Policyholders and consumer advocates contend Blue Cross and Blue Shield of Ohio is misrepresenting its deal with Columbia/HCA Healthcare Corp. as a joint venture to sidestep regulatory procedures on transfer of assets.
Under the proposed deal, the Cleveland-based Blues, Ohio's largest insurer, would transfer most of its business, including 1 million fee-for-service and managed-care customers, to a new company, which would become a wholly owned subsidiary of Columbia. Columbia would pay the Blues $299.5 million.
In a motion for a preliminary injunction filed this month in the Cuyahoga County (Ohio) Court of Common Pleas, Blues policyholders argued that the deal is really a conversion to for-profit ownership.
Families USA/Boston, Consumers Union and the Center for Insurance Research have circulated a statement saying much the same thing (June 10, p. 20).
The distinction is important because Ohio law requires tougher scrutiny of a conversion than of a joint venture.
Also, a conversion would entitle policyholders to shares of stock in the new company. That could make the deal more expensive for Columbia, which would have to share equity or buy shares from policyholders, said attorney David J. Young of the Cleveland-based firm Squire, Sanders & Dempsey. He is investigating the proposed deal for several Ohio hospitals.
The Ohio Department of Insurance will determine whether the deal is a joint venture or a conversion, a spokeswoman said. The policyholders, meanwhile, want a judge to declare it a conversion and appoint an independent panel to determine the value of policyholders' shares.
The issue is one of several concerns about the transfer of assets from the not-for-profit Cleveland-based plan, which is owned by its policyholders.
Consumer groups and insurance regulators want to make sure the deal benefits consumers and the public and is not merely a bonanza for top Blues officials, who stand to make $19 million in consulting contracts and noncompete agreements.
The Blues has yet to release critical documents that could shed some light on the issue, including a fairness opinion attesting to the validity of the $299.5 million purchase price.
Since the deal was announced in March, the Blues has called the transaction a "joint venture" in statements to the news media and filings with the state insurance department.
Blues spokesman Dave Buckel reiterated last week that the deal is not a conversion because the insurer will continue to provide "very real" services to policyholders.
Those services include resolving outstanding lawsuits; reinsuring and guaranteeing policies that are held by the Columbia-owned corporation; and continuing to operate federal employee programs and national Blues accounts.
However, according to a document submitted by the Blues, the new Columbia-owned company will have the right to purchase the Blues' retained business for $1. Thus, Columbia could end up owning all Blues operations.
At the same time, the Blues apparently would remain responsible for any liability from a class-action lawsuit charging that the insurer failed to pass its provider discounts on to subscribers in the form of lower copayments.
Young, who was hired by seven Ohio hospitals to investigate the Blues deal, said that based on what's been disclosed, it doesn't appear to be a joint venture.
"A joint venture involves activities by two independent entities," Young said. "There are serious questions as to whether you have two parties or really whether it's one party plus a shell."
Young said his hospital clients want to remain anonymous because they fear punitive action by Columbia, which would become a major payer in the state if the deal occurs.
Black's Law Dictionary defines a joint venture as a "legal entity in the nature of a partnership....Generally, all contribute assets and share risks." According to Black's, a joint venture requires "a right to direct and govern policy and duty to share in profit and losses."
Last week, the Blues continued to fend off suggestions that its purchase price is too low. Local news media reported that a Coopers & Lybrand valuation in March 1995 put the company's worth at $400 million-$100 million more than Columbia would pay.
In a written statement, the Blues said it was unable to release the report and that the valuation is outdated because the company has since sustained unanticipated underwriting losses.
The Blues also circulated a page from a report by New York-based investment banking firm Donaldson, Lufkin & Jenrette stating that the firm discourages using price per member as a basis for valuations given "wide differences in premiums and margins between regions of the country and between different products."
The $299.5 million price has been questioned because its price per member is about one-third the average for similar transactions.