A fantasy? Nope. This story’s for real, and you may qualify for some of the gold. Its current owner is your local Blue Cross and Blue Shield, one of the 63 Blues plans that insure the health of one in four Americans. The Blues are not-for-profit companies. Now, many of them want to sell stock-in the interest of providing better health care and stronger insurance, they say. But while they may be nonprofit, the Blues aren’t impoverished. Thanks to years of state and federal tax breaks, most of them are rich. Legislators, policyholders, consumer groups, would-be investors and the Blues’ own executives are grabbing for that booty in what may be the biggest gold rush since Sutter’s Mill. “That’s the heart of the debate,” says Texas lawyer Patrick Cantilo, an adviser to state regulators. “Are we letting the value go to the new investors, or are we letting it go to someone else?”
Nobody cared about that question back in the 1930s, when the Blues were set up by doctors and hospitals who wanted to be sure they’d get paid for rendering care. Health insurance was still rare, and the Blues won tax exemptions in return for promising to insure all comers. The public came to view the trademark cross and shield as emblems of some higher virtue. The image persists, but reality has changed. The federal tax break was curbed in 1986. Most states have revoked the Blues’ special tax treatment and freed the companies to reject high-risk customers. By now the insurance policies and health-maintenance organizations that most Blues offer aren’t much different from anybody else’s. “When you hear the phrase not-for-profit, people think, ‘charitable foundation’,” says Patrick Hays, president of the Blue Cross and Blue Shield Association, which franchises the name. “They are definitely not charities.”
But they’re still nonprofits therein lies the rub. For-profit companies like United Healthcare and US Healthcare–soon to be acquired by insurance giant Aetna–have muscled onto the Blues’ turf. “The public isn’t looking for whether we’re profit or nonprofit,” says Roy Heimburger, CEO of Blue Cross and Blue Shield of Missouri. “They’re looking for value.” Blues have fought back by setting up for-profit HMOs. And once there’s a for-profit subsidiary, well, why not take the entire company on the stock market. Unless they can raise more capital selling stock, Blues execs claim, they can’t fend off the competition and finance the ever-rising cost of medical care.
Of course, there’s more to it than keeping up with the Aetnas. The Blues that want to become for-profits are hardly lacking for resources, says Colorado Insurance Commissioner Jack Ehnes. “These are not cash-short companies. These are heavy, heavy balance sheets.” But even if a Blue is well heeled, going public has attractions. Like stock options for execs, which a nonprofit can’t offer but which for-profit Blues will hand out generously the moment they issue equity. Like the chance to snap up other companies, which is hard for a nonprofit to justify but which for-profit companies do all the time. Like extracting more revenue–“unlocking the value,” as Wall Streeters say–from assets like customer lists and the Blue Cross Blue Shield name. Add up all the advantages of issuing stock, says Princeton economist Uwe Reinhardt, and “the temptation is irresistible.”
Like that gold rush back in ‘48, this one started in California. In 1993 Cal Blue Cross sold the public 20 percent of WellPoint Health Networks, its for-profit HMO. WellPoint took off like a rocket and now covers 2.8 million people. Step two: Cal Blue Cross proposed to fold itself into WellPoint. Whoa! said regulators: the nonprofit’s assets–including its 80 percent of WellPoint–are for the public’s benefit. After years of dickering, Cal Blue Cross gave in. On June 1, it will hand $1 billion, plus $2.2 billion in WellPoint stock, to two new foundations. “The state has gotten what it’s entitled to,” says Harry Snyder of Consumers Union in San Francisco. Much of that stock will eventually be sold, leaving the foundations to spend about $200 million a year on medical research and care for the poor.
Colorado’s legislature is looking to emulate California. But elsewhere, Blues are fighting to hold on to their hoards even as they turn capitalist. In Georgia, they’ve won: thanks to a Blue-backed law passed by the legislature, 160,000 policyholders of Blue Cross and Blue Shield of Georgia will each get five shares of stock-value still uncertain-in the for-profit Blue, but the company will hold on to the $140 million in its treasury. Virginia’s Trigon Blue Cross Blue Shield had the same idea, until a Richmond newspaper revealed that Trigon had hired the law firm of the state senate majority leader. The embarrassed company then agreed to hand over $175 million–its net worth at the time it lost its tax exemption eight years ago -to Virginia: s general fund.
The next battle will be in Ohio. On March 29 Columbia/HCA, the nation’s largest hospital company, agreed to buy 85 percent of Blue Cross & Blue Shield of Ohio’s business. It’s an unprecedented marriage. But check the prenuptial agreement. If regulators sign off, a small nonprofit insurance company will survive as Ohio Blue. That company–already quite healthy, thank you–would get Columbia’s cash. Policyholders would get nothing. And even though Ohio Blue had a tax exemption until the mid-1980s, the public wouldn’t see a cent of the $400 million buyout. “It doesn’t come up because we’re a taxpaying company,” says spokesman William Silverman. So who’d be better off from the sale of this nonprofit’s assets? Mostly, it seems, Ohio Blue’s execs, several of whom would get jobs, consulting contracts or cash for agreeing not to work for competitors,
Other Blues’ plans are carefully eying the action-and regulators are nervously eying the Blues. Colorado’s Ehnes blocked Colorado Blue’s for-profit ambitions until the company rescinded a plan, which had been secret, to reward executives with big bonuses as soon as the company sells stock. In New Mexico, where Blue Cross may try to switch to for-profit status next year, Insurance Commissioner Chris Krahling insists that it start giving patients a share of discounts it gets from doctors and hospitals. In Missouri, Commissioner Jay Angoff warns that Missouri Blue Cross is surreptitiously becoming a for-profit company. “The value of the nonprofit belongs to the public,” Angoff insists. Not so, rejoins CEO Heimburger–and in any case, he adds, the state has no claim on the company’s assets. Who does? The folks who built the Blues six decades ago worried more about treating patients than controlling assets. In the age of managed care, their successors don’t have that luxury.
As the Blues go for-profit, states must divvy up billions in assets.
Now a for-profit company; 160,000 policyholders will get shares this spring.
Will become a for-profit company June 1. Its $3.2 billion in assets will go into two new foundations for health projects.
Owns 80 percent of Right-Choice, a for-profit HMO. Some officials say the state should claim its assets.
Hospital giant Columbia/HCA proposes to buy Ohio Blue HMO for about $400 million. Execs want proceeds to stay with Blue Cross.
Virginia Blue will have to return $175 million to the state and more to customers in order to go for-profit.
The legislature is now debating a bill to let Colorado Blue sell stock. The value of the existing nonprofit would go into a foundation.
