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Printable Version

DR. GINSBURG: Let me give you some background on the next presentation about Blue Cross and Blue Shield plans. After our first round, we sat around the table and started thinking about, well, what was interesting that we didn’t get much on but we’d like to learn more in the second round?

And this was one of the topics that came prominently, that basically in people’s interviews with Blue Cross and Blue Shield plans they got a sense of them as organizations that was different from the conventional wisdom and particularly different from what they were hearing on Wall Street. So, we pursued this as one of our special topics and I am pleased to introduce Brad Strunk, of HSC, to do the presentation.

MR. STRUNK: Thank you, Paul.

Good morning. I am very pleased to be here this morning and to have the opportunity to share with you some of the results from our site visits on Blue Cross and Blue Shield plans. Through the course of this presentation, I will be highlighting some of the key findings from research I’ve been working on with Joy Grossman looking at what it means to be Blue in today’s market. And I would like to emphasize that we interpret being Blue in a very broad and general sense and not just in terms of the relationship to the Blue Cross Blue Shield Association.

Our interest in this topic was motivated by a number of factors. There’s currently over 71 million Blue Cross and Blue Shield subscribers. And if all the independent Blues plans were taken together, this would make them the largest health insurer in the United States.

The Blues have held a unique role in the health system and it’s historically been the dominant plans throughout the country. In fact, in our first round of site visits to the 12 communities we track, we found that this was still true in many cases, as Paul said earlier.

We are interested in this topic because in general health plan analyses and research focuses on national managed care companies and HMOs and not local markets and PPO and indemnity business. This study gives us the opportunity to look at traditional local health plans operating in a changing health system.

As for the Blues, in particular, much has been written about them but there haven’t been many recent systematic studies of them in the managed care environment. Given the lack of recent analysis of the Blues in the managed care context, this study attempts to fill this gap by looking at Blues plans in a nationally representative set of markets.

There is at least one Blues plan in each of our 12 sites; in fact, in two sites, Seattle and Orange County, we find two Blues plans. The two sites are--these two sites are particularly interesting in that the Blue Cross plan and the Blue Shield plan there or plans, sometimes a number of plans, haven’t merged with each other and vigorously compete against each other.

As I mentioned earlier, the Blues played a unique role in local health systems across the country. They are started by or as a close collaboration with hospitals and providers and, as such, enjoyed a relationship with providers that other commercial insurers did not. While the Blues have historically been diverse in many ways, many share the commonality of being founded with a sense of a community mission and working to serve the public’s benefit.

Connected to this social mission, many of the plans were started out of unique enabling legislation and as such were often faced with unique regulations, as well. This included the responsibility to be the insurer of last resort, for example. In many States it also meant that the Blues enjoyed special tax treatment and up until 1986, they even enjoyed a special Federal tax exemption.

Under the purview of the Blue Cross and Blue Shield national associations, plans were granted the exclusive right to operate in particular areas of the country. With competition among the Blues restricted and limited competition from commercial insurers, the Blues plans were often able to obtain very significant market share in their local markets. And with large market share they eventually developed one of the most recognizable brand names in the country.

Now, given the history I just discussed this study turns to the present situation of the Blues and asks the question, what does it meant to be Blue in today’s market?

We’re particularly interested in examining what makes the Blues different from their competitors and how are these differences playing out? What competitive pressures are the Blues facing and how does being Blue affect the strategies they pursue? And, overall, how are the Blues faring into today’s changing market place?

The major findings from our study challenge many of the common perceptions about the Blues. And we have three major findings to this effect. First, despite perceptions about the Blues’ difficulty competing and the sense that they are being left behind by managed care, we found that the Blues continue to maintain a strong position in most of our markets.

Second, our study challenges many perceptions about the competitive advantages and disadvantages of being Blue. For example, the Blues plans were often thought of as quasi-public organizations; when in reality it’s no longer so much what’s on the books that affects their ability to compete, but rather lingering expectations from a legacy of regulation.

While the Blues are not distinguished in many ways that many commonly assume, they remain unique in many respects. And this leads to our third major finding that being Blue leaves its mark on the strategies that the Blues are pursuing today.

