Blue Cross and Blue Shield: Experiences of Weak Plans Underscore The Role
of Effective State Oversight (Letter Report, 04/13/94, GAO/HEHS-94-71).

The 1990 failure of Blue Cross and Blue Shield of West Virginia left
thousands of people and many health care providers with millions of
dollars in unpaid claims.  More recently, congressional investigators
uncovered serious financial problems as well as mismanagement at three
other "Blues" plans and raised questions about the oversight of these
plans by their boards of directors and state regulators.  GAO found that
53 of 64 Blues plans are rated in fair to excellent condition by Weiss
Research, Inc.--the only insurance rating agency doing such evaluations
of Blues plans.  The remaining 11 plans, which insure about one-quarter
of all Blues subscribers, are rated as weak to very weak financially.
Some plans were slow to respond to changing market conditions or made
poor investment decisions, while others were put at a competitive
disadvantage by rate-setting constraints and coverage requirements
applicable only to Blues plans.  In addition, weaknesses in oversight by
plan boards of directors and state regulators allowed plans' financial
problems to persist. The Blue Cross and Blue Shield Association,
individual plans, and states have tried to remedy the problems of
financially troubled plans, but it is too soon to tell how successful
these efforts will be.  Under health care reform, the role of state
insurance regulators in monitoring the financial solvency of Blues plans
and protecting subscribers' and providers' interest will become
increasingly important and challenged.  It is essential that state
insurance regulators have the tools necessary to enforce new
requirements on Blues plans and other health insurers.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-71
     TITLE:  Blue Cross and Blue Shield: Experiences of Weak Plans 
             Underscore The Role of Effective State Oversight
      DATE:  04/13/94
   SUBJECT:  Health insurance
             Insurance regulation
             Insurance companies
             Financial management
             Internal controls
             Consumer protection
             Health services administration
             Health care planning
             Financial disclosure reporting
             State programs
IDENTIFIER:  West Virginia
             World War II
             Maine
             Maryland
             Massachusetts
             New Hampshire
             New Jersey
             Vermont
             New York
             New York (NY)
             Rochester (NY)
             District of Columbia
             California
             Blue Cross-Blue Shield Benefits Insurance Plan
             National Health Care Reform Initiative
             Clinton Health Care Plan
             Health Security Act
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairman, Permanent Subcommittee on Investigations,
Committee on Governmental Affairs, U.S.  Senate

April 1994

BLUE CROSS AND BLUE SHIELD -
EXPERIENCES OF WEAK PLANS
UNDERSCORE THE ROLE OF EFFECTIVE
STATE OVERSIGHT

GAO/HEHS-94-71

Blue Cross and Blue Shield


Abbreviations
=============================================================== ABBREV

  BSCA - Business Systems Corporation of America
  CEO - chief executive officer
  CSC - Capital Services Corporation
  HMO - health maintenance organization
  ITS - Inter-plan Teleprocessing System
  NAIC - National Association of Insurance Commissioners
  NASCO - National Account Service Company
  PIF - Plan Investment Fund
  PLIC - Plan Liability Insurance Company
  PPO - preferred provider organization

Letter
=============================================================== LETTER


B-251114

April 13, 1994

The Honorable Sam Nunn
Chairman, Permanent Subcommittee on
 Investigations
Committee on Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

The 1990 failure of Blue Cross and Blue Shield of West Virginia left
thousands of people and numerous health care providers with millions
of dollars in unpaid claims.  More recently, congressional
investigators uncovered serious financial problems as well as
mismanagement at three other "Blues" plans\1 and raised questions
about the oversight of these plans by their boards of directors and
state regulators.  Investigators also questioned the oversight role
of the Blue Cross and Blue Shield Association that licenses the Blue
Cross and Blue Shield trademarks and coordinates plan activities. 

The nation's 69 Blues plans play an integral role in providing
private health insurance, collectively insuring about 67 million
Americans.  Due to concerns that the financial and management
problems identified at a few plans may also afflict other Blues
plans, you asked us to study the plans and their Association.  Based
on discussions with your office, we agreed to (1) determine the
extent of financial weaknesses among Blues plans; (2) identify
factors that contributed to plans' weak financial conditions; and (3)
determine the measures taken by plans, the Association, and states to
address plan weaknesses.  We also agreed to describe the oversight
and other roles played by the Association and discuss the
implications of health care reform on Blues plans. 

To identify the plans with financial problems, we used information
from Weiss Research, Inc.--the only insurance rating agency that
evaluates the financial condition of most Blues plans.\2 We then
obtained proprietary information from the Association on the
financial condition of each plan rated weak or very weak by Weiss. 
We did not independently assess the financial condition of these
Blues plans.  We visited six plans\3 that differed in financial
performance, regulatory environment, location, size, and product mix. 
We also conducted a telephone survey of insurance department
officials in all 50 states and the District of Columbia to compare
the state regulatory requirements that apply to Blues plans with
those that apply to commercial insurers.  (App.  I contains a more
detailed description of our scope and methodology.)


--------------------
\1 The plans were Blue Cross and Blue Shield of Maryland, the
National Capital Area (District of Columbia), and Empire Blue Cross
and Blue Shield (New York City). 

\2 The Weiss ratings were based on plan data as of June 30, 1993. 
Weiss did not rate six Blues plans because the data these plans
submitted to their state insurance departments were incompatible with
Weiss's rating models. 

\3 GAO visited Blue Cross and Blue Shield of Illinois, Massachusetts,
Michigan, New Jersey, and Oregon, and Blue Cross of California. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The revelation that several Blues plans were in poor financial
condition prompted fundamental questions about all Blues plans
because of the large number of Americans they insure.  Are the plans
run by a single corporate headquarters, or do they each operate as an
independent business?  How do Blues plans differ from commercial
health insurers?  How many Blues plans are in financial trouble and
why?  What are the responsibilities of the Blues Association when
plans have financial problems? 

The 69 Blues plans are independently operated, not-for-profit
corporations, each governed by a board of directors.  They are linked
to the Blue Cross and Blue Shield Association through a licensing
agreement.  The Association is governed by a board of directors
composed of the chief executive officers (CEO) from most Blues plans
and is primarily funded by plans' dues.  (App.  II contains a more
detailed description of the Association and its relationship to
individual plans.)

Early Blues plans were the predominant providers of private health
insurance in the United States.  They were established during the
Depression because health insurance was virtually nonexistent, and
the inability of many Americans to pay for medical care placed a
financial strain on the voluntary hospital system.  Blues plans were
organized on a not-for-profit basis and were dedicated to fulfilling
a community service role.  Accordingly, these plans sought to offer
affordable coverage to all individuals, regardless of health status. 

Following World War II, the health insurance industry changed
significantly.  By the early 1950s, commercial health insurers,
formerly a minor presence in the industry, had surpassed the Blues
plans in total enrollment.  Commercial health insurers competed with
Blues plans by offering lower priced policies to healthier, lower
risk individuals and groups.  Some Blues plans, either voluntarily or
by state requirement, became the only insurers that continued to
accept high-risk individuals and groups excluded by commercial
insurers and to base premiums on the average expected cost of the
entire applicant community.  A plan that performs this role is
commonly called the "insurer of last resort." Other Blues plans
de-emphasized their community service role by adopting practices
similar to their commercial competitors. 

Blues plans today differ considerably from one another in such areas
as market share, management philosophy, and the types of products
they offer to their three primary market segments--individual, small
group, and large group.  Plans also differ in the degree to which
they serve, if at all, as the insurer of last resort.  Currently,
fewer than 20 plans serve this role in their state.  In addition, 24
Blues plans are members of state life/health guaranty associations
that provide limited continuation of coverage and pay benefits to
policyholders and beneficiaries of failed insurers.  (App.  III
summarizes several important differences among Blues plans.)

State insurance regulators are responsible for monitoring the
financial solvency of Blues plans and other insurers to protect
consumers and ensure that plans offer insurance that is affordable
and accessible.\4 A commonly used indicator of an insurer's ability
to cover unexpected losses and measure of insurer solvency is
surplus--the difference between an insurer's assets and liabilities. 

Most state insurance departments regulate Blues plans pursuant to
special enabling statutes, some of which prescribe a community
service role for the plan, typically in the individual and small
group markets.  In recognition of their community service role and to
offset the costs associated with insuring all risks, Blues plans were
given federal and state tax exemptions and other statutory benefits,
such as discounts on hospital charges that were not available to
commercial insurers.\5


--------------------
\4 For more information on how state insurance departments regulate
health insurance, see Health Insurance Regulation:  Wide Variation in
States' Authority, Oversight, and Resources (GAO/HRD-94-26, Dec.  27,
1993). 

\5 The Tax Reform Act of 1986 rescinded the federal tax exemption for
Blues plans and subjected them to taxation as stock insurance
companies.  However, the act also entitled Blues plans to a special
deduction equal to 25 percent of the claims and expenses incurred
during the taxable year less the adjusted surplus at the beginning of
the year.  In addition, some states have rescinded tax exemptions or
other statutory benefits given to Blues plans. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Although recent publicity has raised questions about the financial
condition of Blues plans, 53 of 64 plans are rated in fair to
excellent financial condition by Weiss Research.  The remaining 11
plans, which insure about one- quarter of all Blues subscribers, are
rated in weak to very weak financial condition because of several
factors.\6

Recent financial assistance provided by Blues plans and the
Association appears to have stabilized the financial condition of
some weak plans.  However, the success of other longer term
Association actions and state insurance reforms is unclear because
they have either been in place only for a short period of time or
have not yet been implemented.  In addition, the potential challenges
posed by health care reform could strain the finances of any plan,
particularly those in weak condition. 

The financially weak plans in our study\7 experienced problems for
several reasons.  Mismanagement contributed to the financial
weaknesses of some plans.  These plans were slow to respond to
changing market conditions or made poor investment decisions--such as
investments in money-losing subsidiaries and ineffective claims
processing systems.  Also, in some states, rate-setting constraints
and coverage requirements applicable only to Blues plans put them at
a competitive disadvantage.  Unlike commercial insurers, Blues plans
that are required to serve as insurer of last resort must cover
high-risk applicants and may not receive regulatory permission to set
premium rates at levels sufficient to cover costs. 

In addition, weaknesses in the oversight roles played by plan boards
of directors and state regulators allowed plans' financial problems
to persist.  The boards of directors of some plans in our study did
not adequately perform their oversight roles because they were misled
by plan management or uninformed.  Regulators' oversight efforts have
been hampered by the conflict in their roles of ensuring plans'
solvency and ensuring that plans offer affordable premiums. 
Moreover, questions have been raised about whether an inherent
conflict in the Association's trademark licensor role has made it
unwilling to enforce its membership standards by revoking the license
of a financially troubled plan. 

The Association, individual plans, and states have acted to remedy
the problems of financially troubled plans.  In some instances, these
actions have helped improve their financial condition and better
enabled troubled plans to respond to changing market conditions. 
Because other efforts have not yet been fully implemented, their
effect is not yet known. 

Health care reform could significantly affect Blues plans and
commercial insurers by altering the competitive nature of the health
insurance market.  Reform may require insurers to accept any
applicant regardless of health status and use community rating to set
premium rates.  Health insurance companies and health care providers
may also form increasingly large and more complex financing and
delivery entities to better manage health care costs under reform. 
The combined effect of these reforms may strain the financial
condition of health insurers. 

The role of state insurance regulators in monitoring the financial
solvency of Blues plans and protecting subscribers' and providers'
interests will become increasingly more important and challenging
under reform.  Therefore, it is essential that state insurance
regulators have the tools necessary to enforce new requirements on
Blues plans and other health insurers. 


--------------------
\6 Weiss Research defines weak plans as those demonstrating
significant weaknesses that could adversely impact policyholders. 
Plans in very weak condition have failed some basic tests of fiscal
stability and experienced weaknesses that could pose significant
risks to policyholders, even in a favorable economic environment. 

