Charitable status urged for D.C. Blues Move would hold assets for community if firm, Md. unit go for-profit

Rules for merger advised

Blocking of executive severance plans also is recommended

Health insurance

November 26, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

The District of Columbia insurance commissioner should take steps to conserve charitable assets of the D.C. Blue Cross plan and to block potential executive severance payouts of as much as $3 million, the D.C. corporation counsel has recommended.

The corporation counsel -- the district's equivalent of an attorney general -- called for a number of conditions to be imposed if Commissioner Patrick Kelly approves a "business combination agreement" between the D.C. plan and Blue Cross Blue Shield of Maryland.

Kelly is scheduled to rule on the proposed affiliation next month. Maryland's insurance commissioner, Steven B. Larsen, is also expected to rule next month.

Among the conditions recommended by Corporation Counsel John M. Ferren are that three D.C. Blue Cross executives who have severance agreements be required to renegotiate their contracts to nullify those clauses. Larry Glasscock, chief executive officer of D.C. Blue Cross, could "leave with approximately $3 million in benefits" under current contracts, Ferren's report says. The combination agreement calls for Glasscock to be CEO of both Blue Cross plans and chief operating officer of a new holding company.

Ferren also recommended that Kelly require D.C. Blue Cross to stipulate it is "a charitable and benevolent institution," with assets that, in the event of an eventual conversion to for-profit status, would "be used to establish a foundation dedicated to the health care needs" of the D.C. Blue Cross service area.

"The amount of [the] charitable set-aside will be determined at the time of conversion to a for-profit or mutual insurance company or other triggering event," Ferren said.

At hearings before the two insurance commissioners, consumer groups have called for requiring the insurers to be identified as charitable. As nonprofit institutions, the consumer groups argued, the Blue Cross plans have built up their value as a result of tax breaks, so all their assets should belong to the public in the event of a for-profit conversion. Both Blue Cross plans have said they are not charities.

The "charitable obligation" issue has touched off litigation involving Blue Cross plans in about half a dozen states. While most of the cases have not been decided, Ferren cited a ruling by the New Jersey Superior Court that the Blue Cross plan in that state was "charitable and benevolent."

Consumer groups yesterday praised the corporation counsel's recommendations, while both Blue Cross plans said they could not comment because they had not had enough chance to study the document.

"We are analyzing it," said Jacqueline E. Wells, vice president and general counsel for Blue Cross Blue Shield of the National Capital Area. "We just received it yesterday afternoon, and it is too soon to comment."

Jeffery W. Valentine, director of public relations for Blue Cross Blue Shield of Maryland, said the Maryland plan had not received the document.

"We're very pleased," said Kathleen C. Collins, staff attorney for Boston-based Community Catalyst, who testified at the

Maryland and D.C. hearings. "We certainly hope Commissioner Kelly follows suit and adopts the recommendations."

"Fair Care is pleased that the corporation counsel agrees with us that the Blues' assets are charitable," said A. G. "Terry" Newmyer 3rd, with the D.C.-based Fair Care Foundation. However, he said, Fair Care believes the proposed agreement is sufficient to require that the full market value of D.C. Blue Cross be turned over to a foundation immediately.

The corporation counsel found the proposed business affiliation -- a new nonprofit holding company would control both Blue Cross plans -- did not trigger an obligation to turn over assets. He did recommend the insurance commissioner collect data to help measure the assets in the event of a later conversion -- a suggestion to which both Blue Cross plans have said they are agreeable.

While the charitable benefits issue has also been raised in Maryland hearings, the process here is slightly different, and Larsen, the commissioner, will decide without the equivalent of Ferren's report.

Ferren also found:

Cross-membership between the board of the holding company and the boards of the two Blue Cross plans meant "it is likely that conflicts of interest will result," threatening the charitable assets of the D.C. Blue Cross plan. He called for a change in board structure to reduce the amount of overlap.

D.C. law should be amended to say the assets of D.C. Blue Cross belong to the public. Current law says they belong to policy-holders and holders of notes.

The insurance commissioner should place limits on financial transfers among the two plans and the holding company. Any transfers should be in exchange for a secured note, he said -- making them clearly loans, not gifts -- and transfers of more than $1 million a year should be subject to approval by the insurance commissioner.

The insurance commissioner should review all joint purchases to see how the assets would be used and which entity holds the title.

There is no need to do a full market valuation of D.C. Blue Cross now; it is not needed until there is a for-profit conversion.

Pub Date: 11/26/97

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