By deciding to seek full for-profit status and create a new not-for-profit foundation, Empire Blue Cross and Blue Shield has tiptoed around a brewing controversy over how it would preserve its charitable assets.
Under a proposal announced last week, the New York-based Blues plan said it will seek legal and regulatory approvals to become a for-profit insurer whose stock would be held by a new not-for-profit foundation. Over a five-year period, the foundation would sell at least 95% of the stock to the public, with proceeds funding the foundation's provision of charitable services.
Earlier this year, Empire decided to create two for-profit subsidiaries as a way of tapping equity capital. That move worried consumer groups. They believed the not-for-profit parent would be "cherry-picked" of its profitable lines of business and that the parent's value would be diluted over time. They called for mechanisms to assess and preserve Empire's charitable assets.
Michael A. Stocker, M.D., president and chief executive officer of the 4.7 million-enrollee plan, said the board recognized the public's concern over disposition of Empire's charitable assets and decided to "meet that issue head-on."
The decision to fully convert to for-profit status also was fueled by New York's deregulation of inpatient hospital rates, effective Jan. 1, 1997, and heightened competition among managed-care firms, Stocker said.
He declined to estimate the value of the plan's assets or how much money might be raised through a stock offering.
In a report released last week, the state's Special Advisory Review Panel on Empire highlighted challenges facing the plan as it struggles to restore its solvency after a 1993 state bailout.
While the plan had a $280 million surplus in 1995, 60% of its business is concentrated in traditional indemnity insurance contracts, "which may become obsolete" once state deregulation of hospital rates goes into effect and "may exacerbate the company's ongoing administrative cost problem," the report said.
Between 1992 and 1995, Empire's statewide market share, as measured by premium revenues, fell to 19% from 34%, the report said. However, the panel noted that Empire's managed-care operations have begun to improve, with current enrollment surpassing the plan's 1996 goal of 35% growth.
In making its announcement, Empire becomes the fifth Blues plan that has either fully converted to for-profit status or has said it intends to do so to stay competitive.
Consumer groups welcomed the new proposal.
"It's a step forward in several respects," said Mark Scherzer, an attorney for New Yorkers for Accessible Health Care. "One is the acknowledgement that the entire company is a charitable asset."
He said the proposal also resolves concerns about the potential erosion of the not-for-profit parent and accelerates the process of capturing Empire's charitable value.
Stocker said there would be no overlap in membership on the boards of Empire and the foundation but acknowledged that details of the structure haven't been decided.
It's also too soon to know how the restructuring will affect hospital contracts, according to Kenneth E. Raske, president of the Greater New York Hospital Association. He said the association needs more information before it can assess the impact of the proposed change. "We're not going to rush to judgment," he said.
To become a public, for-profit insurer, Empire requires approval by New York's insurance department, attorney general and Supreme Court, as well as the Securities and Exchange Commission.