Blue Cross loses bid to set up for-profit unit

January 24, 1995|By John Fairhall | John Fairhall,Sun Staff Writer

Blue Cross and Blue Shield of Maryland's ambitious strategy for regional growth was derailed yesterday when the state insurance commissioner rejected the company's plan to sell stock and reorganize.

Blue Cross contended that its plan would have benefited policyholders by making the company more efficient and financially sound, but Insurance Commissioner Dwight K. Bartlett III said it would have violated state law that created Blue Cross in 1937 as a nonprofit insurer.

The plan would have made "profit-making the dominant motivation" of Blue Cross, said Mr. Bartlett, who essentially gave the company this choice: You can be for-profit or nonprofit, but not both.

Blue Cross officials had hoped to gain the advantages of being a for-profit company, such as the ability to sell stock, while retaining more than $12 million a year in nonprofit tax exemptions. Converting entirely to a for-profit company would require Blue Cross to give up its tax exemptions and to obtain the approval of subscribers and employers who buy policies.

William L. Jews, company president and chief executive officer, criticized the decision, but would not say whether the insurer would appeal it in court. He said it would have no impact on the 1.4 million subscribers of Blue Cross, the largest health insurer in Maryland.

"There should be absolutely no concern on the part of subscribers or customers," Mr. Jews said. The decision "in no way precludes us from continuing to grow and develop and be a strong and viable company."

But Mr. Jews added that the ruling was "an unfortunate decision for the citizens of Maryland." A favorable decision would have enabled Blue Cross to more quickly meet its goals of becoming more efficient and more affordable, he said.

"We want to be price competitive, we want to continue growing our market share, focus on managed care, provide good quality service and obviously be financially strong," he said.

"Even though this is not in my mind devastating, it is not the enhancement we were looking for," Mr. Jews said.

The decision was particularly tough for Mr. Jews because the plan represented the culmination of the steps he has taken since being hired in 1993 to turn around the struggling company. After nearing insolvency in the late 1980s and early 1990s, the company has built up a capital surplus of $148 million, aggressively cut costs and lowered premiums to attract new business. Blue Cross' reorganization plan would have split the company into two businesses: a for-profit subsidiary controlling the company's five health maintenance organizations (HMOs) and a nonprofit parent company selling traditional indemnity insurance policies. The subsidiary would have sold roughly $40 million in stock this year, money the company says is needed to compete against for-profit insurers that have cut into Blue Cross' market.

"We need to be given the flexibility . . . to compete in the marketplace effectively," Mr. Jews said. "We are without question the most regulated insurer in Maryland" and "shackled to a large degree" by an inability to sell stock and behave more like for-profit companies, he said.

Although the company could seek legislation in the General Assembly to circumvent Mr. Bartlett's decision, it is unlikely to get any help from the chairman of the House Economic Matters Committee in Annapolis, which oversees insurance issues. Del. Michael E. Busch, an Anne Arundel County Democrat, said he had read the decision and found it "wise and pragmatic."

A spokeswoman for the Maryland Hospital Association, which had supported Blue Cross' plan, said the company needs to "step back and develop another plan, another strategy to accomplish" its goals.

John A. Donaho, the former insurance commissioner who was fired by Gov. William Donald Schaefer in 1993 after numerous public fights with Blue Cross, said Mr. Bartlett has "taken a stance that is in the public interest." Blue Cross "can't suddenly become a for-profit and expect some of the advantages, the tax relief" of a nonprofit. "You can't have it both ways," he said.

Mr. Bartlett said the company could submit a revised plan to him, but he made clear that it will have to be substantially different. VTC He found numerous faults with the first, even though Mr. Bartlett said he does not disagree with the company's goals of raising capital and competing.

"In many ways, a reorganization makes eminent sense from a business standpoint. I cannot, however, ignore the special nonprofit status of [Blue Cross]," Mr. Bartlett said.

Blue Cross officials insisted that their plan preserved the company's nonprofit nature by having a nonprofit parent in control of a for-profit subsidiary. But the commissioner said "the proposed reorganization is in reality more than a mere reorganization" and "tantamount to a conversion to a for-profit enterprise."

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