Blue Cross and Blue Shield of North Carolina Continues to Report Decline in Profitability

CHAPEL HILL, N.C. – Blue Cross and Blue Shield of North Carolina (BCBSNC) reported consolidated net income of $45.9 million for the three months ending March 31, 2005 - 13 percent less than the company earned during the same period last year. This decrease in net income is due to increased medical costs and operating expenses, and a decrease in investment results. Medical costs increased due to increased outpatient and professional expenses. Operating expenses were up because of investments in personnel and technology to allow BCBSNC to serve its growing customer base.
 
"Medical costs show signs of accelerating again and our company’s profits are declining. That means this is a time to ensure our continued stability - not take it for granted," BCBSNC President and CEO Bob Greczyn said. "Our company’s financial stability is critical to our customers, our employees and the thousands of physicians and hospitals who depend on us for payment."
 
BCBSNC has added 168,492 members since March 31, 2004 and now serves over 3.2 million people.
 
BCBSNC’s net income represents 5 percent of total revenue – 5 cents for every dollar of revenue. This is nearly a 21 percent decrease from the company’s net income ratio of 6.3 percent at March 31, 2004. BCBSNC is on track to achieve year-end net income results well within 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 March 31, 2005 of $911.8 million, up 9.1 percent compared with the same period in 2004. The company’s membership has increased 70 percent since December 31, 2000.

*Membership includes BlueCard Host members. These members reside or are traveling in North Carolina, but have coverage written through Blue Cross and Blue Shield Plans in other states.
 
As a fully taxed corporation, BCBSNC’s federal, state and local tax expenses (including income, premium and payroll taxes) were $39.7 million for the period ending March 31, 2005.
 
In the first three months of 2005, 81 cents of every premium dollar went toward medical expenses, up from nearly 78 cents during the same period in 2004. Claims expense increased by nearly $80 million to $679.8 million – an increase of 13 percent over claims expenses for the same period in 2004.
 
"This year, our customers can expect our net income ratio to continue to decline while the reserve that exists to protect our members and allow our company to deliver new and enhanced products and services remains stable," BCBSNC Chief Financial Officer Dan Glaser said. "That’s the same promise we made - and delivered on - last year."
 
Investment activity, including net realized gains and net investment income, decreased $3.1 million from the same period in 2004 due to fewer gains from investment transactions. Investment income for the year ending March 31, 2005 was $11.1 million, compared with $14.2 million for the same period in 2004.
 
Operating expenses during the 3-month period ending March 31, 2005, increased $7.7 million compared with the same period in 2004 due to continued growth in business, and investments in technology and personnel that will allow BCBSNC to better serve its customers.
 
"We are in the midst of bringing an entirely new type of product – the Health Savings Account – to our customers, and this requires significant investment in technology to integrate health insurance and financial services capabilities," Greczyn said. "In addition, we continue to invest in our long-term ability to serve customers on a new claims processing platform and to offer enhanced real-time capabilities."
 
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 ended March 31, 2005 and 2004
(dollars in thousands)  
   
 20052004
Revenues:  
Premiums$ 838,777$ 769,762
Administrative fees and other revenue$ + 61,869$ + 51,974
Operating revenue$ 900,646$ 821,736
   
Net investment income$ 12,085$ 10,218
Net realized investment gains$ - (957)$ + 4,016
Total investment revenue$ 11,128$ 14,234
   
Total Revenue$ 911,774$ 835,970
   
Expenses:  
Claims and medical expenses$ 679,790$ 600,016
Operating expenses$ 163,325$ 155,655
Interest expense$ + 1,264$ + 1,274
Total Expenses$ 844,379$ 756,945
   
Income before income taxes$ 67,395$ 79,025
   
Income tax expense$ 21,536$ 26,226
   
Net income$ 45,859$ 52,799
   
Operating income1$ 57,531$ 66,065
   
Medical loss ratio281.0%77.9%
Operating expense ratio218.1%18.9%
Operating income ratio26.4%8.0%
Net income ratio25.0%6.3%
   
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  
Insured1,122,7211,096,938
Self-funded1,432,8241,426,737
Total membership2,582,6692,523,675
BlueCard host619,632510,134
Total members served3,202,3013,033,809
 
 
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 71 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 bcbsnc.com.
 
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