Blue Shield of California

By Robert Chess, Julie Makinen
2018 | Case No. OIT112 | Length 27 pgs.
Paul Markovich felt that a time bomb was ticking inside his industry. Each year, the cost of healthcare was rising steadily, while incomes were only inching upward. In 2018, the median income for a family of four in the United States was $65,000. His company’s most popular health insurance product for such a family? A package that would cost them $16,000 a year — a whopping 26 percent of their gross pre-tax income. That was almost three times the cost of such a plan in 1999. In the San Francisco Bay Area, where Blue Shield of California (BSC) was headquartered, the situation was even worse. “If you have a Silicon Valley engineer, it would cost the company more to pay for the health benefits of that engineer [in the United States] than to hire one in India for a year,” said Markovich, the CEO of BSC. The problem with insurance companies, Markovich thought, was not out-of-control administrative expenses or fat profit margins. For every dollar that Blue Shield of California customers paid, 87 cents went to pay directly for health care costs, taxes and fees. And as one of the largest not-for-profit health care insurers in the United States, Blue Shield of California capped its profits at just 2 percent per year. “Just being more efficient as an insurance plan is not going to solve the affordability crisis,” Markovich believed. “Even if we eliminated our profit and our administrative costs, that would only buy us three years [before costs caught up again].” Something much more fundamental needed to change, Markovich reasoned. Insurers like Blue Shield of California needed to reimagine their role. No longer could they simply define themselves as middlemen who tried to bring together tens of thousands of scattered physicians, hospitals and pharmacies into a network, and make arrangements for treatment and payments. Instead, Markovich believed, these middlemen needed to think boldly about how to use their clout and leverage to drive fundamental change throughout the health care system. For example, how might they use their heft in the marketplace to accelerate the development of truly complete digital medical records that would improve patient outcomes and reduce costs? How could they come up with a system that really tied payments to quality care?

Learning Objective

This case introduces students to the history of health insurance in the United States, including both employer-paid and government-paid programs. It traces various historical and policy factors influencing both the cost of coverage and the extent of care, and focuses on one particular insurer, Blue Shield of California, as it sought to navigate the rapidly changing industry and become innovative to remain relevant.
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