State insurance chief turns down Blues' stock plan

January 23, 1995|By John Fairhall | John Fairhall,Sun Staff Writer

In a major setback for Blue Cross and Blue Shield of Maryland's future plans, the state insurance commissioner has rejected the nonprofit company's controversial proposal to create a for-profit business and sell stock to investors.

Officials of Blue Cross, the state's largest health insurer, had no immediate comment.

Blue Cross has described the proposed reorganization plan as essen tial to its future, but critics warned it would make the company more beholden to stockholders than subscribers.

The plan would have split the company into two enterprises: a for-profit subsidiary owning Blue Cross' five health maintenance organizations, and a nonprofit parent company selling traditional "indemnity" insurance policies.

In his decision, issued Friday but released today, Commissioner Dwight K. Bartlett III said the compa ny's plan is "riddled with conflicts of interest between" the for-profit subsidiary and the nonprofit parent.

He said that, contrary to Blue Cross' characterization of the plan, it would have transformed the overall company into a for-profit business -- in violation of its historic mission and legal charter as a nonprofit.

Crafted by president and chief executive William L. Jews, who was hired in 1993 to turn around the struggling company, the plan would have raised roughly $40 million this spring through an initial sale of stock.

Company officials have said the plan would benefit their 1.4 million subscribers by bringing in fresh capital needed to compete against increasingly tough for-profit insurers. With the extra money, the company would have created new businesses and beefed up existing ones, enabling the company to compete not only in Maryland but surrounding states, its leader said.

At a hearing before Mr. Bartlett last month, Blue Cross officials insisted the reorganization did not represent a conversion from a nonprofit to a for-profit company.

They pointed to the fact that in terms of annual revenues, the nonprofit component would be larger following reorganization than the for-profit side.

But Mr. Bartlett said the plan was tantamount to a total conversion from nonprofit to for-profit.

"I have concluded that the profit-making aspects of the entire enterprise would be so substantial that" Blue Cross "would lose its character as a nonprofit health services plan," Mr. Bartlett said.

He added that the plan "renders profit-making the dominant motivation of the overall organization and would assign nonprofit health services a secondary, and dispensable role."

Mr. Bartlett said that under the plan, the nonprofit parent "would become smaller and smaller while the for-profit entity would become larger and larger."

He said that stock options and other compensation that would be given to Blue Cross executives would act as incentives favoring "the profit-making aspects of the enterprise over the nonprofit."

The company could appeal the commissioner's decision in court. It also could submit a plan to convert to for-profit status, but it would have to follow specific steps outlined under state law, Mr. Bartlett said.

"I understand the company's desire to create the new corporate structure and the need to raise capital in order to compete in the market," he said. "I cannot, however, ignore the special nonprofit status of" Blue Cross "or the reality of the transformation of the enterprise under the proposal."

Blue Cross is "free to file a different plan for my consideration," Mr. Bartlett said in his decision.

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