\7 Our study focused on the six plans we visited and the four plans
investigated by the Senate Permanent Subcommittee on Investigations. 
Using data from June 30, 1993, Weiss rated six of these plans in weak
or very weak financial condition. 


   SOME BLUES PLANS HAVE FINANCIAL
   PROBLEMS
------------------------------------------------------------ Letter :3

While most Blues plans are financially sound, eight plans are in a
weak condition, and three plans are in a very weak financial
condition, according to Weiss Research ratings.  These 11 plans
insure about 27 percent of the subscribers of Blues plans rated by
Weiss (see fig.  1).  Figure 2 shows the states where these
financially weak plans are located. 

   Figure 1:  Percentage of Blues
   Subscribers by Plans' Financial
   Ratings

   (See figure in printed
   edition.)

Weiss did not rate six plans with about 6.3 million members because
of data limitations.  Based on Association data, one of these plans,
with an enrollment of about 540,000, is in weak financial condition. 

Sources:  Weiss ratings based on June 30, 1993, data, and June 1993
enrollment data from the Blue Cross and Blue Shield Association. 

   Figure 2:  States With
   Financially Weak Blues Plans

   (See figure in printed
   edition.)

The 11 plans are Blue Cross and Blue Shield of Maine, Maryland,
Massachusetts, New Hampshire, New Jersey, Vermont, New York City
(Empire), West Virginia (Mountain State), Western New York (Buffalo),
Blue Cross of Rochester (New York), and Blue Cross and Blue Shield of
the National Capital Area (District of Columbia).  Three additional
plans located in New York are not rated financially weak:  Blue Cross
and Blue Shield of Utica-Watertown, Central New York (Syracuse), and
Blue Shield of Rochester. 

Financial information obtained from the Association further indicates
that two plans, Empire Blue Cross and Blue Shield (New York City) and
Blue Cross and Blue Shield of the National Capital Area (Washington,
D.C.), are in the most severe financial condition.  However, the
respective state insurance regulators for these two plans told us
that the plans had stabilized under recent recovery measures and were
no longer in imminent danger of insolvency. 


   SEVERAL FACTORS CONTRIBUTED TO
   PLANS' FINANCIAL WEAKNESSES
------------------------------------------------------------ Letter :4

Plan mismanagement and regulatory requirements that states imposed on
Blues plans but not commercial insurers contributed to the financial
weakness of plans in our study.  Although the contributing factors
are independent, their effects were not separable.  Therefore, we
could not determine the relative effect of each factor. 


      PLAN MISMANAGEMENT
---------------------------------------------------------- Letter :4.1

Plan management's slow response to changes in the marketplace
contributed to the current or previously weak financial condition of
four Blues plans in our study.  These plans did not adequately
respond to customer demand for different types of insurance policies
or for lower prices.  For example, in certain markets, plans were
slow to recognize customers' preference for lower cost insurance
products, such as managed care.  The experience of several plans
during the mid to late 1980s illustrates this point. 

In New Jersey, the Blues plan's competitors began to offer policies
with coinsurance features and high deductibles to lower the price of
their products, while the Blues plan continued to focus on high-cost
policies without deductibles.  Blues plans in California,
Massachusetts, and New York did not adequately respond to the
increasing market acceptance of managed care plans, like health
maintenance organizations (HMO) and preferred provider organizations
(PPO), to control premium costs. 

Plans attributed delays in offering lower cost or innovative products
in part to management complacency.  This complacency was prompted by
historical factors, including plans' dominant positions in relatively
stable, less competitive markets.  One plan CEO told us that the plan
had been successful for so long, it had become insulated and inwardly
focused and lost touch with its market.  This unresponsiveness
contributed to the plan's weak financial condition in the late 1980s. 

Investment decisions that seven plans in our study made to remain
competitive or otherwise strengthen their financial condition also
contributed to the decline in their financial performance.  These
decisions primarily involved investments in money-losing subsidiary
ventures and in poorly developed and implemented claims processing
and information systems. 

During a recent 3-year period, the surplus of the Washington, D.C.,
plan was significantly depleted when its 30 subsidiaries, many of
which were unrelated to its core health insurance business, incurred
about $89 million in losses.  Ironically, the plan's core health
insurance business would have otherwise increased the plan's surplus
in each of these years.\8 In Maryland, the Blues plan created or
acquired 29 subsidiaries between 1986 and 1991.  In 1992,
congressional investigators reported that, since 1986, the
subsidiaries collectively lost about $72 million.\9

The Maryland Blues plan also spent millions of dollars in developing
a claims processing system that has been plagued with problems and
delays.  Initially, the system was estimated to cost about $9 million
and be fully implemented by mid-1990.\10 However, the plan estimates
the final cost to be about $31 million with full implementation not
occurring until 1994.\11 Similarly, the Massachusetts Blues plan
invested in a claims processing system that a private consulting firm
concluded was ill planned and poorly implemented.  According to the
consultant's report,\12 the plan's investment in this system totaled
$50 million in a 21-month period (December 31, 1987, to September 30,
1989), which represents about 50 percent of the decrease in the
plan's surplus. 


--------------------
\8 U.S.  Senate Permanent Subcommittee on Investigations Hearings on
Oversight of the Insurance Industry:  Blue Cross and Blue Shield of
the National Capital Area, staff statement (Washington, D.C.:  1993). 

\9 U.S.  Senate Permanent Subcommittee on Investigations Hearings on
Oversight of the Insurance Industry:  Blue Cross and Blue Shield of
Maryland, staff statement (Washington, D.C.:  1992). 

\10 U.S.  Senate Permanent Subcommittee on Investigations Hearings on
Oversight of the Insurance Industry:  Blue Cross and Blue Shield of
Maryland. 

\11 Report of the Special Litigation and Indemnification Committee of
the Board of Directors of Blue Cross and Blue Shield of Maryland,
Inc.  (Baltimore, MD:  1993). 

\12 Blue Cross Blue Shield of Massachusetts Corporate Review:  Final
Report, Cresap-Tillinghast, (New York, NY:  1990). 


      STATE REGULATORY
      REQUIREMENTS
---------------------------------------------------------- Letter :4.2

Eight of the 11 plans having financial difficulties operated in
states that impose the greatest number of rate-setting and coverage
requirements on Blues plans.  (App.  IV describes the regulatory
requirements imposed on each Blues plan.) The relationship between
regulatory requirements and financial performance does not hold true
for all plans, however, because 11 other plans that were held to
similar requirements are rated as financially sound. 

In some states, Blues plans were the only insurers required to (1)
set premiums based on the average expected cost of the entire
applicant community, known as community rating (nine states), or (2)
cover all applicants, regardless of their health status (seven
states).  In addition, several plans had to charge state-approved
premium rates that were lower than what they had requested. 

These requirements placed some of the financially troubled Blues
plans at a competitive disadvantage with commercial insurers, which
could increase premium rates without state-imposed limits and control
their claims costs by excluding high-risk applicants.  In New Jersey,
for example, state regulators acknowledged that they approved a
smaller rate increase than the plan requested in 1991 to ensure that
the plan's premiums remained affordable.  While this had the effect
of reducing the plan's income, the state also increased the plan's
costs by requiring it to insure all applicants, regardless of health
status.  In 1992, the plan reported losses of $78 million in its
lines of insurance subject to these requirements.  We did not
determine to what extent these losses were attributable to premium
rate and coverage requirements. 

Losses experienced by other financially troubled plans have also been
concentrated in the individual and small group lines of insurance
that were subject to state-mandated premium rate-setting and coverage
requirements.  For example, external consultants reported that about
87 percent of the New York (Empire) plan's losses in 1992, and the
majority of its losses during the preceding 3 years, occurred in the
plan's lines of insurance subject to rating and coverage
requirements.\13 Similarly, external consultants of the Massachusetts
plan estimated that, from December 1987 to September 1989, the plan
lost $135 million in the lines of insurance subject to similar
requirements.\14

State insurance regulators for four of the six plans we visited
agreed that regulatory requirements imposed only on Blues plans, such
as a public premium rate approval process, have placed plans at a
competitive disadvantage with commercial insurers.  However, three of
the six regulators told us that mismanagement also contributed to the
weak financial condition of the Blues plans in their states. 


--------------------
\13 Management and Financial Audit of Empire Blue Cross and Blue
Shield:  Final Report, Arthur Andersen and Co.  (New York, NY: 
1993).  In September 1993, Empire officials acknowledged that the
plan overstated these reported losses in 1989, 1990, and 1991. 

\14 Blue Cross Blue Shield of Massachusetts Corporate Review:  Final
Report. 


   OVERSIGHT WEAKNESSES MAY HAVE
   ALLOWED BLUES' SOLVENCY
   PROBLEMS TO PERSIST
------------------------------------------------------------ Letter :5

Plans' boards of directors and state insurance regulators are each
responsible for ensuring the financial solvency of Blues plans.  In
addition, because of its interest in protecting the value of the Blue
Cross and Blue Shield trademarks, the Association also performs
certain oversight functions.  However, weaknesses in the oversight
provided by these groups has allowed some Blues plans' solvency
problems to persist and could place plan subscribers at risk of
losing insurance coverage and health care providers at risk of not
having claims paid. 


      PLAN BOARDS OF DIRECTORS
---------------------------------------------------------- Letter :5.1

The board of directors for each Blues plan serves as the first line
of oversight to detect financial weaknesses and plan mismanagement. 
The board's role is particularly important because Blues plans are
not-for-profit and thus have no shareholders to whom the plan's board
must answer.  However, recent congressional investigations found that
the boards of directors of some financially troubled plans had not
adequately performed their oversight roles. 

For example, the board of directors of the Empire Blues plan in New
York relied almost entirely on management for information concerning
plan performance and finances and was unaware of several key measures
of the plan's weakening performance.\15 Plan management dominated the
board, the plan's CEO served as chairman of the board of directors,
and outside board members lacked sufficient knowledge to ask
appropriate questions of plan management. 

Similar weaknesses existed in the oversight role played by plan
boards of directors in West Virginia and Washington, D.C.\16 In West
Virginia, plan management went so far as to create a separate class
of hand-picked board members, referred to as a "super board." The
super board, which included the plan CEO, essentially became a new
governing body that dominated the legislatively mandated plan board
of directors.  In Washington, D.C., former board members conceded
that they were frequently misled by plan management and did not have
sufficient information to fully perform their oversight roles. 


--------------------
\15 U.S.  Senate Permanent Subcommittee on Investigations Hearings on
Oversight of the Insurance Industry:  Empire Blue Cross and Blue
Shield (NY), staff statement (Washington, D.C.:  1993). 

\16 U.S.  Senate Permanent Subcommittee on Investigations Hearings on
Efforts to Combat Fraud and Abuse in the Insurance Industry, Part VI,
staff statement (Washington, D.C.:  1992) and U.S.  Senate Permanent
Subcommittee on Investigations Hearings on Oversight of the Insurance
Industry, Blue Cross Blue Shield of the National Capital Area, staff
statement (Washington, D.C.:  1993). 


      STATE REGULATION
---------------------------------------------------------- Letter :5.2

The unique status of many Blues plans--their large share of the
health insurance market and their role in some states as insurer of
last resort--has challenged regulators to determine the most
appropriate steps to take to improve the financial condition of weak
plans.  The principal responsibility of state insurance regulators is
to protect consumers by monitoring the solvency of insurance
companies.  At the same time, some regulators must administer state
requirements that are intended to ensure that health insurance is
affordable.  In monitoring Blues plans, however, the two objectives
sometimes conflict. 

The failure of the Blues plan in West Virginia might have been
prevented, or its effects minimized, if state insurance regulators
had taken more decisive action as the plan's financial and management
problems became apparent.\17

Moreover, plan officials and others contend that the regulator also
contributed to the plan's failure by not granting timely and adequate
rate increases. 

In a 1984 on-site examination of the plan, regulators identified
serious weaknesses in the plan's financial condition and management. 
Although a follow-up examination in 1986 reaffirmed the plan's
precarious financial condition and mismanagement, state insurance
regulators took no action to protect the plan's subscribers. 