While they are facing similar pressures and pursuing similar strategies as competitors, implementation is sometimes shaped by the unique features that distinguish the Blues.

Now, to get into these findings in a little bit more detail, I will start by focusing on market position. Our first major finding is that contrary to many common perceptions about the Blues, they continue to maintain a strong position in most markets. Looking across all products, the Blues actually remain the dominant plan in 7 of 12 sites that we study and they are major competitors in the rest of the sites.

Much of their strength is attributed to their presence in the PPO and indemnity market. This is even the case in those markets where they have strong HMOs such as in Greenville, where Blue Cross and Blue Shield of South Carolina has the largest HMO enrollment but they still rely on their other lines of business for the bulk of their enrollment.

In fact, the sites where the Blues maintain a dominant position are those with below average HMO penetration. For example, in the low HMO penetration site of Little Rock, the Blues are reported to hold roughly 50 percent market share in that market. In places with higher than average HMO penetration the Blues tend to face more competition that has been cutting into their dominant position.

For example, in Boston, the Blues are competing with two other local health plans, Harvard Pilgrim and Tufts, that also have a very strong brand name recognition and are particularly known for their HMO products.

Cleveland and Lansing stick out here as exceptions to this finding. Cleveland is a special case because a few years ago the Blue Cross and Blue Shield license and trademark were transferred from what was formerly Blue Cross and Blue Shield of Ohio to Anthem as a result of concerns stemming from a proposed merger with Columbia HCA.

Anthem still hasn’t gained the market share they hoped for and, in fact, the former Blue Cross and Blue Shield of Ohio, which is now Medical Mutual of Ohio, is still the dominant player in that market.

In Lansing, even though there is larger than average HMOs penetration Blue Cross and Blue Shield of Michigan remains the clear leader there with respect to overall market share, mainly because of its unequivocal dominance of all other product lines.

Now, moving now beyond the discussion of market position, our next set of findings help us to explore the competitive advantages and disadvantages of being Blue. As I noted earlier, many of the findings about these issues test conventional wisdom about what differentiates the Blues. In the next few slides, I will discuss four key features you see here that differentiates the Blues and explore the extent to which these are competitive advantages and disadvantages.

The Blues’ unique history and longevity in the market plays out in a number of ways today. Clearly their history has given the advantage in terms of size, which gives them considerable market clout. Their history and longstanding relationships with providers have left them with broad networks that are very appealing to purchasers, and their longevity in local communities leaves many market observers to characterize the Blues as stable and secure, which is positive at a time when there is so much turmoil in today’s changing health system.

However, there is a flip side to these advantages. Because they have so many lines and have been part of the community for so long, the Blues are subject to heightened scrutiny from providers, purchasers and the public at large. Similarly, the broad networks have a downside in that they may complicate Blues’ ability to pursue managed care initiatives, such as working with a more selective group of providers.

And, finally, their size and longevity leaves them susceptible to being perceived as old-fashioned and bureaucratic.

In many markets we heard the Blues sometimes referred to as the 1,000-pound gorilla, which speaks to their market clout particularly in relation to providers but also to the fact that they are perceived as slow-moving.

One of the common perceptions of the Blues has always been that they are a uniquely regulated set of organizations required to serve in some sort of public benefit role but often rewarded with special tax treatment. However, the findings of this study question that perception.

In fact, we find that the Blues are not subject to as much differential regulatory treatment as they were in the past. And, as a result, both their related advantages and disadvantages have diminished.

In most cases, in the study the responsibility to be the insurer of last resort was eliminated in the late 1980s and early 1990s. Furthermore, the special Federal tax exemption that the Blues enjoyed was largely eliminated in 1986.

There are still some differential tax treatment for certain plans due to differences in organizational structure in that some are not for profit, some are mutual companies and in this study we also have one investor-owned company, Wellpoint in California. But differences vary by market and were usually perceived by our respondents as insignificant in competition.

Blue Cross and Blue Shield of Michigan, I should note, sticks out here as an important exception. It still is required to be the insurer of last resort in Michigan and the State is very active in regulating many aspects of the plans’ operations.

