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Blues may rise or fall with exchanges

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The Blue Cross and Blue Shield companies may depend more heavily on the fate of the public exchanges than their competitors.

Mark Rouck and other analysts at Fitch Ratings argue as much in a new commentary on the state of the Blues.

Health reform advocates began to set up the carriers that make up today’s network back in 1929.

Today, WellPoint Inc. and the 36 other separate companies in the Blues’ association provide or administer health coverage for about 68 million people, more than one-fifth of all U.S. residents.

They generated a total of $7 billion in net income in 2012 on $218 billion in revenue, and they had a total risk-based capital ratio of 403 percent of the regulators’ action level. That’s high enough to earn a strong AA financial strength rating from Fitch.

Historically, the Fitch analysts say, one challenge the Blues faced was a franchise system that limited each company to operating in one state, or part of one state.

The Blues have developed ways to operate in multiple states and diversify revenue sources, but now, in part because most of those companies continue to have strong ties to certain states, and to the state and federal government plan markets in those states, they have a larger-than-average exposure to the Patient Protection and Affordable Care Act exchanges, the analysts write.

“The profitability of exchange-sourced business is highly uncertain, especially in light of operational difficulties the exchanges have experienced to date,” the analysts write. “Profitability of exchange-sourced products will be driven by enrollment trends and how well they conform to assumptions used to set premium rates, as well as the effectiveness of risk-sharing programs introduced under [PPACA].”

Because the Blues sprang up at a time when many employers offered traditional defined benefit pension plans, the Blues also tend to depend more heavily than large, publicly traded competitors on the performance of pension plan investments, the analysts write.

In recent years, the analysts say, low rates have hurt pension plan yields on forced the Blues to put cash in the plans.

Rates started to increase last year, and that should help the Blues’ pension plans’ funded status, the analysts write.

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