The plan's financial condition continued to decline until October
1990, when regulators declared the plan insolvent and placed it in
receivership.  Until this time, regulators permitted the plan to
continue marketing its products to unsuspecting subscribers, even
though its future viability was in serious doubt.  Regulators
attributed their inaction to insufficient resources, a lack of
authority,\18 and assurances from the Association and external
auditors that the plan's condition would improve. 

Weaknesses in the state oversight of the Empire Blue Cross and Blue
Shield in New York may have allowed that plan's financial problems to
worsen.  In contrast to West Virginia, the New York State insurance
department devotes a relatively large amount of resources to
regulating health insurance and ranks second in expenditures and
third in staffing among all state insurance departments.\19

Nonetheless, it has been criticized for being too lenient in its
regulation of Empire on several occasions.  For example,
congressional investigators reported that state regulators (1)
permitted the plan to continue operating an HMO that from 1986 to
1992 drained more than $115 million from the plan's surplus, (2) did
not require the plan to correct deficiencies and weaknesses
identified by state examiners, and (3) allowed the plan to borrow
from its surplus without documenting how it would restore those
funds.\20 Regulators stated that a conflict existed between the goals
of ensuring that the plan remained solvent while continuing to offer
affordable premiums to a large number of the state's residents. 

Another example of the conflict between solvency and affordable
premiums occurred in 1992 when New Jersey insurance regulators had to
weigh policyholders' need for affordable health insurance against the
New Jersey Blues plan's request for a major rate increase.  The
regulators said they approved a smaller rate increase than the plan
requested to ensure that the plan's premiums remained affordable. 
The regulators estimated that their decision to limit the rate
increase would leave the plan with a deficit of $74 million,
increasing its deficit by $38 million, according to plan officials. 

In another instance, congressional investigators reported that the
then Maryland insurance commissioner postponed a routine financial
examination of the Maryland Blues plan, even though she suspected
that the plan was in a weak financial condition.  One Maryland
regulator explained that if the examination found that the plan had
exhausted its surplus, publicity about this condition could have
jeopardized the plan's future viability. 


--------------------
\17 U.S.  Senate Permanent Subcommittee on Investigations Hearing on
Efforts to Combat Fraud and Abuse in the Insurance Industry, Part VI,
staff statement (Washington, D.C.:  1992). 

\18 The National Association of Insurance Commissioners is currently
examining the adequacy of laws and regulations governing state
oversight of Blues plans. 

\19 Health Insurance:  How Health Care Reform May Affect State
Regulation (GAO/T-HRD-94-55, Nov.  5, 1993). 

\20 U.S.  Senate Permanent Subcommittee on Investigations Hearings on
Oversight of the Insurance Industry:  Empire Blue Cross and Blue
Shield (NY), staff statement (Washington, D.C.:  1993). 


      THE BLUE CROSS AND BLUE
      SHIELD ASSOCIATION
---------------------------------------------------------- Letter :5.3

As part of its trademark licensor role, the Association requires
plans to comply with 10 membership standards to protect the value of
the Blue Cross and Blue Shield trademarks.\21 The Association
regularly monitors the plans' compliance with financial and other
membership standards.  If a plan fails to meet a membership standard,
the Association can terminate its trademark license with a majority
vote of the Association membership, composed of a representative of
each plan. 

Before the failure of the West Virginia plan in 1990, the Association
was reluctant to enforce its membership standards by revoking the
trademark license of a financially troubled plan.  For example,
Association data indicate that, from 1987 through 1990, 20 plans did
not comply with the financial standard for at least 2 consecutive
years.  An Association official acknowledged that, throughout the
1980s, some plans continually failed to comply with the Association
financial and other membership standards.  Nevertheless, since 1982,
the Association has terminated the trademark license of only one plan
for this reason.\22

Although the Association's interest as a trademark licensor is to
ensure that plans comply with membership standards, thereby
protecting the value of the trademarks, revoking the trademark
license of a financially troubled plan could tarnish the reputation
of other member plans and the Blue Cross and Blue Shield trademarks. 
The views of several Blues plan officials suggest that the
Association's reluctance to enforce its membership standards may have
resulted from an inherent conflict in the Association's trademark
licensor role.  For example, one plan's general counsel said the
termination of a plan's trademark license was considered a draconian
measure that would reflect poorly on all plans.  A plan CEO said that
before the insolvency of the West Virginia plan, no Blues plans took
the Association's financial standards seriously, nor envisioned they
would be enforced. 


--------------------
\21 See appendix II for more details on the Association's trademark
licensing role and the 10 membership standards. 

\22 The Association terminated the license of Blue Cross and Blue
Shield of West Virginia, Inc., in October 1990, shortly before state
regulators were to place the plan in receivership.  On four other
occasions from 1982 through November 1993, the Association initiated
the process to terminate the trademark license of a financially
troubled plan.  However, the terminations never took effect because
of a court decision and plan recovery actions. 


   ASSOCIATION, PLANS, AND STATES
   HAVE ACTED TO IMPROVE FINANCIAL
   CONDITION OF PLANS
------------------------------------------------------------ Letter :6

The Association, individual plans, and states have acted to improve
the financial performance of troubled plans.  Certain measures have
succeeded or shown promise, including financial and management
assistance from other plans and the Association, plans' improved
responsiveness to the market, and state reforms intended to create a
"level playing field" by placing the same regulatory requirements on
all insurers.  The Association has also developed measures that are
intended to improve its oversight of plans.  Because these measures
have not yet been fully implemented, their value in ensuring plans'
continued viability is not yet known. 


      ASSOCIATION AND PLAN
      MEASURES CONTRIBUTING TO
      PLANS' RECOVERY
---------------------------------------------------------- Letter :6.1

In the last 5 years, financial assistance from the Association and
several other Blues plans appears to have stabilized the short-term
financial condition of three weak plans.  Generally in the form of a
loan, the assistance increased plans' surplus.  For example, a
consortium of 37 plans recently made financial commitments to the
Washington, D.C., plan that increased the plan's surplus by $60
million.  In all three instances, the financial assistance was
accompanied by management restructuring--replacement of most members
of the Washington, D.C., plan's board of directors and a merger and
an affiliation with other Blues plans in the latter two cases. 
Restructuring plan management is essential in addressing the
underlying problems that contribute to a plan's poor financial
performance.\23

Individual plans have also responded to their assessment of changing
market demands, by replacing CEOs, reorganizing, developing new
insurance products, and, in certain markets, increasing their
emphasis on managed care.  For example, in 1986, under new
management, Blue Cross of California changed its organizational
structure by establishing strategic business units that focus on
specific segments of the insurance market, such as individuals, and
small or large employer groups.  This structure, according to plan
officials, has helped the plan respond more quickly to market changes
and customer demands.  In addition, Blue Cross of California expanded
its managed care offerings from 15 percent of its total business in
1986 to more than 85 percent in 1992.  In 1992, the plan was the
fastest growing insurer in the state. 

Related to the increasing emphasis on managed care is the emerging
trend toward closer relationships between plans and health care
providers, sometimes called community care partnerships.  Under the
partnerships, plans negotiate with hospitals to provide all necessary
health care services to subscribers for a predetermined price. 
Because of the close working relationships and market power, plans
can exert greater pressure on providers to contain costs and better
monitor subscribers' health outcomes to ensure quality service. 
Oversight of these new arrangements will be essential to ensure that
consumers receive timely and quality care. 

The Illinois Blues plan is currently developing such a partnership
with four hospital systems in the state.  The plan will pay the
hospitals a flat annual fee for each subscriber to cover all
necessary health care services, including primary and specialist care
and hospital services.  The annual fee paid to the hospitals is not
to increase by more than the rate of inflation for 5 years, thereby
creating a strong cost-containment incentive for the participating
hospital systems.  Similarly, a partnership recently announced
between the Michigan Blues plan and two hospital systems will also
limit fee increases paid to hospitals as a cost-containment
incentive. 


--------------------
\23 Insurer Failures:  Regulators Fail to Respond in Timely and
Forceful Manner in Four Large Life Insurance Failures,
(GAO/T-GGD-92-43, Sept.  9, 1992). 


      STATE MEASURES LIKELY TO
      CONTRIBUTE TO PLANS'
      FINANCIAL HEALTH
---------------------------------------------------------- Letter :6.2

Under recent state health insurance reforms, several states have set
uniform regulatory requirements for premium rates and coverage for
all health insurers in the state.  Such reform measures have been
implemented in Maine, Massachusetts, New Jersey, New York, and
Vermont for certain types of coverage.  These measures require all
health insurers to accept any applicant, regardless of risk, and to
use community rating for establishing premiums.  Several other states
are considering similar reform measures. 

Seven of the financially weak plans operate in states that have
enacted comprehensive rating and coverage reforms.  Although it is
too soon to know what effect these reforms will have on plans'
financial performance, they appear to remove the regulatory
requirements that placed Blues plans at a competitive disadvantage
and allow them to operate under the same rules as other insurers. 


      EFFECT OF OTHER ASSOCIATION
      MEASURES IS NOT YET KNOWN
---------------------------------------------------------- Letter :6.3

Beginning in 1991, the Association made several changes concerning
the oversight and management of Blues plans.  According to the
Association, these changes are intended to (1) provide it with a
better measure of plans' financial condition, (2) allow it to more
quickly identify plans with financial problems before they become
serious, (3) clarify the oversight role of plan boards of directors,
(4) provide state insurance regulators with certain information on
plans' financial condition, and (5) better protect consumers in the
case of a plan failure. 

The Association revised its financial membership standard by using a
risk-based capital formula to determine minimum plan surplus
requirements.  According to the Association, the new surplus
requirements more accurately reflect each plan's business risks.  The
guidelines to administer these new standards were also changed. 
According to Association officials, they now have more explicit
authority to terminate the license of any plan that fails to meet the
surplus requirement.  The new guidelines also establish an early
warning system that Association officials said will enable them to
identify plans with financial problems sooner than in the past so
that corrective action can be taken more quickly.  For example,
according to Association officials, it has twice initiated the
process to terminate the license of a plan approaching noncompliance
since these standards went into effect. 

The effectiveness of these revisions is currently uncertain, however,
because the new surplus requirement is initially very low,\24 and the
Association has not changed its process for terminating a plan's
trademark license.  A termination decision still requires a majority
vote of the Association membership.  Thus, the apparent conflict in
the Association's trademark licensing role that may have kept it from
enforcing its membership standards in the past remains. 

The views of officials at the Blues plans we visited also suggest
that questions remain about whether the recent changes will improve
the Association's oversight of plans' financial condition.  For
example, two plan CEOs suggested that the new minimum surplus
requirement was insufficient to protect the value of the trademarks. 
According to another plan CEO, a group of newer Blues executives
believes the Association's trademark licensing function should be
performed by an independent body of non-Blues employees that would
have the will to enforce the membership standards. 

The Association has also just implemented or is in the process of
implementing several other changes.  For example, as of December 31,
1993, all plans must provide state regulators information on the
financial condition of their subsidiaries in accordance with the
National Association of Insurance Commissioners' (NAIC) model holding
company act.  Also as of December 31, 1993, all plans must adopt
policies that describe the plan board of directors' oversight roles
and fiduciary obligations.  Plans must annually certify to the
Association that they have adopted procedures to enforce these
policies and that the policies are being followed.  Finally, as of
December 31, 1994, each plan must either have joined its state's
life/health guaranty fund or established another method to ensure
payment of its subscribers' claims and continued coverage in the case
of its insolvency. 


--------------------
\24 Appendix V examines the effect of the Association's new surplus
requirement in more detail. 


   IMPLICATIONS OF HEALTH CARE
   REFORM
------------------------------------------------------------ Letter :7

Health care reform could significantly affect Blues plans and
commercial insurers by altering the competitive nature of the health
insurance market.  For example, many reform proposals could require
all insurers to accept any applicant for coverage, regardless of
health status, and use community rating for setting premiums. 

