PROVIDENCE, R.I. (WPRI) – Blue Cross & Blue Shield of Rhode Island executives say its financial health improved in 2015 despite a sizable loss on paper, allowing the company to bolster its reserves.
While the state’s largest health insurer reported an official net loss of $126 million for the year, the red ink was caused by accounting rules rather than actual cash losses, according to a WPRI.com review of regulatory filings. The company’s net reserves at the end of the year – a key measure of solvency – grew from $264 million in 2014 to $295 million in 2015.
Michael Hudson, Blue Cross’s chief financial officer, said a better measure of the company’s operating performance in 2015 is its $22 million profit from insurance underwriting, for a profit margin of 1.3%. He compared that with the insurer’s underwriting losses of $10.5 million in 2014 and $50.7 million in 2012.
“I think it was a solid year,” Hudson told WPRI.com. “It was a modest profit margin – we have no interest in a big profit margin, but like any business, revenue’s got to be a little bit more than expenses or you just don’t stay in business.”
Revenue ticked up slightly to total $1.67 billion.
The culprits for the official net loss of $126 million were two accounting charges: a $90 million charge to speed up depreciation for Blue Cross’s internal software system, BlueTransIT, which cost more than $200 million to build; and a $64 million charge to shut down its defined-benefit pension plan. Hudson said the two charges only impacted the insurer’s actual cash reserves by a few million dollars.
“So at the end of the day, with the reserves going up, that is your gold standard – is our financial health trending good or is our financial health trending poorly?” he said. “And if our reserves are good, that would be indicative of a good financial performance.”
The Rhode Island plan’s reserves ranked as the third-worst among all Blue Cross affiliates nationally in 2014, and Hudson said he thinks it remains in the lowest quartile now. Its reserve level was 17.8% of premium revenue at the end of 2015, well below the 23% minimum recommended by the R.I. Office of the Health Insurance Commissioner.
Blue Cross membership declined from 388,106 in 2014 to 349,438 in 2015, which is closer to what it averaged between 2011 and 2013. Hudson said membership had risen in 2014 because coverage under President Obama’s health law took effect for the first time.
“Some of it’s the result of an increasingly competitive market, which is fine, which I think is a good thing – I’m for the competition because it makes us work harder at meeting our customers’ needs and also makes us work harder at reducing the cost of health insurance,” he said.
Blue Cross is currently searching for a new CEO after Peter Andruszkiewicz, its chief executive since 2011, announced he plans to retire in May. The insurer has hired SpencerStuart, a Chicago-based headhunting firm, to help find Andruszkiewicz’s replacement. Andruszkiewicz earned $1.2 million in 2015, according to Blue Cross.
One of the biggest jobs facing the new CEO will be implementing Blue Cross’s new IT outsourcing deal with Dell Inc., which took effect in January and will result in significant layoffs at the insurer. The contract is worth roughly $234 million to Dell through 2023, and is expected to save Blue Cross $16 million a year, according to the insurer. Blue Cross has also expanded the agreement with Dell to spend $6 million on data and analytics over the next three years.
Separately, Blue Cross is the target of an antitrust lawsuit brought against it by Steward Health Care System, the Massachusetts company that tried and failed to buy Landmark Medical Center.
The case, filed in 2013, is currently not scheduled to go to trial until next year at the earliest. It has attracted some top legal talent, including famed Washington defense attorney Brendan Sullivan Jr. and former Rhode Island U.S. Attorney Robert Corrente for Steward, and prominent Providence lawyer John Tarantino for Blue Cross.
Asked this week whether the case will go to a mediator, Tarantino told WPRI.com all federal cases are subject to mediation, but U.S. District Court Chief Judge William Smith “has not appointed a mediator on this case at this time and no mediation date has been set.”