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Why health-care insurers keep changing the rules

by Kathleen O'Connor
Special to The Times

Premera Blue Cross, the state's second-largest health insurer with nearly 756,000 members and over 7,000 employers, has quietly been converting some of its business from nonprofit to for-profit status.

Why should you care? Read on.

In November 1998, Premera created Premera Healthcare, Inc. (PHI), a wholly owned, for-profit subsidiary of the Washington-Alaska Group Services, Inc. (WAGS), another wholly-owned, for-profit subsidiary of Premera Blue Cross.

In January, PHI applied to the state insurance commissioner to issue 50,000 shares of stock to capitalize the subsidiary, which already had $10,000 in capital. The Washington-Alaska Group was the sole shareholder.

Add to this Premera's new CEO starting in July, who served as the chief financial officer of HealthNet and who participated in the conversion of Blue Cross of California from nonprofit to for-profit.

It is not just Premera. Regence wants a for-profit subsidiary as well. Regence, created as a holding company for the four separate nonprofit Regence Blue Shield organizations in Washington, Idaho, Oregon and Utah, has filed to create a new for-profit operational company for joint data management, which will be funded by these four nonprofit organizations in the form of stock. As the state's largest insurer, Regence has over 888,000 insured members and another 195,000 who are with employers who self-insure. Boeing ranks as its largest client.

So, what's the big deal? As nonprofit organizations, Premera Blue Cross and Regence Blue Shield, worth $220 million and $500 million, respectively, have enjoyed tax advantages not available to for-profit corporations. If they convert, in whole or in part, what returns do we as taxpayers get for our subsidy of these organizations?

Not chump change

When Blue Cross of California transferred a majority of its stocks into a for-profit subsidiary, the state cried foul and Blue Cross had to pony up $3.2 billion.

But Washington state has no law governing these conversions. The state's Holding Company Act covers property, casualty and life insurers, but HMOs and health-care service contractors, such as Premera and Regence, are not covered by that law. This means, at the present time, HMOs and health care service contractors can do what they want with their assets and transfer whatever they want from their nonprofit business into for-profit corporations without answering to anyone.

The track record

California is not alone in demanding payment. And, the payments are substantial. Colorado obtained $155 million from Blue Cross/Blue Shield of Colorado. Connecticut got $41.5 million. Blue Cross/Blue Shield of Kentucky settled for $45 million. New Hampshire Blue Cross set aside $80 million for health care because of its conversion. Virginia recaptured $175 million in charitable assets for the state. The list goes on.

Over 20 states now have, or are considering, laws to regulate these conversions and require payments to the public for the advantages the insurers have enjoyed as nonprofit corporations.

Most of these settlements came about after years of lawsuits and litigation. Missouri alone waged a six-year fight with its Blue Cross. Texas and Illinois are fighting mergers and suing for assets. Delaware's conversion stalled after the state got involved. Blue Cross/Blue Shield of Kansas has backed away from its conversion once the state attorney general opposed the move. You would think these plans would learn the lesson.

Who wins? Who loses?

Nonprofit organizations are licensed as such because they are seen as serving the public good. Consequently, they are not required to pay most state and federal taxes.

Unlike a nonprofit organization, for-profit shares can be sold for the benefit of individuals and used for executive compensation and bonuses, as well as capital generation.

The potential gain from these conversions is for the new company and its shareholders, not the public.

The loss to the people of the state is the money we would have had if those revenues and assets were taxable like other corporations. So, if these nonprofits want to change the rules of the game after years of nonprofit status, what do they owe the people of the state? Premera Blue Cross has been a nonprofit for 55 years. Regence for 83 years. What is the value of our public subsidy of these organizations?

Call a moratorium

A bill to protect the public interest and regulate these conversions never made it out of committee in Olympia. The Holding Act has not been amended. Interim studies, however, have been proposed. These studies are essential, but what is even more important is being sure we get a return on our investment, especially at a time when Initiative 695 has reduced funds for public health programs.

We need a moratorium on any conversions until we can be assured the public good is being met and that the public, not just corporations, will get a return on its investments.

Kathleen O'Connor is a health-care industry analyst with over 20 years in various sectors of the health-care industry. She resides in Seattle.

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