Welcome

Three factors drive the cost of healthcare:

• Cost of services. Despite an increase of 8 - 12 percent in 2002, the cost of healthcare services in Rhode Island is lower than neighboring states. This seems to suggest that insurance premiums are rising at an artificially high rate. In fact, two other issues are today's actual drivers of healthcare costs.
• Number of services. One of those issues is the number of services that are used by patients. In 2002, BCBSRI members were involved in about 27,000 inpatient hospital admissions - a 9 percent increase over 2001 - at a cost of about $200 million. Additionally, BCBSRI members went to a physician's office about two million times in 2002 - a 4 percent increase over 2001.

BCBSRI members go to doctors, both primary care physicians and specialists, 21 percent more than the national average for those with health insurance. That comes out to almost one more office visit per year than the national average

Our members also tend to visit specialists more than the national average. Overall, BCBSRI pays about $85 million a year on physician office visits.

Going to your doctor often entails diagnostic tests. These make up a rapidly growing area of healthcare service expense. Such tests may include X-rays, MRIs, blood tests and "machine" tests such as electrocardiograms. BCBSRI spent about $125 million for member diagnostic tests in 2002 - that was $25 million more than in 2001.

• Kinds or "mix" of services. Increasing use of diagnostic tests contributes to cost increases. However, there is another, more subtle factor in this that is also driving costs up. Costs increase more rapidly as the "mix" of services changes. For example, using CAT Scan or MRI tests rather than more traditional X-rays is a change in the mix of services. Overall, this phenomenon resulted in a $2 million cost increase - 3 percent in 2002 over 2001.

It should not be a surprise, then, that the more we use the healthcare system, the more it costs. Of course, that does not mean that using the healthcare system is bad or should be avoided. A diagnostic test may uncover a medical problem early and suggest a treatment that provides an early cure. That is what's best for our members, and it is also a way to better control rising costs. After all, waiting for the full onset of disease may well result in more patient discomfort and more costly treatments.

The objective should be to find ways to use the healthcare system effectively. BCBSRI is committed to educating its members about strategies for doing that. Many people still do not know how best to use the healthcare system. Many, for example, still rely on emergency rooms for routine care that could be delivered more effectively, and at less cost, by a primary care physician. Similarly, many are still using name brand prescription drugs when generic drugs would be just as effective medically - and far less costly.

These are just two examples of more affordable choices that patients can make - if they are educated about how the healthcare system works. Armed with knowledge, people are empowered to make better decisions about how they use the healthcare system, and about how to live healthy lives. Decisions about eating healthy foods, avoiding tobacco products, wearing seatbelts in your car, can mean the difference between good health and poor health.

Rising healthcare costs threaten affordability for our members. Administrative costs are the unavoidable expenses of running a business. For a health plan, these costs include such tasks as claims processing, enrollment and billing, sales and marketing, technology, information systems, provider services and contracting, finance and underwriting, customer service and general administration.

This is the "10" in 87-10-3.

At BCBSRI, we are taking every possible step to promote efficiency and to curb administrative costs.

BCBSRI administrative costs have declined steadily over the past five years. Today, these costs are at about 10 percent of premium.

BCBSRI continues to seek ways to achieve operational efficiency. In 2002, TPI, one of the nation's best regarded consultants, studied every function of BCBSRI and recommended that we transfer our technology and some other business process operations such as claims processing to an outside company, Perot Systems.

Shifting these functions to Perot will enable us to better serve members, employers and healthcare providers. And, the transfer will result in substantial cost savings - thereby further helping to curb the rate of premium increases. Moving technology operations to Perot Systems carries numerous operational benefits, including access to a new computer system. That alone will lead to other innovations, including:

• Personalized health plans.
• Twenty-four-hour-a-day customer service and online claims handling.
• Online billing and payment for physicians and other providers.
• A high degree of data security and privacy for members.

After three years of substantial losses in the late 1990s, Blue Cross & Blue Shield of Rhode Island stood at a crossroads. Would the company have a future? How would it prevent such losses in the future? What must be done to protect its members and ensure their access to healthcare services?

Milliman USA and Tillinghast-Towers Perrin, national consulting firms, agreed that BCBSRI reserves were inadequate to ensure operational efficiency and long-term financial stability. Another way of looking at reserves is to think of them as you would a "rainy day" fund.

The consultants recommended that BCBSRI build reserves to between 20 and 30 percent of annual premiums. The dollars put aside to achieve these reserves make up the "3" in 87-10-3. There are several things you should know about this:

• BCBSRI has opted for a reserves goal that is on the low side of the consultants' recommendation. Our goal is to build reserves to 22 percent of premium. We felt that was a reasonable reserves level, one that would provide financial stability while also being fair to those who pay premiums.
• At 22 percent, BCBSRI would be only in the mid-range of Blue Cross plans nationally.
• Today, BCBSRI reserves stand at 15 percent of premiums.
• While some in the healthcare community have questioned the need to build reserves, BCBSRI today stands just 38th among 40 Blue Cross plans nationally. We continue our effort to bolster reserves, but we still have a long way to go before achieving long-term financial stability.
• As premiums grow each year, so, too, must reserves if they are to keep pace. Thus, in setting aside 3 cents of the premium dollar for reserves, 1.5 cents of that is needed just to maintain reserves at current levels. That means only one and a half cents of that dollar actually goes to increase the percentage of reserves to premium.
• Reserves are not optional. Both Rhode Island state law and the Blue Cross & Blue Shield Association, which licenses BCBSRI, require us to maintain reserves
• Only by having adequate reserves can BCBSRI ensure members the access to healthcare services that they need.