New York, New Jersey hoping for big payoffs from health plan conversions

State officials in New York and New Jersey are considering approving nonprofit health plan conversions to for-profit companies on the condition that most of the initial cash windfall will go to strapped state coffers.

The strategy is controversial. The prospect of conversion funds being used to buttress state budgets is worrisome to some consumer groups and medical associations, which argue that any cash generated should be spent, as it has been in other states, on charitable foundations to ease the burdens of the uninsured. In such conversions, cash is raised by selling stock to private investors in an initial public offering.

"There's a lot of money to be had," said Dawn Touzin, director of Community Catalyst, a Boston-based national health care advocacy organization. "It's a very attractive carrot. I don't minimize the challenge that state legislators are facing, but to prompt a conversion to get money is a very short-sighted solution."

In New York, which will face an estimated $5.1 billion budget deficit next year, Gov. George Pataki on Jan. 24 submitted to the state Legislature a budget proposal that includes blanket permission for all nonprofit health plans to convert to publicly traded corporations.

Under Pataki's plan, 95% of the proceeds of any conversion's IPO would go for state purposes and only 5% would go toward a charitable health care foundation. The first $400 million from a conversion would be pumped into a state pool that helps pay for a variety of health-related programs, including subsidies for hospitals and medical education. But the fate of the rest of the conversion proceeds would be spelled out by future legislation, and the cash might be earmarked for anything from public schools to state employee pensions.

The prime candidate for the next big conversion in New York is the Health Insurance Plan of Greater New York, the largest HMO in the New York City area. Conversion could be a means of reaping an estimated $1 billion or more for state programs, according to health care experts.

HIP executives are supportive. "We look forward to working with Gov. Pataki and the Legislature to accomplish this promising transformation," Ron Maiorana, HIP's senior vice president for public affairs, said in February. Consumer watchdogs, however, are viewing a possible HIP conversion with alarm.

"The new statute that the governor has proposed doesn't guarantee that the money [beyond the first $400 million] is going to go to health at all," said Mark Scherzer, attorney for New Yorkers for Accessible Health Coverage, a coalition of citizen groups.

The Medical Society of the State of New York said it had taken no position on the bill yet.

If the New York legislation goes through, it wouldn't be the first time the state allowed a plan to go for-profit without requiring it to channel most of the funds from the IPO into a nonprofit health care foundation.

In November 2002, New York legislators enabled Empire BlueCross BlueShield, the state's largest non-profit insurer, to convert to a publicly traded corporation, but designated the $400 million raised in the company's initial public offering for three years of raises for unionized hospital and nursing home employees.

As in Pataki's current budget proposal, only 5% of the proceeds was to be set aside for a foundation to serve the state's needy. Lawsuits brought by consumer groups over the conversion are pending, and the proceeds from the IPO have not been received by the state yet.

Neighboring New Jersey, with its own $5 billion budget gap predicted for its next fiscal year, also might promote the conversion of nonprofit health plans.

According to the Star-Ledger, state officials could be trying to prod Horizon Blue Cross Blue Shield of New Jersey into reconsidering its lack of interest in going for-profit. In June 2001, legislators passed a bill to let Horizon convert, pending regulatory approvals, with the intent that creating a large nonprofit charitable health care foundation would take over responsibility for many programs previously paid for by the state's general fund. But in August 2001, Horizon said it no longer was considering a for-profit conversion, citing an unfavorable regulatory environment.

The newspaper reported, however, that Horizon President and CEO William J. Marino recently met with New Jersey Senate President Richard J. Codey to discuss conversion as a means of alleviating the state's budget problems. It's estimated by legislators and health care experts that New Jersey's government could receive as much as $1 billion if Horizon converts.

Codey did not return repeated telephone calls from American Medical News. A Horizon spokesman, Tom Rubino, would say only that as far as the insurer is concerned, the conversion issue "remains off the table."

Nonetheless, Mark T. Olesnicky, MD, president and chair of the Medical Society of New Jersey, expressed concern about a possible revival of plans for a Horizon conversion, saying physicians fear that the price of health insurance would rise if the Blues plan became for-profit.

"I don't think that would be good for the patients or for the doctors," Dr. Olesnicky said.