Jun 17, 2008

Providers of Traditional Coverage : Blue Cross—Blue Shield Plans

Providers of traditional coverage include Blue Cross—Blue Shield plans, insurance companies, and employers using self-funded arrangements. While the plans described in this post are characteristic of those offered by the Blues and insurance companies, self-funded plans must be properly designed to be effective. Such plans have "borrowed" liberally from insured plans and contain similar—if not identical—provisions.

Blue Cross—Blue Shield Plans
Prior to the Great Depression, "health" insurance contracts provided by insurance companies were primarily designed to give income benefits to persons who were disabled by accidents and, to a limited degree, illnesses. It was generally accepted that individuals should pay their own medical expenses from their savings. During the depression, however, the savings of many individuals disappeared, unemployment was severe, and most insurance companies ceased writing disability income contracts. Faced with financial difficulties arising from the inability of many patients to pay their bills, many hospitals established plans for the prepayment of hospital expenses. By paying a monthly fee to the hospital, a subscriber (the term used to describe persons covered by such plans) was entitled to a limited number of days of hospitalization per year. The early plans were limited to a single hospital, but by the mid-1930s many plans had become communitywide or statewide operations, offering subscribers the choice of using any participating hospital. Much of this expansion resulted from actions by the American Hospital Association to promote and control this type of plan. In the late 1930s, the American Hospital Association adopted the Blue Cross name and emblem and permitted them to be used only by plans that met standards established by the association. As a general rule, only one plan within a geographic area was allowed to use the Blue Cross name. Eventually, the Blue Cross activities of the American Hospital Association were transferred to a separate national organization, the Blue Cross Association.

The success of the early Blue Cross plans and the inability of physicians to collect bills for their services during the depression resulted in the development of Blue Shield plans, established by local medical associations to prepay physicians' charges. The evolution of Blue Shield plans paralleled that of Blue Cross plans, with the American Medical Association acting similarly to the American Hospital Association. Eventually, the role of the American Medical Association was transferred to the National Association of Blue Shield Plans, which then became the national coordinating body.

To a large extent, the persons covered by Blue Shield plans were the same ones whose hospital charges were covered by Blue Cross plans, and in many geographic regions this overlapping led to a close working relationship between the two. For many years in some areas of the country one plan administered the other. However, this administration was typically on a fee-for-administration basis, with the two plans being separate legal entities. In recent years, there has been a consolidation of most Blue Cross and Blue Shield plans. Usually, this consolidation has taken the form of a complete merger; in a few cases the consolidation has been only partial. These partial consolidations have resulted in Blue Cross—Blue Shield plans that operate under a single staff but with separate governing boards.

There has been consolidation at the national level also. In 1978, the staffs of the two national organizations were merged, and a new organization—the Blue Cross and Blue Shield Associations—was formed to act on matters of mutual interest to both Blue Cross plans and Blue Shield plans. It was governed by members of the boards from both the Blue Cross Association and the National Association of Blue Shield Plans. In 1982, a complete merger took place, with the resulting organization called the Blue Cross and Blue Shield Association.

As of late 2000, there were 50 plans in existence. Most jointly wrote Blue Cross and Blue Shield coverage, but there were a few separate Blue Cross plans and Blue Shield plans. Although most states are served by a single Blue Cross—Blue Shield plan, in a few states there is more than one plan, each operating within a specific geographic region. In a few instances, plans may cover more than one state. Only in a few cases is there any overlapping of the geographic areas served by individual plans.

Each local Blue Cross, Blue Shield, or Blue Cross—Blue Shield plan is a legally separate entity operated by a governing board, which establishes specific practices for the plan in accordance with the broad standards of the national Blue Cross and Blue Shield Association. Consequently, individual plans may differ substantially from one another. The boards of these plans used to be dominated by the providers of coverage, but now the boards of most plans are dominated by "nonproviders," including representatives of consumer organizations, foundations, labor unions, businesses, and the general public.

Traditionally, Blue Cross and Blue Shield plans have been nonprofit corporations and acted as insurers of last resort in most states. This meant that they wrote coverage on almost anyone at competitive rates. For this, the Blues tended to receive favorable tax treatment. However, as insurance companies and HMOs expanded their market share, they tended to take the better business and leave the Blues with coverage of an increasing number of unhealthy lives. As a result, the Blues have become more restrictive in their underwriting practices. In addition, a few of the Blues have changed to for-profit status in order to raise the capital necessary to compete more effectively with other types of providers of medical expense coverage. Many of the Blues also own subsidiaries that are run to make a profit.

Insurance Companies
For many years, Blue Cross and Blue Shield plans were the predominant providers of medical expense coverage; insurance companies were much slower to enter the market and took a different approach. Rather than emphasizing basic first-dollar coverage for hospital or physicians' charges, most insurers chose to write major medical coverage with deductibles and coinsurance. By the mid-1950s, insurance companies surpassed the Blues in premium volume for medical expense coverage.

Like other types of insurance, medical expense coverage is written by both stock and mutual insurance companies. While some coverage is written by insurers that specialize in the medical expense market, much of the premium volume for group coverage is written by large life insurance companies. It is interesting to note that medical expense coverage is also a line of insurance sometimes written by property-casualty insurance companies.


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