Philadelphia Reflections

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Blue Shield and Blue Cross Whats at stake? IV Paying for near charity

Blue Shield and Blue Cross What’s at stake?

IV Paying for near charity

George Ross Fisher, M.D.

As we have seen in previous articles of this series, the blue organizations have come to serve an elaborate social purpose, imaginable as a huge “mobile”, with many features dangling in the balance. A balance of service locations within and without the hospitals depends on the segregation of funds within Blue Cross as distinguished from Blue Shield. The funding of persons of marginal income is part of a second, more regional balance between inner cities and their suburbs, held in a strange balance with the funding of tertiary high-tech care for the whole community. The cost of training medical personnel for an entire region, for another example, is concentrated in certain precincts, and the Blue system facilitated such specialization while diffusing payment for it throughout the region served. The financing of huge community health enterprises was accomplished by permitting hospital discounts to substitute for insurance reserves. And nowadays, all this benevolent complexity threatens to come unglued, because a trillion dollars a year creates its own dynamic, both among those who resist paying it, and those who want to own a piece of it.

Well, Eskimos say the wolf keeps a caribou herd strong, but the saying retains truth only until the herd is wiped out. Whether the name and logo survive or not, the old Blue system is imperiled. The problem for its defenders is that so many of its valuable features were unrequested, hence unauthorized by the courts and legislature. No one compelled the Blue system to support medical research, teaching, and rational distribution of the community’s capital resources. No one authorized a monopoly, no one either is entirely certain what transitional steps, or possibly regulatory protections, are necessary to avoid a medical train wreck in the process of changing financing arrangements. Since the volunteer nonprofit medical system was allowed to proceed on its own best judgment for fifty years, many of its subtleties and even shining glories are unappreciated by the public. Words of appreciation aren’t most important right now. Right now, the thing the courts must devise is a way to protect the original and enduring intent, without getting frozen in the Depression-focused wording of the 1939 Legislature. The courts can surely add a few things to the stated authorizations by recognizing charitable intent within common law. Events are probably moving too rapidly to expect the Legislature to reformulate the system. The Legislature could be pressed to outlaw quickly a few notorious assaults on common sense, but for the most part, our adversarial political system will permit few tax-exempt entities except churches to prevail easily over the taxpaying kind.

This analysis sadly seems to suggest that research and training will probably have to find another source of funding, along with more challengeable assumptions of public power like capital resource allocation, community health planning, and the advancement of entry-level employee welfare. What does remain standing is rock solid legislative mandate for the Blues to assist persons of limited means to obtain health insurance, assisted by the informal right of health providers to tax their other patients. Other patients are somewhat surcharged in order for the healthcare providers to be able to offer their own discounted services in lieu of cash reserves for the distribution agency. Implicit in that system is the providers’ right to enough power within the organization to assure that discounts are not abused at provider expense, or extended beyond the means of the system to sustain itself. History is clear that prudent internal safeguard is all that ever keep any bargain from unraveling.

Although we will later explore more commonly accepted explanations of Blue Cross/Shield competitive losses, it would be my present thesis that present distresses are mainly caused by failure of provider power to prevent the extension of discounts to those who were not meant to receive them, as well as provider inability to restrain the marketing of discounts, however deserved, to a population larger the system could support. That is, Blue Shield gave away the doctors’ money to people who would never have got it from the doctors in person. And Blue Cross encourages hospitals to reply on its subsidy rather than preserve their meaningful sources of outside charitable support. What the system ultimately lacked was the will to put Santa Claus on a budget, because ultimately providers lost too much organizational control over their own charity.

There may have been a still larger organizational flaw, wholly unanticipated in Depression-born desperation to keep the little charitable experiment afloat. The system was not well designed to react to improving mixtures of income distribution in the population served. During the Depression the mindset was, things are bad, probably only going to get worse. To contemplate 80% coverage of millions of prosperous people, with several billion dollars in reserve, was then only the daydream of a madman. Just as everyone now wishes in retrospect to have had the vision to invest heavily in the stock market in 1939, a student of health financing would now wish the founders of the Blue had then foreseen the need to create a paramount organizational goal of dynamic balance between healthcare provider, individual subscriber, management, and governmental power within its system of governance.

Instead, two groups relentlessly drove the Blues toward a reckless extension of provider concessions; the forces of government, and the forces of commercial business. The government extended a tax advantage of about two percent to the Blues and expected the Blues to lighten the state's own charitable obligations in return. Two percent will buy you two percent, but it won't buy you ten. The restlessness of state government with charitable health care was once dramatized by Benjamin Franklin's famous struggles with the legislature; elected representatives of the taxpayers have demonstrated continuous sulkiness before and since that time. Its own underfunded Medicaid program places a poorly defined border between the state and the nonprofit provider charities. The pressure to shift responsibilities in both directions is continuous. There has never been a time when the Blues system would have been able to sustain itself if the entire Medicaid population had been dropped on it. There has been continuous border warfare, to see what the other system might be able to absorb without actually collapsing.

