Way to keep Blue Cross under rein Holding company's incorporation as insurer is suggested

Consolidation and control

KPMG submits recommendations to commissioner

November 08, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

Maryland's insurance commissioner should consider requiring a proposed new holding company that would control the Blue Cross plans of Maryland and the District of Columbia to be incorporated as an insurance company, assuring regulatory control, a consultant's report recommends.

Also, the report says, the commissioner should develop a method for valuing the assets of the two Blue Cross plans and for allocating the assets if the insurers ever convert to for-profit status.

KPMG Financial Services Consulting submitted its recommendations yesterday to Steven B. Larsen, the Maryland insurance commissioner. Larsen and his D.C. counterpart each have to approve the two Blues plans' proposed consolidation.

Overall, KPMG said, "it is in the best interest of the Maryland public for both plans to continue to grow as viable organizations located in the local communities."

The marketplace demands that insurers have "sophisticated systems and technology," KPMG said, yet, "because of their status as nonprofit entities, there are very few options for the plans to raise the capital to support the substantial investments required to remain competitive." The business combination, the report concluded, could result in savings and marketing opportunities that will help the Blue Cross plans raise the money they need.

Jeffery W. Valentine, director of public relations for Blue Cross Blue Shield of Maryland, said the report "supports our basic rationale for the affiliation." Along with a consultants' report to the D.C. insurance regulators, he said, "there are now two outside financial advisers that have concluded this business combination makes sense."

Both Larsen and Albert B. Wann, vice president for corporate communications of Blue Cross Blue Shield of the National Capital area, declined comment on the report.

Valentine said Maryland Blue Cross agreed with the recommendation that a method be developed to value assets and to allocate them among Maryland, D.C. and Virginia. Consumer groups have also made such a recommendation, saying in the event of a later conversion to for-profit status, the value of the assets should be placed in a foundation or other public trust.

As for the nature of the holding company, Valentine said, "we think the commissioner could make oversight a condition of his approval," but that he should do so in a way that is "less burden-some" than requiring it to incorporate as an insurance company.

KPMG recommended requiring it to be an insurance company because "the commissioner cannot issue corrective orders to a noninsurance holding company." Corrective orders can cover such areas as administrative expenses and investment practices.

In its report, KPMG also said:

Both Blue Cross plans had substantial financial problems a few years ago, but "the financial condition of both plans has improved significantly, and surplus levels are considered to be adequate."

The commissioner should review asset transfers among the two plans and the holding company, since such transfers elsewhere have led to solvency problems.

Pub Date: 11/08/97

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