In a resounding victory for consumer advocates and state regulators, a Missouri judge has ruled that the state's largest Blue Cross and Blue Shield plan violated its legal status when it moved most of its business into a new for-profit subsidiary two years ago.
The ruling by county Circuit Judge Thomas Brown III permits the state insurance director to take sanctions against St. Louis-based Blue Cross and Blue Shield of Missouri, up to and including dissolution.
This is believed to be the first court ruling that addresses the legality of converting a not-for-profit Blues plan into a for-profit enterprise-a trend sweeping through Blues plans as they position themselves to compete with for-profit HMO companies.
Because of the unprecedented nature of the case, the judge invited the Blues to appeal, and the plan intends to take him up on the offer.
"This is not the final word," said Roy R. Heimburger, the Missouri Blues' president and chief executive officer. "In fact, it is just the beginning of a legal process to clarify how Missouri law truly applies within the context of a dramatically changing healthcare industry."
Randy McConnell, spokesman for Missouri's insurance department, said, "Obviously the next step is up to Blue Cross and Blue Shield."
Consumers Union, an advocacy group battling Blues conversions in other states, called the decision "a tremendous victory for consumers. The message for nonprofits across the country is that you cannot take public money and use it to benefit private interests without violating the law."
In April 1994 the Blues created RightChoice Managed Care, a for-profit subsidiary that would take over the Blues managed-care operations in the 85 Missouri counties where it is licensed to use the Blue Cross and Blue Shield trademarks. The Blues retained 80% of the stock and sold 20% on the New York Stock Exchange to raise equity capital. Missouri Insurance Director Jay Angoff signed off on the plan.
Subsequently, the insurance department alleged, the Blues moved the vast majority of its business into the for-profit subsidiary, leaving the not-for-profit parent company little more than a shell.
Following the lead of regulators and consumer advocates elsewhere, Angoff asked the Blues to contribute the value of the not-for-profit assets to a public foundation to provide healthcare in the state.
Last winter and spring the Missouri Blues and the insurance department were negotiating a settlement. But in May the Blues sued the state, seeking to prevent regulators from taking any pre-emptive action against it.
On Sept. 9, Brown issued an order that appeared to give the Blues much of what it asked for, but he effectively reversed most of that in his ruling of Dec. 30.
The gist of the new ruling pertains to whether the plan operated within Missouri laws governing health services corporations and not-for-profit corporations. Brown ruled against the insurer on both questions.
By moving most of its managed-care business into RightChoice, "the reorganization left Blue Cross less able to provide health plan services on a nonprofit basis," its mission under law, Brown said.
He dismissed the Blues' argument that the reorganization was necessary for the plan's survival as a not-for-profit business. If the Blues was so desperate to gain access to capital markets, he reasoned, why did RightChoice leave $73 million in cash and investments after the reorganization?
McConnell said the insurance department will not take action pending the appeals process. It has no interest in dissolving the Blues, he said, but expects the insurer to contribute a substantial sum to create a foundation for healthcare in the state. He declined to specify a sum, but published estimates have ranged from $200 million to $500 million.
Louise Kertesz contributed to this story.