Applying the brakes: the march to conversion and consolidation by Blues plans has slowed considerably, and some are finding solace in remaining a nonprofit.Over the past 15 years, many Blue Cross and Blue Shield Blue Shield A US not-for-profit health care insurer that is a reimbursement intermediary for physicians. Cf Blue Cross. health plans have joined Hamlet in asking "to be or not to be"--for-profit or nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. , in their case. Moves by Blues plans to scrap their not-for-profit status and become a for-profit company escalated in the early 1990s, but the surge of consolidations and conversions has now slowed considerably, in part due to a highly politicized environment and regulatory guardrails. In addition, the most recent attempts at consolidation have been anything but easy, and some experts believe they may have set the stage, making it more difficult for other plans to convert. Making the Move In the past, many Blues plans decided to become a for-profit company primarily to acquire access to capital, extend their reach into new markets, become more flexible and gain a competitive position over local rivals. Some plans also believed conversion would create fertile grounds for future mergers and acquisitions. Many Blues plans converted because of the financial challenges they were facing as a result of managed care eating away at their business, said Dawn Touzin, a director of Community Catalyst, a nonprofit advocacy group that works with state and local advocates to affect change in the health-care system on the state level. "However, as managed care products lost their luster, Blues products were very attractive because they were similar to the old point-of-service plans that countered the consumer choice issues that became a negative impact on managed care." Blue Cross of California was one of the first Blue Cross plans to convert--first trading publicly on the New York Stock Exchange New York Stock Exchange (NYSE) World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. in 1993 and undergoing recapitalization Recapitalization Restructuring a company's debt and equity mixture often with the aim of making a company's capital structure more stable. Notes: Companies often want to diversify their debt-to-equity ratio to improve liquidity. in 1996. Over the course of several years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time California Blues had the unique position of "inventing the wheel" in terms of establishing a system for plans' move to public companies. As a result of conversion, California Blues set up two charitable foundations, which were worth $3 billion at the time of the conversion. By 2003, for-profit Blues plans were operating in 15 states. Most of those were part of Anthem Inc., which owns plans in nine states, and WellPoint Health Networks Inc., which owns plans in four states. These plans' decisions to more to for-profit status came in 1994 on the heels of the Blues Association allowing its licensees to choose to become for-profit, publicly traded companies publicly traded company A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized exchanges or in the over-the-counter market. . Today, nearly one-third of states have a for-profit Blues plan, although there are still 37 not-for-profit of mutual Blues plans among the system's 41 primary licensees. In November 2002, New York's Empire Blue Cross Blue Shield was the last successful entrant en·trant n. One that enters, especially one that enters a competition. [French, from present participle of entrer, to enter, from Old French; see enter. into the conversion arena when it converted to a for-profit, publicly traded company, Well-Choice Inc., in the culmination of a seven-year effort. One hundred percent of the stock in the for-profit company was given to The New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Public Asset Fund and The New York Charitable Foundation, pursuant to the legislation which permitted the conversion. The fund and the foundation then sold approximately 20% of the stock and obtained $417 million in net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). in what some call "one of the most successful initial public offerings in the history of the health-insurance industry." The proceeds are currently held in escrow escrow Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition. , however, following a lawsuit filed by Consumers Union. Today's Trend: Staying Put Despite the decade-long surge of consolidation in the '90s, some Blues plans are finding bigger payoffs in remaining in their not-for-profit status. Contemplating conversion was a decision Excellus BlueCross BlueShield never seriously explored. "The biggest thing in our mission is to serve our communities and members by providing affordable, accessible health care," said Zeke Duda, senior executive vice president and chief financial officer of the Lifetime Healthcare Cos., the parent company for Excellus BlueCross BlueShield and Excellus Health Plan. "If you have to serve stockholders first, that compromises the mission." In addition, he believes remaining a not-for-profit affords the company a greater opportunity to keep the percentage of uninsured persons low, write business on a direct-pay basis and provide safety net products that benefit lower income individuals. Throughout their 45-county service area in upstate New York Upstate New York is the region of New York State north of the core of the New York metropolitan area. It has a population of 7,121,911 out of New York State's total 18,976,457. Were it an independent state, it would be ranked 13th by population. , Excellus BlueCross BlueShield