In an effort to resolve a long-running dispute, Blue Cross of California last week said it would convert to a for-profit corporation and divest itself of more than $2 billion in assets from a controversial subsidiary.
The plan was outlined in documents submitted to the California Department of Corporations, which regulates HMOs. Department commissioners, some of whom had been highly critical of Blue Cross, must approve the plan before Blue Cross can implement it.
At deadline, some critics and at least one department commissioner said they were reserving judgment on the offer until they could examine the details of the proposal.
The controversy stems from Blue Cross' January 1993 spinoff of its managed-care operations and other products into WellPoint Health Networks, a for-profit subsidiary. In the subsidiary's initial public offering, Woodland Hills-based Blue Cross sold 20 million shares of WellPoint to investors and retained 80 million shares-Blue Cross' principal asset-valued at more than $2 billion.
The action drew fire from the California Medical Association, legislators and some consumer groups, who claimed Blue Cross used a loophole in state law to, in essence, operate as a for-profit business and avoid donating its assets to charity. When not-for-profit companies become for-profits, they are usually required to donate their assets to a charitable foundation.
In negotiations with the Department of Corporations, Blue Cross subsequently agreed to donate $5 million a year to charity for 20 years and to make an additional $100 million in charitable donations this year.
The offer failed to silence critics, however, and Blue Cross last week said it would donate its WellPoint shares to a charitable foundation.
In addition, Blue Cross would essentially merge with WellPoint, running its business operations with the Blues mark. In doing so, Blue Cross would be taking advantage of a recent decision by the national Blue Cross and Blue Shield Association that permits for-profit Blues subsidiaries to hold Blues licenses and use the Blues trademark.
One reason the plan is good for WellPoint is that in about two years, it will no longer be controlled by a not-for-profit company, said Douglas Sherlock, an HMO analyst in Gwynedd, Pa. That will allow WellPoint to do pooling-of-interest transactions, a less expensive way to make acquisitions, he said.