The Blues Still Have the Blues

Times just aren't getting any better for nonprofit Blue Cross and Blue Shield health plans. Not only has operating income hit the skids, but pressures to merge or convert to for-profit status keep rising. Consider:

• In mid-August, Horizon Blue Cross/Blue Shield of New Jersey applied to become a for-profit organization. The 76-year-old health plan, the state's largest health insurer, said the change would help it compete with other publicly held insurers by raising money through equity sales.
• Meanwhile, two Pennsylvania Blues, Highmark and Independence Blue Cross, filed with the state to merge their operations. The combined organization would cut between 745 and 1,200 jobs, while also raising compensation to top executives who would essentially divide up their current duties by as much as $4.2 million.
• These moves are just part of what is expected to be a new wave of nonprofit health-plan merger/conversions similar to that which swept the industry in the 1990s. In particular, converted plans are likely to become attractive acquisition targets for giants like WellPoint and UnitedHealth Group that are currently having trouble holding onto their existing plan membership.

Why is all this happening now? The organizations themselves claim they need to get bigger or tap public markets just to keep up. Horizon, for instance, argues that needed investment in information technology and quality initiatives will exceed its annual budget by almost a factor of two. Similarly, Independence and Highmark insist that they have to get bigger to compete for corporate accounts against other insurance giants that can offer to handle employee coverage across vast geographies.

There are other advantages, too, as the WSJ notes:

More than a decade ago, health insurers operated largely on a state-by-state basis, or in regions within states, Mr. Field noted. Now, the remaining smaller players must compete against major operations such as WellPoint, UnitedHealthGroup Inc., Humana Inc., Aetna Inc. and the nonprofit Kaiser health plans, he said.

Mr. Field considers WellPoint and Humana the most likely purchasers of Blue Cross Blue Shield plans. A Humana spokesman didn't comment Friday.

In addition to presenting acquisition opportunities, conversions can benefit publicly traded managed-care companies in another way. Nonprofits are required to keep cash surpluses under certain levels, and that can translate into lower pricing that places competitive pressures on for-profit plans.

It's also true, of course, that larger insurers have more leverage for negotiating discounts with hospitals and doctors. In today's whack-a-mole healthcare system, that's really the name of the game.