Extending as much coverage as possible to people of limited means has always been the charge of the Blues. To take over more people of marginal income, the Blues looked beyond the provider community for support and found some in the business community. If more people of ample income became Blues subscribers, it seemed there would be more surplus to spend on the poor. The benefactors were said to be "working men and women" (unions), and "socially responsible employers" (business with tax-sheltered wage arrangements). For these people, unfortunately, the main attraction of Blues was provider discounts.

Now, if you think about it, a system really isn't sustainable which gives everyone a discount. It what grows to be a majority of prosperous subscribers is subsidized, you can expect the providers eventually will rebel, even drop out of the arrangement. It continued for fifty years, however. Somebody else had to be contributing heavily to keep it alive.

Who was paying, grossly overpaying, was the young healthy subscriber. The community-rated premium, one same premium for everybody, is a major bargain for people who are sick, a waste of money for people in perfect health. The extremes are blunted within age groups, older persons experiencing a high risk of disease expense, and young persons a low one. The same premium for everyone? Hard to justify, but little attention was drawn to it, smudged as it was by passing through a tunnel of level contributions for employee health benefits. Employee benefits are a splendid tax shelter, as everyone knows.

The first step in undermining this unbalanced system was experience-rating, a calculation of the premium for an employer group supposedly based on last year's claim experience. What experience rating mostly meant as an approximation of the average age of the employees working for that company. Experience rating was the invention of commercial insurers, struggling for a way to compete with the Blue Cross hospital discount. When the Blues eventually responded by offering experience-rated contracts themselves, one foot was placed on the slippery slope of their own destruction. If you give to the main source of their overpayments to you, eventually you have to reduce your charity work or go bankrupt.

Other steps down the slope followed, like the exploitation of the ERISA permission to a business to self-insure. ERISA was a federal law designed to make it possible for large corporations to have uniform interstate benefits and insurance administration. It more or less inadvertently permitted large corporations to escape subsidizing other subscribers to community-wide insurance continuing to get provider discounts in return for offering to use the Blues for administrative services only. In addition to the ERISA problem, even more aggressive competition for the Blues appeared on the scene in the form of HMOs, which developed into a high art the ability to select for themselves employers or groups with a low probable incidence of health cost, leaving the sicker and older ones for the Blues to pay for with their community-rated, one price for all, system.

Simultaneously two nails were thus driven into the Blue coffin. Young healthy subsidizers were selectively wooded away by competitors, while fresh recruits of selectively high-cost subscribers moved in the opposite direction to seek out the provider discounts. Competitive insurance companies finally recognized that the illness cost of young people was so low that, even without discounts from hospitals and physicians, premiums could profitably be lowered far below the one-price-for-all community rated Blue premium. That is to say, the subsidy provided by young people was even larger than the subsidy from healthcare providers, and if you had one, you could do without the other. When the subscriber base of competitors eventually grew large enough to command volume discounts from hospitals, their premiums could be lowered still further and their profits could rise still higher. It was not even very difficult to identify low-cost groups; they were people well enough to go to work every day. By the simple expedient of limiting their marketing to employ groups, competitors could avoid people too sick to work. Individual ("direct-pay") subscribers, the people for whom the Blues were originally founded, began to seem their Achilles heel. No one forced the HMOs and commercial carriers to sell individual non-group policies, although in retrospect it is clear that both the Insurance Commissioner and the Legislature were wrong not to make an issue of it. For aspirant competitors to the Blues, the formula for success was simple: sell only to employer groups and preferably to employers with young employees.

Not only did the Blues drive away healthy people with high premiums, they positively attracted sick ones with discounts accorded them by participating doctors and hospitals. By now, the Blues were really in a fix. Having lost a major source of subsidy from young people, they proceeded to antagonize the other one, the healthcare providers. HMO's and "preferred" provider organizations get discounts from providers, all right, but they do it by brute force. The whole nature of a contract freely agreed to by both sides was called into question by the failure of one side to devise incentives which would placate the other. It's an unlikely way for a charity to solicit supporters.

