Single state Blues need new strategy to prosper

At a time when insurers are expanding their presence on state insurance exchanges and rolling out tech-savvy portals to capture new customers, single-state “Blue” insurers are finding themselves hamstrung by regulations and lack of capital.

And unless they’re able to restructure, they’ll find themselves increasingly squeezed out of a changing market, according to a new report by Deloitte.

Single-state Blues “can’t keep up with the current pace of investment,” says Bill Copeland, vice chairman of Deloitte's U.S. Life Sciences division and the study’s lead author.

While public companies have access to currency for mergers and acquisitions to strengthen market share, stand-alone Blue Cross and Blue Shield organizations have limited cash to be able to do so, says Copeland.

That lack of capital is also hampering their ability to invest in infrastructure including new technology platforms that could expand their reach. “With currency, they can buy new capabilities,” says Copeland.

The report, Escaping Rapunzel’s Tower, analyzed 2012 health insurance company data from publicly available financial statements and National Association of Insurance Commissioners’ reports.  It found that the “Big Five” insurance companies spent, on average, nearly six times more on capital expenditures than single-state Blue plans.

Unlike publicly-traded companies that answer to shareholders, the non-profit Blues are controlled by state insurance regulators. And while publicly-traded companies can sell stock to raise capital, but Blues don’t have that luxury, he notes.
 

NEXT: Going public is not a panacea

Having the single-state Blues restructure to become publicly-traded companies won’t necessarily help, Copeland adds. “If a single state blue went public, I don’t think it would change the competitive nature all that much. It would take consolidation on a much larger scale to effect real change.”

Outdated regulations and methodologies need to change in order to free the Blues, which he compares to Rapunzel trapped in a tower. “They need to be regulated as if they’re an asset of the state. There’s going to continue to be more change, so the question is, is all of this regulation helping or hurting the asset?”

Without change, “their performance levels will begin to drop and it will start to have an adverse impact on their income statement,” says Copeland. Industry-wide change is being driven in large part by the Affordable Care Act (ACA), he notes. “The ACA introduced choice into the marketplace. What we’re seeing now is more competition in the mix, whether it’s from retail, or hospitals, or the financial sector.”

Consumers are responding to the choice and now want to shop for health insurance the way they shop for auto and life insurance products.

The ACA also eliminated an historic competitive advantage for single-state Blues when it mandated that enrollees couldn't be denied coverage for pre-existing conditions.  Prior to that, “Blues were seen as the insurer of last resort,” notes Copeland.  

An answer for long-term survivability lies in broad-scale collaboration among Blues, something that has worked in the past, says Copeland. “Blues have historically worked together on (certain) initiatives like the Blue Card.”

Going forward, “they need a common agenda, which is hard to do as they’re all separate. Doing so would require that they be legally tied together. “Removing obstacles to that action would help,” says Copeland.