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A Healthy Prognosis

Blue Cross and Blue Shield of Florida ensures adequate product pricing with SAS® Activity-Based Management

From retirees and recent immigrants to typical working-class Americans and their dependents, Florida boasts one of the most diverse populations in the United States, ranking No. 4 in population among the 50 states. No matter their demographic differences, the 16 million residents of Florida have one thing in common: the need for affordable, reliable health insurance.

With such a large population base and variety of employers, the field of insurers vying for their business is as bustling as the Sunshine State itself. However, the diversity of the population also reflects the diversity of the employer groups being underwritten. To stay ahead of the competition, Blue Cross and Blue Shield of Florida (BCBSF) uses SAS Activity-Based Management to measure the detailed costs of doing business in order to balance pricing products competitively with adequately funding the risk and ensuring a fair profit margin. SAS facilitates product profitability reporting, providing a detailed analysis of product profitability by customer and customer profitability by product.

"In the mid-1990s, we knew we must understand the cost of our products to help us determine pricing as well as analyze profitability," explains Lee Boardman, director of accounting for BCBSF's Diversified Business Sector. "We also wanted to gain efficiencies and, in general, get a better handle on our costs. With SAS, we're accomplishing that."

The Diversified Business Sector offers ancillary products that complement health insurance – such as life insurance, disability insurance, dental insurance, workers' compensation and long-term care. Some are sold at fixed prices, although benefits may be paid far beyond the date sold. So having access to precise cost information is crucial to ensuring that products are priced accurately.

"Our challenge was to maintain product profitability and support effective product management in a highly competitive market," he explains. "Therefore, we needed a good understanding of the activity cost of providing our products and services."

Claims Processed 90 Percent Faster
In one instance, Boardman's group used SAS to help show a profit with a disability product that had previously reported high administrative costs. BCBSF performs third-party administrator services for self-funded disability plans. Using SAS, BCBSF discovered that the administrative fee it was charging did not cover the internal cost of administering the claims process.

"As a separate project, we identified manual processes – such as weekly check-writing, claim-payment reporting, and tax-withholding and payment processing – that could be automated to save time and money," Boardman says. "By using SAS to identify inefficiencies, we were able to reduce the time required to process disability claims by 90 percent. The cost per claim has decreased from more than $80 to $20. SAS helped make this disability product profitable."

Profitability reporting enhances the expense management process. Departmental expense analyses by product helps managers see costs in terms of activities. Managers can see unit costs to improve efficiency and direct work efforts appropriately. "Product-level cost information is developed for business and operational planning and decision making," Boardman says. "Actual expenses by product are captured and compared with planning assumptions to monitor variances from the profit plan and to troubleshoot problems."

Discovering the true costs of offering a product can sometimes lead to rate increases for customers. But customers don't seem to mind as long as they understand why BCBSF is asking them to pay more. BCBSF does this by documenting and reporting to the customer the group's actual costs in comparison to rates paid. "We've had three customers for whom we've had to triple rates, and they've stayed with us," Boardman says. "Their only other option was to get canceled, and they chose to stay. SAS is helping us show our customers the value of doing business with us."

Other uses of SAS Activity-Based Management at BCBSF include:

  • Determining inter-company service costs and supporting product research and development.
  • Building and analyzing trend data to support profitability management.
  • Forecasting costs for future business opportunities.

 

"We've gained a lot more from it than we originally expected, especially in terms of assisting with forecasting and planning," Boardman says. "For example, when we were working on our mid-year assessment, everything we had – profitability reports by customer, detailed cost versus budget information – came from SAS Activity-Based Management. It helped us to see where we'll be by the end of the year, so it's a tremendous solution."

By incorporating activity costs and budget figures by month, BCBSF managers can compare budget to actual and drill into activities to find out more detailed information about costs to uncover inefficiencies.

"SAS Activity-Based Management has proven to have a significant value as both a pricing and management tool," Boardman says.

Blue Cross and Blue Shield of Florida

Business Issue:
Maintain product profitability and support effective product management in a highly competitive market
Solution:
SAS Activity-Based Management uncovers the hidden costs of doing business, thus allowing more intelligent product pricing
"By using SAS to identify inefficiencies, we were able to reduce the time required to process disability claims by 90 percent. The cost per claim has decreased from more than $80 to $20."
- Lee Boardman , Director of accounting, BCBS Florida

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