A lawsuit by a consumer advocacy group against Blue Cross Blue Shield of the National Capital Area has once again focused attention on what happens to Blues assets when they merge or convert to for-profit status.
Wash D.C. advocacy group sues to protect assets of local Blues plan from being l
February 28, 1998
Wash D.C. advocacy group sues to protect assets of local Blues plan from being lost in merger
A lawsuit by a consumer advocacy group against Blue Cross Blue Shield of the National Capital Area has once again focused attention on what happens to Blues assets when they merge or convert to for-profit status.
In a lawsuit filed last month against Blue Cross Blue Shield of the National Capital area, the Fair Care Foundation, a Washington, D.C.-based consumer group, says it is worried that District of Columbia taxpayers will be cheated out of an asset they helped build if the merger between District of Columbia Blue Cross and Blue Shield and the nonprofit Blue Cross and Blue Shield of Maryland is completed.
The Fair Care Foundation last month sued Blue Cross Blue Shield of the National Capital Area, claiming its assets, gained through years of tax breaks as a nonprofit, will be illegally absorbed by the Maryland plan. At presstime, the District of Columbia Superior Court was considering a motion by BCBS of the National Capital Area to dismiss the suit. Fair Care is seeking a preliminary injunction to block the completion of the Blues' merger until the lawsuit is settled.
Seventh largest Blue
The National Capital Blue and BCBS of Maryland formally consolidated Jan. 16, to form CareFirst Inc., with the merger of sales forces, computer systems, products and networks of health care professionals and hospitals slated to be completed within six months. The combined company will be the seventh largest Blue Cross plan in the country with 2 million members, annual revenues of $3 billion and 5,000 employees. Under the consolidation, the two Blues remain separate entities but CareFirst, a holding company, controls their boards.
John Ellison, an attorney with the Pennsylvania law firm Anderson, Kill & Olick which represents the foundation, believes the consolidation of the Blues is the first step toward becoming for-profit. He noted that the Maryland plan made two unsuccessful attempts to convert the Blue to for-profit status.
In suing the Blue, the Fair Care Foundation joins a fierce, nationwide battle over control of Blues' assets whose estimated value is in the billions of dollars. Opponents in several states, including New Jersey, Georgia, Kentucky and Connecticut, are waging legal wars to keep Blues' assets for public use, arguing that they are charitable,
William Jews, the former chief executive officer (CEO) of the Maryland plan who became president and CEO of the new holding company, said that the consolidation will result in substantial savings. Larry C. Glasscock, president of the National Capital Area plan, is the holding company's chief operating officer.
According to Mr. Jews, the consolidation will improve the Blues access to capital and boost its chances to prosper in an increasingly competitive health-care marketplace. Currently, the Blue Cross market share in the District of Columbia is 20%, half of what it is in Maryland.
The Fair Care Foundation says that while the two Blues may remain separate entities they will be far from equal. "We think this consolidation means a shift of control of the assets from the District to Maryland," said A.G. ("Terry") Newmyer III, director of the foundation. The new holding company is based in Maryland, which means that "the District will be the real loser," he said.
Blues in other states have converted to for-profit status without setting aside any charitable assets. In Connecticut and Kentucky state attorney generals are suing the merged Blues in attempts to recover their assets for charitable uses.
In addition to the Superior Court lawsuit, the Fair Care Foundation has filed a lawsuit in the District of Columbia Court of Appeals, charging that the group was illegally excluded from discussions by District and Maryland insurance commissioners who later watered down the conditions under which the two Blues were allowed to consolidate.
The foundation particularly objects to the temporary suspension of a requirement that CareFirst, Inc., be licensed as a nonprofit health insurer and the softening of a ban on executive severance packages for officers of the Blues. Mr. Newmyer said the Blues "privately cozied up to the insurance regulators, which we think is disgusting behavior."
Under his contract with the District of Columbia Blue, Mr. Glasscock could have received $3 million worth of severance benefits. He did not return telephone calls concerning his final pay arrangement.
Dennis Carroll, an attorney in Maryland insurance commissioner Steven Larsen's office, said the commissioner postponed the nonprofit licensing requirement until the Blues find out from the Internal Revenue Service if they owe an estimated $20 million in taxes because of their consolidation.
"We think this consolidation means a shift of control of the assets from the District to Maryland.
Newmyer
Many of the legal battles over Blues assets involve Anthem Insurance Companies, Inc., which is gobbling up Blues across the country.
Blue Cross and Blue Shield of New Jersey last month lost the last, and probably final round, of its fight to convert to a mutual insurance company without giving an estimated $1 billion to charity. The state Supreme Court Jan. 26 denied the Blue's request to review a lower court ruling that the Blue is a charitable organization.
The Blue had sued the state after the state attorney general found that the Blue was a charitable organization. Shortly after the lawsuit was filed, Anthem dropped its merger attempt with the Blue.
BCBS of New Jersey spokesman Fred Hillman said the Blue has scrapped its conversion plans and will continue to operate as a not-for-profit health services corporation.
In Connecticut, the attorney general last month filed suit in Hartford Superior Court against Anthem, which previously had acquired the state's Blue Cross and Blue Shield, for failure to protect the Blue's charitable assets.
"The Blue Cross has historically operated as a nonprofit, charitable organization, and, as such, it has amassed large assets which belong in a charitable trust, said Robert Shields, Jr., a special counsel to the attorney general.
Anthem said it will vigorously contest the lawsuit. "The company never was a charity, never received charitable contributions or donations, and never provided free coverage or health benefits, said Harry Torello, president and CEO of Anthem Blue Cross and Blue Shield of Connecticut.
Anthem is using the same argument in Kentucky, where the state attorney general last year sued the company to recover charitable assets estimated to be as high as $700 million. The unusual twist in this litigation is that the lawsuit was filed nearly five years after the Kentucky Blue Cross and Blue Shield merged with Anthem.
Georgia is one state where Anthem is not involved. Eight small nonprofit groups filed a class action lawsuit last year against the Georgia commissioner of insurance and the Blue Cross plan for failing to protect the charitable assets when the plan converted into a privately held for-profit corporation.
The nonprofit groups Jan. 12 scored a victory when the Superior Court of Fulton County put aside the Blue's request to dismiss the case, giving the plaintiffs time to prepare their case. The groups are arguing that the state legislation which allowed the conversion is unconstitutional, said their attorney, David Pope, a partner in the firm of Carr Tabb & Pope. The suit asks that all of the Blue's assets, which Mr. Pope said are estimated at $500 million, should be used for charitable purposes.
Mary Klein
Contact: Mr. Newmyer III at 703- 775-3738; Mr. Ellison at 215-568-4710; Mr. Jews at 401-581-3000; Mr. Carroll at 410-468-2030; Mr. Hillman at 973-466-8755; Mr. Shields at 860-522-8338; Mr. Torello at 203- 239-8381; and Mr. Pope at 404-876-7790.
A lawsuit by a consumer advocacy group against Blue Cross Blue Shield of the National Capital Area has once again focused attention on what happens to Blues assets when they merge or convert to for-profit status.
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