Iowa's largest health insurer, Wellmark Inc., wants to take the profit out of its business.

Wellmark's profit/loss margins have been as high as 5 percent and as low as a minus 3.5 percent during the past decade.

As a mutual insurance company owned by policyholders, Wellmark has never felt the pressure to achieve the 7 to 10 percent margins targeted by publicly traded health insurers.

But now, the Des Moines company that writes half of all health insurance in Iowa wants to go further.

Wellmark Chief Executive John Forsyth set a goal this year of dropping its profit margin to zero.

The goal of the no-profit plan is "to keep health care costs as low as possible," Forsyth said.

"The strategy is very innovative," said David Fleisch, a partner at Bain & Co., a consulting firm that Wellmark hired last year to poke holes in the no-profit plan.

Bain found a few weaknesses, Forsyth said, "but we addressed them before we took the strategy to our board," which approved the strategy and put it into effect in January.

More than eight months later, it seems to be working.

Wellmark's total operating margin through Aug. 31 was 0.3 percent, compared with 3.6 percent for the same period a year ago, said Chief Financial Officer David Southwell.

If Wellmark can "deliver maximum value to policyholders," Forsyth said, it protects its already substantial market share in Iowa and South Dakota and provides incentives to attract new business.

The best way to do that, he said, is by being an efficient, low-cost provider.

Wellmark's administrative costs are already among the lowest in the country, Fleisch said.

"What they're doing now is taking out profits, too," the consultant said.

Eliminating profits is a radical step for any business.

Like all insurers, Wellmark uses profits to build cash reserves, which provide a cushion during periods when claims come in higher than expected.

Wellmark's reserves total about $1.2 billion, which Iowa Insurance Commissioner Susan Voss said is "more than adequate for the risks they have on their books."

But even with a substantial cushion, wouldn't a lack of profit eventually cut into growth or cause problems with ratings agencies?

Ordinarily it could, Forsyth said.

But Wellmark's unusual strategy is predicated on managing its reserves in a way that will allow the company to stay ahead of the growth curve and on the right side of agencies that rate the financial health of insurers. The linchpin for the no-profit strategy, Forsyth said, is Wellmark's large cash reserves. If managed wisely, he said, income generated from the reserves will serve the same function as profits by supporting future growth and keeping the insurer competitive.

Another key is Wellmark's position as a mutual insurance company. Publicly traded companies have pressures from shareholders for profits and immediate results that mutual companies do not.

Not having shares that are traded on the stock market allows Wellmark to be more aggressive with investments than other health insurers, Forsyth said. Publicly traded companies are pressured to manage quarter to quarter, for short-term gain, while Wellmark has the luxury of being able take a longer view of several years.

Most insurers, he said, have their reserves invested in low-risk, fixed-income investments. By taking a longer view, Wellmark can invest a portion of its reserves in equities, which historically earn a higher return than fixed-income investments.

The short-term volatility of the market always evens out over the longer term, giving Wellmark a higher return on investments, he said.

Wellmark's position in the health-care market is also important, Forsyth said.

To be successful today, health insurers need a certain economy of scale, he said. That's why there have been so many mergers in recent years. Growth creates economies of scale, and the quickest way to grow is by merger.

Since Forsyth joined Wellmark in 1996, the Iowa company has had several opportunities to acquire or merge with Blue Cross franchises in other states. But the Wellmark board declined each time after determining there was no strategic benefit for the Iowa company, Forsyth said.

Instead, the insurer has concentrated on growing its business in Iowa and South Dakota, Forsyth said.

Today, Wellmark has about 2 million customers with annual revenue of about $2.8 billion last year.

Compared with most other Blue Cross franchises, the Iowa-South Dakota franchise is mid- to small-sized, Forsyth said.

Still, he said, Wellmark is large enough to have economies of scale in important areas, like information technology and marketing.

The number of areas where more size would be advantageous are relatively small, Forsyth said. But there are a few, which means that at some point Wellmark could be at a competitive disadvantage to larger competitors.

To protect itself in those areas, Forsyth said, Wellmark's no-profit plan creates special internal funds supported by the increase in investment income.

Specific business functions, such as disease and medical management or marketing promotion, can tap into those special funds as needed to keep Wellmark cost-competitive with other insurers, Forsyth said.

Expenditures from those funds "will not be passed on to our customers through premiums or administrative fees," Forsyth said.

That won't mean rate cuts or higher fees for doctors and hospitals, he said.

But it will mean that over time, Wellmark's insurance premiums should grow more slowly than the rest of the industry, preserving the insurer's position as a low-cost provider.

Business Editor David Elbert can be reached at (515) 284-8533 or delbert@dmreg.com"

Source:  The Des Moines Register