Incorporated: 1982
SIC: 6794 Patent Owners & Lessors; 6324 Hospital & Medical Service Plans
The Blue Cross and Blue Shield Association is a nationwide organization that coordinates 70 independent health care plans which operate under the Blue Cross and Blue Shield banner. The association owns the Blue Cross and Blue Shield names and trademarks, and licenses them to its members. All Blue Cross and Blue Shield plans (often referred to collectively as the 'Blues') are run autonomously, but must meet standards laid out by the association. Taken together, the Blues are the largest health insurers in the United States, covering about 25 percent of the nation's population. Sixty-eight million Americans are currently enrolled in Blue Cross and Blue Shield plans. Licensees also operate in Canada, Jamaica, and the United Kingdom. The Blues serve an additional 34 million individuals through their role as contractors for Medicare processing.
Eighty-seven percent of the Blue Cross and Blue Shield network's subscribers belong to group insurance plans, while the rest are enrolled as individuals. Five and a half million Blues customers in 42 states participate in Health Maintenance Organizations (HMOs). Another 15.5 million customers receive their health care through Preferred Provider Organizations (PPOs), in which members may choose any physician or hospital, but receive greater benefits for choosing from among those 'preferred' by the plan. In 1992, the plans collectively processed over a half billion claims, paying out $63 billion in benefits. Nearly another half billion Medicare bills were processed by the Blues as well.
Dr. Justin Ford Kimball, a Baylor University administrator, is generally recognized as the originator of Blue Cross. Kimball noticed that among the university hospital's unpaid bills were those of a disproportionate number of local school teachers. In 1929, he addressed this problem by organizing a plan in which teachers could be covered for a three-week hospital stay in a semi-private room by prepaying as little as 50 cents a month. The first group health plan was off the ground when 1,250 Dallas-area teachers enrolled at once.
Other groups of Dallas employees joined the program, and it began to attract attention across the United States. Similar plans sprang up in Iowa and Illinois. Like the Dallas prototype, those plans involved only one hospital. In the early 1930s, plans were created that offered customers a choice of different hospitals in their communities. California, New Jersey, and New York were among the first locations for programs of that type. The Blue Cross name and symbol were developed in 1934 by E. A. van Steenwyk, a pioneer of St. Paul, Minnesota's group health plan. By 1935, there were 15 Blue Cross plans in 11 states. The following year, the American Hospital Association (AHA) created the Committee on Hospital Services to oversee the growing batch of Blue Cross organizations nationwide. The Committee's early leader was C. Rufus Rorem, who had been involved with the AHA for several years. By 1938, there were 38 Blue Cross plans in the United States, with a total enrollment of 1.4 million. In comparison, only about 100,000 people were covered for hospitalization by private insurance companies at that time.
Meanwhile, a similar movement had begun for covering the costs of physicians' services. In the Pacific Northwest, a few lumber and mining companies had begun making arrangements to pay doctors a monthly fee for providing their employees with health care services. The first of these plans appeared in Tacoma, Washington, in 1917. The first modern Blue Shield plan was established in 1939 in California. Modeled on the earlier programs, the California Plan enabled its customers to receive physician services for $1.70 a month. Only those with income under $3,000 a year were eligible for the program. The medical societies of other states began to develop similar programs, and in 1946 the first handful of such plans banded into a national group called the Associated Medical Care Plans, overseen by the American Medical Association (AMA). This group informally adopted the Blue Shield as its symbol two years later, and it eventually became known as the Blue Shield Association.
Between 1940 and 1945, the number of Blue Cross plans operating nationwide grew from 56 to 80, and enrollment increased from 6 million to 19 million. Blue Shield's enrollment was approximately 3 million. This growth was largely due to the wartime emphasis on fringe benefits as a way to increase wages without boosting salaries. In 1946, Rorem resigned as executive director of the AHA commission overseeing Blue Cross plans, and was replaced by Richard M. Jones, whom Rorem had hired as head of public relations. The organization's name was then changed to the Blue Cross Commission.
