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Karl Vick, The Washington Post, Published October 12 2009

North Dakota case raises co-op concerns

EDITOR’S NOTE: The following story ran in over the weekend in The Washington Post.

BISMARCK – For the North Dakota insurance sales reps, March may have been the ideal time to enjoy the swim-up bar at a resort on Grand Cayman Island. But back on the Northern Plains, where temperatures were below zero, policyholders at Blue Cross Blue Shield of North Dakota were less delighted when they learned about the trip for 66 staff members and guests.

Word of the $238,000 Caribbean retreat broke last winter, compounded by news of other perks: $15 million in executive bonuses over five years, $400,000 for charter flights and $35,000 for a vice president’s retirement party. And when the ensuing uproar cost Michael Unhjem his job as chief executive, his landing was softened by a $2.5 million severance payment. The golden parachute had been added to his contract after his 2006 drunken-driving arrest, a state audit pointed out.

In an era in which stories of corporate excess are common, the drama of North Dakota’s dominant insurer resonated deeply here, largely because the state’s nonprofit Blue Cross Blue Shield is essentially a cooperative, owned by policyholders. It is an arrangement close to the model promoted by lawmakers as an alternative to the “public option” that would put the federal government in the insurance business. The legislation that the Senate Finance Committee will probably approve Tuesday calls for the creation of health insurance cooperatives.

A liberal group here argues that the North Dakota scandal illustrates the danger of assuming that the co-op model would assure virtuous behavior, especially in an industry awash in money.

“Call it cooperative, call it mutual, call it private insurance,” said Don Morrison, executive director of NDpeople.org. “If what we want is to have quality health care at a price people can afford, it’s not coming from the culture of private insurance. If this is a model, let’s get real.”

As an existing company, the Blues would not be allowed into the ranks of new co-ops envisioned by Sen. Kent Conrad, the North Dakota Democrat who is also the Finance Committee’s most zealous promoter of the model. Conrad, who grew up in Bismarck, declined to comment on the controversy surrounding the Blues. But he cites the success of the electrical, farm and even commercial cooperatives that rose out of the same tradition of prairie populism that produced the original Blue Cross seven decades ago.

“The co-op plan aims to achieve the same benefits for consumers as a public option without government control of health insurance,” Conrad said in a statement this month. “It does so by creating private, consumer-driven, nonprofit health plans. Because these plans will be owned by their members, they will focus on getting the best value for consumers, rather than maximizing revenues or profits.”

Not much is known about health care cooperatives on a large scale because there are only a few in the country. Timothy Jost, who studies health care policy at Washington and Lee University, said they tend to provide good service to members but have not made “any tremendous difference in terms of cost or price.”

In North Dakota, which has a $1 billion state budget surplus, residents wear their parsimony proudly. And all of the spending excesses, said state Insurance Commissioner Adam Hamm, came roughly at the time the company was seeking premium increases of 15 to 20 percent.

“They’re owned by the policyholders,” said Hamm, whose powers would have been curtailed under legislation the company was pushing when the scandal erupted. “Every dime they’re spending is the policyholders’ dime.”

Paul von Ebers, who took over as the Blues’ CEO in the scandal’s aftermath, said the current scrutiny is both inevitable and frustrating, given the company’s overall record. It spends just 7 percent of premiums on overhead. Last year, only eight official complaints were filed against the company, up from six the year before.

“Nationwide, the attacks on insurance companies are a concerted attempt to distract discussion from the real issues of what’s going on in health care,” von Ebers said from the company’s Fargo headquarters. “In Washington, we’re focusing on insurance companies as evil entities, while anyone who understands health care realizes that utilization rates and technology are the major cost drivers.”

Critics, however, find a timely lesson in the transformation of the North Dakota insurer from its populist origins.

Conceived in the late 1930s by a bishop as a “benevolent and charitable corporation,” the Blue Cross co-op rose from the same egalitarian impulse that produced a state-owned bank and grain elevator. In the late 1980s, it merged with another nonprofit, Blue Shield, and grew into a major player in the political establishment.

“They have more clout than anyone in the state,” said state Sen. Tim Mathern of Fargo, the 2008 Democratic candidate for governor.

Along the way, board members’ salaries rose along with executive pay; they quadrupled in two years to $12,000 annually, plus $1,200 per meeting.

“It’s a self-perpetuating board,” said Morrison of NDpeople.org, noting that a 1998 effort by consumer advocates to nominate two directors was rebuffed in favor of candidates selected by incumbents. “The people on the board who supposedly had the people’s interests were the power elite of North Dakota.”

The board’s coziness with executives was clearest in the severance package for von Ebers’ predecessor, Unhjem, who acknowledged at the time that he should have realized the public relations problem the Cayman Islands trip would cause. State auditors were also puzzled that the board paid severance to two other executives whose contracts required none. Bonuses for “performance” were paid even when underwriting showed a loss.

Board Chairman Dennis Elbert did not return calls seeking comment.

“The premiums keep going up and up. It makes me angry that the top CEOs and so on would reward themselves. And for what? For what?” said Pat Swanson, 68, who during her time in an insurance broker’s office sold policies for “the Blues,” as the nonprofit is known. She now works at a Hallmark store at Kirkwood Mall.

Though the Blues’ premiums are among the lowest in the country, they have risen 87 percent since 2001 for group policies, far faster than income has. “When they pay, they pay out of their minds. That’s why their policies are so spendy,” said Lisa Marchus, 47.

Hamm, a Republican elected in November, thinks the Blues’ virtual monopoly stands at the core of the scandal. But in the quest for competition on the national level, he worries that a public option might use federal subsidies to undercut private competitors unfairly. Still, he was loath to recommend co-ops, either.

“One of the main things you see in health care cooperatives in this country is the board hasn’t always acted in the best interests of the membership and cut down on waste,” Hamm said. “It hasn’t been able to achieve in the health-care economy what it’s been able to achieve in agriculture and other areas.”