'Economics 101:' Overhaul bill will hike insurance premiums for healthy, BlueCross CEO says
BlueCross BlueShield of North Carolina reported 2009 profits at $107 million. And that figure was disappointing. The company had bigger goals. State regulators had already given BlueCross BlueShield permission to hike health premiums in 2010 by an average of 12 percent. But many customers are now dealing with hikes of more than 50 percent. It's one of many issues that WFAE's Julie Rose addressed with new company President and CEO Brad Wilson. Her interview with Wilson begins with this question: How do you justify increases in premiums? Wilson : It is a very good question and one that I do get asked on a regular basis. So there are about three components that we need to understand. First of all, Blue Cross is a not for profit, but it is important that we have a bottom line profit because with that profit, we reinvest that into the company to improve our products and services to our customers. Approximately 87 cents of every premium dollar we take in goes out to pay a provider for a service that they have rendered. So the margin there of 13 cents is used to A) create that profit margin for us. Secondly, to pay our $138 million in taxes that we paid last year at the state and federal level. And then the remainder is what we use to pay 'our overhead'.And it's very, very important that we all understand and remember that the primary driver around premium increases are medical cost increases. Rose: So you're saying that my rates are going up because doctors are charging more for what they're doing? Wilson : Correct. Rose: Because there are doctors who will say 'We can only charge what the insurance companies will allow us to charge in the rates that we negotiate in these contracts that our doctors groups and our hospitals negotiate with Blue Cross Blue Shield. Wilson: Well indeedm if you negotiate a contract and agree on a price for a service then that's the price. But they key point is that that's a negotiation. One of the challenges that our provider partners face is they have three revenue streams: Medicaid, Medicare, and then private pay, which includes both insurers and people who do not have insurance that pay cash for the services. And what I hear from our provider partners is that the Medicaid reimbursement falls far short from paying the cost of the care that they deliver to that very important population. Likewise, in many or most circumstances, the Medicare payment falls short. So they have to make up the loss for the two prior revenue streams in the private sector. Likewise the cost of things they have to purchase continues to increase, and as that goes up, that is reflected in the premiums. Rose: BlueCross BlueShield insures the majority of North Carolinians . In some cases practically a monopoly status that you have. You're by far the largest. So, does that mean that Blue Cross also bears some responsibility for the fact that we have more than a million and a half people uninsured right now in North Carolina ? Wilson: I think we all North Carolinians bear responsibility for that. It's not a simple solution, and some people choose to be uninsured. So hypothetically is it my fault or your fault or Blue Cross' fault that they choose not to purchase health insurance? Of course not. If the product is offered they cannot afford, well whose fault might that be? Rose: Well often they blame you. Wilson : Well yes, and I understand that. But what I want to focus on here is I don't think the conversation post-healthcare reform is going to be advances by parsing out and trying to assess blame for the current circumstance. What we're about-and what I'm about as the new leader of BlueCross-is about making healthcare reform work here in North Carolina . The law has passed, the debate is over. Rose: So you have published about a month ago an Op-Ed piece that ran in a number of newspapers. And in here, you mention that people are surprised to hear that contrary to how to blue cross has been portrayed, we have always favored healthcare reform. This includes nearly all key components of President Obama's reform initiative. On the other hand, I have seen and heard Bob Gretchen speak at the end of last year-your predecessor-in opposition to the senate bill. And BlueCross did also do mailings in opposition to portions of the health care reform bill, and had some automated phone calls that actually resulted in some fines from the attorney general. So, how do you say that you have always been in support of health care reform in light of those actions? Wilson: Because it's accurate. Simply because we opposed a component of a 2,700 page bill, does not mean we oppose healthcare reform. It means that we opposed the public option. We have always supported the mandate. In fact we support a more robust mandate than what was ultimately enacted. Rose: You have also said that the health care reform legislation will likely cause healthy people to pay more for their insurance. Will you explain that to me? Wilson : The age ban mandate that's part of the health care reform legislation says that the most expensive premium cannot be more than three times the cheapest premium. That's going to close the gap between the highest premium and the lowest premium. And in order for that to sustain itself economically- it is Economics 101-If you're