Pennsylvania's not-for-profit Blues plans were called on the carpet last week to explain surplus and reserve levels that some say would be the envy of any publicly traded company. Meanwhile, in New York, Empire Blue Cross and Blue Shield raised barely an eyebrow when it filed a registration statement with the Securities and Exchange Commission in preparation for an initial public offering and conversion to for-profit status.
For all intents and purposes New York's largest insurer won its yearslong battle to become a for-profit last January. As part of an election year healthcare budget, state lawmakers found $1.8 billion in new funding to directly subsidize healthcare workers' salaries and help in recruitment and retention efforts in hospitals and nursing homes (Jan. 21, p. 18). A large part of the money was to come from the estimated $1 billion that would be raised by Empire's IPO, which at the time amounted to a de facto approval of the conversion.
Empire still awaits approval from the state insurance department and the Chicago-based Blue Cross and Blue Shield Association, its licensing body, but everything is moving forward smoothly so that the stock likely will be ready to price and sell by year-end, said Deborah Bohren, an Empire spokeswoman.
The registration statement, filed Aug. 30, notes that 95% of the money raised by the offering will be used as a public asset to fund a wide variety of public programs as set by law. The remaining 5% of the proceeds will be used to form a charitable foundation to help care for New York's poor and uninsured. Empire so far has not specified how much it hopes to raise through the offering.
Although it will continue to be headquartered in New York and do business as Empire, the parent company will be named WellChoice and incorporated in Delaware.
As of June 30, Empire, which insures more than 4.6 million people in New York and New Jersey, reported total assets of $2.5 billion and total reserves for policyholders' protection of $964.9 million. For the six months ended June 30, total revenue was $2.6 billion and net income was $138.7 million, according to the statement.
Controversy may be waning at Empire, but the Pennsylvania Blues plans have found themselves on the hot seat. State Insurance Commissioner M. Diane Koken called an informational hearing last week to gather information about the reserve and surplus levels of Highmark Blue Cross and Blue Shield, which includes Blue Cross of Northeastern Pennsylvania, Capital Blue Cross, Independence Blue Cross and Pennsylvania Blue Shield. More than 200 people attended the daylong hearing in Harrisburg, Pa.
The hearing was held as Capital, Highmark and Independence are battling separate but similar lawsuits charging that they are sitting on millions of dollars in reserves in defiance of their not-for-profit status. In opening remarks, Koken observed that consumers and legislators alike have raised "substantial concern" about the amount of money that the not-for-profit insurers have amassed. She said information from the hearing would assist insurance regulators in further examining the issues.
As expected, the insurers argued their levels are appropriate to meet their obligations and remain financially sound. Highmark officials said its surplus represents only $440 for each of the 4.8 million people it covers. Officials at Independence noted that though it may easily satisfy the insurance department's minimum surplus requirements, it also must satisfy the much higher requirements of the Blue Cross and Blue Shield Association.
Nevertheless, the seemingly wealthy insurers found some unlikely allies at hospitals. "Bashing HMOs is a popular pastime these days but, in my judgment, it is misplaced," Robert Martin, chief executive officer of four-hospital University of Pennsylvania Health System, Philadelphia, said in a letter sent to Koken.
Likewise, Fred Hyde, M.D., president of 24-bed Aliquippa (Pa.) Community Hospital, which filed for bankruptcy protection last week, stuck up for Highmark. "The record of the Commonwealth in allowing provider-sponsored insurance plans (to wit, PHICO Insurance Co.) to expend resources down to the minimum necessary, and beyond, should give pause to all who are seeking a piece of Highmark's reserves for short-term gain, at the prospect of long-term loss," he said. The insurance department earlier this year liquidated PHICO, which shares the same parent as the Hospital and Healthsystem Association of Pennsylvania (Feb. 4, p. 4).
The hospital association posed what it considered an important question in light of Independence's and Highmark's market dominance in Philadelphia and Pittsburgh, respectively. "Have hospital and professional health service plans accumulated and then used surpluses to increase market dominance, and then inhibit health insurance market competition and innovation in their primary markets?" hospital association officials asked.