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Blue Cross Struggles to Staunch Red Ink

February 16, 1988|JAMES F. PELTZ | Times Staff Writer

Since Leonard D. Schaeffer was hired two years ago as president of Blue Cross of California, the giant but struggling health insurer, he's put in 70-hour workweeks. He's pared the company's bloated work force from 6,000 to 4,500 through attrition and layoffs--the firm's first layoffs in more than 30 years. He's straightened out the company's poor computer system. He's also raised some badly needed cash by selling the company's Woodland Hills headquarters for $90 million.

And he's trying to move Blue Cross into new markets, while spearheading several organizational changes as part of an overhaul of Blue Cross' philosophy toward its role in health care.

But the score card shows it still hasn't been enough. Soaring health-care costs and increased competition have left Blue Cross--which collects nearly $2 billion a year in premiums--with $150 million in losses in the past two years.

"Their losses last year were huge compared with what they expected," said Thomas Kelly, a partner and health-care specialist at the accounting firm Peat Marwick Main & Co. "They can't afford another year like that."

Schaeffer said Blue Cross could weather another year like 1987. The company has more assets it could sell if necessary, he said, including 32 acres surrounding its leased headquarters. Commercial land in the area now sells for about $500,000 an acre.

But Schaeffer thinks Blue Cross won't need the cash. "We don't make predictions," he said, but suggested that if Blue Cross has finally priced its insurance policies right, "and we think we have, this will be a much, much better year."

Blue Cross has managed to reduce its losses, but not eliminate them. In the first nine months of 1987, Blue Cross lost $97.8 million. Besides its operating woes, Blue Cross' investment portfolio suffered a $15 million loss after the stock market crashed Oct. 19. And no one, including Schaeffer, is predicting whether the firm can post a surplus any time soon.

Schaeffer, 42, is understandably sensitive about the losses. During an interview he gave a visitor a two-page, typewritten summary of recent newspaper stories detailing the problems at 13 other major insurance companies.

Indeed, many traditional health insurers are struggling with the rise in medical costs and strong competition. Travelers Corp., for example, recently posted a 77% drop in fourth-quarter profits because of a $57 million operating loss in its group health insurance sector.

The competition is coming from health maintenance organizations and other "managed-care" plans that try to limit medical costs by providing coverage with selected doctors and hospitals at preset rates. Since emerging about 15 years ago, HMOs and their relatively low prices have attracted 30 million members.

But even the HMOs are now finding profits pinched by skyrocketing medical costs, and are having to raise prices by 20% or more. One group, Maxicare Health Plans, suffered a $28.4 million loss in the first nine months of 1987.

Analyst Kelly conceded that Blue Cross's losses "haven't been all that surprising given the industry's experience. On the other hand, they've lost a significant amount of business. They were asleep at the switch." Blue Cross last year insured 2.9 million Californians, compared to 3.7 million in 1984.

After developing one of the best-known names in health insurance over the past 50 years, Blue Cross is still trying to regain its rock-solid footing.

77 Independent Companies

Blue Cross of California is one of 77 independent companies that make up the national Blue Cross/Blue Shield Assn., whose overall membership is 77.5 million. Each plan is a private, nonprofit concern, although in some regions the Blue Cross and Blue Shield organizations are one entity.

Blue Cross of California, in fact, began as separate Blue Cross companies, one serving northern California, the other the south. They merged in 1982 in hopes of improving the efficiency and service of both firms. Instead, the merger created many of Blue Cross' current headaches.

"When the merger occurred there was no integration," Schaeffer said. "So another layer of bureaucracy was put in to bring all that stuff together but no attention was focused on making it efficient."

Blue Cross' bid to regain competitiveness began two years ago when it looked outside its own ranks and hired Schaeffer. He had been president of Group Health, an HMO based in St. Paul, Minn. He also had served as an administrator of the Health Care Financing Administration of the U.S. Department of Health and Human Services.

He said he took the Blue Cross job because of the challenge of finding a way to control the costs of health care while not restricting its quality. "That's what attracts me to this business," he said.

First, Schaeffer had to deal with Blue Cross' computer problems. When the company installed a new computer system after the 1982 merger, the hardware was supposed to streamline Blue Cross and cut costs.

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