Blue Cross rejects label 'charitable' More than semantics is at issue as plans eye for-profit status

Conversion could be costly

Consumer groups say assets belong to public due to tax breaks

Health care

November 23, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

Some organizations would be honored to be called charitable. Blue Cross plans may take offense at the designation.

The District of Columbia Blue Cross plan "is not, and to my knowledge never has been, engaged in charitable activity," Larry C. Glasscock, its chief executive officer, stated in response to questions from the D.C. Office of Corporation Counsel.

Similarly, Blue Cross Blue Shield of Maryland says it isn't a charity, and never has been.

But as the Maryland and D.C. plans seek regulatory approval for a "business combination," consumer groups are, in effect, accusing them of being charitable.

The debate is not just rhetorical. Potentially, hundreds of millions of dollars are at stake, as nonprofit Blue Cross plans throughout the country merge, convert to for-profit status or otherwise restructure themselves.

If charitable organizations convert to for-profit status, or are sold to for-profit businesses, under state laws all their assets are turned over to foundations serving a similar purpose. Consumer groups say Blue Cross plans have built their value through public tax breaks, so their assets belong to the public.

Blue Cross plans see it differently. Most Blue Cross plans are nonprofit, but they say that is not the same as being charities. State laws vary; some Blue Cross plans have conceded a "public benefit obligation" for all their assets, but others say there is no obligation.

The consumer groups are using "inflammatory rhetoric" to attempt "a wealth transfer from people who have paid for coverage to some outside body," complained Christopher Molineaux, vice president for communication of the national Blue Cross Blue Shield Association. "It's a campaign to extort money from these legitimate businesses."

John A. Picciotto, senior vice president and general counsel of Blue Cross Blue Shield of Maryland, acknowledged that the Blues would have some obligation if they converted to for-profit status.

"We fully expect that a public benefit obligation would be created in some degree," he said. But, he added, that obligation would not necessarily be the full value of the company -- which is what the consumer groups say would be owed if the plan is charitable.

In cases where the issue has been settled, the consequences can be dramatic. When the Blue Cross plan in California became a for-profit stock company in 1993, two health-related foundations were created in 1996 and got $3.2 billion, the full market value of the company.

Those California foundations are the largest of 81 health-related "conversion foundations" with assets of more than $9 billion, each launched when a Blue Cross plan, hospital or HMO converted from nonprofit to for-profit status, according to a study in the current issue of the journal Health Affairs. Nearly two-thirds of them were created in the past four years, the article reports.

A. G. "Terry" Newmyer 3rd, a consumer advocate with the Washington-based Fair Care Foundation, contends that the proposed Maryland-D.C. Blue Cross affiliation should trigger the creation of such a foundation.

Other consumer groups say that while the pending deal is not a merger or conversion, it may well be a step toward one. Regulators, they argue, need to take action now to make sure charitable assets are preserved if there is a switch to for-profit status in the future.

"Unless it is clearly demonstrated that adequate regulations currently exist to oversee potential conversions from a holding company to a for-profit company, we can only view a favorable decision on the holding company as facilitating for-profit conversion," said Richard Bruning, president of the Maryland Universal Health Care Action Network, in testimony at a hearing this month before the Maryland insurance commissioner.

"I am not confident these plans will remain nonprofit, charitable entities for long," Kathleen C. Collins, staff attorney for Boston-based Community Catalyst, said at the same hearing. "As you are probably aware, the Maryland plan has tried to convert twice in the past two years. In addition, the Maryland plan's stated rationale for the deal is based, in part, on the fact that the resulting company will be attractive to equity investors."

Regulators are well advised to look ahead to potential future transactions when considering whatever Blue Cross restructuring is on the table or "you can end up with creeping conversion" to for-profit status, said Jack Ehnes, Colorado's insurance commissioner.

Ehnes is considering a proposal by Colorado Blue Cross to convert to for-profit status, and he chairs a special committee of the National Association of Insurance Commissioners studying Blue Cross reorganizations.

Collins and other consumer representatives asked the Maryland and D.C. insurance commissioners to require, as a condition of approving their affiliation plan, that the two Blue Cross plans and their new holding company state officially that they are charitable.

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