A New Jersey state appeals court ruled recently that Blue Cross and Blue Shield of New Jersey is a charitable organization. The ruling may have the effect of forcing BCBS to give an estimated $1 billion to charity if it converts to a mutual insurance company as is proposed.
A coalition of health and consumer groups said the insurer accumulated financial benefits worth $1 billion thanks to the tax breaks it enjoyed during its 60 years as a nonprofit insurer.
The appeals court ruling and the original ruling by the state Superior Court focused on the very narrow issue of whether the insurer was a charitable organization under the statutes regulating it.
In upholding the Superior Court ruling, the appeals court agreed that Blue Cross is a charitable organization. But the appeals court did not rule on whether the state Commissioner of Banking and Insurance has the authority to extract a charitable contribution from the Blue as a condition of its proposed mutualization.
A spokesman for the insurer said it might appeal the decision to the state Supreme Court or initiate a new legal action. The insurer has 60 days from the Oct. 24th ruling to file an appeal.
Charity designation dispute
The dispute began last year when Blue Cross filed a proposal to convert to a mutual and simultaneously filed for the mutual to merge with Anthem Insurance Companies, Inc. of Indiana. New Jersey Attorney General Peter Verniero issued an advisory opinion stating that the insurer was a charitable organization and should not be allowed to convert unless it set aside its assets for the public’s benefit. Blue Cross responded by filing a lawsuit against the state. Anthem subsequently dropped its merger attempt.
Blue Cross argues that "we have never operated as a charity; we have never given away health care," company spokesman Fred Hillmann said. Furthermore, tax breaks received by the insurer were "insignificant," he said.
"Our role of insurer of last resort almost put us out of business. In 1988 we had a deficit of $280 million." The state legislature recognized the problem, he said, and in 1992 passed a law to alleviate Blue Cross of its responsibility to be the state’s health insurance safety net.
Chuck Bell, programs manager for Consumers Union, disagreed, saying that under a state law, Blue Cross is defined as a "charitable and benevolent" institution. It should therefore "recognize its obligation to transfer its assets to a charitable foundation if it converts to mutual status."
Companies often convert to mutual status to escape from their obligation to transfer their assets to a nonprofit foundation, Julie Silas, a staff attorney for Consumers Union said. "We’ve seen in the past that mutualization is a stepping stone to becoming an outright for-profit stock company."
One example is Kentucky Blue Cross and Blue Shield whose hundreds of millions of dollars in assets were absorbed by Anthem when the two companies merged in 1993. The state attorney recently sued Anthem to recover the money for public use.
In Connecticut, the attorney general is expected to issue an opinion soon on whether the state’s for-profit Blue Cross and Blue Shield must preserve and protect charitable assets if it merges with Anthem. Mr. Bell said the public is entitled to these assets for two reasons: the insurer was a nonprofit health services corporation until 1984, and under a special state charter it must be operated solely for the promotion of social welfare.
Appeal in Missouri
Blue Cross and Blue Shield of Missouri is appealing a court ruling that found it abused or exceeded its authority as a nonprofit by transferring its assets to a for-profit subsidiary which benefits only private shareholders.
Meanwhile, the national Blue Cross and Blue Shield Association makes a distinction between being a non-profit and being a charity with obligations to the public. Not-for-profits don't take donations," said spokeswoman Iris Shaffer.
Contact Mr. Hillmann at 973-466-8744; Mr. Bell at 914-378-2193; and Ms. Shaffer at 312-440-5572.
Appeals court rules BCBS of NJ is charity, raising prospects for creation of foundation
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