Blue Cross Makes $6.3 Million in 1998

by Jim Harris  on Monday, May. 10, 1999 12:00 am  

Despite knowing it would lose millions in the short term, Arkansas Blue Cross and Blue Shield reached into its deep pockets in the mid-1990s and, with its partners, decided it wasn't going to lose the battle for market share.

That stance apparently paid off in 1998.

After losing more than $32 million over a three-year period, the company showed a slight profit in 1997, then realized a boom in 1998 of more than $6.3 million on premium revenue of $576 million.

Robert Shoptaw, Blue Cross' chief executive officer, says 1998's good news didn't come as a surprise.

"Not when we saw the other companies were being rational with their pricing," Shoptaw says.

Blue Cross, he says, invested $40 million-$50 million in infrastructure and new systems beginning in 1994. In revamping its computer systems for Year 2000, Shoptaw says, Blue Cross will have spent $14 million since 1996. And Blue Cross for several years played the bidding game with competitors for employer health insurance contracts,

Shoptaw says.

It still took an increase of $67 million in premiums to realize a nice profit, records at the Arkansas Insurance Department show. And, before the year was up, the company had lost 14,000 members in a bidding war for the state employees and public school teachers health care contract. Still, 78 percent of the teachers remained with Blue Cross' products despite having to pay in the neighborhood of $30 a month more than some competitors' offerings, Shoptaw says.

Repricing among all the competitors, though, helped change Blue Cross' fortunes and spur growth, he says. Its decision to contract with Baptist Health and other hospitals and physicians around the state with pooled products in tighter panels proved to be the right one for the company, he says.

Not only did Blue Cross enjoy a good 1998, but its HMO Partners Inc., a health maintenance organization owned jointly in a 50-50 partnership with Baptist Health and known in the market as Health Advantage, had its best year to date.

Health Advantage had net income of $3.1 million. Its $760,063 earned in 1997 was the first time the company had been in the black since starting in 1994.

Whereas administrative costs rose with most HMOs, Health Advantage was able to lower its administration expenses by $3.3 million in 1998. Premium revenue rose almost $3 million, and hospital and medical expenditures were reduced almost 17 percent.

Bad News for Others

While Health Advantage clearly took over the lead among the state's HMOs, the others faltered badly.

When the health insurance market share battle ensued in central Arkansas in 1994, most of the players were willing to sacrifice early profits for a piece of the pie. In the HMO industry, whose financial records are available at the Insurance Department, that battle obviously has shaken out with clear winners and losers in the past year.

Illinois-based American Health Care Inc., which operated the state's first HMO, officially left the state last month. Early players HealthWise of Arkansas Inc., Healthsource Arkansas Inc., and Prudential Health Plans Inc. now answer to new owners.

United Healthcare of Arkansas Inc., which had regularly been in positive figures and was No. 1 in income in 1996-98, lost almost $1.5 million in 1998 - the company had net income of almost $2 million in 1997.

Healthsource, once partnered with St. Vincent Health System and now owned by Cigna Corp., lost $1.55 million in the market in 1998 after making almost $200,000 in 1997.

And QualChoice of Arkansas Inc. lost a whopping $5.65 million in 1998. In 1997, its first full year of operation, the company lost $1.2 million. QualChoice, aligned with the University of Arkansas for Medical Sciences and owned partly by the publicly traded Tenet Healthcare Corp., spent most of 1998 attempting to build market share and won the low bid for the teachers and state employees contract a year ago. Enrollment for those plans came in the last five months of 1998, so revenue figures likely will show some improvement in 1999.

But Blue Cross, which had controlled the teacher and state employee contract for two years, still saw teachers stay with the proven performer over price, Shoptaw indicates.

"We think what we've done has worked well ... particularly when you look at the public school employee group, 78 percent stayed with us at premiums that were 10-14 percent higher than what QualChoice offered," he says, adding that Blue Cross bid for the contracts at what it determined was its break-even point.

But, as Blue Cross officials noted, a $6.1 million profit on $576 million in premium revenue isn't cause for wild celebration. There are enough problems surrounding health care costs that have everyone, including Shoptaw, concerned.

"We're almost today where we were in the early '90s, before we began the national health care debate at the federal level," he says. "The reason I say that is, a lot of the initiatives came out of the managed care sector early on, especially driven by the multi-state publicly traded companies that have kind of hit the wall in terms of their price performance, and their stock reflects that, and in the fact that health care costs are going back up to the 8, 10, 12 percent growth level."

Shoptaw is concerned that the debate, particularly as the nation heads toward another presidential election year, will turn into "a political quagmire of sorts ... where everybody essentially has a different agenda."

