Dental Benefit Providers of Maryland Inc. is a nonprofit insurance plan worth somewhere between $170,000 and $939,000 - and that difference was the subject of a hearing before the state's insurance commissioner yesterday.
Dental Benefit wants to convert to for-profit status. When Insurance Commissioner Steven B. Larsen determines how much the company is worth, that amount will be paid over to the Maryland Health Care Foundation, created by the legislature in 1997 to receive the proceeds if nonprofit health plans or hospitals convert to for-profit status.
The case of Dental Benefit matters not only in terms of the contribution to the foundation varying by several hundred thousand dollars. It may set precedents which will be used if CareFirst BlueCross BlueShield, the state's largest health insurer, files to convert to for-profit status and or to be acquired.
CareFirst has not commented on its plans, but it has indicated to state officials for months that it is considering conversion and acquisition. CareFirst could be worth a billion dollars or more.
The Dental Benefit case is the first in Maryland since the 1997 law that created the foundation and attempted to define how a conversion should take place. Yesterday's hearing demonstrated how two professionals could come up with wildly different estimates for the value of a nonprofit health plan.
When it filed for conversion, Dental Benefit hired a local accounting firm, Reznick Fedder & Silverman, which valued the nonprofit at $170,000 to $200,000. Larsen hired another local accounting firm, Ellin & Tucker, which valued DBP at between $799,000 and $939,000.
While some of the differences are related to unusual aspects of the Dental Benefit transaction, it shows that estimating the value of CareFirst, should it seek to convert, could be a process with more than its share of controversy.
"This is an art, not a science," Carl F. Miller, who did the Ellin & Tucker evaluation, said at yesterday's hearing.
What sets DBP apart is that the Maryland nonprofit is a small subsidiary of a for-profit entity. The parent company, DBP Inc., is incorporated in Delaware but has headquarters in Bethesda. It assembles and administers dental HMOs and other dental insurance plans under contract to health insurers.
The Maryland nonprofit was created to bid on government employee dental insurance plans. It has no employees of its own, and has a management contract with the for-profit parents. The parent company provides dental care to about 2.5 million members; the Maryland not-for-profit to about 20,000.
The parent was acquired by United Health Group, the huge Minnesota-based health insurer, for $105 million. In 1999, Larsen allowed the acquisition to go ahead, while keeping the nonprofit separate, pending a study of its value and the hearing.
At the hearing, Miller and Leonard Sacks, who did the valuation for the Reznick firm, agreed that three major issues - two having to do with transactions between the for-profit parent and the not-for-profit Maryland plan - led to their different conclusions. They:
Differed as to how large a management fee the nonprofit should have been paying to the for-profit parent. Adjusting the size of the fee changes the projections of the nonprofit's operating surplus, and, therefore, its value. Larsen also noted that this raised the question of whether the owners of the for-profit parent might have been benefiting unduly from the operations of the nonprofit.
Offered different estimates of how to evaluate how risky the business is. Most of the nonprofit's revenue comes from a few large contracts that are subject to competitive bidding. Different views of how risky that makes the nonprofit then lead to different estimates of future cash flow.
Disagreed as to whether to treat money provided by the for-profit parent to the nonprofit as a loan or as an equity investment, and therefore, whether it should be a liability on the balance sheet.
While most of yesterday's hearing focused on arcane points of accounting, the law on conversions also gives Larsen the power to determine whether a conversion is in the public interest. Dental Benefit testified briefly that the conversion would have no impact on premiums or availability of dental coverage.
No consumer or provider groups appeared at the hearing, but Larsen said they would have been welcome, and would be welcome at hearings on any future conversions.