In response to loud protests from consumer groups, Empire Blue Cross Blue Shield is rewriting the mission statement for a proposed charitable foundation that would be created as part of its conversion to for-profit status.
When the insurer announced this summer that the foundation’s focus would be on health-related research, education and training programs, consumer advocates protested that its mission should be to provide access to health insurance for poor individuals.
"We thought that the proposal looked more like a subsidy to the academic medical centers," said Mark Scherzer, legislative counsel to New Yorkers for Accessible Health Coverage (NYAC).
At stake is more than $100 million for charitable purposes. The potential value of Empire’s stock is more than $1 billion, according to NYAC. Empire proposes to transfer all of its assets, liabilities and businesses to its for-profit subsidiaries, which were formed last year. It would then set up a charitable foundation that would own all of the stock of the new for-profit Empire. Empire estimates that its initial public stock offering would raise at least $100 million for the foundation’s coffers.
Pilot programs on access
Stung by the criticism, Empire expects to complete revision of the foundation’s mission by early next year. The insurer is exploring "innovative ways of providing access to health care such as pilot programs that leverage the dollars," said Empire spokeswoman Deborah Bohren.
The main opposition to the original mission statement came from a coalition of 50 voluntary health and consumer groups, which include NYAC and Consumers Union. They argued that the proposal would violate New York state law. Under the state’s doctrine of quasi cy pres, a charitable foundation must continue the mission of the original not-for-profit organization.
Empire has historically been the health insurer of last resort for New York’s poorest residents, said Chuck Bell, programs manager for Consumers Union’s Yonkers, NY office. Three million New York residents do not have health insurance. "We have a number of other foundations that focus on medical research, but very few foundations focus on expanding access to health care coverage," he said.
Empire must obtain for-profit status to survive in today’s fiercely competitive for-profit health care market, said Empire President and CEO Dr. Michael A. Stocker. Empire has lost half of its 10 million members over the past five years, and it has only recently halted its financial slide into nearly $800 million of debt by 1995. If Empire does not become a for-profit, its charitable assets will dissipate, he said.
Empire incurred much of its debt after the federal government ended the Blues’ tax exempt status in 1986. The change placed Empire and the other Blues in a double bind, said Stephen Isaacs, president of the Center for Health and Social Policy, which is studying foundations created by for-profit conversions.
Being a non-profit under state law, but being required to pay taxes under federal law is "the worst of all possible worlds," Mr. Isaacs said. "Not only did they have to
pay taxes, but they could not float tax-exempt bond issues to raise money because they were no longer federally exempt." However, Empire has since recovered and now has a surplus of $330.2 million.
Consumer advocates predict that it will take at least until next spring for Empire’s conversion plan to be finalized. The plan must first win the approval of the state Attorney General and the Superintendent of Insurance, and then be accepted by the New York Supreme Court. State Attorney General Dennis C. Vacco plans to hold a wrap-up public information session on Empire’s final proposal, and insurance chief Neil D. Levin will soon hold his own hearing. Dates have not been set yet for either event.
Meanwhile, Empire is not supporting proposals by two existing non-profit foundations, United Hospital Fund and Group Health Incorporated, to act as Empire’s charitable foundation.
"I think it’s interesting that a lot of people want the money. But, our proposal is for a new and independent foundation.," Ms. Bohren said. "If you use an established foundation you can save on some overhead start-up costs, but every organization brings with it its own history, its own pros and cons. We want to set up a foundation with a clean slate."
Attorney General opinion
Another issue facing Empire is the legality of its proposed conversion to for-profit status. Assemblyman Alexander ("Pete") Grannis, D-NY has asked Attorney General Vacco to determine whether state insurance law prohibits such conversions. The law {Article 43, Section 4301 (J)} states in part that "no medical expense indemnity corporation, health service corporation or hospital service corporation shall be converted into a corporation organized for pecuniary profit."
Mr. Grannis, who chairs the Assembly Insurance Committee and supports the conversion, said the law might need to be amended to accommodate Empire’s plan. Unless the law is clarified, Empire could face lawsuits, depressed stock prices and a subsequent erosion of its charitable assets, he said.
However, it is unlikely this legal question will be an obstacle to Empire’s plan. Mr. Vacco has informally indicated that current law permits the conversion and Mr. Grannis said he will abide by the Attorney General’s opinion.
Controversies avoided
Empire Blue Cross and Blue Shield has avoided most of the other hotly debated controversies over plans by other Blues to change to for-profit status, said Empire’s Ms. Bohren. "We’ve tried to learn from what other Blues have done right and done wrong, and develop a restructuring proposal that does everything the right way."
Unlike Blue Cross and Blue Shield of New Jersey and Blue Cross of California, Empire has not contested its obligation to contribute assets gained through tax breaks and other financial incentives to a charitable foundation. On Oct. 24, BCBS of New Jersey lost another round of its legal battle to avoid being classified as a charitable organization.
Empire’s conversion plan calls for the formation of an independent charitable foundation funded through the sale of Empire’s stock. The plan forbids any financial officer or other employee of Empire to benefit financially from the insurer’s conversion. To avoid any conflict of interest, Empire would hire an outside executive search firm to identify candidates to serve on the foundation’s 15-member board of directors. The directors would represent a wide range of interests in the community, ranging from the hospital industry and medical providers to consumer advocates.
In contrast, Blue Cross of California originally proposed a generous stock option plan for its top executives, which it was later forced to scrap because of public indignation. Under mounting public pressure, the giant insurer finally agreed to create a charitable foundation, but it attempted unsuccessfully to "stack the board with members of the for-profit Blue Cross," Isaacs said.
After a long battle, the California Blue set up two new foundations with an endowment of more than $3 billion. Foundation grants totaled $160 million last year. Board members were selected by three search firms and the process was overseen by the state corporations commission.
Contact Mr. Scherzer at 212-406-9606; Ms. Bohern at 212-476-3552; Mr. Bell at 914-378-2193; Mr. Grannis at 212-860-4906; and Mr. Stocker at 212-476-1000.
Charitable foundation created by Empire BCBS should focus on uninsured, consumer groups say
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