For-profit conversions by Blue Cross and Blue Shield plans, which have slowed to a trickle in recent months, are expected to resume their steady pace as the insurers become more adept at satisfying regulators' concerns, industry observers said.
A decade ago, the Blue Cross and Blue Shield Association allowed its traditionally not-for-profit affiliates to pursue for-profit status. The decision triggered a string of conversions: 15 Blues plans either went for-profit on their own or were snapped up by for-profit Blues giants Anthem and WellPoint Health Networks.
Then suddenly, the procession ground to a virtual halt. Amid a growing public outcry, state regulators last year blocked the proposed conversions of CareFirst Blue Cross and Blue Shield, Owings Mills, Md., and Blue Cross and Blue Shield of Kansas. Soon after, Blue Cross and Blue Shield of North Carolina and Horizon Blue Cross and Blue Shield of New Jersey scrapped their respective plans to convert.
"The climate has changed, at least in the short term," said former Maryland Insurance Commissioner Steven Larsen. "Conversion proposals are being scrutinized much more closely, and people are finding that they often don't look as good as they did when they were scrutinized from 30,000 feet."
Larsen, now an attorney in private practice, rejected CareFirst's planned conversion and $1.3 billion sale to WellPoint after ruling that the deal would jeopardize local healthcare and unfairly enrich the insurer's top brass. The state subsequently enacted a reform law that locked in CareFirst's not-for-profit status for five years and outlined provisions to overhaul its board of directors and executive compensation.
Hungry for more
Larsen said he believes conversion activity will pick up, fueled largely by the pending $16 billion merger of Anthem and WellPoint, which is expected to close within the next few months. Both companies have grown significantly through Blues plan acquisitions, and observers said the combined organization will be hungry for more.
"They're going to be looking to continue their growth plans, which up until now have kept their investors very happy," said Dawn Touzin, director of the health assets project at Community Catalyst in Boston.
One likely target, analysts say, is New York-based WellChoice, which in November 2002 became the last Blues plan to officially go for-profit. The parent of Empire Blue Cross and Blue Shield covers 4.65 million members primarily in metropolitan New York, home to several Fortune 500 companies -- and potentially lucrative clients.
Other Blues plans are expected to pursue conversion to make themselves more attractive takeover targets. By becoming part of a much larger company, local Blues plans gain better access to capital, greater efficiencies and improved negotiating clout, helping them compete with national insurers like UnitedHealth Group and Aetna.
Future conversions could even be pushed along by state officials eager to shake loose some of the insurers' hundreds of millions of dollars in assets. WellChoice's conversion, for instance, was endorsed by New York Gov. George Pataki, who earmarked 95% of the roughly $1 billion the company raised in its initial public offering to subsidize salaries for state healthcare workers.
Pataki is now pursuing legislation that would allow any not-for-profit health insurer to go public, a move that would clear the path for HealthNow New York to convert should it decide to do so. The parent of Blue Cross and Blue Shield of Western New York said more than a year ago that it would consider such a move but has backed away from the idea under new leadership. Still, "the board has not eliminated it as an option," HealthNow President and Chief Executive Officer Alphonso O'Neill-White told the Buffalo News in March.
And Touzin of Community Catalyst said Horizon is expected to renew its conversion bid later this year with the encouragement of New Jersey politicians looking for ways to plug a $4 billion shortfall in next year's budget.
Public's best interest
Overall, however, future Blues conversions won't be like those of the mid-1990s, when money-losing plans often won quick approvals from regulators hoping to save the plans from bankruptcy. At the time, disputes focused not on whether the plans should go for-profit but on how to structure the deal.
Now, with Blues plans posting record profits and amassing hundreds of millions of dollars in reserves, consumers, regulators and legislators have begun to question whether specific for-profit conversions should be approved at all. "Focus has shifted from whether conversion is in the company's best interest to whether it's in the public's best interest," Larsen said.
Former Kansas Insurance Commissioner Gov. Kathleen Sebelius, now state governor, blocked the Kansas Blues' proposed sale to Anthem based largely on research indicating the deal would cause rates to soar. And in North Carolina, consultants predicted that a conversion by the state's Blues would lead to more uninsured and, by extension, more deaths. The North Carolina Blues abandoned its plan after regulators threatened to impose rate restrictions on it.
All eyes are now on Premera Blue Cross, Mountlake Terrace, Wash., the only Blues plan now pursuing a conversion. Public hearings are scheduled to conclude May 18 with a final decision expected July 19.
Premera spokesman Scott Forslund said the company needs to go for-profit because its net income, which reached $53.6 million last year, is not adequate to finance new products, expand services and maintain ample reserves. (Premera's reserves stand at $425 million, only slightly more than the minimum set by the Blues association, he said.) Forslund added that the conversion would benefit consumers by creating two multimillion-dollar foundations to fund community healthcare programs in Washington and Alaska.
But Premera could face an uphill battle. Providers and consumer groups have testified against conversion, alleging that, as a for-profit, Premera would have greater motivation to abandon rural areas, cut reimbursement and raise premiums. And consultants hired by the Washington insurance commissioner's office have twice advised the state to reject Premera's application or to approve it only with conditions.
Regardless of the final ruling, however, Touzin said she believes the increased scrutiny that conversions are receiving will go a long way toward protecting consumers. "We're asking the bigger questions now," she said. "It's no longer just 'Are the investment bankers going to be happy?' It's 'What is the potential health impact on the community?' "