A state court ruling that Blue Cross and Blue Shield of Missouri abused its non-profit status in converting 80% of its business to a for-profit venture could set the tone for how for-profit conversions are handled nationwide, according to officials inside and outside the state.
Cole County Circuit Judge Thomas Brown III ruled Dec. 30 that Missouri can seek dissolution of the company, RightCHOICE, or take its assets for public benefit because it violated the law.
The ruling, which Blue Cross will appeal, is, in essence, a reversal of much of a decision Judge Brown made three months earlier in favor of the Missouri insurer. In his Sept. 9 ruling, Judge Brown determined that the non-profit organization had no public benefit obligation arising from the reorganization.
The Missouri Department of Insurance had maintained that Blue Cross was obligated to contribute from $97 million to $500 million to a charitable trust to benefit uninsured state residents.
Several insurance officials and consumer groups say they believe the first-of-its-kind ruling might dissuade Blue Cross and Blue Shield officials elsewhere from attempting conversions to for-profit status without compensating the public for tax benefits the groups received in the past.
While the latest ruling does not require that Blue Cross establish a charitable trust, it does leave open the possibility of creating such a trust if the organization is dissolved, says Steve Holste, a spokesman for the Missouri attorney general’s office. If Blue Cross were dissolved, it would have to sell its 80% stake in RightCHOICE.
"The benefit of the Missouri decision isn’t necessarily its direct legal effect," says Colorado Insurance Commissioner Jack Ehnes. "It does provide, I would hope, some convergence of public policy perspective on these charitable trust obligations.
"We have had, up to this point, a number of transactions going in different directions, and obviously the public concern has increased steadily."
Blue Cross and Blue Shield of Missouri maintains that the Dec. 30 ruling won’t have much impact in Missouri, much less the rest of the country.
"Our understanding is that the order does not substantially change the
summary judgment in our favor issued on Sept. 9," a spokeswoman for the Missouri Blues says. Judge Brown has stayed his Dec. 30 ruling until Blue Cross’ appeal can be heard.
The spokeswoman for Blue Cross and Blue Shield of Missouri says that the judge’s earlier order, written in response to a lawsuit brought by Blue Cross, found that "the formation of our for-profit subsidiary was specifically approved by the Department of Insurance as being in accordance with all applicable insurance laws." That order found that the company had abided by all applicable laws and regulations in spinning off its managed care business as a for-profit entity, 80% of which is owned by Blue Cross and Blue Shield of Missouri, and the rest by other shareholders.
In his Dec. 30 ruling, however, Judge Brown applied a different section of Missouri law governing non-profit health service corporations, finding that the organization acted contrary to its statutory purpose as a non-profit.
The court also withdrew its earlier finding that Blue Cross was a mutual benefit corporation, and said it never intended to preclude the attorney general from
seeking to establish that Blue Cross is a public benefit corporation.
Specifically, the ruling said Blue Cross management had failed to meet its fiduciary duty to the corporation in spinning off the largest and fastest-growing part of its business.
"The creation and operation of RightCHOICE would have been within Blue Cross’ statutory authority only if reasonably necessary’ or appropriate, convenient, and suitable’ to further Blue Cross’ legitimate purposes," the judge ruled.
A non-profit health plan could operate a for-profit subsidiary, but only as a means of furthering the non-profit plan’s business, Judge Brown said. "To find that the 1994 reorganization reasonably furthered Blue Cross’ non-profit business activity, this court must identify benefits of the reorganization that were sufficient to justify a reduction of 80% or 90% percent in the service provided by Blue Cross’ non-profit health plans."
Judge Brown rejected arguments that Blue Cross benefited from the addition of $74 million in assets it received through the privatization. RightCHOICE didn’t pay dividends on the stock owned by Blue Cross and has been restricted from selling the stock, and the newly added assets don’t make up for the loss of revenue, he said.
The judge also found Blue Cross’ argument that the move was necessary for its continued survival "lacks factual support."
The privatization wasn’t necessary to raise equity capital, he said, noting that RightCHOICE has kept available capital in interest-bearing investments since the spin-off and Blue Cross’ own documents show cash flow from the operations it retained are more than sufficient to fund its operating and capital expenditures. By surrendering rights to use the Blue Cross and Blue Shield names in Missouri to RightCHOICE, Blue Cross is actually hurting its business, Judge Brown concluded.
Ironically, Blue Cross and Blue Shield of Ohio had cited a portion of Judge Brown’s Sept. 9 ruling in support of its motion for summary judgment in a case challenging the acquisition of the not-for-profit insurer by for-profit Columbia/HCA.
Craig Mayton, section chief for the Charitable Foundations Section of the Ohio Attorney General's office, believes at least one aspect of the Missouri ruling—that Blue Cross and Blue Shield of Missouri "abused their authority as a non-profit corporation" by transferring assets to a for-profit subsidiary— applies to what is going on in his state as well.
"There are some striking similarities between the transfer in Missouri and the transfer to Columbia/HCA in that respect," he says.
No impact in New York
The ruling shouldn’t have any direct effect in New York, says Mark Scherzer, counsel for the advocacy group New Yorkers for Accessible Health Coverage. He notes that Empire Blue Cross & Blue Shield already has decided to create a foundation with proceeds from its stock sale to compensate the state for tax breaks.
"But, this ruling should have an impact on plans in other states that haven’t decided to go that route," Mr. Scherzer says.
Contact Mr. Ehnes at 303-894-7455, (ext. 311); Mr. Scherzer at 212- 406-9606;
Mr. Mayton at 614-466-4462; Mr. Holste at 573-751-3321; and Mr. McConnell at 573- 751-5107.