Weighing the impact
They’re from Blue Cross and Blue Shield of North Carolina, the Chapel Hill-based company that insures more than a third of Baptist’s patients, accounting for much of the medical center’s nearly $800 million annual budget. Its three-year contract expired two years earlier, but Baptist operates under an extension — at rates almost five years old. We’re losing money when we treat your members, the hospital argues, accusing the insurer of postponing meetings and stalling. A Blue Cross negotiator replies with a shrug: “We’re fine with what we’re paying you now.” The offer on the table, Baptist officials are told, would make it Blue Cross’ best-paid hospital in the state. Other hospitals, they would discover, had been told that, too.
On June 4, talks collapse. Blue Cross agrees to pay Baptist’s patients directly. When they ask what to do with their checks, the insurer replies: Cash them. Some ignore the hospital, using the money for other purposes, in one case, buying a car. Baptist executives fume as unpaid bills mount. “It was another way to put pressure on us,” one recalls. The stalemate ends that October when the hospital, citing concern for its patients, signs a new contract.
That confrontation five years ago — reconstructed from sources on both sides — is a rare look into what Kevin Schulman describes as “brass-knuckles” health-care negotiations. “The gentleman’s-agreement world that existed until the late ’80s has disappeared,” says the physician, who has an MBA and teaches in Duke University’s medical and business schools. Blue Cross and Baptist, now Wake Forest University Baptist Medical Center, have buried the hatchet — for the time being. Brad Wilson, who succeeded Robert Greczyn as the insurer’s president and CEO earlier this year, dismisses what happened as routine bargaining — “sparks fly and reasonable people will disagree” — but promises what he calls a new era of transparency in dealing with providers. Edward Chadwick, who joined the medical center last year as chief financial officer, adds, “There’s a new dimension on quality now, not just cost. I’m optimistic.” Talks on a contract for 2011 will begin soon.
The standoff scenario is more than a glimpse at the secret side of the medical business: It shows one reason — audacity and hardball tactics — why 77-year-old Blue Cross dominates health care in North Carolina. Its clout is second only to that of federal Medicare and Medicaid programs for the elderly and the poor, which provide more than 60% of many hospitals’ and doctors’ revenue. With contracts covering 92% of the state’s doctors and 99% of its hospitals, Blue Cross can sway what patients pay for care, how good it is and when and where they have access to it. It directly insures more than 3.7 million of North Carolina’s 9.4 million residents. What Blue Cross does touches every Tar Heel, member or not.
When, for example, the insurer squeezes reimbursements to doctors and hospitals, it holds down premiums, saving members money. But it leaves doctors and hospitals facing hard choices — scale back their compensation or charge more to members of other insurance plans, patients who pay their own bills or local taxpayers who subsidize charity care. “Blue Cross and Blue Shield is the 800-pound gorilla of health care in North Carolina,” says Chuck Stone, director of North Carolinians for Affordable Health Care, a lobbying arm of the 55,000-member State Employees Association. Blue Cross administers the health plan for state employees, dependents and retirees, covering about 660,000 people.
The appellation brings a smile to the face of Wilson, 57, who has heard it before. It’s difficult to compute accurately Blue Cross’ market share, but analysts estimate that it exceeds 90% in selected segments, such as policies sold to individuals. In September, the company and the N.C. Department of Insurance announced that Blue Cross would refund more than $155 million to 215,000 individual policyholders. These aren’t overcharges, Wilson says, but due to health-care reform provisions that permit them. What goes unsaid is that they defuse critic’s claims that Blue Cross has an overwhelming market share in some segments and needs to be tightly regulated. “Basically, in health care they’re a dictator,” Stone says. “They can dictate to health providers and individuals and companies seeking insurance their own terms and conditions. They have pretty much a monopoly.”
Others take a kinder view. Blue Cross, they say, plays a vital role in controlling health costs in North Carolina, which have risen five times faster than wages since 2000. Schulman says Blue Cross and its sometimes bitter, though rarely public, spats with doctors and hospitals counterbalance the providers’ pricing power. “We need someone in an adversarial role — it would be dangerous not to have them.” The insurer spends millions on community programs, and its charitable foundation has donated more than $58 million to North Carolina organizations since 2000.
Wilson is unapologetic and occasionally combative. Hard negotiations, he says, benefit members through lower premiums. Other insurers can match them or suffer the competitive consequences. Blue Cross quality-of-care initiatives prod doctors and hospitals to provide better and, ultimately for Blue Cross, cheaper care. It has pioneered pay-for-performance initiatives that reward doctors and hospitals for how well their patients do — not how many procedures they perform on them.
