Wraps finally are off BCBS state contract

Staff WriterApril 9, 2011 

Since 2006, the State Health Plan has operated under a confidential contract with Blue Cross and Blue Shield of North Carolina that requires taxpayers and state employees to cover all of the insurance giant's costs of administering the plan, plus a modest profit.

However, the terms of the secret "cost-plus" contract made it virtually impossible for anyone outside of the company's headquarters to know exactly what the government was paying for.

Critics have long said the state's deal with BCBS, a full copy of which was made public for the first time Friday, was bad for the state. The company is regarded as having one of the most effective lobbying armadas in the state capital, and its top executives include former high-ranking state staffers with close ties to Democratic leaders.

Details of the state's contract with the company have been a tightly guarded secret, even as costs soared and taxpayer funds were tapped to bail out the health plan, which covers 633,000 employees, retirees and dependents.

SEANC critical of deal

"A cost-plus contract never should have been put in place, especially for taxpayers footing the bill," said Cary Edgar, a spokeswoman for the State Employees Association of North Carolina.

"No one other than Blue Cross Blue Shield knows whether it's a good deal because it was never put out to bid," she said. "It was a no-bid, secret contract from the very beginning."

BCBS sent the 2006 contract and its 13 amendments to reporters on Friday, a week after GOP lawmakers now in the majority at the legislature passed a bill that requires it to be made public. The Chapel Hill-based insurer also provided the documents to some members of the General Assembly.

Releasing the full contract now "was the right thing to do," said BCBS spokesman Lew Borman, even though Gov. Bev Perdue has not yet signed the new bill into law.

But Borman also defended the confidentiality as necessary to protect proprietary information and prevent competitors from stealing the company's business and poaching key employees.

He pointed to a series of five state and outside audits performed since 2009 that have found no evidence of fraud or that the company has charged the state for anything it was not allowed to.

Limits on audits

However, under the terms of the original 2006 contract, the state couldn't even perform its own audit of BCBS expenses unless the auditor signed a confidentiality agreement not to disclose the company's "actual cost components" back to the state.

After new management took over at the State Health Plan in 2008, they sought and won an amendment to the agreement that gave the government more latitude to examine the company's books.

"Reports and data provided to the SHP by BCBS to monitor costs have historically lacked detail or were not in a format that the SHP could use to adequately monitor costs," concluded a subsequent audit. In August 2010, nearly four years after the no-bid contract went into effect, state administrators got another amendment that for the first time detailed 27 cost categories BCBS could no longer charge the government. That list included payments to the company's top executives, lobbying, travel, meals and alcoholic beverages.

"Without controls about what can be excluded under these types of cost-plus agreements, without clear financial reporting from the vendor and reasonable transparency to costs, they do create a vulnerability," Lacey Barnes, the deputy executive administrator of the State Health Plan, said Friday.

Borman said that to his knowledge none of the 27 costs listed in the amendment were actually charged to the state other than a "minuscule" executive compensation. He said he did not know the exact figure and that he couldn't find out Friday afternoon.

"I don't think it's productive to relive the past," Bowman said, when asked for details.

The federal government forbids its agencies from signing cost-plus contracts. Since the profit to a vendor is calculated using a percentage of the total costs, there is an incentive to jack up costs.

Under the 2006 contract, BCBS' profit is 0.625 percent of its billed costs.

Last fiscal year, BCBS billed the state $107.6 million, earning it $672,790 in profit. That's not much for a company that had $5.2 billion in total revenue in 2010. Though incorporated as a nonprofit company, BCBS' net income last year was $167.7 million.

Brad Wilson, who took over as Blue Cross CEO in February 2010, made $1.87 million last year, according to its annual report. In 2009, then-CEO Bob Greczyn took home $4.08 million.

Adam Searing of the Health Access Coalition at the N.C. Justice Center said BCBS has long used political muscle to boost its income.

He pointed out that Wilson previously served as chief of staff to former Gov. Jim Hunt. One of the company's top lobbyists, Christine Evans, previously served as the lawyer for the State Health Plan.

"They're one of the most powerful political groups in the state. They certainly show that every day at the General Assembly," said Searing, a longtime critic of the company. "That this contract was signed at a huge disadvantage to the state has to be seen through the lens of the fact that there has been a revolving door between state government and Blue Cross."

Staff writer Joseph Neff contributed to this report.

michael.biesecker@newsobserver.com or 919-829-4698

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