1. 2001 Financial Examination Blue Cross Blue Shield of Michigan
Michigan Office of Financial and Insurance Services
Commissioner Frank M. Fitzgerald
September, 2001

2. The purpose and scope of the financial examination
Michigan Office of Financial and Insurance Services’ (OFIS) role as regulator of Blue Cross Blue Shield of Michigan (BCBSM)
The purpose and scope of the financial examination
OFIS regulates BCBSM pursuant to PA350 (NPHCRA) of 1980
Why? BCBSM advocated age rating of small group to Comish and Gov. in ’99 and ’00
Three purposes to the examination:
Verification of financial data supplied OFIS by BCBSM for three years; identification of “reportable” issues
Review of operational issues—somewhat unusual for a triennial examination
Actuarial review of losses in the small group market
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

3. The Importance of BCBSM
Over 50% of Michigan’s population depends on BCBSM for coverage and service
Michigan historically has relied on BCBSM for affordable and accessible health care coverage
BCBSM is Michigan’s “insurer of last resort”
BCBSM is a very valuable asset to Michigan.
1 of every 2 citizens depends on BCBSM
Greater market penetration than any other insuring entity in Michigan
It’s financial and operational health are critical to Michigan’s citizens and health care providing community
BCBSM is one of the largest traditional Blues plans left in the country
Much consolidation occurring
2.Michigan is home to many companies that are attractive customers to BC plans
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

4. BCBSM Family Organizational Chart
Blue Cross Blue Shield
of Michigan (BCBSM)
PPOM
The Accident
Fund Company
Global Health
Options
75% Ownership
Health First
50% Ownership
BCN
Management
Company
BCBSM is a very valuable asset to Michigan.
1 of every 2 citizens depends on BCBSM
Greater market penetration than any other insuring entity in Michigan
It’s financial and operational health are critical to Michigan’s citizens and health care providing community
BCBSM is one of the largest traditional Blues plans left in the country
Much consolidation occurring
2.Michigan is home to many companies that are attractive customers to BC plans
BCN of
Michigan
Blue Care,
Inc.
BCN Service
Company
BCBSM Foundation
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

5. BCBSM Mix of Business Line of Business 1993 1999 2001
Small Group (ARS) 24.5% 25.7% 25.5%
Large Group (ERS) 16.0% 15.9% 17.0%
Non Group % 0.5% 0.4%
Group Conversion % 0.5% 0.5%
Medigap % 2.1% 1.8%
ASC (self-funded) 53.8% 54.2% 54.8%
All Lines 100% 100% 100%
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

6. BCBSM AT A CROSSROADS
Safe and solvent today, BCBSM shows disturbing trends and symptoms. Ignoring these problems will threaten BCBSM within the next decade.
Two critical points to stress:
1. People can rely today on the financial integrity of BCBSM
2. The failure of BCBSM to successfully address the following issues could spell serious problems for BCBSM within the next decade
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

7. Why BCBSM is at a crossroads
Losses in the small group market
Information systems
Cash strain
Inadequate investment return
Strain of Administrative Services Contract business
Management and board structure
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

8. Losses in the Small Group Market
Total BCBSM and Blue Care Network lives is 1,372,664
In the past 5 years, BCBSM has lost over $400 million in this market line
Small Group Average Monthly Premiums for Hospital & Medical Coverage
Individual 2 person Family
Contract Contract Contract
$178 $375 $419
$198 $414 $464
Change 11% 10% 11%
$234 $490 $549
Change 18% 18% 18%
$248 $522 $584
Change 6% 7% 6%
Cumulative Change 39% 39% 39%
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

9. Losses in the Small Group Market
BCBSM responded by making the loss an asset by using Financial Accounting Standard (FAS) 71 – a unique response
Making the loss an asset (a receivable) means it must be recovered within a reasonable amount of time or it will become a loss to BCBSM
Recovering the loss will add to future premium increases for small businesses caused by medical inflation
Total loss: $
Capitalized: $
To bottom line: $
Declared uncollectable: $
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