In 1948, Blue Cross and Blue Shield agreed to merge. The move was blocked by the AMA, however, on the grounds that such cooperation between hospitals and physicians could lead to actions in restraint of trade. Nevertheless, the Blues began working together around that time on public policy issues, while remaining independent, competing entities. To facilitate their continued growth, both Blues set up nonprofit agencies to coordinate the activities of their member plans. The Blue Cross Commission established Health Services, Inc. (HSI), a stock insurance company, to coordinate national enrollment in Blue Cross plans and to act as an underwriter to make up for differences in benefits between member plans when national contracts made it necessary. The Blue Cross Association was created as a holding company for HSI stock, which was actually owned by the plans themselves. Blue Shield set up a similar structure, establishing Medical Indemnity of America (MIA) as its counterpart to HSI.
Although the Blues continued to grow in the 1950s, they began to face stiff competition for the first time from commercial insurance companies. In 1945, Blue Cross controlled 61 percent of the national market for hospital insurance. By 1951, private commercial hospital insurance customers outnumbered Blue Cross members for the first time, 40 million to 37.4 million. The emergence of major medical policies, in which the customer shares the risk by paying a 'deductible' sum before any benefits kick in, posed a strong challenge to the Blues in the 1950s. As major medical coverage bloomed, primarily through labor contracts, the Blues attempt to counter by offering coverage for longer hospital stays and broadening the range of medical conditions for which it would pay the costs.
Enrollment in the 77 Blue Cross plans was up to 51 million in 1955. The following year the Blue Cross Association (BCA) was given an additional role. Previously a paper corporation set up to meet the legal necessities of stockholding, the BCA now became the primary vehicle for cultivating new national enrollment contracts. The Blue Cross Commission (BCC), under new leader Basil C. MacLean, continued to serve as the coordinating agency and trade association for member plans. In 1960, most of the functions previously carried out by the BCC were shifted to the BCA, and the BCA became the sole organization for the national coordination of Blue Cross plans. Its president was James Stuart, originally an officer of the Cincinnati Blue Cross plan.
Nearly 56 million people, or one-third of the U.S. population, were members of a Blue Cross plan in 1960. Walter J. McNerney took over as head of the BCA in 1961. The Blues continued to lose ground to private insurers through the 1960s, although they retained their strongholds in major urban centers. Their dominance in those areas was mainly due to their ability to strike national deals with large employers, including all of the major automakers. By 1963, 46 percent of all Americans with hospital insurance had some Blue Cross coverage. In metropolitan areas, however, Blue Cross continued to insure over half the population.
Later in the decade, Blue Cross and Blue Shield benefitted from the establishment of Medicare. With the passage of the Medicare Act in 1965, Blue Cross was assigned the task of implementing the federal program to provide medical assistance for the elderly. Many states began operating their Medicaid programs through Blue Cross as well. These federal health care programs helped enable the Blues to maintain their dominant position in the area of hospital insurance despite the entry of numerous major insurance companies into the field. By 1969, 35 percent of the civilian population of the United States under age 65 (70.6 million people ) was enrolled in Blue Cross. About half the $10 billion in premiums Blue Cross was collecting by 1970 came from government agencies.
By the early 1970s, Blue Cross and Blue Shield began to feel the effects of health care costs spiraling out of control. The Blues attempted to meet this challenge with a combination of rate hikes and cost control measures such as utilization reviews of hospital admissions. The public did not react well to these actions, and many customers became suspicious of the close relationship between Blue Cross and the AHA. A feeling persisted among policyholders that this affiliation meant that decisions at Blue Cross were inevitably being driven by the interests of the hospitals rather than those of Blue Cross customers, who had come to rely on the Blues as the insurers of last resort. Partly as a reaction to these concerns, the BCA's official ties with the AHA were severed in 1972, and ownership of the Blue Cross name and symbol were transferred to the BCA.
