When is a not-for-profit not a not-for-profit?
The answer to that question will decide if two giant Blue Cross and Blue Shield plans can complete a proposed merger.
The plans, in Illinois and Texas, are trying to form the nation's second-largest Blues plan with 3.8 million subscribers and $6 billion in annual revenues (Feb. 5, p. 6).
The problem is, Texas not-for-profits must merge with like organizations. And Texas Attorney General Dan Morales says the Illinois Blues isn't a not-for-profit, no matter its contention otherwise.
The Illinois Blues is a mutual insurance company that identifies itself as not-for-profit in its articles of incorporation. Its bylaws stipulate that Blues income won't be distributed to any individuals or organizations.
That's a key part of Texas' definition of a not-for-profit. In a lawsuit filed last month, however, Morales argues that the Illinois Blues does not meet the Texas definition because a majority vote of its board could change its bylaws at any time.
Besides asking that the merger be barred, Morales charged the Texas Blues with breaching its fiduciary duty to the state. The case is before a state district judge in Travis County (Nov. 18, p. 4). A hearing hasn't been set.
The Texas Blues has until Dec. 11 to file its response. A spokesman said the Blues would respond "appropriately" and wouldn't have proposed the transaction if it weren't confident the deal is legal.
The Illinois Blues referred questions to Texas.
In a July interview, Illinois Blues President Raymond McCaskey told the National Underwriter, a trade publication, that the merger would preserve the not-for-profit status of both plans. The new company would spend about $200 million less annually on administrative expenses by consolidating several functions, he said.
Texas officials were being lobbied by Consumers Union Southwest Region.
Consumers Union, which has objected to Blues conversions elsewhere, argues that converting to a not-for-profit mutual would amount to a change of ownership for the Texas plan. It says Texas residents should be compensated for the loss of community assets with a new public charity created by the Blues.
The two plans have dismissed the idea of a trust, saying the assets are needed to ensure adequate coverage for subscribers.
Morales' action effectively derailed a review of the proposal by the Texas Department of Insurance. The department said a public hearing on the merger, scheduled for Jan. 21, will be postponed and perhaps canceled as a result of the lawsuit.