The fact that differential regulation has diminished relative to the past does not mean that the Blues face a completely level playing field, however. In many sites, market observers expressed and Blues’ respondents perceived an expectation to serve in some sort of a community benefit role despite a lack of a requirement to that effect.

Premier Blue Cross in Seattle, for example, felt significant pressure to remain in the individual market despite very significant financial losses. The Insurance Commissioner there made this a very prominent issue and it received a lot of attention in the press. Although they did finally exit the market, they felt that their actions were subject to a higher level of scrutiny, in part, due to their history in the individual market.

The sense that there is a different expectation for the Blues’ plans also becomes apparent in the case of conversions and I will address this issue later in the presentation.

A third factor that differentiates the Blues from their competitors is the brand name recognition of the Blue Cross and Blue Shield trademark. However, many respondents in our study questioned the actual value this provides. Most market observers do agree that the brand name recognition is strong in certain segments and helps to bring them business. For example, it’s strong for seniors, individuals, people who travel and unions. However, the benefits of attracting these traditional Blues segments are not always positive, due to variations in the profitability of these segments across markets.

Furthermore, respondents suggested that Blues, like their competitors, need to be pricing at markets to be competitive and that the trademark does not give them the ability to obtain a premium on their products. Price being equal, respondents suggested that being Blue does actually give them some advantage over their competitors. Nevertheless, market observers questioned the overall value of the trademark given today’s very price sensitive purchasers.

In addition, there’s a sense that the trademark does not represent managed care which is a disadvantage given employers’ reliance on managed care today. However, some respondents suggested that given backlash, the Blues’ broad networks and strong PPOs might be seen as very attractive to purchasers.

A final way that the Blues are distinguished is by their unique, by a unique national association that provides certain benefits, such as the ability to organize national and government accounts, the Blue card program which allows Blue Cross and Blue Shield subscribers to access care when they’re away from home; and a forum that helps to facilitate closer relationships among its members. For example, when Mountain State Blue Cross and Blue Shield in West Virginia went bankrupt, other Blues, including the former Blue Cross and Blue Shield of Ohio, stepped in to help them recover.

However, our study challenges the perception that the Blues are a monolithic organization or a collection of uniformly characterized organizations making up one big national player. in fact, our results show a great deal of market variation in the way these plans look and act. Take, for example, a plan like Blue Cross of California, which is owned by Wellpoint, which given the advanced managed care environment in Orange County, no longer offers any indemnity products. In contrast, Blue Cross and Blue Shield of Central New York’s indemnity business still makes up a huge chunk of this plan’s business in the low HMO penetration area of Syracuse. In fact, the plan just introduced the PPO last year following the elimination of hospital rate setting that had previously made this product unfeasible.

This contrast underscores the local orientation of the Blues. While the association offers them a number of strategic options their strategies are primarily shaped by the specific circumstances of their local market. Unlike national managed care companies that might try to impose a national strategy on their local markets, our data suggests that the Blues are driven first by their local market and second by a national Blues identity.

Thinking across the many features that differentiate the Blues, their history, their regulatory legacy, their brand name and a unique affiliation of local plans, our study suggests that there remains something distinctive about being Blue.

This leads to our third major finding which is that while the Blues face many similar pressures and are pursuing similar strategies as their competitors, the way these strategies are implemented and getting played out is sometimes distinctively Blue.

Like their competitors, Blues’ plans are confronted by purchasers who are demanding broad choice and low premiums in an effort to maximize the value of their health care dollar. Just as other plans, the Blues are also experiencing pressure on margins given the current stage of the underwriting cycle. Like many plans around the country, many of the Blues have been challenged by financial difficulties in recent years.

The Blues also face pressure from new competitors and the threat of entry and from shifts in the balance of power as providers consolidate. In addition, the Blues share with their competitors a continuing struggle to find effective ways to work with providers to find effective ways to deliver cost-effective care.

In response to these pressures, they are also pursuing strategies that on the face of it appear very similar to their competitors. They are actively involved in mergers and acquisitions and joint ventures in an effort to gain market share or achieve efficiencies and expand into new geographic regions.