As the 1970s continued, the financial situation worsened for the Blues. By 1975, the entire Blue Cross system had reserves of only $1.2 billion, far short of its needs. That year, Blue Cross plans ran at a collective deficit of $455 million. The nation's 70 Blue Shield plans were not faring much better, recording a $291 million shortfall for 1975. Meanwhile, medical costs continued to skyrocket, and Blue Cross was feeling pressures from both sides of the issue. Government regulators, which had usually passed Blue Cross rate increase proposals with little or no resistance in the past, became stingier in response to public outcry. At the same time, some hospitals, faced with accelerating inflation coupled with increased competition from over-building, began clamoring for the elimination of special discounts Blue Cross had always been able to negotiate.
Blue Cross' response to the steep escalation in the cost of health care was to look for ways to shorten hospital stays. By 1975, 27 plans across the United States were sponsoring HMOs, which emphasize preventive care with the goal of minimizing the need for hospitalization. Pre-admission testing programs, which encourage subscribers to have routine testing done on an outpatient basis well in advance of scheduled in-patient treatment or surgery, was also being offered as a benefit by 56 plans. Same-day surgery, home care, and other outpatient services were incorporated into a number of plans scattered across the country.
Entering the 1980s, the Blues continued to be plagued by soaring health care costs, which tripled between 1967 and 1981. Frustrated by the failure of most plans to heed his urging to modernize their operations, McNerney resigned as president of the BCA in November 1981, and was succeeded by Bernard Tresnowski. In 1982, Blue Cross and Blue Shield finally completed their long-awaited merger, and although the two types of plans were still run separately in some areas, both were coordinated by the same organization, the Blue Cross and Blue Shield Association based in Chicago. The number of Blue Cross and Blue Shield plans numbered 97 in 1983. That year, the association announced the formation of a 21-state network of 38 HMOs. The HMO network was designed to make the Blues attractive to large companies with employees located across the nation.
The Blues continued to falter financially through the remainder of the 1980s. Between 1980 and 1988, the system lost about 10 million customers and the number of plans declined. The 75 member plans in operation in 1987 and 1988 ran a combined deficit of $3 billion for those two years. Competition from commercial insurance companies, independent HMOs, and other health care sources dragged the Blues' market share down to 31 percent. At the same time, some member plans found it necessary to operate more like commercial insurance companies. The community rating system, in which rates are determined according to collective rather than individual statistics (a guiding principle of the Blues from the start), was even abandoned by a few plans. Some plans began to compete with each other through subsidiary operations outside their home states.
The beginning of the 1990s brought more bad news for the Blues. In late 1990, Blue Cross/Blue Shield of West Virginia became insolvent, the first financial collapse in the history of the Blues, when $53 million in medical bills went unpaid. Several other plans were discovered to be on shaky financial ground. Early in 1991, it was revealed that executives of some member plans were receiving the kinds of salaries and perks normally associated with more profit-driven businesses, including sports skyboxes, lavish golf outings, and flights on the Concorde. Allegations of widespread mismanagement throughout the system prompted a Senate investigation of Blue Cross and Blue Shield operations. The Senate panel, chaired by Georgia Senator Sam Nunn, turned up evidence of reckless spending at several of the plans.
By late 1992, several plans required financial bailouts by neighboring association members. For example, Blue Cross and Blue Shield of Virginia was called upon to rescue the floundering Group Hospitalization and Medical Services (parent company to Blue Cross and Blue Shield of the National Capital Area) when it lost 50 percent of its reserves to bad investments. This sort of marriage by necessity shrank the number of Blue Cross and Blue Shield plans nationwide to 72 by the end of 1992. The Blues' market share continued to erode as well, slipping to an all-time low of about 30 percent, as the system's credibility deteriorated in the aftermath of the Senate hearings.
