Experts question Blue Cross plans to reinvent itself Conflicts are feared among new for-profit, nonprofit subsidiaries

Shareholders vs. patients

Company feels it must sell stock to compete for health care dollars

October 08, 1995|By Jay Hancock and John Fairhall | Jay Hancock and John Fairhall,SUN STAFF

Blue Cross and Blue Shield of Maryland's latest proposal to restructure the company is fraught with conflicts between the interests of subscribers, the public and investors -- and perhaps ought to be junked, according to several experts.

Respected tax and health policy authorities say that the plan Blue Cross is showing to regulators and legislators raises doubts about executive loyalties, the welfare of subscribers and the fate of hundreds of millions of dollars built up from decades of taxpayer subsidies.

Nonprofit Blue Cross wants to reorganize so it can sell part of itself to private investors. It would use the money to start new businesses, expand into surrounding states and compete in an increasingly tough health insurance industry.

Blue Cross' plan would essentially rearrange the company's present components into two divisions -- a for-profit business that would sell stock and a slimmed down nonprofit business. The plan is still under development, the company warns, and may not be completed until late December.

Several authorities, including experts from Harvard and Yale universities, the University of Baltimore and the University of Virginia, reviewed the most recent version of the structure. They raised several concerns that the company, the state insurance commissioner and General Assembly may need to address:

* The for-profit, investor side of the business could drain funds and subscribers from the nonprofit side, harming some subscribers and the public.

* Blue Cross executives, working for both profit-seeking stockholders and subscribers in a separate, nonprofit health plan, would face serious conflicting loyalties.

* The public stands to receive little benefit from the substantial assets Blue Cross has piled up under its nonprofit shield.

* The subscribers of the nonprofit business could be the big losers in the restructuring, which could eventually lead to rate increases and force customers into health maintenance organizations.

* Blue Cross could continue to enjoy valuable tax subsidies even as it operates a large insurance operation owned by private investors.

Few experts doubt that Blue Cross needs to sell stock in itself. Health insurers everywhere are merging and expanding. Without new pool of cash and stock to pay for acquisitions, Blue Cross of Maryland will be stuck on the sidelines.

But the company's current blueprint for change, experts said, is a complicated and contradictory attempt to enjoy the best of two worlds -- the nonprofit and the for-profit. The citizens of Maryland and future investors in Blue Cross might be better served if the walls between those worlds were higher and stronger, authorities said.

"They are trying to have it both ways," said Nancy M. Kane of Harvard's School of Public Health. "I think it's a very unstable structure and not in the public's interest -- but perhaps in the short-term best interest of the [for-profit] company and Blue Cross' management."

In rejecting a similar Blue Cross reorganization proposal in January, Insurance Commissioner Dwight K. Bartlett III found that it was "riddled with conflicts of interest" favoring the for-profit side of the business over the nonprofit side.

Blue Cross' current proposal poses the same problems for subscribers and for the general public, several authorities say.

One problem is that the management team headed by William L. Jews, Blue Cross' president and chief executive, would run both the nonprofit and for-profit businesses and the holding corporation that would oversee them.

Managers would have to try to balance the demands of shareholders -- who want bigger profits -- against the interests of nonprofit subscribers who want smaller premiums and adequate financial reserves to pay their claims.

"Could the nonprofit company's interests suffer and could funds flow from the nonprofit to the for-profit? I think the answer is yes," said James A. Phills Jr., assistant professor of organization and management at the Yale School of Management.

And there could be another problem. "You could have an issue of conflict of interest," Dr. Phills said. "It's conceivable they could funnel the more attractive or more profitable business to the for-profit business and the less attractive or less profitable business to the nonprofit."

In fact, Blue Cross is doing exactly that.

The for-profit business would get Blue Cross' health maintenance organizations. Potential investors see the HMOs as the company's most valuable property because they're expected to grow rapidly in response to employer demands for cheaper, managed health care.

The nonprofit business would keep the shrinking side of the insurance business: the more costly traditional or "indemnity" insurance policies that permit subscribers to pick virtually any doctor or hospital.

Mr. Bartlett concluded that, under the first plan, the nonprofit side would "eventually be little more than a shell."

Some experts say the second proposal would lead to the same result.

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