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MANAGING INSTABILITY
The farewell parties for William Flaherty mostly took place under
darkening skies, heavy not with storm clouds but with the smoke of raging forest fires,
souvenirs of the summer inferno.
When Flaherty stepped down as chief executive officer of Blue Cross
and Blue Shield of Florida on June 30, he ended a 37-year tenure in the health insurance
business; 19 of those years were spent with the Florida Blues.
It is fitting that Flaherty’s retirement began as firefighters
struggled against the blazes all about the company’s Jacksonville headquarters
because, in a way, Flaherty’s career bears a metaphorical resemblance to the work of
the firefighters. It was spent adjusting, maneuvering, and battling in unruly and
tempestuous circumstances.
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Cover Story
by jacquelyn horkan, editor
Managing Instability
The farewell parties for William Flaherty mostly took place under darkening skies,
heavy not with storm clouds but with the smoke of raging forest fires, souvenirs of the
summer inferno.
When Flaherty stepped down as chief executive officer of Blue Cross and Blue Shield of
Florida on June 30, he ended a 37-year tenure in the health insurance business; 19 of
those years were spent with the Florida Blues.
It is fitting that Flaherty’s retirement began as firefighters struggled against
the blazes all about the company’s Jacksonville headquarters because, in a way,
Flaherty’s career bears a metaphorical resemblance to the work of the firefighters.
It was spent adjusting, maneuvering, and battling in unruly and tempestuous circumstances.
As an executive, Flaherty has four times wrenched a company back from the brink, while
participating in the total overhaul of the health insurance market. In the final act of
leadership, he is leaving Blue Cross and Blue Shield of Florida, posting profits for the
ninth straight year, in the capable hands of a well-prepared successor, Michael Cascone, a
30-year veteran of the company.
So it is fitting as well that, on the day of one of the last good-bye parties, rain
from the night before had cleared away the pall of smoke, leaving behind the air-blue
skies of a Florida summer.
Turnaround
In 1961, Flaherty, a Michigan native, started working at Blue Cross and Blue Shield of
Michigan. On the same day, the local newspaper ran a front-page story on the
company’s proposed 20-percent rate hike.
"The assumption in the early sixties was that health care inflation was reasonable
and good," Flaherty recalls. Higher prices meant better services for patients and
higher wages for health care workers.
The inflationary euphoria would not last. By the early 1970s, health insurance
companies across the nation were struggling with skyrocketing costs. Flaherty left
Michigan to take over the Delaware Blues in 1975. In 1979, he moved on to Florida, each
transition bringing with it the task of turning around a struggling company.
In Florida, the situation was particularly dire with the company on the verge of
insolvency.
At that time, Blue Cross and Blue Shield was organized as two separate companies, the
first a cooperative with hospitals, the second with doctors. One of Flaherty’s first
steps was to sever the formal bond between the two non-profit corporations and the medical
community.
"We referred to it as a separation but not a divorce," says Flaherty.
The next step in the reinvention was to merge the two Blues into one tax-paying mutual
insurance company.
With a return to some form of stability, Flaherty and his management team next turned
their attention to the competitive issue of the day: creating a health maintenance
organization. Flaherty wanted to structure the launch of the HMO in a manner that would
infuse it with an entrepreneurial spirit, a challenge for any large corporation.
"We made the decision that it had to have a very local focus on a community by
community basis," explains Flaherty. "And that meant starting a series of small
companies and trying to, as we used to say, not let the elephant kill the mouse."
As it turned out, the biggest threat to the mouse was not the elephant but the youth of
the rodent itself.
"There was no experienced [HMO] industry management you could go out and hire
because it was a new business activity," says Flaherty.
Part of the lack of experience was an imperfect knowledge of how much it would cost to
run an HMO. By 1987, it was obvious that the state’s HMO’s had underestimated
their costs. Blue Cross and Blue Shield’s HMO, Health Options, was failing so badly
that the entire company posted $118 million in losses in 1987 and 1988.
