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Subject: Capital Blue Cross Seeks Help;Losses Have Company Shopping for Investor To
Date: Wed, 28 Oct 92 04:28:31 EST
Message-ID: <50.1992Oct28.042831@AmeriCast.com>

Capital Blue Cross Seeks Help;Losses Have Company Shopping for
Investor To Bolster Reserves<By Albert B. Crenshaw and Thomas
Heath=Washington Post Staff Writers=

Blue Cross-Blue Shield of the National Capital Area, hurt by
severe losses in its real estate investments and spinoff com-
panies, is searching for a business partner that could pour mil-
lions of dollars into the ailing health insurer, company offi-
cials said.

A spokesman for Blue Cross, which insures 1.1 million Washington
area residents, nearly half of them federal workers, said yester-
day that policyholders still can rely on the company to meet its
obligations, including patient coverage.

"Blue Cross is running business as usual," spokesman Ray Freson
said.

However, Freson and other officials said in interviews this week
that the insurer's financial health weakened in recent months as
reserves fell by half, from about $102 million to approximately
$52 million.

Blue Cross officials attributed much of the decline in reserves -
the amount of money and other assets that would be left over if
the insurer paid all of its bills - to the falling value of real
estate owned by the company. Insurance industry regulators in
Virginia have been pressing Blue Cross for months to place a more
accurate value on its real estate holdings when the company cal-
culates its assets and liabilities.

Compounding the real estate decline were losses in several subsi-
diary companies and a sharp drop in profits on the company's
traditional insurance business, Freson said.

The crunch in Blue Cross's finances comes months before the com-
pany is to appear before a Senate subcommittee that has been in-
vestigating the financial strength of the nation's 73 Blue Cross
plans.

The hearings began after the catastrophic failure of the West
Virginia plan in October 1990, which stranded more than 51,000
people without medical insurance and left millions of dollars in
unpaid doctor and hospital bills.

On Monday night, officials of National Capital Blue Cross con-
vened an emergency meeting to discuss ways of raising revenue,
including selling some troubled subsidiaries, merging with anoth-
er Blue Cross plan or forming a partnership with an investor.

No decision had been reached as of late yesterday; Freson said
one is expected within a few days.

Freson added that as the company considers alternatives, it is
weighing carefully how each one would play under the public
spotlight of the Senate hearings.

"The hearing has the potential to generate negative publicity for
us, so we want to go in as strong as we can," Freson said, adding
that the company was willing "to make some cuts and (absorb) some
short-term losses" to achieve that end.

The company has formed dozens of subsidiaries in recent years in
an effort to strengthen its balance sheet and preserve its custo-
mer base.

The subsidiaries have been a financial drain, drawing about $77
million from the company's reserves since 1985.

Until now, the company had maintained that its reserves - $102
million as of last December - were adequate to cover routine ob-
ligations and foreseeable emergencies.

Then two things happened. The value of some of the assets dropped
dramatically, forcing the company to reduce the value of its real
estate holdings by $22 million and mark down the value other as-
sets, including some stocks, by $10 million. Meanwhile, the
company's core insurance business fared poorly this year, failing
to generate enough profits to offset the perennial losses from
subsidiaries.

The company said it expects to lose about $14 million overall
this year, although officials believe it will be performing
better by year's end.

The improvement in the second half of this year could make an in-
vestment in the National Capital Area operation more appealing
for an investor.

"Clearly, we're looking for capital to strengthen our reserves,"
Freson said. "We would like to finish the year with significantly
higher reserves."

Speculation about a partner has centered on the Richmond-based
Blue Cross and Blue Shield of Virginia, which has reported
reserves of about $450 million.

Officials of the Virginia plan declined to comment yesterday on
"any pending affiliation or merger."

Some industry observers said yesterday that they believed the na-
tional Blue Cross and Blue Shield Association, which oversees use
of the Blue Cross name and trademark, was taking an active role
in assisting the National Capital Area company.  The nationwide
parent, which was severely embarrassed by the West Virginia
failure, the only one in Blue Cross history, now makes it a poli-
cy to become aggressively involved whenever a plan fails to meet
certain financial criteria.

It currently is working with New York regulators to merge a trou-
bled Blue Shield plan in Buffalo into the healthier Blue Cross
Association of Western New York.

In August, the Virginia Bureau of Insurance, which is conducting
a financial examination of Blue Cross-Blue Shield of the National
Capital Area, barred it from creating new business ventures or
loaning money to existing subsidiaries.

At the time, Virginia regulators said the order was issued "to
ensure that the (subsidiary) operations do not impair the
company's responsibilities to its policyholders."

Those subsidiaries include far-flung operations from Fairfax to
New Guinea, Jamaica, Paris, Australia, Singapore and the Channel
Islands between England and France. The functions of those com-
panies range from evacuating travelers who become ill to provid-
ing customer service to Australian automobile clubs and process-
ing medical claims for self-insured companies.

Blue Cross-Blue Shield of Maryland suffered similar problems with
its subsidiaries, losing tens of millions of dollars after in-
vesting in untested technologies and exotic businesses such as
credit cards for karate schools.

The Maryland Blue Cross later abandoned its money-losing subsidi-
aries and nurtured others, which now are making a profit, offi-
cials said.

Earlier this month, the National Capital Area company hired
Prince George's County lawyer Peter O'Malley, at a one-year
salary of $435,000, to serve as chairman of the board of
trustees.

Less than two weeks later, the company announced it was closing
six of its subsidiaries and was selling the seventh business to
its partner in the venture.<02:38 10-28C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

For more information, send-email to American Cybercasting Cor-
poration (usa@AmeriCast.COM)