Maryland’s 12 members on the nonprofit’s board of directors. The law also established CareFirst’s mission as providing affordable health-care, created a nine-member commission appointed by the governor, House speaker, and Senate president to select new board members, limited board salaries to $12,000 a year, and enacted term limits for board members. In response, the national Blue Cross association sued. The settlement, according to an analyst for the Maryland General Assembly’s Department of Legislative Services, who requested anonymity, reduced to five the number of board members to be selected by the nine-member commission, but kept intact other provisions, including the removal of all current board members.