Why did Blue Cross change course?

On the same day last week that Blue Cross and Blue Shield of North Carolina announced it was dropping its attempt to go for-profit, state regulators released a report showing a for-profit Blue could result in a significant rise in insurance premiums and the number of uninsured North Carolinians over the next five years.

The consultants’ report–which was overshadowed by Blue’s announcement on conversion–took the company’s professed goal of a 4.3 percent jump in profits and calculated that meeting the target would mean premium increases of $562 million over five years, and an average of 13,791 more uninsured North Carolinians “on any given day” in 2006.

Company officials dismiss those numbers as purely “hypothetical” and insist there was no link between the negative information and Blue’s decision to drop its application to convert to for-profit status. “That was not a discussion point within management, it was not discussed or articulated by the board, and played no role in the decision-making process,” says Brad Wilson, Blue’s senior vice president and general counsel.

Critics of conversion and state regulators say that’s just the problem: During the 18 months since Blue Cross submitted its application to the Department of Insurance, the company failed to adequately address the crucial issues of how conversion would affect insurance rates and access to health-care coverage.

Under North Carolina’s conversion law–pushed by consumer and health-care advocates–the change to for-profit status must benefit the public. Using that test, says Martin Eakes, founder of the Durham-based Self-Help Credit Union who helped lobby for passage of the state’s tough conversion regulations, “The company was unable to show either that there was a compelling interest in why it needed to convert, or that the public interest would have benefited. The bottom line is, Blue Cross did not make its case.”

Eakes says even the carrot held out in favor of conversion–a nonprofit foundation that state law requires be created if such a change is approved–was not enough to tip the scales. He points out that the $562 million worth of rate increases cited in the recent consultants’ report is significantly higher than the estimated $35 million that foundation would have paid out in grants each year.

“Had conversion been able to meet the test, I would have been supportive,” Eakes says. “But given the facts as they emerged, the people of North Carolina would not have been better off.”

Not surprisingly, company officials dispute this analysis. “There is no possible way to determine the value [of the foundation] in advance,” said Blue’s CEO Bob Grecyzn at a press conference immediately following the company’s July 8 announcement. “Any statements to that effect are just puffery and making up numbers.”

He and other company officials say Blue pulled out of the conversion process (after spending $18 million on it) when it became clear that state regulators were going to release “confidential business information” and attach conditions–namely, rate caps and oversight of executive compensation–that other insurers are not subject to.

“Not only did we realize that we were not going to get an order that would provide a level playing field, we were not going to get that order for a long time,” says Wilson, Blue’s vice president. “We added those two things together and made the right decision. We entered this for the right reasons and we exited for the right reasons.”

It’s not that Blue Cross failed to mention insurance rates and access to care. From the start, company officials clearly stated that premiums and coverage would not rise solely because of conversion. Instead, they said market forces would continue to drive increases in the cost of health-care insurance.

Initial consultants’ reports for the DOI bore that idea out, showing that in other states where Blue Cross organizations have become for-profits, insurance rates have not gone through the roof. But as time went on, the consultants’ research drew more negative conclusions and questions from state regulators and the public mounted.

Chrissy Pearson, a spokeswoman for the DOI–which, along with the state attorney general’s office makes the final decision on conversion–says Blue Cross never provided complete answers.

“I’m not going to say they barred the door,” she says. “But every time we’d say, ‘Why do you need access to capital? Why do you need more technology? Give us specific examples.’ That just didn’t happen.”

Much of the information the public was eager to know about conversion, such as how much a for-profit Blue’s stock might earn on Wall Street, and how many people would become uninsured if the company raised rates, was kept out of the DOI’s public reports at Blue’s request.

Within those reports, the biggest question is still left hanging Pearson says, namely, “Why did they want to convert? Why did they feel it would help the state and consumers? And we’re not the only ones asking.”

Across the country, citizens and regulators have become more pointed in their evaluations of conversion requests from nonprofit Blue Cross organizations. “With conversions in the 1990s, you were looking at plans that were struggling. The idea was, convert or face bankruptcy,” says Dawn Touzin, who’s been tracking Blue Cross conversions for the Boston-based consumer group, Community Catalyst. “Now, there’s a change in the landscape. Blues are in better financial condition and you can ask more questions.”

Even Blue Cross leaders admit that the North Carolina company’s hefty profits over the past few years hurt its argument that conversion was a necessary step.

Wilson, for one, feels that attitude is unfair. “Go back and read the tone of commentary a few years ago when the company was losing money,” he says. “If you lose money people criticize you; if you make money people criticize you.”

But Touzin says failing to address the money issues head-on by making information about rates, stock options and profit margins public is what doomed Blue’s conversion attempt. “If this is such a good idea, why not release the information?” she asks. “The fact that you won’t raises suspicion. It’s sad that Blue Cross and Blue Shield had to spend $18 million to learn that.”

Blue Cross leaders insist they were forthcoming with all information, made their best arguments and have no regrets about the process. But one thing company leaders now appear intent on doing is convincing the public that being a nonprofit doesn’t preclude earning big profits.

“We’re not a not-for-profit like the benevolent society down the street–not a charitable organization,” Wilson says. “We’re a business that is structured under a statute that permits us to run a health insurance company and not have stockholders. It is essential that this company make a profit.”

What regulators and consumer groups say they’ll be keeping an eye on is what the company does with that profit–whether it is used mainly to benefit Blue’s bottom line or the public interest.

When asked for his reaction on the day Blue Cross withdrew its conversion application, Holly Springs resident Jimmy Cobb–one of the many citizens who expressed concerns about the plan to the DOI–responded this way: “While I’m glad the conversion process is now dead, I do believe that many questions have been raised concerning Blue Cross’s current nonprofit status,” he wrote in an e-mail. “Shouldn’t a nonprofit operate as a nonprofit? The goal is to maintain sufficient reserves to fund estimated future claims and to operate in an efficient manner. Who will benefit from these maximized profits? Blue Cross members? The Blue Cross management? Who?”