Blue Cross and Blue Shield of Maryland's latest proposal to restructure the company is fraught with conflicts between the interests of subscribers, the public and investors -- and perhaps ought to be junked, according to several experts.
Respected tax and health policy authorities say that the plan Blue Cross is showing to regulators and legislators raises doubts about executive loyalties, the welfare of subscribers and the fate of hundreds of millions of dollars built up from decades of taxpayer subsidies.
Nonprofit Blue Cross wants to reorganize so it can sell part of itself to private investors. It would use the money to start new businesses, expand into surrounding states and compete in an increasingly tough health insurance industry.
Blue Cross' plan would essentially rearrange the company's present components into two divisions -- a for-profit business that would sell stock and a slimmed down nonprofit business. The plan is still under development, the company warns, and may not be completed until late December.
Several authorities, including experts from Harvard and Yale universities, the University of Baltimore and the University of Virginia, reviewed the most recent version of the structure. They raised several concerns that the company, the state insurance commissioner and General Assembly may need to address:
* The for-profit, investor side of the business could drain funds and subscribers from the nonprofit side, harming some subscribers and the public.
* Blue Cross executives, working for both profit-seeking stockholders and subscribers in a separate, nonprofit health plan, would face serious conflicting loyalties.
* The public stands to receive little benefit from the substantial assets Blue Cross has piled up under its nonprofit shield.
* The subscribers of the nonprofit business could be the big losers in the restructuring, which could eventually lead to rate increases and force customers into health maintenance organizations.
* Blue Cross could continue to enjoy valuable tax subsidies even as it operates a large insurance operation owned by private investors.
Few experts doubt that Blue Cross needs to sell stock in itself. Health insurers everywhere are merging and expanding. Without new pool of cash and stock to pay for acquisitions, Blue Cross of Maryland will be stuck on the sidelines.
But the company's current blueprint for change, experts said, is a complicated and contradictory attempt to enjoy the best of two worlds -- the nonprofit and the for-profit. The citizens of Maryland and future investors in Blue Cross might be better served if the walls between those worlds were higher and stronger, authorities said.
"They are trying to have it both ways," said Nancy M. Kane of Harvard's School of Public Health. "I think it's a very unstable structure and not in the public's interest -- but perhaps in the short-term best interest of the [for-profit] company and Blue Cross' management."
In rejecting a similar Blue Cross reorganization proposal in January, Insurance Commissioner Dwight K. Bartlett III found that it was "riddled with conflicts of interest" favoring the for-profit side of the business over the nonprofit side.
Blue Cross' current proposal poses the same problems for subscribers and for the general public, several authorities say.
One problem is that the management team headed by William L. Jews, Blue Cross' president and chief executive, would run both the nonprofit and for-profit businesses and the holding corporation that would oversee them.
Managers would have to try to balance the demands of shareholders -- who want bigger profits -- against the interests of nonprofit subscribers who want smaller premiums and adequate financial reserves to pay their claims.
"Could the nonprofit company's interests suffer and could funds flow from the nonprofit to the for-profit? I think the answer is yes," said James A. Phills Jr., assistant professor of organization and management at the Yale School of Management.
And there could be another problem. "You could have an issue of conflict of interest," Dr. Phills said. "It's conceivable they could funnel the more attractive or more profitable business to the for-profit business and the less attractive or less profitable business to the nonprofit."
In fact, Blue Cross is doing exactly that.
The for-profit business would get Blue Cross' health maintenance organizations. Potential investors see the HMOs as the company's most valuable property because they're expected to grow rapidly in response to employer demands for cheaper, managed health care.
The nonprofit business would keep the shrinking side of the insurance business: the more costly traditional or "indemnity" insurance policies that permit subscribers to pick virtually any doctor or hospital.
Mr. Bartlett concluded that, under the first plan, the nonprofit side would "eventually be little more than a shell."
Some experts say the second proposal would lead to the same result.
"There's every incentive to weaken the nonprofit to the benefit of the for-profit, because the for-profit is holding all the attractive lines of business," said Dr. Kane, who was hired by California regulators to help protect the public interest in a restructuring of a Blue Cross company there.
She predicted that the new for-profit business would make the nonprofit's subscribers its "first target."
Dr. Phills said the HMOs wouldn't try to lure away just any subscribers from the nonprofit -- only the "best" ones, those who are young, healthy and cheap to insure.
