Although a market that favors consolidation may cause the number of Blue Cross and Blue Shield plans to dwindle from today's high of 47 down to 20 or 25 over the next five years, consumers shouldn't be alarmed, according to a Conning & Co. study.

The study, published March 13, 2001, reports that many of the Blue Cross and Blue Shield plans, known as the Blues, lack adequate access to capital to compete with their bigger non-Blue rivals. These mostly nonprofit Blues will be forced to merge with other Blues plans or become publicly traded stock companies to even the market's playing field that currently favors large for-profit insurers.

For example, the for-profit Anthem has merged with Blue Cross and Blue Shield HMOs in Connecticut, Indiana, Kentucky, and Ohio, and is currently exploring conversion from a mutual insurance company to a publicly traded stock company.

"There will likely be a knee-jerk reaction that the Blues are selling out to become for-profit entities, especially since they've historically been nonprofits," says Conning Vice President Samuel Levitt, the study's author. "But the economic realities of health care leave them no choice. Having a competitive market is good for the consumer in the long run."

"Though this trusted brand attracts consumers who are uneasy with managed care, increasing enrollments appear to have not been enough to offset the meager profit margins among the Blues overall," Levitt says. "To remain competitive, the Blues will need to restructure and consolidate and many will test the public markets." The result, says Levitt, will likely bode well for consumers if these moves improve the Blues' overall financial strength.

But consumer advocacy groups warn that studies like these are self-serving to the insurance industry and that the consolidation trend will ultimately spell disaster for consumers. "Studies like these drive the parade [of consumers] to the wolf," says Jamie Court, a spokesperson with the Foundation of Taxpayer & Consumer Rights. "All the pernicious problems of managed care can be traced back to health insurers becoming for-profits. Nonprofits can compete if they don't join the race for the bottom with the for-profits that slash costs and don't maintain quality. Consumers will pay more for a higher-quality product."

Vicious cycle

The study concludes that meager profits have created a "vicious cycle" that will be increasingly difficult for the Blues to overcome. According to Levitt, low profit margins:

• Make it more costly for the Blues to obtain the new capital they need to plow back into their businesses.
• Are further reduced because a lion's share of any surplus is held back to satisfy the insurance industry's reserve requirements.
• Make it difficult to compete with companies with larger profit margins because these companies have used their advantage to obtain capital to invest heavily in targeted acquisitions, product development, and new technologies to improve efficiency and customer service. "In today's market, scale and efficiency matter," Levitt says.

Conning & Co. located in Hartford, Conn., is a subsidiary of Conning Corp., which provides asset management services and research to insurance companies.