State denies Blues' bid to change legal status

December 27, 1990|By Ross Hetrick | Ross Hetrick,Evening Sun Staff

In a blow to efforts by Blue Cross and Blue Shield of Maryland to change its legal status, the state has rejected a request by the state's largest health insurer to convert to a mutual organization.

The order was signed yesterday by Insurance Commissioner John A. Donaho.

After considering a transcript of a hearing in August and other evidence, Donaho concluded that the conversion to a mutual "is not in the best interest of its subscribers and policy holders, nor the citizens of the state of Maryland."

A spokeswoman for Blue Cross said it is "disappointed" by Donaho's decision.

Originally formed by an act of the Maryland General Assembly in 1937, the non-profit Blue Cross organization is under stricter regulation than are other health insurance companies. Blue Cross also has the distinction of offering health insurance to any individual, regardless of his or her medical condition.

As a mutual organization, where the subscribers technically own the company, Blue Cross would be under less state government control, but would have to pay state premium taxes of $8 million to $10 million a year.

Blue Cross said it needed to convert to a mutual structure so that it can compete "on an even playing field" with other insurers.

Even though Blue Cross pledged that it will continue to be the "insurer of last resort," Donaho said that would be uncertain under a mutual operation. "It is apparent to me that the activities envisioned by management to enable [Blue Cross] to compete with commercial insurers will only deviate from and dilute the primary purpose for which [Blue Cross] was legislatively created," he said in his opinion.

Donaho was also critical of Blue Cross' plan to spread the cost of the premium tax across all portions of its operations, including self-insured programs where Blue Cross is only the administrator.

"This would effectively impose a premium tax on non-taxable contracts, i.e., self-insured plans, including the state of Maryland and the city of Baltimore," he said. Even though these self-insured plans would pay the tax, they would be voting members in the mutual organization, Donaho said.

"This is discriminatory and unlawful," he said in the opinion. "It amounts to taxation without representation, an issue settled centuries ago by our Colonial forefathers," the opinion said.

Noting that committees in the General Assembly have called for a management study of Blue Cross, Donaho said approval of the conversion of a mutual organization before such a study "is ill-advised."

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