Member satisfaction — about 85%, according to an internal survey last September — is his report card, he says. In shirtsleeves in a conference room at the company’s headquarters, he flashes the feistiness honed in 14 years practicing law in Lenoir. He joined Blue Cross in 1995. “We’re the state’s largest health insurer, and we’ve obtained that position because people choose to do business with us. We have 12 ardent competitors on the ground in North Carolina going after the same business every day, and people have a choice.”
But how Blue Cross achieved and maintains its dominance, friends and detractors agree, is more than a matter of compiling good deeds and keeping customers happy. How competitive its competitors really are may be more than a matter of their merit in the marketplace. Hidden, as if behind the one-way glass that clads Blue Cross’ iconic headquarters building, are nuanced answers that include historical pedigree, rough-and-tumble politics and shrewd, effective use of its bulk.
In Burlington, textile mills were filled with men with faded dreams and women with weathered faces. In the ’30s, one of those women penned a letter to President Franklin Roosevelt and his wife, Eleanor, breathless in its urgency. “… Never do we have a dime for doctor or medicine or anything else and it sure looks hard. If we get sick we have to die or get well the best we can for the doctors have got so they won’t treat people without money and that is something the working class of people don’t have.”
Blue Cross was born of that era — the Great Depression. “Nobody wanted to get into the health-insurance business,” says Adam Searing, director of Raleigh-based North Carolina Health Access Coalition, which lobbies for consumers. “It was too risky. So a movement started where nonprofits in each state would take over a function the commercial market didn’t want.” Politicians, doctors and hospitals jumped on the bandwagon, with a push for a nonprofit North Carolina Blue Cross and Blue Shield — the cross for hospitals, the shield for doctors — modeled on a plan Texas pioneered in 1929. World War II dramatized the abysmal state of Tar Heel wellness. “More than half of North Carolinians drafted were rejected because they were in such poor health,” Searing says.
Blue Cross got not only nonprofit status and seed money but also charitable support and tax breaks. “There was a huge push after World War II to get more people covered by insurance,” Searing says. By the ’50s, when for-profit insurers began seeing healthy returns from sick people, “Blue Cross had a tremendous head start, and they were benefiting from direct and indirect state help,” a factor that still bolsters the company’s fortunes. It administers the no-bid health plan for state employees, which paid $2.6 billion in claims last year.
Wilson agrees with Searing — up to a point. He concedes that the insurer’s sheltered history gives it special obligations. But the primary benefit it receives as a nonprofit, he says, is that it is accountable only to members. “We’re not chasing a 15% quarter-over-quarter return for shareholders, which means we can be a corporation with a conscience. Last year, our profit margin was about 2.1%, which wouldn’t be particularly attractive to aggressive investors on Wall Street, but it puts us in a position where we can keep our products as competitive as they can be. It’s not because some governmental advantage has been given to us. Today, we’re fully taxed and operate like every other company.”
Some critics say, though, that behind Blue Cross’ neighborly image — advertising shows grateful customers, such as members of a cancer-stricken Chapel Hill family thankful they didn’t lose their home to medical bills — lies a giant that doesn’t hesitate to wield its heft to stagger opponents. Case in point: an odd phrase borrowed from international diplomacy.
“Most favored nation” status is written into contracts such as the one Blue Cross has with Wake Emergency Physicians PA, a Cary-based practice whose 72 doctors and 30 middle-level practitioners make it one of the state’s largest. Six years ago, the group left Blue Cross, complaining that reimbursements were too stingy. One contract provision then and now — out of the insurer’s network for four years, it’s back under a new contract — specifies that if another insurer negotiates a lower price, Blue Cross could force Wake Emergency to cut its rates to match. “Yes, they do have that language in their agreements,” says Michael Brohawn, the practice’s manager. He is also president of the state chapter of Englewood, Colo.-based Medical Group Management Association, which has 21,500 members nationwide.
Other providers, competitors and health-care observers say Blue Cross’ contracts negate any advantage that wishful giant killers gain by hard bargaining. “If I’m a newcomer, I try to set up my own network and negotiate lower prices so I can offer lower premiums,” the State Employees Association’s Stone says. “I go to a provider and they say, ‘I’m willing to see your members for $40 for a standard office visit.’ Blue Cross comes along and says, ‘Wait a minute — you offered us $45, so now we’re cutting you to $40 for our patients.’ That’s one way they maintain their monopoly.” Wilson bridles at such criticism. “I’d point out that that is a provision in a contract agreed to by two willing parties. Secondly, I find that approach consistent with our efforts to provide our customers the best quality at the best price. I appreciate our competitors’ point of view, but that’s the nature of competition.”
