Insurers that trace their ancestry back to the first days of American health insurance are now facing potentially existential challenges.
Many single-state Blue Cross and Blue Shield companies, like those in Alabama and Tennessee, have large commercial and public payer market share, plus opportunities to grow, even with the Affordable Care Act and in part because of it.
But according to a new report from Deloitte, the 18 single-state Blue-licensed insurers find themselves in an odd predicament that in some ways resembles the fairy tale character Rapunzel, who was locked in a castle tower supposedly for her own protections.
"Rapunzel longed to escape from the tower to explore the stunning landscape she could see through her one tiny window. She dreamed of one day gaining freedom to set off in new directions," write Bill Copeland, Deloitte vice chairman and life sciences and health leader, and colleagues.
"Many of the single-state Blue Cross Blue Shield plans are living this same story today," Copeland and colleagues write. "These independent, nonprofit health plans are finding themselves trapped in a tower of expectations and regulations that have built up around them over the last 60 to 70 years and the new business context resulting from the ACA."
The legacies of single-state Blues are strong on many accounts, in myriad states having majority market shares, being the historic insurer of last resort and serving local communities via philanthropic foundations.
Indeed, in many of those 18 states, there is a perception among business leaders and media that the Blue insurers are poised to thrive in the new health reform market of more competition, lower margins and new business models.
That's not necessarily a guarantee, argue Copeland and colleagues.
"The single-state Blues' legacy of success, the expectations of state regulators, and the constraints of their enabling birthrights may be limiting Blues' ability to take advantage of business opportunities that are sitting just outside their reach -- opportunities that may be critical for their survival," they write.
Insurers small and large, nonprofit and for-profit, are all trying to invest in health reform -- in value-based care designs, customer service, information technology, retail operations and diversification into consumer health and wellness.
Single-state Blues may not have a lot of capital to do that, however, Copeland and colleagues contend.
While large for-profit health plans and multi-state Blues plans can build or buy new technology and services, single-state Blues, even if well-capitalized, typically cannot access equity markets or use stock as currency for acquisitions.
And as they stand now, single-state Blues don't have the scale to spend as much on fixed-cost investments.
In 2012, the five largest publicly-traded national plans invested an average of $554 million, about one percent of their revenue, on capital investments in property, equipment, and other areas, according to Deloitte. Total capital expenditures by the 18 single-state Blues, meanwhile, was an average of $92 million, at four percent of revenue. The "Big Five" insurers spent four times less per member, but six times more in total than the single-state Blues.
Historically, most single-state Blues plans have exceeded their regulation-required capital by "a significant margin," Copeland and colleagues note, but they have less in total available capital -- and in choices, often facing merger and acquisition limitations.
Former state insurance commissioners surveyed by Deloitte generally agreed that single-state Blues have a good reputation, strong brand recognition and a foothold to maintain or increase market share.
But a number of them also said they think the single-state Blues' strength might be diminishing, especially considering investment trends, with some even starting to resemble their publicly-traded competitors.
"All seemed to agree that walking this line will become increasingly difficult as the single-state Blues plans try to figure out ways to maintain awareness of their unique brand and strengthen their capabilities to operate in the post-ACA world," the author write.
Among the strategies single-state Blues can take -- similar to those of multi-state nonprofit Blue companies like Cambia Health Solutions and Highmark -- are alliances with other health organizations and legal restructuring, Copeland and colleagues suggest.
For instance, in setting up a new holding company, any single-state Blue can divide itself into two legally separate entities, one designated as a regulated insurance holding company that owns the licenses to operate as a health insurer, the other is designated as a non-insurer free to manage, develop and buy new product and services.
"Separating the reserves into two distinct pools allows for different investment options and returns on capital strategies that potentially create greater value for the entire enterprise without non-insurance businesses being constrained by insurance regulations," Copeland and colleagues write.