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Empire Blue Cross and Blue Shield (Empire) is the largest private not-for-profit health insurer in the country. It provides both hospital and physician coverage for approximately ten million customers in the 28 counties of eastern New York State, including the greater New York City area. Empire was created by the 1985 merger of Blue Cross and Blue Shield of Greater New York with Blue Cross of Northeastern New York, both of which were early products of nationwide innovations in nonprofit insurance made necessary by the Great Depression. After years of spectacular growth, Empire and its fellow nonprofit insurers are struggling with inflation, as the cost of medical care in the United States continues to rise.
Blue Cross and Blue Shield of Greater New York was the older and larger of the two companies that eventually formed Empire and was itself the result of a 1974 merger of two Depression-era health insurance firms. The Great Depression took an especially heavy toll on "voluntary" hospitals, those not-for-profit institutions relying for their fiscal well-being on charitable contributions, endowments, and limited patient payments. All three sources of income declined steeply in the early years of the Depression, forcing administrators of voluntary and government hospitals to revise their financial strategies. One suggested way to increase the amount of money contributed by patients was to provide them with an insurance policy requiring affordable monthly payments while protecting them from the burden of sudden, exorbitant hospital bills. Such a plan was first used at Baylor University's hospital in 1929 and proved to be both popular and economically feasible. The concept was discussed at the 1932 national convention of the American Hospital Association, an umbrella organization for some 6,000 voluntary and government hospitals, and it was soon adopted by many groups around the country. An association in Saint Paul, Minnesota, was the first to use the Blue Cross name, and this too soon caught on.
In New York City, the United Hospital Fund (UHF) served as administrator for the area's many voluntary hospitals. UHF and the other concerned parties agreed in 1932 to create a separate nonprofit membership corporation to institute a health insurance plan for its affiliated hospitals. After necessary legislation was passed by the state of New York, the Associated Hospital Service of New York (AHS) was incorporated on October 9, 1934, with the help of $30,000 in seed money from The Commonwealth Fund and The Josiah Macy Junior Foundation. From the outset AHS was a creation of the hospitals themselves, which meant that both the agent and the eventual recipient of its insurance funds were one and the same. This apparent conflict of interest was at the root of much criticism later leveled at the Blue Cross and Blue Shield organizations, although by stature no such conflict exists in the current operation of Empire Blue Cross and Blue Shield.
From its inception, the AHS plan was a success. In 1935 individual rates were as low as 80¢ a month. The "three cents a day plan" was advertised as "No more than the cost of your daily paper," and the AHS Blue Cross plan enrolled more than 40,000 subscribers within a year. Its coverage included most basic hospital services for a period of 21 days, after which a percentage of costs would be covered. In 1936 the program was extended to cover the employee's spouse and unmarried children under age 19 as well, at a cost of 7¢ a day. In the years that followed, coverage was extended to include most of the recent developments in medical technology, and in 1947 an Inter-Plan Bank made it possible for members of one Blue Cross plan to receive treatment at other participating Blue Cross hospitals around the country. By 1945, a scant ten years after its founding, AHS subscribers numbered 2.2 million, a large percentage of them participants in group plans sponsored by unions and employers.
At the same time AHS was starting, a similar concept was gaining popularity among doctors. In 1939 the first Blue Shield plan was adopted by a physicians' organization in California to pay for doctors' fees through the same type of non-profit insurance coverage as Blue Cross provided for hospitals. New York's Dr. Frederic Elliott, a radiologist, was instrumental in prodding the state legislature to draft legislation necessary before such an organization could be formed in New York, and in November 1940 the Medical Expense Fund was incorporated in New York City. The infant fund was no sooner in operation than it found itself competing with a similar plan created by AHS, Community Medical Care, Inc. The inevitable merger of the two concerns took place in June 1944, when the United Medical Service, Inc., (UMS) was born. At its inception UMS had about 80,000 subscribers on its rolls.
UMS offered its clients, initially large corporations such as J.P. Morgan & Company and Time, Inc., a choice of three benefit plans and premium schedules: Surgical benefits, surgical-medical benefits, and a general medical plan that covered home and office visits. As with AHS's hospital coverage, public awareness of rising medical costs helped to make UMS remarkably successful in a short period of time. Four years after its founding, the company could boast of 1.5 million subscribers and 16,000 participating physicians. Also in 1949 UMS adopted the Blue Shield name and logo and became a member of the national Blue Shield Association which was founded in 1946.