Reform could also intensify competition among insurers by changing
the way health care is purchased.  Most proposals envision the
creation of purchasing cooperatives to pool the purchasing power of
individuals and small employers.  These cooperatives could allow
consumers to better compare competing health plans by providing them
with information about each plan's premium rates, provider networks,
and member satisfaction. 

Health insurance companies and health care providers may also form
increasingly large and more complex financing and delivery entities
to better manage health care costs under reform.  In addition, the
extent of health care coverage provided through fee-for-service plans
may further decline as traditional insurers begin providing care as
prepaid health care reimbursement systems under regional purchasing
cooperatives. 


   CONCLUDING OBSERVATIONS
------------------------------------------------------------ Letter :8

Under health care reform, the role of state insurance regulators in
monitoring the financial solvency of Blues plans and protecting
subscribers' and providers' interests will become increasingly
important and challenging.  Regulators have not always adequately
monitored troubled Blues plans in part because of the size and
important role the plans have played in their markets.  The large
integrated financing and delivery entities likely to be created under
reform may also play an important role in the markets they operate
and pose similar challenges to state regulators' resources and
expertise.  Therefore, it is essential that state insurance
regulators have the tools necessary to enforce new requirements on
Blues plans and other health insurers. 

Although health care reform may level the playing field by
eliminating the competitive disadvantage that contributed to the
financial problems of some Blues plans, reform could also change the
health insurance industry in ways that strain the finances of any
plan, particularly those currently in weak financial condition. 
While the financial condition of Blues plans appears stable at
present, health care reform will likely require Blues plans to more
quickly adjust to increased competition, changing market conditions,
and customers' needs--an adjustment that has in the past been
difficult for some plans and contributed to their financial problems. 


---------------------------------------------------------- Letter :8.1

We obtained written comments from the Blue Cross and Blue Shield
Association on a draft of this report.  (App.  VI contains the
Association's letter and our comments.) The Association generally
agreed with our findings concerning plan financial weaknesses and
their causes, but disagreed with our assessment of the Association's
new surplus requirements and our conclusion that conflicts in the
Association's trademark licensing role may hinder its enforcement of
plan membership standards.  We have reviewed the Association's
comments and made changes to this report where appropriate. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after its issue date.  At that time, we will send
copies of this report to the Association, its 69 member plans, the
NAIC, state insurance commissioners, and other interested parties. 
Copies will also be made available to others on request. 

Please call me on (202) 512-7119 if you or your staff have any
questions about this report.  Major contributors are listed in
appendix VII. 

Sincerely yours,

Leslie G.  Aronovitz
Associate Director
Health Financing Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

The purpose of this report, based on discussions with staff of the
Permanent Subcommittee on Investigations, Senate Committee on
Governmental Affairs, was to (1) determine the extent of financial
weaknesses among Blues plans; (2) identify factors that contributed
to plans' weak financial conditions; and (3) determine the measures
taken by plans, the Association, and regulators to address plan
weaknesses.  This report also discusses the implications of health
care reform on Blues plans. 

To determine the extent of financial weaknesses among Blues plans, we
(1) obtained Weiss Research, Inc.'s ratings of Blues plans based on
plan data as of June 30, 1993; (2) reviewed proprietary Association
information on the performance and financial condition of the 11
plans identified as weak or very weak by Weiss; (3) reviewed
information from the congressional investigations of Blues plans in
West Virginia, Maryland, Washington, D.C., and New York (Empire); and
(4) interviewed officials at six individual Blues plans (Blue Cross
and Blue Shield of Illinois, Massachusetts, Michigan, New Jersey, and
Oregon, and Blue Cross of California), and their respective state
regulators. 

We visited six Blues plans that differed in financial performance,
regulatory environment, size, types of products offered, and location
to obtain a clear understanding of the unique markets in which
individual Blues plans operate and the varying roles they play in
them.  Blue Cross and Blue Shield of Massachusetts and New Jersey are
currently experiencing financial weaknesses while the other four are
not.  However, the plans in California, Illinois, and Michigan have
previously experienced financial weaknesses.  The Blues plan in
Oregon has historically been financially sound. 

To identify factors that contributed to plans' weak financial
conditions, we (1) interviewed state regulators and officials from
the National Association of Insurance Commissioners, the Association,
and individual plans; (2) reviewed three management audits of
financially weak plans; and (3) reviewed data from congressional
investigations of troubled Blues plans in three states and the
District of Columbia.  The three management audits we reviewed were
conducted between 1988 and 1993 by the private consulting firms of
Ernst & Whinney, Cresap-Tillinghast, and Arthur Andersen.  These
audits, requested by state regulators, examined the financial and
operating performance of Blues plans in New Jersey, Massachusetts,
and New York (Empire), respectively. 

We also surveyed insurance regulators in every state and the District
of Columbia to obtain information on the oversight of Blues plans and
commercial insurers.  Between April and July 1993, we used a
structured telephone interview to obtain information on each state's
regulations for health insurers.  This included information on
premium rate and coverage requirements, limitations on pre-existing
condition exclusions, and surplus and capital requirements.  Through
these telephone interviews, we determined each state's regulatory
activities as of December 1991.  We also obtained information about
any regulations that were implemented by December 1993 because of
state health reform initiatives. 

To determine the measures taken by plans, the Association, and
regulators to address plan weaknesses, we (1) reviewed the
Association's reform proposals and discussed them with Association
officials; (2) reviewed the Association's financial membership
standard and guidelines for monitoring plans' compliance with this
standard; and (3) interviewed individual plan officials, state
regulators, and NAIC representatives.  Interviewers asked questions
about the response of plans and the Association to the financial
problems of individual Blues plans, the Association's reform
initiatives, and the implementation of health insurance reforms in
certain states. 

To understand the Association's role, we (1) reviewed current and
historic literature on the origin and evolution of plans and the
Association, including academic studies and trade journal articles;
(2) obtained an overview of the Association's functions and related
Association documents; and (3) discussed each plan's evolution and
its relationship to the Association with officials at the six plans
we visited. 

To determine the implications of health care reform on Blues plans,
we (1) reviewed the Administration's and other health care reform
proposals; (2) reviewed industry outlooks from insurance rating
services, including A.M.  Best and Standard and Poor's; and (3)
discussed health care reform with Association officials, individual
plans, and some state regulators. 

We conducted our review from November 1992 through December 1993 in
accordance with generally accepted government auditing standards. 


ROLE OF THE BLUE CROSS AND BLUE
SHIELD ASSOCIATION
========================================================== Appendix II

The role of the Association and its impact on the operation and
finances of Blues plans has recently been scrutinized by state
insurance regulators and congressional investigators.  As part of its
ongoing evaluation of the adequacy of state laws and regulations over
Blues plans, the National Association of Insurance Commissioners has
also raised questions about the Association's relationship to
individual Blues plans.  This appendix describes the Association's
purpose, governance, revenue sources, and oversight of individual
Blues plans and provides an overview of the affiliated corporations
owned jointly by the Association and plans. 


   PURPOSE
-------------------------------------------------------- Appendix II:1

The Blue Cross and Blue Shield Association is the national trade
association and coordinating agency of the 69 independent Blues plans
and the owner and licensor of the Blue Cross and Blue Shield names
and trademarks.  The Association performs three primary roles--those
of a trademark licensor, a trade association, and provider of various
business and coordinating plan services. 

As a trademark licensor, the Association acts to protect the value of
the Blue Cross and Blue Shield names and trademarks by requiring
plans to comply with terms of a license agreement.  The agreement
defines the geographic boundaries within which plans may use the
names and trademarks and the conditions of that usage.  As a trade
association, the Association represents the collective interests of
plans before the federal and state governments and certain other
national organizations.  As a plan service provider, the Association
administers programs designed to coordinate plan coverage nationwide
for private business and government contracts and provides consulting
services to individual plans. 

The Association has no authority to regulate Blues plans' compliance
with state insurance laws.  This regulatory authority rests with each
state.  Further, the Association is not an insurance company and is
therefore accountable neither to insurance regulators nor plan
subscribers. 


   GOVERNANCE
-------------------------------------------------------- Appendix II:2

The Association, headquartered in Chicago, is an Illinois
not-for-profit corporation that employed 677 people as of December
1993.  The Association's members include the 69 Blues plans located
in the United States and Puerto Rico.  As members of the Association,
Blues plans collectively govern the Association's affairs pursuant to
written bylaws.  Under these bylaws, the Association is governed by a
board of directors.  The board of directors consists of the CEOs of
most plans and the Association president.  Plan representatives to
the membership meetings may or may not be the plan CEO.\1 For
practical purposes, meetings of the Association's board of directors
and its membership comprise largely the same individuals.\2 The board
of directors meets at least four times annually, while meetings of
the members are held at least once each year.\3

The Association's board annually elects a chairman and officers of
the Association, while the membership elects the board's executive
committee.  The executive committee comprises the chairman of the
board, the president of the Association, and 24 members and acts on
behalf of the board of directors when the board is not in session. 
The chairman of the board, a plan CEO, is the only Association
officer who is also a Blues plan employee.  The executive committee
establishes compensation levels for Association officers. 

The board also appoints members to standing committees that oversee
the Association's activities in specific areas.  Organizational units
of the Association directly support these committees.  For example,
the Association's Licensure and Financial Services Division monitors
Blues plans' compliance with the membership standards and reports
directly to the board's Plan Performance and Financial Standards
Committee, which makes recommendations to the board on plan licensure
decisions. 

Decisions on significant issues relevant to all plans are generally
decided by a vote of the Association membership.  Examples of
significant issues include the termination of a plan's membership
license or the amendment of the Association's bylaws.  The membership
voting process combines a straight vote--one member, one vote--and a
weighted vote.  Under weighted voting, each member plan is entitled
to one vote for each $1,000 of annual dues it pays to the
Association.  Because dues are based on plan premium volume, the
larger plans receive a greater number of weighted votes than smaller
plans. 

For a membership vote to pass, the bylaws generally require a
majority of both the straight and weighted votes of the members. 
However, this rule has exceptions.  For example, the termination of a
plan's trademark license requires at least three-fourths of the
straight vote and three-fourths of the weighted vote rather than a
simple majority.  An amendment to the Association bylaws, on the
other hand, requires one-half of the straight vote and two-thirds of
the weighted vote. 


--------------------
\1 In addition to regular member plans domiciled in the United
States, the membership includes Associate and Affiliate member plans
domiciled outside of the United States that do not fully participate
in the Association's coordinating programs.  Associate members retain
membership voting rights but do not have a representative on the
board of directors.  Affiliate members have no voting rights. 

\2 The difference between the board of directors and the membership
was more significant before 1991 because the Board had a much smaller
number of CEOs. 

\3 Members of the board of directors are not compensated for their
time, but may be reimbursed for expenses incurred while attending
board meetings. 


   ASSOCIATION REVENUE
-------------------------------------------------------- Appendix II:3

The Association's revenue comes primarily from plan membership dues,
fees from its administration of government programs, and fees from
consulting and individual plan services.  In 1992, total Association
revenue was $137 million.  From 1982 through 1992, about 59 percent
of the Association's revenue was generated by member plans--42
percent from membership dues and 17 percent from consulting and other
service fees.  During the same period, about 39 percent of the
Association's revenue came from its administration of contracts under
the Medicare and Federal Employee Health Benefits programs.  Figure
II.1 shows Association's annual revenue by source from 1982 through
1992. 

   Figure II.1:  Association
   Revenue

   (See figure in printed
   edition.)

Source:  Blue Cross and Blue Shield Association. 

The Association determines the funding level necessary to accomplish
its objectives through an annual budgeting process.  The process
starts when the Association's president outlines the objectives of
the Association for the upcoming year.  Division directors then
develop plans and budgets consistent with the corporate priorities
established by the president.  After consulting with the directors,
the president formulates an operating plan and budget and submits the
package for approval first to the executive committee, then to the
board of directors, and finally to the plan membership. 

