Monday, October 19, 2009

Singin' the Blues: A History Lesson

[Welcome Industry Radar readers!]

Bob and I frequently offer advice and opinion at a consumer-related bulletin board; folks post questions or describe insurance problems, and we (along with a few others) try to help out.

One of the other "regulars" there is a gentleman named Jay, who is an active, involved and knowledgeable insurance regulator. Jay brings an interesting perspective to the board: although he doesn't sell insurance, he has a unique, "insiders view" of how it works (and how it doesn't). Recently, a poster asked about whether or not Blue Cross/Blue Shield was a not-for-profit venture. Jay was kind enough to recount some of the history of that organization, and has agreed to let us share that with our readers:


This is a pretty close history. Back in the Depression days (the FDR one), doctors and hospitals were concerned about getting paid during the hard times. Obviously, medical care was needed, even during the Depression, so the states provided "seed" money to start BC/BS plans in the states. These were initially organized by the doctors [Blue Shield] and the hospitals [Blue Cross] in the states, sort of like the state medical association.

What the public generally doesn't know is that each plan is a separate entity, and some states have, or had, several Blues operating. Ohio had plans in Cleveland, Columbus and Cincinnati at one time. Illinois had plans in Chicago and Rockford. These were organized under special sections of the state insurance code....not the same laws that governed "commercial" insurers like Prudential or Mutual of Omaha. They got special treatment because of the public need to continue medical care and keep facilities open. They were all non-profits to start with under this organizational model.

Then, in the 1980's I think, the Blues in Chicago was the first to convert to a "for profit" and reorganized as a mutual insurance company. This was not without much controversy and consternation. Repayment of the seed money to the state, or other charitable purposes was required. The Illinois Blues in Chicago was my very first exam back in October 1974, 35 years ago [ed: Jay was a child prodigy: he was a mere 5 years old at the time]. They were still non-profit, but somehow had several hundred million dollars in cash sitting in bank accounts. Other Blue plans followed suit after Illinois, and a couple other state plans broke the ice and ceased being organized as non-profits.

Nearly all have now converted to either stock or mutual insurance companies and have surrendered the special treatment they once enjoyed under the various state insurance codes. The North Dakota plan is still non-profit and there may be a few others left.

Some of the perks for being a non-profit were substantial; exemption from state taxation, agents didn't have to be licensed to sell Blue plans if that was all they sold, many other very favorable accommodations due to the crisis in the depression.


Thanks, Jay! Readers with additional questions or information are encouraged to share them in the comments; we'll be happy to pass them on.
blog comments powered by Disqus