2001 Financial Examination Blue Cross Blue Shield of Michigan

1
2001 Financial Examination Blue Cross Blue
Shield of Michigan

• Michigan Office of Financial and Insurance
  Services
• Commissioner Frank M. Fitzgerald
• September, 2001

2

• Michigan Office of Financial and Insurance
  Services (OFIS) role as regulator of Blue Cross
  Blue Shield of Michigan (BCBSM)
• The purpose and scope of the financial examination

3
The Importance of BCBSM

• Over 50 of Michigans population depends on
  BCBSM for coverage and service
• Michigan historically has relied on BCBSM for
  affordable and accessible health care coverage
• BCBSM is Michigans insurer of last resort

4
BCBSM Family Organizational Chart
Blue Cross Blue Shield of Michigan (BCBSM)
PPOM
The Accident Fund Company
Global Health Options 75 Ownership
Health First 50 Ownership
BCN Management Company
BCN of Michigan
Blue Care, Inc.
BCN Service Company
BCBSM Foundation
5
BCBSM Mix of Business
Line of Business 1993 1999 2001 Small Group
(ARS) 24.5 25.7 25.5 Large Group
(ERS) 16.0 15.9 17.0 Non Group 0.9
0.5 0.4 Group Conversion 1.0 0.5
0.5 Medigap 2.6 2.1 1.8 ASC
(self-funded) 53.8 54.2 54.8 All
Lines 100 100 100
6
BCBSM AT A CROSSROADS

• Safe and solvent today, BCBSM shows disturbing
  trends and symptoms. Ignoring these problems
  will threaten BCBSM within the next decade.

7
Why BCBSM is at a crossroads

• Losses in the small group market
• Information systems
• Cash strain
• Inadequate investment return
• Strain of Administrative Services Contract
  business
• Management and board structure

8
Losses in the Small Group Market

• Total BCBSM and Blue Care Network lives is
  1,372,664
• In the past 5 years, BCBSM has lost over 400
  million in this market line

• Small Group Average Monthly Premiums for Hospital
  Medical Coverage
• Individual 2 person Family
• Contract Contract Contract
• 178 375 419
• 198 414 464
• Change 11 10 11
• 234 490 549
• Change 18 18 18
• 248 522 584
• Change 6 7 6

Cumulative Change 39 39 39
9
Losses in the Small Group Market

• BCBSM responded by making the loss an asset by
  using Financial Accounting Standard (FAS) 71 a
  unique response
• Making the loss an asset (a receivable) means it
  must be recovered within a reasonable amount of
  time or it will become a loss to BCBSM
• Recovering the loss will add to future premium
  increases for small businesses caused by medical
  inflation

10
Information Systems

• BCBSM has outdated technology systems
• The OFIS financial examination showed serious
  shortcomings in the use of data by BCBSM
• Ratemaking data is unavailable or not readily
  usable
• The cost of upgrading the system is estimated at
  300 million or more

11
Cash Strain Blue Care Network (BCN)

• 54 million expense to merge 4 regional Blue HMOs
  into BCN
• 134.3 million BCN total loss from 1998 2000
• 18.2 million BCN loss to date this year
• Decline in BCN net worth from 190.7 in 1996 to
  60.2 million on 2001
• BCBSM is the parent that must support BCN

12
Cash Strain of Acquiring and Operating Affiliated
Companies

• BCBSM acquired Accident Fund Company and PPOM for
  cash 272.1 million and 182.6 million
  respectively
• Accident Fund Company provided no return for five
  years
• Investments in affiliates account for 40 of
  total invested assets, almost 20 of total
  assets, and almost 100 of stock holdings

13
BCBSM Investment Return
BCBSM INVESTED ASSETS Bonds 824,339,310 47 Com
mon Stocks 579,008,195 33 Real
Estate 211,583,618 12 Cash and Sort-Term
Investments (28,579,345) -2 Other Invested
Assets 185,532,084 10 Total Invested Assets
1,771,883,862 100 Total Assets
3,669,366,663 Invested Assets as
a of Total Assets 48.3
INVESTED RETURN
Net Investment Income / 105,562,188
Average Invested Assets 1,737,189,640 The
usual investment return includes
6.1 Results between 4.5 -10.0
Investment Return Excluding 56,271,523 Affiliated
Investments and 1,186,159,184 Associ
ated Dividend Income 4.7
Investment Return as a 56,271,523 Percentage
of Total Assets 3,669,366,663 Excludi
ng Affiliated Investments 1.8
14
Inadequate Investment Return

• Real estate is 12 of total BCBSM assets
• There is no return on these real estate assets
• 108 million in appreciated BCBSM real estate
  value is not being used in any manner

15
Inadequate Investment Return

• Common stock investment is 33 of invested assets
  almost all in affiliated companies returning
  little to BCBSM
• Overall return on investments as percentage of
  total assets (excluding affiliated investments)
  is 1.8

16
Inadequate Investment Return Advances to
Providers

• This is a monthly outflow of money that does not
  earn interest for BCBSM
• BCBSM is historically put in the less favorable
  position of hospitals owing it money

Advances To Providers Asset Liability Differe
nce 3/31/2001 265,429,232 194,069,851 71,359,
381 12/31/2000 253,180,397 178,282,439
74,897,958 12/31/1999 172,869,563
183,288,855 (10,419,292) 12/31/1998
298,946,340 188,866,526 110,079,814 12/31/1997
350,187,018 190,144,166 160,042,852
17
Strain of Administrative Services Contract (ASC)
Business

• Traditionally, this represented half of BCBSM
  premium revenue
• 4.5 billion returned 6.6 million in 1999
• New reporting requirements will disallow
  reporting this as premium
• It is questionable whether this business is
  appropriately leveraged by BCBSM to the benefit
  of subscribers

18
Management and Board Structure

• 1 Chief Executive Officer, 1 Executive Vice
  President, 10 Senior Vice Presidents and 27
  additional Vice Presidents
• Bonus plan and performance levels do not properly
  incentivize management
• 35 member board large by industry standards
• Statutory mission PA 350, Section 550.1201

19
Consequences of maintaining status quo

• Threat to affordability of and access to health
  care coverage
• Declining BCBSM asset value for Michigan
• Will BCBSM as we know it exist at decades end?
• These possibilities do not leave Michigan with
  the best BCBSM health care asset
• There are no easy or quick fixes for BCBSM

20
Age Rating Is Not The Answer

• BCBSM controls 57 of the small group market
• BCBSM and BCN control 71 of the small group
  market
• Total BCBSM and BCN lives is 1,372,664 the next
  largest competitor is 210,712
• OFIS approved price adjustors for group size and
  participation percentages are stemming losses

21
BCBSMs Board and Management Must Refocus

• Greater attention to the BCBSMs statutory
  charitable and benevolent mission
• Acting competitively, not monopolistically
• Leveraging BCBSMs strengths in a competitive and
  changing health care coverage marketplace

22
Next Steps

• Meet with Governor John Engler
• Share findings with legislators
• Take a more proactive approach toward BCBSM by
  OFIS and the Commissioner