Once the annual budget is adopted by the membership, dues assessments
are calculated for each plan using a formula with a graduated scale
based on revenues from insurance premiums and other business.  Dues
represent a relatively minor expense for plans.  In 1992, all plans
paid dues that were much less than 1 percent of their net
subscription revenue.\4


--------------------
\4 Net subscription revenue is defined as premiums less all
applicable premium taxes. 


   ASSOCIATION AUTHORITY OVER PLAN
   OPERATIONS
-------------------------------------------------------- Appendix II:4

Although Blues plans are independent corporations, they are bound by
terms of the license agreement with the Association.  This section
summarizes key terms of the license agreement. 


      LICENSE AGREEMENT
------------------------------------------------------ Appendix II:4.1

To use the Blue Cross and Blue Shield names and trademarks, each
Blues plan must sign a license agreement with the Association.  The
agreement does not constitute a partnership or joint venture, and the
Association has no obligations for the debts of member plans. 

The license agreement restricts plans from using the trademark
outside their prescribed service area to prevent competition among
plans using the Blue Cross and Blue Shield names and trademarks.  Use
of the trademark is also restricted to nonprofit health care plans or
mutual health insurers acting on a not-for-profit basis in the sale,
marketing, and administration of health care services.  The agreement
does not restrict plans from engaging in any lawful business activity
itself or through a subsidiary that does not use the Blue Cross and
Blue Shield trademarks. 

A plan's subsidiary or affiliate may also use the trademarks if the
plan obtains a controlled affiliate license from the Association.  A
controlled affiliate license may be granted to Blues plans for any
health care plan or related service organization, as long as it does
not violate its controlled affiliate license agreement.  Plan
affiliates and subsidiaries may be for-profit or nonprofit but must
be controlled by the plan. 

A plan must remain a member in good standing of the Association by
(1) paying its dues, (2) complying with the membership standards and
all applicable laws, and (3) permitting the Association to inspect
its records. 

The Association can seek judicial enforcement of the license
agreement or terminate a plan's license if it fails to comply with
the terms of the agreement or for other reasons is determined to
threaten the reputation of all Blues plans.  Under these
circumstances, license termination requires a three-fourths weighted
and three-fourths straight vote of the Association membership. 
Termination is to be automatic under certain other circumstances,
such as a plan's bankruptcy, receivership, nonpayment of dues, or the
assumption of plan control by state regulators. 


      MEMBERSHIP STANDARDS
------------------------------------------------------ Appendix II:4.2

All plans must adhere to membership standards as required by the
license agreement.  These standards may be revised only by a
three-fourths straight and three-fourths weighted membership vote. 
The 10 standards in effect during 1993 are summarized below. 

  Standard 1:  Not-for-Profit Operation--A plan must be organized and
     operated on a not-for-profit basis. 

  Standard 2:  Board Control--A plan's board of directors must have a
     majority of members who are not health care providers and adopt
     policies that set forth the director's fiduciary
     responsibilities. 

  Standard 3:  Reports and Records--A plan must provide the
     Association with timely and accurate reports and records related
     to compliance with the membership standards. 

  Standard 4:  Financial Responsibility--A plan must maintain
     adequate financial resources to protect subscribers and to meet
     its financial obligations. 

  Standard 5:  Availability of Cost-Effective Health Care Services--A
     plan must use its best efforts to contract with cost-effective
     providers of health care services. 

  Standard 6:  Responsiveness to Customers--A plan must be responsive
     to customer needs and requirements by meeting minimum enrollment
     trends and service levels and offering a managed care product in
     certain metropolitan areas. 

  Standard 7:  Participation in National Programs--A plan must
     participate in national programs that provide portability of
     membership between Blues plans and ease claims processing for
     customers that receive benefits outside of its service area. 

  Standard 8:  Financial Performance Requirements--A plan must ensure
     that it can meet its financial commitments under national
     programs. 

  Standard 9:  Certain Disclosures--A plan must disclose to third
     parties information related to its financial condition and the
     independent nature of each Blues plan. 

  Standard 10:  Cooperation With the Monitoring Program--A plan must
     cooperate with the Association's monitoring program and address
     performance problems identified by the Association. 


      PLAN PERFORMANCE MONITORING
      PROGRAM
------------------------------------------------------ Appendix II:4.3

The Association obtains financial and other performance information
from all plans on a quarterly basis that it uses to identify plans
having performance problems.  Plans that fail certain performance
thresholds may be placed in a monitoring program and subjected to
increasing levels of scrutiny.  The monitoring program provides the
Association with a method of identifying plans with performance
problems so that the Association can act to protect the value of the
trademarks. 

Plans in the monitoring program are generally required to submit a
recovery plan to the Plan Performance and Financial Standards
Committee of the Association's board for approval.  Once approved,
each plan's performance is to be monitored against the terms of its
recovery plan until performance exceeds the thresholds and the plan
is removed from the monitoring program.  If necessary, the
Association or other Blues plans may provide financial or management
assistance to a troubled plan, although they have no legal obligation
to do so.  In addition, the Association may directly contact a plan's
board of directors or its state insurance regulators to seek
resolution. 


      COORDINATING PROGRAMS
------------------------------------------------------ Appendix II:4.4

All plans must participate in certain programs to coordinate the
coverage of Blues plans nationwide as required under membership
standard 7.  This section provides an overview of each program. 


         INTER-PLAN SERVICE
         BENEFIT BANK AND
         RECIPROCITY
---------------------------------------------------- Appendix II:4.4.1

The Inter-plan and Reciprocity programs facilitate the processing of
claims when Blues subscribers travel and receive medical care outside
their plan's service area.  The programs are intended to enhance the
portability of benefits, simplify claims processing, and expand
access for all Blues subscribers to the provider discounts negotiated
locally.  The programs work as follows. 

When Blues subscribers travel outside of their "home" plan's service
area and receive medical care, they present their Blues card to
providers who generally honor it as though it were issued by the
local Blues plan.  These providers submit claims directly to the
local or host plan, which then pays the claim according to the
contract between the home plan and the subscriber.  Through a
financial clearinghouse, the host plan then is reimbursed by the home
plan for the cost of the claim plus an administrative allowance. 
Under these programs, the Association functions primarily as the
financial clearinghouse and performs all accounting functions
necessary for the bimonthly settlement and transfer of funds between
home and host plans.  It also operates the inter-plan data
telecommunications link that allows plans to exchange information. 

The Inter-plan and Reciprocity programs will be replaced by the
Out-of-Area program in 1994.  The Out-of-Area program will serve the
same objectives and, according to the Association, include a number
of technological and procedural changes to improve the flow of funds
and information among plans.  Under this program, accounts will be
settled daily, and an independent financial institution rather than
the Association will perform the financial clearinghouse functions. 


         INTER-PLAN TELEPROCESSING
         SYSTEM
---------------------------------------------------- Appendix II:4.4.2

The Inter-plan Teleprocessing System (ITS) is a combination of
operations, procedures, and technical systems that facilitates the
exchange of information necessary for plans to carry out inter-plan
activities.  ITS is designed to interface with each plan's
information systems and its membership, claims processing, customer
service, and managed care functions, linking the functions and
systems in any one plan to the corresponding functions and systems in
every other plan.  ITS will serve as the primary data system for the
Out-of-Area program. 


         UNIFORM IDENTIFICATION
         CARD PROGRAM
---------------------------------------------------- Appendix II:4.4.3

This program was developed to foster consistency in the appearance
and content of Blues subscriber identification cards.  All cards that
use the Blue Cross and Blue Shield names and symbols must adhere to
rules pertaining to the use of account- or plan-specific
identification codes and the proper use of the Blues names and
symbols. 


         INTER-PLAN TRANSFER
         AGREEMENT
---------------------------------------------------- Appendix II:4.4.4

This program establishes a mechanism for transferring the membership
of subscribers who move permanently to an area served by another
Blues plans.  Under the program, continuity of coverage is provided
to subscribers through requirements that all plans offer certain
minimum benefits and limits on the nature and extent of coverage
restrictions (such as pre-existing condition clauses) that plans may
impose. 


         INTER-PLAN DATA REPORTING
         PROGRAM
---------------------------------------------------- Appendix II:4.4.5

The Inter-plan Data Reporting program is a national reporting network
designed to facilitate data reporting and analysis for Blues plans'
national accounts.\5 The system is based on software developed and
licensed by the Association. 


--------------------
\5 A national account is a contract for a Blues plan to provide
health insurance for a business's employees, even though the
employees are located in at least one other plan's service area.  On
a voluntary basis, plans agree to share with the primary contracting
plan in the risk of insuring these individuals.  A plan may choose
not to participate in a national account but is required by the
license agreement to forward claims from employees in its service
area to the contracting plan in return for a transaction fee. 


         NATIONAL ACCOUNT
         EQUALIZATION PROGRAM
---------------------------------------------------- Appendix II:4.4.6

This program provides a model formula plans can use to allocate the
gains, losses, and administrative expenses of national account
business among control plans and other participating plans. 


         CENTRAL CERTIFICATION
         PROGRAM
---------------------------------------------------- Appendix II:4.4.7

For certain large national accounts with geographically dispersed
members, this program provides a mechanism for participating plans to
determine eligibility of employee claims without maintaining
eligibility files on each employee.  It was discontinued as a
mandatory participation program after March of 1994 because of its
limited usefulness. 


   SYSTEM AFFILIATES
-------------------------------------------------------- Appendix II:5

The Association and various Blues plans jointly own and control six
affiliated stock corporations.  The affiliates are for-profit
corporations whose stock is held by the Association and various Blues
plans.  They were created to perform services for plans that the
Association itself cannot or does not perform.  Profits generated by
the affiliates are returned to the Association and plans that share
in their ownership. 


      BCS FINANCIAL CORPORATION
------------------------------------------------------ Appendix II:5.1

BCS Financial is an insurance holding company.  Its two insurance
subsidiaries provide insurance and insurance services to Blues plans,
including reinsurance and health, life, and property and casualty
insurance.  A subsidiary of BCS Financial was recently formed to
contribute $60 million to the Washington, D.C., Blues plan.  BCS
Financial is owned by the Association and 55 Blues plans.  Its 1992
gross revenues were $105.7 million. 


      BUSINESS SYSTEMS CORPORATION
      OF AMERICA (BSCA)
------------------------------------------------------ Appendix II:5.2

BSCA is a software development and support company that also provides
fee-for-service consulting.  Its primary product is a comprehensive
business information system for subscribers, claims, and financial
processing that is currently licensed to 14 Blues plans.  BSCA is
owned by the Association and nine Blues plans.  Its gross revenues in
1992 were $9.8 million. 


      HEALTH PLANS CAPITAL
      SERVICES CORPORATION (CSC)
------------------------------------------------------ Appendix II:5.3

CSC is a finance cooperative that makes direct loans to Blues plans,
assists Blues plans in obtaining funds from other sources,
administers plan investments, and provides financial and related
consulting services.  CSC is owned by the Association, BCS Financial,
and 24 Blues plans.  At year-end 1992, CSC managed $60.2 million in
assets. 


      NATIONAL ACCOUNT SERVICE
      COMPANY (NASCO)
------------------------------------------------------ Appendix II:5.4

NASCO operates a central processing system that is linked to selected
Blues plans by a telecommunications network.  Developed by Electronic
Data Systems Corporation, this technology allows plans to coordinate
the health benefits of employees of certain national accounts
nationwide.  NASCO's processing services include subscribers, claims,
customer service, client reporting, and managed care support.  NASCO
is owned by the Association and five Blues plans.  Its 1992 gross
revenues were $66.5 million. 


      PLAN INVESTMENT FUND (PIF)
------------------------------------------------------ Appendix II:5.5

PIF is a Security and Exchange Commission-registered Maryland
corporation created in 1985 to provide investment services to Blues
plans.  It is a management investment company that administers a
money market portfolio and a short-term investment portfolio.  PIF is
owned by the Association and about 50 Blues plans.  At year-end 1992,
PIF managed $586.2 million in assets. 


