More than three years after announcing plans to convert to for-profit status, New York's largest private health insurer finally has gotten support for the move from the state attorney general's office.
Following lengthy talks regarding the legality of the proposed conversion, Attorney General Eliot Spitzer last week approved a modified plan from not-for-profit Empire Blue Cross and Blue Shield that would allow the New York City-based insurer to raise money by selling its stock on Wall Street.
Empire pledged as part of the agreement that its 4.1 million members, which include much of the state's working poor, would see no change in coverage, services or rates following its switch in status.
The plan still requires the approval of the Blue Cross and Blue Shield Association, the state Legislature and, ultimately, the state Supreme Court.
Empire spokeswoman Deborah Bohren said it was too early to speculate on when the final conversion might take place.
"There are still several steps in the process," she said, before Empire can join the three other Blues plans that have gone for-profit (See box).
As a key aspect of the plan, Empire has agreed to create an independent, not-for-profit foundation to support healthcare programs for the state's poor and uninsured. The foundation would become the initial owner of the for-profit company's stock, which is estimated to be worth several hundred million dollars.
Such a foundation would satisfy a legal mandate requiring Empire to return to the public the charitable assets it garnered over its years as a not-for-profit. Since the 1930s, Empire has benefited from millions in tax breaks, discounted hospital rates and other subsidies.
"In these long negotiations, Empire and my office have worked hard to reach a deal that strikes an appropriate balance between the needs of the new Empire, the needs of the national Blue Cross and Blue Shield Association, and the needs of the foundation and the people of . . . New York," Spitzer said Wednesday at a healthcare forum.
While not opposing Empire's plan outright, Spitzer has contended that it would violate a 1934 insurance law, which broadly prohibits for-profit conversions. Although the state Department of Insurance disagrees with Spitzer, Empire has decided to avoid further conflicts by asking state legislators to amend the law before it seeks state court approval.
The Legislature's decision is crucial because it will set the standards for what could be a series of future decisions by the state's not-for-profit health plans and hospitals to switch to for-profit status.
"We're setting a precedent," Bohren said.
The company's main objective, however, is to raise money.
Empire became one of the nation's first Blues plans and, at one point, was the world's largest private health insurer. But it fell on hard times in more recent years, losing nearly $800 million and half its subscribers between 1986 and 1995.
A new management team has since steered Empire back on track. Last year, the company earned $65.6 million from operations, compared with an operating loss of $21.6 million in 1998. Overall revenue rose 13% to $3.6 billion.
But the revived company now faces a health insurance market dominated by better-capitalized for-profit competitors like Aetna U.S. Healthcare and Oxford Health Plans.
The cash Empire hopes to raise through public offerings would go toward buying information systems, acquiring other health plans and picking up new subscribers.
But Empire still faces some hurdles, not the least of which is winning the support of the Blue Cross and Blue Shield Association.
"We're in the process of reviewing the proposed transaction," said Iris Shaffer, spokeswoman for the Chicago-based association. "Before we can approve it, we need to ensure that it doesn't conflict with any of our requirements for licensure."
For a for-profit health plan to retain its right to use the Blues trademark, for instance, none of its shareholders can control more than a 5% stake. Under this rule, the for-profit's new foundation would have three to five years to sell down its Empire shares.
Meanwhile, consumer advocates are closely watching Empire's moves.
"Empire, historically, has played an important role in providing affordable health insurance to the needy in New York state," said Charles Bell, program director for Consumers Union.
"Obviously, we'd be very concerned if its change in status jeopardized that. The attorney general has to make sure that Empire remains responsive to the community's needs."