THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, September 11, 1994 TAG: 9409100260
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY LON WAGNER, STAFF WRITER
LENGTH: Long : 327 lines
Blue Cross and Blue Shield of Virginia has evolved from an insurance company born of the Hippocratic oath to one employing former ``Cheers'' character Cliff Clavin to explain its mystifying adoption of the name Trigon.
The sterling reputation of the shield, once the doctors' symbol of trust and protection, is now being raised to protect the insurer from legal challenge. The 59-year-old Blue suddenly has lots of explaining to do.
The state Attorney General's office in July leaked a Bureau of Insurance report that said Trigon misrepresented pertinent facts of policy coverage ``with such frequency as to indicate a general business practice.''
Who would have ever thought that the Blue - historically dedicated to its policyholders and technically owned by them - would be under investigation for overbilling and, possibly, worse? And why the name change?
The insurer, which once had the trust of a country doctor, has in recent months become as suspect as a Wall Street wheeler-dealer. It has plans to abandon its special regulatory status and go public. Even though it is flush with a $641 million surplus, it wants to sell stock to raise even more cash.
The company is stepping beyond its back yard - Virginia - to do business in other states. The already mammoth insurer says it needs to grow to survive.
Trigon is pressing forward with its plans to sell stock, despite being confronted by controversy. The Bureau of Insurance is completing its investigation into Trigon's billing practices. Preliminary results of the inquiry suggest Trigon told policyholders it ``paid'' amounts for hospital bills that it did not pay, the insurance bureau found.
Now, Attorney General James S. Gilmore III has stepped in.
A month ago, Gilmore wrote a letter to Gov. George F. Allen advising him the Attorney General's office was expanding its investigation into Trigon.
Gilmore's interest was piqued by Trigon's administration of insurance benefits for 87,000 state employees, who paid $310 million in health benefit premiums last year. He asked Allen to delay awarding a contract to Trigon to again administer the state's Key Advantage benefits plan in 1995.
``I am concerned that the Commonwealth's employees who are covered by Trigon's Key Advantage program may have been subject to deceptive or unfair practices,'' Gilmore wrote.
Gilmore's concerns may be echoing throughout Virginia. Trigon's 965,000 policies cover 1.8 million Virginians; that's a whopping 30 percent market share.
Despite its size, Trigon's stranglehold on the state's health insurance business is slipping. Groups like Sentara Health System in Hampton Roads have bought into doctors' practices and formed health maintenance organizations, essentially blockading Trigon from a segment of its potential market, at least regionally.
Hence, the corporate makeover and plans to place this policyholder-owned firm in the hands of investors.
The day it begins selling stock, Trigon will become one of the largest publicly owned companies headquartered in Virginia. By Trigon's own calculations, its $2.2 billion insales in 1993 would place it 65th among Fortune magazine's ranking of the country's largest service companies.
If all this makes Trigon sound like a company under siege, it is. Yet, observers also see it as a sleeping giant in the health care industry, and it appears the slumber is ending.
Trigon may come out of hibernation a very hungry company. WAL-MART DEALS, BOUTIQUE PRICES
Before it falls to Wall Street investors, Trigon needs to take care of its legal problems at home. Its headaches began with Scottsville resident Gerald Haeckel, the ``poster boy'' of disgruntled Blue Cross policyholders. He's the one who brought state regulators crashing down on Trigon's billing practices.
Haeckel's wife had outpatient surgery in late 1992. When he got Trigon's bill, Haeckel (pronounced, appropriately enough, heckle) decided to request an itemized bill from the hospital.
``I guess the only thing I've got going in my favor is persistence,'' Haeckel said.
Haeckel learned that he was, in effect, overcharged. Blue Cross ``paid'' a discounted fee it had arranged in advance with the hospital. Yet Haeckel paid 20 percent of the undiscounted cost.
Blue Cross sent a bill to the Haeckels telling them the ``amount charged'' for the procedure was $950. Their 20 percent co-payment, based on that gross charge, was $190.
