Folding about 80,000 new people into a large insured population is a challenging business, especially when many of the 80,000 have lots of untreated health conditions and have never had health insurance.
On Jan. 1, 2014, the market for individual health insurance in Louisiana was changed forever. This was the day the Affordable Care Act took effect. The law took away our ability to use medical underwriting to determine eligibility for health insurance. That’s a fancy way of saying that after healthcare reform, we sold people health insurance without asking them a single medical question, without checking to see what medications they were on, and without changing our rates one dime based on their health conditions. This is the opposite of how health insurance had traditionally been handled.
The Affordable Care Act required us to make these changes if we wanted to sell insurance on www.healthcare.gov. Since our mission is “To improve the health and lives of ALL Louisianians,” we see it as vital that Blue Cross offers this type of coverage through the government website in every nook and cranny of Louisiana. And so we are. No matter which of the 64 parishes you live in, you can go to www.healthcare.gov and find Blue Cross plans in your parish. That’s perfectly aligned with our mission.
The real battle for us, and for me personally, has been to figure out ahead of time how much healthcare these 80,000 new customers are going to need BEFORE they need it. We do that so we can price their insurance at the right amount. Price it too high, and we have to issue rebates. Price it too low, and we lose money and start living on our emergency funds account, which, while strong, will last only so long. This is what happened to Blue Cross last year. Our regulators get very concerned once we start losing money, so we want to price carefully in the future.
I can now say, since I have the 2015 financial results right in front of me, that we’ve still got some work to do. In both 2014 and 2015, those 80,000 customers used a lot more healthcare than they paid for. A LOT more.
In fact, in 2015 the 80,000 used all the money they paid in premiums, plus the money paid in by many, many other people. The final result, because they required such a high level of medical attention, and our premium prices were so low, was that Blue Cross spent $83 million more than we received in premiums. As a result, the entire company (all 1.6 million members) lost millions.
To solidify my ongoing commitment to you, our members, to be as transparent as possible about what is happening to YOUR MONEY, let me tell you how we spent your money in 2015 versus 2014. Remember, it’s YOUR MONEY, paid through your premiums — not ours, not mine.
In 2015, our fully insured group and individual members (that’s roughly 650,000 people) trusted us with $3.14 billion (yes, that’s BILLION) dollars of their hard-earned money, by way of their premium payments. That was $220 million more than customers paid in premiums in 2014.
Where did that money go? The bulk of our premium dollars go to hospitals. Between 2013 and 2015, our hospital spending grew from $958 million to $1.29 billion, an increase of $332 million. And, it looks like our newly insured customers got a lot of care in hospitals – 41% of every premium dollar we collected went straight out into hospital payments in 2015. That’s up from 37% in 2014 and 34% in 2013.
What does this mean for you? When Blue Cross has to pay more for hospital care, it affects how much all of our customers pay in premiums – even if you have never been to the hospital yourself. Hospitals almost always make money when Blue Cross is paying the bills. Meanwhile, hospitals lose money treating the uninsured (always), Medicaid patients (always) and Medicare patients (occasionally). There are costs baked into the amount privately insured customers pay for health insurance to offset that.
Another 27% of your premium dollars in 2015 went to pay physicians and outpatient services. That’s up from 23% in 2014 and may reflect newly insured folks finally figuring out how to navigate the system and actually developing relationships with primary care doctors. But the spending is way up, so we’ve clearly got work to do.
In 2014 we saw record levels of expensive specialty drugs being dispensed. Costs and trends moderated a bit in 2015, and the drug spend fell from 24% to 19% of the total spend. When our newly insured customers came to us in 2014, many were affected with conditions requiring very expensive specialty drugs (conditions like hemophilia or Hepatitis C), and we were very aggressive in negotiating better pricing for these meds in 2015 as our customers’ volume of use of them increased. Such negotiations may be beginning to pay off, but the volume of use has not moderated.
Finally, our overhead was basically flat between 2014 and 2015, despite massive new costs being driven by higher federal taxes (the “Health Insurer Tax”) and the absence of promised payments for taking on the additional risk of new customers requiring ongoing medical attention. We also lowered commissions to the agents who sell new individual products, but held the line on renewal commissions now that most of the folks who could get into www.healthcare.gov are already in.
The net result of all this activity was a loss. We actually spent $60 million more than we received in premium payments, even after Blue Cross did significant cost cutting to trim our administrative and operating expenses. The $83 million we lost on our new individual customers was the main factor affecting our performance, but the good news is, as a member-owned, not-for-profit company, it’s not important that we MAKE money. Breaking even, or nearly so, is mostly fine with us.
Losing money is a bit more challenging. We have been blessed with strong earnings for many years, and have been very careful to invest these earnings wisely to create a reserve fund – like a “safety-net” fund – and we will draw upon those funds this year, because we need a safety net right now. Using this fund, we can easily cover 2015’s losses, and we will.
The other good news is that the money we drew down from this fund was put to very good use. It bought healthcare for people. It was pumped into the medical economy here in Louisiana at a time when economic activity is in a downturn. I sleep very comfortably at night, knowing that it was money very well spent. But, there is only so much money in our savings, and we can’t keep that up forever.
We have a fiduciary (think “monetary”) responsibility to all of our 1.6 million members to keep this company safe, solid and a strong ongoing concern. We have to protect the money people invest in us, that they trust us with, so they can be confident that a health crisis will not ruin them financially. When you need us, we must be there, ready to pay for your health needs. That’s why we exist, also.
So we’ll make some adjustments: end poorly-performing products, expand our most high-quality, cost- efficient networks, work with our network doctors and clinics to develop programs that center the care on YOU, the patient, make even more products that encourage healthy behavior available all over the state, and in general, encourage people to make smart choices about their healthcare. That’s how we plan to fix this revenue gap and return our company to an even keel. It’s already under way.
Remember, we are here to improve your health and your life. And we take that very seriously.
Great summary. I think that if Blue Cross and other insurers are serious about reducing health care costs and improving health outcomes, it will take a near complete overhaul of how health care services are paid for.
Today, there are few financial incentives for hospitals and physicians to keep people healthy, utilizing fewer services, and out of hospitals. When health care services are capitated, or pre-paid, for individuals and populations, health systems have proven to be very effective in curtailing unnecessary health care spending and engaging individuals in healthier behaviors. Our ability to measure the health of populations through better data and analytics can now ensure that individuals are not simply denied needed care in that form of payment.
If Blue Cross wants to continue its leadership role in the state, it will need to sell products that require individuals to align with health systems willing and able of taking on this form of “capitated” payment. This will need to be done through an identified primary care relationship and benefits which assist health systems with keeping individuals within their network of aligned providers and facilities.
It works. Patients will have to understand that the tradeoff for much more affordable insurance premiums and frankly, better health care outcomes, will be narrower choices of physicians and hospitals.
From where I sit, I think it is a necessary tradeoff, because consumers will not be able to afford the premium increases that will be necessary to overcome many $60 million losses.
Thanks again for your summary!
You are REALLY going to enjoy next week’s post! Stay tuned and thanks for the thoughtful comments.
Wonderful information. Great job of explaining an extremely complex system. Thank you.