Blue Cross makes bundle from state: Processing fees questioned

RALEIGH, Feb 28, 2009 (The News & Observer - McClatchy-Tribune Information Services via COMTEX) -- EDS | Quote | Chart | News | PowerRating -- With state lawmakers about to embark on premium increases and benefit cuts to the health plan that serves 667,000 state employees and retirees, some critics have asked why legislative leaders are not looking at the money paid to Blue Cross and Blue Shield of North Carolina to process claims.

Information released this week is adding fuel to the debate. In the fiscal year ending last June 30, the State Health Plan paid Blue Cross $97.5 million to process 9.4 million claims. That comes out to more than $10 per claim, or 18 times what the state spends per claim to process Medicaid bills. For Medicaid claims, the state pays Electronic Data Systems an average of 57 cents.

Blue Cross' revenue exposes a serious miscalculation of plan costs. Roughly two-thirds of Blue Cross' total revenue comes from a contract to administer a preferred provider organization plan. A financial consultant to the plan had underestimated Blue Cross' annual revenue under the PPO contract by roughly $20 million, or more than 40 percent.

"Mathematically, it's a whopper," said Lacey Barnes, the State Health Plan's deputy executive administrator.

But she and other plan officials defended the payments to Blue Cross. It has two contracts with the plan, one struck three years ago to process claims under the PPO; the other signed 13 years ago to process claims under an older plan that is being phased out this year.

Barnes and Mona Moon, the plan's chief financial officer, say that the plan's administrative costs are in line with 12 other states. They cite a study showing those states' administrative costs range from a low of 3.5 percent of the total health plan cost to a high of 7.8 percent. North Carolina's administrative costs amount to 6.5 percent of the plan's $2.15 billion in annual expenditures.

That study does not identify the other states or break out how much those states are paying for claims processing.

More service

Barnes, Moon and a Blue Cross spokesman, Lew Borman, also said that Blue Cross' service to the plan is more extensive than EDS' for Medicaid. They said that unlike EDS, Blue Cross handles enrollment, provides a call center for members and has to work with more than 300 state and local agencies.

Barnes and Moon did not join the plan until last year, so they were not around when the financial consultant, Aon Consulting, produced its projection for Blue Cross' revenues. But Ken Vieira, a senior vice president for Aon, said in a recent interview that the firm underestimated the cost because it did not have access to the Blue Cross PPO contract.

A state law sponsored by Senate Majority Leader Tony Rand had kept the PPO contract's contents private from all but a handful of state officials. Rand, a Fayetteville Democrat, is co-chairman of a legislative committee that oversees the health plan, and has long held more control over its fortunes than any other lawmaker. He said the purpose of the secrecy was to protect discounts that Blue Cross had negotiated with health care providers.

Plan officials had repeatedly denied requests to make contract information public, but reversed their position on the Blue Cross contract's total cost after The News & Observer protested, contending that Rand's law did not pertain to the cost of claims-processing contracts. An assistant attorney general agreed with The N&O's interpretation.

Adam Searing of the N.C. Justice Center, which advocates for lower-income people, said the newly released financial information shows that lawmakers need to take a closer look at Blue Cross' services and see if there is an opportunity to save money by renegotiating the PPO contract.

"Ten dollars per claim is an outrageous amount," said Searing, project director for the center's Health Access Coalition. "It's such a huge disparity, and, in a few months, we are going to be asking state employees to pay a lot more for their health care coverage in terms of their deductibles and premiums."

Next week, state lawmakers are expected to take up legislation that would bail out the health plan, which is on course to run out of money by the end of March unless there's a new infusion. Plan officials say it will need an additional $250 million to remain solvent through June 30. For next fiscal year, it is expected to need about $330 million above earlier projections to keep afloat.

The legislation co-written by Rand and House Majority Leader Hugh Holliman would use a combination of premium increases and benefit cuts to pay for the bailout. Taxpayers and plan members would share the hit. The state covers the premiums for employees and retirees, but they would have to pay for increases in co-payments and deductibles.

Contract till 2013

Rand and Holliman said they would have a difficult time renegotiating Blue Cross' contract because it does not expire until June 30, 2013. Holliman also said that cutting the contract's cost would not come close toward fixing the plan's shortfall.

"Even if you cut the Blue Cross contract from $100 million to $50 million, we've still got to address the deficit that we have," Holliman said.

The plan awarded Blue Cross the PPO contract in February 2006 and cited a state law -- since repealed -- that allowed the plan to bypass the bidding process. Blue Cross is the state's largest health care insurer, and plan officials said they selected it to take advantage of the company's extensive statewide provider network.

Plan officials stipulated that the discounts for medical services that Blue Cross had negotiated with doctors, hospitals and other providers for Blue Cross members would be extended to the plan's members in exchange for the claims processing contract. The plan had anticipated the contract would save the state 8 percent in total annual costs, but the savings turned out to be roughly half that.

dan.kane@newsobserver.com or 919-829-4861

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