and Excellus Health Plan cover about 50% of the region's insured population. "From a financial perspective, savings come because you don't have to increase the earnings rate continuously," Duda said. "However, just because we're not a for-profit doesn't mean we don't operate as if we are one in terms of operating discipline." He added that Excel]us has one of the lowest administrative expense rates in the country and the lowest in New York state due in part to applying the same kind of financial discipline to the budget, paying attention Noun 1. paying attention - paying particular notice (as to children or helpless people); "his attentiveness to her wishes"; "he spends without heed to the consequences" attentiveness, heed, regard to operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. and allocating resources. In addition, Duda said that for-profit companies must constantly grow, and it seems that most of that growth comes from acquisitions as opposed to intrinsic growth. "After they pick off good targets they have to go after second-and third-tier targets to maintain growth rates Growth Rates The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures. Notes: Remember, historically high growth rates don't always mean a high rate of growth looking into the future. , and over time that will create an interesting dynamic for for-profits around how to maintain those kinds of trends." In addition, some plans decide not to abandon their nonprofit status because of new costs and risks--such as corporate scandals A corporate scandal is a scandal involving allegations of unethical behavior by people acting within or on behalf of a corporation. A corporate scandal sometimes involves accounting fraud of some sort. , the declining stock market and new regulations, including the Sarbanes-Oxley Act--that public companies face. Fear that conversion may bring a rise in premiums also has influenced some companies' decisions on going public, although experts disagree on whether or not premiums rise as a result of conversion. One suggested rise, for instance, came from a study by the Center for Health Policy; Law and Management at Duke University's Terry Sanford Institute of Public Policy The Terry Sanford Institute of Public Policy at Duke University is named after former Duke president and Governor of North Carolina Terry Sanford, who established the university's Institute for Policy Sciences and Public Affairs in 1971 as an interdisciplinary program geared toward , which estimated that had the North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. Blues' conversion been approved last year, premium increases would have resulted in an additional 12,097 people becoming uninsured during 2003. The study estimated that higher taxes and medical costs tot the state's residents would have added up to $50 million over five years and would have resulted in five to six avoidable deaths each year from uninsured people not getting needed care. Not-for-Profit vs. For-Profit While the conversion decision remains on the minds of some plans, some experts believe the line between nonprofit and for-profit status has recently blurred blur v. blurred, blur·ring, blurs v.tr. 1. To make indistinct and hazy in outline or appearance; obscure. 2. To smear or stain; smudge. 3. . "There's a big misconception mis·con·cep·tion n. A mistaken thought, idea, or notion; a misunderstanding: had many misconceptions about the new tax program. about for-profit and nonprofit Blues plans," said Ken Ferber, spokesperson for WellPoint. "On the surface, we're just talking about tax status, which affords a company certain tax consequences or breaks." The status doesn't influence the business. "The business strategy can supersede To obliterate, replace, make void, or useless. Supersede means to take the place of, as by reason of superior worth or right. A recently enacted statute that repeals an older law is said to supersede the prior legislation. any of those tax implications. However, it does provide capital to work with." Conversion has allowed Blue Cross of California to create efficiencies and more products and services as a result, Ferber added. A study of Blues conversions by Conning Research & Consulting found that plans don't necessarily have to convert to achieve strong financial performance. Although total revenues of the for-profit plans were moderately higher, nonprofit plans as a group had equally good profit margins and did as good of better in key measures of efficiency. Robert Booz, vice president of Conning, also found that profit margins at publicly traded Blues plans averaged about 3.5% during the period studied, the same as for mutual Blues. In addition, the profit margin for nonprofit plans that were not mutual companies was less, 2%, but Booz said in a statement that wasn't really that big a difference. "I don't think conversions have a meaningful implication whatsoever on consumers and the industry, except possibly positive in that firms are able to access the capital to make innovations," said Douglas B. Sherlock A Macintosh utility starting with Version 8.5 of the operating system that provides a common facility for searching the local hard disk, the local network and the Internet. , president of Sherlock Co., based in North Wales North Wales (known in some archaic texts as Northgalis) is the northernmost unofficial region of Wales, bordered to the south by Mid Wales and to the east by England. , Pa. However, John Fitzgibbon John Fitzgibbon may refer to:
KPMG Kaiser Permanente Medical Group KPMG Keiner Prüft Mehr Genau (German) KPMG Kommen Prüfen Meckern Gehen LLR LLR Lunar Laser Ranging LLR Log-Likelihood Ratio LLR Loan Loss Reserve LLR Low Level Radiation LLR Looks Like Rain (song) LLR Local Linear Regression LLR Lessons Learned Report LLR Load-Limiting Resistor sees some distinct differences and views life asa public company as very different. For-profit companies require much management and have public reporting responsibilities, in addition to regulations that require them to report internal controls, he said. "However, the upside Upside The potential dollar amount by which the market or a stock could rise. Notes: This is basically an educated guess on how high a stock could go in the near future. See also: Bull, Downside is that they can get some capital, and it provides a vehicle for stock options to reward employees for good performance." While 2003 was a good year for managed care--with similar growth anticipated in 2004--at some point the cycle will turn and medical costs will grow faster than premiums, so capital is a good thing to have because it gives companies the ability to take a longer view, he added. Access to Capital One of the main reasons companies decide to convert is to search for capital to fuel growth. "Most Blues are now quite profitable and don't have problems funding current operations, but if they want to grow of do something new of develop new products, more capital is required," said KPMG's Fitzgibbon. Additional outside capital also helps companies expand their geographic spread and set up for future acquisitions, in addition to fostering investments in information technology. Empire Blue Cross Blue Shield's decision to convert in 2002 came at a time when the company was struggling from lost business and membership. "Scale is more easily obtain able asa for-profit company because you can aggregate companies more easily, and the discipline of the for-profit world requires you to have guidance and quarterly earnings and makes you a better operating company operating company A business that engages in transactions with outsiders. ," said Dr. Michael Stocker, president and chief executive officer. In addition, conversion forces companies to make difficult decisions in terms of controlling administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. , which is needed to grow, and provides capital to invest in technology, which is important for health plans, he added. But is conversion financially necessary for Blues plans? "It depends on what kind of position they are in," said Dr. Peter Kongstvedt, vice president, Cap Gemini Ernst & Young Health Consulting. Large companies with large surpluses and financial resources may not necessarily benefit from conversion unless they need more access to capital, he added. Meeting Opposition Consumer opposition is a barrier that often goes hand-in-hand with conversion attempts. A study by the Kaiser Family Foundation The Henry J. Kaiser Family Foundation (KFF), or just Kaiser Family Foundation, is a U.S.-based non-profit, private operating foundation headquartered in Menlo Park, California. found that more than half of 1,000 Americans surveyed said they disapproved of the trend toward for-profit health care. Only 19% believed conversion was a "good thing." Blue Cross Blue Shield United of Wisconsin, which converted in March 2001, faced some opposition during its trek to conversion, particularly around its desire to create a foundation to fund the state's two medical schools. "However, once people understood that the money was going to be more widely dispersed dis·perse v. dis·persed, dis·pers·ing, dis·pers·es v.tr. 1. a. To drive off or scatter in different directions: The police dispersed the crowd. b. than just to the schools and there would be opportunities to get money through the schools, there was then general support for conversion and the foundation," said Stephen Bablitch, former chairman of Cobalt Corp., the Blue Cross and Blue Shield licensee licensee n. a person given a license by government or under private agreement. (See: license, licensor) LICENSEE. One to whom a license has been given. 1 M. Q. & S. 699 n. for the state of Wisconsin and an independent licensee of the Blues Association. Cobalt, which merged with WellPoint in September 2003, was formed by the combination of Blue Cross Blue Shield United of Wisconsin and United Wisconsin Services Inc. But what does conversion really mean for consumers? "In some cases where plans were inefficiently managed, the demand of shareholders for profits was a strong motivator that made for-profit plans hone management abilities better than their nonprofit counterparts. So when the Blues were struggling to adapt to the new managed-care marketplace they used to say a financially strong for-profit Blue is also good for the consumer. But that has been debunked, beginning in Kansas with Commissioner Sebelius' in-depth hearings on the Kansas Blues conversion," said Touzin of Community Catalyst. In August 2003, Insurance Commissioner Kathleen Sebelius Kathleen Gilligan Sebelius (born May 15 1948) is currently serving as the forty-fourth Governor of Kansas.