Blue Cross/Blue Shield of Michigan (BCBSM) is a quasi-public, nonprofit health insurance firm that controls over 50 percent of the health-insurance market in Michigan. It has been insulated from the rigors of a truly competitive market, thanks to Michigan's Public Act 350 of 1980, a law that exempts it from state taxes.
What this means is that taxpayers who do not have BCBS insurance are subsidizing health insurance for the rest, which are paying higher premiums than they should. Although it has the opportunity to do so, BCBSM has not moved from its highly protected position toward an investor-owned, private, for-profit business model. Doing so would not only help Michigan consumers, but would also help BCBSM stay competitive, raise needed financial capital and offer management flexibility that is impossible under the current setup.
What is Blue Cross/Blue Shield?
Members of the Blue Cross/Blue Shield Association (BCBSA) have provided health insurance to consumers, business and governments nationwide for more than 70 years. The first Blue Shield insurance plan was founded in California in 1939 and was patterned along the same lines as pre-paid "medical service bureaus" (which were composed of groups of doctors), created for employees of lumber and mining camps in the Pacific Northwest.
Over the years, the association has evolved from a pre-payer of hospital costs (under the Blue Cross insignia) and physician bills (under the Blue Shield insignia) to a Medicare intermediary, then to a managed-care facilitator, and finally, to an investor-owned business. It operates in all 50 states, Puerto Rico and the District of Columbia.
The BCBSA licenses all so-called "Blue" plans nationwide. That is, it authorizes licensees (essentially franchise owners) to sell insurance to the public under the rubric of Blue Cross and Blue Shield, provided they adhere to Association rules. The Association limits one BCBS license to each geographic area. Consequently, there is one licensee in Michigan and the BCBSA will not grant a second.
More than three-quarters of Fortune 100 companies provide their employees with BCBS coverage, including the Big Three automakers here in Michigan.
Michigan's Public Act 350 and the change in BCBSA rules
The interaction of two factors with Michigan's Blue Cross/Blue Shield chapter add up to overly expensive health insurance for more than half of the state's consumers.
The first is Public Act 350, a law passed in 1980, which regulates nonprofit health-care corporations to "promote an appropriate distribution of health-care services for all residents" of Michigan. Public Act 350 governs how such health insurance corporations operate, i.e., how they elect their boards, how they apply their rates, and a host of other minutiae. It also allows for a review of BCBSM's rates by the state insurance commissioner.
Each such health-care corporation, according to P.A. 350, is dubbed a "charitable and benevolent institution" and, as a result, is exempt from taxes on revenue and property. Until 1994, the harm this law inflicted upon Michigan consumers was to give health-insurance nonprofits an unfair advantage over their market rivals; a market distortion that tends to drive prices higher than they otherwise would rise.
But in 1994, and facing intense competition from for-profit companies for market share, the BCBS Association authorized its members to become for-profit, public stock companies.
On the whole, this appears to have been a great move for BCBS and its clients. Many regional BCBSA affiliates took advantage of the opportunity to become more competitive in the health insurance market and thereby offer their customers the best service for the lowest possible price.
Unfortunately, Michigan's BCBS affiliate chose not to take this opportunity. Why? Because P.A. 350's tax exemption gave it an incentive not to do so. Rather than lose the tax exemption offered by P.A. 350, BCBSM chose not to become a for-profit company. To retain the exemption, BCBSM remained a nonprofit.
Losing tax exemption might be better than remaining semi-public
Blue Cross-Blue Shield of Michigan's most recent triennial report, released Sept. 14, reveals that it lost a whopping $400 million in the "small group" area of its insurance business over the past five years. Unfortunately, the report does not indicate any desire on the part of BCBSM to forego its tax exemption in order to become a for-profit corporation that could offer competitive rates to small-group consumers. BCBSM wants to retain its status as a nonprofit.