That would leave the nonprofit with the highest-cost subscribers, who would face higher premiums that could put coverage out of their financial reach.
Mr. Jews, Blue Cross' president, was not available to comment. But John A. Picciotto, the general counsel and senior vice president, asserted that Blue Cross will protect the nonprofit business.
"There will be some sort of financial guarantee from the holding company to the nonprofit company," he said. "Therefore it's in the holding company's interest to ensure that the nonprofit company continues to be a viable company and continues to be profitable and have sufficient reserves."
Mr. Picciotto said the nonprofit also will be given its own board of directors. Although some members of the board would also serve on the board governing the holding company and the for-profit business, a majority would not, he said.
But this may not make the nonprofit board independent. A minority can rule if the majority is not united, according to Dana A. Forgione, associate professor of accounting in the Robert G. Merrick School of Business at the University of Baltimore. "You can control an entity with less than 50 percent," he said.
The proposed structure, ironically, could also hurt the for-profit business or at least raise doubts among investors. Potential stock owners would question why Blue Cross has proposed a nonprofit parent company to run the for-profit HMOs, said John L. Colley Jr., professor of business administration at the Darden Graduate School of Business at the University of Virginia.
And investors would question links between the HMOs and foundations or other nonprofit affiliates set up by Blue Cross, said Professor Colley, who is a director of Trigon Blue Cross and Blue Shield, based in Richmond, Va.
"Are there going to be transfers? Is the [for-profit] public company going to be paying fees to the parent company? Is there some overhead? Are they going to cream off profits?" he asked. "If you're an investor, there's something to worry about."
Another crucial issue raised by Blue Cross' proposed structure is the fate of the public's long-established ownership stake in the company.
As a nonprofit company, subsidized by tax breaks for decades, Blue Cross in essence is owned by the people of Maryland, many analysts contend. And, they add, the people should be compensated if a piece of their company is sold to private investors.
Keeping the wealth
One possibility would keep all the wealth created by a stock sale inside of Blue Cross. Such an outcome would serve the public welfare, Blue Cross officials argue, by indirectly benefiting subscribers of Blue Cross' nonprofit plan.
"The benefit might not inure directly to the subscribers right away, but ultimately if it makes Blue Cross a stronger company, it helps them," said Mr. Picciotto, theBlue Cross lawyer.
That's not good enough, said Dr. Kane, the Harvard lecturer who has worked in health care finance and regulation for 20 years. If it sells out to private investors, Blue Cross should turn over a substantial portion of its assets to an independent charity, she said.
"They can't just sit on it forever," she said.
Blue Cross has talked about endowing a charitable foundation that would disburse money for Maryland health care causes. That's a better option, said Milton Cerny, a respected Washington tax lawyer who specializes in nonprofit issues.
But in discussions so far, the size of the proposed grant has been unclear. And Blue Cross wants some control over the charity, which also raises red flags in the minds of some analysts because that would compromise its independence.
So far, nobody at Blue Cross or in the insurance commissioner's office is proposing a complete split between the nonprofit and for-profit companies. That's what is happening in California, where a Blue Cross plan is fully converting to a for-profit concern and turning over more than $3 billion to independent foundations to pay back the public.
Some experts say that arrangement is a model for other Blue Cross plans that want to sell stock.
Tax exemption questioned
Whatever structure prevails, there's another question affecting the public's money -- the continuing exemption Blue Cross receives from state premium taxes.
The Legislature granted this tax break, now worth nearly $12 million a year, with the understanding that the company would devote all its resources to providing the cheapest possible insurance to Marylanders. But the restructuring casts doubt on that.
Left with a shrinking traditional insurance business, the nonprofit would have to raise rates, undermining the goal of affordable insurance, experts said.
"The mere fact that they put a nonprofit label on it doesn't mean it's going to be operated in any public interest or for nonprofit purposes, unless you can establish they're going to continue some broad public benefits with that money," said Mr. Cerny, the tax lawyer.
The arguments over how to restructure Blue Cross boil down to this question: How can the state help the company satisfy its need for capital while safeguarding public assets?
"Blue Cross I think is probably doing what they ought to be doing -- preparing for moving into a totally different mode of providing service," said Dr. Forgione of the University of Baltimore. "It's just have to be totally sure the public's interests are protected."