Washington Blues plan loses its bid to go for-profit

The era of a nonprofit Blue Cross Blue Shield plan trying to convert to a for-profit company appears to be over, now that a state regulator has rejected an application by the only Blues plan still seeking conversion.

Washington state insurance commissioner Mike Kreidler on July 15 denied such a request by Premera Blue Cross, the largest commercial insurer in the state. Kreidler said a conversion could lead to higher patient premiums and lower physician reimbursements, or both.

Premera had sought conversion for nearly two years and spent about $35 million on the attempt. It had the right to appeal Kreidler's decision to a state court within 30 days of the decision, but had not yet announced its plans at press time. Regulators in Alaska were to make a separate decision on Premera's conversion later in July, because the company has members there, but permission from both states was needed.

The failure of the Mountainlake Terrace, Wash.-based plan to obtain the state's approval represented the apparent defeat of the last remaining active conversion application pending among Blues plans nationwide. It also caps a recent trend of other states rejecting their Blues plans' attempts to convert to for-profit companies.

For-profit plans operate in at least 14 states and Puerto Rico, and cover more than one-quarter of the 88 million members enrolled in Blues plans, according to figures from the Chicago-based BlueCross BlueShield Assn.

But the slowing of Blues conversions, some observers say, could indicate a continued surge in activism by state regulators and the gradual diminishing of an obvious source of expansion for large national payers.

State insurance officials, reacting to increased interest in health care affordability, have come to view Blues companies virtually as public utilities to be regulated with the public good in mind and whose requests to convert or merge must pass stringent requirements, said Robert Booz, vice president of health services research at META Group, a Stamford, Conn.-based consulting firm.

It was the possibility that Premera would be gobbled up by a national for-profit insurer after conversion that contributed to Kreidler's decision to deny the Blues plan's request, he said. "Premera had always been clear in maintaining they would keep their company local," Kreidler said. "The difficulty I had was looking at what has taken place nationally. Good intentions are one thing, but I think given the trend of what's going on nationally they might get caught up in it."

Kreidler's decision was applauded by the Washington State Medical Assn., which had opposed the proposal. "It would have been hard to conceive of him ruling any other way," said Tom Curry, the group's executive director. "We were convinced from the very beginning ... this would have been bad for doctors and bad for patients."

Doctors in Premera's network probably would have seen "severe downward pressure" on their reimbursement rates over time, Curry said. Physicians also feared Premera might drop out of less lucrative markets such as rural areas in Washington, said Jeff Collins, MD, WSMA president and a Spokane internist.

Premera insures about 70% of patients in eastern Washington, and doctors in that region were especially concerned about the effects of conversion, said Janet Monaco, CEO of the Spokane County Medical Society. "Premera in eastern Washington already is one of the lowest payers in the state," she said.

Premera found itself playing defense throughout much of the conversion application process, insisting conversion wouldn't adversely affect access to care, premiums or physician payments. But consultants hired by Kreidler's office concluded that because the insurance market in Washington was already somewhat saturated, Premera would have to raise prices or trim physician reimbursements to keep itself attractive to investors.

Many of the issues cited by Kreidler in rejecting Premera's request echoed previous denials in other states of either conversion bids or mergers.

In the summer of 2003, the Kansas Supreme Court upheld a 2002 state insurance commissioner's decision to deny a merger with Anthem because it could have harmed the public health by raising health premiums 20% to 40% in some cases.

In July 2003, BlueCross BlueShield of North Carolina gave up its attempt to convert, saying it saw little chance of success in a regulatory environment that it viewed as hostile.

Four months earlier, CareFirst BlueCross BlueShield got its hopes to convert -- and its plan to be subsequently purchased by WellPoint -- dashed when the Maryland state insurance commissioner sternly rebuffed its conversion proposal.

The last Blues plan to win state permission to go for-profit was Empire BlueCross BlueShield in New York, in November 2002. In that case, approval was facilitated by unique political circumstances. When the plan converted, the $417 million generated by an initial public stock offering was transferred to the state's budget as a means of shoring up wage levels for members of health care unions.