The recent proposal to unite Blue Cross and Blue Shield plans in six states has raised red flags among consumer advocacy groups that fear the alliance may be another veiled attempt by a not-for-profit Blues plan to convert to for-profit status.
Consumers Union in San Francisco and Community Catalyst in Boston have sent letters to the insurance commissioners of Idaho, Oregon, Utah and Washington, demanding that regulators there scrutinize the pending alliance between Regence Group, which operates the licensed Blues plans in those four states, and Health Care Service Corp., which owns the Blues plans in Illinois and Texas.
The letters warned that the affiliation could be the first step in a gradual or "creeping" conversion--a process in which assets are slowly moved into out-of-state or for-profit subsidiaries. By doing so, advocates contend, Portland, Ore.-based Regence and its four Blues plans could remake themselves into largely bottom-line businesses without having to repay the public for the millions of dollars in tax breaks they amassed over the years as not-for-profit organizations.
Under the proposed alliance, announced in August, Regence and Chicago-based Health Care Service would form the nation's largest not-for-profit health insurer, with about 10 million members and $15 billion in annual premium revenue. Although the parties aren't calling the deal a merger, they plan to create a single board of directors and top management team to oversee the operations of all six Blues plans from headquarters in Chicago.
The concern is that Illinois law allows Health Care Service, a mutual corporation, to convert to for-profit status at any time with a simple vote by its shareholders. If it were to do so after capturing the charitable assets built up in Regence's four Blues plans, that public money could be forever lost to the benefit of policyholders in Illinois, said Jim Stevenson, spokesman for the Washington state insurance commissioner.
"The affiliation could create a mechanism by which assets are moved out of the state, where they are out of the reach of Washington state officials and the public," said Stevenson, pointing out that Regence Group owns Washington's largest health insurer, 1.1 million-member Regence Blue Shield.
That's what happened in Nevada, when the state's regulators approved the 1997 merger between not-for-profit Nevada Blue Cross, and Blue Cross and Blue Shield of Colorado, a mutual corporation.
Two weeks after the merger, the Colorado plan filed to convert to for-profit status. At the Colorado conversion proceedings, Nevada's attorney general wasn't given the chance to defend the rights of her state's residents. So while the conversion resulted in the creation of a $155 million charitable foundation for Colorado, Nevada received only $1.5 million.
Regence Blue Shield, however, insists it has no plans to convert and contends that consumer groups are crying wolf without accurate information about the nature of the alliance.
"The whole point of the affiliation is to preserve the concept of the not-for-profit health plan," said the Blues plan's spokesman, Chris Bruzzo. "By becoming stronger and bigger, we're ensuring that the public will have a viable not-for-profit option available to them in the future."
But Washington regulators had begun to suspect Regence Group was planning a gradual conversion earlier this year when it filed to create a new for-profit operating company in which its four state Blues plans could invest. The insurer shelved the effort after alliance talks began with Health Care Service.
The deal may take several more months to complete. The companies have yet to submit any formal proposal to regulatory agencies, Bruzzo said.
In the meantime, consumer groups and state legislators are pushing for safeguards to protect charitable assets for the public should the insurers decide to change their status.
"Regulators that have actively monitored such transactions in other states have been able to preserve billions of dollars for community healthcare needs," said Scott Benbow, staff attorney for Consumers Union's West Coast office. "But without strong regulatory oversight, these public funds could end up in the hands of corporate insiders and investors."
Creeping conversions aren't new to Blues plans. Philadelphia-based Independence Blue Cross used that strategy to transform itself during the past 10 years from a not-for-profit health insurer with a charitable mission to a mostly for-profit business--without ever compensating the state for decades of tax exemptions.
Step by step, the giant health insurer transferred the heart of its business--fast-growing managed-care plans like Keystone Health Plan East and Personal Choice PPO--into its for-profit AmeriHealth subsidiary, which now generates nearly 90% of its $6 billion in annual revenue. Meanwhile, the company's spending on charity care dropped to $15.3 million in 1999 from $43 million in 1996, the company said.
In other states, Blues plans that have formally converted to for-profit status have had to create charitable foundations to repay the public for the tax breaks they received while operating as a not-for-profit. But 4.5 million-member Independence said it's under no obligation to do so because it has not gone fully for-profit and still funds charitable activities, albeit on a smaller scale.