10. Information Systems BCBSM has outdated technology systems
The OFIS financial examination showed serious shortcomings in the use of data by BCBSM
Ratemaking data is unavailable or not readily usable
The cost of upgrading the system is estimated at $300 million or more
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

11. Cash Strain – Blue Care Network (BCN)
$54 million expense to merge 4 regional Blue HMOs into BCN
$134.3 million BCN total loss from 1998 – 2000
$18.2 million BCN loss to date this year
Decline in BCN net worth from $190.7 in 1996 to $60.2 million on 2001
BCBSM is the “parent” that must support BCN
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

12. Cash Strain of Acquiring and Operating Affiliated Companies
BCBSM acquired Accident Fund Company and PPOM for cash – $272.1 million and $182.6 million respectively
Accident Fund Company provided no return for five years
Investments in affiliates account for 40% of total invested assets, almost 20% of total assets, and almost 100% of stock holdings
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

13. BCBSM Investment Return
BCBSM INVESTED ASSETS
Bonds 824,339, %
Common Stocks 579,008, %
Real Estate 211,583, %
Cash and Sort-Term Investments (28,579,345) -2%
Other Invested Assets 185,532, %
Total Invested Assets ,771,883, %
Total Assets ,669,366,663
Invested Assets as a % of Total Assets %
INVESTED RETURN
= Net Investment Income / 105,562,188
Average Invested Assets ,737,189,640
The usual investment return includes %
Results between 4.5% -10.0%
Investment Return Excluding 56,271,523
Affiliated Investments and ,186,159,184
Associated Dividend Income %
Investment Return as a 56,271,523
Percentage of Total Assets ,669,366,663
Excluding Affiliated Investments %
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

14. Inadequate Investment Return
Real estate is 12% of total BCBSM assets
There is no return on these real estate assets
$108 million in appreciated BCBSM real estate value is not being used in any manner
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

15. Inadequate Investment Return
Common stock investment is 33% of invested assets – almost all in affiliated companies returning little to BCBSM
Overall return on investments as percentage of total assets (excluding affiliated investments) is 1.8%
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

16. Inadequate Investment Return – Advances to Providers
This is a monthly outflow of money that does not earn interest for BCBSM
BCBSM is historically put in the less favorable position of hospitals owing it money
Advances To Providers:
Asset Liability Difference
3/31/2001 $265,429,232 $194,069,851 $71,359,381
12/31/ ,180, ,282, ,897,958
12/31/ ,869, ,288,855 (10,419,292)
12/31/ ,946, ,866, ,079,814
12/31/ ,187, ,144, ,042,852
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

17. Strain of Administrative Services Contract (ASC) Business
Traditionally, this represented half of BCBSM premium revenue
$4.5 billion returned $6.6 million in 1999
New reporting requirements will disallow reporting this as premium
It is questionable whether this business is appropriately leveraged by BCBSM to the benefit of subscribers
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

18. Management and Board Structure
1 Chief Executive Officer, 1 Executive Vice President, 10 Senior Vice Presidents and 27 additional Vice Presidents
Bonus plan and performance levels do not properly incentivize management
35 member board – large by industry standards
Statutory mission – PA 350, Section
Org Chart Prop
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

19. Consequences of maintaining status quo
Threat to affordability of and access to health care coverage
Declining BCBSM asset value for Michigan
Will BCBSM as we know it exist at decade’s end?
These possibilities do not leave Michigan with the best BCBSM health care asset
There are no easy or quick fixes for BCBSM
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

20. Age Rating Is Not The Answer
BCBSM controls 57% of the small group market
BCBSM and BCN control 71% of the small group market
Total BCBSM and BCN lives is 1,372,664 – the next largest competitor is 210,712
OFIS approved price adjustors for group size and participation percentages are stemming losses
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

21. BCBSM’s Board and Management Must Refocus
Greater attention to the BCBSM’s statutory “charitable and benevolent” mission
Acting competitively, not monopolistically
Leveraging BCBSM’s strengths in a competitive and changing health care coverage marketplace
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination

22. Next Steps Meet with Governor John Engler
Share findings with legislators
Take a more proactive approach toward BCBSM by OFIS and the Commissioner
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination