NJBIZ Exclusive Marino battles back #8212 the Horizon CEO challenges the governor’s assertions

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Horizon Blue Cross Blue Shield of New Jersey CEO Robert Marino has been at the helm of the company since 2011. In that time, the company has weathered a bounceback from the economic recession, the changes and investments involved in the Affordable Care Act, Hurricane Sandy and the contentious OMNIA rollout.Horizon Blue Cross Blue Shield of New Jersey CEO Robert Marino has been at the helm of the company since 2011. In that time, the company has weathered a bounceback from the economic recession, the changes and investments involved in the Affordable Care Act, Hurricane Sandy and the contentious OMNIA rollout.

This year’s fight comes from Gov. Chris Christie.

Without consulting the Department of Banking and Insurance, as has been revealed in recent budget hearings, the governor went after the insurer’s reserves — which he has called excessive surplus — in an attempt to grab $300 million for his anti-addiction campaign.

Christie has gone so far as to call out executives as being overcompensated, attacked the company’s highly-paid lobbyists and said it has profited off of the sick and poor through managing Medicaid policyholders in the state.

In an exclusive interview, Marino revealed how he has been handling the most recent conflict, as well as detailed the company’s stance on a number of current issues.

NJBIZ: Let’s start off with the idea that you are being accused of having an abundant or excessive surplus. We’ve heard your team respond that it isn’t a surplus and helps support 75 days of claims — why do you need a surplus at all?

Robert Marino: We manage our surplus at a prudent level. This is a company that is a very large company, it has a fair amount of risk in front of it and we always seek to balance the capital that we need to manage those risks.

Two years ago, there was a breakthrough drug that came out for hepatitis C. We spent $140 million on 5,000 prescription claims for that breakthrough drug. It was not in the budget, it was something that was unplanned in the market. It was approved by regulators, and we had a $140 million payout on that.

NJBIZ: But your reserves are much higher than that. Does the Department of Banking and Insurance have any guidelines on that?

RM: The way the regulators work is, they look at statutory accounting, which is the accounting they would use if you had to liquidate the company. And the number is $2.4 billion.

If you look at the reserves, it equates to about, if you look at what the actuaries are telling me, about $638 per person. An emergency room visit is more than $638. Reserves are determined by what we call risk-based capital. It’s an actuarial formula … expressed as a percentage. And we manage our risk-based capital between 550 percent and 700 percent. We get nervous if we get around 550. This year, our business plan calls for us to finish at about 585 percent of risk-based capital. I think what the governor has failed to recognize is that, if you look back to 2013, our risk-based capital … has been on a year-over-year decline. Simply stated, the risk have grown faster than the dollar per capital reserve.

NJBIZ: What about the investments made into innovation and other programs that are not community-focused?

RM: Well, first of all, context. The private investments the company has made (in organizations such as COTA, NANT Health, AbleTo or any of those) are less than 1 percent of the investment portfolio. So, we are talking $30-$35 million of an investment portfolio that’s over $3 billion. But, more importantly, those investments are very deliberately decided, because we believe they will bring value to our policyholders in terms of improvement of their health and well-being. So, they are not investments that we say, ‘Let’s get into this because we can get a 20 percent return and isn’t that great.’ It’s more over how does that investment help our members in terms of improving health care and improving the status of their well-being, and supporting our initiatives in value-based care.

NJBIZ: If you’re running on a tight margin, why invest?

RM: Reserves give us the benefit of making prudent investments and good decisions. We are, to my knowledge, the only health care company that is in all 21 counties for managed Medicaid. We do that because we can absorb the risk that goes with being in all 21 counties … reserves give us that ability. If you look at our competitors in that market — which, by the way, happen to be publicly traded stock companies — they pick the counties they are going to be in, and they pick it based on actuarial or underwriting analysis. That’s what reserves enable us to do. Reserves enable us to do OMNIA and health care value. It enables us to take a risk that we ultimately benefit the members. We don’t use the reserves imprudently, we use them deliberately.

NJBIZ: What would happen if the state did take $300 million from you? Wouldn’t it be a small, one-time hit?

