Pennsylvania Blue Shield

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Pennsylvania Blue Shield

1800 Center Street
Camp Hill, Pennsylvania 17089
U.S.A.
(717)763-3151 Fax: (717) 763-3544

Nonprofit Company
Incorporated: 1939 as Medical Service Association of Pennsylvania
Employees: 6,000
Assets: $848.27 million

Pennsylvania Blue Shield is the nation’s largest Blue Shield association. Including its vast Medicare accounts, Pennsylvania Blue Shield processed more than 79 million claims in 1989, paying out $5.3 billion in benefits to eight million people. Blue Shield associations provide non-profit insurance coverage for most physicians’ bills, and as such they find themselves at the center of national dissatisfaction with the rising cost of health care. As the nation’s largest Blue Shield group, Pennsylvania Blue Shield now devotes an increasing amount of its energy to cost containment—a simple phrase masking the enormous complexity involved in bringing the cost of medical care under control.

The first Blue Shield organizations were patterned after the successful Blue Cross plans introduced during the Great Depression. Blue Cross provides non-profit insurance for hospitalization, as opposed to physician, costs. Prior to that time most of the country’s voluntary, that is non-profit, hospitals had managed to survive on a combination of charitable contributions, private endowments, and limited patient payments. With the catastrophic downturn of the 1930s, however, all three sources of income were cut back and voluntary hospitals faced potential bankruptcy. In 1929, the first non-profit hospital insurance plan was introduced in Texas, and its success was soon imitated by hospital groups around the country. By providing an increasing number of lower income individuals with affordable monthly payments, these Blue Cross associations helped member hospitals stabilize their finances, while making health care more widely available at a time of near poverty for many.

Plagued by similar problems, physicians sought a plan for an insurance association of their own. Three factors seem to have played a part in their growing support for an insurance program. First, many of their patients could no longer afford decent medical services, a circumstance that was increasingly criticized by many as scandalous. Such widespread impoverishment meant a decrease in doctors’ revenue as well, a trend that was understandably viewed with alarm by the physicians, and provided a second impetus toward insurance. Last, under President Franklin Roosevelt, the United States government showed a willingness to involve itself more deeply than ever before in the workings of the U.S. economy. It had been often proposed that the government should in particular take over health-care services. The combined pressure of these three considerations induced physicians to create the first pre-paid medical insurance plan, in California, in the early 1930s. As had the Blue Cross plans, the new Blue Shield concept soon caught on around the country during the pre-World War II years.

In October 1938 the Pennsylvania Medical Society’s governing body debated the adoption of such a plan. As presented by Chauncey Palmer, the plan called for a voluntary organization of medical professionals to provide services for low income subscribers, who would in turn pay a fixed monthly fee while remaining free to use the participating doctor of their choice. As the financial intermediary between doctors and patients, the Medical Service Association of Pennsylvania, MSAP, as the new insurance company would be called, was to receive the monthly subscriber payments and disburse checks to the proper physicians as services were rendered. The new association would be run by a board of directors dominated by doctors, but its policies and fees would be subject to the jurisdiction of the state insurance commissioner and department of health.

The necessary legislation was finalized by the summer of 1939 and MSAP was incorporated in that same year, with headquarters in Harrisburg, Pennsylvania, and initial capital of $25,000 borrowed from the Pennsylvania Medical Society. Palmer was named its first president and Lester Perry, one of the association’s earliest and strongest supporters, its secretary and executive director. Initial premiums were set at 35¢ a month for an individual, $1.05 for two persons, and $1.75 for a family, with services largely restricted to surgical and obstetrical procedures. To help the new association get off the ground and to reduce overhead costs, an agreement for unified recruiting and marketing was reached with Hospital Service Association of Pittsburgh, which later became a Blue Cross organization. At the end of MSAP’s first year, subscribers numbered 7,163 and from gross income of $32,000 the association realized a net income of $7,000.

The onset of World War II forced the relocation of subscribers, and MSAP enrollment dropped slightly during the war’s first few years. The association soon regained momentum, and by war’s end had upped membership to 27,000 subscribers and 3,300 physicians. In 1945 the Pennsylvania Medical Society substantially increased its loan to MSAP as a sign of its long term commitment and to secure more firmly the association’s reserve funds. Under new president J. Arthur Daugherty, who would remain the head of MSAP until 1968, the association quickly proved its strength in the booming postwar economy. In 1946 the number of new subscribers increased substantially, and MSAP began its pursuit of large corporate and union accounts—starting with the United Mine Workers and the Congress of Industrial Organizations (CIO). In the same year MSAP first received permission to use the Blue Shield name and logo, although the corporate name was not changed until 1964.

The years immediately following the war witnessed phenomenal growth at MSAP. The 1945 subscription total of 27,000 rose tenfold by 1948, and from there skyrocketed to 1.6 million only three years later, making MSAP the nation’s third-largest Blue Shield organization. The association’s coverage was considerably expanded as doctors and customers alike became more confident about what was still a relatively new concept in U.S. health care. Along with its expanded coverage MSAP pursued ever larger accounts, in 1951 landing the 150,000 employees of United States Steel and soon coordinating national coverage for multi-state corporate clients. This rapid growth in all phases of its business forced MSAP early on to join the computer age, and in 1956 the company installed an advanced IBM 650 computer featuring a memory bank with the then-remarkable capacity of 1,000 words.