But conversion might be better not just for Michigan consumers, but for BCBSM as well. A big part of the reason the company has become uncompetitive in the market for small-group health insurance is that under P.A. 350 it must offer its services as "insurers of last resort." This means BCBSM subscribers are forced to subsidize Medigap insurance for seniors, for example, and keep rates at lower-than-market levels for high-risk insurance groups.
In addition, under P.A. 350, non-profit health insurers cannot raise capital by selling stock as do private companies. This is especially crippling right now because of the need for technology upgrades that may cost BCBS, according to estimates in the triennial audit, up to $400 million over the next several years. The new technology is needed to replace hardware and software to better process enrollment, claims processing, billing, actuarial estimates and to work more efficiently with corresponding plans elsewhere.
BCBS of Michigan bringing up the rear
Michigan's BCBS affiliate is the last state-controlled plan of its kind in the nation. Blue Cross/Blue Shield plans covering 14 states have converted to investor-owned companies. The Blue plans in states that surround Michigan-Ohio, Indiana, Illinois and Wisconsin-have all consolidated or become stock companies.
Remaining a state-controlled plan for the foreseeable future means facing increased state regulation, remaining an insurer of last resort, and having a diminished ability to service regional and national businesses because it will not be sharing a common vision, values and strategies with other BCBS plans.
How does this hurt Michigan consumers? Both competition and choice are more limited than they otherwise would be-which sends prices higher-in large part because of BCBSM's dominance in the state, which is derived largely from its P.A. 350 legal privilege. Because of its status as a de facto state agency, for example, BCBSM controls almost 100 percent of the health insurance market for public schools, either directly or indirectly through the Michigan Education Special Services Association (MESSA, a subsidiary of the state's largest school employee labor union), or directly through the market.
What should BCBS of Michigan do?
It is highly unlikely that BCBSM will act on its own to step out into a more competitive, investor-owned business model. What will more than likely have to happen is for the state legislature to repeal Public Act 350 and force Blue Cross Blue Shield of Michigan to convert to investor-owned status. Both BCBSM and Michigan's biggest labor unions will strenuously oppose such a move, since both profit from the current setup. The Rolls-Royce coverage provided by BSBSM to autoworkers, for instance, is a generously negotiated package that constitutes a non-cash payment to autoworkers. The above-market-level cost of these is foisted on consumers as higher prices and automobile stockholders as more price per share.
This sort of protected arrangement insulates BCBSM from competition, and officials at the top of such organizations enjoy a privileged status that is difficult to resist. Such leaders are hard to convince, even when the benefit to the company of throwing off government controls might outweigh the advantages of regulatory protection. The compensation and employment tenure of the current executive staff are protected by retaining the status quo.
On the other hand, if the legislature were to strip BCBSM of its government protection, BCBSM could have the same advantages that other converted plans have: access to capital, more flexibility, the ability to strategically partner with other plans. By partnering with other plans BCBSM could increase its economies of scale and compete in new markets.
Meanwhile, the market is developing in ways that may become too competitive for BCBS plans to be economically viable as non-profits. The Michigan Insurance Commissioner's 2001 audit of BCBSM, recently completed, warns of substantial cash flow problems over the next several years, and premium increases as the only possible remedy-a remedy that is also politically non-viable. While the audit confirms that BCBSM is doing fine for the moment, it also predicts an uncertain future.
It's high time for state leaders and Blue Cross and Blue Shield of Michigan to consider the private alternatives to a state-controlled virtual monopoly. They can begin now to move to an investor-owned organizational model, or they can wait until the Legislature does it for them. Either way, the result will probably mean lower premiums for all of Michigan's citizens.
Frank Webster, a health-care advisor to the Mackinac Center for Public Policy, is a health-care cost management consultant. He is a former Blue Cross and Blue Shield Executive Vice President in Columbus, Ohio, and a former Executive Director of Michigan Education Special Services Association (the largest BCBSM experience-rated group).