By Christopher Guadagnino, Ph.D.

Published October 2008

MTK: We think it’s totally unnecessary, so we’re instinctively against it. Blue Cross has been inoculated for some 70 years from paying taxes and it has, basically, an unfair advantage over all the for-profits in the state. We also believe, looking at their financials, that they’re very heavily reserved, with almost $2 billion in reserves. They claim they service 3.8 million members, but only about a million are fully insured. So, having reserves of that level is really quite high. You’ll never see that in a for-profit company. And over the last several years we’ve noticed a large buildup of reserves. Going back a few years ago, they only had $200 million in reserves and now they’re up to almost $2 billion. They haven’t been reporting heavy profits – they look like they’ve been breaking even – but they’ve been stashing it in their reserves.

MTK: Right now, Blue Cross is the 800-pound gorilla. Servicing 3.6 million people, whether they’re fully insured or self-funded, makes no difference because they use that clout in contracting with hospitals, doctors and other health care providers. I mean, you’re in or you’re out. The big fear is that Senator Vitale is trying to pass a universal health plan, which is going to cover 1.7 million uninsured. And if Blue Cross becomes the administrator of that plan, that adds another 1.7 million and gives them 5.3 million members that they’ll be servicing. Clearly, there will be no competition in the state of New Jersey. They’ll be no new entries. It’s their call on premiums. And it’ll be their call on what they pay and what they deny.

The money that they threw out initially – $1 billion – that they would pay into a charitable foundation represents what we believe is only a fraction of what their current value is. We’ve hired an economist –Stephen Foreman, Ph.D., J.D., M.P.A., associate professor of economics and health administration at Robert Morris University – to do a study for us and he came up with a present value of Horizon Blue Cross of between $7.5 billion and $8.5 billion, which means if the state accepts $1 billion or slightly more, they’re leaving a lot of money on the table. Clearly, when the management and the board of directors receive their stock options if there is a conversion, once they vest on those stock options their upward mobility from a financial point of view will be really substantial. The wealth creation will go to a few, from all the people of the state of New Jersey who have been supporting Blue Cross all these years. We find that reprehensible.

MTK: It would be adjusted. There will be plenty of people, such as ourselves, who will have economic analysis of what the value should be. A billion dollars buys you basically nothing if you want to take care of 1.7 million uninsured. What that comes out to is a one-time $588 per person with no future funding source. It doesn’t mean anything. In fact, if the state needed a billion dollars right now, they could just take it out of Blue Cross’s reserves because clearly they are so far over-reserved that it would mean nothing to their operations. The actuaries that are paid by Blue Cross will naturally submit a valuation. The investment bankers that are taking it public will set a valuation, and it would be in their best interest to keep the value low because they would be getting a portion of the equity of Blue Cross – a percentage of the stock that’s issued that will go to the investment banking firm at the price that’s set on the initial public offering (IPO). If it went out, for instance, at $9 a share and in five years from now it’s worth $62 a share, they can exercise their options at $9 a share. So, you see the upward mobility. That also applies to all the senior executives at Horizon Blue Cross, and the board members as well. They know that the lower the valuation, the more money goes into their pockets in the future.

MTK: We have seven million people in New Jersey right now who have some sort of health care coverage; 1.7 million don’t. Horizon Blue Cross, with its 3.6 million, is already over 50 percent of the marketplace, particularly in the northern tier of New Jersey, where they’re probably 60 percent of the market share. They’re the giant. They can buy market share. They can raise premiums. They could do what they want because they’re heavily reserved. They control the tempo of the marketplace. There won’t be any new entries coming into this state. The only new entry that would come into this state would be one more Blue Cross plan. There’s only one publicly-traded Blue Cross plan in the continental United States, and that’s Wellpoint. Wellpoint has purchased every single converted Blue Cross plan in the country. They’re now in 14 states. They’re a merger and acquisition company, they don’t grow their company organically one policy at a time. They will gobble up Horizon Blue Cross. There’s no doubt in our minds because they pay a premium for every one of these converted Blue Crosses that they purchase. And if you get something like a Wellpoint coming into New Jersey, they have no history in New Jersey. They never built a park. They never built a school. They never donated to anything and we’ll be dealing with an out-of-state organization that has no emotional ties whatsoever to New Jersey.

Our organization receives five times more complaints about Horizon Blue Cross and their onerous business practices than all the other managed care companies, combined. The bottom line is, we’re able to adjudicate with companies like Aetna, Cigna and others where, if they feel they’ve made a mistake, or they were irresponsible in processing a claim, or they should have approved something that was included under their coverage agreement in their policies, they will listen and they’ll do a reverse. Horizon doesn’t talk to anyone. Particularly if you’re an out-of-network doctor: you can only talk to a robot. They don’t allow their people at Horizon Blue Cross to talk to an out-of-network doctor.

MTK: It can’t get any better because right now, they don’t have any external pressure from shareholders. Once that changes, the shareholders and analysts are going to start determining what the forecasted financial results are going to be. Clearly, Horizon is going to have pressure to meet those financial objectives. They don’t have that now. The people who work at Horizon Blue Cross have never dealt in the open market, and the pressure to meet those numbers is going to be tough. There are two ways you can beat the numbers: you can raise your premiums or you can lower your medical-loss ratio – the amount of money they pay out in claims. When you build a budget for a for-profit, it’s different than building a not-for-profit. On a for-profit, you forecast what your earnings per share are going to be for the next five years and then you adjust your finances accordingly to hit those earnings per share. Right now, Blue Cross has been basically taking their surpluses and putting it into their reserves. They have substantial reserves for a not-for-profit.

