When Blue Cross and Blue Shield of Kansas and Blue Cross and Blue Shield of Kansas City (Mo.) scrapped their merger plans earlier this month, they blamed a number of legal and regulatory hurdles for their breakup.
But some observers believe the decision to dump the deal runs much deeper and is related to continuing allegations of questionable business practices by the Kansas City plan. They suggest the Kansas plan backed out of the deal because it didn't want its reputation tainted by its potential business partner.
The merger, first unveiled last November, was supposed to bolster both organizations by conferring better access to capital and greater economies of scale.
The Kansas City plan would contribute its experience in managed-care contracting while the Kansas plan, based in Topeka, would bring its superlative physician relations. The Kansas plan is mostly an indemnity carrier.
Richard P. Krecker, chief executive officer of the Kansas City plan, blamed the merger's failure on the complexity of the legal environment in Missouri and Kansas.
"A number of barriers to this merger have emerged in the five months since we began this process," Krecker said in a statement. "Some of these issues will take many months-perhaps even years-to resolve. ...It is in the best interest of both companies to end discussions at the present time."
Janet Cooper, a spokeswoman for the Kansas City plan, explained: "The barrier that arose was a huge hurdle at the state level. We filed suit against the attorney general of Missouri on March 17. We are seeking a declaratory judgment to say we are a not-for-profit mutual benefit corporation under Missouri law."
Missouri Attorney General Jay Nixon says the plan is a public benefit corporation, not a mutual benefit corporation (April 15, 1996, p. 30).
"It's pretty much the same thing that went on when we were trying to go public," Cooper said. "It's a friendly lawsuit. Both sides agree we have a different interpretation of the law."
Nixon's counterpart in Kansas, Attorney General Carla Stovall, has raised some of the same issues.
"Blue Cross and Blue Shield of Kansas was created as a nonprofit corporation operating with exclusively charitable purposes," said her spokeswoman, Mary Horsch. "With the merger, the charitable assets would be converted to a use not intended when the corporation was originally organized."
Nixon said the Kansas City plan sued him "in attempt to avoid their public benefit obligation. It's our position that Blue Cross and Blue Shield of Kansas City is a public benefit company. We have made that eminently clear to them over the last months and years. As a public benefit company, they cannot merge with a mutual company."
As a public benefit company, Nixon said, the Blues have enjoyed distinct benefits for decades. "They are tax-exempt and have myriad other abilities to raise tax-exempt funds. They have had less scrutiny compared to the rest of the insurance market we deal with on a daily basis," he said.
He said part of the Kansas City plan's motivation to merge with the other plan was "to attempt to avoid Missouri regulation by coming under the auspices of what we consider to be less strenuous Kansas laws and regulatory resources."
He declined to specify where Kansas was deficient, but said, "The Legislature in Kansas has passed measures that have limited the strength of Kansas regulators in this area."
Nixon believes one of the primary goals of the merger was for the surviving organization to be chartered in Kansas. "Obviously, this is a major insurer in Missouri, and us losing primary regulatory control over them concerns us," he added.
Missouri insurance department spokesman Randy McConnell said his office had no position on the merger.
"We don't comment on mergers until we get an application," he said. "After the announcement in November, we never received anything."
Cooper said these legal sandtraps could have stymied completion of the merger for longer than a year, which would have impaired employee morale and operating efficiency.
But sources in Kansas City said they believed the Kansas plan pulled the plug on the deal because of a continuing stream of bad publicity surrounding the Kansas City plan.
Blue Cross and Blue Shield of Kansas City has fallen afoul of insurance regulators in both states. It also has developed the unfortunate habit of being named in federal indictments, although not as a defendant.
Last November, the insurance commissioners of Missouri and Kansas ordered the Kansas City plan to refund $1.7 million in healthcare overcharges to policy-holders and pay fines of $150,000.
Then in March, a federal grand jury indicted a Kansas City political and business figure, Elbert Anderson, who is closely linked to the Kansas City plan. In three of the 14 counts it is alleged that Anderson paid $20,000 in three installments to former Kansas City, Mo., city councilwoman, now awaiting sentencing herself, to steer the city's health insurance contract to the Kansas City Blues plan.
In late 1993, the plan was trying to persuade the City Council that all city employees should be insured through one local carrier. At the time the workers had the choice of being insured by three carriers, including the Blues.
The councilwoman, D. Jeanne Robinson, argued strenuously that insurance premiums shouldn't be paid to "out-of-town" companies. The other two carriers, Humana and PrincipalHealth Care, are based in other states.
The Kansas City plan succeeded in getting the bidding process reopened. But the plan inadvertently submitted its bid after the deadline. In addition, the plan's bid was bested by a joint proposal from Humana and Kaiser Permanente, which was several million dollars lower.
In 1995, the plan paid Anderson's public relations agency $55,000 for marketing services related to a Medicaid managed care plan. Anderson is a personal friend of plan Executive Vice President John W. Walker, the insurer's No.2 official after Krecker, who in 1993 had lobbied the City Council hard to switch the contract.
Cooper said the plan is no longer doing business with Anderson.
The plan also had a starring role in another major indictment handed up by a federal grand jury in western Missouri last year (Nov.4, 1996, p.4).
The plan, it was alleged, did not like Missouri Gov. Mel Carnahan's health reform bill of early 1994, and it paid a well-connected lobbyist in the state capital of Jefferson City to try