Blue Cross' profits plunge in quarter 59% slide linked to rising costs and competitive market

August 15, 1996|By Mark Guidera | Mark Guidera,SUN STAFF

Hurt by rising hospital and pharmaceutical costs, Blue Cross and Blue Shield of Maryland reported yesterday that second-quarter profits slid 59 percent to $5.8 million, compared with the same period last year.

This is the second year in a row that Blue Cross has reported lower profits for its first two quarters, a sign of the increasingly competitive market.

The depressed bottom line for the state's largest health insurer came despite signing on 12,000 new subscribers during the past six months, and posting a 6 percent rise in revenues for the quarter.

The growth in subscribers, Blue Cross officials said, came chiefly in its Medicare plan, called Medicare First. The insurer signed on 8,000 new members in that plan during the first half of 1996.

Owings Mills-based Blue Cross posted revenues for the quarter ended June 30 of $487 million, a 6 percent increase over the $459 million posted in the year-ago quarter.

Gary Baker, controller for Blue Cross and Blue Shield, said the not-for-profit insurer was "very happy with the strong revenue growth" for the quarter. "But we know what our profit shortfalls are and we're dealing with the issues."

The profit margin for the first half of the year -- down 49 percent from last year -- was particularly hurt by rising medical costs at hospitals and for drugs and other medicines for subscribers, said Baker.

The medical insurer, which operates five health maintenance organizations and a traditional indemnity plan, did not expect costs for hospital services and prices for drugs and other medicines to rise as much as they did this year, he said.

In fact, Blue Cross reported spending $17 million more on medical reimbursements during the first half of 1996 than during the comparable period of 1995.

"Our costs went up while our rates [for coverage] were declining," said Baker.

As a result, while the insurer did expect that profits for the first half of the year would be lower than for the year-earlier period, they were much lower than anticipated.

Blue Cross had projected to close the first half with profits of about $21 million. Instead, it closed with $13.9 million.

Baker said Blue Cross is undertaking several measures to boost profit margins. The insurer expects those efforts to improve the end-of-the-year profit picture, he said.

These measures include a plan to seek state regulatory help in establishing what's called a "global pricing" plan at hospitals.

Such an arrangement sets one fee for the same procedure at all hospitals, rather than allowing hospitals to individually charge varying fees.

Global pricing, said Baker, would help lower Blue Cross' administrative and other costs associated with managing hospital reimbursement operations.

The medical insurer also is undertaking a review of hospital and pharmacy costs to see if it can spot any trends or aberrations that it might address.

Blue Cross, said Baker, also plans to look at what are called "referral costs," or the fees paid to specialists who have cared for patients referred to them from primary care doctors.

The insurer, he said, may consider setting fixed fees -- called "capitation" -- for some specialists' services as a way to control costs in that arena.

The organization is also planning to increase its efforts to recover money from other insurers, such as automobile and accident insurers, who may be responsible for a medical bill Blue Cross was billed for and paid.

Baker said Blue Cross recovers, on average, between $5 million and $10 million annually from such third parties.

"If we can double that, it's $5 million to $10 million added to the bottom line with minimal administrative costs to us," said Baker.

Blue Cross, he acknowledged, also is reviewing the rates charged to its customers for coverage.

But, said Baker, "Raising rates is really an '80's reaction. Foremost is remaining competitive. So we are going to be looking at controlling costs first."

Pub Date: 8/15/96

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