Blue Cross takes state to the cleaners in contract

You can read the contract between Blue Cross and Blue Shield of North Carolina and the State Health Plan here. (Let me know if you see any interesting provisions that I missed.)

It’s no wonder that Blue Cross is jumping up and down shouting that it makes a slim profit margin on administering the State Health Plan. The insurance company wants to draw attention away from the rest of the contract.

For administration the State Health Plan has agreed to reimburse Blue Cross using the “cost plus” method, which means that we pay Blue Cross the “cost” of actually administering the plan “plus” other expenses. You might think that cost plus makes sense because we pay Blue Cross the cost of running the plan plus the 0.625 profit margin. But that’s only the beginning.

State Health Plan officials have agreed to pay Blue Cross the cost of operating the plan plus the profit margin plus “overhead” plus “implementation costs.” What, exactly, counts as overhead? It’s spelled out in the contract:

Overhead is general corporate expense, incurred by BCBSNC and/or its affiliates in conducting business, including but not limited to human resources, finance, legal and other functions not connected with administering the Group Health Plan.

In other words, Blue Cross could use a big chunk of State Health Plan funds and use it for Bob Greczyn’s fat bonus. That’s perfectly legal under the terms of the contract.

It’s important to note that profit margin in itself is irrelevant. To determine if the State Health Plan is getting a good deal it is more important to know how much of every dollar goes to “base administrative costs” and how much goes to “human resources, finance, legal and other functions not connected with administering the Group Health Plan.”

So this cost plus method sounds pretty scary. Is there any limit on the amount Blue Cross can charge? Yes! The contract says that cost plus is capped and explains how the cap is determined:

BCBSNC will in good faith determine BCBSNC’s then-current Cost Plus on a PMPM [per member per month] basis. BCBSNC will then notify the State Health Plan of BCBSNC’s calculation of a cap on Cost Plus that equates to such then-current Cost Plus plus an annual increase as described below.

So Blue Cross determines its own cap.

There are a few positive notes in the contract. One is that the State Health Plan has the right to audit Blue Cross using an “independent Certified Public Accountant” that has “no conflict of interest with respect to either Party, and must be nationally recognized …”

Of course, there is a catch. The State Health Plan is only entitled to see a final report:

The CPA’s confidentiality agreement will restrict the CPA to providing the State Health Plan only the final results of such audit and a description of the audit methodology used. All other Confidential Information, including but not limited to BCBSNC’s actual cost components, will remain strictly confidential.

But hey, something is better than nothing. Also, the contract can be amended at any time.

Another provision that we have not heard much about is an amendment signed by State Health Plan Executive Administrator Jack Walker in October to delay payments to Blue Cross from October 2008 through March 2009. From October to December we paid Blue Cross $1 million per month and from January to March the state is paying $3.5 million per month. At the end of March the State Health Plan owes Blue Cross all of the delayed payments plus interest. These balloon payments to Blue Cross are due on May 15 and June 15 and the principal is not to exceed $40 million although the money owed could top that sum with interest.

So we see the consequences of hapless managers leading the State Health Plan. Sharp Blue Cross attorneys are able to get any terms they want and the state rolls over. This is also the danger of no-bid agreements. The State Health Plan did not set the terms of the contract and ask companies if they could meet our requirements. Instead, we allowed Blue Cross to dictate its terms.

State workers should not have to pay for the mismanagement of the State Health Plan.


  1. Tom Bomadil

    March 18, 2009 at 4:21 pm

    Mr. Searing & Mr. Linker,

    Thanks for your ongoing work in the health care arena. Thanks in particular to Mr. Linker for the investigation into the SHP-BCBS contract.

    State employees and the public in general owe you a debt of gratitude.


  2. AdamL

    March 18, 2009 at 4:29 pm

    Thank you for the kind words. Let’s hope that legislators realize that we all owe state employees a debt of gratitude.

  3. Marsha V. Hammond, PhD

    March 19, 2009 at 1:41 am

    Oh please: here’s overhead:
    Wednesday, March 11, 2009
    $16 Million paid to BCBSNC Board Members: the Ponzi scheme that the insured have paid into

    Look at this pdf: http://www.ncpolicywatch.com/docs/pdfs/2008SupplementalCompensationExhibit.PDF

    You will see that the 13 members of the BCBSNC board 2008 reimbursement is approximatly $16 million.
    Marsha V. Hammond, PhD:
    NC mental health reform: http://madame-defarge.blogspot.com/

  4. Alice Battle

    March 24, 2009 at 8:36 am

    Sounds like very lax oversight by the State that is going to cost state employees in benefits. No wonder health insurance is so costly. The patient gets the blame.

    Thank you for your report.

  5. […] we noted when the Blue Cross contract with the State Health Plan was first released, the terms are terrible […]

  6. […] Blue Cross and Blue Shield of North Carolina was busy bamboozling the State Health Plan, cutting radio ads to attack state employees, and plotting commercials to […]

  7. […] Editor’s Note: Author of this piece is Jeff Seiler, an Illinois insurance consultant. His web site is http://www.ssbenefits.net. It pays to read contracts, if you can get them for review. This is especially true if you are a third party beneficiary but not a party to the contract. A journalist in North Carolina has done a little work in that area – http://pulse.ncpolicywatch.org/2009/03/18/blue-cross-takes-state-to-the-cleaners-in-contract/ […]

  8. […] that they are now paying much more for health care benefits because Blue Cross was able to get a sweetheart deal on administering the State Health […]

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