Blue Cross and Blue Shield of Georgia, the first Blues plan to convert to for-profit status with the national Blues association's blessing, last week was hit with a class-action suit demanding the return of about $400 million in assets to the public.
Nine not-for-profit charitable organizations representing people with disabilities and others sued the Georgia Blues plan in Fulton County Superior Court in Atlanta.
The suit charges the plan with illegally transferring public assets to private investors when it became a for-profit insurer in 1996 without setting up a foundation. It had been a not-for-profit organization.
The lawsuit says the plan accumulated the $400 million by enjoying the benefits of a not-for-profit, such as not paying certain taxes.
Instead of moving the money to a foundation, the Georgia Blues created a for-profit corporation called Cerulean Cos. The Blues converted to for-profit status and transferred its assets to Cerulean. It then became a subsidiary of Cerulean, and continued to market itself as a Blues plan.
In 1995, the Georgia Legislature passed special legislation that allowed the conversion to take place without the establishment of a foundation.
The lawsuit says that in doing so, the Legislature violated the state constitution by trumping an old law that had required converting companies to set up a foundation.
More than 70,000 eligible Blues enrollees accepted the offer of five free shares of stock in Cerulean. In addition, private investors bought $49.9 million worth of Cerulean stock, which is not publicly traded.
No executive of the Georgia plan received any stock, said Hugh J. Stedman, the plan's general counsel.
The national Blues association authorized plans to convert in June 1994. While Blue Cross of California's WellPoint Health Networks had already converted, Georgia was the first to do so with the national Blues' blessing.
About a half-dozen other plans have converted in whole or in part to for-profit status. Some have voluntarily established foundations or were forced to do so by state lawmakers, said Natalie Seto, a spokeswoman for Community Catalyst, a group working with the plaintiffs.
But the Georgia Blues maintains that in 1960 the state Supreme Court ruled it was not a charity. Since then, it has paid state taxes-a total of more than $48 million-"the same as any other insurer," Stedman said.
David Pope, an attorney for the plaintiffs, said the Supreme Court's ruling "has nothing to do with the issue" because the plan's own articles of incorporation say it's a charity.
The Georgia plan said it would use the capital raised by conversion to increase access to primary care in underserved areas and to further develop its local healthcare partnerships (Oct. 14, 1996, p. 70).
The plan is the state's largest insurer, covering 1.5 million enrollees. It had revenues of $1.3 billion and net income of $16.3 million in 1996.