Asbury Park Press

Blue Seeks The Green

Horizon Blue Cross Blue Shield of New Jersey thinks it needs to become a for-profit company to keep up with the rapidly changing health-care industry.

Asbury Park Press — Sunday, September 21, 2008

By MICHAEL L. DIAMOND
BUSINESS WRITER

William Marino joined Horizon Blue Cross Blue Shield in 1992, when the state's biggest health insurer was losing money and was viewed as slow to anticipate sweeping changes in the health-care landscape.

The company recovered, but to Marino the lesson was simple: Even perfectly healthy companies are in jeopardy if they don't have an eye on what's to come.

"The pace of change is dramatically faster now than it was then," said Marino, Horizon's president and chief executive officer. "The competition is keener and more intense. We're on the edge of more dramatic change driven by the marketplace's demands."

Horizon last month filed an application with the state to convert to a for-profit company from a nonprofit company in a move that Marino said is needed to keep pace with the rapid-fire health-care changes that are sure to come.

It's a process that could give the cash-strapped state a windfall to help improve health care. But the prospect of a for-profit Horizon has sounded alarm bells. Hospitals and doctors worry it will lead to lower reimbursements. Consumer groups worry it will lead to even less access to coverage.

"There's a lot at stake here," said Kerry McKean Kelly, a spokeswoman for the New Jersey Hospital Association. "Individuals' future premiums. Whether they will be able to find insurance. Whether Horizon will continue to cover Medicaid beneficiaries. A lot of issues here have very real implications for residents of New Jersey."

Horizon has 3.6 million members and 46 percent of New Jersey's insured market. Its membership has grown about 5 percent a year the past two years, giving it a sizable lead over its biggest competitor, Aetna, which has about 21 percent of the market, according to the state Department of Banking and Insurance.

Long history

Horizon, founded in 1932, operates as a nonprofit company, exempt from state and federal taxes. The company essentially has no owner. It is operated by a 15-member board. Any profit it makes is put into a reserve fund for emergencies, such as a natural disaster or a health crisis.

Marino, 64, and a Morris Township resident, sat in his 16th floor office Wednesday morning at the company's Newark headquarters. Behind him was an expansive view of Manhattan that, without an early-morning haze, would have been stunning.

He said the company is financially strong. It has $1.6 billion in reserves and is gaining market share. It's an assessment that is backed by Standard & Poor's, a credit rating agency that gave Horizon an A rating – a vast improvement from the D rating the company received when Marino joined 16 years ago.

S&P, however, in a November report said the company has a negative outlook. Faced with increased competition in New Jersey, not only from Aetna, but also from United Health/Oxford and Cigna, Horizon has increased market share by keeping the lid on some premium increases. As a result, the company's profits – and reserves – have slipped enough that S&P could lower its credit rating, the report said.

Marino said he sees other challenges. Namely, the health-care industry is changing fast. Consumers are increasingly becoming responsible for their health decisions and need access to everything from how to manage an illness to finding an expert. Doctors and hospitals want to track claims and get paid faster, he said.

It will require an investment in technology bordering on $100 million a year, or 40 percent more than it currently spends – just to keep pace with the company's competitors, all of which are for-profit, Marino said.

Publicly traded companies have one big advantage over nonprofits. They can raise money whenever they need to by selling stock to the public.

"The only way we have to generate capital right now is . . . revenue has to be high," he said. "We'd rather access the capital market as a means to generate capital."

Horizon got the green light from the New Jersey Legislature and former acting Gov. Donald DiFrancesco to convert to a for-profit company in 2001.

The legislation called for Horizon to place all of the proceeds of an initial public offering into a foundation that would spend the money on increasing access to health care. Horizon then would continue to operate by making a secondary stock offering.

The company has said it expects to raise more than $1 billion. Other groups have estimated Horizon to be worth as much as $8 billion. The foundation would invest the money and presumably use the interest "solely for the purposes of expanding access to quality, affordable health care," according to the legislation.

Tempting for politicians

It's a pot of money that skeptics say would be enticing to lawmakers itching to fill a giant budget gap, regardless of the current law's restrictions.

The foundation couldn't use it to build schools, roads or bridges. But could it pay for state workers' health care? Could it increase reimbursement to hospitals for charity care? That isn't clear.

"It's a broad statement," said Sen. Joseph Vitale, D-Middlesex. But "if it's done the right way, for the right reasons, if we could protect consumers, it could be a very good thing for New Jersey."

Horizon isn't the first to want to convert. Blue Cross Blue Shield organizations got their start in Texas in 1929, when a businessman offered school teachers hospital coverage for a small monthly payment. The idea took off in full after Congress passed the National Labor Relations Act that set the stage for employer-based health coverage.

They operated as nonprofits until the 1990s, when insurers under pressure to reduce health-care costs began to convert to for-profit companies, giving them more access to capital and develop more efficient health-care practices, according to a 2003 Rutgers University report.

Since then, nearly two dozen Blue Cross Blue Shield organizations have become for-profit companies. But not all of them have made the switch without resistance.

The Washington state insurance commissioner in 2004, for example, rejected Premera Blue Cross' application because he said Wall Street's profit pressures would put subscribers at risk for excessive rate increases and likely would lead to the company's acquisition.

New Jersey consumer and industry groups raise similar concerns.

Eve Weissman, the health-care coordinator for New Jersey Citizen Action, said she wasn't sure how a for-profit Horizon would lead to lower premiums or better coverage for the 1.3 million New Jersey residents without health insurance, noting that even nonprofit Horizon dropped contracts with hospitals.

It's a particular concern since Horizon historically has been considered the insurer of last resort, observers said.

(Marino said the company will continue to accept all applicants and by law can't discriminate against higher-risk consumers.)

Profit pressures

Michael Kornett, chief executive officer for the Medical Center of New Jersey, which represents physicians, said Horizon would face intense pressure to improve its bottom line quarter after quarter, squeezing doctors trying to get paid for their services.

"They have no idea the demands that are going to be put upon them," Kornett said. "They have two choices: They raise premiums or they lower their medical-loss ratio to get a better bottom line. The analysts on Wall Street determine what the bottom line should be on a quarterly basis. It's not going to mean a thing other than satisfying Wall Street."

One expert said their concerns are partially justified. Premiums can be kept in check as long as the market remains competitive. But health-insurance companies with strong motivation to make a profit drive a harder bargain with providers, said Glenn Melnick, a health economics and finance professor at the University of Southern California.

"The speculation is that if you are for-profit, there is more incentive for managers to (be tougher negotiators)," he said. "If you are nonprofit, what's the incentive? You're only going to create unhappy hospitals and doctors that will write letters to the board."

It's a debate that could become intense. Horizon needs approval from the Department of Banking and Insurance and the Attorney General's office. The process will include at least one public hearing. The hearing date has yet to be set.

Marino's timing could have been better. He sat down for an interview as the financial markets staged a historic meltdown and the federal government rushed in with bailouts.

He could have been forgiven for changing his mind on the spot, but he said he had no second thoughts. Companies that manage for short-term profits and don't make the investments needed to keep up with the changing marketplace don't last, he said.

"Shareholders expect a return," he said. But "the way any company generates profit is by doing a good job for your customers."

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