Just four days after a Missouri circuit court judge threw out the settlement between Blue Cross and Blue Shield of Missouri and state regulators last week, another insurance company stepped in to create further uncertainty around the Blues.
On Nov. 2, the Missouri Blues said Health Care Services Corp., the parent of Blues plans in Illinois and Texas, had acquired a significant stake in its for-profit subsidiary, RightChoice Managed Care.
The Chicago-based holding company bought 18.8% of RightChoice's Class A stock, which gives it 3.7% of total shares outstanding. The Missouri Blues holds 80% of RightChoice stock, including all the Class B stock, and exercises voting control.
Tony Rau, a spokesman for Health Care Services, said his company is looking for investment opportunities.
"We think RightChoice is an excellent company and the stock is a good value," he said.
Citing a confidentiality agreement with RightChoice, Rau declined to say whether Health Care Services was interested in buying all of the managed-care subsidiary.
Deb Wiethop, a spokeswoman for RightChoice, said: "We've had no formal offer from them. We believe we will be better positioned to consider any possible combinations-mergers, acquisitions-after the resolution of the litigation. At that time we may consider pursuing something."
That would suit Judge Thomas Brown III just fine.
For months the county judge has been holding up a settlement reached by the Missouri Insurance Department, the state attorney general and the Missouri Blues, claiming that the deal fails to deliver full value for the not-for-profit assets illegally converted to for-profit purposes when RightChoice was formed in 1994.
The Missouri conversion isn't the only such transaction under review. Blue Cross and Blue Shield of Georgia also has hit some significant legal snags in its planned sale to WellPoint Health Networks (See story, p. 60).
Brown is supervising a legal settlement that would create the Missouri Foundation for Health. But in a five-page decision issued Oct. 28, the judge ruled the settlement "unreasonable, unfair and inadequate."
When the Blues formed RightChoice, it placed 95% of its assets there. The state insurance department took issue with the conversion in 1995, saying the Blues had originally pledged to place only a small part of its assets in RightChoice.
The Blues sued the state insurance department in May 1996 to force clarification of its status and proceed with the conversion. The Blues lost the case, forcing it to enter negotiations to turn over the value of its formerly tax-exempt assets to a charitable foundation.
When state regulators and the Blues reached their settlement in September 1998, the new Missouri Foundation for Health was expected to be worth roughly $175 million.
That amount could fluctuate according to the market valuation of RightChoice. It was structured as $13 million in cash, plus 15 million shares of RightChoice, which the foundation would gradually sell over seven years.
The state Supreme Court set a deadline of Nov. 9 for Brown to rule on the settlement. On Oct. 28, Brown rejected it. He pointed out that even though the foundation would own the RightChoice shares, voting control over the stock would remain with the Blues.
Brown said he thinks RightChoice is worth between $300 million and $500 million and that selling the shares gradually on the open market will realize only a small portion of its market value for the foundation. Such a piecemeal sale would forfeit the potential "control premium" that a company would pay to gain control of a majority of shares at once. The judge wants the foundation to have the legal right to auction RightChoice as a whole if it chooses.
RightChoice's Wiethop said the company doesn't think its value will be maximized in a forced sale.
"If anybody does sell a block of stock, it should be with permission of the RightChoice board. We can't just hand over the Blue Cross trademarks to a foundation," she said.