Blue Cross and Blue Shield plans, faced with increasingly diversified and growing for-profit rivals, are testing new corporate structures they hope will provide them with the capital and flexibility they need to remain competitive.
Blue Cross and Blue Shield of North Carolina is the latest example, with the nonprofit carrier receiving state approval this month to transfer a portion of its money, property and other investments to a new parent company run by the same executives. Horizon Blue Cross Blue Shield of New Jersey converted to a similar nonprofit mutual holding company at the end of last year.
The reorganizations allow the North Carolina and New Jersey Blues to operate more like their for-profit rivals by creating new nonprofit entities not subject to regulations on reserves, investments and corporate status that govern their insurance operations.
Companies testing these models aim to invest in new technology and physician practices. Both nonprofit carriers contend the reorganizations are necessary for them to better compete with big for-profit insurers and negotiate with large providers, and will translate to lower healthcare costs.
Their arguments may spark a feeling of déjà vu. In the 2000s, a number of Blues plans made similar arguments to justify corporate reorganizations. Mergers between Blue Cross and Blue Shield companies, stock issuances and the establishment of new holding companies have generally led to financially stronger companies.
But Blue Cross and Blue Shield of North Carolina and Horizon Blue Cross’ moves have revived a debate about whether Blues plans are upholding the charitable mission dictated by the federal tax code.
“If it's a for-profit, there’s no issue. Their mission is to make money,” said Ge Bai, an accounting and health policy professor at Johns Hopkins University. “But because it’s a nonprofit, there's tax subsidies involved. Once you have tax subsidies involved, the taxpayers and the government want to make sure the tax subsidies are well-justified. They will be more suspicious of a blatant, profit-driven behavior.”
Blue Cross strategy
Blue Cross and Blue Shield of North Carolina, Horizon Blue Cross and other Blues have responded to market challenges, including consolidation among rivals and providers, by establishing holding companies that enable them to access free-flowing capital to diversify their investments. At least 30 other Blues plans operate under a similar structure, a Blue Cross and Blue Shield of North Carolina spokesperson wrote in an email.
The majority-Republican North Carolina General Assembly and Democratic Gov. Roy Cooper approved the Blues carrier's plan to establish a separate, nonprofit holding company despite opposition from Insurance Commissioner Mike Causey (R). “The law ensures that Blue Cross N.C. can continue to offer competitive services to members and play by the same rules as large out-of-state for-profit insurers not bound by the same regulations,” the spokesperson wrote.
Blue Cross and Blue Shield of North Carolina may contribute up to 25% of its assets to the new entity under the terms of its deal with the state. The insurer reported $36.2 million in net income on revenues of $10.9 billion in 2022, according to its most recent financial statements. The company said it paid $25.7 million in federal, state and local taxes.
In New Jersey, Horizon reorganized in December to create a nonprofit mutual holding company. Blue Cross and Blue Shield companies in 18 other states operate under similar structures, a spokesperson wrote in an email.
By reorganizing, Horizon will be able to invest more in non-insurance services, such as home health, and face a lower tax burden, Jennifer Velez, vice president of health and network solutions, told the New Jersey Department of Banking and Insurance in October. Velez testified growing competition from for-profit insurers and retail chains made reorganization necessary, citing CVS Health’s $8 billion purchase of home health provider Signify Health.
“Many of the major hospital systems in New Jersey see companies like Signify as competitors for their patients and revenue,” Velez said. “Horizon would benefit from being able to co-invest in creating seamless home health solutions tied to our own population health and telehealth digital tools.”
Horizon agreed to 11 conditions to secure state approval, including paying New Jersey $1.25 billion over 25 years to compensate for projected tax revenue losses. The state also limited Horizon to investing $300 million into the venture and required the company to wait three years before using the money to pay dividends.
Horizon Blue Cross does not disclose its earnings and did not respond to a request to provide financial statements.
The activist group New Jersey Citizen Action and the labor union Health Professionals and Allied Employees sued New Jersey in December to halt the new arrangement. The plaintiffs argue that regulators failed to adequately evaluate the effect on premiums. The case has failed to date and the plaintiffs are awaiting word on whether the New Jersey Supreme Court will hear an appeal.