But with a ``contractual adjustment,'' a discount negotiated earlier, Blue Cross paid the hospital $564. If Haeckel had been charged 20 percent of what the surgery cost Blue Cross, his co-payment would only have been $112.80 - $77.20 less than he actually paid.
Most people would never have noticed; in fact, the Attorney General's office thinks that during a two-year period Trigon filed 1.7 million similarly misleading claims.
``It's a three-cornered bill,'' Haeckel says. ``Blue Cross tells the policyholder something, they tell the provider something, the provider tells the policyholder something else. You have to look at all three sides to see what they're all telling each other.''
The Haeckels have never recovered their $77.20, but they might soon. Gilmore is investigating both Trigon's insurance contracts with individuals and businesses and its administration benefits for self-insured companies, such as the state.
``Our concern has been with individual consumers who unknowingly made higher payments than they should have made,'' Gilmore said. ``It would be desirable, we believe, for the consumers to receive refunds.''
The amount Blue Cross may have to repay has yet to be calculated, but earlier comments by Gilmore suggest it could be millions of dollars.
Trigon Chief Executive Officer Norwood H. Davis Jr. admits the company's advertising materials - explaining billing procedures - were misleading. But he cites industry precedent as a defense. Other large insurers negotiate discounts with hospitals, he says, and base co-payments on nondiscounted prices.
Insurance Commissioner Steven Foster, head regulator of the state's insurers, disagrees. He says he has no reason to believe other large insurance companies were billing customers the same way. But Foster is looking at the Washington, D.C., Blue Cross plan ``for the same thing,'' he said.
Trigon began, in Davis' words, ``very aggressive'' negotiations with hospitals in the early 1980s. Because of its massive customer base, Trigon could promise a hospital volume, monetary advances based on that anticipated volume, help in processing the paperwork and few bad debts from policyholders.
``We are not the legal agent of our customers in negotiating,'' Davis said in defending the former billing practice. ``Our customers are not a party to the hospital arrangements we have.
``Technically, legally, that's not an issue.''
The negotiated discounts played into Blue Cross' premium rates, allowing the company to keep them lower than otherwise would have been possible, Davis said.
``The purchaser's going to buy based on the cost of the product, not based on what kind of discount you can get,'' he said. ``If they can find a better deal, they can go someplace else.
``Having said all that, we fell down on really looking at it from the policyholders' point of view.''
Trigon stopped the practice shortly before the state made it illegal earlier this year. But what it was doing compares to how a big retailer like Wal-Mart operates. Wal-Mart promises to buy large quantities of products from its suppliers in exchange for a lower per-item price.
Unlike Wal-Mart, though, Trigon continued to base its customers' co-payments on the retail price. And unlike the giant retailer, Trigon is supposedly owned by policyholders and pledged to protect their interests.
Sen. Clancy Holland, D-Virginia Beach, introduced the legislation that ended Blue Cross' billing practices. Holland became miffed when Blue Cross executives said the change in billing procedures would ultimately be laid on the backs of policyholders.
``Any company that's been doing this for years and has in the range of $700 million in reserves and is talking about going public,'' Holland says, ``I'm just not going to sit still for that.'' He becomes more heated at the suggestion Blue Cross would raise its premium rates instead of absorbing the cost of straightening out its billing practices.
Holland, himself a physician, concedes Blue Cross has instituted positive programs around the state: for instance, its boosterism - financial and otherwise - of free clinics. But he still views the company as a bit arrogant in getting state regulations crafted to suit its interests.
``When I put this bill in, I couldn't get the CEO and the president to come down and talk to me about it,'' Holland says. ``They took their own good time about coming in; once they realized I was on the side of the angels on this issue, they sat down and talked to me about it.''
Davis says he regrets that the investigations and news of the company's billing practices have ``tarnished this company's image.'' But he rightly says Trigon's billing system was similar to that of other Blue Crosses - and the federal government's Medicare program.
``I don't necessarily agree with the way the calculation is done,'' says Don Lorton, chief financial officer for Carilion Health Systems in Roanoke. ``But it is the norm, and they're being singled out here.
