"We have among the lowest per-member per-month administrative costs in the industry, and we’re lower than any publicly traded company that we’re aware of."
– John Forsyth
Chairman and CEO, Wellmark Inc.
"We have among the lowest per-member per-month administrative costs in the industry, and we’re lower than any publicly traded company that we’re aware of." – John Forsyth Chairman and CEO, Wellmark Inc.

Last Tuesday, John Forsyth sent a company-wide e-mail that grabbed everyone's attention at Wellmark Inc. The two-word, heart-stopping subject line: "Job Cuts."

Actually, Wellmark's chairman and CEO was writing to assure his more than 2,000 employees that job cuts were not on the horizon, despite recent news of a badly deteriorating economy. Given the e-mail's subject line, he was reasonably sure everyone would read it.

"I sent it out because the previous week there were something like 75,000 job cuts across the country, and people start to worry," Forsyth said. "And when you start to worry, you can't do your job as well as you normally would. So I sent out something that said we continue to be strong and we continue to be a leader in terms of our quality and pricing.

"And while I couldn't guarantee anybody their job, I said if we keep doing the things we're doing, I didn't see in the foreseeable future - this year or next year - any layoffs at our company. I don't think we will have layoffs, because we continue to do well in the marketplace."

Among Greater Des Moines' 10 largest private employers, Wellmark operates health insurance plans covering more than 2 million policyholders in Iowa and South Dakota, and is the largest health insurer in both states.

In recent weeks, several major health insurers across the country have announced layoffs, driven by decreasing numbers of policyholders as more companies cut employees, as well as by staggering losses on the investment reserves those insurers hold.

Last month, for instance, Indianapolis-based Wellpoint Inc., a Blue Cross licensee in 14 states, announced it would eliminate about 1,500 jobs and record a $24 million charge to fourth-quarter earnings. That news was preceded by an announcement from Philadelphia-based Cigna Corp. saying it will cut about 1,100 jobs worldwide. Aetna Inc., based in Hartford, Conn., said in December that it will eliminate about 1,000 jobs to reduce its administrative costs.

Healthy and growing

Des Moines-based Wellmark posted a 20 percent investment loss of $175 million in 2008 and a net after-tax loss for the year. However, by nearly every other operational measure beyond investment results, the company is healthy and growing, said Forsyth, who joined the insurer as its CEO in 1996.

Wellmark, which took in $3.3 billion in premiums last year, has more than doubled its number of policyholders in the past 10 years. To a large extent, the company's strength and competitive advantage come from its structure as a for-profit mutual insurer, which makes it accountable to its policyholders, not to shareholders, Forysth said.

In fact, Forsyth said, Wellmark's -1.3 percent operating margin last year was within the company's "sweet spot" for its targeted margin. Three years ago, Wellmark's board of directors instituted a target profit margin of between zero and 3 percent, which means an operating margin (which includes unplanned expenses), between negative 1 to 2 percent is acceptable.

"So we're not trying to make a lot of money; we're owned by our policyholders and we have adequate reserves," Forsyth said. "So the way to get that value to our policyholders is to get as low a pricing as we can."

Within two years of setting the new target margin, the company achieved a three-year goal of adding 150,000 policyholders, largely by attracting new small employer groups.

"We found there was a lot of elasticity in the small-group market," he said. "More employers started to offer health insurance because our rates were so competitive."

Operating efficiently has also been a key to Wellmark's success. One indicator of that is the company's administrative cost percentage of 8.4 percent, which represents the amount of each premium dollar spent on salaries, facilities, taxes and other non-claims expenses.

"We have among the lowest per-member per-month administrative costs in the industry, and we're lower than any publicly traded company that we're aware of," Forsyth said. "Up until about a year ago, we were the lowest in the Blue Cross system; right now we're the third-lowest." (See chart below.)

By emphasizing continuous process improvement through Six Sigma and Lean techniques, Wellmark has more than doubled its policyholder base during the past 10 years, yet handles that workload with the same number of employees as a decade ago. And rather than laying off employees when a position is eliminated, the company maintains a "redeployment pool" through which employees are given temporary assignments if it appears they can be retrained for another job within 12 months.

As construction continues on its 550,000-square-foot headquarters near Western Gateway Park, Wellmark has set a goal to become 5 percent more efficient by designing the new building around its work processes, not its organizational charts, Forsyth said. The company plans to begin moving from space it leases in several buildings downtown to its own building beginning late next year.

Coverage guarantee

Another initiative begun about two years ago may help Wellmark gain additional market share during the recession. The company designed a policy called Blue Transitions that essentially guarantees coverage to any Wellmark policyholder of two years or more who has been laid off or otherwise loses his or her job, without requiring the person to go through underwriting. The product has attracted nearly 1,500 policyholders so far in Iowa, and Wellmark has sent representatives to pitch the product to any members who have been laid off.

"So we think we've put in a safety net for our members who have been with us two years or longer," Forsyth said, but at an acceptable level of risk to Wellmark.

Wellmark's next strategic challenge, mandated by its board of directors, is to reduce increases in its average annual premiums to the rate of inflation, as measured by the Consumer Price Index, by 2014.

Wellmark has met with provider groups in both Iowa and South Dakota over the past few months as well as with national experts to gather input for the initiative, which it calls "Creating a Sustainable Health System."

"Over the next couple of months, we'll be putting together a strategy and then going out and sharing that with leaders in the health-care community in both of our states, and have discussions with employers as well," Forsyth said.

"So it's a very different challenge. Rather than seeing how much money you can make, it's seeing how much you can reduce the rate of (cost) increase to the benefit of our members."