Transforming Blue Cross

September 23, 1992

There is nothing wrong with Carl J. Sardegna's grand vision to transform Maryland Blue Cross and Blue Shield from a non-profit health insurance organization into a competitive health-care management company. But in his zeal to realize this vision, Mr. Sardegna should be careful not to lose sight of the organization's special status as the health insurer of last resort that is supposed to provide affordable health care coverage for Marylanders.

When Mr. Sardegna took over the management of the Maryland Blues seven years ago, it was in horrendous financial shape and barely solvent. He developed a simple strategic plan: decrease the size of its insurance business and expand its profit-making businesses such as health maintenance organizations, claims processing companies and other less-regulated enterprises. He wanted the operations of the non-profit organization to mimic those of a commercial insurer.

Many of these new investments failed, consuming more than $140 million in precious capital. Unlike a commercial insurer, which can use profits to cover losses or issue new stock to raise capital, the Maryland Blues rely on subscriber premiums or profits from their subsidiaries for their capital. If the profit-making businesses result only in losses, the burden will inevitably fall on subscribers, who will pay higher premiums for their coverage.

Mr. Sardegna maintains the Maryland Blues' 16 subsidiaries are now profitable and will generate earnings of $10 million this year. It is not clear what damage was done to the organization's balance sheet by the heavy losses from previous years. An examination, to be finished next summer, should answer that question.

In the past, the Maryland Blues have not been candid with regulators about their losses and its financial condition. Recently, the Blues have promised to be more forthright. As the organization ventures into riskier health-care investments, the need for state regulators to supervise closely its basic insurance operations increases.

Beginning tomorrow the U.S. Senate's Permanent Subcommittee on Investigations holds two days of hearings into the operations of the Maryland Blues. This may raise additional concerns.

Since Blue Cross provides health insurance coverage for a quarter of the state's citizens, its financial health is of considerable interest to our readers. The group's primary objective should not be to build a corporate colossus but to provide affordable health insurance coverage to all who need it.

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