      PLAN LIABILITY INSURANCE
      COMPANY (PLIC)
------------------------------------------------------ Appendix II:5.6

PLIC is an Ohio-based insurance corporation formed in 1986 to provide
property/casualty and general liability insurance to plans and to
reinsure a portion of the coverage written by BCS Insurance.  It is
owned by the Association, BCS Financial, and more than 40 Blues
plans.  Its 1992 gross revenues were $4.6 million. 


DIFFERENCES AMONG BLUES PLANS
========================================================= Appendix III

Our study found that Blues plans differ considerably in organization,
operations, and regulation. 

For example, plans operate within different legal contexts.  As of
May 1993, 54 plans were regulated pursuant to special enabling
statutes, 14 as mutual insurers, and 2 as not-for-profit stock
insurers (see column 1 of table III.1).  Enabling statutes often
prescribe a unique role for Blues plans that may set them apart from
commercial insurers, while others, especially those organized as
mutual insurers, are generally regulated the same way as commercial
health insurers. 

To varying degrees, plans perform a community service role by
covering all applicants, regardless of health status, or by basing
premiums on the average expected costs of the applicant pool.  As
shown in column 6 of table III.1, 30 plans were required to offer
coverage to all applicants through open enrollment provisions in
1993, while 7 plans did so voluntarily.  Column 7 of the table
indicates that, in 1993, 32 plans were limited in their ability to
adjust premium rates by applicant.  Further, 24 plans were required
to participate in their state life/health guaranty funds as of June
1993 (see column 4).\1

Plans also differ considerably in their size, market share, and the
extent of their managed care business.  For example, Empire had about
7 million subscribers compared to 78,000 subscribers for the Blues
plan in Wyoming (see column 2).  Similarly, Blue Shield of California
had only a 4.9 percent share of its health insurance market, while
the Blues plans in Rochester, New York, had a 73 percent share (see
column 3).  Further, about 90 percent of the Minnesota Blues Plan's
and Blue Cross of California's business was in managed care, while
the Blues plans in Arkansas, Idaho, and Wyoming offered no managed
care products. 



                                   Table III.1
                     
                          Differences Among Blues Plans


                                          (4)
                                          Member
                (1)          (2)          of
                Enabled   Number     (3)  state      (5)
                (E) or        of  Market  guaran  Manage
                mutual    enroll   share  ty      d care
                (M) 5/    ees 6/  (%) 6/  fund    (%) 6/
Plan name       1/93       30/93   30/93  6/93     30/93  91\b  93\c  91\b  93\c
--------------  --------  ------  ------  ------  ------  ----  ----  ----  ----
BC/BS of        E         2,008,    44.4  No        75.7  V
Alabama                      773

Arkansas BC/    M         372,06    15.7  Yes        0.0
BS                             4

BC/BS of        E         413,19    10.4  No        83.5
Arizona                        9

BC of           E         2,712,     8.4  No        88.2        R
California                   233

BS of           E         1,569,     4.9  No        74.6        R
California                   940

BC/BS of        E         553,97     8.7  No        48.1              L     L
Colorado\d                     5

BC/BS of        M         890,80    26.6  Yes       20.9  R\e   R\e   L     L
Connecticut                    4

BC/BS of the    E\f       920,81    29.4  Yes       64.4  \g    V     \g
National                       8
Capital Area

BC/BS of        E         213,31  32.2\h  No      18.0\h
Delaware                       5

BC/BS of        M         1,759,    12.5  Yes       81.2        R           L
Florida                      620

BC/BS of        E         1,171,    17.0  No        23.7
Georgia                      425

BC/BS of        E         621,72    53.7  No        58.0  R     R     \i    \i
Hawaii                         7

IASD Health     M         1,020,    29.7  Yes       40.2        R\e         L
Services Co.\j               568

BC of Idaho     E         241,22    23.7  No         6.2        R\e         L
Health Service                 2

BS of Idaho     E         242,25    23.3  No         0.0        R\e         L
                               1

BC/BS of        M         2,487,    21.0  Yes       59.6
Illinois                     614

BC/BS of        M         1,197,    19.6  Yes       28.7
Indiana                      470

BC/BS of        M         749,79    38.2  Yes       33.3        R\e         L
Kansas                         3

BC/BS of        M\k       894,75    24.1  Yes       52.1
Kentucky                       6

BC/BS of        M         360,28     8.7  No        20.0
Louisiana                      0

BC/BS of        E         2,101,    33.5  No        34.5  R     R     P     P
Massachusetts                523

BC/BS of        E         1,289,    35.2  Yes       58.0  V     V     L     L
Maryland                     840

BC/BS of Maine  E         383,39    30.2  No         3.6  V     R           L
                               7

BC/BS of        E         4,622,    49.0  No        22.4  R     R     P     P
Michigan                     817

BC/BS of        E         1,145,    24.3  Yes       91.1        R     L     L
Minnesota                    874

BC/BS of        E         300,26    15.4  Yes       77.3
Kansas City                    6
(MO)

BC/BS of        E         806,82    20.0  Yes       65.5
Missouri                       1

BC/BS of        E         417,15    16.2  No        14.5
Mississippi                    0

BC/BS of        E         206,15    26.1  No        11.0
Montana                        7

BC/BS of        M         395,83    25.1  Yes       19.2
Nebraska                       0

BC/BS of        E             \d      \d  No          \d
Nevada\d

BC/BS of New    E         265,54    22.5  No         0.0  R     R     L     L
Hampshire                      2

BC/BS of New    E         1,944,    24.6  Yes        5.4  R     R     L     P
Jersey                       600

BC/BS of New    E             \d      \d  No          \d
Mexico\d

BC/BS of        E         892,86    55.7  No        18.0  R     R     P     P
Western New                    3
York, Inc.

Empire BC/BS    E         6,968,    46.8  No         3.7  R     R     P     P
(NY)                         697

BC and BS of    E         802,10  72.9\l  No      56.0\l  R     R     P     P
the Rochester                1\l
Area (NY)\l

BC/BS of        E         630,93    51.2  No         5.7  R     R     P     P
Central NY                     9

BC/BS of        E         292,14    31.8  No         3.3  R     R     P     P
Utica-                         4
Watertown (NY)

BC/BS of North  E         1,680,    24.4  No        26.9  V     R     L     L
Carolina                     156

BC/BS of North  E         350,64    57.0  Yes        2.3
Dakota                         4

Community       M         1,453,      \m  Yes         \m
Mutual BC/BS                348\
(OH)

BC/BS of Ohio   M         1,292,      \m  Yes         \m
                             012

BC/BS of        E         276,99     8.9  No        66.6
Oklahoma                       6

BC/BS of        E         994,53    33.5  No        64.0        R\e
Oregon                         4

Pennsylvania    E         6,152,    51.4  No        11.8  V     V     P     P
BS                           410

Capital BC      E         1,443,    47.0  No         6.7  V     V     P     P
(PA)                         900

Independence    E         1,980,    52.3  No        19.6  V     V     P     P
BC (PA)                      155

BC of Western   E         2,565,    62.7  No         6.0  V     V     P     P
Pennsylvania                 011

BC of           E         653,45    59.3  No         8.6  V     V     P     P
Northeastern                   3
Pennsylvania

La Cruz Azul    E         543,39    15.1  No        20.7  \m    \m    \m    \m
de Puerto Rico                 0

Triple-S (PR)   \n        467,51    13.0  Yes        0.0  \m    \m    \m    \m
                               8

BC/BS of Rhode  E         536,54    52.5  No        41.0  V     R\e   P     P
Island                         4

BC/BS of South  M         813,67    22.3  Yes       75.2
Carolina                       3

South Dakota    E         121,44    17.4  No         4.1              L     L
BS                             3

BC/BS of        E         1,350,    33.5  No        75.2        R\e
Tennessee                    220

BC/BS of        E         241,98    25.3  No        80.6        R\e
Memphis (TN)                   6

BC/BS of Texas  E         1,131,     6.2  Yes       12.2
                             625

BC/BS of Utah   E         451,72    25.2  Yes       15.4
                               5

BC/BS of        M         1,669,    30.5  Yes       28.1  R     R     L     L
Virginia                     797

BC/BS of        E         172,98    29.7  No         2.0  R     R     P     P
Vermont                        7

BC of           E         570,22     9.5  No        65.1
Washington and                 4
Alaska

King County     E         782,74    36.9  No        60.0
Medical BS                     4
(WA)

Washington      \n        131,29    12.7  No        30.4
Physicians                     6
Service

Medical         E         241,61    37.1  No        53.8
Service Corp.                  2
of Eastern
Washington

Pierce County   E         163,25    26.0  No        76.7
Medical Bureau                 6
(WA)

Mountain State  E         264,34    15.2  Yes        7.0              L     L
BC/BS (WV)                     4

BC/BS United    E         376,24     7.5  No        23.4        R\e
of Wisconsin                   2

BC/BS of        E         78,020    17.9  No         0.0        R\e   L     L
Wyoming
--------------------------------------------------------------------------------
\a These coverage requirements and rating methods only apply to
individual or small employer group insurance products.  Under open
enrollment, plans accept all applicants for coverage, regardless of
their health status, prior claims experience, or demographic factors. 
In pure community rating, the plans are not permitted to use any
factors, including geography, age, gender, industry, health status,
or actual claims experience to adjust premium rates.  Plans that must
apply limited community rating methods cannot use health status nor
actual claims experience to adjust premium rates. 

\b 12/31/91. 

\c 12/31/93. 

\d The Blues plans in Colorado, New Mexico, and Nevada are
affiliated.  Therefore, the Association combines statistics from the
three plans under the name Rocky Mountain Health Care Corporation. 

\e Due to small employer insurance reform legislation, all insurers
are required to guarantee access to small employer groups for a
minimum benefits plan designed by the state. 

\f Blue Cross and Blue Shield of the National Capital Area is a
congressionally chartered health service corporation. 

\g Blue Cross and Blue Shield of the National Capital Area was not
subject to regulation by the District of Columbia insurance
department until February 1993.  Before that time, the plan was
regulated jointly by insurance regulators in Virginia and Maryland. 

\h Data from year-end 1992 were the most recent available. 

\i The Hawaii department of insurance does not review the plan's
premium rate filings.  According to a survey conducted by the Blue
Cross Blue Shield Association, BC/BS of Hawaii does not use the
following factors to adjust rates:  geography, age, gender, or
industry/occupation. 

\j IASD Health Services is one corporation that does business under
two trade names:  Blue Cross Blue Shield of Iowa and Blue Cross of
South Dakota. 

\k On July 1, 1993, the plan reorganized as a health maintenance
organization to merge with BC/BS of Indiana. 

\l Blue Cross of the Rochester Area and Blue Shield of the Rochester
Area are affiliated organizations.  Therefore, the Association
combines their statistics when compiling its quarterly reports. 

\m Data were not available for this plan. 

\n The Blues plan is organized as a stock insurer. 

Sources:  Columns 1,6,7:  GAO State Health Insurance Telephone Survey
(1993).
Columns 2,3,5:  Association Report:  Plans' Enrollment Results at
March 31, 1993.
Column 4:  Association's Legal Affairs Bulletin, June 1993. 


--------------------
\1 The Association recently revised its financial membership standard
to include a requirement that all Blues plans must, by December 31,
1994, guarantee the payment of claims liabilities and the
continuation of coverage in case of an insolvency.  This standard may
be met through participation in the state guaranty fund or through
some other method approved by the Association. 


STATE REGULATION OF BLUES PLANS
========================================================== Appendix IV

To obtain information about the regulation of health insurers and to
determine what differences, if any, existed in the regulation of
Blues plans and commercial insurers, we conducted a telephone survey
of insurance regulators in the 50 states and the District of
Columbia.\1 We also used information collected from a prior GAO
survey of state insurance officials.\2 The information collected from
these two surveys was organized according to the rate-setting and
coverage requirements placed upon Blues plans or commercial insurers
(see tables IV.1 and IV.2).\3

States placed the following types of rate-setting requirements on
Blues plans or commercial insurers. 

