Blue Plans: Playing the Blues No More

Chapter 3 from Understanding Health System Change

Joy M. Grossman, Ph.D., and Bradley C. Strunk

Introduction

The Blue Cross and Blue Shield Plans occupy a unique position in American health insurance. The local member companies of the Blue Cross and Blue Shield Association (BCBSA) have collectively provided coverage to Americans for close to three-quarters of a century. Over that span, they have both shaped and witnessed countless changes in health care organization and financing. By the time of this study, 46 Plans covered 79 million people -- approximately one in four Americans -- making the Blues the largest private payer in the United States. Their combined government insurance enrollment and Medicare claims processing exceeded that of any other plan, and their aggregate HMO enrollment made them the largest managed care provider in the country.

From their earliest days, the Blues played a distinctive community role. They entered the health insurance field when commercial insurers had largely avoided it, establishing themselves as the first prepaid health plans more than 70 years before this study. Each Plan developed independently at the local level, with its own board of directors. A hallmark of the early Plans was their dedication to community service: they operated on a not-for-profit basis, accepted all applicants, used community rating to set premiums without regard to individual health status, and maintained broad accountability to the populations they served.

Historical Advantages and Competitive Pressures

The early Blues benefited from several structural advantages. As providers of a public benefit, they received special regulatory treatment including tax exemptions. Their provider-sponsored origins gave them close ties to hospitals and physicians, yielding broad networks and provider discounts. Each Plan held the exclusive right to the Blue Cross and Blue Shield trademarks in its designated service area. These conditions allowed the Blues to build the value of their brand and to establish dominant positions in local markets.

Despite this dominance, the Blues were never immune to competitive pressure. Over the decades, successive rounds of adaptation gradually blurred the line between the Blues and their commercial competitors. In the 1950s, competitive pressure led many Plans to abandon community rating in favor of experience rating for group business. By the late 1990s, a range of market developments had posed new challenges: rapid growth in employer reliance on managed care, the rise of national for-profit managed care companies, increasing self-insurance among employers, and growing demand from multisite employers for carriers able to serve multiple states. Rising health care costs were also squeezing margins industrywide, forcing more disciplined pricing and strategic entry and exit decisions.

Changes in Regulation and BCBSA Rules

Historically, the Blues received preferential regulatory treatment in exchange for their public-benefit function. This included tax advantages, mandated provider discounts in some states, and an expectation that the Blues would serve as insurers of last resort. Over time, the regulatory landscape moved toward more uniform treatment. In 1986, the Blues lost their full federal income tax exemption. Many insurer-of-last-resort requirements were removed in the 1980s. State insurance reforms in the early 1990s replaced Blues-specific mandates with requirements applicable to all health plans.

The BCBSA itself also changed. In 1991, following the insolvency of the West Virginia Blue Plan, the Association strengthened financial oversight and raised minimum surplus requirements. In 1994, the BCBSA allowed investor ownership of Blue Plans for the first time, ending the longstanding not-for-profit requirement. This opened the door to for-profit conversions and mergers that would reshape the Blues in subsequent years.

Study Design

This chapter is based on interviews completed during the second round of CTS site visits to 12 communities, conducted between June 1998 and February 1999. The analysis covers all 14 Blue Cross and Blue Shield Plans operating in these 12 markets. The 14 Plans represented about a quarter of the 53 BCBSA member Plans as of late 1998 and were equally distributed across the four Census regions. Thirteen operated on a not-for-profit basis; one (Blue Cross of California) was for-profit and owned by WellPoint. Plan enrollment ranged from about 670,000 to 4.7 million. Information was gathered through 33 Blue Plan interviews and 95 vantage interviews with competitors, hospitals, physician organizations, employers, and regulators.

What It Means to Be Blue Today

Study findings indicated that Blue Plans remained well positioned to confront competitive pressures. In seven of the 12 study sites, the Blues held the largest overall market share. Plans in Lansing, Little Rock, Syracuse, and Greenville commanded near-complete dominance with few close competitors, each controlling at least 50 percent of their state markets. In the remaining five sites, the Blues were significant competitors but not dominant, typically vying for the top spot with several plans of comparable size.

The Blues offered a wide range of products, but their dominance was concentrated in PPO and indemnity markets rather than HMOs. In nearly every site, respondents identified the Blues as having the broadest provider networks among all competing plans. These networks enabled the Blues to offer indemnity, PPO, HMO, and POS products, in contrast to many managed care competitors that specialized in a single product line. BCBSA membership gave each Plan exclusive brand rights in its territory, access to national programs like the Federal Employees Health Benefits Program and the Blue Card program, and coordination services for multistate employers.

Competitive Strategies and Challenges

The Blues' competitive strategies were shaped by both general market forces and factors unique to their structure. All health plans faced growing purchaser demand for broad networks, rising employer interest in multistate coverage, and increasing health care costs. The Blues additionally confronted constraints imposed by BCBSA licensing agreements (which restricted competition in other Plans' territories), limitations on capital access inherent in not-for-profit status, and tensions between community-service traditions and market imperatives.

Two strategic responses carried particular implications for consumers and policymakers. First, decisions about whether to continue covering hard-to-insure populations reflected the ongoing tension between business imperatives and the Blues' legacy of community service. Second, the trend toward mergers and for-profit conversions raised questions about whether the Blues' traditional consumer benefits at the local level would be preserved as the plans grew larger and more commercially oriented. The study concluded by weighing the potential costs and benefits of these strategies for consumers in local communities and for public policy more broadly.

Related Resources

For additional HSC research on health plan competition, visit the HSC archives at hschange.com