In addition, certain plans are closing out unprofitable business, such as Medicare and Medicaid and exiting the non-core lines of business, such as zoning and manager provider groups, while at the same time introducing new products where there is greater potential for profitability.

However, despite these many similarities, our study highlights that while these strategies may be similar on the surface, they are sometimes being played out in a way that is distinctively Blue

Now, the Blues are pursuing consolidation and geographic expansion, they are usually doing so with other Blues plans. And the extent of this consolidation can be seen in the fact that there is 51 Blues’ plans today versus 69 just four years ago and much of that consolidation has involved the Blues merging with one another.

One of the plans that is leading this trend is Anthem which Paul alluded to earlier in the morning, which started as the Blues plan in Indiana and now has not only merged with the Blues plans in Ohio, Kentucky and Connecticut, but also has pending merger plans with the Blues in Maine, New Hampshire and Colorado.

While Anthem has gotten a lot of attention for its national consolidation efforts, it’s not to say that other Blues’ plans haven’t been pursuing mergers and affiliations to strengthen their regional presence, as well. For example, the plan in Syracuse merged with its neighbors in Rochester and Utica to form a more regional entity in Central New York.

In addition to the fact that the Blues tend to merge with one another, the pursuit of mergers is also distinguished by heightened scrutiny from regulators and the public stemming from the unique expectations of the Blues. A good example of this from our study involves the failed merger between Anthem and Blue Cross and Blue Shield of New Jersey. In this case regulators ruled that despite the contentions of the New Jersey Blues the company was actually a charity, thereby, responsible to the community as a whole and not just its subscribers. Therefore, in order to convert the plan would have had to have establish a charitable foundation and given the anticipated size of that foundation the two plans called off the merger. Several respondents noted that the regulators’ decision seemed to reflect lingering expectations about the Blues’ role in the community.

The effect of being Blue is also seen in Blues’ strategies to expand to new geographic markets. Because the plans are licensed for particular services areas, they are unable to market themselves as Blue outside of those areas. And this is particularly problematic in areas with wide commuting patterns that cross State lines such as the New York City/New Jersey/Pennsylvania area.

One way that the Blues have gotten around this is by creating unbranded products which are products that are sold under a different name than Blue Cross and Blue Shield.

Northern New Jersey is again a good example of this. In order to expand into neighboring areas, Blue Cross and Blue Shield of New Jersey renamed itself Horizon Blue Cross and Blue Shield of New Jersey and is now marketing itself outside of New Jersey as Horizon Health Care in places such as New York City and Philadelphia in Pennsylvania. Similarly, the licensed Blues plans in New York and Pennsylvania have also entered the New Jersey market with unbranded products of their own.

Finally, while the Blues are pursuing a number of strategies that deal with unprofitable business, there are some cases where being Blue makes it more difficult than would otherwise be the case. In Boston, Blue Cross and Blue Shield of Massachusetts is the major and only local provider of Medigap products, a product that is particularly unprofitable in Massachusetts. And attempts to improve this situation such as by raising premiums have met with strong opposition from the State.

The Blues, like their competitors, are also pursuing new lines of business. Our respondents generally don’t view the Blues as innovators, especially relative to national managed care companies, nonetheless, the Blues do show signs of the ability to innovate and in some cases leveraging the unique features of being Blue.

Consider the following examples, the Selection’s point of service product in Seattle. It was there that longstanding relationships with providers left Regents Blue Shield with lots of data on those providers and Regents was able to use that data in order to select a tighter network and create a very successful product.

There is also the new claims processing business in Greenville, where Blue Cross and Blue Shield of South Carolina has a long history as claims processor predominantly for government programs, and is now marketing its claims processing systems and experienced services in the commercial sector nationally. For example, they are now doing all the claims processing for Blue Cross and Blue Shield United of Wisconsin.

And, finally, there’s TriWest Health Care Alliance in Phoenix. Blue Cross and Blue Shield of Arizona is one of 14 partners which is mostly made up of Blues plans that formed a company to compete for CHAMPUS business on a regional basis.

Looking across these examples, while the Blues may not be product innovators in the traditional sense, one can see that they are being innovative in other nonconventional ways.

