Comparison of the Blues and Insurance Companies

Perhaps the best way to describe the characteristics of Blue Cross—Blue Shield plans and insurance company plans is to compare their characteristics. Traditionally, the similarities between the Blues and insurance companies were overshadowed by their differences. Over time, however, intense competition has often caused one type of provider to adopt the more popular but differing practices of the other. As a result, insurance companies and the Blues are becoming increasingly similar, in spite of their many distinctly different characteristics.

The following comparison of the Blues and insurance companies focuses on their operation with respect to traditional medical expense insurance coverage. It is followed by a brief treatment of how both types of organizations have expanded into managed care.

Regulation and Taxation
In a few states, Blue Cross—Blue Shield plans are regulated under the same laws that apply to insurance companies. However, in most states the Blues are nonprofit organizations and are regulated under special legislation. Typically, this regulation is carried out by the same body that regulates insurance companies. However, in some respects the Blues receive preferential treatment over insurance companies, probably the most significant example being their exemption from premium taxation and income taxation by many states. Because premium taxes (usually about 2 percent of premiums) are passed on to consumers, this gives the Blues a cost advantage. In many other respects, however, the Blues are subject to more stringent regulation than insurance companies. For example, in most states their rates are subject to regulatory approval. With recent trends toward consumerism, this approval has become more burdensome and expensive.

In addition, the Blues are also accorded favorable tax treatment under the federal income tax laws. Prior to the Tax Reform Act of 1986, the Blues (except for the few plans that were incorporated as insurance companies) were exempt from federal income taxation. The tax act eliminated this complete exemption. Because of various deductions that can be taken, however, the average effective tax rate for the Blues is significantly below the average tax rate for insurance companies.

Form of Benefits
Traditionally, the Blues offered benefits in the form of services, while insurance companies offered benefits on an indemnity (or reimbursement) basis. Under the service-benefit concept, benefits are expressed in terms of the services that are provided by the hospitals or physicians participating in the plan rather than in terms of dollar maximums. For example, a Blue Cross plan might provide up to 90 days of hospitalization per year in semiprivate accommodations. In contrast, an insurance company might provide reimbursement for hospital charges subject to both dollar and duration limits, such as $400 per day for 90 days. In both cases, however, any charges in excess of the benefits must be borne by the covered person.

Blue Cross—Blue Shield plans involve two separate types of contractual relationships: a plan promises to provide specified services to a subscriber for whom a premium has been paid, and it has contracts with providers of services whereby the providers are reimbursed for the cost of services rendered to subscribers. In general, subscribers are not billed for the cost of covered services or required to file claim forms. Rather, this cost is negotiated between the plan and the providers. This type of arrangement generally requires that subscribers receive their services from providers participating in the plan; however, most hospitals and physicians are participants. If nonparticipating providers can be used (such as for emergencies), benefits are usually paid on an indemnity basis, as is done by insurance companies.

In contrast, an insurance company that writes traditional medical expense coverage agrees only to reimburse a covered person for medical expenses up to the limits specified in the insurance contract. There is no contractual relationship between the providers of medical services and the insurance company. Thus, covered persons must file the appropriate claim forms. While covered persons have a legal obligation to pay their medical bills, the insurance company's obligation (unless benefits are assigned) is only to reimburse the covered person, not to actually pay the providers. However, most hospitals and many other providers require that any potential insurance benefits be assigned to them by a patient before they will render services. In effect, such an assignment requires the insurance company to pay benefits directly to the provider on behalf of the covered person.

In the past, insurance companies incorporated maximum daily room and board limits into their contracts that did not cover medical expenses in full. However, to compete with the Blues, many insurance companies now frequently write contracts that provide full reimbursement for certain medical expenses. Even though a covered person may see little difference in the benefits received from either type of provider, the traditional distinction still exists: The Blues are providing services, whereas insurance companies are providing reimbursement for the cost of services.

Types of Benefits
Over the years the Blues specialized in providing basic medical benefits, with Blue Cross providing coverage for hospital expenses and Blue Shield providing coverage for surgical expenses and physicians' visits. Major medical benefits were rarely available. However, competition from insurance companies and increased cooperation between Blue Cross and Blue Shield have resulted in the Blues now offering virtually the same coverages as insurance companies. It is interesting to note that as the Blues have expanded the scope of benefits offered, they have frequently included deductible and coinsurance provisions similar to those used by insurance companies. When there is a deductible, a covered person is required to pay expenses up to some limit (such as $100 per year or per illness) out of his or her own pocket before benefits are paid. When coinsurance is used, a covered person is required to pay a percentage (such as 20 percent) of some or all expenses, the remaining portion being covered under the medical expense plan.

The advantage many insurance companies have had over the Blues has been their ability to offer a wide variety of group benefits, including life insurance coverage and disability income coverage. Until a few years ago, most states had laws and regulations that prevented the Blues from offering any coverage other than medical expense benefits, but because of recent changes in these laws and regulations, the Blues can now offer a wider range of group benefits to their subscribers. While competition between the Blues and insurance companies over writing these other benefits is increasing, the Blues currently write relatively little coverage other than medical expense benefits.