The decades following saw a growing U.S. economy and a corresponding rise in the cost of technologically more advanced health care. The rising expense of doctor and hospital services became an increasingly difficult problem for elderly citizens, upon whom the brunt of such costs fell. In 1966 the federal government created a national health insurance fund called Medicare for citizens 65 years and older. To administer so massive a distribution of tax dollars the government asked the Blue Cross and Blue Shield companies around the country to manage, respectively, the hospital and physician portions of Medicare coverage. Blue Cross and Blue Shield plans were chosen for this task because of their size and because, as nonprofit institutions, they enjoyed widespread respect and trust from the public.
The addition of the Medicare business meant a substantial increase in subscribers, claims, and cash flow at both AHS and UMS, and it meant increased staff and more overtime work. It also subjected all Blue Cross and Blue Shield organizations to increased government scrutiny and a flurry of concerns about potential conflicts of interest, particularly on the part of Blue Shield plans. With medical costs escalating every year, some observers felt that the Blue Shield plans, most of whose governing boards were dominated by doctors, had little incentive to contest the fees charged. Prodded by such critics, Secretary of Health, Education and Welfare Joseph Califano decreed in 1978 that any organization serving as a Medicare or Medicaid intermediary must be directed by a board the majority of whose members are consumers and public representatives. UMS had to comply.
As a courtesy to its smaller sister company, AHS for many years had handled the marketing and billing functions of UMS. As a result, many consumers had come to think of the two companies as one, and in 1974 their loose alignment was formalized by a merger. The two companies became Blue Cross and Blue Shield of Greater New York and were able to offer insurance coverage for both hospital and physician bills to New York area residents, while gaining economies of scale created by the unification of two such large companies.
Shortly before the merger, AHS had formed its first health-maintenance organization (HMO) to compete with the rapidly growing number of such firms in the New York area. Blue Cross and Blue Shield of Greater New York (BC/BS) added a second HMO in 1978 and two more in the next few years. The continuing acceleration in health care costs has prompted BC/BS to initiate a number of cost containment measures aside from HMOs, including extensive advisory services to help its subscribers avoid unnecessary hospital stays, and a more critical approach to the bills submitted by hospitals and doctors. Cost containment clearly remains the top priority at all Blue Cross/Blue Shield plans.
In 1985 BC/BS merged with a second leading New York state nonprofit insurer, Blue Cross of Northeastern New York. The latter's origins were very similar to those of AHS and UMS: responding to the depression-era distress of local voluntary hospitals, the Associated Hospital Service Capital District (AHSCD) was founded in July 1936 in Albany. Closely modeled on the New York City AHS, the Capital District association was the fifth Blue Cross organization in the state of New York and the 21st in the nation. The new company's first customer was William Barnet and Son, Inc., of Rennselaer, for whom it provided coverage similar to what the earlier AHS offered in Manhattan. By the end of its first year of operation, the firm had paid out 33 claims.
AHSCD early formed a relationship with a local medical care insurance association that covered doctors' fees called Northeastern New York Medical Service, Inc., which eventually became a Blue Shield affiliate. Although the two companies had a working relationship, unlike many other pairs of Blue Cross and Blue Shield organizations, the two were never merged. After AHSCD was merged with BC/BS the latter discontinued all relations with the Albany Blue Shield, which later suffered financial reverses and was taken over by a fellow Blue Shield plan.
In 1956 AHSCD began to provide coverage for the relatives of U.S. servicemen through an organization called CHAMPUS, and in 1957 AHSCD made use of its proximity to the state legislature in Albany to win the contract to provide the first health plan for the state's 77,000 employees. Three years later it began to provide coverage for federal employees as well. AHSCD did not adopt the Blue Cross name until 1965, one year before it joined the other Blue Cross members in administrating the new Medicare system for the federal government.
The 1985 merger of Blue Cross of Northeastern New York with BC/BS created the largest private not-for-profit health insurance firm in the country. The company originally kept its Albany and New York divisions quite separate, with a strict segregation of duties and a president headquartered at each location. This scheme was subsequently abandoned and the two partners more fully integrated under the direction of chief executive Albert A. Cardone and his 13 divisional vice presidents.
Having processed some 48 million claims in 1989 alone, Empire Blue Cross and Blue Shield obviously finds itself at the center of today's crisis in health care. Empire provides coverage for giant organizations such as IBM, AT & T, and the City of New York, but also prides itself on its programs for individual subscribers of all income levels. As the middleman caught between ten million customers increasingly fed up with soaring medical costs and a legion of health care professionals ethically committed to providing the best medical care possible, Empire must do its best to negotiate a compromise level of care that is both affordable and adequate.
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