This perspective on innovation is consistent with our overall findings that challenge many of the common perceptions about the Blues. First of all, despite the rise of managed care and a rapidly changing health system, the Blues are, in fact, holding their own admist increasing competition. Second, the study finds that the uniqueness of being Blue may not always be what we think it is. For one, the Blues are not the big, monolithic organizations that many perceive them to be but rather a collection of diverse, local plans operating in diverse circumstances.

Furthermore, the Blues are no longer quasi-public organizations although a shadow of their former role continues to confront them in the form of expectations to act in the public’s benefit.

And the value of a trademark that has historically been one of the most recognizable brand names in the country is now in question by today’s market observers.

Nonetheless, our study confirms that the Blues’ history and legacy in local markets has left its mark and it’s still the case that the Blues remain unique in important ways although not in the ways that many commonly assume.

And, finally, the features that make the Blues unique in today’s market when taken together are shaping the Blues’ strategies as they adapt to a changing market place.

As they attempt to merge and expand, exit unprofitable lines of business and replace them with lines of business that have greater potential for profitability, they’re doing so in a way that is shaped by their unique history and distinguishing features. Ultimately, our study suggests that these plans are a diverse set of organizations that are nonetheless continuing to evolve in a uniquely Blue way.

Thank you.

[Applause.]

DR. GINSBURG: Now, we will hear from Ed O’Neill.

DR. O’NEIL: Thanks, Paul.

First, let me apologize for this cold and also just affirm that I get my care from a fee for service compensated primary care provider in the last indemnity plan operating in California.

[Laughter.]

DR. O’NEIL: Just to show you how good it is.

Basically I agree with the comments offered by Brad on his paper from Joy. And my observations come from experience over the past 5 years in being in about 25 of the remaining 50 or so Blues plans and being invited back to about a dozen of them to help them read their watch over an extended period of time.

Let’s just get a little bit of perspective. Between 1975 and 1995, the Blues lost one-fourth of their business. There are very few businesses in this country, outside of health care, that could take that kind of body blow, about a 22 million loss in covered lives. But since 1995, they’ve added 8 million lives back to the stock and begun some significant change in the way they operate.

Much is made of the Blues’ conservatism in this paper and I think that the Blues, in fact, are conservative. Sometimes when we hear all of the advice taken from the advisory board and others being conservative is not such a bad thing in health care. You can see the failures as others are paying for them.

But the tradition of operating in a regulated environment and also the tradition of being a not for profit but sort of cost-plus, reimbursed business has not produced a great deal of innovation and contributes to that conservatism.

There is a lingering public benefit orientation which changes dramatically from State to State depending on the position of the plan, the market share of the plan, the ambition of the plan to move from a nonprofit status to publicly traded status. I think one of the hands of conservatism on these plans that Brad alluded to is not just that they were started by hospitals and physicians in the ’30s and’40s, but that many of them still operate with physician and hospital representatives on their board in the nonprofit sector.

In fact, some of the publicly traded companies have maintained those board positions in consent agreements with States Attorney General.

I think many of the leadership cadres within the Blues have come out of legal, never a source of great innovation; or, if not legal, operations. So, they are wonderful at discussing the issues and paying the claims but may not be quite as quick on the uptake on a new product design or a new network development scheme.

They have large market share. If you have a large part of the market you tend to be conservative and don’t respond. And they have this traditional relationship with the providers. And some sense of noblesse oblige I think in some parts of the country, still, particularly in the southeast in that relationship with the provider community, perhaps more so with the physicians out of that provider community than the hospitals.

I think part of that complexion is also informed by the fact that while they have this enormous market share if you go in and look at a State like Minnesota, you’ll find that in the cities they actually duke it out with the other two big plans in terms of about equal share of the market. But where they really pick up their market share is the out of the cities area. And, so, not surprisingly, those conservative, not as intensively managed regions of the State contribute in part to the conservatism as well. But by and large, I think they have been and remain a conservative part of the health plan community.

Now, about the Blue mark. One of the great urban legends in the insurance industry is the story told by all Blues members when you go in and that is that the Blues mark is the second most readily identifiable corporate symbol underneath Coca Cola. Regardless of whether or not that’s truth, within the Blues system that kind of attachment to the mark is significant.

