Blue Cross faces fight on sale of stock If nonprofit insurer goes public, who gets the proceeds?

September 24, 1995|By John Fairhall | John Fairhall,SUN STAFF

SAN FRANCISCO, Calif. -- Blue Cross companies from California to Maryland are demanding the right to sell their nonprofit businesses and generate tens of billions of dollars. The question is: Who should profit?

The public will in California, where Blue Cross is contributing $3.2 billion to charitable foundations devoted to improving the health of all citizens.

But in Maryland, the public may not receive a dime.

The reason for this vast discrepancy is simple: While regulators and Blue Cross executives in California believe that the public is entitled to profit because the company received valuable tax breaks, Maryland regulators and Blue Cross officials do not agree, although the company also enjoyed tax benefits.

Blue Cross and Blue Shield of Maryland and its chief regulator, state Insurance Commissioner Dwight K. Bartlett III, face a battle on this issue. The outcome will decide the public's right to hundreds of millions of dollars and the future of the 1.3 million-subscriber insurance company.

"Those assets should be used for the public and not become part of the profit of stockholders," said E. Clinton Bamberger Jr., a prominent Maryland lawyer who was president of Blue Cross' board in the 1960s.

Blue Cross' proposal to restructure the company and obtain permission to sell stock is expected next month. Mr. Bartlett's decision will be binding, unless the General Assembly or the courts intervene.

Tens of billions of dollars are at stake nationally as increasing numbers of Blue Cross companies consider converting to for-profit businesses. Four of them, including California's, already have sold stock and converted part or all of their businesses. At least a dozen more are considering doing so.

The Blues are being forced to change because they have outgrown their Depression-era nonprofit roots. Created when no one else wanted to insure the general public, the companies now face brutal competition from dozens of for-profit insurers.

Many Blue Cross executives across the country believe that to survive they must invest heavily in HMOs and other new insurance products -- which means raising capital, usually by selling stock.

Mr. Bartlett and his counterpart in California, Corporations Commissioner Gary S. Mendoza, don't contest Blue Cross' need to sell stock. But they have taken strikingly different approaches to the issues of how the companies should restructure themselves and who should profit.

While Mr. Mendoza broadly interpreted state law to benefit all Californians, Mr. Bartlett is taking a narrower legal view of Blue Cross' obligation. And while Mr. Mendoza gave the public numerous opportunities to comment and took his time making a decision, Mr. Bartlett faces strong pressure from Blue Cross and state political leaders to help the company and rush the process.

In California, Mr. Mendoza ruled Sept. 7 that Blue Cross can convert to a for-profit company, issue stock and keep all of the 3 million subscribers. But the company must give up ownership of its stock and cash, which is worth $3.2 billion. Two charitable foundations will get it.

In Maryland, Blue Cross also wants to create a for-profit company and issue stock -- which could eventually be worth hundreds of millions of dollars when it is sold to investors. But neither Blue Cross officials nor Mr. Bartlett believes the company should have to give its stock and cash to foundations or benefit the general public in some other way.

Who would benefit from the stock and cash will remain unclear until the company fully unveils its proposal.

The differences in approaches between the two states are magnified because California is viewed by many as the model for all other states to follow in dealing with Blue Cross companies that wish to convert to for-profit status.

California's handling of the sensitive and complex issues should be used as "a prototype for health-care conversions in other parts of the country," said Consumers Union, publisher of Consumer Reports magazine.

"I think the lesson from California is these converting nonprofit organizations must deliver all of their assets to a charitable foundation to be used for improving the health of Maryland residents," said Harry Snyder, a national expert on Blue Cross conversions and co-director of the West Coast office of Consumers Union.

"This is a pot of gold," he said of the money involved. "And there's no getting away from that. You have to keep your eye on the pot of gold. Who's going to get it? A foundation whose purpose is dedicated to improving the health of Maryland? Or insiders [at Blue Cross] or people on Wall Street?"

A number of Marylanders agree that Blue Cross owes a big debt to the public: officials of the state Health Services Cost Review Commission, which regulates hospital rates, a health policy expert at Johns Hopkins, the Maryland Citizen Action Coalition and Mr. Bamberger.

Among the key issues in Maryland are:

* Blue Cross' obligation to the public.

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