Although the discount system was originally devised to keep the company solvent while helping the poor, it had gradually evolved into a system of loss-leaders for the attraction of business from prosperous sectors of society. Egregious abuse of the discount occurred whenever corporate employers became self-insured; discounts intended by providers became self-insured; discounts intended by providers for charity were used to attract business for ASO, administrative services only, which by definition permit no internal transfers from the rich to the poor. Such an extension could only be justified within the broader range of poorer people. That might have been somewhat true at one time, but in recent years the participants in the circle eventually worked things around to the point where extending discounts to non-poor people accelerated the downward spiral caused by adverse deselection of young working subscribers, because increasing pressure on healthcare providers to expand the scope of their subsidy to non-poor people was ultimately counterproductive.

Problems of this general nature beset Blue plans across the country, although nature and degree varied with the locality. As the subscriber base declined, the idea of merging Blue plans was put forward. Merging Blue Shield (doctor) plans with Blue Cross (hospital) plans seemed to be one way to overcome the resistance of beleaguered hospitals to funds moving from the in-patient to the out-patient area. It is hard to find any evidence, however, that this sort of merger actually improved the financial health of plans who tried it. Mergers of neighboring Blue plans probably offered only minor cost efficiencies in top management, and possibly computer systems.

One has to conclude that the gigantic system of cross-subsidies within the Blue plans was going to have to retreat a little, or maybe a lot. There were going to be some losers, not just everybody surviving by helping each other. Hospitals clearly had allowed their costs to rise and their capacity to over-expand. Medical schools had produced a surplus of graduates by creating a surplus of training capacity. The center of a large city was an expensive place to run a hospital, compared with other locations. No amount of nostalgia can overcome the hard-cold assessment that certain parts of the medical industry are destined for downsizing. With survival becoming a personal issue for many who never before gave it a thought, many must be asking whether they can any longer afford to be charitable.

Throughout the voluntary medical system, it is possible to see ancient charitable institutions cutting the charitable function loose from the businesses they have been running. The mechanism is called corporate restructuring, in which the tax-exempt parent creates a tax-paying subsidiary and then sells it. It is a close question whether the charity is getting out of a failing business, or whether the business is getting rid of a charitable drag. Sometimes one, perhaps, and sometimes the other.

It is not clear yet whether Pennsylvania Blue Shield and Western Pennsylvania Blue Cross, after merging expect to convert to for-profit status, create further for-profit subsidiaries, break up into several pieces which will merge in some way with the other Blue Cross plans in the state, merge with some large hospital chain, purchase physicians' practices to become a vertically integrated delivery system, or go in serval other directions. Not clear. But it surely cannot be imagined that a statewide physician payment system will indefinitely persist in close combination with only one-third of the hospital payment systems in the same state. The conviction seems very safe that the present merger is only a transitional step. It is uncomfortable, and perhaps legally intolerable, for this hybrid organization to be permitted to play its cards, one card at a time. There is too much risk that the health system will confront a series of steps toward a goal it would never have tolerated, each step based on a doomsday threat of industry-wide destruction unless the next step is allowed.

Before coming to a conclusion, a word must be said about the attractiveness of converting the tax-exempt Blues to for-profit status in one way or another. The ability to raise capital in the markets is not a convincing argument, because it first requires the divestiture of billions of dollars of capital to avoid the accusation of private inurement. Nor is it completely persuasive to trust a totally privatized system for what is, at its root, a transitional layer between public welfare and private service. The nonprofit corporation has a legitimate place.

However, it is foolish to ignore the financial pressures on its managers. Some very good and highly honorable friends of mine are executives in these organizations. Nevertheless, they are performing jobs and bearing responsibilities which are quite comparable to those of people in the private sector making twenty times their income. Just one percent of the net worth of one particularly famous HMO counterpart would make any one of them a multimillionaire.

Working for a Blue plan has two great liabilities. The first is that if the income of the president rises above that of the board of directors, the job the board, probably the chair.

The second problem is best exemplified by the way the New York Times exposed and derided the chauffeured limousine and the $500,000 income of the president of Empire Blue Cross. No one on the reportorial staff of that newspaper seems to have noticed that their own executive editor was provided with an equally elegant chauffeured limousine, and was paid a substantially higher income. To be executive of a charity, you are expected to take the subway, while to perform the same job for stockholders, you are entitled to anything you can take them for. Sorry, that's just the way it is.

To this author, certain desirable principles of Blues restructuring seem to emerge.

1.The first is that the historical charitable mission of the Blues is not safe if entrusted to a system of governance dominated by customers who mainly want professional discounts for themselves. The charity and its discount system should be returned to the control of those provide the discounts.

2. Linked to the charitable function, which can grow as large or as small as the healthcare providers wish to be charitable, should be the non-group, direct-pay, individual subscriber group. This group is seen as highly undesirable business y insurers, and only the Blues provide individual coverage to any extent at present.

