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Converting to for-profit may not increase profits

A study finds health plan conversions don't guarantee increased efficiency.

By Robert Kazel, amednews staff. May 19, 2003.

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Despite the insistence by some Blue Cross and Blue Shield plans that converting to shareholder-owned companies is the way to thrive, a new report says hardly any difference exists between the financial performance of for-profit and nonprofit mutual Blues, and in some respects the traditional plans are more efficient.

"Profit margins of [nonprofit] mutual Blues plan and publicly traded Blues plans are essentially the same, so bingo, you don't necessarily have to convert," said Robert H. Booz, vice president of Hartford, Conn.-based Conning Research & Consulting, which tracks health insurance trends.

Booz's study gauged the financial performance of all Blues plans in the country for 2000 and 2001 to evaluate such measures as profit margin, administrative expense ratio and medical loss ratio. It found that, although total revenues of the for-profit plans were moderately higher, nonprofit plans as a group had equally good profit margins and did as good or better in key measures of efficiency.

Proponents of Blues conversion have said becoming for-profit allows them to preserve and grow profits faster, obtain technology, avoid unwanted takeovers and benefit through access to capital markets. More than a dozen plans have converted or are pursuing approval to do so.

Booz found profit margins at publicly traded Blues plans averaged about 3.5% during the period studied, the same as for mutual Blues. The profit margin for nonprofit Blues plans that were not mutual companies was less, 2%, but Booz said that was "really not that big of a difference."

Virtually no difference existed between publicly traded Blues and mutual Blues plans when medical loss ratios were analyzed, the report said. For 2001, the loss ratio for public Blues was 82.1% for for-profit plans, or 82.1 cents of each collected premium dollar being spent on care. The medical loss ratio for mutual Blues was 82%.

Moreover, the mutual Blues had lower administrative expense ratios -- the ratio of claims administration expenses to premium dollars collected -- which is an indication of how efficiently overhead is being financed.

"The argument all along for the combination and conversion of these [nonprofit] Blues was they could lower their operating costs," Booz said.

The findings of the Conning study should not be interpreted to mean that there is never a reason for a traditional Blues plan to consider for-profit conversion, because unique market considerations must be weighed, said Douglas Sherlock, senior analyst with Gwynedd, Pa.-based Sherlock Co., a health industry consulting firm.

The Conning report also does not address the issue of whether it would be better for a given community to sell the assets of a nonprofit Blues plan and reap the benefits, he said. Blues that convert to public companies typically have turned their assets over to newly created, independent health care foundations to assist needy and uninsured individuals.

Booz also noted that the Conning study covered only two years, so cannot be considered definitive. But, he added, "If the [conversion] trend continues, I think you could tell the public has not necessarily benefited."

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