Blue Cross and Blue Shield of North Carolina’s Net Income Continues Planned Downward Trend

CHAPEL HILL, N.C. – Blue Cross and Blue Shield of North Carolina (BCBSNC) reported consolidated net income of $90.1 million for the six months ending June 30, 2005 – 13 percent less than the company earned during the same period last year, and roughly 25 percent less than the company earned during the same period in 2003. This decrease in net income is due to increased medical costs and operating expenses. Medical costs rose due to increased outpatient and professional expenses. Operating expenses were up because of investments in employment to serve BCBSNC’s growing customer base, as well as increased investments in mandates and projects to enhance services to members and business partners.
 
BCBSNC has added 168,105 members since June 30, 2004, and now serves over 3.2 million people. That is nearly double the number of members the company served just five years ago.
 
"Unlike others in the industry, we’ve purposely lowered our rate of profitability, and we are on track to record our second year of significantly reduced profits," BCBSNC President and CEO Bob Greczyn said. "Based on our anticipated year–end results, we are within the range of profitability that will protect the stability and reliability of our company for the benefit of our customers and our company. Our continued membership growth shows that we are delivering the products, services and price that customers demand."
 
BCBSNC’s net income represents 4.8 percent of total revenue – less than 5 cents for every dollar of revenue. This is nearly a 23 percent decrease from the company’s net income ratio of 6.2 percent at June 30, 2004, and a decrease of more than 38 percent compared to the same period in 2003. BCBSNC is on track to achieve year-end net income results near the middle to lower end of the company’s target net income range of 3.5 to 4.5 percent.
 
BCBSNC’s membership growth and normal rate increases contributed to the increased total revenue as of June 30, 2005, of $1.9 billion, which was up 11 percent compared with the same period in 2004. The company’s membership has increased 5.5 percent since June 30, 2004.
 
BCBSNC’s federal, state and local tax expenses (including income, premium and payroll taxes) were $76.5 million for the six months ending June 30, 2005. BCBSNC is fully taxed, even though it is a nonprofit company.
 
In the first half of 2005, 81.1 cents of every premium dollar went toward medical expenses, up from 78.6 cents during the same period in 2004. Claims and medical expenses increased by nearly $168 million to $1.4 billion – an increase of nearly 14 percent over claims expenses for the same period in 2004.
 
"While it is good news that our company shows excellent growth in membership, it is bad news that medical expenses are again rising at a double-digit rate," BCBSNC Chief Financial Officer Dan Glaser said. "Medical costs are the primary factor driving premium increases. When customers use more medical services and those services cost more, premiums rise as a result."
 
Investment activity, including net realized gains and net investment income, increased $2.8 million from the same period in 2004 due to positive cash flow and increased interest income. Investment income for the six months ending June 30, 2005, was $26.3 million, compared with $21.2 million for the same period in 2004.
 
Operating expenses during the six–month period ending June 30, 2005, increased $42 million compared with the same period in 2004 due to continued growth in business, which led the company to hire 428 new employees in the past year. The company has seen increased expenses in technology and projects to benefit customers.
 
BCBSNC’s statutory reserves remain stable at 3.7 months of claims and expenses – the same level the company recorded at year–end 2003 and 2004. This is below BCBSNC’s 20–year average of 4.1 months.
 
Blue Cross and Blue Shield of North Carolina Consolidated Statements of Income (Unaudited) For the Year-to-Date period ending June 30, 2005, and 2004
(dollars in thousands)  
   
 20052004
Revenues:  
Premiums$ 1,707,491$ 1,548,823
Administrative fees and other revenue$ 130,142$ 105,985
Operating revenue$ 1,837,633$ 1,654,808
   
Net investment income$ 26,273$ 21,208
Net realized investment gains$ 1,844$ 4,134
Total investment revenue$ 28,117$ 25,342
   
Total Revenue$ 1,865,750$ 1,680,150
   
Expenses:  
Claims and medical expenses$ 1,384,553$ 1,216,641
Operating expenses$ 346,948$ 304,621
Interest expense$ 2,471$ 3,020
Total Expenses$ 1,733,972$ 1,524,282
   
Income before income taxes$ 131,778$ 155,868
   
Income tax expense$ 41,664$ 51,765
   
Net income$ 90,114$ 104,103
   
Operating income1$ 106,132$ 133,546
   
Medical loss ratio281.1%78.6%
Operating expense ratio218.9%18.4%
Operating income ratio25.8%8.1%
Net income ratio24.8%6.2%
   
1 Pretax operating revenue less claims and medical expenses and operating expenses (excluding interest expense).
2 Ratios calculated as a percentage of premiums for medical loss ratio, a percentage of operating revenues for operating income and operating expense ratios and a percentage of total revenue for net income ratio.
Note: Certain prior year amounts have been reclassified to conform with current year presentation.
   
Membership  
Insured1,134,3861,100,098
Self-funded1,468,0021,413,479
Total membership2,602,3882,513,577
BlueCard host620,672541,378
Total members served3,223,0603,054,955
 
 
About Blue Cross and Blue Shield of North Carolina:
Blue Cross and Blue Shield of North Carolina is a leader in delivering innovative health care products, services and information to more than 3.2 million members, including approximately 620,000 served on behalf of other Blue Plans. For 72 years, the company has served its customers by offering health insurance at a competitive price and has served the people of North Carolina through support of community organizations, programs and events that promote good health. Blue Cross and Blue Shield of North Carolina is an independent licensee of the Blue Cross and Blue Shield Association. Access BCBSNC online at bcbcnc.com.
###