  Prior rate approval:  Insurance departments required insurers to
     submit detailed rate filings that were reviewed by the
     department.  Blues plans and commercial insurers could not use
     the rates until approved by the insurance department. 

  Actuarial memorandum:  Insurance departments required Blues plans
     and commercial insurers to submit actuarial data that justified
     their rates.  These data, certified by a qualified actuary,
     usually included the expected morbidity for the anticipated or
     currently insured applicant pool. 

  Public hearings:  Insurance departments subjected Blues plans' rate
     filings to public hearings, but not those of commercial
     insurers.  During these hearings, citizens could express their
     opposition to the requested premium rate.  Some regulators
     reduced or disapproved the plans' rate filings due to this
     highly publicized review process. 

  Pure community rating:  Insurance departments required the Blues
     plans, but not commercial insurers, to establish premium rates
     based on pure community rating.\4 Each applicant was charged the
     same rate for the same type of coverage.  The rate charged could
     not be adjusted on a per applicant basis using age, sex,
     geography, industry, health status, or actual claims experience. 

  Limited rating adjustment factors:  Insurance departments did not
     permit Blues plans and commercial insurers to adjust an
     applicant's community rate using health status or actual claims
     experience.  However, insurers could adjust the premium rate
     using the applicant's age, sex, geography, and occupation or
     industry. 

States placed the following two coverage requirements on Blues plans
or commercial insurers: 

  open enrollment--insurance departments required insurers to accept
     all applicants for coverage throughout the year or during
     specific time periods and

  guaranteed renewal--regulators required insurers to renew lapsing
     health insurance policies at the request of the policyholders
     regardless of their health status or use of health services. 

Table IV.1 shows state rate-setting and coverage requirements for
Blues plans.\5 Plans are grouped by the total number of state
requirements that they were subject to and then organized
alphabetically by state within each group. 



                                        Table IV.1
                         
                         State Regulatory Requirements for Blues
                                  Plans (as of 12/31/91)



                                                           Required
                                                           limited
                Required                         Required  rating
                prior     Required     Required  pure      adjustme  Year        Required
                rate      actuarial    public    communit  nt        -           guarante
                approval  memorandum\  hearing\  y         factors\  roun  Part  ed
    Plan        \a        b            c         rating\d  e         d     ial   renewal
--  ----------  --------  -----------  --------  --------  --------  ----  ----  --------
MA  Boston      X         X            X         X                         X     X

NY  Buffalo     X         X            X         X                   X           X

NY  New York    X         X            X         X                   X           X
    City

NY  Rochester   X         X            X         X                   X           X
    BC

NY  Rochester   X         X            X         X                   X           X
    BS

NY  Syracuse    X         X            X         X                   X           X

NY  Utica       X         X            X         X                   X           X

CT  North       X         X                                X         X           X
    Haven

MI  Detroit               X                      X         X         X           X

NJ  Newark                X            X\f                 X         X           X

NH  Concord     X         X                                X         X

SD  Sioux       X         X                                X                     X
    Falls

VA  Richmond              X                                X         X           X

VT  Montpelier            X                      X                   X           X

WV  Parkersbur  X         X                                X                     X
    g

CO  Denver                X                                X                     X

PA  Camp Hill   X         X                      X

PA  Harrisburg  X         X                      X

PA  Philadelph  X         X                      X
    ia

PA  Pittsburgh  X         X                      X

PA  Wilkes      X         X                      X
    Barre

RI  Providence            X            X         X

TN  Chattanoog            X            X                                         X
    a

TN  Memphis               X            X                                         X

AZ  Phoenix     X         X

ID  Boise                 X                                                      X

ID  Lewiston              X                                                      X

MD  Baltimore             X                                X

ME  Portland              X            X

MN  St. Paul              X                                X

NC  Durham                X                                X

NE  Omaha       X         X

NM  Albuquerqu            X                                                      X
    e

OR  Portland    X         X

SC  Columbia              X                                                      X

TX  Dallas                X                                                      X

AL  Birmingham            X

AR  Little                X
    Rock

CA  San                                                                          X
    Francisco

FL  Jacksonvil            X
    le

HI  Honolulu                                                         X

IA  Des Moines            X

IN  Indianapol            X
    is

KS  Topeka                X

KY  Louisville            X

MS  Jackson     \g        X

ND  Fargo                 X

NV  Reno                  X

OH  Cincinnati            X

OH  Cleveland             X

UT  Salt Lake             X
    City

WI  Milwaukee             X

WY  Cheyenne                                               X

CA  Woodland
    Hills

DE  Wilmington

GA  Atlanta

IL  Chicago

LA  Baton
    Rouge

MO  Kansas
    City

MO  St. Louis

MT  Helena

OK  Tulsa

WA  King

WA  Seattle

WA  Spokane

WA  Tacoma

WA  WPS
-----------------------------------------------------------------------------------------
Financially weak plans appear in boldface type. 

These rate-setting and coverage requirements only apply to individual
or small employer group insurance products.  Blue Cross and Blue
Shield of the National Capital Area is not included because the
District of Columbia insurance department did not have regulatory
authority over the plan until February 1993. 

\a Prior approval was determined by insurance department review of
first-time or change rate filings.  The rate filing could be used
only after the plan received notice from the department, and for most
plans there was no specified time limit in which the department had
to notify the plan. 

\b Actuarial memorandum was determined by insurance department review
of first-time or change rate filings. 

\c Public hearing was determined by insurance department review of
first-time or change rate filings. 

\d Regulators stated that the plans could not use any factors to
adjust premium rates on a per applicant basis, including geography,
age, gender, industry, health status, or actual claims experience. 

\e Regulators stated that plans could neither use health status nor
actual claims experience to adjust premium rates on a per applicant
basis. 

\f Although the Department of Insurance had the authority to hold
hearings to review rate increases, the Public Advocate also had this
authority. 

\g No data available. 

Sources:  Column 1:  GAO State Health Insurance Questionnaire Survey
(1991).
Columns 2-7:  GAO State Health Insurance Telephone Survey (1993). 



                                    Table IV.2
                     
                     State Regulatory Requirements for BC/BS
                     Plans (BP) and Commercial Insurers (CI)
                                 (as of 12/31/91)




St
at
e   BP  CI  BP    CI    BP  CI  BP  CI  BP    CI    BP  CI  BP  CI  BP  CI
--  --  --  ----  ----  --  --  --  --  ----  ----  --  --  --  --  --  --------
AL          X

AR          X     X

AZ  X   X   X     X

CA                                                                  X\
                                                                    \f

CO          X     X                     X     X                     X   X

CT  X   X   X     X                     X     X     X   X           X   X

DE

FL          X     X

GA

HI                                                  X   X

IA          X     X

ID          X     X                                                 X   X

IL

IN          X     X

KS          X     X

KY          X     X

LA

MA  X       X     X     X       X                           X       X

MD          X     X                     X     X

ME          X     X     X

MI          X     X             X       X           X               X

MN          X     X                     X     X

MO

MS  g   g   X
\   \

MT

NC      X   X     X                     X     X

ND          X     X

NE  X   X   X     X

NH  X   X   X     X                     X           X

NJ          X     X     X\              X           X               X
                        h

NM          X     X                                                 X   X

NV          X     X

NY  X   X   X     X     X       X                   X               X

OH          X     X

OK

OR  X   X   X     X

PA  X   X   X     X             X

RI          X     X     X       X

SC          X     X                                                 X   X

SD  X       X     X                     X     X                     X   X

TN          X     X     X                                           X

TX          X     X                                                 X   X

UT          X     X

VA          X     X                     X           X               X

VT          X     X             X                   X               X

WA                X

WI          X     X

WV  X   X   X     X                     X     X                     X   X

WY                                      X     X
--------------------------------------------------------------------------------
States that contain a financially weak BC/BS plan appear in boldface. 

These rate-setting and coverage requirements only apply to individual
or small employer group insurance products.  The District of Columbia
is not included because its insurance department did not have
authority for Blue Cross Blue Shield of the National Capital Area
until February 1993.  Alaska is not included because it did not have
a domiciled Blues plan, and U.S.  territories are not included as
well. 

\a Prior approval was determined by insurance department review of
first-time or change rate filings.  The rate filing could be used
only after the plan or insurer received notice from the department,
and for most plans or insurers there was no specified time limit in
which the department had to notify them. 

\b Actuarial memorandum was determined by insurance department review
of first-time or change rate filings. 

\c Public hearing was determined by insurance department review of
first-time or change rate filings. 

\d Regulators stated that the plans could not use any factors to
adjust premium rates on a per applicant basis, including geography,
age, gender, industry, health status, or actual claims experience. 

\e Regulators stated that plans or insurers could neither use health
status nor actual claims experience to adjust premium rates on a per
applicant basis. 

\f The California Department of Corporations, which had authority
over Blue Shield of California, required the plan to offer guaranteed
renewable policies.  The California Department of Insurance, which
had authority over Blue Cross of California, did not place this
requirement on the plan. 

\g No data available. 

\h Although the Department of Insurance had the authority to hold
hearings to review rate increases, the Public Advocate also had this
authority. 

Sources:  Column 1:  GAO State Health Insurance Questionnaire Survey
(1991)
Columns 2-7:  GAO State Health Insurance Telephone Survey (1993)


--------------------
\1 The methodology for our telephone survey of state insurance
regulators is discussed in appendix I. 

\2 The results of GAO's questionnaire survey of insurance department
officials in the 50 states and the District of Columbia appear in
Health Insurance Regulation:  Wide Variation in States' Authority,
Oversight, and Resources (GAO/HRD-94-26, Dec.  27, 1993).  All but
one state responded to the questionnaire. 

\3 These rate-setting and coverage requirements only apply to
individual or small employer group insurance products. 

\4 Premium rates that were established using pure community rating
were based on the average expected health care utilization of the
applicant community. 

\5 Blue Cross and Blue Shield of the National Capital Area is not
included because the District of Columbia insurance department did
not have regulatory authority over the plan until February 1993.  The
two plans located in Puerto Rico are not included either. 


EFFECT OF NEW ASSOCIATION SURPLUS
REQUIREMENTS
=========================================================== Appendix V

Partly in response to the insolvency of the West Virginia Blues plan,
the Blue Cross and Blue Shield Association announced, in late 1990,
its intention to improve its financial oversight of plans by
establishing a minimum surplus requirement for all plans and more
rigorously enforcing this requirement.  The Association developed a
new surplus requirement intended to more closely reflect a plan's
business risk.  However, the new surplus requirement was initially
much lower than the previous surplus level that the Association used
to determine whether plans were maintaining adequate financial
resources to protect plan subscribers.  As a result, plans that
lacked sufficient financial resources to meet the previous standard
now comply with the Association's new surplus requirement.  Although
the Association intends to gradually increase the minimum surplus
requirement, it is not yet clear whether the current requirement is
sufficient to protect plan subscribers. 


   PRE-1991 MINIMUM SURPLUS
   REQUIREMENTS
--------------------------------------------------------- Appendix V:1

Before 1991, the Association used a set of guidelines to evaluate
each plan's compliance with its membership standards.  The guidelines
identified the "minimum acceptable level of performance" that each
plan needed to achieve to be considered in compliance with a
standard. 

The Association's guidelines for the financial responsibility
standard stipulated, "A plan shall maintain adequate financial
resources to protect the interests of its subscribers." According to
the guidelines, the adequate level of financial resources that each
plan needed to maintain was a surplus sufficient to pay claims and
expenses for 1-1/2 months.  If a plan's surplus dropped below this,
it was to be considered out of compliance with the financial
membership standard and could be placed in the Association's
monitoring program, where it was subjected to increased scrutiny and
required to submit and implement a recovery plan. 

