The health insurance Diamond that lost its sparkle

FRAN O'SULLIVAN and ADAM GIFFORD examine the chronic illness at Southern Cross.

It was touted simply as the "Diamond" - the multimillion-dollar computer system that would bring a new sparkle to Southern Cross, enabling New Zealand's largest health insurer to compete in a bionic age.

If all had gone to plan, the insurer - whose policies now cover 810,000 New Zealanders - should be basking in the success of a high-level project to shift its long-time members' accounts to the glitzy electronic system it acquired when it bought its prime competitor, Aetna Health.

Southern Cross is instead coping with a public relations nightmare which is affecting its reputation as the country's most trusted health insurance brand.

For six weeks, the company tried to keep the lid on the senior management failure that led to the debacle.

Excuses were trotted out as angry members went public with their frustrations over the long delays in getting their claims processed.

On Friday, Southern Cross chief executive Roger Bowie finally took full responsibility, stopped blaming computer problems for processing delays and admitted that the insurer had failed to hire and train enough staff for the switch to the new system.

Asked if any jobs would be lost, he replied: "I'm just not going to go there. I'm the chief executive. I take responsibility."

Pressed repeatedly on the issue, he said: "I'm responsible. I'll fix it."

He has no other option.

His former operating officer George Jepson - the executive who steered the high-level project - has already moved to Australia.

His contract, which also included responsibility for Southern Cross' push to sign up medical specialists and private hospitals as affiliated providers, had been timed to end once the transfer of accounts to the new system was finished.

Mr Jepson, a former Aetna executive, was appointed by Mr Bowie.

A high-level team of 25, drawn from Southern Cross, Aetna and their technical partners, worked on the challenge of shifting the accounts of more than 760,000 Southern Cross members from an out-of-date mainframe to the Diamond platform, which served the 40,000 customers on Aetna's own health insurance books.

Mr Jepson's job finished early last month with the final transfer of Southern Cross' corporate clients.

His role has since been filled by Dr Michael Ashby, who acted as the company's PR face during the Christmas-New Year period. His job was to sell the line that the claims delays would be over by the end of this month and plead for public patience.

Chairman Hylton LeGrice chimed in over the festive season, putting the embarrassing delays down to a computer glitch - of no import to his board. Those directors are Jeff Todd, Dr Susan Macken, Bryan Kensington, Bruce Davidson, Dr John Matthews and Peter Smith.

It took a series of leaks by former claims staff - who had been made redundant when Southern Cross shifted its processing centre from Auckland to Hamilton late last year - to force the friendly society to come clean over the lack of training.

Southern Cross staff say claims are being held up because the new computer system does not allow human operators to make as many decisions.

Julie Bedggood, who liaises with the project team, says the system cannot finish a claim if a piece of data is missing.

"This new system is a lot more rules-based than the old one, and getting people used to those rules ... has been the issue.

"The assessors put the data in. Once the information is in the system, the system will adjudicate it and the assessor checks the result.

"That is new. Under the old system, the assessor adjudicated the claims."

Southern Cross has admitted that the Diamond system was one of its main reasons for buying Aetna Health last year. It hoped to cut costs by using the system's ability to automatically settle most claims.

Aetna had already modified the American system for New Zealand conditions, including the ability to bill individuals rather than the corporate billing most US insurers use.

However, Aetna was not using the system's ability to assess claims automatically. Southern Cross began doing this for the first time in New Zealand.

Mr Bowie defends the company's so-called Crisp (Cost Reduction Improved Service Performance) project to set up the system as on time and within its $9 million budget.

"The difficulty was in two areas. We underestimated the amount of training people needed in the new processes and we underestimated the productivity dip, so we didn't have enough people on early enough."

He says the company saw no cause for alarm as it began transferring membership records.

"It wasn't until the last lot came over, which was the last few weeks of November culminating on December 8, that we saw the problem was building up unacceptably, and that's when we started to bring more people in."

As delays built up, members rang the call centre. When call centre operators passed those queries on to claim assessors to resolve, it slowed their ability to process other claims.

Mr Bowie says the number of calls has dropped from a peak of 5000 to about 3000 a day, still above the pre-Diamond average.

He will not concede that moving claims processing from Auckland to Hamilton was a blunder, or that the productivity drop could have been better predicted.

Although Aetna had not used the system for automatic claims assessment, he argues that the main issue was the difference in scale. Southern Cross had to make a system tuned for Aetna's tens of thousands of customers to cope with the merged enterprise's many hundreds of thousands.

"There was not much difference between the business models, just a lot more claims. We made some small changes but the basic principles were the same."

A former staff member said Southern Cross should have waited until February to switch systems because there were always a lot of claims in November and December, "because people save up their claims so they can get some cash back for Christmas".

Mr Bowie was anxious to focus on the "big picture" when he sat down on Friday for the first of a series of interviews.

The "big picture" issue that concerns him is the pressure on Southern Cross to "fill the gap" by covering the growing hole in areas where the public health system is deficient, the shrinking numbers of New Zealanders with health insurance, ageing clients and the huge explosion in costly surgical procedures which are newly available.

He was concerned to counter reports suggesting that claims processing was behind by three months and could spark a private health industry cash-flow crisis to the tune of $90 million.

"We have not stopped paying claims - a misperception has been created."

Waving a ratings statement by credit agency Standard & Poor's, he pointed to the insurer's AA- rating, excellent market position, very strong capitalisation, conservative investment profile and prudent and experienced management in health care finance and delivery.

"This current situation is a sad chapter, but it's not the book," he said, proffering a copy of a history of the not-for-profit insurer by his predecessor, Peter Smith.

