Nonprofit, Local Health Insurer Attributes Turnaround to Cost Reduction Efforts, Historically Low Medical Claims Costs
(Providence, RI, 03.9.2012) - Blue Cross & Blue Shield of Rhode Island (BCBSRI) today reported progress in its efforts to moderate healthcare costs and improve its financial situation. Renewed efforts to reduce medical and administrative costs, coupled with steep declines in hospital inpatient admissions and adjustment of the company's reserve for inadequate premiums, allowed the company to achieve near break-even operating results for the year ending December 31, 2011. "BCBSRI has been working very hard over the last two years to find ways to improve members' health and reduce the cost of running our business," said Peter Andruszkiewicz, president and chief executive officer at BCBSRI. "The combination of those efforts, as well as a $92 million reduction to our premium deficiency reserve, has helped stabilize our financial situation."
BCBSRI's premium and other revenue totaled $1.57 billion in 2011. Payments to hospitals and doctors, which totaled $1.34 billion, accounted for 85.3 percent of the company's expenses last year. BCBSRI's reserves increased to 20.6 percent of premium revenue, which is on par with the reserves levels maintained by other regional health insurers.
PREMIUM DEFICIENCY RESERVES
According to Brian O'Malley, vice president of finance at BCBSRI, small and large group rates for 2011 were approved by the Office of the Health Insurance Commissioner (OHIC) in June of 2010. At that time, historical claims trends and actuarial projections reviewed by Rhode Island's Department of Business Regulation indicated that approved rates would be insufficient to cover the amount of projected member claims and operating costs for 2010 and 2011.
"Any time that established rates are lower than projected claims and operating costs, health insurance companies are required by regulators to set aside a pool of money, called a premium deficiency reserve, to ensure their ability to pay members' medical claims," explained O'Malley. "As required, BCBSRI booked the anticipated losses and set aside $92 million for the protection of our members. In instances where the reserves are not needed, which was the case for BCBSRI in 2011, the reserve is credited back into the company's financial results, creating a net accounting gain."
COST REDUCTION EFFORTS
"The good news is that the steps we've taken have successfully slowed the growth of medical claims trends and reduced our operating expenses," said Andruszkiewicz. "Those efforts, as well as the unusually low medical claims costs experienced throughout the country last year, contributed to the more favorable financial results."
In fact, BCBSRI has undertaken a series of belt-tightening initiatives over the last two years that allowed the company to reduce administrative expenses by $35 million.
"Our administrative expenses need to be lower," explained Andruszkiewicz. "To improve the affordability of care, we took a good hard look at our operations and identified a number of opportunities to reduce overhead without impacting member services."
BCBSRI took a similar approach to moderating medical expense claims and successfully reduced those costs by $139 million over the same period. Efforts included rolling out a new drug formulary that lowered drug costs by $21 million. BCBSRI also introduced a new hospital compensation model that aligns base reimbursement with inflation but provides additional incentives for meeting agreed-upon quality and efficiency standards.
"We're cautiously optimistic, but will need to continue efforts to reduce medical expenses," concluded Andruszkiewicz. "Although we've successfully slowed the rate at which healthcare costs are increasing, the reality is that they do still go up—every year—just not as fast. That means that every year we have to come up with new ways to control costs, or health insurance premiums will continue to rise."
Longer term, the company remains committed to making healthcare more affordable by improving healthcare access and quality through initiatives such as its patient-centered medical homes, care coordination programs and innovative, new product offerings.
Blue Cross & Blue Shield of Rhode Island is the state's leading health insurer and covers more than 600,000 members. The company is an independent licensee of the Blue Cross and Blue Shield Association. For more information, visit BCBSRI.com and follow us on Twitter @BCBSRI.