The Wasteful Provisions of the Operating Agreement

To the detriment of public education, MESSA has created inefficiency and waste in the administration of health insurance. First of all, even though one system for the processing of claims could accommodate both MESSA and Blue Cross, two separate systems have been established in order to give MESSA members more choices for health care. In addition, MESSA encourages unnecessary costs by not taking reasonable measures to control utilization of certain programs. The combined effect of these deficiencies is higher costs and less money for school districts.

Prior to its operating agreement with Blue Cross, MESSA processed all claims submitted by its members. When MESSA contracted with Blue Cross in 1985, the claims processing systems of both corporations were integrated using a complex computer network. A common history file was developed, which lists the record of claims for each MESSA member. Each time a claim is received, either by Blue Cross or by MESSA, the data is entered into this common file. And while the history file may be common, the data entry system is not. Blue Cross and MESSA each maintain separate operations for the processing of claims.

Whenever a MESSA member receives treatment from a participating Blue Cross provider, the claim is processed by Blue Cross. Yet, whenever a MESSA member is treated by a non-participating provider, the claim is processed by MESSA. There is no need to have two separate facilities entering data into one file-a duplicated filing system. Even though MESSA could arrange to have the claims processing aspect of administration centralized into a single operation, it needlessly continues to process certain claims. For example, MESSA could have all claims forwarded to Blue Cross and entered into a single history file. Even if a provider is not participating with Blue Cross, that does not automatically disqualify Blue Cross from handling the claim. Blue Cross, however, has the facilities and capability of handling a large volume of claims, so any additional costs would be marginal in this case. MESSA could then reduce expenses by minimizing the cost of claims administration and scaling down the magnitude of its computer network.

Why doesn't MESSA let Blue Cross process these claims just as any other third party administrator would? With its other accounts that are similar to MESSA, Blue Cross consistently works off of one centrally organized history file. Yet, MESSA is granted an exemption from standard practice because MESSA believes that it is protecting its members from any disregard that Blue Cross might have for their financial interests while claims are being processed. Furthermore, Blue Cross accepts without question the payments made by MESSA to MESSA members for relevant medical expenses. Blue Cross takes these payments for granted and builds them into its rate structure. In other words, Blue Cross does not arbitrate or verify MESSA-incurred benefit costs which will be passed along to school districts in the form of premiums for health insurance. This would not seem to be responsible behavior for a quasi-public corporation created to serve the public interest.

The estimated waste of this duplicate filing system extends into the millions of dollars, based upon the expenses for data processing listed in MESSA's "Schedule of Operating Expense."50 One estimate places the waste of duplicate administration at around $27 million.51 But if this procedure is clearly wasteful, why wouldn't MESSA take corrective action? Consider what would happen to the MEA if MESSA's operations were streamlined.

Remember that both MESSA and the MEA contract with MEDNA for data processing services. In actuality, MESSA is paying MEDNA to operate the computer network which is at the core of claims processing. If MESSA operations were relinquished to Blue Cross, there would be little need for MEDNA to maintain its vast data processing resources. Since the MEA depends on MEDNA for access to MESSA's computing resources, the MEA would suffer a blow if MEDNA were pushed out of business.

If MESSA were removed as a co-administrator of its health insurance program, the immediate savings could exceed $20 million in administrative expenses, and millions more in controlling fees paid for physician and ancillary services. In 1992, MESSA had a composite premium obligation of $327 million to its underwriters. If $300 million of that total was owed to Blue Cross, and if Blue Cross had standard administrative expenses of 7.5 percent excluding charges for insurance reserves, the total Blue Cross administrative charge to MESSA in 1992 was $22.5 million. The $27.6 million in operating expenses listed in MESSA's financial statements does not include expenses incurred by Blue Cross. If .$20 million of this amount was to co-administer Blue Cross insurance, then the total administrative expense for MESSA health insurance was $42.5 million, or 12.75 percent of premiums. For a third party administrator, this expense is typically around 4 or 5 percent, and rarely will it ever exceed 7 percent. If even reduced to the 7 percent level, the annual savings for 1992 would have been $21.5 million.

Another factor that contributes to the cost of MESSA's health programs is its offer to pay for services rendered by providers who do not participate in Blue Cross. Although access to non-participating providers is an added benefit to the members, MESSA could reduce costs simply by limiting the options given to members for receiving medical services, as many managed care programs do. While members can reduce costs by patronizing only participating Blue Cross providers, there is neither a requirement nor an incentive for them to do so.

As previously noted, whenever a MESSA member receives care from a participating Blue Cross provider, Blue Cross minimizes costs for MESSA by compensating the provider based upon a discounted fee schedule. However, in cases where a MESSA member is treated by a provider that refuses to accept Blue Cross's payment, MESSA receives the bill from the member, processes the claim, and reimburses the member. (MESSA deducts any amount paid to its members from the total amount that it owes to Blue Cross, so Blue Cross is still at risk, since MESSA does not pay for any claims which exceed its premium obligation to Blue Cross.)