RM: If this governor were successful in taking $300 million from this company this year, our company would be at about 518 percent by year-end. This business is sometimes unpredictable. There’s something called the medical cost ratio — the percent of every dollar that we spend on medical cost. We roughly spend 87 cents on the dollar. If we miss that by one penny — and, by the way, the stock market is doing incredibly well; at some point it’s going to come down — if we miss our medical cost by 1 percent and the stock market collapsed by 10 percent this year and the governor took $300 million on top of that, our risk-based capital would be about 450 percent. I wouldn’t sleep at night, I’d have insomnia for the rest of my career if we got down to that number.

NJBIZ: What would you do to mitigate that?

RM: We don’t have a money tree outside I can go pick from; we would have to make that up in premium rate hikes. The actuaries ran the numbers, and they are telling me a $300 million reserve grab is $600 for an individual policy and $1,700 for a family of four.  What I worry about is, now I’m disadvantaged against my competition, because I’m building that into the rates on top of all the other crap we have to build into the rates — medical inflation, uncertainty in Washington, D.C. — so, now, we are going to be competitively disadvantaged because our policyholders are going to be paying this hidden tax in the form of additional premium.

NJBIZ: There have been rumors that this is exactly the goal — to reduce Horizon’s influence so other competitors can come in. What do you think?

RM: There are a lot of barriers to entry in the state. It’s not easy to become a health insurance company in the state. Look at Oscar, look at Health Republic, and then go back in history in the late ’80s and early ’90s with all these failed physician and provider organizations that thought they could become insurance companies.

NJBIZ: Isn’t that what you’re doing with OMNIA? Making hospitals and health systems take on risk like insurers?

RM: It’s a variance. It’s a very different thing than the hospitals wanting to become insurers. We went through a very deliberate process to pick these partners. One of the criteria was the mindset of the partner. Here is what I mean by that: Are they intellectually aligned on the fact that we are going to move the system into value-based as opposed to volume-based? That was pretty big for a hospital CEO to sit across the table in this room or over dinner and say to me, ‘We’re going to sign up for that.’ Because they are signing up for the fact that they are not going to be paid for bodies in beds, but for the value they create. The other thing we said was, and this is where the commonality came, we were not going to get into the bricks-and-mortar business. We were not going to buy hospitals, we were not going to buy doctors’ practices and try to vertically integrate the finances. UnitedHealthcare is buying doctors groups, one of the Blues in Pennsylvania bought a hospital system out there. We looked for partners on the other side of table who said (they) didn’t want to be an insurance company.

NJBIZ: The OMNIA Alliance is in place and is giving providers a new relationship with Horizon. How have you fared after all the litigation and legislative backlash?

RM: The innovation got lost in the blowback of who is in Tier 1 and Tier 2. I’ve got to tell you, I got Blues CEOs in the Midwest and on the West Coast calling me and asking me about OMNIA: ‘It’s so innovative, we want to understand it.’

NJBIZ: Another thing the governor and other legislators appear to be exploring is pushing Horizon to, for the third time, consider converting to a for-profit. Why are you not for this idea?

RM: A couple of thoughts. The first thing is the mission of the company. The first thing we would have to determine is, once you become a publicly traded company and you convert, your mission changes. Your mission doesn’t necessarily become provide access to affordable, high quality health care for the residents of New Jersey. Your mission becomes the fiduciary obligation to your shareholders, which is your quarterly earnings. I would be obligated; I as the CEO would be obligated to create shareholder value. And shareholder value is the earnings for the next quarter. Shareholder value, in my opinion — I’ve not run a publicly traded company — you tend to become more immediate and more current in your thinking, and you don’t have the ability to do long-term planning.

NJBIZ: Have you talked with the board about conversion?

RM: My predecessor was on a path to convert the company. I became the CEO in 2011. My board asked me my view on this and, at that time, my point of view was the stock market had tanked, we were in a recession, the ACA got passed, it was the biggest piece of federal legislation since Medicare, and to try to convert a company while all that was going on, I strongly believed it was a management distraction. It was not the right time to do it, and the board agreed with my assessment.

Is that something that the board would someday look at and re-evaluate again? Possibly. Never say never, but right now I do believe in the mission and the good work this company does.

NJBIZ: How have you felt throughout the past few months with all the commotion?

RM: It’s difficult for me, because I have so much passion about this company and I believe in its mission, to be attacked like this. Because I see the difference. I live it every day. The difference that this company makes versus those that we compete with and their for-profit orientation. And to be called (out for) excessive profits, when you’re running a $13 billion organization on 0.9 (percent) net income, if that doesn’t get to the mission of this company, I don’t know what does.