Will New Jersey Blues filing prompt for-profit rush?

If Horizon Blue Cross Blue Shield succeeds in becoming investor-owned, experts say, that could unleash a wave of similar moves.

By Emily Berry — Posted Sept. 22, 2008

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In the mid-1990s, Horizon Blue Cross Blue Shield of New Jersey was denied a chance to merge with another Blues plan as acquisitions and for-profit conversions took hold. In the early 2000s, Horizon passed on a chance to convert to for-profit status as public backlash grew, especially because it appeared that the same firm that wanted to buy Horizon the first time was ready to do so again.

In 2008, Horizon is trying one more time to turn from nonprofit to for-profit. If it succeeds, many believe Horizon could represent the start of a second wave of Blues conversions, as well as the return of WellPoint as a consolidator of those companies -- a prospect that experts say is not friendly to physicians.

"I would be surprised if, for both WellPoint and Horizon people, it had not crossed their minds," said Doug Sherlock, a health care business analyst and president of Sherlock Co., based in Gwynedd, Pa.

Neither Horizon nor WellPoint say such a deal is in the offing. However, Medical Society of New Jersey Chief Executive Officer Michael Kornett said there is "no doubt in our minds" WellPoint plans to buy Horizon if the conversion is successful, and that it is a factor in the society's opposition to Horizon's conversion.

No other nonprofit Blues plan has a conversion application on the table. But other plans are watching closely. Mary Beth Chambers, spokeswoman for BlueCross and BlueShield of Kansas, which in 2003 lost a court fight to convert, said, "We always need to keep an eye out on what the industry's doing and how we can best serve our members in the future."

If Horizon succeeds in convincing regulators to allow a conversion, it could be game-changing for other nonprofit Blues plans, said Mark Hall, professor of law and public health at the Wake Forest School of Law in Winston-Salem, N.C. Like Horizon, these plans are complaining that despite their prominent, in-state market position, they don't have the capital and scope to compete with national companies such as UnitedHealth Group and Aetna.

"If a prominent one does succeed, that might change the prevailing views," Hall said. "But I also think each state is really unique."

Horizon's Aug. 15 filing with the New Jersey Dept. of Banking and Insurance is its first formal attempt at converting to for-profit status. But it is not the first time it appeared that Horizon might be converted or acquired by an outside firm.

In 1997, a state court turned back a deal that would have allowed Horizon, then Blue Cross Blue Shield of New Jersey, to be acquired by Indianapolis-based Anthem, now WellPoint but then a mutually owned insurer that had begun acquiring similar plans. In 2001, after New Jersey passed laws governing for-profit conversions, Horizon broached the idea of converting to for-profit status but, faced with public opposition, never followed through.

So what's changed now? Horizon spokesman Tom Rubino said although the company -- which insures about four of every 10 New Jerseyans -- has no plans to expand, it needs the capital only Wall Street can provide to give members and physicians the kind of services they want. Rubino said those are services such as disease management, real-time claims adjudication and data analysis.

The change would require approval from the state insurance commissioner and attorney general. If the conversion is allowed to go forward, Horizon would establish a foundation as beneficiary of the initial stock offering -- likely to be valued at more than $1 billion, Rubino said.

The money would be earmarked for improvements to health care, providing a tax-free windfall to the state's health care system, though that money would not go into the state treasury, Rubino said. Still, some experts say $1 billion is tempting for a state that is facing a $5 billion budget hole.

Opposition brewing

Approval is no sure thing. Critics note that Horizon hardly is losing business in New Jersey. In fact, as Aetna, United and some smaller plans lost membership between 2006 and 2008, Horizon grew. According to state enrollment figures, in the first quarter of 2008, Horizon insured 48% of the commercially insured in New Jersey, up from 36% in the first quarter of 2006.

Even though the New Jersey medical society says Horizon already has a "take-it-or-leave-it" contract approach as a nonprofit, one analyst said a return to Blues conversions would not be good for physicians.

"Cultures change with companies once [insurers] go for-profit," said Susanne Madden, president and CEO of the Verden Group, a consulting firm in Nyack, N.Y., that assists doctors with health plan firms. "They have to manage to the number -- it becomes more about managing the dollar and less about managing health care."

Meanwhile, no state has approved a conversion since 2002, when New York OK'd an application from WellChoice, the parent firm of Empire Blue Cross Blue Shield of New York.

After the conversion, that company was acquired by WellPoint, which owns every one of the 14 for-profit Blues plans in the continental United States (it does not own a for-profit plan in Puerto Rico). Opponents and many stock analysts believe that if a conversion happens, a WellPoint acquisition is soon to follow.

Selling to WellPoint or another plan could be in the best interest of the foundation that will hold the new company's stock, Sherlock said. Other stock analysts said an acquisition -- especially one that gives them Blues plans across the New York metropolitan area -- could help boost WellPoint's own stock price, off 40% since the start of the year.

WellPoint spokeswoman Cheryl Leamon did not say the company wanted to acquire Horizon. But, she said, an option is "to look for opportunities to partner with or acquire another Blue plan."

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How conversion happens

Requirements vary by state but generally involve public hearings and approval from the state insurance department. A plan approved for for-profit status may be required to return to the public some portion of its stock offering proceeds. Here's the process for Horizon Blue Cross Blue Shield of New Jersey:

Step 1: On Aug. 15, Horizon submitted an application for conversion and a plan to set up a health care foundation, funded by the assessed fair market value of the company.

Step 2: The state's attorney general and Dept. of Insurance have 60 days from submission to determine if the application and plan are complete.

Step 3: Public hearings must be scheduled within 90 days after that.

Step 4: When the public comment period ends, the insurance department has 45 days to approve or deny the conversion.

Step 5: The state Supreme Court must approve the establishment of the foundation.

Source: Horizon Blue Cross Blue Shield of New Jersey (link)

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Conversion wave

In 1994, BlueCross BlueShield Assn. stopped requiring licensed plans to be nonprofit. Requests for status changes started soon thereafter.

1996: WellPoint Health Networks merges with BlueCross of California, whose attempt to form a for-profit subsidiary helped lead to the association's change in policy.

1997: Blue Cross and Blue Shield of New Jersey, which added the Horizon name in 1998, and Indianapolis-based Anthem end acquisition discussions after a ruling that would have required Horizon to turn over assets to a charitable foundation.

2001: Anthem converts from a mutual insurer to a for-profit and completes a $1.9 billion IPO. Meanwhile, Horizon begins discussions with state regulators to attempt a for-profit conversion under a new law the state passed that year.

2002-03: Attempts to convert Blues in Kansas and North Carolina are scuttled, as is an attempt by CareFirst, which operates multiple mid-Atlantic states' Blues plans.

2004: Anthem and WellPoint Health Networks merge and now operate under the name WellPoint.

2005: Horizon withdraws its second attempt to convert in the face of regulatory and legislative opposition. It never formally filed a conversion request.

2007: Premera Blue Cross, which operates plans in the Pacific Northwest, drops its court fight against the Washington state insurance department, which had blocked the company's conversion attempt.

2008: Horizon applies to convert to for-profit status. If successful, it would be the first Blues conversion nationwide since Empire Blue Cross Blue Shield in New York in 2002.

Sources: AMNews archives, WellPoint, Consumers Union, Horizon Blue Cross Blue Shield of New Jersey

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