Patrick Springer, Published September 13 2009
Blues' expenses questioned, Audit finds N.D. insurer healthy, but spending criticizedEDITOR'S NOTE: This story originally appeared in The Forum on July 19, 1995.
BISMARCK - Blue Cross Blue Shield of North Dakota is paying former Sen. Mark Andrews' firm $80,000 a year as a Washington consultant.
The question raised by state insurance regulators: Are the Blues' 314,000 health insurance subscribers getting anything for the money?
"We asked for and could find very little documentation that they were getting their money's worth," says North Dakota Insurance Commissioner Glenn Pomeroy.
Regulators also question a $500,000 investment the Blues made two years ago in a consortium that bought stock to prop up an ailing Blue Cross Blue Shield program in Washington, D.C. -- an investment examiners concluded earned one-third of 1 percent in the last year.
Pomeroy's department on Tuesday made public a detailed audit of the North Dakota Blues' operations during 1990-1993. The report found that the state's top health insurer, which covers half the state's population, is in strong financial health.
Indeed, Pomeroy's staff believes the company might be carrying reserves beyond levels required by law, a position the company disputes.
However, the audit also found a number of questionable expenditures, including extensive travel for top executives and board members; the retainer of Andrews' lobbying and consulting firm; and the $500,000 investment in a troubled sister plan, which represents a sliver of the company's portfolio.
The report, the most extensive the department ever has performed on the Blues, suggests the need for greater oversight by the board of directors, Pomeroy said.
"In certain areas the board could get more active, should get more active," he said. "I would hope they take this report as a wake-up call."
In fact, Pomeroy's staff questions whether consumer representatives have a true majority on the board, as required under a 1991 law, an assertion the company disputes.
"We're not alleging that there was wild spending, out of control, and we're all paying more for our health insurance as a result," he said. It underscores the need for more safeguards and better controls, however.
Michael Unhjem, chief executive of Blue Cross Blue Shield of North Dakota, heralded the report as evidence the company is performing well overall, though he acknowledged it identified problems.
"Our sense is that the audit report concludes that we're a financially solvent company and well managed," Unhjem said.
Among the administrative concerns identified in the report, which culminated a two-year examination:
- Restructuring boosted management positions to 60 from 42, an increase of 43 percent. Examiners said the company was unable to provide specific information regarding the need to increase management.
- Administrative expenses increased 100 percent from 1988 to 1993, outpacing the growth in claims incurred and during a time when enrollment decreased steadily.
- The incentive program for executive performance results in virtually automatic annual increases of about 10 percent of administrators' base salary.
- A conflict of interest occurred during 1992 and 1993, when Unhjem and Robert Carlson, a top vice president, served on the board and together owned 4 percent of a subsidiary investment firm, Northern Capital Management Co.
However, Unhjem vehemently defended the company's management restructuring, performance and administrative efficiency.
Administrative expenses actually increased 96 percent during the period, not 100 percent, a figure which he says improperly included certain tax payments. The 96 percent compared to a 91-percent average increase for an eight-state region.
More importantly, Unhjem argued, the North Dakota Blues tied for the lowest administrative costs in the region, as measured by monthly costs per subscriber. North Dakota's monthly costs per member were $9.14 last year, the lowest among the eight states, and compared to a high of $16.98.
Also, the North Dakota Blues rank second in the nation among 68 Blue Cross and Blue Shield plans in a rating comparing market share, financial strength and customer service results.
Of the 18 new managers the report said were added, 14 were promoted internally and replacements were not hired, Unhjem said. Since 1993, the last year covered in the report, three or four management positions have been trimmed, he said.
"We didn't simply promote people or add positions at will," Unhjem said.
In addition, the company, whose annual operations total $54 million, has grown considerably during the period covered in the report, he said.
Assets totaled $97.7 million in 1988, when net premiums earned were $225.3 million. In 1993, assets had mushroomed to $219.7 million, when net earned premiums totaled $403.8million.
Unhjem said the administrative costs and positions increased when the company adopted more stringent "managed care" reimbursement controls.
As a result, average annual group rate increases, hemorrhaging in the late 1980s and early 1990s, peaking at 20.5 percent in 1991, since have steadily increased, to just 3.4 percent last year and 3 percent this year, Unhjem said.
"We have been good stewards of our subscribers' premium dollars," he said.
Unhjem defended the $80,000 retainer paid to Andrews' Washington firm, Andrews Associates Inc., since 1993, though he said the contract will be re-evaluated after this year. He called Andrews, a former senator and congressman, the company's "eyes and ears" in Washington during a time when major health reforms were debated.
In addition, Unhjem defended the rapid rise in charitable contributions, which exceeded $48,000 in 1993, compared to $1,000 three years earlier. Among the 1993 contributions: $1,000 for the inauguration of top elected state officials; $1,000 for the Mrs. North Dakota Pageant; and $500 for the American Legislative Exchange Council, though Unhjem said that contribution was not renewed this year.
omeroy said more needs to be done to rein in ever-rising health costs. And the North Dakota Blues - who command almost three-quarters of the private health insurance market, the nation's highest - must play a lead role, he said.
Noting that the average increase for the so-called bank depositors group, which covers individuals, rose 4.1 percent this year, Pomeroy said, "We all have work to do here."
The department will push for a law in 1997 that will more clearly establish a board majority of consumer representatives, he said.