During the 1950s, Americans not only developed a taste for increasing numbers of consumer goods, they also began to expect much more comprehensive and technologically advanced medical services. A pattern was beginning—patients naturally wanted the best care money could buy, and doctors for both financial and ethical reasons were more than happy to supply such care. With the persuasive arguments of technology urging them on, neither side of the exchange had any incentive to refuse new and more costly techniques, and the overall national health bill started climbing. As the “bank” for millions of Pennsylvania subscribers, MSAP found its physician payments rising uncontrollably, and in 1960 it was forced for the first time to ask state regulators for a premium increase.

Insurance Commissioner Francis Smith granted an increase equal to about 75% of MSAP’s request, but at the same time he cautioned the association to remember the “public purpose of Blue Shield” and take whatever steps were necessary to control its costs. The latter goal, of course, has proven beyond the reach of anyone in U.S. medicine, but MSAP did inaugurate a series of overview committees to monitor rising costs and created a Subscriber Advisory Council to give its subscribers a greater voice in management of the association. Despite these measures, Pennsylvania Blue Shield—the name was taken in 1964—has since that time endured a steady stream of criticism for its role in the general inflation of medical expenses.

In 1965 the U.S. government took steps to cushion the older segment of the U.S. population from inflation by creating Medicare, a national health-care plan for persons 65 and over. Pennsylvania Blue Shield was chosen in February 1966 to administer Part B of the Medicare program, that part providing insurance for physicians’ bills. Pennsylvania Blue Shield was forced to double the number of its employees in order to handle the enormous increase in new Medicare business, and soon became the leading Blue Shield Medicare provider in the country. The association also introduced Blue Shield 65-Special in 1966 to cover the 20% of medical expenses not paid by Medicare. The rapid rise in customers and claims threatened to overwhelm Pennsylvania Blue Shield’s data-processing capability, and from 1968 to 1975 it contracted with Electronic Data Systems of Texas to handle its information flow.

By 1970 the rising cost of physician care had outstripped Pennsylvania Blue Shield’s premium income and the company suffered the first of a string of annual losses. It was again forced to petition the state for a rate increase, as it has every year since; but this time the public mood was less receptive. Perhaps because Pennsylvania Blue Shield was now receiving large amounts of federal dollars as a result of its Medicare work, or simply because in 1970 the country was highly suspicious of all manifestations of “big business,” the association came under widespread and prolonged attack for its rate request. Insurance Commissioner Herbert Denenberg for three years refused to grant a premium increase, instead demanding that Pennsylvania Blue Shield take further measures to cut costs and balance its board of directors between laymen and physicians. To make matters worse, in 1976 the Federal Trade Commission embarked on a nationwide investigation of Blue Shield plans to determine if the conflict of interest inherent in their role had tended to keep medical costs needlessly high. As Blue Shield associations were founded and run by doctors to help pay doctors’ bills, it was evident that Blue Shield had little incentive to contest or deny the payment of such bills, which therefore continued on their inflationary spiral. The FTC eventually dropped its investigation, and Blue Shield organizations like Pennsylvania Blue Shield moved to balance their boards’ composition. The charge of conflict of interest has remained a thorn in the collective side of Blue Shield.

In response to this controversy, Pennsylvania Blue Shield stepped up its internal policing, in many cases forcing its providers of both Medicare and regular Blue Shield coverage to refund unjustified payments. In a host of other areas the company attempted to put a cap on rising expenses. It cut back coverage for certain surgical procedures, instituted a second surgery-opinion program, and provided a stiff review board for its new dental coverage; but by the early 1980s, Pennsylvania Blue Shield and other traditional health insurance firms were losing considerable ground to the new health-maintenance organizations (HMOs) springing up around the country. HMOs, which charge a flat monthly fee for unlimited access to a reduced number of services, were able in many cases to undercut the premium schedules of typical Blue Shield providers such as Pennsylvania Blue Shield. Fighting back, Pennsylvania Blue Shield formed the first of its three Keystone HMOs in 1981, gaining a foothold in what appears to be a growing trend among corporate and private subscribers alike.

Along with its new HMOs, Pennsylvania Blue Shield has added a number of other subsidiaries in related medical fields, including a marketer of medical office automation systems, a pre-certification center for the detection of unnecessary procedures, and even a small learning center for preschool and kindergarten children. The balance of its time and energy, however, is still devoted to defining and implementing a program of health insurance acceptable to both consumers and providers. In 1989, for example, although Pennsylvania Blue Shield showed a healthy net increase in reserves of $80 million, on premium income of $2.3 billion, the company’s annual report featured a 23-page roundtable discussion of the crisis in health care expenditures. The nation’s largest Blue Shield and Medicare B provider is clearly feeling pressure from all sides of the health-care marketplace; less clear is whether it or anyone else will be able to resolve a workable compromise among the many competing forces.

Principal Subsidiaries

Camp Hill Insurance Company; Keystone Health Plan Central; Keystone Health Plan East; Keystone Health Plan West; KHP Services; Keystone Technologies, Inc.; Health Benefits Management Inc.; Carefree Learning Center for Children; Omni Med Consultants.