Some blamed Health Options’s brush with death on the company’s tardy entry
into the HMO market, but Flaherty says the slow pace was deliberate. It paid off. As
Michael Cascone remembers, when they began developing an HMO in Jacksonville, the city had
none. "Six months later, we were operational," he says. "We were number
six."
"Most of them went under," Flaherty adds.
In 1988, Flaherty reinvigorated Health Options
by hiking prices and implementing cost controls. Turnaround time came in 1989 when the
company recorded a net income of $35.4 million on revenues
of $1.3 billion. Blue Cross and Blue Shield has been profitable ever since.
Beyond the Limits
The health insurance industry remains tumultuous. The threat of government intervention
is one source of the turmoil. Justified or not, politicians are playing on public fears
over the adequacy of health care to defend a massive regulatory incursion into the
business of HMOs (see related story on page 22).
Government intervention is particularly threatening at this point in time because,
while HMOs have proven successful at holding down medical costs, the inflationary beast is
not yet vanquished. Many HMOs, including Health Options, lost money last year because
health care costs, particularly pharmaceuticals, are growing faster than expected.
Bureaucratic regulation would also stifle the remarkable dynamism in the industry.
"There are so many competitors out there trying to innovate and the market has not
yet voted," says Flaherty. "And what they vote for today, they may
reject tomorrow."
An example of that creativity can be found in Minneapolis where a group of Fortune 500
companies, having already moved from traditional fee-for-service plans to the HMO model,
are now making their way back to a new form of fee for service. This time, however, using
the data and experience gained with HMOs, the Minnesota group is contracting with a
network of trusted physician group practices. Instead of negotiating on price, the
employers are using quality and productivity standards as the basis of expectation.
Whether Florida can eventually adopt a similar approach remains to be seen because of
the differences between the two markets. Minneapolis is a city of large companies and
large group practices. It has already been through the disciplining experience of HMO
pricing. Florida does not share those characteristics.
Florida’s market does seem prepared to embark on a spree of consolidation in the
managed care industry. Cascone, believes that in the next couple of years Blue Cross and
Blue Shield will have no choice but to join in the merger and acquisition fever. The
company has been investigating possible candidates but hasn’t found the right
strategic fit. Until it does, Cascone will continue to grow the business internally,
rather than entering into a partnership where, as Flaherty puts it, "We’re
simply two wheels on a four-wheel buggy."
Cascone is also seeking to acquire other capabilities that will help the company hold
down costs or increase revenues. One project with the potential to do both is the
insurer’s Virtual Office.
Virtual Office will connect the computers of participating physicians with those of
Blue Cross and Blue Shield. The system will not only speed up the flow of claims data; it
will provide a valuable data base of patient information, including records of referrals
to specialists, what services are covered by the patient’s policy, and what
deductibles or co-payments are due. Physicians will also have access to the latest
information on treatments for specific diseases. The program is still in the pilot project
stages, with selected physicians participating in field trials. When fully operational,
Virtual Office promises to save administrative expenses for providers, savings that can be
passed on
to its customers.
"If we can improve the efficiency and effectiveness of the provider’s office
and our office together," says Cascone, "there’s a huge benefit and a value
there to our customers."
Cascone also hopes one day to market Virtual Office to other providers, making a profit
center out of something that was originally designed as a cost-control strategy.
"The limits on what we do are going to be the limits of what we can think
of," says Flaherty.
Now though, Flaherty no longer bears the responsibility for testing those limits. He
remains with Blue Cross and Blue Shield as chairman of the board, while Cascone serves as
president and CEO. The succession was a smooth one that actually began 10 years ago, in
annual reviews of the strengths and weaknesses of the senior executives.
Cascone’s management talent was apparent to Flaherty from the day he joined the
Florida Blues in 1979. Then, Cascone was running the company’s Medicare Part B
section. "It was clearly the highest performing unit in the company," recalls
Flaherty.