N.C. Department of Insurance spokeswoman Kristin Milam says that Blue Cross collected $4.3 billion in premiums in 2009, dwarfing the $1.3 billion of the state’s second-largest insurer, United Healthcare of North Carolina Inc. “When a health insurer who dominates a market uses most-favored-nation clauses in contracts with health-care providers,” says Tracey Lempner, United Healthcare spokeswoman in Greensboro, “it can harm competition by preventing potential competitors from entering markets and result in artificially higher prices for consumers.”
Most-favored-nation clauses came under fire Oct. 18 when the U.S. Justice Department sued Blue Cross Blue Shield of Michigan. In that case, however, the Justice Department says the provisions sometimes forced hospitals to charge higher rates to Blue Cross competitors. It also claims Blue Cross of Michigan obtained most-favored-nation status by raising the prices it paid some hospitals, essentially buying protection from competition.
Surveys by the medical-group association show many Tar Heel doctors feel they get the short end of the take-it-or-leave-it contracts. About 38% responded in a 2009 poll that they have “no leverage” with Blue Cross, highest for any insurer in the state. Duke’s Schulman — who, as a caveat, mentions he recently was offered a consulting position with Blue Cross — contends the flip side is that more than 60% feel that they do have a voice. But he and others note that Blue Cross influences Tar Heel health care in another way that is easily overlooked.
“The people who feel they have no leverage have a choice,” Schulman says. “They can stay in independent practices or join one of the hospital systems. That’s market dynamics.” One result is a decline in solo practitioners “adversely affected by the leverage exerted by large health plans,” the American Medical Society says.” Another is a dramatic increase in size of health-care systems, such as Winston-Salem based Novant Health Inc., which covers nearly three dozen counties in the Carolinas and Virginia and employs more than 1,000 doctors. “One implication is that more and more doctors and hospitals will join systems to gain more leverage, which will drive up the cost of care,” Schulman says.
While doctors are limited in their ability to fight back — antitrust laws prevent them from sharing prices or other bargaining information — Blue Cross is largely unfettered, and its arsenal includes a formidable war chest. Consumers Union, the Yonkers, N.Y.-based nonprofit, recently gigged the company for amassing $1.4 billion in reserves through “steady and steep rate hikes.” In September, state regulators approved a 5.37% increase — Blue Cross had requested 6.97% — for its Blue Advantage individual coverage, the lowest rate increase in four years for that policy.
Wilson says the reserves are needed to protect members — though Consumers Union called them “well above industry standards” — and points out that Blue Cross’ operating margin of about 2% last year was below target. (As president and chief operating officer, his compensation in 2009 was nearly $1.8 million, including a $1.2 million bonus; CEO Greczyn’s was more than $4 million, $3.1 million of it bonus.) “Our philosophy and business approach is to hit 3.5% to 4.5% every year,” Wilson says. “That kind of steady approach provides us sufficient operating margin, capital and liquidity to reinvest for the benefit of our customers, to do things like conforming to health-care reform. That’s not free.” But when he announced the $155 million refund, Wilson credited it partly to reform changes due in 2014 that will reduce required reserves.
Mark Hall, a law professor and expert in health-care law at Wake Forest University, says “no particular hospital or hospital system can come close to the influence Blue Cross has statewide.” On one hand, the insurer can keep doctors and hospitals in places where “there is in effect, no local competition” from gouging patients. On the other hand, “the risk is that Blue Cross will use its market clout to drive down provider rates but not pass that along to consumers.”
A provision of health-care reform mandates that 85 cents of each dollar of premium go to claims for group-policy patients — 80 cents in the case of individuals. Blue Cross already pays 87 cents, Wilson says. How other provisions will affect Blue Cross remain to be seen. But one thing is certain: The company and its chief executive are no strangers to the law — or the political arena in which it’s written.
As Michael Campbell tees off on opening day of the 2005 U.S. Open in Pinehurst, most of the smart money is on Tiger Woods. He falters, and the New Zealander will wind up the winner. But Blue Cross and Blue Shield of North Carolina has money riding on something else, spending $478,000 for a hospitality suite to ensure that the drinks are cold and the hors d’oeuvres delectable for its A-list guests from the realms of health care and politics.
