Supervising Blue Cross

August 01, 1992

The agreement allowing the state insurance commissioner access to the financial records of Maryland Blue Cross and Blue Shield's profit-making subsidiaries is welcome. But it is long overdue. To effectively regulate the state's largest health insurance company, the commissioner should be able to examine these subsidiaries as soon as they are created.

Although the Maryland Blues' managers correctly think of their organization as a business, it doesn't have the built-in accountability normally found in American corporations. It is a non-profit organization. There are no stockholders. The organization's management plays an important role in the selection of its board of directors. There is no one in the organization's structure who looks out for the interest of the subscribers and the citizens of Maryland, who are its beneficiaries. Given the absence of disinterested supervision within the organization, oversight must be taken up by outsiders. That job belongs to state regulators.

Close supervision is also necessary because Blue Cross is changing its mix of business. The Blues are moving away from their traditional business of writing risk-based health insurance. They own three health maintenance organizations, managed-care companies and other for-profit subsidiaries. Blue Cross claims these subsidiaries generate profits that allow it to fulfill its obligation as insurer of last resort. But until the insurance commissioner can see for himself, that is only an assertion.

Regulators need to supervise the operation of these subsidiaries because they can lose as well as gain money. A number of these ventures lost quite a bit of money -- several million dollars in the case of an arbitrage business -- and ate away precious capital the organization still needs for its health insurance activities.

Regulators should have a say as to which businesses are appropriate for the state's largest health insurer. In their quest for additional profits, Blue Cross executives invested in ventures whose risks were probably too great for a non-profit organization. Regulators might have forced Blue Cross executives to develop more realistic business plans. Regulators also should be able to observe these subsidiaries. If they begin to lose an unreasonable amount of money, the state should have the tools to persuade Blue Cross to stop the losses.

The current management has resisted having regulators muck around in its business. With the help of board members, company officials have opposed a thorough examination of the entire Blue Cross organization. Now they are paying the price. Not only are state regulators demanding access, U.S. Senate investigators are concerned, too. If the insurance commissioner had been given the access he initially demanded, Blue Cross executives would not now have to be as defensive about the organization's financial condition.

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