For the second time in two years, Blue Cross and Blue Shield of Maryland Inc. wants to significantly alter its structure -- this time to raise cash by selling a portion of its health maintenance organizations and its mental health unit to outside investors.
According to documents filed with the state's Insurance Division, Blue Cross is seeking to form a new company, called NEWCO, that would own the company's two HMO networks and Green Spring Mental Health Services, a mental health and substance-abuse care unit based in Columbia.
The move, if approved, could help raise millions of dollars for the company at a time when the state's largest health insurer is entering a historical three-year down cycle. The cycle, which stems from the lagging nature of premium increases to offset higher medical costs, typically results in three solid years of profits followed by three years of losses.
The non-profit insurer lost more than $100 million in the previous downturn in the late 1980s. The company, which remains profitable, had $72.4 million in reserves March 31. Despite the financial cushion represented by the reserves, an insurance rating company, Weiss Research Inc., said this week that "the company's financial statements display weaknesses which . . . could lead to fiscal difficulties."
In a letter to regulators dated April 10 and released by the Insurance Division yesterday, John A. Picciotto, Blue Cross' vice president and chief legal officer, said the aim of the latest plan was to allow the company to focus better on its managed-care business and to permit Blue Cross "to attract external investors, either private or public, which will provide an immediate benefit to Blue Cross and Blue Shield in the form of cash."
"In order to be competitive and position ourselves for customer needs for the future, we've got to have access to capital," said Amy Levy, a Blue Cross vice president. "The access to capital allows you to develop new products and services. That's really what this is all about."
Ms. Levy said the company expects to sell only a minority interest in the new managed-care subsidiary and that policyholders would not be affected by the moves.
Under the terms of the proposal outlined in corporate documents, Blue Cross would create NEWCO as a subsidiary that, in turn, would own Green Spring and the two HMO networks, CareFirst/FreeState and the Columbia Medical Plan. After the restructuring, Blue Cross would attempt to sell stock in NEWCO.
"The ability to sell part of NEWCO to private or public investors will establish their worth and thus strengthen our financial position," Mr. Picciotto wrote regulators in April.
Blue Cross has been working with Baltimore-based Legg Mason Inc. to help structure the deal, which does not seek to alter the company's special non-profit status.
The letter also stated that Carl Sardegna, current chairman, chief executive and president of Blue Cross, would continue to serve in that role, as well as holding the titles of chief executive and president at NEWCO.
Donald P. Brandenberg, associate commissioner for life and health insurance in the Insurance Division, said there was no timetable for ruling on the latest request.
Regulators are awaiting an opinion from the state's attorney general on whether the division has the authority to approve the request or whether the proposed change requires legislative action.
According to one analyst, however, if regulators approve the move, the timing would be auspicious.
"The market is really excellent for HMOs," said Douglas B. Sherlock, president of Sherlock Co., an HMO merger and acquisition adviser in Philadelphia. "It is something that more TTC not-for-profit organizations of various stripes are either doing or considering."
Mr. Sherlock said the stock price of the 21 publicly owned HMOs in the country have increased an average 15.5 percent since the start of the year, in contrast to a 2 percent drop in the S&P 500.
And Blue Cross of Maryland's plan does have a precedent. In October, Blue Cross & Blue Shield United of Wisconsin sold nearly 20 percent of a subsidiary, United Wisconsin Services, in a public offering of stock worth about $17.4 million. It was the first of the 73 Blue Cross plans to publicly trade stock in its operations.
Mr. Sherlock said there are too many variables to estimate how much the Maryland Blues could raise through a stock offering but that the average stock in the industry was selling for 16 times its previous 12 months' earnings.
Blue Cross' HMO operations, with 260,000 members, earned $4.5 million last year and $1.5 million in this year's first quarter, the company said. It had revenue of $366 million and $96 million in the respective periods. Results for Green Spring were not available.
The parent company, Blue Cross, collected $348 million in premiums in the first quarter, earning $7.2 million.
For Blue Cross of Maryland, the latest move is a second try at reshaping itself in an effort to find firmer financial ground.
In May 1990, Blue Cross, the state's largest health insurer, petitioned the Insurance Division to allow it to change from its special non-profit status to a mutual insurance company. State regulators turned down that request.