In North Carolina’s $60 billion-a-year medical marketplace, Blue Cross is as at home behind the closed doors of politicians and the halls of government as in doctors’ offices and hospitals. Wilson, who joined the insurer after a stint as general counsel for then-Gov. Jim Hunt, is unabashed about his company’s political pull. “We’re engaged in the policymaking process, which is by its nature political. Politics is the grease that makes democracy work. Sometimes grease isn’t very attractive.”
If Wilson is correct, Blue Cross is the Jiffy Lube of Tar Heel health care. It has three full-time General Assembly lobbyists, the most of any corporation in the state, says Sam Watt, policy analyst at the nonpartisan North Carolina Center for Public Policy Research. And its involvement in the U.S. Open shows that those who oppose it do so at peril. Since 2002, Blue Cross had been locked in an effort to persuade the legislature to allow it to convert to for-profit status so it could raise additional capital from shareholders. Many doctors vehemently opposed the move — some called their anti-Blue Cross campaign a “death match” — and formed ProCare, a political committee to fight it. It was headed by two icons of Tar Heel politics: Democrat Gary Pearce, a top Hunt adviser, and Republican Carter Wrenn, former strategist for Sen. Jesse Helms.
When someone — Blue Cross later told a judge it was a dissident employee — sneaked documents to ProCare detailing the insurer’s U.S. Open politicking, Blue Cross sued Pearce and Wrenn to shut them up and remove the information from ProCare’s Web site. Contacted recently, both shakily declined comment, muzzled as a result of a settlement that let them off the hook — but only as long as they remain silent. “Do we play hardball politics?” Wilson asks with a grin. “I don’t want to quibble over words, but I will say we are fully engaged in the political debate. Whether that’s hardball is in the eyes of the beholder. But we will always do it the right way — in full conformance with the law.”
Even when it loses skirmishes, Blue Cross usually wins its battles. In late 2009, months before Wilson became CEO, the company went to war against provisions of the national health-care reform law that would have established public-option insurance. Though Wilson says Blue Cross supported many of the provisions that were enacted, he believed government-backed insurance would wreck private-sector insurers. Blue Cross launched what it called an “educational” campaign, but 20 North Carolina lawmakers protested to the N.C. attorney general that the insurer was using premiums to fight health-care reform.
Blue Cross was fined $95,000 earlier this year when the attorney general concluded that its hired boiler-room operatives made more than 100,000 calls violating a state law against computerized, robot-call campaigns. “We’re embarrassed — a mistake was made,” a contrite Wilson says. “We apologize.” The public option was dropped from final reform legislation, but its prospect had been a warning shot fired across Blue Cross’ bow.
Now Wilson has embarked on a quest, seeking what he calls “aggressive evolution” at Blue Cross. Part of that effort, he says, will be repairing frayed relations with providers still seething over treatment by Greczyn and his team, but he is asking aides to consider a question few have pondered since the dawn of health insurance in the 1930s: What if there were no more private insurance?
Blue Cross is steeling itself for uncertainty. It has a goal of reducing operating costs 20% — $200 million a year — by 2014, and earlier this year the insurer announced it would outsource some data entry to the Philippines and outside contractors, costing 90 jobs. A few months before, it had pared 145 through early-retirement packages. Other cutbacks are likely. Conversion to a for-profit — the inflammatory topic of the early 2000s — is permanently off the table, Wilson says, but little else is.
The goal is to obtain 20% of revenue by 2014 from nontraditional sources, such as increased dental and life insurance but also possibly workers’ compensation coverage and even noninsurance lines of business. With thousands of employees skilled in data handling and human resources, Wilson says, Blue Cross might consider such ventures as payroll management and various HR functions for other companies. Or managing practices for physicians.
“We’re telling our people there are no dumb ideas here. We’re going to stay close to our core. We’re not going to get into the used-car business. But we’re going to examine everything that seems reasonable to help diversify.” As with playing politics, which he considers no more than a CEO’s duty to protect his company, Wilson sees raising troubling questions about its future as his obligation to its 3.7 million members and more then 4,000 employees.
“I can imagine a scenario that brings the financial collapse of not only this company but the insurance industry. I’m not panicked, but with reform we’re sailing undiscovered waters, and we can’t foresee every storm that might be out there.” He’s bent upon weathering that storm, but if the tempest casts Blue Cross upon terra incognita, it’s better that the company be an agile, aggressive gorilla than a once dominant, now doomed dinosaur.