The guidelines in place at this time permitted the Association to
terminate the license of a plan only if it (1) was not in compliance
for 2 consecutive years and (2) failed to submit and implement a
recovery plan.  According to Association officials, their authority
to terminate a plan's license was unclear because all financially
troubled plans submitted and attempted to implement recovery plans. 
Association officials said that they only had the legal authority to
terminate a license if a state regulator was to declare a plan
insolvent, as in West Virginia. 


   NEW MINIMUM SURPLUS
   REQUIREMENTS
--------------------------------------------------------- Appendix V:2

In 1991, the Association's new minimum surplus requirement took
effect.  Rather than identify a minimum resource level to protect
subscribers, the new standard only required plans to remain
solvent--maintain a surplus of no less than $0--to comply with the
Association's financial responsibility standard.  Plans in a deficit
position when the new standard took effect were given 2 years to come
into compliance. 

As of December 31, 1993, plans are subject to new risk-based surplus
requirements tailored to each plan's business risk environment.  For
example, a plan with risky investments would be subject to a higher
surplus requirement than a plan with less risky investments. 
Association officials said that the risk-based surplus requirements
will be raised in 1995 and thereafter until an appropriate level is
reached. 


   BENEFIT OF NEW ASSOCIATION
   SURPLUS REQUIREMENTS UNCLEAR
--------------------------------------------------------- Appendix V:3

Under the $0 surplus requirement in effect from 1991 through 1993,
all plans complied with the Association's financial responsibility
standard, even though several were rated in weak or very weak
financial condition.  If the pre-1991 minimum surplus requirement
remained in effect, 12 plans with almost 21 million subscribers would
have failed the requirement as of June 30, 1993.\1 Although the
risk-based surplus requirements in effect for 1994 and planned for
1995 exceed the surplus requirement in effect from 1991 through 1993,
they remain low.  When we applied the 1994 and 1995 requirements to
plans' financial condition as of June 30, 1993, none of the plans
failed the 1994 requirement, and only one plan failed the 1995
requirement. 

The new surplus requirement has been criticized by some senior
officials of Blues plans.  One plan CEO told us that the
Association's ability to protect the value of the trademarks was
diminished by the $0 surplus requirement.  This official suggested
that the Association will be subject to continued criticism until the
standards are "responsibly raised." Another plan's general counsel
said the new requirements are too low and should be set significantly
higher than the levels planned for 1994 and 1995. 



(See figure in printed edition.)Appendix VI

--------------------
\1 These plans would not necessarily have been subject to license
termination, however, because under the old standard, termination
also required noncompliance for 2 consecutive years and a plan's
failure to make progress toward an approved recovery plan. 


COMMENTS OF THE BLUE CROSS AND
BLUE SHIELD ASSOCIATION
=========================================================== Appendix V



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the BlueCross BlueShield
Association's letter dated February 11, 1994. 


   GAO COMMENTS
--------------------------------------------------------- Appendix V:4

1.  The Association suggests that its new capital benchmark formula
better measures the actual capital needs of a plan because it is
similar to the risk-weighted formula the National Association of
Insurance Commissioners uses for life/health insurers.  This
assertion may create the misleading impression that the NAIC agrees
that the formulas are similar.  However, NAIC has not been provided
the Association's formula and thus has not had an opportunity to
determine whether the Association's formula better measures the
actual capital needs of a plan. 

2.  The Association contends that by the end of 1995 all plans will
be required to have capital levels above those at which the NAIC's
model act requires a regulator to take over an insurer.  This
comparison suggests that the Association's capital standards are more
stringent than NAIC's.  In our view, such a comparison may be
misleading for several reasons. 

First, the comparison of the Association's formula with the NAIC's
life/health risk-based capital model may not be valid.  The NAIC
model formula was designed for and tested on a group of primarily
life insurers and therefore emphasizes an insurer's asset risk.  The
Association's formula was designed to reflect the specific risks and
operating characteristics of Blues plans.  A formula designed
primarily for health insurers would likely concentrate on insurance
underwriting risk.  Accordingly, the NAIC is currently developing a
risk-based capital model formula specifically for not-for-profit
health plans like the Blues. 

Second, the goals of the respective standards differ.  NAIC's
risk-based capital model was intended to establish the minimum
capital requirements an insurer needed to function.  In contrast, the
Association's requirement is intended to protect the value of the
trademarks.  Thus, one would expect the Association's standards to be
more stringent than the regulators to identify plans in weak
financial condition long before their surplus levels reach the point
where the regulators would assume control. 

3.  The Association states that several actions stand as proof of
Blues plans' accountability to their subscribers.  As an example,
they mention the requirement that all plans join their state
life/health guaranty funds or establish another mechanism to ensure
that claims payment and continued coverage are guaranteed by the end
of 1994.  While this requirement should help protect plan
subscribers, progress toward complying with this new requirement
appears to be slow.  Although this standard was adopted in April
1993, the number of plans that meet the standard has essentially not
changed since June 1993.  As of February 1994, 24 plans belonged to
their state guaranty associations,\1 while 8 others provided
subscribers with a guaranty of claims payment and continued coverage
through some other mechanism.  The remaining 37 Blues plans are still
considering how they will meet this standard by the end of 1994. 

4.  While we agree that regulators have, in some cases, been
challenged to balance the competing objectives of maintaining insurer
solvency and premium affordability, our report does not identify
states with "highly regulated environments" as the Association
suggests.  Rather, our report suggests that rating and coverage
requirements imposed only on Blues plans and not commercial insurers
have contributed to the weak financial condition of some plans. 

5.  The Association contends that we have presented a misleading view
of its commitment to strongly enforcing its minimum surplus
requirements because we suggest that it will not act against a Blues
plan that falls below its minimum standards.  While the Association
has initiated termination proceedings twice since the new standards
took effect, we believe that the effectiveness of the Association's
enforcement efforts remains uncertain for several reasons.  First,
the two termination actions were based on the low surplus
requirements in place at that time.  In our view, these actions may
not be a good indicator of the Association's future willingness to
enforce more stringent surplus standards.  The skepticism expressed
by some Blues plan officials supports this conclusion.  Second, the
Association continues to use the same procedures for license
termination that have contributed to its historic reluctance to
enforce its membership standards. 

6.  The Association is concerned that our report may be misread to
suggest that our findings of plan mismanagement reflect the current
situation among Blues plans.  We believe our report clearly indicates
that the examples of plan unresponsiveness to market demand come from
the experiences of plans during the mid to late 1980s.  (See pp.  8
and 9.) We also indicate that plans in our study have begun to
respond to this demand.  (See pp.  15 and 16.) For illustration
purposes, we chose one plan, California Blue Cross, as a particularly
vivid example because of its current competitive and financial
strength.  We did not mean to imply that it is the only example.  We
did not use the Blues plans in Massachusetts and New Jersey as
examples because, although they have made strides toward expanding
their managed care programs, they continue to be rated as in weak
financial condition. 

7.  Although the 69 Blues plans may collectively have more than 24
million subscribers enrolled in managed care programs, aggregating
these statistics for all Blues plans obscures a wide variation in the
proportion of each plan's business that is in managed care.  As
illustrated in appendix III, some plans have most subscribers
enrolled in managed care programs, while other plans have no managed
care programs whatsoever.  Further, aggregating this type of
information for all plans may be misleading since each plan is an
independent corporation and its performance is unrelated to that of
other plans. 

8.  We do not dispute the Association's contention that, before 1991,
it may not have had clear authority to terminate a plan's license for
failing the financial membership standard.  As noted in our report,
we found that the Association's reluctance in enforcing its financial
and other membership standards before 1991 was due, in part, to a
conflict in its trademark licensor role.  (See p.  14.)

Further, the Association's suggestion that there was no requirement
that plans maintain a specific level of surplus is, in our view,
misleading.  As discussed in appendix V, the Association guidelines,
before 1991, identified a minimum surplus level that a plan needed to
maintain adequate financial resources to protect its subscribers. 

9.  The Association contention that, currently, the general level at
which they begin monitoring a plan's performance is similar to the
pre-1991 levels is somewhat misleading.  According to Association
guidelines, the pre-1991 level was considered a minimum acceptable
level of performance, rather than the level at which the Association
should begin monitoring the plan's performance. 

10.  The Association indicates that it has done much to ease the
trauma that resulted from the insolvency of the old West Virginia
Blues plan.  For example, the Association notes that it agreed to a
plan to reimburse subscribers of the plan money owed them and prevent
providers from trying to collect from subscribers any money owed them
by the insolvent plan.  Despite this agreement, as of February 1994,
about $40 million in claims against the liquidated plan remained
unpaid, and no money has yet been paid to subscribers because claims
against the assets of the liquidated plan are subject to ongoing
litigation.  Further, some providers have continued to bill
subscribers for money owed by the liquidated plan. 

11.  We agree that disparate rate setting and coverage requirements
contributed to the weak financial condition of some Blues plans. 
However, we also found that other factors contributed to plans'
financial weaknesses. 

Although the Association provided us information on state regulatory
requirements from a survey of its member plans, we used the results
of our survey of state regulators, who, in our view, were a better
source of information on the regulatory requirements states imposed
on Blues plans. 

12.  We recognize that differences may exist between our analysis of
state regulatory requirements imposed on Blues plans and the
Association's because we used different sources to obtain our
information.  However, as discussed in comment 11, we believe state
regulators are a better source of information on state regulatory
requirements. 

13.  We changed the text to indicate that each plan paid an amount in
dues equal to much less than 1 percent of its net subscription
revenue. 


--------------------
\1 One of the plans that belonged to its state guaranty association
in June 1993 is no longer a Blues plan. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

John C.  Hansen, Assistant Director, (202) 512-7105
Randy M.  DiRosa, Evaluator-in-Charge
Hannah F.  Fein
Rolfe A.  Forland
Susan L.  Sullivan
Susan R.  Thillman
Joan K.  Vogel

RELATED GAO PRODUCTS

Health Insurance Regulation:  Wide Variation in States' Authority,
Oversight, and Resources (GAO/HRD-94-26, Dec.  27, 1993). 

Health Insurance:  How Health Care Reform May Affect State Regulation
(GAO/T-HRD-94-55, Nov.  5, 1993). 

Employer-Based Health Insurance:  High Costs, Wide Variation Threaten
System (GAO/HRD-92-125, Sept.  22, 1992). 

Access to Health Care:  States Respond to a Growing Crisis
(GAO/HRD-92-70, June 16, 1992). 

Access to Health Insurance:  States Efforts to Assist Small
Businesses (GAO/HRD-92-90, May 14, 1992). 

Insurer Failures:  Life/Health Insurer Insolvencies and Limitations
of State Guaranty Funds (GAO/GGD-92-44, Mar.  19, 1992). 

Small Group Market Reforms:  Assessment of Proposals to Make Health
Insurance More Readily Available to Small Businesses
(GAO/HRD-92-27BR, Mar.  12, 1992). 

Insurance Regulation:  The Failures of Four Large Life Insurers
(GAO/T-GGD-92-13, Feb.  18, 1992). 

Private Health Insurance:  Problems Caused by a Segmented Market
(GAO/HRD-91-114, July 2, 1991). 

Insurance Regulation:  State Handling of Financially Troubled
Property/Casualty Insurers (GAO/GGD-91-92, May 21, 1991). 

Employee Benefits:  Improvements Needed in Enforcing Health Insurance
Continuation Requirements (GAO/HRD-91-37, Dec.  18, 1990). 

Health Insurance:  Cost Increases Lead to Coverage Limitations and
Cost Shifting (GAO/HRD-90-68, May 22, 1990). 

Health Insurance:  Comparing Blue Cross and Blue Shield Plans With
Commercial Insurers (GAO/HRD-86-110, July 11, 1986). 

Public Representation on Boards and Blue Shield Allowance:  Important
Relationship Not Found (GAO/HRD-81-31, Dec.  31, 1980). 