"We're serving our community just as we always have," said Independence spokesman Chris Rathke. "Nothing has really changed."
But not everyone sees it that way.
"Charitable assets should continue to be used for charitable activity, and that's just not happening," said Ann Torregrossa, director of the Pennsylvania Health Law Project, an advocacy group in Philadelphia.
Similar concerns surfaced in Missouri, where in 1994 state regulators challenged a "restructuring" by the state's Blues plan in which it moved 80% of its business into its for-profit RightChoice subsidiary. After a bitter, six-year court battle, the insurer finally agreed in January to create a $200 million foundation that will give away roughly $10 million a year in community healthcare grants.
And in North Carolina, the state Legislature determined that the Blues plan there would be considered for-profit--and would be required to return all its assets to the public--if more than 40% of its revenue ever came from money-making units.
The law was passed in 1998 after the North Carolina Blues backed a bill in the state Legislature that would have allotted all corporate reserves to the company and its subscribers in the event of a conversion. Company officials also raised concerns of lawmakers when they proposed that the Blues plan be allowed to buy for-profit insurers while retaining its not-for-profit status.
No state law prevents Blues plans from owning for-profit subsidiaries as long as their not-for-profit parent continues to fulfill its charitable obligations, explained Alan Hirsch, North Carolina's deputy attorney general. But the problem is that state regulators have very little control over an insurer's assets once they have been moved into such profit-making units, especially if they are out of state.
"Once the character of a not-for-profit entity changes substantially, we believe it should be required to formally complete the process. Forty-percent was established as the trigger point for when a de facto conversion is thought to have occurred," Hirsch said. "By this, we hope to prevent any confusion or potential mischief."
So too do regulators in Washington state, which, unlike 20 or so other states, has no law governing for-profit conversions by health plans.
The state's insurance department has been pushing for a law that would allow regulators to review all transfers of more than 10% of a not-for-profit plan's assets to ensure that the transfer benefits subscribers or the public. The bill would also require the health plans to set aside all reserves in excess of minimal capitalization to fund healthcare for the poor.
The bill was devised early this year after regulators began to suspect that Premera Blue Cross, Washington's second-largest health insurer, was quietly preparing to go for-profit.
Late last year, Premera filed an application to create a for-profit subsidiary through the secretary of state's office--an unusual route for health plans, which typically work through the insurance commission.
Add to that the fact that Premera's new chief executive officer, H.R. Brereton Barlow, was senior vice president of finance and operations at Health Net when the Woodland Hills, Calif.-based HMO turned for-profit in 1992, and things began to look suspicious, said Barbara Stenson, spokeswoman for Washington's insurance commissioner.
"These moves sounded alarm bells . . . because they closely resembled the initial stages of conversions that have taken place in several other states," Stenson said.
Premera spokesman Scott Forslund said the Seattle-based insurer has no plans to convert. Premera, he pointed out, already has six for-profit subsidiaries that could receive the parent's assets if company officials intended to make a transfer.
"The only reason we created the latest subsidiary was so that we could do business in a county where there was a dispute (with Regence) over who holds the rights to the Blues name," Forslund said.
Several Blues plans nationwide are thinking about converting to for-profit status or launching profit-making subsidiaries as a way to raise capital and strengthen their financial position. Being for-profit also allows the plans to attract and retain better management by offering equity incentives. Doing so is a must, they say, if they are to remain competitive in the cutthroat managed-care market.
Indeed, about two-thirds of the nation's HMOs are for-profit. From 1994 to 1998, enrollment climbed 18.8% at for-profits but only 4% at not-for-profits, according to A.M. Best Co., an insurance-rating company.
The national Blue Cross and Blue Shield Association acknowledged the changing times in 1994, when it revised its licensing rules and allowed health plans using its name to become completely for-profit (See chart). There soon followed a wave of conversions, mergers and affiliations, driving the number of Blues plans down to 47 today from 67 in 1995.
Most of these efforts have been challenged by concerned legislators and consumer groups. The plans have a right to convert, they contend, but not at the public's expense, lawmakers and consumer advocates counter.
"We want to make sure these Blue plans, which were originally created through grass-roots efforts, return their fair market value to the public," Consumers Union attorney Benbow said.