It’s important I think though to separate in health care today particularly as branding and consumer preference become increasingly important, the difference between brand awareness and brand identity. Brand awareness, people recognize the Blue. What do they actually understand that to mean when they to go the market?

And in the past, I think sometimes--and this paper alludes to it--we’ve thought that from inside the beltway or from inside the consultant world or from inside the movers and shakers of health care, maybe the Blues looked a little bit like they were in the back seat, not really engaged in cutting edge decisions. And that may be the case.

Interestingly when we surveyed in three States, we’ve actually found for our clients that consumers disassociate the Blues with managed care for the very same reason, the Blues may be just as managed, they may have just as many lives in that but the consumer doesn’t perceive that product to be a managed care product and would prefer that. Particularly when the Blues’ products are a price point sensitive and approaching whatever their competitors are bringing to the market.

So, a consumer now with that perception that even though they say it’s managed care it’s really not managed care, because it’s a Blues’ product, and I can now purchase it for essentially the same price, the consumer at the individual level or even at the corporate level, is showing a distinct preference for the Blues and I think that’s one of the reasons to attribute to an 8 million growth over the past four years.

Alluded to the association and the role in it and I think there’s a set of mixed signals. Right at the time when you would hopefully be able to generate some market clout for national accounts, for integration of IT, the development of care management strategies, whatever the particular strategy of the association is, is right at a time when the association is not being rent asunder but certainly being pulled as plans go from not for profit to for profit, as they go across geographic boundaries to compete with one another. And, so, the same kind of colleagueship and common vision and strategy that might have existed 5 or 10 years ago is more difficult, I think, to generate within the association. Though, interestingly, now, there are large regional aggregations, regions in the Northwest, the Anthem accumulation and the accumulation of plans under the Blue Cross California Wellpoint, that may, in fact, achieve the same kind of market power that could be assumed or advanced by a powerful association.

One of the things that the Blues haven’t taken advantage of is using this 26 percent share of the market that they have. They’ve showed little appetite for using that market share to push back on the provider beyond what--the sort of accepted level of push-back from the managed care industry in individual States happens to be.

And I think that is distinctly to their disadvantage. In part they might approach that in a way that invites the provider into a different kind of partnership, a different kind of linkage and then pushes them to refine their product offerings to the customer base. But across-the-board, categorically, Blues have been unwilling to do that.

The other thing that they have been unwilling to do, I think far more so than other health plans, is to demonstrate selectivity in the development of the provider network. They grew out of the non-exclusive world of any provider being paid and they have not developed, I think, the same kind of critical ability to think about the future and how to limit access to some providers.

The paper also alludes to this lingering issue of public benefit, and I think that there there is probably more torture than advantage that goes to the Blues plans because they’re unwilling to advance or redefine the public benefit. Right at a time when I think, as evidenced by many of the questions today, there’s a considerable amount of angst about what’s next in health care, the Blues are in a unique position among health plans by this public perception to be able to articulate a sort of broad public strategy or health commons because they serve in many places the entire jurisdiction of the state.

But, by and large, right at a time when they might be able to take advantage of that, I think they’re pulling back from that public benefit and trying to make themselves appear to be just like any other managed care company, and thereby perhaps giving up, perhaps, a big piece of an important part of their legacy.

Thank you.

[Applause.]

DR. GINSBURG: Thank you.

We should start with the panel.

DR. GOLDSMITH: I just wanted to ask either the presenter or discussant, Don’t you think it’s kind of ironic that after tens of billions of dollars in investment in creating a managed care infrastructure, what we have today in managed care looks remarkably like what we had with Blue Cross 20 years ago? In what meaningful way does a United Health Care, shorn of its utilizing management capability, differ from a Blue Cross plan except for this gloss of community that you talked about?

DR. O’NEIL: Not much. I mean, I think one of the ways to understand the past 15 years from the health plan perspective is 15 years of trying to bring some discipline to the system. Now, I do think that we can’t underestimate their capacity to bring cost discipline to the system, but in terms of medical management, I don’t think that there’s much to be demonstrated.

