Florida Blue CEO Pat Geraghty has staked out a leadership position that is putting his company —and Florida —at the forefront of health care trends.

In the course of one week in October, Florida Blue CEO Pat Geraghty appeared at a health care entrepreneur event his company sponsored in Orlando, then traveled the next day to the White House to confer with Health and Human Services Secretary Kathleen Sebelius over the catastrophic rollout of the Affordable Care Act.

He was back in Orlando the following day to announce his company would be the anchor tenant at a new lab and business incubator. He then traveled to London, where he participated in a Jacksonville economic development effort tied to the Jacksonville Jaguars’ appearance in the annual NFL game in England. While there, he also appeared on NBC’s “Meet the Press.”

Since taking over the top job at Jacksonville-based Florida Blue in 2011, Geraghty has led the company and Florida down a new road as the economics of the Health insurance marketplace change in dramatic and unforeseeable ways. “Nobody really knows for sure how these things are going to evolve,” says University of Florida health policy professor Paul Duncan. “The expectation that there’s a very clear blueprint we’re marching, or lurching, toward is not correct.”

Since Blue Cross Blue Shield of Florida started in Florida in 1944, it has enjoyed what Duncan describes as “spectacular” leadership. The company has had only four CEOs in the last three decades and has grown into the market leader. The notfor- profit business, one of Florida’s largest employers with 11,500 workers, holds 29% of the private market, the largest share of any insurer. A staid company in a staid industry, it came to count many of Florida’s larger employers and household names among its group plans, built enviable name recognition and has served as a stalwart community donor. It’s also come under increasing pressure.

The federal law caps margins for insurers and imposes such new regulatory constraints that some commentators now Speak of insurers functioning essentially as public utilities. The government, employers and patients all want to squeeze margins. As a not-for-profit, Florida Blue aims for only a 2% to 3% margin — 2012’s $159 million in earnings was 2.4% of $6.6 billion in revenue — but even that is under pressure.

The act poses a particular threat to insurers’ small group business, which is often insurers’ highest-margin venture. Meanwhile, other lines can be unprofitable altogether. Florida Blue lost $28 million on its Medicare business in 2012. Born and raised in New York, Geraghty grew up in a big Irish-Italian Catholic family where he came to appreciate the value of hearing diverse opinions, which he says he’s sought to encourage in his business career. “The dinner table was an exchange of ideas, an exchange of philosophies, an exchange of political points of view. Sometimes it was loud. Sometimes it was really engaged,” he says.

A Colgate graduate, he spent 18 years with Prudential, then nine with the Blue affiliate in New Jersey before being hired In 2008 as CEO at the Minnesota Blue. He was there when Robert Lufrano, the Florida Blue leader, decided to retire in 2011 and called Geraghty, a friend, to let him know the position would be available. It’s rare for the CEO of one Blue to jump to another, but Geraghty says the Florida opportunity and “size, scope, complexity of the assignment” drew him.

Geraghty says he’s trying to craft a new company that keeps its core insurance business but pursues other health-related business. “Take some risks, be open to innovating, be open to taking a leading position in an evolving health and health care marketplace, understanding that in a reformed environment we were going to have to be different,” he says.

Among other moves, Geraghty has led a round of acquisitions [“Strategy and Tactics,” page 62] and expanded the number of Florida Blue retail centers that the company first opened in 2006.

Most notably, he led a reorganization last year that shifted $1.6 billion of Florida Blue’s $2.8-billion surplus to a new entity that can deploy the money in acquisitions Of for-profit, higher-margin businesses and entrepreneurial ventures. One example: Florida Blue, through its wholly owned Navigy Holdings, last year led a $20-million funding round for Audax Health Solutions, a Washington, D.C., developer of a game-like health social network called Zensey as well as a runners app called “Battle by the Bay” and a tabletbased employee health assessment.

In the course of getting state approval for Florida Blue to reorganize, Geraghty’s 2012 $6.8-million compensation (including $1.3 million in relocation expenses) came to light. Geraghty says Florida Blue’s board, comprised entirely of independent directors, sets his compensation with advice from consultants. He says $975,000 is base salary and the rest depends on whether he achieves company goals.

It is in Medicaid that Geraghty’s influence is most evident beyond Florida Blue’s campus. As originally passed, the law forced states to expand Medicaid, but the U.S. Supreme Court rejected that mandate. Gov. Rick Scott initially refused to voluntarily expand Medicaid, foregoing An estimated $51 billion in federal dollars over 10 years.

Geraghty argued to Scott and business leaders that Florida should take the money — otherwise, Florida tax dollars go to fund coverage in other states, 900,000 Floridians don’t get coverage and the cost of their uncompensated treatment shifts to businesses and consumers with insurance.