[1] She is the second female governor of the state of Kansas, and is currently chairwoman of the Democratic Governors Association. delivered a regulatory landmark decision A landmark decision is the outcome of a legal case (often thus referred to as a landmark case) that establishes a precedent that either substantially changes the interpretation of the law or that simply establishes new case law on a particular issue. to deny Blue Cross Blue Shield of Kansas to go public. One of the biggest questions that surround a conversion proposal by consumer groups is whether or not the company's executives will get rich as a result of going public. "The argument made against executives receiving large payments is that they did not own stock in the company; rather, the not-for-profit company was held in the public trust," said Cap Gemini Ernst & Young's Kongstvedt. Recent Attempts The momentum for Blues conversions in the '90s has now nearly stopped dead in its tracks as four plans recently abandoned proposals to convert--either by choice of by force. In August 2003, the Kansas Supreme Court The Kansas Supreme Court is the highest judicial authority in the state of Kansas based in Topeka. Composed of seven justices, led by Chief Justice Kay McFarland, the Court supervises the legal profession, administers over the judicial branch, and serves as the state court of last unanimously upheld Sebelius' rejection of Blue Cross Blue Shield of Kansas Inc.'s bid to convert to a stock company and be acquired by Anthem Inc. Prior to the Kansas decision, two other conversion attempts were not completed in 2003. In March, former Maryland Insurance Commissioner Steven Larsen refused to grant CareFirst Inc. approval to shed its nonprofit status and be acquired by WellPoint, saying the transaction wasn't in the public interest. The following month, the Maryland Legislature passed a bill that would prevent CareFirst from being acquired for five years, replace 12 board members and force it to return to its nonprofit mission. And in July, Blue Cross Blue Shield of North Carolina ended its attempt, saying conversion ultimately would have hurt the company because it would have to abide by To stand to; to adhere; to maintain. See also: Abide rules and regulations that wouldn't apply to other for-profit insurers. The most recent attempt came in August 2003 when New Jersey's Horizon Blue Cross Blue Shield, which proposed becoming a for-profit company in 2001 after years of talks about moving to a for-profit entity, withdrew its proposal. The company originally decided to convert after legislation regarding conversions was passed in the state. Under the new law, 100% of Horizon's value would have gone to a new charitable foundation that would have expanded access Expanded access refers to the inclusion of patients in a clinical trial for a new therapeutic treatment or chemical entity, where those patients would not satisfy the enrolment criteria for the scientific study in progress. to affordable, quality health care. Some experts believe these attempts may have muddied the waters for future conversions. "The national trend to convert has definitely slowed down or maybe even stopped for a while. Political sentiment is so difficult now that any advantage of converting has been taken away by politics of what companies have to go through and how they have to turn over such large amounts to charitable foundations, monies that sometimes turn out to not even go to those causes but to other purposes," said Excellus' Duda. Many experts agree that the decision to convert is an individual choice. "Choosing to convert is a local decision and isn't right for everyone," said WellPoint's Ferber. "There are Blues plans in the country that have as much as 85% market share, so it might not be of much value for them" Once the decision is made, he said, the conversion process has to be done with a careful and measured approach to understanding the reasons for conversion and how it will help serve members. William Jews Jews [from Judah], traditionally, descendants of Judah, the fourth son of Jacob, whose tribe, with that of his half brother Benjamin, made up the kingdom of Judah; historically, members of the worldwide community of adherents to Judaism. , president and chief executive officer of CareFirst BlueCross BlueShield, also believes the decision to go public is up to each individual plan, and "going for-profit is not a panacea Some antidote or remedy that completely solves a problem. Most so-called panaceas in this industry, if they survive at all, wind up sitting alongside and working with the products they were supposed to replace. ," he said in May 2003. "But it is necessary for a company to act based on the market environment in which they're competing." For the Maryland plan, the best option five years ago was to become the holding company of the Washington, D.C., and Delaware plans The Delaware Plan is a proposed system to reorganize the state presidential primary elections amongst the 50 states and the several territories of the United States. In brief, the Plan divides the states and territories into four groups, and has the territories and smallest states , he added. "For five years, that has worked extremely well. I believe that the next generation, particularly in our very competitive marketplace, is to have a broader affiliation, because the competition here will be so acute." Looking Ahead Some experts believe future attempts for Blues conversions will be few and far between. "The conversion process for Blues plans has become highly politicized in most states, and while that's not necessarily a bad thing, it's definitely now slowed down the process for more conversions," said KPMG's Fitzgibbon. Today, only one Blues plan remains committed to pursuing conversion. Premera Blue Cross Premera Blue Cross is a nonprofit Blue Cross Blue Shield licensed health insurance company based in Mountlake Terrace, Washington. It sells health insurance plans under the Blue Cross license in Washington state except Clark County and under both the Blue Cross and Blue Shield , which serves members in Washington state and Alaska, said its long-term strategic decision to move to an investor-owned company would create a new source of capital equity to maintain adequate risk-based capital levels, enhance its ability to make investments in technology and