Blues Reform Pleases No One

May 13, 2002
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Now the real debate begins.

With a legislative proposal introduced in Lansing to alter the health insurance market and the way the state’s largest insurer, Blue Cross Blue Shield of Michigan, does business, lawmakers now may have to pick which is more important.

Blue Cross Blue Shield of Michigan, in a statement issued shortly after the legislation was introduced Thursday, said it has “serious concerns” about the reform package because it “appears to jeopardize the Blues’ historic mission” as the insurer of last resort in Michigan by offering a route for the Blues to become a private, for-profit insurer.

The Blues also contends that market reforms — and not internal changes — are what’s needed most to stabilize escalating rates that are squeezing many small businesses. Tying market reforms and Blue reforms together will “complicate the important objective of providing small business insurance rate stability,” said Rich Cole, senior vice president of communication for Blue Cross Blue Shield of Michigan.

“This is the central issue and must remain the central issue if small business in Michigan is going to be provided any relief from the dramatic rise in health care costs,” Cole said.

The legislative proposal, introduced in the state House last week by Reps. Tom George, R-Kalamazoo, and Andrew Raczkowski, R-Farmington Hills, would reduce the size of the Blues’ 35-member board of directors, cut the number of slots set aside for representation by certain interest groups, and completely eliminate seats for health care providers such as hospitals and physicians.

The package would do away with the current law that governs the insurer but would maintain Blue Cross Blue Shield of Michigan’s position as a nonprofit company and its status as the insurer of last resort that must accept all applicants, regardless of age or health status. The bills also would institute regulatory reforms and reform the small-group health insurance market that has been hit hard by double-digit health increase over the last four years.

“We have presented a comprehensive reform proposal that is designed to protect Michigan patients and pocketbooks,” George said. “Enacting the proposals will keep Blue Cross Blue Shield of Michigan solvent and our citizens insured.”

Blue Cross Blue Shield of Michigan insures more than half the state’s population and 71 percent of small businesses.

Among the market reforms proposed is allowing the Blues to set rates based on age, in the process doing away with a community rating system that set premiums based on where a subscriber lives and putting the Blues on an even playing field with commercial carriers, and requiring 75 percent of eligible employees to participate in order for a company to receive coverage.

Barry Cargill, vice president for government relations at the Small Business Association of Michigan, calls the legislative package “something less than perfect.” While the association likes the market reforms proposed, Cargill worries they’ll get lost in the political wrangling that’s likely to occur over internal reform for the Blues.

“The reorganization of the Blues isn’t important,” he said. “The politics of the reorganization are going to get in the way of market reforms.”

If that happens, there is the possibility that lawmakers could always take up the issues separately.

But Insurance Commissioner Frank Fitzgerald contends that all of the reforms — market, regulatory and internal at the Blues — are needed to make a difference. The Legislature would come up short if it took one issue over the other, Fitzgerald said.

“It’s very important to take a look at the forest along with the trees,” Fitzgerald said. “They really should not come up separately. It would still leave Blue Cross at a crossroads and probably leave Blue Cross not operating as effectively as it needs to.”

SBAM, meanwhile, likes the market reforms proposed because they would create common rules for all insurance carriers on how health insurance rates are set. That, in turn, would lure new competitors into the marketplace and provide small businesses in Michigan more options for health insurance, Cargill said.

“Companies in other states will come to Michigan because the rules are similar. They’ll have a state that has stable rules and they’ll know what they’re dealing with,” Cargill said.

The Blues has pushed for such reforms for three years, saying commercial insurers were siphoning away younger, healthier employee groups and leaving it older workers that are costlier to insure.

The push for reform picked up steam last fall when the state Office of Financial and Insurance Services issued its triennial audit of the Blues that identified “disturbing trends” that, if left unchecked, threatened its long-term viability.

The audit found that Blue Cross Blue Shield of Michigan lost more than $400 million from 1996 to 2000 in the small-group market that provides health insurance to 1.3 million employees at small businesses with a workforce of 100 or less. The small-group market represents more than a quarter of Blue Cross Blue Shield of Michigan’s business mix.

The Blues lost $20 million underwriting insurance for small business last year. That’s down from a $66 million loss incurred in the small-group market in 2000, although the decrease is largely attributable to the large premium increases that show no signs of easing anytime soon unless the status quo changes.

Gov. John Engler upped the ante in January when he used his annual State of the State address to call for reforms to preserve and reform the Blues, including streamlining the insurer’s board of directors.

Perhaps the most divisive aspects of the legislative package are provisions that establish a process for Blue Cross Blue Shield of Michigan to privatize, should directors ever decide to pursue that route.

Blue Cross Blue Shield of Michigan has repeatedly stated that it has no interest in going private, as Blues health plans in 20 other states have done in recent years. Nor does Engler or the insurance commissioner favor the idea, said Julie Smith, spokeswoman for the Office of Financial and Insurance Services.

The provisions proposed are designed to provide a mechanism for a smooth transition to privatization and protections for consumers should it ever occur, Smith said. The number of Blue Cross Blue Shield plans nationally has fallen from 134 in 1986 to 44 today.

“It would be quite silly for Michigan to stick its head in the sand and believe it could never happen here,” Smith said.           

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