Blue Cross to Cut Costs 20%

Blue Cross to cut costs 20%

Its CEO sees 'a smaller company' in effort to improve the bottom line, limit premium hikes and adapt to reforms.

By Alan M. Wolf, Staff Writer, Charlotte Observer, July 14, 2010

Blue Cross and Blue Shield of North Carolina plans to slash its administrative costs by 20 percent by 2014, as the state's largest medical insurer adapts to health reform and the economic slump.

The move means one of this region's oldest, largest and most stable companies will shrink. It's another blow to the Triangle's economy, which has been showing signs of recovery, with expansions planned at IBM and other major employers.

The strategy is aimed partly at improving financial results, but also at keeping premiums down. Blue Cross raised rates for individual members an average of 12 percent this year, but hit some consumers with much higher increases.

Blue Cross expects to carve about $200 million from its annual $1 billion budget by eliminating open positions, cutting jobs through attrition and early retirements, streamlining operations and taking other steps to reduce expenses, said CEO J. Bradley "Brad" Wilson. He warned workers in a memorandum of "tough challenges" ahead.

The nonprofit also plans to review its real-estate portfolio, which includes more than 1 million square feet of Blue Cross offices, mostly in Durham and Chapel Hill. That could lead Blue Cross to sell properties or end leases, further depressing an already weak real-estate market.

"Over time, Blue Cross will be a smaller company," Wilson said in an interview. "It's all about change. We're focused on how we need to change to meet the needs of North Carolina."

He would not rule out layoffs among its 4,400 or so employees, most of whom work in the Triangle, but said he hopes Blue Cross can avoid them. The company first will use measures such as an early retirement offer last fall that 145 workers accepted.

Still, "no one can guarantee full, permanent employment in perpetuity," Wilson added. The comments echo similar statements Wilson made as he prepared to take the insurer's CEO spot on Feb. 1.

As it tightens its belt, Blue Cross also will work with hospitals and other providers to reduce surging medical costs. That will include some "tough negotiations" with hospital systems and others across the state, Wilson noted.

In some cases, it also will mean more collaboration. Blue Cross plans to expand a pilot project that put its customer-service representatives on site at WakeMed, Raleigh's largest hospital, to help speed members' claims and resolve problems.

Wilson said that every employer he talks to is trying to cope with rising medical expenses and asks how Blue Cross can help identify the providers "that deliver the best care at the lowest cost." There's no question health care providers and insurers must work together to find new ways to reduce costs, said Bill Roper, CEO of the UNC Health Care System. There are several forces driving that need, including the health care reform law, which President Barack Obama signed into law in March, the economy and looming cuts to Medicare and Medicaid.

"It's not just about 'let's drive harder bargains' where we're trying to get more money and they're trying to pay us less," Roper added. "It's time for us to sit down and work together, instead of just beating each other up.

"How to save money and how to share in that savings, that's something we're interested in discussing," he said.

Reform's effects felt

The health reform law was intended in part to streamline the health industry and keep medical costs down. That's leading insurers to look at ways to reduce overhead, said Michael Walden, an economist at N.C. State.

Blue Cross spends about 13 cents of each premium dollar on administrative costs such as taxes, utilities, salaries and more. After passing on some costs related to managing health plans for other insurers, the company's "hard administrative costs" are 7 percent to 8 percent, which is "reasonably efficient" by industry standards, Wilson said.

Blue Cross lobbied against some aspects of the federal health reform bill, such as a government-run insurance plan, a measure that was dropped by lawmakers.

Blue Cross' cost-cutting plan will effectively limit hiring at the company. The insurer recently began a test to outsource some information-technology work, and officials will look at other, similar opportunities, Wilson said.

But the health care industry, which historically has been an economic foundation of the Triangle, will continue to expand with the growing and aging population, Walden said. That will minimize the effect of cost-cutting by insurers.

"It's not a static industry," he added. "It's still very labor intensive. There may be fewer jobs in insurers' offices, but employment will shift to hospitals, community clinics and other providers."

Blue Cross covers about 3.7 million people in North Carolina. The company expects its main health business will be flat, or increase about 1 percent a year, hurt by the recession and reform.

To offset that projected slowdown, Blue Cross also will look to boost revenue by adding new lines of business and introducing new types of health plans aimed at cost-conscious employers.

Officials are reviewing opportunities to expand into life insurance, workers' compensation coverage and payroll services, Wilson said. His goal is to have up to 25 percent of Blue Cross' operating income from non-health businesses by 2014.

Wants reforms changed

Wilson wants to see further changes to the current reform law, such as a stronger penalty if consumers or employers don't pay for health coverage. He expects lawmakers to tweak the law as implementation reveals problems with some new rules.

2 But the company recognizes it must evolve with a new landscape, Wilson said. Health care reform means that about 2 million additional people in North Carolina will be insured by 2014, a positive outcome for the state, he added. But that will put more strain on a shaky system.

Unless the industry is revamped and medical inflation tamed, "it brings you to a doomsday scenario down the road."