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Insurer battles identity crisis

Blue Cross’s status as nonprofit scrutinized amid outcry over pay

Blue Cross Blue Shield chief Andrew Dreyfus spoke with health care executives at Lowell General Hospital on Friday. Blue Cross Blue Shield chief Andrew Dreyfus spoke with health care executives at Lowell General Hospital on Friday. (Wendy Maeda/ Globe Staff)
By Robert Weisman
Globe Staff / March 20, 2011

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The doctor was angry. Not long after Blue Cross Blue Shield of Massachusetts urged him and other health care providers to keep their costs down, the insurer this month disclosed it had agreed to an $11 million payout for its former chief executive. In a terse voicemail, the physician told Blue Cross: You have a credibility problem.

It was the kind of call Andrew Dreyfus expected. Hired as chief executive of Blue Cross last fall, Dreyfus has been championing affordability — prodding payers and providers to work together to rein in the price of medical care following years of double-digit insurance premium increases. Then came the uproar over millions of dollars collected by his predecessor, Cleve L. Killingsworth, and headlines about five-figure annual fees paid to board members. Suddenly, the talk about lowering health care costs rang hollow.

To many, Killingsworth’s pay package and the board’s fees — which were suspended more than a week ago in an effort to diffuse the public outcry — undercut Dreyfus’s call to control health care spend ing. “It’s hard to reconcile those two messages,’’ he admitted.

The pay furor also tapped into strong feelings that the state’s largest health insurer evokes in customers, rivals, and government officials.

“At a time when folks across the Commonwealth are struggling to make ends meet, I think this sends a terrible message to the people of Massachusetts,’’ said House Speaker Robert A. DeLeo, who joined a chorus of Blue Cross critics following the Killingsworth news.

The backlash cut to the heart of what Dreyfus calls Blue Cross’s “identity crisis,’’ raising questions about the community’s expectations for the role it has — or should have — in Massachusetts health care. Do the company’s 3,000 employees and $7 billion in annual revenue mean it should operate like a major corporation? Or is Blue Cross really a nonprofit public charity, as defined by state law?

Actually, it’s both. Blue Cross has juggled dual roles since its founding more than 70 years ago. It has competed with for-profit behemoths such as Aetna and Cigna for national accounts and executive talent, even as it has endowed a charitable foundation that grooms state health care leaders and conducted research underpinning the state’s 2006 universal health care law.

“They have a multiple set of objectives, one of which is to come as close to breaking even as they can,’’ said Harvard Business School professor Jay W. Lorsch, who has consulted for Blue Cross organizations in Massachusetts and elsewhere. “Another objective driving the people here in Massachusetts is trying to get health costs down. They’re connected missions, but they can be competing.’’

The disclosure of Killingsworth’s rich exit package exposed the tension between the insurer’s roots as a charity and its current standing as a financial powerhouse whose board is packed with well-connected business, labor, and education insiders. The board negotiated Killingsworth’s departure, letting him resign with the same multimillion-dollar severance package his contract guaranteed in the event he was fired.

Now, at the board’s request — and after Dreyfus advised directors to stop accepting fees from Blue Cross at least through this year — the insurer is opening a “public conversation’’ with community leaders and the state attorney general’s office. The topic: What does it mean to be both a big business and a charity?

That discourse might lead to a change in how Blue Cross is classified, though the practical effects of that are unclear. More important to Blue Cross may be the opportunity to reset public expectations for what it does.

“The biggest problem we have is the dichotomy between how we are expected to perform as a company and how we are expected to behave as a public charity,’’ said William C. Van Faasen, the current Blue Cross chairman and its former chief executive. “Why are we held to the standards of a charity when we’re not one?’’ For example, Van Faasen noted, the insurer does not accept donations, as hospitals, museums, and other charitable operations do.

Whether its status as a nonprofit charity will change won’t be known for months. Dreyfus has said Blue Cross isn’t interested in being a stock-owned company, which could make it vulnerable to a takeover by a for-profit insurance giant such as WellPoint Inc., based in Indianapolis. Blue Cross companies in New Hampshire, Connecticut, Maine, New York, and 10 other states already have been absorbed by WellPoint. Dreyfus doesn’t want that to happen to Blue Cross here. Becoming for-profit means “you could lose local control,’’ he said.

Other options are for Blue Cross to become a mutual insurer — owned by its nearly 3 million members — or a nonprofit that is not a public charity. Either way, it would still have to file the executive and board compensation disclosures that fueled this month’s criticism.

It’s not certain how either outcome would affect the company’s tax status. Blue Cross pays federal income taxes, while other public charities in Massachusetts do not, though it is taxed at a lower rate than private companies. It also pays state taxes on its insurance premiums at the same level as private insurers. And it makes payments in lieu of taxes on properties it owns in Hingham and Quincy. The company’s headquarters in Boston’s Landmark Center is leased.

As the reassessment of Blue Cross gets underway, health care leaders and others are struggling to understand its dual identity and whether it has benefited the insurer and the state. Some believe Blue Cross has been largely a force for good in pushing for expanded health care access. Others contend it has acted no differently than for-profit insurers by consistently boosting premiums, placing an increasing burden on families, businesses, and municipalities.

Critics say the insurer also bears responsibility for the disparity in reimbursements to providers, cited by Attorney General Martha Coakley last year, by paying more to larger institutions than smaller ones.

“They made a decision that they didn’t want to take a hard line’’ with the best-paid hospitals, said Ellen Zane, president of Tufts Medical Center in Boston. “That skewed the market.’’ A Blue Cross spokesman said it has begun to address payment gaps by offering incentives for members to be treated in hospitals that charge less.