Reimbursement of Providers
The method by which the Blues reimburse the providers often results in their having a competitive advantage over insurance companies. Most Blue Cross plans pay participating hospitals on a per diem basis for each day a subscriber is hospitalized. Periodic negotiations with Blue Cross determine the amount of this payment (which includes room-and-board charges as well as other covered charges) for each hospital. For example, if the per diem amount is $600, the hospital will receive $600 for each day a subscriber is hospitalized, regardless of what the actual charges might be. While this per diem amount is adequate on the average, the hospital will "lose money" on some patients but "make money" on others.

In addition to the administrative simplicity of this method of reimbursement, the per diem amount is often less than the average daily hospital charges. Frequently, it is determined by excluding such hospital costs as bad debts, charity care, and nursing school costs. These costs are used in determining charges for patients who are not Blue Cross subscribers or members of managed care plans that have entered into similar arrangements. Therefore, Blue Cross subscribers, in effect, receive a discount on the charges made to some other patients, including those whose benefits are provided by insurance companies under many traditional medical expense plans. However, insurance companies often also reimburse hospitals on a per diem basis under their managed care plans.

Under some Blue Shield plans, physicians may also be reimbursed at less than their actual charges.

National Coverage
While Blue Cross—Blue Shield plans operate in precise geographic regions, many insurance companies have historically operated on a national basis. In the era of traditional medical expense plans, the Blues had a more difficult time competing with insurance companies for the group insurance business of employers whose employees were located in areas served by several different Blue Cross—Blue Shield plans. Today, the situation has changed. It is more difficult for insurance companies to operate on a national basis because of differences in the state regulation of medical expense insurance. In addition, in this era of managed care, a national presence requires the ability to set up provider networks everywhere. As a result, many insurance companies have withdrawn from the medical expense market or do not sell products in all states. The Blues, on the other hand, have developed procedures on a cooperative basis among themselves for providing coverage to "national accounts." For example, an employer can arrange a medical expense plan that allows any employee to have coverage through the HMO or PPO of the Blue Cross—Blue Shield organization that operates in the area where the employee resides.

Flexibility
There seems to be a feeling among benefit consultants that insurance companies have a greater degree of flexibility than Blue Cross—Blue Shield in modifying their group contracts to meet employers' needs and desires. Blue Cross—Blue Shield contracts have traditionally been quite standardized, with few, if any, variations allowed. One major reason for this rigidity is that changes in the benefits promised to subscribers also have an effect on the contracts between the Blues and the providers. However, with employers increasingly wanting new approaches to medical expense benefits, often for cost-containment reasons, many Blue Cross—Blue Shield plans have taken a more flexible approach. Many variations exist among plans, and some have been very innovative in meeting the demands of the marketplace, even going as far as to administer benefit plans that are self-funded by employers.

Rating
In their early years, the Blues used only a "community-rating" approach in determining what premium rates to charge. Under this approach, each plan used the same rate structure for all subscribers, regardless of their past or potential loss experience and regardless of whether coverage was written on an individual or a group basis. Usually, the only variations in the rate structure resulted from variations in coverage: whether it was for an individual, a couple without children, or a family. The philosophy behind the community-rating approach was that coverage should be available to the widest range of persons possible at an affordable cost. Charging lower premium rates to segments of the community with better-than-average loss experience was thought to result in higher and possibly unaffordable premium rates for other segments of the community.

Community rating placed Blue Cross and Blue Shield plans at a competitive disadvantage when insurance companies began to aggressively market group medical expense insurance and use experience rating, which allowed them to charge certain employer groups much lower premiums than those charged by the Blues. As a result, by the mid-1950s insurance companies surpassed the Blues in the number of persons covered. Faced with the growing dilemma that rate increases necessary to compensate for the loss of better-than-average business tended to drive even more business to the insurance companies, the Blues initiated the use of experience rating for groups. Today, there is little difference in this regard between these two major providers with respect to group business. However, the Blues still use community rating in pricing products for smaller employers and for the individual marketplace.

Marketing
The Blues tend to have lower acquisition expenses than insurance companies, and most coverage is marketed by salaried employees. However, more than half of the plans also market coverage through agents and/or brokers in addition to their own sales forces. In general, the commissions paid to agents or brokers are below the commissions paid by insurance companies.

The Blues and Insurance Companies in Today's Environment
Today, the Blues and insurance companies have moved far beyond writing only traditional medical expense plans and are major players in the managed care marketplace. Together they write the majority of PPO coverage and a significant portion of HMO coverage.

Most of the Blues now have their own HMOs, PPOs, and point-of-service plans. In fact, national statistics show that slightly more than one-third of Blue Cross—Blue Shield subscribers are covered under PPOs, and this is the fastest-growing market segment. About one-third of their subscribers are covered under traditional plans, and a little less than one-third are covered under HMOs. As the Blues have expanded into broader markets, many of them have changed their names and do not use Blue Cross or Blue Shield in the new names.

Similarly, insurance companies have expanded their offerings. Most insurers that write traditional medical expense coverage also offer PPO products. Some insurers have actually gotten out of the market for traditional products and only offer PPOs. A relatively small number of insurers have gotten into the HMO market—sometimes through mergers with existing HMOs—but these insurers account for about 20 percent of HMO coverage written. Insurance companies also offer a wide array of products and services for use with self-funded plans.