The actual reimbursements for medical services are based upon MESSA's determination of how much the service is worth. In 1985, MESSA claimed that its schedule of "reasonable and customary" fees was similar to the one used by the Equitable.52 In fact, the reimbursements offered by the Equitable are larger than those offered by Blue Cross. Regardless, MESSA's valuation of reasonable fees is inflated above Blue Cross's valuation of reasonable fees. But for what reason?

Suppose a MESSA member can receive the same service from a participating provider or a non-participating provider, and MESSA will cover 90 percent of the cost up to the reasonable and customary level as determined by the processor of the claim. The participating provider is limited in how much it can charge, since it will only receive the reimbursement that Blue Cross has determined to be reasonable. The non-participator can charge more for the same service, because Blue Cross does not set its prices. Since MESSA is aware that non-participators will charge a higher rate to its members than participating Blue Cross providers, it has set inflated determinations of "reasonable and customary" charges in order to limit out-of-pocket expenses for its members. In this sense, non-participators can "balance bill" with MESSA's fee schedule. From a practical standpoint, it is in the best interest of all providers not to participate with Blue Cross when treating a MESSA member in order to overcharge the member and let MESSA pickup the costs.

According to its 1992 financial statements, MESSA itself spent a total amount of $14,168,617 on direct benefits paid to members, which would include payments to members who chose to receive medical services from non-participating providers. MESSA could avoid any excess costs by using a deflated fee schedule, or it could eliminate them altogether by requiring its members to patronize only participating Blue Cross providers.

There are other ways MESSA can improve the efficiency of its arrangement with Blue Cross, specifically through "managed care" initiatives. A study conducted by the Rand Corporation found that 20 percent of national health care expenditures is consumed by unnecessary use of services.53 With MESSA, there are few managed care incentives that encourage members to use less health care services, so overuse of MESSA programs is expected to be much higher than average. For example, although this practice contradicts standard Blue Cross procedures, Blue Cross does not require that MESSA members obtain verification from Blue Cross before checking into a hospital. Pre-admission certification, as it is called, can reduce costs by eliminating unnecessary hospital stays. Yet, MESSA has kept all of its utilization review programs in-house in order to protect its members from unfavorable cost arbitration. MESSA members are given the option of having a MESSA Care Rider, which requires pre-admission certification for in-patient hospital treatment, second opinions for surgical procedures, and medical case management. The Care Rider reduces costs billed to the member by five percent.54 If MESSA mandated that all members have this Care Rider, MESSA would be able to avoid certain needless medical expenses and reduce overall costs.

According to the Health Insurance Association of America, in 1990, only five percent of group health insurance plans offered unlimited choice of physicians and no control over the use of medical services.55 While some will argue that MESSA is among the five percent, and others will argue that MESSA does manage care to a certain extent, the fact remains that MESSA's managed care measures are minimal when compared with the measures undertaken by other insurance administrators. As long as MESSA members anticipate that most medical claims will be covered in full, they believe that MESSA will always interpret policies in their favor, and they are not forced to pay many out-of-pocket expenses, there is little incentive to restrict overuse. MESSA could implement a managed care program of cost sharing, selective contracting, and utilization review that would dwarf its current program, yet still be fair to its members. The typical potential savings with various managed care options are estimated as follows:56

  • Deductibles: 10 percent of premium.

  • Co-payments: 5 percent of premium.

  • Employee premium contribution: 5-8 percent of premium.

  • Coordination of benefits (to assure that the employer's insurance is primary): 7-10 percent of premium.

  • Utilization review (assure acute days and aggressive discharge planning): 10-15 percent of premium.

If MESSA could even reduce premiums of $300 million by just 10 percent through managed care measures, the savings would be $30 million. This is certainly possible. In the past, MESSA has contended that it does use managed care. Again, MESSA's use of managed care is not sufficient to limit noticeably the costs of MESSA's benefit packages. As of late, there have been persistent rumors circulating that MESSA is now actively exploring managed care initiatives in response to the Clinton health care reform proposals. What remains important is that if MESSA ever does implement a managed care program, it must be effective and not just a token act if costs are ever to be reduced.

The wasteful and costly provisions of MESSA's operating agreement with Blue Cross are based upon the overall design of MESSA health insurance plans, and not some callous intended effort to raise costs. The way any potential savings can be realized is by modifying the design of MESSA benefit packages. Yet, the design of MESSA's benefit packages can only be changed through MESSA's own initiative, a legislative requirement, or the collective bargaining process between school districts and the MEA. Nevertheless, if administrative expenses were minimized and managed care was implemented so as to reduce costs by just 10 percent, the total potential savings of cleaning up MESSA's health insurance program is estimated at a minimum of $50 million.