Blue Cross also has been criticized for maintaining a higher cash surplus than the state requires, essentially holding as reserves money that could be used to lower premiums for businesses and individuals. The insurer says it’s being prudent given market uncertainties.

Executives at Partners HealthCare System Inc., the state’s largest group of hospitals and among the most highly reimbursed, point to Blue Cross’s crucial role in driving state health care policy.

“They’re not like the Sisters of the Poor,’’ said Dr. Thomas H. Lee, chief executive of the physicians network at Partners, which operates Massachusetts General and Brigham and Women’s hospitals. “But instead of being focused on stock prices, Blue Cross has been focused on the community and the local politicians in a way a Fortune 500 company never could be.’’

Some consumer advocates are skeptical of that view. Deirdre Cummings, legislative director for the Massachusetts Public Interest Research Group, said Blue Cross has not shown the public spirit that might be expected of a nonprofit charity.

“The real issue is the disconnect between their executive compensation and rising health care costs,’’ Cummings said. “The public would have hoped a nonprofit would play a role in bringing down the huge premiums, but an insurance company is an insurance company. The fact that they’re the largest insurer means they have the market power to lower premiums, but they haven’t.’’

If Blue Cross and its sister organizations around the country are sometimes held to different standards than other insurers, it’s partly because of their history as the government’s designated “insurers of last resort’’ — meaning they traditionally provided low-cost insurance to those who otherwise couldn’t afford it (something they are no longer required to do).

Most Blue Cross and Blue Shield organizations were founded in the 1930s and 1940s by hospitals or doctors groups. The cross in their logo symbolized hospitals, while doctors were represented by a shield. Many of those organizations have since merged. Today, they make up a crazy quilt of insurers that license the Blue Cross name and share accounts across state lines, but are organized in different ways — some as for-profits, some as mutuals, and some as nonprofits. Few are nonprofit public charities these days.

“We have a saying that if you’ve seen one Blue Cross, you’ve seen one Blue Cross,’’ said Roger Wilson, general counsel of the Blue Cross Blue Shield Association, a national trade group.

In 1937, a consortium that included the Massachusetts Hospital Association and the Massachusetts Medical Society founded an insurer called the Associated Hospital Service Corp. It was “designed to spread the cost of hospital treatment among a large group of employed persons of limited means, to absorb the financial shock of emergency hospitalization,’’ according to a newspaper report from that year.

Two years later, it became Blue Cross of Massachusetts. In 1941, a group of doctors formed Blue Shield of Massachusetts. The two organizations worked for decades under a joint operating agreement, dominating the state’s health insurance market for much of the last century, before formally merging in 1989 as Blue Cross Blue Shield.

The long-staid insurance business began to morph in the 1970s with the introduction of health maintenance organizations. They provided a range of medical services for a fixed fee under a new model known as managed care. The more agile HMOs quickly gained market share and challenged the traditional Blue Cross model.

By the late 1980s, Blue Cross in Massachusetts was on the verge of bankruptcy. Consultants hired by state regulators blamed the decline on its failure to compete with popular HMOs such as Pilgrim Health Care and Tufts Health Plan. The board hired Van Faasen from Michigan’s Blue Cross to right the company.

Van Faasen quickly moved to strengthen the insurer’s managed-care capability in 1992 by combining seven geographically separate managed care operations it already owned into HMO Blue. That same year it bought another insurance company, the failing Bay State Health Care, and took on its 350,000 subscribers. But while its membership was growing, making all the organizations fit together proved difficult. In 1996, Blue Cross lost a staggering $100 million.

Under state oversight, Blue Cross launched a reorganization. Among other steps, the company sold its headquarters building in Boston and jettisoned unprofitable businesses. The path to financial recovery was aided by a booming economy. By the time Van Faasen retired as chief executive in 2005, the insurer had stemmed the losses and restored its position as the state’s dominant health insurer.

But in 2007, Blue Cross disclosed that Van Faasen walked away with $16.4 million in retirement pay. As with the Killingsworth cash-out to come later, Van Faasen’s riches did not sit well outside the company. While lauding Van Faasen’s performance, state Senator Mark C. Montigny, of New Bedford, said at the time, “If he wants that kind of money, he should run a hedge fund.’’

An investigation by the attorney general’s office led to pressure on Blue Cross to separate the jobs of chairman and chief executive — Van Faasen held both titles, as did his hand-picked successor Killingsworth, who had led an HMO in Detroit.

During his five years at the helm, Killingsworth was credited with leading efforts to contain spending by creating a “global payment’’ plan that put doctors and hospitals on a budget and gave them incentives to hold down costs. The financial results, however, were not always positive. As the economy weakened, the company posted operating losses that totaled nearly $215 million in 2009 and 2010.

Last March, just weeks after he had to relinquish the chairman’s post following the attorney general’s investigation, Killingsworth abruptly resigned and Van Faasen returned as interim chief executive. Six months later, Dreyfus, a Massachusetts health policy veteran, was tapped for the top job. He immediately identified health care affordability as his top priority and asked the board to set his own compensation at the lower end of the insurer’s pay scale, taking a base salary of $800,000 this year.

Dreyfus hopes a public conversation about Blue Cross’s classification as a nonprofit public charity — a process that has yet to be clearly defined — might let it get back to the business of working with providers on affordability. All the furor over executive and board pay, he said, won’t do anything to help the company’s millions of customers.

“If we eliminated all the salaries tomorrow,’’ Dreyfus said, “the premiums would still be too high.’’

Robert Weisman can be reached at weisman@globe.com.

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