Blues pause in march to be for-profit

Conversions are on hold

future of trend is unclear

May 05, 2004|By M. William Salganik | M. William Salganik,SUN STAFF

A decade ago, the Blue Cross and Blue Shield Association broke with a nonprofit tradition dating from the Depression and allowed member Blues plans to convert to for-profit businesses.

That touched off a cascade. By the time Maryland-based CareFirst BlueCross BlueShield announced its intention to go for-profit in 2001, more than a dozen Blues had converted on their own or been snapped up by growing national companies.

Suddenly, in place of a cascade, there isn't even a trickle.

Regulators turned thumbs-down on conversions and sales in Kansas and Maryland. Then, in quick succession, Blues in North Carolina and New Jersey backed away from their conversion proposals.

Since the CareFirst plan was rejected by Maryland regulators more than a year ago, not a single Blues plan has proposed going for-profit.

Analysts, industry sources and advocacy groups disagree about whether conversions have slowed permanently or are simply in a lull between waves.

"I just don't see [conversions] happening frequently, particularly if organizations like ours are doing our jobs well to protect nonprofit health care and to enhance its performance," said Bruce McPherson, executive director of the Alliance for Advancing Nonprofit Healthcare. His group formed about a year and a half ago to represent and promote nonprofit insurers, hospitals and nursing homes.

Thomas A. Carroll, a health care analyst with Legg Mason Wood Walker in Baltimore, disagrees: "I can't imagine we're not going to see the Blues conversions pick up again."

Insurers need access to capital, he said, and nonprofit plans will convert because "it gets you in the game. In the future, you can tap the equity markets," selling stock to raise money.

What's clear, however, is that future conversions won't be like the early ones in the mid-1990s, when financially troubled plans often won quick approvals from state regulators.

First, the remaining nonprofit plans are healthier, both because the weaker plans were quicker to convert and because all health insurers have recently been booking fatter profits.

CareFirst, for example, posted an operating surplus of $171 million last year - double what it earned the year before its attempted conversion.

"Most of the Blue nonprofits have been quite successful in implementing a capital-building and retention strategy - without access to the equity capital market - while adding 3.8 million new customers ... and making significant infrastructure and product investments," Susan R. Barrish, a former Blue Cross Association official, wrote in a recent report for McPherson's nonprofit alliance.

Conversions have been pushed, Barrish wrote, by "Wall Street investment firms" that stand to pocket fees for conversions and acquisitions.

Second, the Kansas and Maryland battles saw the development of what amounts to a scrutiny industry for Blues conversions. Take the one current conversion case, in the state of Washington.

Steven B. Larsen, who blocked the CareFirst deal when he was Maryland's insurance commissioner, did a report for the hospital association there, pointing out problems with the proposed conversion. Calvin Pierson, president of the Maryland Hospital Association, gave a deposition in support of his counterparts.

And two consultants who worked for Larsen in Maryland - Patrick Cantillo, a Texas lawyer, and the Blackstone Group, a New York investment banking firm - have assumed similar roles for Washington's insurance commissioner.

"You've got an army of experts, folks out for hire like Mr. Larsen," said Eric Veiel, a health analyst in the Baltimore office of Wachovia Securities. (Larsen is now in private practice.)

"Consumers, regulators and providers have gotten a lot smarter," said Dawn Touzin, an attorney for Community Catalyst. Her Boston-based group, in a joint project with Consumers Union, works with local consumer organizations on conversion issues.

The result has been more contentious battles over conversion, attracting more attention - and ending with more regulators turning thumbs-down.

Early Blue Cross and Blue Shield plans offered coverage at one low rate to pretty much anyone who wanted to buy it, and they continued that way for decades. They were generally known as "insurers of last resort," willing to write policies for just about anyone, because they could spread the risk over a large membership pool.

In the 1980s, however, for-profit insurers began selling coverage at lower prices to young and healthy members. In the 1990s, HMOs, many of them for-profit, began offering cut-rate policies to buyers willing to accept more restrictions on care.

Blues plans were slow to adapt to the competition. Membership in the system nationally plummeted from 87.8 million in 1980 to 65.2 million in 1994.

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