The Blue Cross and Blue Shield plans of Florida and Arkansas intend to consolidate their specialty insurance products under a new for-profit venture that they hope will eventually evolve into a national Blues-backed organization.
Under the proposed arrangement, the two not-for-profit, mutual Blues plans would create and share equal ownership of an outside holding company, which would manage their combined life and dental insurance, workers' compensation and long-term-care products, as well as administration of their health reimbursement accounts and flexible spending plans.
The goal is to leverage each company's unique product expertise while sharing information technology, marketing and administrative costs. In the longer term, the companies hope to attract other Blues plan participants to expand their sales area and attain even greater economies of scale, said Max Heuer, spokeswoman for Arkansas Blue Cross and Blue Shield.
"Looking into the future, we hope to grow into a major regional and potentially national entity," she said.
The arrangement reflects a steady shift among Blues plans toward for-profit operations. Since 1994, 14 Blues plans have converted to for-profit status, and virtually all the remaining 24 not-for-profits and 13 mutuals now own one or more for-profit subsidiaries, according to Brian Crawford, spokesman for the Blue Cross and Blue Shield Association.
The two companies, which have signed a "nonbinding memorandum of understanding," are still hammering out the details of the affiliation, such as the name and location of the holding company and who its managers and directors will be. They hope to complete the terms of the deal by year-end.
The Arkansas Blues, which dominates the state's commercial insurance market with 898,000 members, earned $52 million last year on $902 million in revenue, according to the state insurance department. Blue Cross and Blue Shield of Florida, also the largest insurer in its state with 6 million members, earned $281 million last year on revenue of $5.5 billion.
Their agreement calls for the Arkansas Blues' for-profit USAble Life subsidiary to take over the Florida Blues' life insurance business, now managed by its for-profit Florida Combined Life unit. USAble Life, which will likely retain its name, accounted for $108 million, or 12%, of the Arkansas Blues' 2003 revenue.
In return, Florida Combined Life will manage Arkansas' other specialty products, most likely under a new name. The Florida unit accounted for $100 million, or about 2%, of its parent company's revenue.
Key to the partnership is the expansion of the Florida Blues' long-term-care products into Arkansas, Heuer said. Long-term-care insurance, which covers the cost of nursing-home care or in-home caregiver services, is widely expected to be a major growth area for insurers as baby boomers reach retirement age and Medicaid funding in several states continues to dwindle. "We obviously thought that with Florida's experience in that area, it would be a good match," she said.
The Florida Blues, which has been selling long-term-care insurance since 1992, saw its revenue from such products jump 112% last year to $1 million. "Consumers are beginning to understand the significant financial advantages of having long-term-care insurance," said Lisa Wendt, vice president of long-term care for Florida Combined Life.
For-profit business lines give companies readier access to capital and can generate more income to support their core not-for-profit operations, Crawford said. But consumer advocates fear that by shifting assets into for-profit subsidiaries, the plans can remake themselves into largely bottom-line businesses without remaining financially accountable to their policyholders or the public-something they would have to do if they pursued a full conversion.
"The concern is tracing the flow of money and ensuring the company remains accountable to its charitable mission," said Laurie Sobel, senior attorney for Consumers Union, adding that a red flag should be raised if more than 10% of a not-for-profit's assets are being held in a for-profit subsidiary. "How will those profits be used and to whose benefit?"
No state prevents Blues plans from owning for-profit subsidiaries as long as their not-for-profit parent continues to fulfill its charitable obligations. But many states have begun to crack down on the way not-for-profit insurers handle their money (May 17, p. 6) and are taking precautions to prevent gradual or "creeping conversions."