``They must be doing something right,'' Lorton adds. ``I don't know what all they've done wrong, but they don't have 30 percent market share by abusing their policyholders.'' A GOLDEN STATUTE
In many ways, the benevolent beginnings of Blue Cross and Blue Shield carried the company into the 1990s as a Virginia-born child that could do no wrong in the legislature's eyes.
Trigon President Phyllis Cothran refers to the company as ``a creature of statute.'' Blue Cross has a special section in the Code of Virginia that lays out the guidelines by which it operates.
By offering open enrollment - guaranteeing, at a price, to insure anyone - Blue Cross got a concession. The General Assembly agreed Blue Cross would pay a premium tax of .75 percent. Other insurers operating in the state pay three times as much.
As a mutual insurance company, Trigon's policyholders own the company. Yet Trigon does not have to tell policyholders how much it pays its officers, nor does it pay the policyholders dividends when it has a profitable year.
When asked to provide salary figures for this article, it refused.
The company added $116 million to its coffers in 1993, and $81 million more during the first six months of this year.
Insurance Commissioner Foster can prod the company to be more accountable to its owners, but that's about all.
``I do think when you become a mutual there's an expectation that when you've had a good year, why not dividend that back to your policyholders?'' Foster says. ``So far my gentle suggestions have not had much effect.
``There's no provision for us to tell a company they've got too much cash.''
As Trigon has stepped its way toward becoming a company traded on Wall Street, it has picked up some of the traditional trappings of big public companies:
It leases a private plane at the Richmond airport. Cothran says the plane is mostly used for shuttling between Richmond and Trigon's government services operations in Roanoke.
It flew a handful of board members and employees to the Olympics in Barcelona, Spain, two years ago. Cothran said Blue Cross representatives went to the Olympics as part of its corporate sponsorship of the games.
It spent $2,200 per broker last year to hold an annual retreat for its top insurance agents in Ponteverde, Fla. Cothran, who describes herself as ``tight-fisted,'' did a survey of other companies to make sure the $2,200 figure was not excessive. Trigon says it falls well below the $3,000- to $5,000-per-person retreats other companies give their top salespeople.
``I guess we started these five or six years ago, and I was the great doubter that we even needed to do this at all,'' Cothran said. ``Then people brought to me the evidence that these same brokers and agents can be entertained by Aetna and Cigna, and this is part of a reward that's perceived to be nicer than a check.''
Trigon's executives think the company, if it stayed its present size, would be just as susceptible as its agents to being swept away by the competition.
So the company is willing to give up its shielded status, the Virginia in its name and its humble not-for-profit roots.
In fact, Blue Cross and Blue Shield of Virginia has gradually been transforming itself during the 1990s. The pace of that change is about to accelerate.
``It's like, you can see this train coming two or three miles down the track, and you say, `Well, we'll work out something,' '' Davis said. ``And now the train is right here.'' WHAT'S A ``TRIGON''?
Many Virginians consider Blue Cross and Blue Shield of Virginia's name change about as wise as Coca-Cola's mid-1980s attempt to change the formula of its flagship product and create ``New Coke.''
The insurance commissioner is one of them.
``My favorite name,'' Foster says, tongue-in-cheek, when told the topic is Trigon. ``With all the good will they've built up with `Virginia' in their name, they spend all this money to get `Virginia' out of their name.''
Trigon handled developing name recognition for its new moniker lightheartedly. The actor most people know as Cliff from ``Cheers'' appeared in TV commercials and spouted off several obviously incorrect originations of the word Trigon; he said, for instance, Trigon was the name for the Pentagon before the fourth and fifth sides were added.
Actually, Trigon is an antiquated term for triangle, which CEO Davis likes because it stands for strength and stability.
Like Coca-Cola's jostling of its product line, Blue Cross' name change was a direct result of competitive pressures.
The company has tried to expand its market share in Virginia, but Cothran thinks it has captured about as much of the state's insurance business as possible.
Over the past several years, the company has tried to become more of a retailer, marketing itself to individuals in addition to businesses. Evidence of the company's attempt to expand into every home in Virginia shows up in Trigon's advertising budget: In 1985, the company spent $1.1 million marketing its plans; in 1993, it spent $6.6 million.