Cascone was unofficially tapped as Flaherty’s successor in 1995, when Flaherty was
named chairman and passed on the title of president to Cascone.
Now that the round of parties is over and the succession completed, Flaherty says he
plans to
spend time traveling with his wife and visiting the grandchildren in Denver, Bradenton,
Fla., and
Madison, Wisc. And he will continue to play a role, albeit smaller, in shaping the future
of health insurance, a task that holds more than economic significance for him.
"If you can do it better, cheaper, smarter," he says, "that means
there’s more resources out there for the population to get more services or to get
the same services at a different cost, which lets them get something else they want as
much or more."
Which is why one man braved the upheavals of his chosen field over a span of four
decades. Call it the morality of the marketplace.
The Other Side
For Kerry L. Herndon, health insurance, politics, and bromeliads are a natural mix.
Kerry’s Bromeliad Nursery is the nation’s largest orchid grower, shipping
flowering plants from greenhouses in Homestead, Fla., to clients throughout the country
and overseas. With 230 employees, the availability of quality health insurance at an
affordable rate is a priority for Herndon. He’s found the product he needs through
Health Options, the HMO of Blue Cross and Blue Shield of Florida.
Making sure that product stays available inspired him -- and 12,000 other Blue Cross
customers
-- to participate in the company’s grassroots public affairs campaign.
Blue Cross implements its grassroots program in response to attacks on the managed care
system. Sometimes, subscribers are called and asked to contact their elected officials,
urging them to support managed care. Customers are provided with information on the issue,
but they write their own letters in their own words.
"Blue Cross advocating solutions is not nearly as effective or as influential as
our customers advocating points of view," says Bruce Davidson, the company’s
senior vice president for south Florida.
On average, more than 30 percent of those contacted agree to take action.
In some cases, Blue Cross will fly subscribers to Tallahassee where they give lawmakers
firsthand accounts of managed care’s success stories.
The company also runs television ads and is getting ready to launch a public policy Web
site. This year, the public relations staff began circulating "Success Stories of the
Week," to the state’s newspapers and television stations.
All of this is done in an effort to counteract the propagation of anti-managed care
stories, to make sure the other side gets heard. It’s a weapon in the war against the
kind of government intervention that stifles market dynamics and adds waste to the system.
"As far as I’m concerned," says Kerry Herndon, "managed care saved
health insurance for working people."
Breathing Easier
Asthma is a potentially life-threatening disease that afflicts 14.6 million Americans.
Fortunately, the risk is one that can be minimized through an aggressive plan of treatment
and patient cooperation. Making sure that Blue Cross and Blue Shield HMO patients get that
kind of care is the job of the staff of Dr. Larry Tremonti, vice president for quality and
care delivery.Tremonti is responsible for the development and implementation of care
management programs for sufferers of such chronic conditions as congestive heart failure
and diabetes, as well as asthma. These programs focus on identifying patients, assessing
the severity of their condition, developing treatment plans based on the best science
available, and educating patients and doctors about what they can do to lessen the impact
of the disease on the patient’s quality of life.
"We now have the tools in managed care," Tremonti says, "where
we’ve got all the information together in one place to identify those individuals who
would benefit by this more aggressive therapy."Those tools allow health care
professionals to attack illness aggressively and comprehensively, an advantage that
didn’t exist in what Tremonti calls "the fragmented traditional
system."Blue Cross and Blue Shield identifies potential candidates for its Asthma
Care Plus program by reviewing computer runs of diagnosis codes, emergency room visits,
and drug prescriptions. A candidate is contacted by a case manager who helps coordinate an
evidence-based regime of treatment with the patient’s primary physician. The case
manager also makes sure the patient understands his own role in managing his illness.
According to a recent survey, patients in the asthma program rate their satisfaction at
4.87 on a scale of 1 to 5. They also credit the program with increasing their quality of
life by third.
Sept/Oct 1998 -- Florida Business Insight, PO Box 784, Tallahassee, Fla.
32302
(850)224-7173, insight@aif.com
