Hospital systems hoping to expand regionally are breathing a sigh of relief after a Texas judge ruled the state's Blues plan isn't a public charity like not-for-profit hospitals.
The ruling by Travis County Texas District Judge Thomas Hart in Austin cleared the path for the merger of Blue Cross and Blue Shield of Texas with Blue Cross and Blue Shield of Illinois.
If Hart had found that the Texas plan was a charity, it could have stopped the merger because the plan would have been forced to leave behind its charitable assets in a separate foundation before doing business with the Illinois plan.
Some observers feared that such an adverse ruling could have been applied to hospital system mergers across state lines.
In a Feb. 12 bench ruling, Hart said the Texas-Illinois Blues merger doesn't violate the Texas Non-Profit Corporation Act because the Texas plan doesn't fall under the law's definition of a charity.
As a not-for-profit mutual, the plan returns profits to the company's shareholders, while a charity is owned by the public, the judge said.
"Someday, somewhere there is going to be a fight about charitable assets as they cross state lines, but not-for-profit hospitals should be happy it didn't start in Texas," said Michael Peregrine, an attorney with Gardner Carton & Douglas in Chicago.
In a seven-page letter informing the Texas Blues and Texas Attorney General Dan Morales' office of his decision, Hart said there aren't legal grounds to stop the merger, which will create a plan with 5 million enrollees and nearly $7 billion in annual revenues (See chart).
The deal, announced two years ago, had been held up by Morales, who sued in July 1997 to stop the deal. Morales' office contended control of hundreds of millions of dollars invested by Texans into the Texas Blues plan would be lost by merging with the Illinois plan.
Morales wanted the plan to be declared a charity to force the establishment of a foundation to fund state charitable projects.
Other state attorneys general and state courts have stopped or altered mergers of Blues plans or conversions of plans into for-profit corporations by ruling the plans are charities and must leave behind their historic assets before such transactions can take plan.
The national Blue Cross and Blue Shield Association downplayed the significance of Hart's ruling, saying other judges have declared Blues plans not-for-profits and not charities.
"As we say, once you've seen one Blues plan restructure, you've seen one Blues plan restructure, and this is no different," said Iris Shaffer, an association spokeswoman. "There's no precedent here with the Texas case."