Geraghty says Florida can use the 10- year funding to transform health care coverage from the traditional fee-forservice model to a “value” model that rewards efficiency and results. Today, Florida Blue pays just over 20% of its payments on a value model. “I think to move the whole state there would be significant,” Geraghty says. “It would set us up to have a more fiscally sound health financing apparatus in our state for decades to come.”

Florida Blue, which hasn’t been a player in the Medicaid market, stands to gain billions in added revenue if it is as successful at capturing a share of the expansion as it has been in the private market. Florida Blue says Medicaid isn’t profitable but fits its mission. “Would we get some of that expansion population? Yeah, we absolutely would, but I think the reasons to do this are much bigger than Florida Blue’s own interest,” Geraghty says.

After meeting with Geraghty and Others Scott reversed himself on the Medicaid issue. He said he would seek the Medicaid expansion money for three years, once the federal government promised Florida the freedom to use managed-care to run the program. Florida Blue donated $1 million since 2010 to Scott’s Let’s Get To Work political committee, which makes the company one of the committee’s biggest backers, according to contribution information listed on the committee’s site.

The Legislature wasn’t sold, however, and refused the expansion. House Speaker Will Weatherford called the federal government approach “take it or leave it, all or nothing” and said it was unsustainable, relied on borrowed money, not Floridians’ tax dollars, and would cost the state $3.5 billion over a decade as well as impact spending on education and other state needs. He backed a state House Republican measure that he said was sustainable and would cover 55% of the people the Medicaid expansion would cover.

Geraghty says he will continue to urge legislators to take the Medicaid money. He says it’s important for the company to be a “thought leader” in health care policy with the courage to speak out on state and national policy. Unusually visible for the CEO of a Blue, Geraghty has appeared in the New York Times and on Fox Business News and MSNBC, among others.

Regardless of what the Legislature does this spring with Medicaid, Florida Blue is poised to make Medicaid big business. Through a partnership, it won bids for the Medicaid business in eight of Florida’s 11 Medicaid regions for which it bid. “We will be a large Medicaid player by the middle of (2014),” Geraghty says.

Meanwhile, Geraghty has to navigate the new federal law. The company made headlines when it began canceling plans that didn’t meet the law’s new mandated coverages, affecting 300,000 Floridians. The day of Geraghty’s interview with Florida Trend, President Obama was in Massachusetts saying such policies were substandard and from “bad apple insurers.” Florida Blue answers that its “Go Blue” product responded to customer demand for a plan not intended as a full insurance plan but one that offered protection that met customers’ budgetary and lifestyle needs. Obama, after much criticism over the canceled plans here and in other states, granted them a reprieve for a year even though they didn’t meet the new federal requirements. Florida Blue said it will offer customers renewals.

Geraghty supports the law. The deal implicit in the act is that insurers take costly sick and high-risk people without excluding any with pre-existing conditions and without charging them commensurately with the risk they represent. In return, in theory, the law — by mandating coverage — is supposed to deliver new, healthy, high-margin, premium- paying customers.

Geraghty says providing coverage for pre-existing conditions and for children of policyholders up to age 26 is popular and appropriate. Where he and the law part ways is over its shrinking of age-rating premium categories. In the individual market before the law took effect, Florida limited how much an insurance company charged an older customer — say, near retirement — to seven times what it charged a younger one for the same coverage. The federal law restricts how much premiums can vary based on a person’s age to three times. While that’s better for older customers, it means younger ones pay more to in effect subsidize them. Geraghty worries it will drive young people out of the market.

By the end of October, a day short of the first full month of the Obamacare exchanges, Geraghty — obeying the federal government’s instructions that data releases come from Washington — would say only that more than 1,000 people had signed up for Florida Blue policies through the healthcare.gov website.

A Florida Office of Insurance Regulation report says that on average Florida Blue premiums will go up 31% under the Affordable Care Act. Says Geraghty, “This is a place where averages lie, OK?” A young, healthy customer earning too much for a government subsidy might see his premium double while a chronically ill older person might see a 20% reduction. “It really depends on who you are, whether or not you’re advantaged or disadvantaged by the law in the final analysis,” he says.

The individual market, as much as it has been in the news, accounts for less than 10% of Florida Blue’s insurance base.

Throughout its insurance lines, Florida Blue has to find a way to lower costs. Its overall underwriting gain in 2012 was $68.5 million, less than half the $152.8 million Florida Blue gained in investment income.

