In an ambitious bid to remain competitive, Blue Cross and Blue Shield of Maryland has asked state regulators to approve a drastic reorganization that would transform a historically nonprofit, public service company into a predominantly for-profit corporation accountable to stockholders.
Blue Cross wants to start a new for-profit insurance business, create a new insurance sales agency and raise $40 million to $50 million through a sale of stock next spring, according to documents released yesterday by the state insurance commissioner's office.
The commissioner will hold a public hearing on the proposal Dec. 19. Blue Cross managers refused to answer questions or provide documents. But in a statement released after repeated inquiries, the company late yesterday said that "restructuring would have no effect on the current products or services offered to our customers."
Blue Cross is the largest health insurer in Maryland, with 1.4 million subscribers, but it has been losing customers to competitors and recently cut 300 positions, resulting in the layoffs of more than 200 people.
Company officials said earlier that they were considering selling stock, which would generate money that could be used to expand and fight off competitors in an increasingly tough market.
"We're a not-for-profit company in a marketplace where for-profit companies are coming in, leveraging their stock portfolios, and, to a large degree, they're positioned to undercut us in the market," Blue Cross President William L. Jews said in an interview last month with The Sun.
The insurance commissioner's announcement yesterday of a public hearing was the first disclosure of the company's detailed plans for selling stock and reorganizing. One of the major issues the insurance commissioner must consider is whether a for-profit, publicly owned Blue Cross will behave differently toward the public than a nonprofit company. Will Blue Cross have to become
more aggressive at controlling costs and maximizing revenues in order to improve its bottom line? How would this affect services to customers?
There are few models for what Blue Cross officials propose to do. Only four of the nation's 68 Blue Cross and Blue Shield plans have established stock-issuing subsidiaries; none has a substantial track record.
Many Blue Cross plans have established for-profit entities that don't sell stock. Blue Cross and Blue Shield of Maryland's health maintenance organizations are a for-profit subsidiary, for example. This arrangement allows the transfer of money between Blue Cross' businesses, but does not require Blue Cross to boost profits to please stockholders -- a situation that would change next year if the company is permitted to go public.
Blue Cross has a unique status as an insurer created not to make profits but to provide insurance to the largest number of people possible, including individuals whose poor health has made it impossible for them to be insured by other companies. The company said in its brief statement that it wants to restructure "without compromising the philosophy and direction of Blue Cross and Blue Shield of Maryland."
"Restructuring affords the company the opportunity to enhance its market position and to be responsive to competitive pressures. . . . [The company] will continue to provide the high level of service and the quality, comprehensive health care insurance products that our customers have come to expect."
Frank A. Gunther Jr., the chairman of the board of Blue Cross and Blue Shield of Maryland, said in a brief interview that restructuring would benefit the public.
"It will make us more competitive and allow us to . . . keep our costs down and be more efficient and allow us to reduce our premiums, which in effect reduces the cost of insurance" to customers, he said. He added that the changes would help Blue Cross improve its reserves, the amount of money set aside to deal with unexpected cash demands.
Referring to the tough insurance marketplace, Mr. Gunther said the reorganization would "put us in a better position to compete with the people we have to compete with."
Blue Cross' reorganization proposal initially would create a for-profit subsidiary to act as a holding company for its five health maintenance organizations, pre-paid health plans on which the company is banking for future growth and profitability.
Initially, up to 20 million shares of stock would be issued, with as much as 35 percent sold to the public and the remainder held by the company, according to a reorganization blueprint submitted to the insurance commissioner.
Most of the money raised from a stock sale would underwrite expansion of HMOs and traditional insurance business in Maryland and out of state, the blueprint suggests. Some $10 million would be spent on "practice acquisition," apparently the purchase of physicians' practices. Another $7 million would be put into reserves.
The blueprint also lists the creation of a for-profit indemnity insurer that would sell traditional insurance policies, which generally allow subscribers to pick their own doctors but require deductibles, unlike HMOs.
But the blueprint provides no details about this proposed entity nor about the proposed insurance sales agency.