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Maryland bucks national trend, blocks Blues for-profit conversion

The decision, based in part on how physicians would be negatively affected, is expected to embolden opposition to such moves in other states.

By Robert Kazel, amednews staff. March 24/31, 2003.

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The road ahead for Blue Cross Blue Shield plans that wish to convert to for-profit status, possibly in an effort to be acquired by large, private insurers, may be getting bumpier.

The Maryland insurance commissioner's blistering, impassioned rejection March 5 of the proposed for-profit conversion of CareFirst BlueCross BlueShield is likely to energize regulators to scrutinize such proposals with intensity, industry analysts say. Commissioner Steven B. Larsen cited strained relations between physicians in states with Blues plans run by WellPoint Health Networks Inc., which would have acquired CareFirst after its conversion, as one of many reasons to scotch the plan. A conversion would "negatively affect quality of care," Larsen said.

"It's a big red flag that every other state is going to look at," said Clifford A. Hewitt, a health care analyst in Baltimore. "If you're on a board of a Blue Cross plan and you're contemplating converting to for-profit, I think you're going to really think twice now if it's in the best interest of subscribers."

CareFirst, which said in a prepared statement it was "shocked and disappointed" by Larsen's move, has until early April to challenge the decision in court. The plan has not indicated whether it will.

The Maryland decision comes as four other states wrestle with proposed Blues plan conversions.

In Kansas, the state Supreme Court is expected to rule April 18 over whether Blue Cross Blue Shield of Kansas may convert to for-profit status. The state insurance department had said last year that the Blues' conversion, and subsequent acquisition by Anthem Inc., would raise premiums by millions of dollars.

New Jersey, North Carolina and Washington also have conversions pending.

Sam Cullison, MD, past president of the Washington State Medical Assn. and a family physician in Seattle, called the Maryland decision a "heartening tale" that he said could very well influence the state insurance commissioner as he decides whether to OK Premera Blue Cross's conversion request. "Maryland certainly made the right choice. We see that there are precise parallels in the state of Washington."

Dr. Cullison said the proposal to convert in Washington is "frightening both to doctors and patients" in the state and that Premera's claim that access to new pools of capital will allow it to hold the line on benefit increases is "a skeleton without much meat on it."

The WSMA is officially opposing the conversion.

The drive to convert

Blues plans have successfully converted to for-profit from nonprofit status in 14 states and Puerto Rico, mostly during the 1990s, with the latest being New York State's plan, Empire Blue Cross Blue Shield's conversion in 2002.

The Blues say they need to convert to get access to capital through stock offerings and other means so they may remain competitive in a consolidating health plan industry. In fact, in all but Wisconsin, New York and Puerto Rico, the converted plans were snapped up either by Thousand Oaks, Calif.-based WellPoint or Indianapolis-based Anthem after conversion.

In many cases, the plans fought state regulators, courts and physicians for the right to convert, but ended up getting what they wanted, with the notable exception of New Jersey, where a conversion plan was rejected in 1998. Physicians, for the most part, reported lower reimbursements and greater troubles with the for-profit plans than they did with their nonprofit predecessors.

So the fact that CareFirst got a fight from the Maryland insurance commissioner, as well as the state's physicians, was not unusual. But analysts say it's the level of the fight that could put a chill on future Blues conversions.

Larsen's 300-page report blasted most of the methods by which the insurer strove to be bought by WellPoint, including accepting an undervalued acquisition price and overvalued bonuses to management for selling.

Analysts expect Maryland's decision to short-circuit CareFirst's conversion efforts in other states it operates in.

"It certainly is the strongest condemnation of a Blue Cross Blue Shield plan I am aware of," said Doug Sherlock, senior health care analyst with the Sherlock Co. in Gwynedd, Pa.

Insurance regulators are likely to take note of Larsen's words and gain courage to question future conversion initiatives, said Duane Sobecki, senior partner in Focused Results, an Indianapolis-based health care consulting firm.

"I think it will embolden other state insurance commissioners, if they can't stop a merger, to at least make sure the state gets the fair proceeds of the conversion," he said, referring to charity proceeds and untaxed income accrued by the Blues plans as nonprofit entities. Generally, Blues plans agree to put the money into a charitable foundation in order to convert, although plans and states argue over how much money the plans must turn over.

Most physicians in Maryland had been opposed to the conversion and sale of CareFirst. Many said CareFirst didn't need to access capital markets and already had amassed a surplus of more than $700 million since the early 1990s, in part through reductions in physician reimbursements and a strategic pullback from low-profit member groups such as Medicaid and Medicare.

Catherine Smoot-Haselnus, MD, president of MedChi, the Maryland State Medical Society, said Larsen's decision could signal other nonprofit Blues plans that becoming investor-owned might meet unforeseen obstacles. "I hope it will really reverse some trends we see across the country," she said.

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