Blue Cross-Blue Shield to cut administrative costs

Insurer says it must adjust for expected drop in enrollment

Blue Cross and Blue Shield of Massachusetts, anticipating further deterioration of an employer-based health insurance system and more competition from out-of-state, needs to rein in administrative costs, according to an internal e-mail obtained by the Globe.

The 18- to 24-month effort is intended to keep the state's largest health insurer competitive as employers become less willing to absorb hefty annual premium increases.

No major layoffs are planned at the Boston firm, which has 3,800 employees. But Blue Cross-Blue Shield wants to keep payroll costs down by reducing its headcount through attrition, by boosting productivity through increased use of technology, and by allowing some employees to work from home to save on office space.

Blue Cross-Blue Shield is telling its workers the cost-cutting is part of an effort to fundamentally change the way it does business.

"Our current business model has served us very well over the past decade," said senior vice president Carole Waite, who will head the project, in an e-mail to employees. "This initiative I'm leading is about preparing our company for where the market is headed."

Blue Cross-Blue Shield is the state's dominant health insurer, with just over 3 million members. Harvard Pilgrim Health Care covers about 1 million members, and Tufts Health Plan has about 650,000. Several other Massachusetts health plans and some out-of-state, for-profit insurers also sell coverage in Massachusetts.

Since becoming president of Blue Cross-Blue Shield in 2003, Cleve L. Killingsworth has consistently criticized hospitals and other healthcare providers for offering too much or too little care to patients, and for providing too much care in emergency rooms instead of doctors' offices. He has also scolded hospitals for driving up medical costs, which account for 90 percent of Blue Cross-Blue Shield's spending.

But the new effort is instead focused on internal spending. Although the insurer's annual spending on administrative expenses has stayed roughly constant since 2001 on a percentage basis - between 10 and 12 percent of premiums - spending has soared because premiums have grown dramatically. In 2002, Blue Cross-Blue Shield spent $406 million on administrative expenses. Last year, it had grown to $705 million.

"Most of our time is spent trying to manage the 90 percent piece of the pie," said Stephen R. Booma, senior vice president of sales, marketing, and service. "This is about managing our own administrative costs."

Administrative costs can include salaries, the price of administering claims, marketing, computer systems, and other basic functions.

Booma said the plan to streamline spending is driven in part by fundamental changes happening in the nation's healthcare system. In recent years, the number of Americans who get their healthcare from employers has steadily declined. Only 60 percent of companies now offer healthcare coverage to employees, down from 69 percent in 2000, according to the nonpartisan Drum Major Institute for Public Policy.

Booma predicts more companies will give workers a fixed dollar contribution toward healthcare coverage, instead of a specific health plan. As a result, more coverage will be sold on an individual, retail basis, instead of through group plans. That means customers will become more aware of prices, he said. Blue Cross-Blue Shield predicts premiums for members renewing coverage in January will rise 11 to 13 percent, unless their employers trim benefits.

"Over time, there will be steady erosion of employers paying for healthcare," said Booma.

But still, he said, "If we manage our costs well, there's still a chance to grow market share in our core business," despite the state's stagnant population.

Blue Cross-Blue Shield is undertaking the cost-cutting plan while it is strong, Booma said, rather than waiting for a financial crisis. But despite its size, the insurer faces tough challenges. As Massachusetts companies have been acquired by out-of-state firms, more employees are switching to insurance provided by headquarters located elsewhere. Blue Cross-Blue Shield expects to lose about 40,000 members this year, falling to 3.02 million, in part because former Gillette employees now receive health benefits from parent firm Procter & Gamble Co., based in Cincinnati. It will be Blue Cross-Blue Shield's first membership decline since 1998.

The company also faces new competition in its lucrative business providing health plans to Massachusetts cities and towns. Under new rules, the municipalities are free to purchase insurance from the Group Insurance Commission, which arranges coverage for state employees and their families. Blue Cross-Blue Shield doesn't participate in the GIC's health plan.

And some question how much effect reining in administrative costs will have on the insurer's overall rates, given that they represent a small part of overall spending.

Jim Burgess, an associate professor of health policy and management at the Boston University School of Public Health and a consultant who has worked for Blue Cross-Blue Shield, said he views the effort to change the company's business model as a way of sending a coded message to customers and investors.

"Rather than trying to save significant amounts of money, Blue Cross is trying to tell employer groups and potential bond borrowers that they are a safe place to put money," said Burgess.

Jeffrey Krasner can be reached at krasner@globe.com.