Court says Anthem can't take over Kansas Blues

After long delays, the state's high court upheld a commissioner's decision denying the company the right to buy another plan.

By Robert Kazel, amednews staff. Sept. 1, 2003.

Like Dorothy in "The Wizard of Oz," BlueCross BlueShield in Kansas dreamed of reaching beyond the Sunflower State and becoming part of a larger and more exciting world -- in the insurer's case, by persuading the state to allow Indianapolis-based Anthem Inc. to buy the Kansas plan for $190 million.

But after more than two years of following a yellow brick road that included confrontations with state regulators and legal skirmishes, the Blues plan didn't get what it wanted in its meeting with the great and powerful Oz known as the Kansas Supreme Court. It upheld a decision by the state insurance department that blocked the sale.

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Officials had warned that an acquisition could hurt the public health, partly because it would raise health premiums for many businesses and make coverage unaffordable for some.

The ruling was a setback for Anthem, which had viewed winning the Kansas plan as its next step toward fulfilling its goal of eventually becoming the nation's top insurer. Officials at the Kansas plan expressed disappointment but also relief that the fight was behind them.

The Kansas plan said it had no interest in pursuing a merger with another insurance company. Anthem, for its part, said it would continue to look for merger partners elsewhere.

Anthem and the Kansas company announced in May 2001 that they had reached agreement to merge, and the policyholders of the Kansas plan approved the sale by a 2-1 margin. But in February 2002, Kansas Insurance Commissioner Kathleen Sebelius, now the governor, denied permission for the merger. Regulators pointed to studies that predicted Anthem could raise premiums by 20% to 25% for some Blue Cross products and that small groups could see price hikes of 30% to 40%. The Supreme Court's decision struck down a lower court's decision that had overturned the Sebelius action as beyond her authority.

"We're very pleased," said Sandy Praeger, who was elected insurance commissioner in January as successor to Sebelius. "For Kansas, it reaffirms the ability of the Dept. of Insurance and the commissioner to be able to authorize mergers and acquisitions of health insurance companies. This says to [other] states, 'You don't have to approve these just because they've been presented to you.' "

The Kansas Medical Society opposed the proposed sale because it viewed the state's Blue Cross as being "an extremely well-run, efficient company," said Jerry Slaughter, the group's executive director. The Kansas Blues returns 90 cents on each premium dollar in patient care, while Anthem returns significantly less, he said. "The state really did a thorough job [investigating the proposal]. It really dug down beneath the layers to see what the effect really would be.

"This thing probably has made other states say that if these [offers] come down the pike, maybe they do have an obligation to look into them more."

The rejection of the Anthem plan is good news for doctors because a sale probably would have led to lower reimbursement rates, according to Dawn Touzin, an attorney with Community Catalyst, a national patient advocacy group that intervened in court against the proposed merger.

According to the Kansas Blues plan, becoming part of Anthem wasn't key to its continuing to be successful but would have made it easier. The Blues plan now has a two-thirds market share and is much more dominant than other insurers in the state, but its potential for gaining new patients in Kansas is shrinking as the population base stagnates, said spokeswoman Mary Beth Brutton.

Anthem is not alone in failing to persuade state regulators to OK a Blues merger. The insurance commissioner of Maryland in March turned down a proposal by nonprofit CareFirst BlueCross BlueShield to become part of California-based WellPoint Health Networks Inc., citing concerns for patients and doctors and alleged improprieties by CareFirst's leadership in its efforts to sell.

This also isn't the first time that a state has beaten back Anthem. After Anthem and Horizon Blue Cross Blue Shield of New Jersey agreed to merge, a state court ruled in 1997 that the Blues plan, though a mutual company, was a "benevolent institution" and that its charitable assets must be preserved even during a for-profit conversion and acquisition. Anthem dropped the merger.