Blue Cross Has Come a Long Way from 75-Cents-a-Month Insurance

January 22, 1995|By JOHN FAIRHALL

Myths die hard. One is that Blue Cross and Blue Shield of Maryland is the same kind of company it was in 1937, when Arline R. McNabb of Baltimore bought the first policy for 75 cents a month.

But where Blue Cross saw community service, other insurers

smelled potential profits. The for-profit companies offered lower rates to healthy groups, luring them away. Blue Cross reluctantly began to base more of its rates on subscribers' medical histories, as the competition was doing.

Looking back on the demise of community rating, Mr. Sherlock says the health insurance industry was changing in the 1960s "in ways that a lot of us who were in the business at the time didn't really care for."

Exploding medical costs in the 1970s and 1980s created a new challenge. Though driven largely by expensive technology and consumer demands for more services, the problem was aggravated by hospitals and doctors resistant to changing their ways of doing business. Blue Cross and Blue Shield did little to reform their old allies in the medical industry.

But Carl Sardegna would soon shake up the established order. Coming from the for-profit insurance industry, he brought a different culture to the merged Blue Cross and Blue Shield. He promised a new attitude, new products, a market-driven company.

Longtime Blue Cross board member James B. Coulter didn't like what he saw happening under Mr. Sardegna. The company became less of an "open, public service type company," he says. "Now we have a corporation that is far more company-oriented than customer-oriented."

The board yielded power to Mr. Sardegna, a "profound change," says Mr. Coulter, 74, a former state secretary of natural resources who served on the Blue Cross board from the early 1970s to 1987. Board members, previously unpaid, began to receive annual fees. And the board's makeup changed to include "businessmen more interested in corporations that had to make money for stockholders."

Salaries shot up. While the previous presidents of Blue Cross and Blue Shield had each received $150,000 in 1984, Mr. Sardegna took his cue from the compensation paid to for-profit insurance executives and demanded more money, eventually earning $850,000 a year. That sum -- occurring during a period of big losses from questionable investments -- jarred Marylanders' sense of nonprofit propriety.

"Just what is the mission of this nonprofit health service plan?" an exasperated John A. Donaho, then state insurance commissioner, asked in 1992. "Far from being the Depression-era organization that provided health care to subscribers at the lowest possible price, the Maryland Blues have ventured into purported profit-making schemes without my regulatory approval or knowledge."

After Mr. Sardegna quit under pressure in December 1992, following a U.S. Senate subcommittee investigation of Blue Cross, the board hired a former hospital administrator, William L. Jews, to replace him.

The new president and chief executive promptly revived one of Mr. Sardegna's most ambitious ideas for making Blue Cross more like its for-profit competitors: a plan to create a for-profit subsidiary that would sell stock to investors.

Whatever the merits of the plan, which Mr. Coulter opposes and Mr. Sherlock supports, it illustrates how much the company's vision of its mission has changed in the past 10 years. In a corporate history completed in 1985, on the eve of the Sardegna era, Blue Cross described itself this way:

"From the beginning, the corporation was unique. . . . It places greater importance on making protection available to everyone -- the bad risks as well as the good -- rather than making profits."

What will the next corporate history say?

John Fairhall is a reporter for The Baltimore Sun.

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