The tide is rapidly turning in what once appeared to be a growing sea of for-profit Blues plan conversions.
Blue Cross and Blue Shield of North Carolina, the state's largest health insurer, abruptly decided last week to abandon its plan to convert to for-profit status after having spent more than 19 months and $18 million trying to get the proposal approved. Meanwhile, Maryland regulators continued their stinging rebuke of CareFirst Blue Cross and Blue Shield's failed conversion attempt by announcing plans to fine the company and three of its top officials for allegedly violating state laws regulating not-for-profit insurers.
The North Carolina Blues' board of trustees voted unanimously to withdraw its conversion plan, citing the growing length and cost of the process as well as the fear that state regulators would condition approval on measures that could hurt the company, including rate caps and disclosure of confidential business information.
"We are still spending almost $1 million per month, yet we appear to be no closer to an end," Bob Greczyn, North Carolina Blues' president and chief executive officer, said. "The risks of continuing this process were too great." Company spokesman Mark Stinneford added that the insurer would not seek conversion again in the future.
The Blues' decision follows a flurry of state-commissioned reports signaling bad news for the insurer. One concluded that the Durham, N.C.-based company, as a for-profit, could face increased pressure to raise rates. Another concluded the insurer had not effectively made the case that it needed to convert. A third report, issued just days before the Blues' announcement to scrap its conversion plans, recommended that the state Insurance Department oversee and possibly restrict increases in executive compensation if the insurer converted.
That report advised state officials to limit financial incentives-such as pay increases and stock option grants-that could encourage the Blues' top brass to sell the company to another insurer, such as Blues giants Anthem or WellPoint Health Networks. Officials at the North Carolina Blues have maintained the company is not for sale.
For industry observers, the company's abandonment of its conversion plan was the latest sign of the increasingly uphill battle Blues plans now face in attempting to go for-profit. "It's a big indication that the old trend of conversions going unquestioned and unchallenged is over," said Dawn Touzin, director of the health assets project at Community Catalyst, a Boston-based advocacy group.
Some 14 Blues plans nationwide have switched to for-profit status since 1994, when the national Blue Cross and Blue Shield Association first allowed them to do so. But in recent years, these conversion efforts have faced growing opposition from critics who contend the transactions would jeopardize local healthcare.
North Carolina represents the third Blues conversion plan to be halted, at least temporarily, in recent months. In February 2002, Kansas' then-Insurance Commissioner Kathleen Sebelius rejected a request by the state's Blues plan to convert to for-profit status as part of its proposed sale to Indianapolis-based Anthem. The insurers appealed to the state Supreme Court in March 2003, arguing that Sebelius had overstepped her authority. A final ruling is expected this month, Touzin said.
And in June, Maryland regulators finally halted CareFirst's plan to convert and merge with Thousand Oaks, Calif.-based WellPoint (June 16, p. 14). A federal judge approved a revised reform law that locked in the Blues plan's not-for-profit status for five years, outlined provisions to overhaul its board of directors and granted state regulators limited authority to review the Owings Mills, Md.-based insurer's executive pay. Maryland's former insurance commissioner, Steven Larsen, had blocked the conversion in March, criticizing CareFirst for failing to negotiate a fair acquisition price and approving what he called excessive bonuses for its top executives.
Yet CareFirst's travails seem far from over. Last week, Maryland Insurance Commissioner Alfred Redmer Jr. said he would seek civil charges and fines against the company and three of its leaders-CEO William Jews, Executive Vice President David Wolf and Chairman Daniel Altobello-for allegedly committing at least seven major violations of state insurance law. In an 84-page report, Redmer cited deception, mismanagement and flagrant attempts by CareFirst to profit from its planned conversion. The report also accused Jews of willfully misrepresenting facts about the insurer's proposed sale to WellPoint.
If the alleged violations prove true, they could jeopardize Jews' chances of remaining at the helm of the 3.2 million-member insurer, industry observers said. Jews has maintained that despite growing criticism, he is the best person to lead CareFirst as it works to comply with the state's reform law.
"Jews and his buddies would get millions of dollars if they resigned, even without a merger, but they correctly sense that the state would probably block those payments once they became known," said A.G. Newmyer III, chairman of the Washington-based Fair Care Foundation, adding that Jews was paid $2.8 million last year. "So although regime change is sorely needed at CareFirst, senior management will hang in there for a while longer."
CareFirst officials declined to comment for this article. But the company released a written statement defending its actions, saying that Redmer's charges were based entirely on allegations made by Larsen when he rejected the company's conversion plan. "In all circumstances, the CareFirst board and its executive management acted appropriately in representing the interests of this company and we look forward to presenting our case at the appropriate time," the statement said. "There is nothing on the record of the public hearings into our transaction to support a contention that any provision of the Maryland insurance laws were willfully violated."
CareFirst has 30 days after Redmer issues the orders to decide whether to respond. If the company requests a hearing, Redmer or someone from his staff would preside as company advocates challenge his conclusions. The maximum penalty per violation would be $5,000 for individuals and $125,000 for the company.
Now, some observers in North Carolina predict that their state's Blues plan hasn't seen the last of its conversion debacle either. Leaders of ProCare, a Raleigh, N.C.-based coalition of healthcare providers, have said they already are laying the groundwork for a reform bill similar to the one passed in Maryland.
The growing outcry against conversion is largely the result of the Blues' improved finances, said Nomita Ganguly, staff attorney for Community Catalyst. Previously money-losing Blues plans sought to convert primarily to save themselves from potential bankruptcy. Anthem, for instance, faced few hurdles when it acquired beleaguered Blues plans in New Hampshire and Maine in 1999 and 2000.
But now, with Blues plans posting record profits, consumers, regulators and legislators have begun to question whether for-profit conversions are still warranted (May 26, p. 10). CareFirst posted net income of $25.4 million on revenue of $1.8 billion for the first three months of the year. The North Carolina Blues reported first-quarter net income of $61.6 million on $761 million in revenue. "Today, conversion is an option and no longer a necessity," Ganguly said.
The North Carolina Blues had filed its conversion plan in January 2002, saying that a for-profit switch would give the company greater access to capital and more flexibility to pursue new services. The plan also would have created a multimillion-dollar foundation dedicated to healthcare in the state.
But the board ultimately withdrew the proposal, fearing that regulators would subject the company to tighter restrictions that could have made it less competitive. State officials, for instance, were considering requiring the insurer to publicly disclose proprietary business information, such as its contracting methodology, new product plans and projected enrollment, spokesman Stinneford said.