3. Because direct-pay individual subscribers have been relegated to insurance which is 30% more expansive than the employer-selected kind, by virtue of drastically reduced tax preference, direct-pay is always the second choice. Therefore, the individual subscriber group contains a disproportionately large number of sick people, who seem highly attractive to providers on a fee-for-service basis, but highly undesirable to capitated systems. Fee-for-service only is the additional advantage of presenting a sharp contrast to indigent persons herded into Medicaid HMOs, considering whether to migrate up the social scale to the status of low income. The loss of Medicaid coverage which would face them is the present greatest obstacle to true reform of welfare, in the minds of its victims. Unless individual subscriber policies of the Blues (or any other insurer the Legislature can force to issue them) become more attractive and sustainable, the Commonwealth is going to have a Welfare problem it cannot solve.

4. Give over to this proposed nonprofit system the administrative intermediary role for Medicare. Although this large government contract looks like a great plum, in fact, it is barely self-sustaining. Prudential voluntarily withdrew from the intermediary role in New Jersey, and everyone who has such a contract privately grumbles that the Federal government seems committed to assuring that no contractor makes a profit. An insurer with a dominant charitable mission would be in a much better bargaining position (confronting a government which ultimately cannot do without the service) because the government would know its counterparty has no hidden resources.

5.Stripping out these functions (subsidized plan, individual policies, and Medicare intermediary contracts) would create an entity clearly entitled to tax-exempted status. The problem is to find a way to remain solvent. For this purpose, two proposals are made.

A. The first is that the front-end deductible is raised appreciably. If an individual cannot afford to pay for vaccinations and routine checkups directly, that individual also cannot afford to pay for them through an insurance policy with its added administrative costs. The higher you raise the deductible, the cheaper the premium becomes. The optimum deductible should approximate that level of costs which are almost always experienced if you are admitted to the hospital but seldom experienced otherwise. About $2500 per year, at present prices, and $4000 for a family.

B. The second approach to solvency would be to try to attract back the young working group, those much-abused subsidizers of everyone else's costs. It is poor public policy to reduce health insurance costs in order to increase expendable income. Rather, the same premium cost should be applied to young people s to their parents, while the extra premium is placed in permanent health insurance. Portability between jobs requires individual ownership, not employer-owned groups. Permanent coverage requires individual ownership, too because very few people can be certain of staying with a single lifetime employer. The permanently funded reserves would generate internal investment income, revenue the present one-year term insurance could never produce. Fewer uninsured people going between jobs would reduce the need for charity coverage. Seeing a way to get your money back should increase the attractiveness of health insurance to young healthy people. To all of this might be added a Medical Savings Account, if Senator Edward M. Kennedy (D, MA) permits it to shake off the shackles he attached in the 1996 Congressional session.

Permanent insurance has another attraction. It potentially has only one marketing and sales cost for life. That cost reduction would go a long way in making it competitive with employer-selected plans since although the employer group buys in bulk, it buys every year.

Well, there you have half of the proposal for a struggling idealistic fee-for-service, individually owned, high-deductible, permanently insured product, lodged in s collection of loser departments of the present Blue system, given back to the doctors and the charitable shells of neighborhood hospitals to run. It is very difficult to see why Blue management, organized labor, or self-insured employer groups would object to being rid of cost centers for which they have historically display little sympathy.

Free, at last, would be the administrative services for large self-insured employers who actually insure through the Blues. The fee to set their own rules and premiums, free to merge with profit-making entities. Paying their fair share of taxes, of course, and possibly someday being forced to contribute to research, training, and charity if society should decide that all such entities should do so. And only losing one thing they presently enjoy but are certain to lose soon anyway. They lose discounts from hospitals and doctors.

Let’s say it explicitly. To accomplish the foregoing goals, and to live within the described principles of accord, the Blues corporations should be splits into two corporations, one nonprofit, the other a tax-paying subsidiary. The nonprofit parent should provide financing for healthcare for low-income (but not completely indigent) persons, the tax-paying subsidiary should provide financing for higher income persons, and the two should not cross the line between them. The for-profit corporation should subsidize the charitable parent in the only way it can, by paying dividends out of profits to its owner.

In the next and concluding article on the confusing subject of the nonprofit Blue insurers, we examine the seemingly abstruse legal issue which is presently before the courts. Blue Cross and Blue Shield are incorporated under two differing enabling acts. To merge them now would conflict with the original legislature might reconsider its intent, but until it does so, the courts cannot permit the two corporations to flout it.

Originally published: Tuesday, August 07, 2018; most-recently modified: Wednesday, May 15, 2019