How Tennessee's biggest health insurer helped ensure its own profits remained healthy in 2014

Aerial photo of BlueCross BlueShield of Tennessee headquarters in Chattanooga.

Tennessee's biggest health insurer helped ensure its own profits remained healthy last year by selling its stake in an IT company to offset extra taxes and higher-than-expected medical claims from its new Obamacare health plans.

Chattanooga-based BlueCross BlueShield of Tennessee earned $199.7 million during 2014 on total revenues of $10.8 billion, according to company filings with the Tennessee Department of Commerce and Insurance.

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By the numbers

In 2014, BlueCross BlueShield of Tennessee handled:* 3.3 million members* 82.2 million claims paid to 25,000 health care providers* 6.7 million calls handled by BlueCross employees, up 19 percent from the previous year* $11.6 billion in claims paid, including TennCare, Medicare and self-insured plans* 5,400 employees, including more than 4,400 in the Chattanooga area

The not-for-profit insurer said it lost $141 million on its health exchange plans sold under the Affordable Care Act due to heavier-than-expected health care claims by the 164,896 Tennesseans BlueCross covered under the new Obamacare plans. BlueCross' tax bill also jumped 72 percent to a record high $463 million last year, largely due to new taxes levied under provisions of the Affordable Care Act.

But BlueCross offset those losses and extra costs with income from its commercial insurance, Medicare and TennCare businesses and the gain from the sale of the information technology company it uses, TriZetto.

BlueCross, which already insures nearly half of all Tennesseans, boosted its enrollment by 5 percent last year to 3.3 million members and boosted medical claims paid by 8 percent.

"Overall, we had a good year in terms of growth in memberships and revenues and had one line of business that didn't perform as expected," said Roy Vaughn, vice president of corporate communications for BlueCross. "We were able to get through last year based upon the breadth of our business and the benefit of a one-time gain in investments."

Nearly two-thirds of the company's profits came last year from a $126.1 million gain in investment income, primarily from the sale of BlueCross's share in the $2.7 billion sale of TriZetto. BlueCross bought a piece of the health care information technology company it uses in 2008 but agreed to sell TriZetto last fall to Cognizant Technology Solutions.

"We're fortunate to operate a number of businesses so that when one area loses money, or several have losses in a year, we have other businesses that are profitable to help offset those losses or we have reserves to provide us money for unanticipated claims," Vaughn said.

Last year's net income for BlueCross was down 22 percent from the record high reached in 2013 and represents about a 1.9 percent profit margin on all of the revenues the company handles. But as a not-for-profit company, BlueCross doesn't pay dividends or return yields to shareholders.

The Tennessee BlueCross plan is one of 37 independent and locally owned BlueCross plans, which include both investor-owned and nonprofit companies.

In Tennessee, Blue-Cross must pay the same insurance, sales and property taxes as investor-owned companies even though it is organized as a not-for-profit company. BlueCross banks what it earns each year in its reserve fund to help grow the company, fund new initiatives and provide a buffer for unexpected medical claims or other costs, Vaughn said.

Last year's net income helped boost BlueCross's statutory reserves to more than $1.8 billion, about $370 million, or 21 percent, above the minimum required by state regulators. BlueCross also has other holdings in real estate and business ventures, such as its stake in the IT company TriZetto, which proved lucrative for the company last year.

TriZetto develops, licenses and manages IT solutions for about 350 health plans, including BlueCross in Chattanooga. BlueCross and Cambia Health Solutions joined as minority investors with Apax Funds in 2008 to buy TriZetto. Last September, Apax struck a deal to sell TriZetto for $2.7 billion.

Such holdings and reserves have led some to suggest that BlueCross could refund or at least limit rate increases by using some of its excess reserves.

The Consumers Union has urged state regulators to limit rate increases by BlueCross since the company has more than doubled its reserves in the past decade while raising average insurance rates more than the general inflation rate.

But BlueCross insists its rate increases reflect the higher costs of medical care and that having excess reserves is valuable to protect the 70-year-old company from unforeseen medical or economic crises. Although BlueCross reserves are more than what is required, the company estimates its reserves amount to only $111 per member and would cover only 72 days of member claims without any additional funds.

But BlueCross has continued to collect additional funds to pay for its programs.

In response to losses from its role as the leading provider of health exchange plans under Obamacare, BlueCross raised the individual rates on such plans last year by an average 19 percent and is proposing another 36 percent average increase next year.

BlueCross had a similar experience with TennCare six years ago when managed care organizations were again put at their own financial risk. In 2009, BlueCross' TennCare business, which operates as BlueCare, lost $95.6 million. Since then, the insurer has worked with the state to raise rates, revamp its network and provider payments and restore the program to profitability.

According to the company's preliminary estimates, BlueCross appears to have met the requirements under the Affordable Care Act for the share of premiums it collected that were paid out for health care.

Under Obamacare, health insurers must pay at least 80 percent of their premium income to hospitals, physicians and other health care providers for medical care among those buying individual or small business insurance. Insurers must pay at least 85 percent of premium income for health care services for large companies.

BlueCross and other health insurers typically spend 10 to 20 percent of each premium dollar on handling claims, paying taxes, selling and administering policies and maintaining reserves for potential catastrophic illnesses or disasters.

Overall, BlueCross said it paid 87 percent of what it collected for medical claims last year, including $5.7 billion to hospitals, $4.4 billion to physicians, and $1.5 billion for drug prescriptions.

In the company's annual report, BlueCross CEO Bill Gracey said the company is focused on "delivering on our mission" of paying for medical care and better health outcomes for Tennesseans. Last year, the company contributed a record $14.5 million in charitable giving, primarily to health-related programs across Tennessee.

"At a time when our industry continues to undergo change, we've stayed steadfast in our focus on improving health and health care for our customers and plan members," Gracey said.

Last year, BlueCross paid Gracey $2.7 million, up from the $1.9 million compensation package he got the previous year during his first year as company CEO. Despite the yearly gain in compensation, Gracey's pay and benefits were still less than half the peak reached by his predecessor, Vicky Gregg, who was paid $6.8 million in 2011.

Gracey's pay was also only a fraction of the compensation paid last year to others in the industry, including UnitedHealth GroupCEO Stephen Hemsley, who was paid $14.86 million, or Cigna Corp. CEO David Cordani, who was paid $14.46 million.

Contact Dave Flessner at dflessner@timesfree or 423-757-6340.