To lower costs and improve care, Florida Blue is trying the “medical home” approach, which now includes 2,300 doctors. A patient’s care is led by a single physician who coordinates the care provided by others. As part of the effort, the company pays primary care doctors to keep offices open for longer hours to cut ER use and gives incentive pay for quality care. Florida Blue also has agreements with accountable care organizations, in which hospitals, doctors and other providers coordinate care on a value-based compensation model.

In a third endeavor, Florida Blue provides direct care through its own doctors in a multispecialty practice in Largo, a clinic in Pensacola, a managedcare plan, called a staff-model HMO, in Daytona, and a mixed-model HMO in Tallahassee. “There is not one silver bullet,” Geraghty says.

As Geraghty leads Florida Blue into the new health care world, it helps that the company is strong financially. Ratings firm A.M. Best last year raised Florida Blue’s rating to A+. The company’s underwriting gains and investment income give it a capital position that could offer a competitive advantage and allow it to respond to changes in the market under Obamacare, according to A.M. Best.

The Blues stand to benefit from their experience dealing directly with consumers since the exchanges hold the potential of moving more people into the direct-purchase market. Additionally, says Raymond James health care analyst Michael Baker, Blues with the financial wherewithal are at an advantage as margins get squeezed and as the demand for more tech spending in the under-automated industry grows. The question is whether such large, traditional organizations can adjust as the government reshapes the market.

“There’s a lot of change coming at once,” Baker says. “There’s a much greater need to drive for efficiency, for innovation, and how you adjust to this changing backdrop. What was a steady ship will likely get into choppier seas so you need a captain who can look out and see where the next destination is, the path, if you will, to the future.”

Strategy and Tactics

CEO of Florida Blue since 2011, Pat Geraghty has continued initiatives that started before he arrived while positioning the company for more radical change.

Florida Blue has expanded its initiative to sell insurance in a retail setting. It now operates 18 retail centers in Florida that offer consumers basic wellness information, such as blood pressure readings and health care advice, but also sell insurance and serve as places to demonstrate products for sale.

Nationally, GuideWell, a forprofit venture begun in 2010, sells health-related products and services such as electronic sleepaid devices and gingko biloba. A small enterprise, it will have a “more prominent presence for the organization moving forward,” company spokesman Paul Kluding says. In-state, the online Florida Blue Health Shop peddles Sundown supplements, body fat analyzers, yoga mats and the like.

Florida Blue closed on an $8.6-million acquisition of a forprofit Medicare audit contractor shortly after Geraghty’s arrival. Because of the deal, Florida Blue now is the third-party administrator for Medicare Parts A and B in 12 states. Before the acquisition, Florida Blue, with only Florida, had 8% of the U.S. thirdparty administrative market. Now it has 32%.

Florida Blue paid $53 million to buy a for-profit multispecialty doctor practice in Largo. It opened a primary care clinic in Pensacola in 2012.

Florida Blue also has positioned itself to enter the Medicaid business through a joint venture with a Blue in Philadelphia and that joint venture’s investment in Prestige Health Choice, a health center-owned Medicaid provider.

A Path Not Taken

The usual suspects in making contrasts to health insurance in the U.S. are the single-payer, government-run systems in Canada and the United Kingdom. In 2010, Pat Geraghty traveled with a delegation to Germany to look at its system. It intrigued him, as did the response he received when he went to Washington on his return.

Health insurance is mandatory in Germany. All employees are required to contribute 8.2% of their gross income (up to about $58,000 in 2011) to health insurance. Employers pay a sort of match of 7.3% for a combined max of about $759 per month in 2011. Employees and their dependents in return receive coverage through “sickness funds,” privately run, competing, non-profit, non-government health insurance. That takes care of about 85% of the population. Government workers, the self-employed and high-earners can buy private health insurance from for-profit or non-profit firms. The unemployed and retired contribute out of their unemployment pay or pensions; the government kicks in for the long-term unemployed.

Most care, including dental, vision and sick leave compensation, is covered, though there’s a small co-pay for many services. Germans can pay up for enhanced services.

“We were in a meeting with the chief advocate for the German system, and I point blank asked him, just to be devil’s Advocate, would you be better if you had a single payer?” Geraghty says. “And he looked at me and said, ‘Why would we take choice away from our people, and why would we stifle innovation? Because the minute you go to one, innovation gets squelched and choice goes away.’

“I asked all kinds of people in Washington about their knowledge of the German system after our return from Germany. They said, ‘I don’t know anything about it, and I can’t really be focused on that. I’m working on U.S. health system reform.’ It was interesting to me that we bury our head and say, ‘That’s not on my radar. I’m fixing this thing.’ ”