`Greening' of Blues a gray area

Many health plans drop nonprofit status to better compete

Yet, experts are divided

No. 1 insurer in area, CareFirst BlueCross, is expected to switch

March 04, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

In 1989, there were 73 Blue Cross-Blue Shield plans, all nonprofits. Today, there are 46, but some of them are traded on Wall Street and some are for-profit mutual companies. And some of them are nonprofits that have for-profit subsidiaries.

If CareFirst BlueCross BlueShield, Maryland's largest health insurer, converts to for-profit status, as is widely expected, it will be one more change in a rapidly changing Blues world.

The national BlueCross BlueShield Association reports 36 mergers, for-profit conversions and other transactions among Blues plans in the past decade. Several other deals are in the works.

"One could characterize it as the greening of the Blues," said Joy Grossman, associate director of the Center for Studying Health System Change and author of a forthcoming report on the changing role of Blues plans.

"What's going on now," she said, "could be the final step in transforming the Blues into something that looks more like other health insurance plans."

Blue Cross and Blue Shield of Maryland proposed creating a for-profit subsidiary in 1995, but shelved the idea when regulators and legislators objected.

Instead, the Maryland Blues joined with the District of Columbia Blues in 1998, creating CareFirst as a holding company. The Delaware Blues were brought into the fold last year.

CareFirst, based in Owings Mills, covers about 3 million people in Maryland, the District of Columbia, Delaware and Northern Virginia.

Although CareFirst has declined to discuss its plans publicly, one of its officials testified in Annapolis last week that the insurer still is undecided about converting.

A for-profit conversion would give nonprofit Blues better access to capital, which would allow them more flexibility to expand or otherwise develop strategies to compete, according to analysts and the plans themselves.

Some experts, however, question whether conversion is really needed to provide money to operate.

What isn't debated is that the publicly traded Blues plans have shown growth in earnings and stock price beyond industry norms.

Blue Cross and Blue Shield plans were created by medical societies and hospital associations during the Depression, when commercial insurers showed little interest in health care. (Maryland Blue Cross, for example, was started by 15 hospitals in 1937.)

"In the late 1980s, they began to lose significant market share to the HMOs," Grossman said. "There were financial problems and management mishaps. That served as a wake-up call to the [BlueCross BlueShield] Association, and to its members, that they needed to change the way they did business."

In 1994, the association began to allow its members to convert to for-profit status.

The first to do so was Blue Cross of California, now WellPoint. "We were facing very well-capitalized, aggressive competitors," said Thomas G. Geiser, executive vice president and general counsel, describing the thinking that led to what was, at the time, a radical move for a Blues plan.

Similarly, Brooke Taylor, vice president for corporation communications for Trigon Healthcare Inc., the converted Virginia Blues plan, said her company went for-profit in 1997 because "we believed that going public was the best way to insure that we remain competitive with the large, national companies that were targeting our region."

Sandra Van Trease, president and chief operating officer of RightCHOICE Managed Care Inc., the converted Missouri Blues plan, said the switch allowed it to broaden its product portfolio and increase market share.

David Shove, analyst for Prudential Securities, said, "When you get to be a certain size - and CareFirst might fall in this category - you need economies of scale, so you need to keep growing, and you need cheap capital." And, he added, "Equity capital is generally cheaper than debt."

One skeptic toward the access-to-capital argument is Uwe E. Reinhardt, a Princeton University economist.

"If you want to go the equity market, you have to have good cash flow, or nobody would buy the shares," he said. "If you have good cash flow, you should be able to sell bonds. My own feeling is that the argument they need to convert to get access to capital is not persuasive."

Another complication in the access-to-capital discussion is that for-profit Blues plans may not get all - or any - of the money raised by an initial public offering.

Since many nonprofits enjoy special tax advantages and are effectively owned by the public, the Blues plans are required to make a contribution to a foundation or for some other public purpose as the price of conversion.

RightCHOICE and Trigon, as early converters, were able to come out of the process with some cash, but most analysts think conversions in the future will follow some variation on what is being called "the WellPoint model."

WellPoint, the former Blue Cross of California, contributed all its stock to a foundation, which in turn sold the shares over five years to raise money for projects.

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