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Patrick Springer, Published September 12 2009

Study to look at cost sharing at Blue Cross Blue Shield

North Dakota’s top insurance regulator plans to examine whether customers of Blue Cross Blue Shield are improperly subsidizing its affiliated companies or health plans it administers.

Insurance Commissioner Adam Hamm said he will include a cost allocation study along with the Blues’ next routine financial examination.

State insurance examiners just concluded a special audit of the Blues’ expenses, leading Hamm to conclude that “millions and millions of dollars” of administrative costs paid by health-insurance premiums were misspent over a five-year period.

In that recently released financial examination, and in the previous routine financial audit, back in 2004, questions arose involving the proper allocation of costs and the possibility of cross-subsidization, Hamm said.

“What I learned is that we have questions,” he said, adding that he has drawn no conclusions.

Hamm has told Blue Cross Blue Shield the cost-allocation study is coming. “They think we’re going to be comfortable with the answers we get,” he said.

Blue Cross Blue Shield executives say they have controls in place to ensure that they fairly divide costs among different health plans and their umbrella of companies.

The cost-sharing review will coincide with the next routine financial audit of the Blues, which will cover 2005 to 2009, Hamm said.

Administrative costs are apportioned among not-for-profit Blue Cross Blue Shield and its subsidiary life and dental insurance companies as well as Noridian Administrative Services, a for-profit subsidiary that processes Medicare claims.

The Blues also must segregate costs for managing its own insured members as well as self-funded employer group health plans that it administers.

David Breuer, chief financial officer for the North Dakota Blues, said different methods are used to allocate costs.

Executives and other employees keep logs charting the time they spend working for one firm or group of companies. Statistical tools also help to allocate costs, Breuer said.

The economies of scale resulting from sharing resources help to significantly defray costs that help hold down premiums for Blues members, he said.

Noridian Administrative Services, for example, has invested in sophisticated computer hardware and software to analyze and pay claims, as well as mail-processing equipment that can be shared.

In an analysis provided to The Forum, the Blues calculated the net benefit to members of “absorbed overhead” costs to be $32.5 million from 2004 to 2008, the five years covered in the examination of expenses.

Noridian Administrative Services, listed as an investment asset for Blue Cross Blue Shield, experienced operating losses in four of the five years totaling $14.4 million.

The total investment in Noridian Administrative Services totaled $26 million, but its “fair value” was determined to be $7.3 million as of Dec. 31, 2008, reflecting a loss in value of almost $18.7 million, examiners reported.

Breuer said he was unable to provide an estimate of how much of the $26 million invested in Noridian Administrative Services originated with Blue Cross Blue premiums. The Blues’ calculation of the net benefit to members, $32.5 million, exceeded the total investment.

“It’s easy to see that there’s some savings there,” Breuer said.

North Dakota insurance regulators and customers have long had questions about the financial interrelationships of the Blues companies and how they benefit policyholders, Hamm said.

Although he’s not ready to disclose specifics of the impending cost study, Hamm said he wants to address longstanding questions.

“The guts of it would be to get at issues that have been around for years,” he said.

Denise Kolpack, the Blues’ vice president for corporate communications, said the affiliated companies provide other benefits in addition to investment income and economies of scale that help to hold down members’ premiums.

Together, the companies combine to provide strategic value and offer benefits of “one-stop shopping” for customers.

Because competition to win contracts to manage large self-funded insurance groups is steep, some have questioned whether the Blues have allowed its own policyholders to absorb costs of administering other health plans, Hamm said.

“I’ve never really had an answer to it,” he said.

In the last routine financial audit, in 2004, examiners recommended that the Blues “adopt a method to allocate expenses” for the plans it administers.

The Blues initially disagreed with the need to do so, but later took additional steps to ensure proper allocation of costs between plans to prevent cross-subsidization, Breuer said.

“I think we have those controls in place,” he added. Also, premium rate filings, subject to regulatory approval, always must account for administrative costs.

Readers can reach Forum reporter Patrick Springer at (701) 241-5522