Risky business: a decade of daredevil finance and other games plays a hidden role in the health insurance crisis - Cover Story

Common Cause Magazine, Spring, 1993 by Jeffrey Denny

Company officials deny that their health policyholders have been hurt as a result. But critics say the same investment strategies that helped to sink the S&L industry are playing an indirect role in the health insurance crisis. "First they take our money with a false promise of safety," Martin Weiss, a Palm Beach, Fla., financial adviser who analyzes the health insurance industry, maintains. "Then they invest it in junk bonds and speculative real estate, and now they're trying to make us, the consumers, pay for their blunders."

E.F. Hutton Spoke

While Blue Cross health plans are non-profits, many still couldn't resist the gogo investment game.

One eager participant was Blue Cross of West Virginia. In early 1987, Shearson Lehman Brothers, the big Manhattan brokerage house, and E.F. Hutton, the financial adviser, offered to loan the Blue Cross plan $25 million to buy 30-year U.S. Treasury bonds on credit and make futures and options trades at the Chicago commodities exchanges, according to a pending lawsuit filed in state court by the West Virginia insurance commission.

Convinced, the Blue Cross plan bought the Treasury bonds and over the next 10 months undertook a frenzy of high-risk commodities trades, at times making a dozen or more transactions a day. It stopped only after it had lost $2.3 million - plus $150,000 it had paid Shearson and Hutton for their financial services. Shearson Lehman (which later acquired Hutton) refused to comment for this article.

Partly because of its losing investments, West Virginia Blue Cross became the first in the Blues network to collapse, stranding 51,000 policyholders with unpaid medical claims and others with reduced or canceled coverage. Local doctors have defied court orders and ignored pleas from state officials not to dun patients. Some policyholders' credit ratings have been ruined. One medical group with $114,000 in unpaid claims reportedly insists that patients needing non-emergency surgery pay half their bill in advance. "I lost a total of over $23,000 myself," one policyholder told Congress. "How could a health insurance company simply go bankrupt and leave over $41 million worth of claims unpaid?"

West Virginia Blue Cross also hemorrhaged an undetermined sum of money through a number of for-profit subsidiaries and affiliates, some of which were set up for the personal gain of the health plan's executives, a Senate investigations subcommittee chaired by Sen. Sam Nunn (D-Ga.) found in a 1992 probe. An offshoot of one subsidiary set up to invest in real estate and travel agencies sold computer equipment back to the health plan at mark-ups of 80 to 130 percent, the state insurance commissioner found later.

Nationwide many Blue Cross plans have financed the creation of for-profit ventures, some health-related and some not, in an effort to earn extra money to hold down premiums. The Blue Cross national association in Chicago defends this practice and argues that subsidiaries altogether cleared some $195 million in profits in 1991 (although a Blue Cross spokesperson could not say how it affected premiums).