Health insurers target cost-cuts, diversification as formula for success

When the recession hit home in 2008, health insurers, like everyone involved in healthcare, tightened their belts. Now news is beginning to trickle in that health insurers are instituting additional cost-reduction measures--and many also are looking for new opportunities outside their traditional role. Here are three examples:

Cigna Corp. Earlier this year the Philadelphia-based company led the cost-cutting announcements, with CEO David Cordani telling investors at an investment conference that operating expense reductions begun in 2009 would "continue through 2010, 2011 and 2012 as we seek to garner further efficiencies for the benefit of our customers and shareholders while simultaneously investing back in the business." Cordani also noted that "approximately 40 percent of our company is tied to our international business and our group, disability, life and accident business, which essentially has limited to no impact from a healthcare reform standpoint."

Fast forward a few months: Cigna no longer even identifies itself as a health insurer with regard to the 60 percent of its business that is healthcare-oriented, Cordani told the Intelligent Investing team at Forbes. "We look at ourselves actually as a health service company, as opposed to a health insurance company. So it's a service-oriented provider."

Why the switch? "More businesses than ever are looking for additional solutions around health engagement, wellness programs, the use of incentives and transparency to drive more sustainable cost improvements," said Cordani. "With a well-designed benefit program, good incentives, transparency and assistance programs, we're able to take costs out of the system to the tune of 26 percent over four years. And very importantly, driving that is an increased use of prevention--not a decrease--an increased compliance with medication."

Blue Cross and Blue Shield of North Carolina (BCBSNC). The Chapel Hill-based health insurer will cut 20 percent from its $1 billion annual budget by 2014, as well as looking for opportunities to generate up to 25 percent of its operating income from non-health businesses (e.g., life insurance, workers' compensation or payroll services) in that same time period, reports the Charlotte Observer.

BCBSNC expects to achieve the $200 million reduction in administrative costs through the elimination of open jobs, attrition and early retirements, streamlined operations, a review of its real-estate portfolio, and other expense reductions that CEO Brad Wilson characterized as "tough challenges" in a memo to BCBSNC employees. Those challenges potentially could include layoffs. "No one can guarantee full, permanent employment in perpetuity," Wilson told the Observer. "Over time, Blue Cross will be a smaller company."

BCBSNC projects that its main healthcare business will experience a flat annual growth rate of 1 percent. While the insurer expects to introduce new cost-focused health plans that will attract employers, revenue growth will have to come from other areas as well--hence the move outside its traditional business lines.

Health Care Service Corp. (HCSC). The Chicago-based insurer is seeking to reduce administrative costs in the southwest region by consolidating marketing support positions in Oklahoma and New Mexico into its Texas operations, reports the Tulsa World. "While it is never easy to make decisions that affect staffing levels ... we must continue to look for opportunities to streamline processes to enhance our overall efficiency and effectiveness," Nicole Amend, assistant manager of public relations with Blue Cross and Blue Shield of Oklahoma, told the World.

To learn more:
- read the Intelligent Investing transcript at Forbes
- take a look at this Wall Street Journal piece on Cigna
- read this Charlotte Observer article
- read this Tulsa World article

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