Md. Blues report lower net worth Stricter accounting produces 75% drop

March 02, 1993|By Patricia Meisol | Patricia Meisol,Company's regulatory statement.Staff Writer

In the first strict by-the-book accounting of its finances since the mid-1980s, Blue Cross and Blue Shield of Maryland reported yesterday that it reduced its net worth by 75 percent from levels reported earlier in 1992, to $25 million as of Dec. 31.

At the same time, the state's largest health insurer reported an operating profit of $40.8 million, its best since 1984.

The Blues also reported net earnings of $10 million from subsidiary operations, mostly from health maintenance organizations, for the year that ended Dec. 31. In past years, that figure almost always has been a negative.

Blue Cross was forced to write down the value of its assets in a much-expanded annual report after Maryland insurance regulators told the state's largest health insurer that it would have to adhere to insurance-industry accounting standards. State Insurance Commissioner John A. Donaho told the Blues he would no longer allow exceptions to the rules after a U.S. Senate investigation detailed a decade of poor management and questionable financial reporting.

Had the company been forced to follow the same rules over the years, it would have had a negative net worth in at least three years -- 1988, 1989 and 1991.

Blues officials emphasized the positive news.

"Profits are more than twice those of the past several years," said James R. Swenson, chief financial officer. He said the company was also pleased by a continued turnaround of its HMOs, which lost millions before becoming profitable for the first time in June.

The report, which marked the first time Blue Cross was asked for a breakdown of its business interests, also revealed that insurance is no longer its main business. Administering health benefits for other corporations, a service that involves little or no risk, now accounts for 57 percent of its revenues. Traditional insurance accounts for 43 percent.

Still, Blue Cross reported it lost money on its nonrisk business, confirming what state regulators discovered in September after gaining access to internal company documents for the first time. The insurer reported an operating loss of $9.8 million on nonrisk business; investment income cut the loss to $4.8 million.

Essentially, the insurer, in a bid to hold its own in the hotly competitive industry of managing benefits, is not charging enough to cover its costs, Mr. Swenson conceded.

Blue Cross discounts nonrisk services to large public or private clients, but individuals who buy health insurance from the company pay a higher price as a result.

Expenses were 10.8 percent of income, mostly because of severance packages paid to top executives who were fired last fall and one-time legal and other expenses associated with the congressional investigation of the company in September. The Blues' goal is to get expenses under 10 percent; the average for Blues nationwide is 7 percent to 10 percent.

The Blues HMOs -- Columbia Medical Plan Inc., HealthCare Corp. of the Potomac, HealthCare Corp. of the Mid-Atlantic (also known as CareFirst) and Free State Health Plan Inc. -- earned $11.7 million, up 5 percent from last year. HealthLine lost $2.5 million on its Medcash credit card product and is for sale. Remaining subsidiaries earned $1 million.

Overall, Blues revenue rose 7.3 percent, to $1.5 billion, comprising $833 million from nonrisk business and $627 million from traditional insurance.

Net income rose 36.4 percent, to $40.8 million.

The Blues had reported reserves of about $102 million as recently as July, mostly as a result of industry accounting rules that were not available to competitors. The Sun reported Sept. 17 that the insurance company was barely solvent in 1991 and would possibly be in the red without special favors from insurance regulators. Mr. Donaho, the state insurance commissioner, put Blue Cross on notice in October that he would no longer allow the exceptions.

The result of his order was that Blue Cross was forced to cut $89.3 million in assets from its reserve. These included $42 million worth of subsidiary losses that were not charged in the past; $25 million for furniture, equipment, computer software and old debts; and $22 million the insurer ascribed to its CareFirst

HMO when it purchased it in 1991.

The reserve level is important because it represents assets the Blues can convert to cash to pay medical claims should they exceed expected levels. A bill in the General Assembly would phase in higher reserve requirements over the next four years. Based on the current level of the Blues risk business, the minimum would be more than twice the current $25 million.

THE BLUES: 1992

Despite reporting an operating profit of nearly $41 million for 1992, Blue Cross and Blue Shield of Maryland said its reserves -- the amount retained for unexpected claims and expenses -- actually dropped during the year. Much of the change came because of stricter accounting methods required by state regulators. The table below shows selected information from the company's income statement (in millions):

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