He adds, "And you've got price that's probably going to manifest itself more going forward than what we've seen in the last several years."

Employees saw their compounded health insurance costs rise to levels above 15 percent from 1988-90, studies show, before managed care came on the national scene in full force. Those changing costs dropped steadily to where employees saw significant price reduction in 1994. Since then, however, with insurance companies trying to make up losses from the competitive years, the percentage has steadily risen to a projected 10 percent when all the 1998 numbers are in.

Shoptaw knows he might be perceived as the boy crying wolf, saying, "We say this every year, but we're at a crossroads in terms of where health care is going to go."

What makes this period different are factors in place that could direct Americans in one of two directions, he says.

One is piecemeal regulation that dismantles private sector-based managed care effectiveness, leading to some form of federally administered, tax-supported single-payer system such as what's seen in Canada. The other, he notes, would be the adoption of reasonable standards that address inappropriate managed care practices, which would lead to market forces used effectively for quality and efficiently for cost containment in determining the best deployment of resources at the community level.

It's not hard to figure out which option Blue Cross likes.

The second option, he says, would be a market-based system with federal and state governments setting parameters "that basically promote competition but safeguard the consumer and let the market pretty much determine how to configurate the pricing and how the delivery system is going to look."

Another red flag in the political debate, Shoptaw says, is dealing with HMO liability. The system can't function with endless suits for every decision an HMO makes.

On a state level, Shoptaw cites a recent report by the Washington, D.C.-based Center for Studying Health System Change that, he says, is right on target when it assesses the Little Rock market as being at overcapacity for hospital beds and subspecialists while underserved by the primary care-level physician.


Headline: Healthy United Feels Health Care Cost Crunch in '98

For three years running, United HealthCare of Arkansas Inc. led the state's health maintenance organizations in net income. While others underpriced their HMO contracts to attract market share, United stayed the course with conservative pricing and didn't give its product away to secure business.

Using that approach, though, didn't matter in 1998, even for United, which suffered its first negative figure in net income since coming to Arkansas. And that speaks volumes about how much overall health care costs soared in 1998.

The company's HMO had premium revenue of $78.9 million, but United lost $1.46 million after taxes, according to filings with the Arkansas Insurance Department. United's net income in 1997 was $1.97 million, far and away the best figure in Arkansas.

"Medical inflation was faster than what we thought it would run," explains Rob Herndon, United HealthCare of Arkansas' chief executive officer.

Changes that deal with the rising costs already have been implemented, he says. "Fast changes, in two areas mainly," Herndon says. "One is trying to control medical expenses, and also making premiums match more closely the cost of doing business."

United's premium revenue increased about $24 million in 1998, but total medical and hospital expenses jumped about $27 million. Administrative expenses rose about $2.4 million.

Healthsource Arkansas Inc., after breaking into the black in 1997, also experienced similar losses in 1998.

The HMOs operating in Arkansas but based out-of-state had large losses in their total operations. Prudential Health Plans Inc. lost almost $64 million before the company was sold to Aetna Insurance Co. The St. Louis-based Mercy Health Plans of Missouri Inc., operating in eight Arkansas counties, lost $7 million in 1998, an improvement over the $20 million lost in 1997.

Health Advantage, the HMO jointly owned by Baptist Health and Arkansas Blue Cross and Blue Shield, was the only in-state managed care company apparently ready, or pricing its product appropriately, to deal with the sudden run up in medical expenses. It netted $3.06 million in 1998 after earnings $760,000 in 1997.

Nationwide, health care experts pointed figures at managed care for not being able to control costs after basing its development on that premise. Herndon says managed care is working, but health care simply continues to grow in ways not dreamed of even three or four years ago with advances that have sparked inflation.

"We know on the day-to-day operation that we save a lot of money from waste and overutilization and things of that nature," he says. "We know that if we weren't part of the system, it would be more, but it's really hard to quantify that.

"But even though we're part of the system and a major part of how health care is delivered as far as the financing of it, it still costs more and more every year. New drugs come out, and no matter what people think about us as an industry, we provide access to those new drugs . . . And I think the drug sector was double-digit inflation just from price increases last year.

"Then, you've got new technology that comes out in the medical field and it costs more ... New stuff is out there, and even if people think we do, you can't deny it. You cover a lot of that stuff."

HMOs try to forecast how much health care will cost and relate that back into dollars, Herndon says. Some might think weather forecasting is easier.

But United is still healthy, he says.

"We bucked the trend for a number of years and every once in a while it catches up with you," Herndon says. "By no way are we in trouble or anything like that, because we corrected it in pretty short order. Actually, the first quarter looks good for us."

First-quarter figures for the HMOs will be made available by the Insurance Department in June.

- Jim Harris



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