Despite Trigon's increased emphasis on selling itself, Lou Rossiter, director of health care policy at the Medical College of Virginia, points out that Blue Cross has taken its share of competitive whippings. Sentara moved in on Blue Cross' Hampton Roads territory during the 1980s, and Kaiser Permanente Health Care Program did the same in Northern Virginia.
``Obviously, whatever they did the past 10 years in Northern Virginia and Tidewater didn't work,'' says Rossiter. ``They've got to have a different game plan.''
Trigon does have a new game plan, and that's what brought about its name change. The company would like to replicate the success of one of its subsidiaries, Health Communication Services Inc. The computerized data processing network links hospitals, doctors and insurers and is the nation's largest such company, operating in 40 states and Great Britain. Similarly, Trigon wants to take its core business, health insurance, to other states.
As a whole, the Richmond-based company employs more than 3,900 people.
The nation's Blues are franchised much like fast-food restaurants. The national Blue Cross Blue Shield Association prohibits its 69 members from using the cross and shield trademarks outside their individual franchise areas. So if the Virginia plan wants to sell insurance nationally, it has to do it under another name.
Exit Blue Cross and Blue Shield of Virginia. Enter Trigon Blue Cross Blue Shield.
Cothran said she sees down the road a fevered, dog-eat-dog consolidation in the health care industry. Small and weak health insurers will be swallowed.
The Virginia Blue is already big and is considered one of the most financially healthy Blues in the country. In July, Trigon reported a $641 million surplus, which means it could pay claims and operate for the next 14 weeks without taking in a dime.
But Cothran thinks Trigon wouldn't be powerful enough, if it stayed its current size, to fend off bigger competitors.
``As we've looked out to the next five years,'' Cothran says, ``basically as a company we feel like we're going to need to be two to three times our size.''
To grow, Trigon needs to raise money, and selling stock is the most efficient way. It will use the capital to buy smaller competitors and invest in administrative systems, managed-care products and claims operations, Davis said.
Twenty years ago there were more than 130 Blues, about twice as many as today. Davis says the consolidation will continue, and he wants to make sure Trigon is powerful enough to make the cut.
The name change, along with the probability of the company selling stock, carries some risk. On the plus side, Blue Cross and Blue Shield of Virginia will remove itself one step from the tarnished image of the bankrupted West Virginia Blue and the struggling Washington, D.C., Blue. Many people don't understand that the 69 plans operate separately, and any reports of mismanagement in, say, New York upset policyholders in Virginia.
And the Virginia Blue, despite its financial solidity, suffered a couple of bruises to its image. A report released in 1992 by the U.S. Office of Personnel Management questioned $4.5 million in bills that Trigon submitted from 1982 to 1987 as part of its contracts for federal employees. Trigon spokesman Jim Goss said the government accepted Blue Cross' explanation of about $2.3 million of the charges, and Blue Cross had to repay the government for the rest.
Trigon learned from those mistakes, Goss says, and the national association recently named it the nation's best administrator of federal programs.
Haeckel's complaints and the state's subsequent investigation became an anecdote in a report issued this summer during congressional oversight hearings about the Blues.
Nonetheless, in Virginia the Blue Cross and Blue Shield image is nothing to discard without consideration, MCV's Rossiter says. Similarly, becoming a public company means Trigon will shed much of its regulatory protections.
``I don't think it's fashionable or in vogue for Blue Cross Blue Shield plans to do this,'' Rossiter says. ``It's a question of survival.
``If you're not actively involved in helping providers manage the care of patients, you will be watching the world go by.'' ILLUSTRATION: Graphic
STAFF
TRIGON
BLUE CROSS BLUE SHIELD
SOURCE: Standard & Poor's
[For complete graphic, please see microfilm]
Color photo
LAWRENCE JACKSON/Staff
Trigon President Phyllis Cothran
Photo
ASSOCIATED PRESS
Trigon Chief Executive Officer Norwood H. Davis Jr. at the company's
offices in Richmond. Davis defends Trigon's billing practices, which
have come under fire, but says he regrets that news and
investigations of them have ``tarnished this company's image.''
by CNB