December 04, 2001|By M. William Salganik | M. William Salganik,SUN STAFF
CareFirst BlueCross Blue- Shield's plan to convert from nonprofit to for-profit status and be acquired by a California company jeopardizes the state's health care financing system, according to a study for the Abell Foundation released yesterday.
Moreover, the report concludes, there are no "economic or business reasons why Blue Cross of Maryland should be sold."
"The loss of Maryland's commitment to a system that protects the poor and the otherwise uninsurable, while providing a predictable environment for the state's hospitals and insurance companies, would be an intolerable price to pay for CareFirst's corporate ambitions," says the report written by Carl J. Schramm, former head of the Johns Hopkins Center for Hospital Finance and Management.
CareFirst spokesman Jeffery W. Valentine said the health economist's report was "rife with factual errors and misstatements."
Valentine said CareFirst did not see the report until late yesterday, and he could not comment in detail. However, he said, since financial data is reported differently by for-profit and nonprofit insurers, Schramm's mixing of the data "significantly skewed the conclusions."
Schramm said he had complied with an Abell Foundation request to provide CareFirst with an opportunity to comment on the report before it was released. He said he'd made some minor corrections based on CareFirst's responses.
Valentine said Schramm had "walked through" the report for CareFirst executives, but had not offered the insurer an opportunity to comment in detail.
The report will help define issues and shape the debate over the conversion and sale, said Casper R. Taylor Jr., speaker of the House of Delegates, who said he hasn't read the report but had discussed its general findings with Schramm.
Most of the 111-page report consists not of ringing rhetoric, but of academic and economic analysis. That's not surprising for Schramm, who is not only a former professor but now chief executive officer of Greenspring Advisors, a Towson merchant banking firm concentrating on health-related businesses.
Robert C. Embry, president of the Abell Foundation, said the initial request for an independent review came more than six months ago from Lt. Gov. Kathleen Kennedy Townsend.
Embry said the foundation, which paid $80,000 for the report, did not have a position on the CareFirst proposal.
CareFirst announced Nov. 20 that it had signed a deal under which it would shift its nonprofit status to for-profit and be bought by WellPoint Health Networks Inc. for $1.3 billion. WellPoint operates for-profit Blue Cross plans in California and Georgia.
That money - $450 million in cash and $850 million in WellPoint stock - would be divided among the jurisdictions where CareFirst operates: Maryland, the District of Columbia and Delaware. The money would be used for foundations or another public purpose.
The deal requires approval of insurance regulators in the three jurisdictions and action by Congress, a process that is expected to last a year or more.
The report was written before CareFirst's announcement, and CareFirst has yet to detail its own reasons for converting.
Schramm said he was not opposed, in principle, to for-profit health coverage. "I'm a for-profit guy. I'm a capitalist," he said, noting that he once headed the Health Insurance Association of America, a trade group for for-profit insurers.
Schramm said he looked at three main clusters of issues: whether "the economics of insurance compel this transaction," how to value and use CareFirst's assets if it were to become a for-profit company, and the potential impact of the conversion on Maryland's health regulatory system.
Blues' plans contend that consolidating into larger entities will make them more efficient and more competitive. But, the report said, the nation's 10 smallest Blue Cross plans - all nonprofits - have an average operating margin slightly higher than the 10 largest, a group that includes for-profit as well as nonprofit companies.
And while some health insurers, including WellPoint, have thrived through acquisitions, others have run into problems. In some acquisitions, the report said, "the integration of multiple systems will require significant and expensive retooling."
As for valuing assets, the report said that nonprofit Blue Cross plans had built their value through tax breaks and hospital discounts, and that this should be taken into account in placing a value on CareFirst.
If the transaction is approved, the state should be paid in cash, or should have some sort of protection in case the value of the stock drops, report said.
The report also called for a foundation to take over an earlier Blue Cross role as "insurer of last resort," making affordable insurance available to those who have trouble getting coverage.