What Mr Bowie did not focus on is the agency's less than enthusiastic comments on Southern Cross' "poor operating performance".

Standard & Poor's said the operating profit for the last June year was a "lacklustre $2.2 million" and underwriting performance was also poor, although it was considered satisfactory in the context that the group was a mutual and had a "claims-paying ethos".

By buying Aetna Health, Southern Cross hoped to increase its share of the health insurance market to 80 per cent and be able to integrate the two offices to get more innovative business processing - Mr Bowie says "three times as fast" - for the call centre, membership and claims team.

This year, Southern Cross should be concentrating on the next phase - further innovative insurance products, using its new electronic system to get the cost of providing services to its members down and devising new pricing policies to better match the size of premiums to members' risks of suffering major health problems.

Former senior managers - some made redundant in a restructuring wave in 1999 and others who left late last year - suggest the insurer's problems have been exacerbated by the cultural shift Mr Bowie introduced after he took up the chief executive's role in late 1995.

His vision was for the long-time friendly society to become a major player in New Zealand healthcare.

Under his leadership Southern Cross moved away from a simple reliance on what many observers see as a "claims-paying mentality".

A raft of senior sales managers and other key people lost their roles, with Southern Cross having to top up redundancy payments, estimated at $250,000 in one case.

Said one former senior staffer: "I was quite happy to go if they thought your face didn't fit in, but they handled it badly and every time they did it badly someone got extra money."

Many of the former managers acknowledge change was inevitable after 25 years of "family life" under Mr Smith.

"When Roger came in he did visions for the future, business plans, we all ticked it off - and we all developed a bit."

At issue is whether vital institutional knowledge walked out the door with the redundant managers - the intimate knowledge of Southern Cross' own business and first-name familiarity with customers that would have enabled present managers to read the trouble signs earlier.

"We might have said, 'Have you thought about the implications for the computer system?' " said the former senior staff member. "Younger managers might say, 'Yes, you're just thinking at too low a level'.

"But at the end of the day you are talking about the implementation - how will this system affect people at the grass roots."

After the crisis hit, Southern Cross seems to have recognised this by retaining some former managers to help with the claims backlog and problems with some industry clients.

This is not the first time the company has blamed computer problems for claims-processing delays. A raft of former senior managers have pointed to previous instances - confirmed by Mr Bowie - in this area.

There is uniform surprise that Southern Cross had not learned its lessons and ensured it had enough trained staff in place well before the cutover date for the new system.

But Mr Bowie's own difficulties in quickly getting on top of the extent of the processing fiasco have not been helped by a lack of adequate operational data reflecting the day-to-day state of Southern Cross' business.

In two interviews at Southern Cross' Auckland headquarters, he dominated discussions to such an extent that his senior managers had trouble getting a word in to shed their own light on critical issues.

Mr Bowie changed his tune several times on just when Southern Cross was alerted to its problem - was it November or December, or when the final transfer of corporate clients to the new system took place?

He did not accede to requests for figures to show claims trends and the number of clients affected by the backlog, although chief financial officer Terry Moore said claims received were immediately logged using the Diamond system before subsequent processing.

"People go on Diamond and see how many claims are outstanding."

Mr Moore said Southern Cross was able to estimate the size of its backlogged claims in dollar terms by using historical averages to get a picture.

"We log every claim we receive. The Treasury function monitors cash in and cash out - the amount we are behind in claims is pretty much built into the additional cash that is sitting in the organisation."

The trouble is that while Mr Bowie points to a $15 million current excess, his chief financial officer counters: "$15 million to $20 million."

Mr Bowie's eyes gleam as he chuckles over the unexpected bonus his firm has gained from the delays.

That extra sum is earning additional interest for his members.

However, private hospitals do not share his glee.

Mr Bowie says: "I have spoken to virtually all the chief executives of the hospitals and the administrators of the hospitals saying what we aredoing.

"They are telling us that they are not happy about the delays, but they understand we are getting it right and are happy to live with our reassurances.

"Our role is to get those claims processed and through and get the cheques in the hands of the members so they can fulfil their obligations to the hospitals. What we are concentrating on is our job."

John Harman of St Mark's Breast Centre takes a very different view of the situation.

"Nobody seems to be too bothered by Southern Cross getting another 20 per cent of market share by buying Aetna and becoming dominant in the marketplace and simply not paying its bills for three months - and I'm sure they're earning interest on that money.

"We rang these guys and suggested to them in good faith that they've got the money there, they could put it in the bank account of each of the hospitals and then as the computer system matched up to what was owing they could square up, but they're obviously not doing that and they've got the money.

"Two years ago they kept the money for three months and they also said they had a computer problem. Once every two years in the past four years they've had a computer problem.

"Cynically, you could say that Southern Cross has for the past three years run at a loss, so what they've decided to do is over the holiday period hold on to the money for two or three months - it's just that this time they've been noticed.

"This is far too cynical to be just a computer hitch. It's strange that they've changed computers, got not enough people to answer the phones over the holiday period, moved the call centre to Hamilton and gone on holiday over Christmas."

Mr Harman's suspicions that Southern Cross has used the computer glitch to put a cash squeeze on private hospital operators are seen as a little harsh by others such as Lesley Clarke of the Private Hospitals Association and David Russell of the Consumers' Institute.

Mr Bowie is reluctant to offer compensation to private hospitals for their cashflow difficulties.

But he adds: "Our responsibility is to our members. We are prepared to listen to whatever the hospitals say to us - we are in constant dialogue with them."

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