infrastructure, and support its ability to serve more customers. In addition, conversion would enable the creation of a charitable foundation in the two states that would receive 100% of the initial stock of the company. Washington state's Insurance Commissioner Mike Kreidler Myron Bradford "Mike" Kreidler (born 28 September 1943) is an American politician, currently serves as the Washington Insurance Commissioner. He is a Democrat. Kreidler was a long-time legislator, serving 16 years in the Washington Legislature (Washington House of said he expects a final decision about Premera's conversion no later than June 7. "However, while I don't think the trend to Blues conversions has completely stopped, each state has its own environment, and depending on the political and business environment, that's what determines how easy of difficult it is to undergo a conversion," said Kongstvedt of Cap Gemini Ernst & Young. Some states, such as Minnesota, prohibit conversions by law. A recent study begs to differ on the future trend of Blues conversions. In January, the Center for Studying Health System Change The Center for Studying Health System Change (HSC) is a nonprofit, nonpartisan policy research organization located in Washington, D.C. HSC designs and conducts studies focused on the U.S. released a report saying it likely wouldn't be long before Blues plans adapt their conversion strategies and continue with transactions. How they would change their conversion strategies, however, isn't yet clear, said study coauthor co·au·thor or co-au·thor n. A collaborating or joint author. tr.v. co·au·thored, co·au·thor·ing, co·au·thors To be a collaborating or joint author of: "He and a colleague . . . Bradley Strunk. "So far, there's been no evidence that suggests conversions and mergers have had a positive or negative impact on consumers; that's something that will take many years to measure. However, until now, the health-care industry hasn't seen the 'horror stories' that some people thought might occur, such as premiums rising sharply or for-profit companies being less willing to insure some groups, such as older individuals or people with pre-existing conditions." The recent announcement of Anthem and WellPoint's merger--two of the largest holders of Blue Cross and Blue Shield licenses--may have some impact on future Blues Future Blues is the main soundtrack from . Ask DNA, a mini-album, completes the soundtrack. Cowboy Bebop O.S.T. Future Blues Tracklist Track name Length Notes 1. conversions. "The ongoing voracious voracious said of appetite. See polyphagia. appetite of what will be the largest health-care insurer will make the acquisition of licenses in other states the only way to continue expanding, given the geographic monopoly of the Blues plans," said Community Catalyst's Touzin. As a result, some plans may contemplate the advantages of going public. "Increasingly as regulators do the health impact analysis of these conversions, it's going to mean that companies will face the threshold issue of what detriment Any loss or harm to a person or property; relinquishment of a legal right, benefit, or something of value. Detriment is most frequently applied to contract formation, since it is an essential element of consideration, which is a prerequisite of a legally enforceable contract. this is going to have on consumers and communities, and Fm not sure how this will play out for future conversion activity."
Completed Blues
Conversions and Consolidations:
Anthem Inc. (2001)
Date Acquired by
or Affiliated with
Plans Anthem
Anthem Blue Cross Blue Shield of Indiana 1987
Blue Cross Blue Shield of Kentucky 1995
Blue Cross Blue Shield of Ohio 1999
Blue Cross Blue Shield of New Hampshire 1999
Blue Cross Blue Shield of Connecticut 1999 *
Blue Cross Blue Shield of Colorado 1999 *
Blue Cross Blue Shield of Nevada 2000
Blue Cross Blue Shield of Maine 2001 **
Blue Cross Blue Shield of Virginia (Trigon)
* Converted to for-profit status prior to acquisition by Anthem
** Converted to for-profit status in 1997, prior to merger with Anthem
NOTE: Anthem converted to for-profit status in 2001. Anthem acquired
all but one of its state plans before the company became a for-profit
entity.
WellPoint Health Networks Inc.
Date of Conversion
Plans to For-Profit Plan
Blue Cross of California 1996
Blue Cross Blue Shield of Georgia (Cerulean) 1996
Blue Cross Blue Shield of Missouri (RightChoice) 2000
Blue Cross Blue Shield of Wisconsin (Cobalt) 2001
Other Conversions:
Empire Blue Cross Blue Shield 2002
Triple-S Management Corp. (Blue Shield of Puerto Rico) ***
*** Privately held, for-profit company
Conversions Not Approved by Local Regulator or Withdrawn by Plan:
(all in 2003)
CareFirst Blue Cross Blue Shield (Maryland; Washington, D.C.; Delaware)
Blue Cross Blue Shield of Kansas
Blue Cross Blue Shield of North Carolina
Horizon Blue Cross Blue Shield of New Jersey
Source: BlueCross BIueShield Association
Blue Fast Facts * The Blue Cross Blue Shield Association changed its rules in 1994 to allow Blues plans to become for-profit corporations A for-profit corporation is a corporation that is intended to operate a business which will return a profit to the owners. A for-profit corporation, depending on the jurisdiction to which it is incorporated, may be operated either as a stock corporation or as a non-stock . * By 2003, Blues plans in 15 states had converted to for-profit status. More than 33% of Blues plans are for-profits. * In November 2002, New York's Empire Blue Cross Blue Shield was the last Blue to convert to for-profit status. * Only one plan--Premera Blue Cross--currently is pursuing conversion. |
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