Research about the effects on cost and coverage when a Blues plan changes its corporate structure is limited but the available data suggest that how Blues plans are organized matters. When dominant Blues carriers convert to for-profit, fully insured premiums rise an average 13% and self-insured premiums rise 4%, and competitors respond by hiking their own rates, according to a study published in the American Economic Journal in 2019.
Building the Blues
Blue Cross and Blue Shield insurers emerged during the Great Depression era in the 1930s, and the nonprofit carriers earned a reputation as the "insurer of last resort” because they often sold health insurance policies to people in markets for-profit insurance companies shunned. That legacy helped these companies develop and sustain strong brands and big market shares in most states.
In the early 1980s, for-profit insurers lobbied the IRS and Congress to revoke fully tax-exempt status for nonprofit Blues plans by arguing they operated no differently than their competitors.
Congress and President Ronald Reagan created a special tax class for Blues plans under which they pay federal taxes but also receive a significant corporate deduction of 25% on certain claims and expenses that exceed their surpluses, said Elizabeth Plummer, an accounting professor at Texas Christian University who specializes in federal taxation and healthcare. The Treasury Department calculates that exemption will be worth $4 billion over the next decade.
“It's really just an artificial deduction because it isn't tied to anything. It's not like a cash outlay,” Plummer said. “It's just kind of like, ‘Oh, you're Blue Cross Blue Shield, we'll give you another deduction.’ That's been revisited over the years. People will say, ‘Why are they getting this?’ But it's still there.” And, because most Blue Cross plans operate as nonprofits, they often aren't subject to state taxes, she said.
After the IRS updated the tax code, Blues plans began to reorganize. The Blue Cross Blue Shield Association modified its bylaws in 1994 to allow affiliates to convert to for-profit companies. That year, nonprofit Blue Cross of California held a stock sale from its new for-profit subsidiary WellPoint Health Networks.
Anthem, now Elevance Health, in 2001 converted from a mutual insurance company to a for-profit, publicly traded corporation, and acquired WellPoint three years later. Elevance Health now operates Blue Cross and Blue Shield carriers in 14 states and is the largest U.S. insurer by membership. Elevance Health still wants to scoop up Blues: In January, the company proposed a $2.5 billion acquisition of Blue Cross and Blue Shield of Louisiana. If regulators approve the deal, Blue Cross of Louisiana would convert to for-profit.
Elevance Health and Blue Cross and Blue Shield of Louisiana did not respond to interview requests.
The renewed push to retool corporate structures partially relates to a consequential rule change the Blue Cross Blue Shield Association instituted in the aftermath of a landmark, $2.7 billion antitrust settlement. Under the agreement, Blue Cross and Blue Shield companies no longer need to generate at least two-thirds of revenue from Blue-branded businesses. That opened the door to other kinds of investments.
A changing competitive landscape
The overall state of the health insurance market also is a factor in the recent restructurings. Insurers are preparing to weather the most difficult financial year since the COVID-19 pandemic began, as inflation, rising medical costs and stiffer oversight of government health programs present headwinds, Bai said. Other nonprofit insurers such as SCAN Group and CareOregon have banded together to help weather the storm, for instance.
Hospital chains are also increasingly consolidating into large, multistate health systems, giving them greater negotiating leverage with health insurance companies. North Carolina, for example, is among the least competitive hospital markets, according to the Health Care Cost Institute, a nonprofit research organization.
CVS Health and other companies that own for-profit health insurers are making big investments in physician groups, which further impinges on Blue Cross and Blue Shield companies' market leverage, Plummer said. CVS recently bested Blue Cross and Blue Shield of North Carolina when its Aetna subsidiary won a contract to administer the health plan for state employees, which the Blues plan ran for more than 40 years. North Carolina projects the Aetna deal will save $140 million over five years. Blue Cross and Blue Shield of North Carolina has sued to block the arrangement.
“They’re starting to see their accomplishments, or their market, start shrinking,” Plummer said. “If I were a businessperson, I'd get a little worried.”