In spite of the litany of problems, every member plan managed to operate profitably in 1992, and the system reported an aggregate gain of $1.9 billion. Searching for ways to offset the public relations beating it was taking, the association announced a new set of financial standards to which member plans would be held in early 1993. As part of the new policy, plans were required to participate in state guaranty funds or other similar programs which protect consumers in the event of bankruptcy.
In March 1993, the Blues and IBM announced a joint project to expand the system's electronic claims processing capability. The development of the new network would also allow Blue Cross and Blue Shield to process the claims of other insurers for a fee. Bad press for the Blues continued to flow freely, however. Overspending, misrepresentation of losses, and other improprieties were uncovered in 1993 at the system's largest member, Empire Blue Cross of New York. Plans in Washington, D.C. and Ohio were under the scrutiny of government agencies as well.
By the mid 1990s, the Blue Cross and Blue Shield Association stood at a crossroads. In spite of the huge difficulties of recent years, many of them self-imposed, the Blues still control a huge share of the health insurance market. Most of the association's member plans are in reasonably sound financial shape, and a functioning nationwide infrastructure is still in place and going strong for the most part. With health care in the United States on the brink of dramatic changes, the destiny of the Blues will be determined largely by what role, if any, it ends up with in the American health care scheme to be concocted over the next few years.
Further Reading
'Adding Insult to Injury,' Forbes, March 1, 1977, pp. 33-4.
'Aid for Blue Cross in Nixon's Plan,' Business Week, February 27, 1971, pp. 94-96.
Anderson, Odin W., Blue Cross Since 1929: Accountability and the Public Trust, Cambridge, MA: Ballinger Publishing Company, 1975.
'Blue Cross-Blue Shield Binds Health Agencies into 21-State Network,' Wall Street Journal, December 9, 1983, p. 20.
Blue Cross and Blue Shield Fact Book, Chicago: Blue Cross and Blue Shield Association, 1993.
'Blue Cross Plans Support Programs to Reduce Need for Hospitalization,' Journal of Commerce, April 21, 1975, p. 2A.
'Blues Awash in Controversy; Salary Probe Tarnishes Image,' Journal of Commerce, March 16, 1991, p. 5A.
Borzo, Greg, 'Blues Begin Processing Other Carriers' Claims,' American Medical News, April 26, 1993, p. 33.
Freudenheim, Milt, 'Fiscally Battered Blue Cross Fights to Remain Top Insurer,' New York Times, April 2, 1989, p. 24.
Garland, Susan B., 'A Black Eye for the Blues?' Business Week, July 20, 1992, p. 33.
'A Health Insurer that Needs a Cure,' Business Week, May 10, 1982, pp. 158-164.
Kenkel, Paul J., 'The Blues at a Crossroads,' Modern Healthcare, December 14, 1992, pp. 33-40.
Law, Sylvia A., Blue Cross: What Went Wrong?, New Haven: Yale University Press, 1974.
Millenson, Michael L., 'US 'Blues' Association Tightening Standards,' Journal of Commerce, February 11, 1993, p. 8A.
Perham, John C., 'Battle of Policies,' Barron's, October 29, 1956, p. 3.
Siegel, Max H., 'Blue Shield, Blue Cross Reach Accord on Merger,' New York Times, March 12, 1974, p. 1.
Simon, Ruth, 'What Cracks in the Blue Cross System Can Mean for You,' Money, May 1991, pp. 27-28.
Steinmetz, Greg, 'Parent of Blue Cross, Blue Shield Unveils Reforms,' Wall Street Journal, February 16, 1993 p. A4.
Weissenstein, Eric, 'Report for Senate Subcommittee Questions Financial Stability, Practices of Blues Plans,' Modern Healthcare, July 6, 1992, p. 3.
Winslow, Ron, 'IBM, Blue Cross Join in Plan to Boost Electronic Handling of Medical Claims,' Wall Street Journal, March 12, 1993, p. B6.
— Robert R. Jacobson