Of course, the United decision is based upon ten years of experience in which they control selectively the provider group and can still discipline that group, the serious outliers in that, without having to engage directly in medical management throughout the entire network.

DR. GINSBURG: Ed, when you were talking about the opportunity for the Blues at this point to, in a sense, step up and address the public benefit notions, do you think that’s most likely to come from the individual plans or from the national association?

DR. O’NEIL: I think it’s too fractured within the association to see that. I don’t think you could even get a vote on that issue.

Remember, you can think about the association in one of two ways. It’s either a fractious trade association or it’s a unified health plan. It’s probably not either one of those, but we tend to think about it as if it were one of those.

I think the states that have single Blue Cross/Shield plans, United, without a lot of out-of-state competition, may, in fact, be well positioned--well, think about it this way: If the physician from Florida gets his way for a single payer and Jeff can write his article about insuring a floor on payments, then who’s going to process those claims? The largest ASO TPA processor in the country are the Blues, so the Blues are going to be with us.

Why not go to your point earlier about what happens if, in fact, we’ve got so much consolidation and concentration that there really is a public interest question resolved at the state level out of the trade commission and that trade commission is going to have to turn to some insurance entity to form or reformulate the public benefit. And I think the Blues have the only insurance legacy to at least offer themselves as the provider of that.

DR. GINSBURG: Certainly in Lansing, we have a case where, in a sense inspired by both the public and major employers, the Blues in a sense have decided how much of a pound of flesh to take from the hospitals. And so I think that’s what you’re getting at, that they in a sense could become the enforcer of, yes, we have a monopoly, but we still want this to address the public needs.

Any other comments or should we go to the audience? Yes?

FLOOR QUESTION: Yes, I’m Rob Neelenberg (ph) from the University of Washington. I think this session, this particular topic of plan administration, is probably the most valuable of the morning, particularly as we address the issues of high cost of plan administration and also of managing care. I think the United announcement this week is really a sea change in terms of what’s going on out there. They spent $108 million to deny $100 million worth of care that the physician and the patient felt was necessary.

What is unsaid there is that hospitals and doctors who were responding to United Health Care probably spent another $108 million in that process. And I think that’s a national scandal that we are now spending upwards of 30 to 40 percent in managing care, in plan administration, in what essentially should be an intermediary function. And I was wondering if you will be studying this aspect of the health industry and reform.

DR. GINSBURG: Well, certainly to speak for myself, you know, this development of a significant, potential significant decrease in the degree to which plans attempt to micromanage care in the sense of reviewing individual decisions I think is going to have a profound effect on the system. For one thing, we’ll find out perhaps in a couple of years if United is right in its analysis about the fact that what it was doing wasn’t cost-effective even from its narrow interest, let alone the interest of the whole system, which includes the administrative costs of the providers.

I think we’ll also see--and I think United may be one of the leaders as far as putting forward the newer forms of care management--the more creative uses of profiling and the more active intervention of preparing patients to be discharged from hospitals.

DR. GOLDSMITH: Well, look at the political costs associated with maintaining that adversarial posture. I mean, they far outstrip the administrative expenses. These plans are selling at price earnings multiples of 10. I mean, that’s like a cement plant. You know, electrical utility, they’re not regulated, but, you know, they’ve generated such public animosity and investor skepticism, they really do need to begin doing things differently.

You know, to the point about innovation, if Peter Drucker were here, he’d say that it’s innovation that’s going to save this industry. I guess that was one of the pessimistic pieces of your comments and your response, Ed, is that maybe these systems are less capable of innovating than the Uniteds or the Wellpoints.

MR. STRUNK: Well, I certainly think that from the perspective of the market observer that’s the case, that they are not as capable of innovating as other plans. And the Blues are huge, and when you’re that big, I mean, sometimes there’s a question of they have this dominant position and why do they need to do something different to do something else.

But I do think there’s an opportunity for the Blues, if they are able to leverage some of these distinguishing factors that I was highlighting to do things that are innovative, and they might not be products in the strictest sense, but to do things that are going to further the health system and find new things to do.

