Empire Blue Cross tries to avoid common pitfalls in plans to convert to a for-profit enterprise
BCBS for - profit
Empire Blue Cross and Blue Shield CEO Dr. Michael Stocker refers to it as his "Boy Scout proposal."
In converting the nation’s largest not-for-profit health insurer into a profit-making enterprise, Mr. Stocker wants to defuse the issues that have dogged other conversions of Blues plans.
He says he wants no compensation in any form for the current company’s executives, no insider deals from the public sale of stock, no overlapping membership on the boards of the new firm and the charitable foundation to be created from the proceeds of the stock sale, and public involvement in every step of the process.
Sean Delaney, chief of the New York Attorney General’s Charities Registration Bureau, agrees that Empire is "learning the lessons of the experiences that have gone on before in other states," where some Blues have been criticized for undervaluing their companies’ assets or diverting income from stock offerings to executives’ pockets. Critics say undervaluation has reduced the amount of money available for distribution to the public as part of the conversion transaction.
Kudos for Mr. Stocker’s approach have come from a range of players in New York’s health arena, yet his proposal is still causing immense concern among advocacy groups, regulators and lawmakers who believe Empire’s conversion will signal how the state will handle a wave of similar conversions expected to crop up around the state.
"One thing is clear: This is the first of many," said Peter Newell, chief legislative aide to Assembly Insurance Committee Chairman Alexander Grannis.
Several HMOs talking to the AG
"A number of non-profit HMOs are already talking to the Attorney General," he said. The Attorney General’s office confirmed that it’s been contacted by several not-for-profits in addition to Empire, but wouldn’t say which ones or how many. Mr. Newell, while noting he doesn’t know which HMOs have approached the Attorney General, pointed out that several not-for-profits are major providers of health insurance in the state, including HIP in the metropolitan New York City area, Independent Health which writes about half the policies in western New York and five other Blues across New York.
"If you’re a non-profit, the only way you can raise capital is to raise your premiums," Mr. Newell noted. "If you’re being blitzed by Oxford (Health Plan), which has all these fancy computers for managing information and costs, at some point you have to say, "We need to do that or be out of business."
Mr. Delaney, who will be in charge of evaluating Empire’s conversion plan and recommending to the state’s courts how it should be structured, said that while what happens with Empire will have "ramifications" for other conversions, it won’t necessarily set the ground rules for everyone else. He pointed to the difference in size and historic mission between Empire and
other HMOs.
Just how much is a company with 4.7 million subscribers, $4 billion in annual revenues and half a century in tax breaks and bailouts worth?
The scope of public involvement might be less for other not-for-profits simply because they don’t affect nearly as many people. Financial experts also note that the structure of stock offerings may be dramatically different, with many of the
smaller not-for-profits wanting to make private sales rather than a major public offering.
Despite all the assurances, Empire#’s sheer size and role in the state’s health care system is spurring public concern over its plan. The number one concern is, just how much is a company with 4.7 million subscribers, $4 billion in annual revenues and more than half a century in tax breaks and taxpayer-funded bailouts worth?
This is one area where Empire has tried to avoid the quagmires that other Blues, most notably Blue Cross of California, have stepped into. Where many of those insurers tried to internally set a cash value on their assets, or establish it through buyouts or mergers with for-profit companies, Empire wants to let the financial markets figure out what it’s worth.
Details of stock offering
A new charitable foundation would be
given 100% of the new for-profit company’s stock, 95% of which would have to be sold within five years to raise operating capital. But it’s the details of that offering that have advocates concerned.
"If it’s set up the wrong way, the foundation will recognize a very small gain," said Mark Scherzer, legislative counsel for New Yorkers for Accessible Health
Coverage. "If you have a situation where the foundation has to sell stock on a certain schedule, as opposed to giving it more flexibility to respond to market conditions, that could cause a problem. . . .Empire may have other business deals in mind that it wants to do on a certain schedule. We have no idea. Value could be created shortly after the foundation stock is sold."
"Say investor reaction to the initial offering is cool," Mr. Newell added. "There’s an inherent conflict in making the board of the foundation, which has a fiduciary responsibility, have to sell the stock when it might make a ton of money if it held onto it."
Empire watchers also are wary of the structure of the foundation’s board, insisting that it must be completely independent of the new for-profit company. No problem, said Empire spokeswoman Deborah Loeb Bohren: "Nobody’s going to serve on both boards. It’s up to the state to decide who will be on it and what will be done with the foundation."
How foundation spends money
The other critical issue, of course, is how the charitable foundation will spend whatever money it ends up with. The recommendations run the gamut. Mr. Scherzer would like to see a large piece devoted to subsidizing health insurance for some of the state’s 3 million uninsured. But Daniel Sisto, executive director of the Healthcare Association of New York State (the trade group for hospitals and other not-for-profit health care providers), said it might be better to diversify the foundation’s role. "Purchasing insurance for small companies that can’t afford it now—that need far exceeds the value of the corpus," he said.
"We’re going to ensure there is public input."—Delaney
In New York, there’s always the possibility that the governor and legislature may try to get their fingers into the pie as well. During this year’s legislative session, they raided $481 million from a special pool of excess malpractice insurance for doctors to help balance the state budget, for example. Deputy Insurance Superintendent Gregory Serio has already raised the specter of the state dipping into the money raised from the stock sale to get back $93 million it allocated to bail out Empire from its financial difficulties in 1992.
"Unfortunately, any time you start talking about a pool of money in this state, a lot of people start talking about wading in," Mr. Sisto noted.
Guarantee of public scrutiny
At this point, what Mr. Scherzer and
others want most is a guarantee that the whole process will be conducted under public scrutiny. While state law puts the final decision in the courts’ hands, in practical terms the Attorney General’s recommendation is usually the determining factor in charitable conversions, and the whole matter could be handled in closed-door negotiations between the AG and Empire. But that won’t happen, Mr. Delaney pledged.
"We are sensitive to the importance of public involvement before any decision is made," he said. "We’re going to ensure there is public input."
—Harvy Lipman
Contact Mr. Newell at 518-455-5676; Mr. Scherzer at 212-406-9606; Mr. Sisto at 518-431-7600; and Empire Blue Cross press office at 212-476-3552.
Empire Blue Cross tries to avoid common pitfalls in plans to convert to a for-profit enterprise
Subscribe Now for Access
You have reached your article limit for the month. We hope you found our articles
both enjoyable and insightful. For information on new subscriptions, product
trials, alternative billing arrangements or group and site discounts please call
800-688-2421. We look forward to having you as a long-term member of the Relias
Media community.