MTK: I think it only could rise. There’s been a flip-flop on what’s been released from Horizon Blue Cross. Initially, when they came out with the possibility of a conversion, they said it would not affect premiums whatsoever. And then recently their spokespeople said, "well, market conditions may dictate that we may have to raise premiums." So already they’re setting an expectation. Why convert when you’re heavily reserved right now? Their contention is they’ll have access to new capital if they’re in the public arena. They’re so over-capitalized right now, they don’t need access. The next contention is they’ll have access to better talent they’ll be able to attract. The fact of the matter is, if you’ll look at the Lehman Brothers report, one of the big things they talk about as a plus is that Horizon has had the same staff in place for multiple years, and continuity of the staff is very attractive to the street.

MTK: About 80 percent of them have not met the expectations that they claimed in their conversion documents – in terms of keeping their premiums at a decent level, processing claims at a decent medical loss ratio and having good subscriber satisfaction. Some have hit their expectations and have done quite well. The rest have gone off the reservation and have done just what any for-profit company would do, basically coinciding with whatever the philosophy of Wellpoint is, because Wellpoint controls them all.

MTK: They can’t get any lower than they are. Personally, the primary care docs are becoming a dying breed. They’re the ones who are most beholden to a Blue Cross because they have a capitation agreement, wherein they may have 5,000 subscribers that they’re willing to see at a couple of dollars per-member-per-month. They’re locked in tight because there’s no place for them to go. Most surgeons and the specialists are out-of-network, and that’s the bone of contention with Horizon. Horizon harasses out-of-network physicians and, the more they harass them, the more specialists are dropping out of network. So, if the payment rates drop down, I can assure you that our specialists are not going to be seeing Horizon patients.

MTK: I can’t speak to that directly, but I can tell you, having been the CEO of a publicly traded company – I was one of the founders of Oxford Health Plans – there is no doubt about it: to meet the numbers you just drop the rates. Believe it or not – I know this sounds indifferent – most physicians don’t even notice their rates have been dropped because their practice managers are the ones processing the claims and the physicians, all they want to do is be a doctor and to do what they learned in medical school.

Health insurance companies are in an inflation-protected industry. They can pretty much do what they have to do to hit their numbers. And what they do is play follow-the-leader. Clearly, Horizon will have total control of the state of New Jersey; we’re not talking about a state where’s there’s heavy competition. We’re worried about Horizon because of their power. Look at a simple example: there are only 10 blimps in the United States. There’s only one not-for-profit blimp, and that’s Horizon’s blimp – which, to us, is senseless. That money could go to other more meaningful things. We find it very obnoxious when they deny claims, they don’t pay doctors and hospitals properly, and they’re flying around in a blimp.

As another example of their insensitivity, many of our south Jersey physicians refer to Philadelphia, particularly to the Children’s Hospital of Philadelphia, Hospital of the University of Pennsylvania, and Temple. Many of these patients have diseases that are long term – cancer victims, chronic conditions, diabetes – and it is easier for them to go across the bridge than it is for them to go across the state to get help. Horizon cancelled the University of Pennsylvania and the Children’s Hospital of Pennsylvania contracts because they claim they’re too expensive and they can get the work done in New Jersey. The insensitivity of that is, you can have a kid who might be treated since birth going over to CHOP for the last six years, and now that’s cut off. As a not-for-profit you wouldn’t expect that kind of mentality. As a for-profit you would expect it.

MTK: We’re trying to establish in the minds of legislators and consumer groups that the valuation of Horizon Blue Cross is so far off the mark. According to our economist, if part of Wellpoint, it could be worth between $14 billion and $16 billion. We would like to see those kinds of numbers put on the table and into a foundation. That way, we can really make waves here in New Jersey in terms of fixing a fragile health care delivery system. Our hospitals are bleeding. Six hospitals closed last year. Doctors are moving out of state. The Medicaid program is the worst in the country. If we can beef up the Medicaid and the Family Care Program – it’s matched dollar-for-dollar by the federal government – we could infuse more money into the state of New Jersey. We could do a lot of things with a lot more money, rather than just make some people wealthy. That’s what we would like to see. If Horizon were to convert, and if we were to come up with an agreeable valuation, I think there should be a prohibition that Horizon cannot administer a universal health plan in New Jersey that’s funded by those very dollars, because their monopolistic power would just expand, adding another 1.7 million people to their enrollment.

MTK: After it’s accepted, the Department of Banking and Insurance has to put out a notice of hearings and after the hearings there is a period of time that they can take to crunch what they’ve learned during the hearings. Ultimately it’s going to be the decision of the commissioner of Banking and Insurance, in conjunction with the attorney general’s office that will approve and add conditions to the deal, or deny it, or ask for additional information if they’re not satisfied with the outcome after the hearings. It could be as quickly as next Spring, or it can take multiple years, as it did in Maryland. Ultimately, after four years in Maryland, it was denied.