DR. O’NEIL: I think if you drill down to the individual plan level--and some of the ones you’ve looked at, Arkansas--I don’t think you looked at Minnesota--Premeira and regions in the Northwest, there’s significant innovation and considerable breaking of the mold of their role and their relationship to providers, and I think it’s also panning out for many of them in their market position.

DR. GOLDSMITH: Well, talk about what some of those innovations are for a minute, Ed. What specifically are they doing that’s innovative?

DR. O’NEIL: In the Arkansas market, I think the alignment--I said that as a group the Blues plans didn’t use the alignment process, not an exclusive relationship but the alignment, but I think seriously thinking about major alignments with tertiary care centers of excellence, developing that early on, investing in that, limiting costs through that relationship, channeling patients, not worrying too much about controlling the primary care network, providing open access there, but then focusing the need for specialty care in those centers of excellence. And that same model plays out, I think, in Montana and in Washington State.

These are innovative models, oftentimes not using the latest capitation, hard-core managed care approaches that many people are backing away from anyway today.

DR. GINSBURG: You know, one perspective is looking back in previous years, it may have been that there wasn’t a premium on innovation in health insurance. In a sense there were the easy cost savings from paying providers less, and so I think many of the for-profit plans were very much focused on growing, consolidating their position, and perhaps looking forward in the sense that there will be more of a battle on the basis of who can innovate better in the situation where the low-hanging fruit has already been captured.

DR. GOLDSMITH: Just to quibble, but do you consider closed-panel selective contracting an innovative strategy? It’s an old strategy that’s fallen out of favor because people didn’t want it. But is that innovation to you?

DR. O’NEIL: It’s innovation if it works and grows the market share. There are innovations, there are good ideas that never get implemented, never get managed, and some of them get managed at quite high levels of success.

DR. GINSBURG: Did you still want to ask your question? Oh, there was woman with the red top there.

MS. BROWN: Yes, thanks. I’m Jill Brown from Managed Care Week, and on the subject of conversion to for-profit entities, I think we’re seeing another fight right now with the Missouri Blues’ efforts to merge with their subsidiary Right Choice. And I wonder if you would care to project the success of other Blues plans with efforts at converting to for-profit in the future.

MR. STRUNK: Well, I would hesitate to look too far into the future. We can look to what exists today, an example like Wellpoint that is one of the most successful managed care companies around right now and is expanding nationwide and seems to be doing pretty well.

I do think that these conversions are getting away from what the Blues have been in the past, and there’s a real question as to how that will play out and how the public will perceive that. But it’s hard to say how that will play out in the future.

DR. O’NEIL: Yes, I think that the attorneys general are much more aware of this transition, and the barrier or the hurdle that was at one time pretty low, even though Len Schaeffer had to pay $5 billion for his, which we appreciate because it’s in two big foundations in California now. But that barrier just gets higher and higher, and I think it also gets highly politicized in the states for the reason that the paper points to, the traditional public benefit perception of the Blues plans.

So I think if they’re going to compete as other health plans, they’re going to have to face this issue of conversion. If they don’t choose to do that, though, I think they’re going to have to go back and ask these questions about how do they recapture some of that traditional public benefit role and work off that and maybe, Jeff, provide some innovation in that arena. There aren’t many innovative discussions about the recovery of the public health function, and it may well be that that’s an appropriate place for that to take place.

DR. GINSBURG: We just have time for one more question.

MR. McGARVEY: Mick McGarvey from Horizon Blue Cross/Blue Shield of New Jersey. Just a couple of comments going to Jeff’s comments and skepticism about innovation within the Blues.

There are examples, I think, peppered throughout the system. Anthem in Ohio, really using the model used in New York State, did a very, very good program on cardiac centers of excellence with very significant drops in mortality and morbidity in the facilities that are performing cardiac surgery.

In our own State of New Jersey, we launched a kind of unilateral office radiography survey and standard-setting requirement which has shamed the State of New Jersey into adopting a very similar thing, which I think has been a useful thing in the State of New Jersey, protecting a lot of patients from some pretty severely antiquated machines and incompetent providers.

So I think some of that kind of thing is going on; though I think given the fact that the Blues are not, in fact, a monolithic presence, anything at a national level is probably a little bit of a reach.

DR. GINSBURG: Thank You.
 

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