going to bring down the top premium, the lower premium has to go up. I would urge you to look at the state of New York , who's had that in place since 2001. There was a recent New York Times article talking about the market experience there, now that it is several years old, and that is exactly what took place in New York. Rose: What was your objection to the public option? Wilson: You can't compete with the government. Rose: But do you even face that much competition right now in this market? Wilson: We have 12 ardent competitors in North Carolina that we go head to head with every day to compete for business. And people can choose BlueCross BlueShield of North Carolina , or they can choose any one of those other competitions. Now, as it relates to the government, if the government gets into the business of selling health insurance policies, I don't understand how any business can compete with that. First of all they don't pay any taxes. Second of all, the government doesn't balance its books at the end of the year. It can run a deficit. And that just introduces an element of unfair competition that no business, whether you're in the health insurance business or any other business, should have to compete with that. And so that's why we opposed the public option. We would like to think at BlueCross that the reason we have been successful goes back to a value proposition: that we are offering quality products and services to people that they choose to buy or their employer chooses to buy and offer to them. And as a result of that, they stay with us longer, or if they leave us they come back to us more frequently. ose: And the nature of insurance is that size is an advantage in your business because it means larger pools, and larger pools mean spreading the risk, which means ideally lower premiums for everyone. Wilson: Correct. That's why the mandate is so important under health care reform. Rose: I think a lot of people would look at the fact that BlueCross BlueShield is so large that it verges on being a monopoly in North Carolina and they would say that there is no way we can be sure that we're getting the best rate, that we're paying the lowest premium, because BlueCross BlueShield owns the market. And in fact, what I'm hearing you say is the opposite is true, is because you're so large we're more likely to get a better deal on our insurance. Wilson: That's correct. And let me be clear: We are not a monopoly. I just simply respectfully disagree with that characterization. We're not. We happen to be the largest. That does not mean we enjoy a monopolistic position either in the legal sense of the term or the conceptual sense of the term. We have 12 competitors that we go head to head with every day across this state offering our products in competition with them. And people fortunately - and we hope that they will continue to select Blue Cross Blue Shield of North Carolina into the future more often than not because of the value we bring to their life. Rose: Why does BlueCross and BlueShield need to pay its executives what it does? Bob Gretchen last year, your predecessor, made a little over $4 million in salary and bonuses. Why: Is that appropriate for a health insurance company at a time like we're in right now when people are struggling to pay their premiums? Wilson : What our board does - they take a lot of time to use national standard, national benchmarks as to how they pay everyone, including the top executives. And the benchmark they use it that they hit it in the middle of the road. The goal is to recruit and retain the best talent you can to run a multi-billion dollar business like BlueCross BlueShield of North Carolina. Rose: What was Mr. Gretchen's retirement package when he left? Wilson : I have no idea Rose: You have no idea? Wilson: No. Rose: You're the CEO of the company. Wilson: I was not the CEO of the company relative to his retirement package. I mean you'd have to ask him that question. Rose: Is that something that Blue Cross and Blue Shield is interested in sharing, or something that you would divulge? Wilson: No. Rose: OK. Wilson : I mean I don't know what it is. Rose: In the system that we've had previously it's not been in your best interest to see premiums go up because people would just opt not to have it. But before long, we will have a mandate in this country where people will be required to have health insurance. And then, what will the check and balance be to keep premiums from going up, because it will be in your best interest as an insurer to say 'well everyone has to have it, so let's charge them whatever we want?' Wilson: Well we can't do that. The premiums that we charge are submitted months in advance to the North Carolina Department of Insurance. Every premium that we charge is approved by the North Carolina Department of Insurance. They look behind the analysis and the bases that we provide them to show why we're charging what we're charging for various products. And only with their permission do we move forward to introduce that product at that price point in the marketplace. Secondly, the thing that drives that price point is the cost of care: what is being paid to providers to provide the services that our customers and their patients need, demand, and want. If you want to make a difference on the premium, you have to focus on how to save money in that construct.