Ohio takes firm stand against Blue Cross merger while other states search for middle ground
Ohio Blue Cross Merger
April 30, 1997
A decision last month by the Ohio Department of Insurance to block the proposed $299.5 million acquisition of Blue Cross and Blue Shield of Ohio by for-profit Columbia/HCA Healthcare highlights the dramatically different approaches states continue to take to such for-profit
conversions.
Ohio regulators said the price was too low and the interests of the public and 1.5 million policyholders weren’t taken into account. Many policyholders were particularly outraged at plans to provide some $20 million in retirement benefits to two Blue Cross officials. (The national Blue Cross and Blue Shield Association confirmed plans last month to strip the Blue Cross and Blue Shield license from Blue Cross Blue Shield of Ohio and award the franchise for the Cleveland Plan’s service area to Anthem Blue Cross and Blue Shield.)
In the wake of the Insurance Department’s decision, the Ohio Legislature was debating a bill giving the attorney general greater oversight of nonprofit companies that "propose selling or transferring more than 20% of their assets to for-profit firms." (See related story, page 7.)
In sharp contrast to Ohio’s approach, Georgia regulators last year permitted Georgia Blue Cross Blue Shield to convert to a for-profit corporation without requiring the company to preserve charitable assets for the public benefit.
The Georgia plan is one of three Blues that have completed conversions since the national Blue Cross and Blue Shield Association opened the floodgates in June 1994 by eliminating its requirement that member plans be non-profits. The association said that it wanted to give plans more flexibility to deal with health care reform and market restructuring.
Regulators and legislators in many other states, ranging from North Dakota to Maine, continue to seek middle ground between the approaches taken by Ohio and Georgia that would allow some of the 59 Blue Cross Blue Shield Associations to go ahead with conversions while ensuring that the public is compensated for the tax advantages and other benefits conferred on the charitable organization.
The challenge of regulating these conversions, not only by Blue Cross Associations, but also by hospitals and managed care plans, is complicated immensely by the many forms the conversions take, including joint ventures and spin-offs of for-profit units. In many cases, the non-profits claim they have no obligation to protect and preserve charitable assets.
The need to respond in a more systematic manner to the trend was emphasized in a resolution adopted in March by the National Association of Attorneys Generals, which noted that "this phenomenon represents the single most intensive and voluminous conversion of charitable assets in the history of the United States."
Here’s a recap of some recent legislative and court battles involving Blue Cross Blue Shield associations:
• Blue Cross Blue Shield of New Jersey, which wants to convert from a health services corporation to a mutual insurance company in preparation for a merger with Anthem Inc. of Indianapolis, lost a battle in state superior court March 24 when the judge ruled that BCBS of NJ is a charity. Blue Cross had filed a lawsuit against the Department of Banking and Insurance in February, asking the court to declare that the plan was not, and never has been, a charity.
• In Connecticut, several consumer advocacy organizations lost an early court battle to delay a proposed policyholder vote on a merger between BCBS of Connecticut and Anthem Insurance Companies. The policyholders overwhelmingly approved the merger. A for-profit mutual with a special charter from the state to operate exclusively for the promotion of social welfare, the BCBS of Connecticut argues that its only duty is to its policyholders. BCBS converted from a nonprofit health services corporation to a for-profit mutual in 1984. "This transaction does not involve the sale of a non-profit to a for-profit entity," says BCBS spokesman Albert May Jr. "We are two mutual companies coming together."
State Sen. Edith Prague, who called a hearing to review the transaction, which BCBS of Connecticut declined to attend, responds that BCBS of Connecticut "owes the people of the state an explanation about what happened to all that money we think they accumulated when they were a non-profit." She notes that there are some 320,000 uninsured in Connecticut. Consumer advocates estimate BCBS’ assets at around $1 billion; BCBS puts the figure at about $600 million.
The Connecticut attorney general recused his office from dealing with the charitable trust issue because of a conflict of interest (Blue Cross contributed $1 million to the state to aid in litigation against tobacco companies) and is seeking an independent law firm to review the transaction.
In several other states, regulators, if not consumer advocates, appear to have come to a meeting of the minds with Blue Cross officials.
• In Maine, the attorney general and Blue Cross and Blue Shield of Maine announced April 1 an agreement in principle to support legislation which provides that at least 90% of assets would be "made available for the benefit of Maine citizens should Blue Cross and Blue Shield convert at some future time to a for-profit stock company."
The Blues plan won support from the attorney general for the right to establish for-profit subsidiaries for marketing health insurance and managed care products. The insurer also has assurances that the AG’s office would support its continued exemption from premium taxes as long as it retains its non-profit status.
Consumer advocates hail BCBS’ acknowledgement that it is a charitable corporation, but are unhappy that the proposed legislation appears to allow Blue Cross to transfer some of its fair market value to its subscribers if it converts to for-profit status even though it is not, and has never been, a mutual corporation. In a mutual insurance company, policyholders become company members, each paying specified amounts into a common fund from which they are entitled to indemnification in case of loss.
Consumer advocates also are unhappy about the provision that allows BCBS of Maine to sell off a portion of its assets without any requirement that it compensate the public.
• In North Dakota, the governor signed legislation early this month that takes a unique approach to the conversion issue. North Dakota Blue Cross Blue Shield filed Jan. 30 to convert from a health services corporation to a mutual insurance
company.
The North Dakota Medical Association proposed legislation, later amended by the Department of Insurance and the Attorney General, that creates a new non-profit mutual category for Blue Cross, with a prohibition against it later converting to a for-profit mutual or stock company.
Regulating these
conversions is
complicated immensely by the many forms they take, including joint
ventures and spin-offs
of for-profit units
Assistant Attorney General Jim Fleming, primary drafter of the legislation, says his office is aware of the problems other states have had with Blues plans that converted to mutual status and now say they are not charitable organizations and that their only duty is to their policyholders.
SB 2270 does not require the Blues plan to pay out any money to the public, but it also makes clear that the plan is not relieved of any charitable responsibilities it may have had under its previous structure.
Requiring BCBS to compensate the public for assets accumulated while it was a non-profit garnered little support from either the legislature, or certainly from Blue Cross. "No one had the stomach to make them disgorge that money," he says.
A spokeswoman for North Dakota BCBS says the organization is satisfied with the legislation and has no intention of converting to for-profit status.
Contact the national Blue Cross and Blue Shield Association at 312-440-5572; the National Association of Attorneys General at 202-326-6000; Consumers Union (West Coast Regional Office) at 415-431-6747; and Community Catalyst at 617-338-6035.
Ohio takes firm stand against Blue Cross merger while other states search for middle ground
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